4. It consists of financial institutions and dealers in money or credit who wish to produce liquidity.
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6. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).
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9. CONT… Transaction have to be conducted without the help of brokers. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).
10. Objective of Money Market? To provide a parking place to employ short term surplus funds. To provide room for overcoming short term deficits. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.
17. Commercial Banks and Savings Associations Play five important roles: 1.Borrow in money market: To meet their reserve needs To make loans to their commercial or household customers 2.Hold significant levels of Treasury securities on asset side of their balance sheets Assist other participants by: Providing credit enhancements for a fee to those issuing commercial paper and bankers’ acceptances
18. CONT… Serve as agents and underwriters in commercial paper market Serve as primary dealers of U.S. government securities Enables them to trade money market securities on behalf of their corporate customers
19. GSEs Governments & Government-Sponsored Enterprises (GSEs): U.S. Treasury is world’s single largest borrower Issues U.S. Treasury bills (T-bills) Treasury notes and bonds that have longer maturities Privately owned GSEs: Federal National Mortgage Association (Fannie Mae) Federal Farm Credit Banks Funding Corporation (FFCBFC) Student Loan Marketing Association (Sallie Mae)
20. Privately-owned GSEs Engaged in assisting with finance of: Housing Agriculture Education State and municipal (local governments and special districts) governments issue short-term municipal notes to finance: Their own expenditures Expenditures of local schools, hospitals and private firms
21. The Federal Reserve Fed controls level of reserves available to depository institutions open market purchase and sale of T-bills repurchase agreements
22. Corporations/Finance Companies Use money markets to raise funds store funds Issue large amounts of commercial paper as primary source of funds which they lend to consumers and firms use to make up for temporary shortfalls of cash
23. Pension Funds and Insurance Companies Both use money market for cash management to provide needed liquidity
24. Brokers and Dealers Ensure the regular functioning of the money market Market new issues of securities Repurchase securities Establish secondary market Act as intermediaries in the RP market Match buyers and sellers
33. CONT…. The call market enables the banks and institutions to even out their day to day deficits and surpluses of money. Banks especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR). The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis.
34. CONT… In the call market, banks can currently borrow not beyond 100 per cent of their capital funds on a fortnightly average basis and on daily basis it cannot exceed 125 per cent. They can lend up to 25 per cent of their capital funds on a fortnightly average basis and 50 per cent on a daily basis.
35. OPERATIONS IN CALL MONEY Borrowers and lenders contact each other over telephone. The borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favor of the borrower. The borrower in turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the duly discharged receipt.
36. OPERATIONS IN CALL MONEY The deal can be directly negotiated by routing it through the Discount and Finance House of India (DFHI). The borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest. Once the deal is confirmed, the Deal Settlement Advice is exchanged. In case the DFHI borrows, it issues a call deposit receipt to the lender and receives RBI cheque for the money borrowed. The reverse takes place in the case of lending by the DFHI. The duly discharged call deposit receipt is surrendered at the time of settlement. Call loans can be renewed upto a maximum period of 14 days only and such renewals are recorded on the back of the deposit receipt by the borrower.
38. Commercial bills market Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) for the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. If the seller wishes to give some period for payment, the bill would be payable at a future date (usance bill). During the currency of the bill, if the seller is in need of funds, he may approach his bank for discounting the bill.
39. CONT… One of the methods of providing credit to customers by bank is by discounting commercial bills at a prescribed discount rate. The bank will receive the maturity proceeds (face value) of discounted bill from the drawee. In the meanwhile, if the bank is in need of funds, it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related rediscount rate. (The RBI introduced the Bill Market Scheme in 1952 and a new scheme called the Bill Rediscounting Scheme in November 1970).
40. CONT… With a view to eliminating movement of papers and facilitating multiple rediscounting, the RBI introduced an innovative instrument known as "Derivative Usance Promissory Notes" backed by such eligible commercial bills for required amounts and usance period (up to 90 days). Government has exempted stamp duty on derivative usance promissory notes. This has indeed simplified and streamlined the bill rediscounting by Institutions and made commercial bill an active instrument in the secondary money market.
