TREASURY MANAGEMENT

MONEY MARKET AND MONEY MARKETS INSTRUMENTS ABROAD

BY:-
VISHESH KUMAR
10BSP1181

MONEY MARKET AND MONEY MARKETS INSTRUMENTS ABROAD
The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities which are highly liquid and are relatively low-risk debt instruments. The maturities of money market instruments range from one day to one year and are often less than 90 days. It comprises of the call and notice money market, repo market and the market for debt instruments. There is no physical "money market." Instead it is an informal network of banks and traders linked by telephones, fax machines, and computers.
Banks financial institutions, companies and government are the key participants in the money market. The size of the transactions in the money market typically is large ($100,000 or more). At the center of this web is the central bank whose policies have an important bearing on the interest rates in the money markets. The money market provides an equilibrium mechanism for levelling out the demand and supply of short term funds and serves as a focal point for the intervention by the central bank (RBI in India) for influencing the liquidity and interest rates in the financial systems.The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell securities or borrow funds on a short-term basis. In essence the market acts as a repository for short-term funds. Large corporations generally handle their own short-term financial transactions; they participate in the market through dealers. Small businesses, on the other hand, often choose to invest in money-market funds, which are professionally managed mutual funds consisting only of short-term securities.
Although securities purchased on the money market carry less risk than long-term debt, they are still not entirely risk free. After all, banks do sometimes fail, and the fortunes of companies can change rather rapidly. The low risk is associated with lender selectivity. The lender who offers funds with almost instant maturities ("tomorrow") cannot spend too much time qualifying borrowers and thus selects only blue-chip borrowers. Repayment therefore is assured (unless you caught Enron just before it suddenly nose-dived). Borrowers with fewer credentials, of course, have difficult getting money from this market unless it is through well-established funds.
The various money instruments used abroad are listed below: Country | Money Market Instruments | Country | Money Market Instruments | Pakistan | * Treasury Bills * Commercial papers * Repurchase agreement * Banker’s acceptance * Eurodollar deposits * Federal Funds | China | * Repurchase Agreements or outright Basis * Discount Window | UK | * Reserves Averaging * Standing Lending & Deposit Facilities * Treasury Bills * Bills of Exchange * Certificate of deposits * Commercial Papers * Repurchase Agreements | Thailand | * Repurchase Operations(Government Bonds,Tresury bills,FiDF Bonds, Government Guaranteed State Enterprises Bonds) * Bilateral Repurchase Operations * Bank of Thailand Bonds * Foreign Exchange Swaps | Malaysia | * Al-Mudaraba Interbank Investment * Islamic Inter bank Cheque Clearing System * Government Investment Certificate * Cagamas Mudharabah Bonds * Islamic Accepted Bills (IAB) * Repurchase Agreements * Sell and Buy Back Agreement (Islamic Repo) * Islamic Private Debt Securities | Canada | * Treasury Bills * Money Market Strips * Government Guaranted Commercial Paper * Banker’s Acceptance * Commercial Paper | Japan | * Call Money market * Commercial Paper * Certificate of deposits * Treasury Bills * Repurchase Agreements | Russia | * Refinancing Mechanism(Intra-day loans, Overnight loans, Lombard loans, Loans against collateral guarantees) * Repo Operations(Government Bonds, Federal Government Bills, Bank of Russia Bonds) * Securities accepted as Collateral for Bank of Russia loans(Regional Government bonds, Credit Institutions bonds, Mortgage Backed bonds, Resident corporate bonds, Bonds of international financial institutions) * Currency Swaps * Deposit Operations(at Fixed rate and at auction rate) | Australia | * Outright Transactions * Government Securities(treasury Notes,treasury Bonds,Treasury Indexed Bonds) * Semi-Government securities(Promissory note,Bonds,Indexed Bonds) * Repurchase Agreement * Government Securities(treasury Notes,treasury Bonds,Treasury Indexed Bonds) * Semi-Government securities(Promissory note,Bonds,Indexed Bonds) | | * | USA | * Federal Funds * Disciunt window * Certificates of Deposit * Negotiable Certificate of Deposits * Eurodollar CDs * Eurodollar Time Deposits * Repurchase Agreements * Treasury Bills | * Commercial Papers * Banker’s Acceptance * Future Contracts * Options * Interest rate Swaps * Discount notes * Bonds * Money Market mutual Fund |
Treasury Bills- Treasury bills (or T-Bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S. investors. Regular weekly T-Bills are commonly issued with maturity dates of 28 days, 91 days, 182 days, and 364 days.
Commercial papers- In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price.
Certificates of Deposit (CDs)
A certificate of deposit (CD) is a time deposit with a bank, which means that it cannot be withdrawn on demand (like a checking account). A depositor deposits a certain amount for a fixed term and a stated annual percentage rate. At the end of the fixed term (which can be anywhere from a month to several years) the bank returns the deposit with accumulated interest. Since banks have a slightly higher risk of default than the US government, CD's give a slightly higher return than a T-bill; however, the FDIC does insure CD's up to $100,000.

