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Topic 6

Zzz bbb bb. Course WF5023 Conventional & Islamic Financial Markets, Instruments, & Institutions. Topic 6. Conventional Money Market. mbmbmbmbmbmbmbmbmbbmbmbmbmmmbmm. Introduction to Money Market. Just what & where is the Money Market ?. Money Markets

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Topic 6

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  1. Zzz bbb bb Course WF5023 Conventional & Islamic Financial Markets, Instruments, & Institutions Topic 6 Conventional Money Market mbmbmbmbmbmbmbmbmbbmbmbmbmmmbmm

  2. Introduction to Money Market Just what & where is the Money Market ?

  3. Money Markets ● characterized by borrowing and lending large amount of money ● for short periods – typically one day up to, and including 12 months. Bond Markets ● debt market that generally pay interest on instruments for a fixed period of time for loan periods over 12 months up to 30 years. ● also known as the Fixed Income Markets ● involve medium to long term borrowing. (1 to 10 year instruments are called notes and instruments exceeding 10 years in maturity are called bonds) Equity Markets ● involve medium to long term borrowing but in this case interest is not paid to the lender. ● borrowing institutions issue stocks or shares to investors who become part owners of the organization ● investors may or may not be paid dividend on their shares depending on how well the organization performs.

  4. Relationship between Money Market & Other Financial Markets

  5. Recalling the role of a bank … … acts as an intermediary between depositors and borrowers place money lend money

  6. Recalling the role of a bank … In fulfilling its role as an intermediary between units that seek funds and units with surplus funds, the bank always finds itself in the following undesirable positions … Bank Bank

  7. So, what is money market? In general terms, the money market is the market where liquid and short-term borrowing and lending take place.  The lending of funds in this market constitutes short-term investments. 

  8. Activities of the Money Market • Through the money market, participants are able to: • 1. borrow and lend funds; and • 2. buy and sell money market instruments

  9. Structure of the Money Market in Malaysia can be broadly divided into ● Wholesale (Inter-bank Market), and ● Retail (Commercial Market)

  10. Players of the Interbank Money Market are • 1. Commercial Banks • 2. Merchant Banks • 3. Finance Companies • 4. Discount Houses • 5. Insurance companies • 6. Large corporations • 7. Pension funds • 8. Money Brokers

  11. In the Interbank Money Market… • ● direct lending and borrowing among participants take place. Funds lent or borrowed are of short term tenors, usually between overnight to twelve months; • ● financial instruments are traded; • ● money brokers act as middlemen between lenders and borrowers. They earn a commission for broking services.They play an important role especially in a fast moving and active market; • ● the central bank acts as market regulator. It engages in open market operations to influence the supply of money in the banking system, stabilize interest rates, etc. in order to bring about a more desirable and systematic market environment.

  12. Regulation for Money Market? In January 1994, BNM introduced the Malaysia Code of Conduct for Principals and Brokers in the Wholesale Money and Foreign Exchange Market which sets out the market practices, principles and standards to be observed in the Malaysia market. The code also imposed a mandatory requirement for new dealers and brokers to complete an entry examination held by the Institute of Bankers Malaysia.

  13. At the Commercial Money Market… • ● there are other players like non-bank financial • institutions, corporate bodies, government agencies, • statutory bodies, trust and pension funds, insurance • companies, cash-rich individuals, etc; • ● they utilize their temporary surplus funds; • ● either for direct placements in fixed deposits or term • deposits or call money; or • ● for purchasing of money market instruments. • ● they have no access to direct borrowing from the • money market

  14. Major Players in Malaysian Money Market ● Bank Negara Malaysia ● Commercial Banks ● Merchant Banks ● Finance Companies ● Discount Houses ● Khazanah Berhad ● Cagamas Berhad ● EPF ● Fund Managers ● Insurance Companies ● Major Corporations ● Cash-rich Individuals ● Money Brokers

  15. Money Market Products can be categorized as ● Short term Inter-bank Funds ● Instruments under Scriptless Securities Trading System (SSTS) ● Instruments which are not under SSTS ● Other financial products

  16. Short-term Interbank Funds ● borrowing and lending of Ringgit among financial institutions that participate in the interbank money market ● availability of funds is subject to size of inflows and outflows in the banking system which include ♦ government disbursements ♦ maturities & issuance of govt debts such as MGS, MTB ♦ interest payments on govt debts ♦ tax, royalty and customs payments to govt ♦ central bank intervention ● cost of funds is determined by market forces of supply and demand ● maturities range from overnight to 1 year or more

  17. Money Market Instruments under SSTS ● Malaysian Government Securities (MGS) ● Malaysian Government Treasury Bills (MTB) ● Bank Negara Bills (BNB) ● Government Investment Issuance (GII) ● Cagamas Bonds & Notes ● Khazanah Bonds ● Some Commercial Papers (CP), Medium Term Notes (MTN), and Corporate Bonds

  18. Money Market Instruments Not Under SSTS ● Bankers Acceptance (BA) ● Negotiable Instrument of Deposits (NID)

  19. Other Money Market Products ● Fixed Deposits (FD) ● Repo/Reverse Repo ● Short Term Revolving Credits (STRC) ● Securities Borrowing and Lending (SBL) ● Onshore Foreign Currency Loans (OFCL) ● Foreign Currency Accounts (FCA) ● KLIBOR Futures, Bond Futures ● Interest Rate Swaps (IRS) ● Forward Rate Agreements (FRA) ● Currency Swaps ● Currency Options ● Structured Products

  20. Interest-bearing Instruments & Discount Instruments • There are basically two types of instruments issued and traded in the money market, namely: • 1. Interest-bearing instruments • These are instruments which pay interest on the amount invested, where the interest is normally paid to the holder of the instrument (the lender), together with the redemption amount at redemption date.  Interim interest payments may be made in certain cases. • 2. Discount instruments • These are instruments that do not pay interest on the amount invested but are issued at a discount of the nominal value (the redemption amount).  The full nominal amount is paid only on maturity date. These instruments are called discount instruments.

  21. Interest Rates Vs. Discount Rates The discount rate on an instrument and the interest rate paid on an instrument are not the same, and cannot be compared to when deciding on an investment.  E.g. Lets compare a one-year NCD with a nominal amount of RM1 million and an interest rate of 11% with a one-year BA of RM1 million and a discount rate of 11%

  22. Interest Rates Vs. Discount Rates From the above illustration, the yield on the NCD is: The yield on an investment on the BA is, however: The BA would thus give a higher yield and is the better investment, if the difference in risk on these instruments is ignored.

  23. Interest Rates Vs. Discount Rates The discount rate on discount instruments must thus be converted to yield before it can be compared to interest rates offered on interest rate instruments.   The compounding period of rates must also be equal before they can be compared.

  24. Functions of a Money Market Department Basically a Money Market Department performs the following functions:

  25. Functions of the Money Market - Meeting Statutory Reserve Requirements

  26. Functions of the Money Market - Meeting Statutory Reserve Requirements

  27. Functions of the Money Market - Meeting Statutory Reserve Requirements

  28. Money Market & BNM SRR is one of the monetary tools used by BNM in managing the country’s monetary policy

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