MONEY MARKET

DEFINITION
A place where money can be borrowed or deposited. It is a financial market dealing in short-term fund and instruments. (Treasury Bills, Bankers Acceptance, Negotiable Certificate of Deposits)

Participants are able to meet their liquidity requirements by participating in the interbank deposits or buying and selling of money market instruments.

3.1 DEVELOPMENT AND STRUCTURE OF MONEY MARKET.

In Malaysia, it constitutes the interbank market and shortterm funds market.

The inter-bank market involves short-term funds. For instance, overnight money, 7-day money and funds for the period of one, two, three, and six months.

The participants are commercial banks, merchant banks and finance companies (with minimum shareholders fund is not less than RM30 million).

The inter-bank money market is concerned with borrowing and lending funds and the mode of measurements is based on interest rates.

Significant development in the money market

1989 : financial institutions were appointed as Principal Dealers to underwrite and create markets for the primary issues of Malaysian Government Securities (MGS) and Treasury Bills (TBs). They ensure liquidity and provide two-way quotations in all market conditions. January 1990 : SPEEDS (Sistem Pemindahan Elektronik untuk Dana dan Sekuriti) was introduced. Provides a faster settlement and clearing arrangement to cater for the increasing money market instruments.

1990 and 1995 : Rating Agency of Malaysia (RAM) and Malaysian Rating Corporation Berhad (MARC) were established and provide significant development in the Malaysian money market.

January 1994 : Islamic Interbank Money Market (IIMM) was launched. For the purchase and sale of Islamic financial instruments, investment activities and cheques clearing systems.

3.2 Money Market Operations, Risks and Instruments.

OBJECTIVES
Lend out or obtain funds at competitive rates. Maximize profits and minimize cost of funds.

To manage its liquidity position and reserve requirement.

PARTICIPANTS OF MONEY MARKET OPERATIONS

Bank Negara Malaysia (supervising and controlling authority) Banking Institutions (commercial and investment banks)

Non-bank institutions (pension funds, insurance companies)

Corporations (small and medium scale enterprise)

Cagamas Berhad (issuance of Cagamas instruments)

Money brokers (intermediaries to the participants)

CATEGORIES OF MONEY MARKET

Direct lending and borrowing

Sale and purchase of money market instruments.

Direct Lending and Borrowing

A market where a bank will lend (deposits) or borrow directly to/from another bank. Deposits or borrowed amount can be for period of overnight to up to a period of 3 years. But majority is less than one year. Amount that the lender can lend/place with the borrowing party is limited which is called a credit limit or credit line. Credit limit is the authorized maximum amount a lender is able to lend specific counter party.

Transaction is completed as soon when the rate is agreed by both parties.

A money broker can be the intermediaries for the communication process.

Sale an Purchase of MM Instruments

indirect method of borrowing and lending of funds.
The outright sale/purchase of instruments.

The Repurchase Agreement (REPO) market. REPO is an undertaking by a bank to repurchase money market instrument initially sold to a customer at an agreed price with specific future date.

Instruments Traded in the Money Market

Negotiable Instruments of Deposits (NIDs) Bankers Acceptance (BAs) Malaysian Government Securities (MGS) Treasury Bills (TBs)

Bank Negara Bills (BNBs) Cagamas Bonds and Notes

Repurchase Agreement (REPO)

Khazanah Bonds

BANKERS ACCEPTANCE NEGOTIABLE INSTRUMENTS OF DEPOSITS A receipt for a time deposit in Ringgit placed with a commercial bank. negotiable (name of depositor is not stated). issued for multiples of 3 months to 5 years. A bill of exchange drawn on and accepted by either a commercial bank or a merchant bank. Short-term trade financing (limited to 21-365 days). Drawn by either importer, exporter, buyer or supplier who requires financing.

MALAYSIAN GOVERNMENT SECURITIES Issued by the federal government. Long-term papers (maturity 3-21 years). Government also agreed to pay periodic interest to the holder of the instrument and upon maturity the return to the par value.

REPURCHASE AGREEMENT obtain loans by selling negotiable money market instruments (eg. T-bills, NID) for certain period. Period dealt is normally on a number of day basis and thus, suitable for those who needs to manage shortterm funds.

BANK NEGARA BILLS TREASURY BILLS Issued by the federal government. Short-term papers (maturity of 3, 6 & 12 months). Introduced to encourage savings & absorb excess liquidity from the banking system. Short-term paper. Represents an additional money market instrument use by the Central Bank to influence the liquidity situation.

CAGAMAS BONDS Issued by Cagamas Berhad. Intermediary between primary lenders of housing loans & investors of longterm funds. Issued on an auction basis through a system of principal dealers.

Money Market Risk

CREDIT RISK : condition where borrower is not able to make payment on the maturity date agreed. Default payment by one party causing the other party to suffer losses. LIQUIDITY RISK : (i) bank not able to have easy access to funds in the market to meet commercial requirement and/or trading requirement. (ii) Bank not able to convert existing assets. (marketable securities into cash at reasonable price).

INTEREST RATE RISK : banks revenue is adversely affected by the fluctuations in interest rate or situation whereby banks having a mismatched position where the maturities of assets and liabilities are not the same.
OPERATIONAL RISK : bad operational system of the parties in the money market. For instance, banks having poor IT system technology in handling big number of transactions.

Controlling Money Market Risk

CREDIT RISK : establish credit limit by negotiating with various parties local and foreign institutions. Authorized maximum amount that an institution can borrow from another institution. INTEREST RATE RISK : ability to predict rates and prices of financial instruments and running a matched book to avoid gaps.

LIQUIDITY RISK : having mixture of short-term and long-term instruments for faster liquidation.

OPERATIONAL RISK : continuously train and update development in the financial system and investing in a suitable IT system to meet the institution needs.