MONEY MARKET
A market for short term mobilization of
funds among market participants
Maturity of instruments traded from
overnight to one year
Participants comprised of:
- BNM, banking Institutions, Non-bank
Institutions, Corporations, Private
investors
Development of MM
Roles of MM in tandem with economic trend;
economic activities increase, more financing
needed, demand and supply of instruments
increase
Introduction of an electronic transfer and
scripless trading system – SPEEDS –
RENTAS for efficient settlement and clearing
system
Islamic Interbank Money Market launched in
1994
…continue
principal dealers were selected among a
few financial institutions to underwrite
and create markets in the issue of MGS,
TBs and Cagamas Bonds
Formation of rating agencies (RAM) and
(MARC) to evaluate new bond issues
Features of MM:
◦ there must be lenders and borrowers and
buyers and sellers
◦ a ‘commodity’ is traded, that is, money and
price is attached, that is, interest rates
◦ focuses on short term funds (immediate
liquidity requirement)
Objectives of MM:
To provide an outlet for participation of
MM instruments
To be able to lend out and/or obtain
funds at competitive rates
To maximize profits and minimize cost
of funds
To manage liquidity position and reserve
requirement
2 categories of MM operation
Outright sale and purchase
Involved the trading of instruments
directly by buying and selling the
instruments among the participants
If a party is in need of fund sell the MM
instruments; if has excess funds (need to
invest) buy the instruments
REPO – Repurchase Agreement
An undertaking by a bank to repurchase MM instrument
initially sold to a customer at an agreed price for a
specified future date
Initially:
bank sells fin. instrument
Bank customer
bank receives $$$
At maturity:
bank buys back fin. instrument
Bank customer
bank payback $$$
(principal + interest)
Instruments of MM
NIDs
BAs
MGS
REPO
TBs
BNBs
Cagamas bonds & notes
Khazanah bonds
YIELD VS DISCOUNTED INSTRUMENTS
Yield Instruments (interest bearing)
interest is payable or receivable at the maturity date plus the principal
Issuer receives principal/face value amount (full amount)
example of instruments : NIDs, notes and bonds
Par value = RM1000, Coupon = 10% (10% x PV)
Now, investor will pay RM1000. ON maturity, investor will receive
RM1,100 (1000 + 100)
Discounted Instruments (non interest bearing)
discounted amount/discounted proceeds is paid or received upfront, not
at maturity
Issuer receives slightly short of principal amount (lesser)
face value amount is received/paid at the maturity date
example: Treasury Bills, BAs, commercial papers
Par value = RM1000, Coupon = 0% (0% x PV)
Now, investor will pay RM800. ON maturity, investor will receive
RM1,000 . Profit = RM200
Negotiable Instruments of Deposits
(NIDs)
A document issued by a bank to certify a
customer has deposited a sum of money at
a specific rate for specified period
Can be sold before maturity in the
secondary market
Interest rates influenced by inter bank
rates
Better rates for large amount of deposits
Malaysian Government Securities
(MGS)
Issued by BNM to obtain funds to finance
national expenditure
An interest bearing instrument;
government pay periodic interest and
return par value at maturity
A scripless security issued in multiples of
RM 1,000
REPO
Suitable to manage short term funds
A sale of instrument by a bank with an
intention to repurchase it later at an agreed
price
A collateralized deposit arrangement; the
collateral being the MM instruments – NIDs,
MGS, Cagamas Bonds, Bas and others
Using simple interest formula of calculation
MM Risks
Credit risk – non payment of
loan/financing
Liquidity risk – inability to convert assets
to cash; inability to have access to funds
Interest rate risk – fluctuations leads to
adverse value of assets
Operational risk – bad system &
manpower problems
Management of MM risk
Credit risk – establish credit limits
Liquidity risk – balance of short and long
term assets
Interest rate risk - have tools to predict
rates and to run a matched book
Operational risk – provide training &
update system
