Money Markets

Role

  1. Short-term funding
  2. Liquidity
  3. Platform for monetary policy
  4. Debt financing (Government)
  5. Interbank market and Securities market

Historical Development

SPICK

  • Sistem penjelasan imej check kebangsaan
  • Cheque clearing system
  • To ensure an efficient secondary market
  • Foster overnight lending

KLIBOR

  • Kuala Lumpur Interbank Offered Rates
  • Anchor rate for variable rate money market instruments

RENTAS

  • Real Time Gross Settlement System
  • Reduce financial risk (high value payments)

Interbank Giro

  • Exchange of digitized transactions to transmit orders

Principal Dealers

  • Appointed to underwrite and make markets for primary issues
  • MGS, Treasury Bills, Cagamas Bonds

Rating Agencies

  1. Rating Agency Malaysia (RAM)
  2. Malaysian Rating Corporation Berhad (MARC)

Structure of the Malaysian Money Market

Categories

  1. Direct borrowing and lending of ST funds in the secondary loans and deposit market
  2. The sale and purchase of money market instruments

Primary Market

  1. Participants are initial suppliers and fund users of the short-term funds
  2. Mobilized funds via financial institutions are deposits
  3. Final users are business, individuals, governments
  4. Concerned with initial issuance of these securities

Secondary Market

1. Interbank Market

  • Center for the secondary market activities of the loan/deposits market
  • Concerned with active placements of term deposits
  • Deposits are borrowed or lend for a fixed period of time

2. Securities Market

  • Center for the secondary market for securities where negotiable money market instruments are traded

Interest Rates in the Money Markets

  • Per Annum Basis
  • Flat Interest Rate
  • Discounted Rate Basis
  • Explicit Interest Rate/Effective Interest Rate

Effective interest rate – interest payment as a percentage if the amount borrowed adjusted for time

Money Market Instruments

Coupon or Yield Instruments

  1. Interest bearing instrument which carries an explicit interest rate whereby interest is either payable/receivable at the maturity date together with the principal amount
  2. NCD, Bonds, Deposits

Discount Instruments

  1. Non-interest bearing instrument that is paid or received upfront and the face value is paid/received at maturity
  2. Treasury bills, trade bills, BA, CP

Interbank Deposit

  • Unsecured, non-negotiable, fixed rate loan
  • Traded over the counter

Types

  1. Fixed deposit, rate of interest and maturity date is agreed at the outset
  2. Notice deposit, rate of interest and maturity date maybe changed

Interbank deposit market is used as a basis for other money market instruments

  • CD
  • REPO
  • CP
  • FRA
  • Interest rate swaps, Forward FX, FX Swaps

Conventions/Practice

  1. Transaction takes place on trade date
  2. Interest calculated from value date
  3. Value date is normally the spot date

Overnight = deposit today, return tomorrow

Tomorrow/next = deposit tomorrow, return next day

Spot/next = deposit spot date, return next day

Components of a Trade – Interbank Deposits

  1. Value date, start date, delivers principal of trade, interest on deposit begins
  2. Maturity date, end date, borrower repays principal plus interest
  3. Rate, agreed interest rate, yield
  4. Basis, number of days in a year
  5. Taking bank, bank that borrows the money
  6. Placing bank, bank that lends the money
  7. Payment instruction, precise instructions with appropriate details

Certificate of Deposits

  • negotiable receipt for funds deposited at the bank or other financial institutions
  • Option to retain to maturity or resell in the market
  • Tradability gives it an advantage over interbank deposits (lower interest)

Malaysian Secondary Securities Market

  1. Outright purchase/sale market, MM instruments sold on outright basis
  2. Repo market, sold on a discount with an agreement to repurchase

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