Overview of what is money market and different instrument used in Money Market

1. Money Markets
Involves corporations, financial institutions , investors and
governments
Deals with flow of short-term capital
Money markets have expanded in recent past at expense of
banks (disintermediation)
Deregulation and ease of moving money electronically has
supported trend
Low cost of raising money for short-term and irregular cash
flows

2. Money Markets…
Money markets could also involve deployment into other
currencies
However this brings in additional risk (forex)
Hence usually limited to home currencies

3. Money Markets…
Money markets – web of connected borrowers and lenders
Central bank policies determine short-term interest rate
Array of treasuries – company & govt. – around
Invest unneeded cash as safely and profitably as possible
Borrow when necessary when needed at lowest possible cost

4. Money Markets…
Money-market instruments in circulation worldwide
 2001 - $ 6 trillion
 2008 - $ 14 trillion
 2012 - $13 trillion
Money-market investors are very risk averse
Freezing of ‘money markets’ drove economies into recession

5. What do Money Markets do…?
No precise definition of money markets
Generally applied to buying and selling of debt instruments
maturing in one year or less
Related to the bond market (long-term) but with different
objectives – profits v/s cash management
Well developed money-market supports development of long-
term securities

6. Investing in Money Markets…
Short-term instruments unattractive to small investor
Investments through funds, rather than buying individual
securities
Retail and institutional versions of funds
Reduce investors’ search costs and risks
Cost of intermediation lower than banks
Spreads are few basis points

7. Investing in Money Markets…
Institutional Investors
 Trading departments at Banks and investment institutions
 Mutual Funds – for flexibility in redemption
 Pension Funds & Insurers for same reason
 Dominant portion of the money-market operations

8. MONEY MARKET DYNAMICS…

9. MONEY / CAPITAL MARKETS
Money Markets Capital Markets
Maturity of
Instruments
1 year or less More than 1
year
Risks Less More and
varied
Instruments Treasury Bills,
CDs etc.
Shares, bonds,
etc
Finance Short term Long term
Relation with
Central Bank
Direct Indirect

10. Money Markets Instruments
Call / Notice Money
Inter-bank Term Money
Inter-bank Participation Certificate
Inter-corporate Deposit
Treasury Bills
Commercial Bills
Certificate of Deposits
Commercial Paper
Bankers’ Acceptance
Government Agency Notes (//local)
Interbank Loans

11. Call / Notice Money
Forms core of the Money Market Operations
Confined generally to inter-bank business
Mainly on an overnight basis
Small portion of notice money business on 14 day basis

12. INTER-BANK TERM MONEY
Originally exclusively for the commercial & co-operative
banks
Now open to All India DFIs
Permitted to borrow for 3-6 months
Borrowing limits set by RBI
Interest rates are market driven
Predominantly a 90-day market

13. INTER-BANK PARTICIPATION
CERTIFICATE
Short-term instruments
Even-out short term liquidity in banking system
Issued under an underlying advance, classified standard and
aggregate amount of participation in any account time issue

14. INTER-CORPORATE DEPOSIT
Outside purview of regulatory framework
Corporates park short-term surplus funds
Interest rates determined by market
Predominantly a 90 day market

15. TREASURY BILLS
Short-term promissory notes
Issued by Government
Issued at discount for 14 days to 364 days
Assists in dynamic asset-liability management
14, 28, 91 and 364 day TBs have been introduced
Available on auction basis
Amount to be auctioned in pre-announced
Cut-off rate of discount and issue-price determined at
auction

16. COMMERCIAL BILLS
Commercial bills arising out of genuine trade transactions i.e.
credit transactions
Negotiable and self-liquidating paper
Written order from creditor to debtor, to pay a certain sum to
certain person, after a creation period
Always drawn for a short period between 3-6 months

17. CERTIFICATE OF DEPOSITS
Negotiable term-deposits
Accepted by commercial banks from bulk depositors at
market rates
Can be issued at discount to face value
Tenor ranges from 3 months to 1 year
Minimum of 5 lacs to single investor

18. COMMERCIAL PAPER
Unsecured debt instrument in form of promissory note
Issued by highly rated corporate borrowers
Used to fund ongoing business activities
Issued either directly or via dealer bank
Generally issued at market determined discount
Tenors ranging between 15 days and 1 year

19. BANKERS’ ACCEPTANCE
Promissory note issued by non-financial firm to bank for a
loan
Bank resells note in MM at a discount
Bank guarantees payment to buyer
Usually a maturity of less than 6 months

20. GOVT. AGENCY NOTES
Issued by National Govt. agencies
Issued by Local Govt. agencies
Manage irregular cash flows

21. …DEBT SECURITIZATION
Retail – Wholesale – Retail conversion of loans
Transform loans into negotiable instruments tradable in
secondary markets
Can be structured to fund large and long-term projects

22. …MMMF
Primarily meant for individual investors
NRIs can invest on non-repatriable basis
Funds raised to be invested exclusively in money market
instruments
No guaranteed minimum rate of return
Minimum lock-in 46 days

23. REPURCHASE OPTIONS
Borrower places with lender certain acceptable securities
against funds received and agrees to reverse the transaction
on a pre-determined future date at agreed interest cost.
No fixed period prescribed; generally 14 days -1 year
Interest is market determined
These keep markets highly liquid
Commercial Banks; FIs; Brokers; DFHI
Repo transactions limited to TBs

24. PROGRAMMED LEARNING
1. How are the investment objectives different for the money
and bond markets?
2. Efficient money markets help even long-term debt markets
develop. Your views.
3. Why do banks need to borrow and lend in the short-term
money markets?
4. How did the ‘freeze’ in money-markets contribute to the
financial crisis?