41. CONT… In the bill rediscounting market, it is possible to acquire bills having balance maturity period of different days up to 90 days. As some banks were using the facility of rediscounting commercial bills and derivative usance promissory notes for as short a period as one day merely a substitute for call money, RBI has since restricted such rediscounting for a minimum period of 15 days.
42. Acceptance market A bankers acceptance (BA) is a money market instrument: a short-term discount instrument that usually arises in the course of international trade. A draft is a legally binding order by one party (the drawer) to a second party (the drawee) to make payment to a third party (the payee). When a draft guarantees payment for goods in international trade, it is called a bill of exchange.
43. CONT.. A draft can require immediate payment by the second party to the third upon presentation of the draft. This is called a sight draft. An importer might write a draft promising payment to an exporter for delivery of goods with payment to occur 60 days after the goods are delivered. Such drafts are called time drafts.
44. CONT.. In cases where the drawer and drawee of a time draft are distinct parties, the payee may submit the draft to the drawee for confirmation that the draft is a legitimate order and that the drawee will make payment on the specified date. Such confirmation is called acceptance—the drawee accepts the order to pay as legitimate.
45. CONT.. The drawee stamps ACCEPTED on the draft and is thereafter obligated to make the specified payment when it is due. If the drawee is a bank, the acceptance is called a bankers acceptance (BA). A bankers acceptance is an obligation of the accepting bank. Bankers acceptances are quoted in discount form. Maturities are generally between one and six months, and they trade as bearer instruments.
46. Treasury bill market Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price.
47. Types Of Treasury Bills There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 6 months and 12months Treasury bills etc. In India, at present, the Treasury Bills are issued for the following tenors 91-days, 182-days and 364-days Treasury bills.
48. Benefits Of Investment In Treasury Bills No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.
49. Features Form The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialisedform. Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof. Eligibility: All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organizations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. Repayment The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai.
50. CONT… In the primary market, treasury bills are issued by auction technique.
51. Commercial paper (CP) CP is a short term unsecured loan issued by a corporation typically financing day to day operation. CP is very safe investment because the financial situation of a company can easily be predicted over a few months. Only company with high credit rating issues CP’s.
52. SALIENT FEATURES They are unsecured debts of corporate and are issued in the form of promissory notes, redeemable at par to the holder at maturity. Only corporate who get an investment grade rating can issue CPs, as per RBI rules. It is issued at a discount to face value. Attracts issuance stamp duty in primary issue. Has to be mandatorily rated by one of the credit rating agencies. It is issued as per RBI guidelines
53. CONT… It’s held in De-mat form. CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs.5 lakh (face value). Issued at discount to face value as may be determined by the issuer. Bank and FI’s are prohibited from issuance and underwriting of CP’s. Can be issued for a maturity for a minimum of 15 days and a maximum up to one year from the date of issue.
54. RBI GUIDELINES ON ISSUE OF COMMERCIAL PAPER Corporate, primary dealers, satellite dealers and all India financial institutions are permitted to raise short term finance through issue of commercial paper, which should be within the umbrella limit fixed by RBI. A corporate can issue Commercial Paper if: 1. Its tangible net worth is not less than Rs.5 Crores as per latest balance sheet. 2. Working capital limit is obtained from banks/ all India financial institutions, and 3. Its borrowable account is classified as standard asset by banks/ all India financial institutions.
55. CONT.. Commercial paper can be issued for maturities between a minimum of 15 days and a maximum of up to one year from the date of issue. The maturity date of commercial paper should not exceed the date beyond the date up to which credit rating is valid. A company can issue commercial paper to an aggregate amount within the limit approved by board of directors or limit specified by credit rating agency, whichever is lower. Banks and financial institutions have the flexibility to fix working capital limits duly taking into account the resource pattern of company’s financing including commercial papers.