Bankers Acceptance- A banker's acceptance, or BA, is a negotiable instrument or time draft drawn on and accepted by a bank. Before acceptance, the draft is not an obligation of the bank; it is merely an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft. Upon acceptance, which occurs when an authorized bank accepts and signs it, the draft becomes a primary and unconditional liability of the bank. A banker's acceptance is also a money market instrument – a short-term discount instrument that usually arises in the course of international trade.
EuroDollar Deposits- Eurodollars are dollar-denominated time deposits in banks outside the U.S. (including branches of U.S. banks outside the U.S.). These are not limited to Europe, as the name implies, but can be anywhere outside the U.S. Because the banks are outside of the U.S., the Federal Reserve board has no jurisdiction over them; hence they can operate under tighter margins without as many regulations. This can allow the banks to make more money off the deposits and also makes Eurodollars more risky, but this translates to higher interest. Eurodollar deposits are usually in the millions and last less than 6 months; thus the average investor is out priced, but Eurodollars can be invested in through money market funds. A variant of a Eurodollar time deposit is a Eurodollar CD, which is just like a U.S. CD only that it's held outside the U.S.

Repos
A repo, or repurchase agreement, is an overnight loan usually made by government security dealers. The dealer will make an agreement with an investor to sell him securities overnight and then buy them back at a slightly higher price the next day. The investor will make overnight interest equal to the difference for which he buys and sells back the securities. Basically, a repo is a one day loan with securities used as collateral. A term repo is a simply a repo with a longer term, like 30 or so days. A reverse repo is when the investor holds the securities and sells them and buys them back from the security dealer.

Federal Funds
All banks which are members of the Federal Reserve System (every legal U.S. bank) are required to keep a certain amount of money in their reserve account, which is their deposit with "the Fed." The money in their account is called "federal funds" and the amount of money they are required keep is equal to the reserve ratio, which is set by the Fed, multiplied by the amount of deposits in their bank. For instance, if I deposit $100 in my bank and the reserve ratio is 10%, then my bank must put another $10 in their Federal Reserve account. At the end of the day, some banks come up short while others have more than enough federal funds. In order to meet the legal requirements, banks make overnight loans to each other at the "federal funds rate," which is also set by the Fed. Although this was set up primarily as a means of securing banks and ensuring they had enough funds, many large banks now use federal funds as one of their resources for funding.

Discount Window- The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The term originated with the practice of sending a bank representative to a reserve bank teller window when a bank needed to borrow money.[1] In the United States, the central bank is the Federal Reserve. The interest rate charged on such loans by a central bank is called the discount rate, base rate, or repo rate, and should not be confused with the Prime rate.

Money market mutual fund- Money Market funds are open-end management investment companies that are registered under the Investment Company Act and regulated under rule 2a-7 under the Act, which utilize pooled cash investments from many individual (retail) and institutional investors. The funds are structured to invest in a diversified portfolio of very short-term, high grade / low-risk financial, corporate and government debt. Money market funds pay dividends that reflect prevailing short-term interest rates.

Interest Rate Swaps- In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty. The fixed or floating rate is multiplied by a notional principal amount (say, USD 1 million). This notional amount is generally not exchanged between counterparties, but is used only for calculating the size of cash flows to be exchanged. The most common interest rate swap is one where one counterparty A pays a fixed rate (the swap rate) to counterparty B, while receiving a floating rate (usually pegged to a reference rate such as LIBOR).

Outright Transaction- In the U. S, the purchase or sale by the Federal Reserve of money market instruments for retention or for indefinite disbursement, thus creating a drain or an influx into the reserves of the banking system.

In summary, money market instruments are characterized as short-term, highly marketable investments, with an extremely low probability of default. Because the minimum investment is generally large, money market securities are typically owned by individual investors indirectly in the form of investment companies known as money market mutual funds, or, as they are usually called, money market funds. Money market rates tend to move together, and most rates are very close to each other for the same maturity. Treasury bill rates are less than the rates available on other money market securities, approximately one-third of a percentage point, because of their risk-free nature. This Money market exsists across the globe as we can see that in each and every country it is practiced.