56. Certificate of deposit (CD) It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR).
57. Salient Features of CDs CDs can be issued to individuals, corporations, companies, trusts, funds, associates, etc. NRIs can subscribe to CDs on non-repatriable basis. CDs attract stamp duty as applicable to negotiable instruments. Banks have to maintain SLR and CRR on the issue price of CDs. No ceiling on the amount to be issued. The minimum issue size of CDs is Rs.5 lakhs and multiples thereof. CDs are transferable by endorsement and delivery. The minimum lock-in-period for CDs is 15 days. CDs are issued by Banks, when the deposit growth is sluggish and credit demand is high and a tightening trend in call rate is evident. CDs are generally considered high cost liabilities and banks have recourse to them only under tight liquidity conditions.
58. Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc.
59. CONT.. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities.
60. CONT.. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions.
61. Money Market mutual fund Money market mutual funds offer a convenient parking place for cash reserves when an investor is not quite ready to make an investment or is anticipating a near-term cash outlay for a non-investment purpose. Money market mutual funds offer ultimate safety and liquidity. An investor holding a basket of mutual funds from a single fund company may occasionally want to transfer assets from one fund to another
62. CONT… To benefit their clients, brokerage firms regularly use money market mutual funds to provide cash management services. Putting a client's dormant cash into money market mutual funds will earn the client an extra percentage point (or two) in annual returns above those earned by other possible investments
63. Operational Details of Money Market Mutual Funds Money market mutual funds are designed to offer features that are particularly suited to the needs of small investors. Minimum initial investments generally range from $500 to $5,000 Money market mutual funds also offer some simplified withdrawal features that are more typically associated with bank or trust accounts.
64. Categories of Money Market Mutual Funds Money market mutual funds may contain a specific type of money market security or a combination of securities across a wide spectrum: One particular type of fund limits its asset purchases to U.S. Treasury securities. Another class of money market funds purchases both U.S. government securities and investments in various government-sponsored enterprises (GSEs). The third and largest class of money market mutual funds invests in a variety of money market securities that offer the highest degree of security.
65. Ready Forward Contracts (Repos) Ready forward or Repo is a transaction in which the parties agree to buy and sell the same security at an agreed price at a future date. It is a combination of securities trading (involving a purchase and sale transaction) and money market operation (lending and borrowing). The repo-rate represents the borrowing/lending rate for use of the money in the intervening period. Internationally repos are versatile instruments and used extensively in money market operations.
66. CONT… Repos can be for any period. While earlier there was a minimum period of 3 days, this has since been withdrawn. The RBI has been using repo instrument effectively for its liquidity management, both for absorbing liquidity and for injecting funds in to the system. Ready forward or Repos or Buyback deal is a transaction in which two parties agree to sell and repurchase the same security.
67. CONT.. Under such an arrangement, the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a prefixed price. For the purchaser of the security, it becomes a Reverse Repo deal. In simple terms, it is recognized as a buy back arrangement.
68. CONT.. The repo-rate represents the borrowing/lending rate for use of the money in the intervening period. As the inflow of cash from the ready forward transaction is used to meet temporary cash requirement, such a transaction in essence is a short term cash management technique. It is a combination of securities trading (involving a purchase and sale transaction) and money market operation (lending and borrowing).
69. RBI has prescribed that following factors have to be considered while performing repo Purchase and sale price should be in alignment with the ongoing market rates No sale of securities should be effected unless the securities are actually held by the seller in his own investment portfolio. Immediately on sale, the corresponding amount should be reduced from the investment account of the seller. The securities under repo should be marked to market on the balance sheet date.
70. CONCLUSION The money market specializes in debt securities that mature in less than one year. Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities. The easiest way for individuals to gain access to the money market is through a money market mutual fund. T-bills are short-term government securities that mature in one year or less from their issue date. T-bills are considered to be one of the safest investments - they don't provide a great return.
71. CONT.. A certificate of deposit (CD) is a time deposit with a bank. Annual percentage yield (APY) takes into account compound interest, annual percentage rate (APR) does not. CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD. Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than T-bills because of the higher default risk. Banker's acceptances (BA)are negotiable time draft for financing transactions in goods. BAs are used frequently in international trade and are generally only available to individuals through money market funds. Repurchase agreements (repos) are a form of overnight borrowing backed by government securities.
