Professional Documents
Culture Documents
SUBMITTED BY
PRIYANKA SHANTISWAROOP RAJPUT
TYBFM (V SEMESTER)
PROJECT GUIDE
PROF. PRASANNA CHOUDHARI
SUBMITTED TO
UNIVERSITY OF MUMBAI
RAJHASTHANI SAMMELAN’S
Ghanshyamdas Saraf College
Affiliated to University of Mumbai
ACCREDITED BY NAAC BY ‘A’ GRADE
&
Durgadevi Saraf Junior College
(ARTS & COMMERCE)
S.V Road, Malad (W)
Mumbai: 400 064
Year: 2012-2013
RAJHASTHANI SAMMELAN’S
Ghanshyamdas Saraf College
Affiliated to University of Mumbai
ACCREDITED BY NAAC BY ‘A’ GRADE
&
Durgadevi Saraf Junior College
(ARTS & COMMERCE)
S.V Road, Malad (W)
Mumbai: 400 064
Year: 2012-2013
CERTIFICATE
Date:
Date:
ACKNOWLEDGEMENT
EXECUTIVE SUMMARY
The seventh largest and second most populous country in the world, India has
long been considered a country of unrealized potential. A new spirit of
economic freedom is now stirring in the country, bringing sweeping changes in
its wake. A series of ambitious economic reforms aimed at deregulating the
country and stimulating foreign investment has moved India firmly into the
front ranks of the rapidly growing Asia Pacific region and unleashed the latent
strengths of a complex and rapidly changing nation.
Today, India is one of the most exciting emerging money markets in the world.
Skilled managerial and technical manpower that match the best available in the
world and a middle class whose size exceeds the population of the USA or the
European Union, provide India with a distinct cutting edge in global
competition. The average turnover of the money market in India is over Rs.
40,000 crores daily. This is more than 3 percents of the total money supply in
the Indian economy and 6 percent of the total funds that commercial banks
have let out to the system. This implies that 2 percent of the annual GDP of
India gets traded in the money market in just one day. Even though the money
market is many times larger than the capital market, it is not even fraction of
the daily trading in developed markets.
INDEX
Sr. No. Contents Page No
1. Introduction 2
2. History 4
10. Questionnaire 57
11. Suggestion 62
12. Conclusion 63
14. Articles
15. Bibliography
Introduction
One of the main differences between the money market and the stock market is
that most money market securities trade in very high denominations. This
limits access for the individual investor. Furthermore, the money market is
a dealer market, which means that firms buy and sell securities in their own
accounts, at their own risk. Compare this to the stock market where a broker
receives commission to acts as an agent, while the investor takes the risk of
holding the stock. Another characteristic of a dealer market is the lack of a
central trading floor or exchange. Deals are transacted over the phone or
through electronic systems.
The easiest way for us to gain access to the money market is with a money
market mutual funds, or sometimes through a money market bank account.
These accounts and funds pool together the assets of thousands of investors in
order to buy the money market securities on their behalf. However, some
money market instruments, like Treasury bills, may be purchased directly.
Failing that, they can be acquired through other large financial institutions with
direct access to these markets. There are several different instruments in the
money market, offering different returns and different risks.
History
Till 1935, when the RBI was set up the Indian money market remained highly
disintegrated, unorganized, narrow, shallow and therefore, very backward. The
planned economic development that commenced in the year 1951 market an
important beginning in the annals of the Indian money market. The
nationalization of banks in 1969, setting up of various committees such as the
Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986),
the setting up of discount and finance house of India ltd. (1988), the securities
trading corporation of India (1994) and the commencement of liberalization
and globalization process in 1991 gave a further fillip for the integrated and
efficient development of India money market.
1980s, has witnessed new instruments and new directions have been chalked
out. It is to be noted
here that, strictly speaking, the money market deals with short term flow of
funds whereas the
capital market, embracing the stock market, deals with medium and long-term
capital flows. But
these two markets can not be placed in water tight compartments and there is
often a spillover
Money market refers to the market where money and highly liquid
marketable securities are bought and sold having a maturity period of one or
less than one year. It is not a place like the stock market but an activity
conducted by telephone. The money market constitutes a very important
segment of the Indian financial system.
The major player in the money market are Reserve Bank of India
(RBI), Discount and Finance House of India (DFHI), banks, financial
institutions, mutual funds, government, big corporate houses. The basic aim of
dealing in money market instruments is to fill the gap of short-term liquidity
problems or to deploy the short-term surplus to gain income on that.
It consists of various sub markets like call money market, bill market etc.
A well developed money market helps the industries to secure short term loans
for meeting their working capital requirements. It thus saves a number of
industrial units from becoming sick.
An outward and a well knit money market system play an important role in
financing the domestic as well as international trade. The traders can get short
term finance from banks by discounting bills of exchange. The acceptance
houses and discount market help in financing foreign trade.
The money market helps the commercial banks to earn profit by investing their
surplus funds in the purchase of. Treasury bills and bills of exchange, these
short term credit instruments are not only safe but also highly liquid. The banks
can easily convert them into cash at a short notice.
(iv) Self sufficiency of banks
The money market is useful for the commercial banks themselves. If the
commercial banks are at any time in need of funds, they can meet their
requirements by recalling their old short term loans from the money market.
The well developed money market helps the central bank in shaping and
controlling the flow of money in the country. The central bank mops up excess
short term liquidity through the sale of treasury bills and injects liquidity by
purchase of treasury bills.
If the money market is well organized, it safeguards the liquidity and safety of
financial asset This encourages the twin functions of economic growth, savings
and investments.
In the money market, the demand for and supply of loan able funds are
brought at equilibrium The savings of the community are converted into
investment which leads to pro allocation of resources in the country.
STRUCTURE OF MONEY MARKET
The Indian money market is divided into two parts namely organized and
unorganized. The organized sector consist of The Reserve Bank of India,
Foreign Banks, Commercial Banks, Co-operative banks, Discount and Finance
House of India, Mutual funds and finance Companies.
STRUCTURE OF
MONEY MARKET
The RBI is the apex institution which controls and monitors all the
organizations in the organised sector. The commercial banks can operate as
lenders and operators. The FIs like IDBI, ICICI, and others operate as lenders.
The organised sector of Indian money market is fairly developed and
organised, but it is not comparable to the money markets of developed
countries like USA, UK and Japan.
Reserve Bank of India is the regulator over the money market in India. As the
Central bank, it injects liquidity in the banking system, when it is deficient and
contracts the same in opposite situation.
Commercial Banks
Commercial Banks and the CO-operative banks are the major participants in
the Indian money market. They mobilize the savings of the people through
acceptance of deposits and lend it to business houses for their short term
working capital requirements. While a portion of these deposits is invested in
medium and long-term Government securities and corporate shares and bonds,
they provide short-term funds to the Government by investing in the Treasury
Bills. They employ the short-term surpluses in various money market
instruments.
Discount and Finance House of India Ltd. (DFHI)
DFHI deals both ways in the money market instruments. Hence, it has helped
in the growth of secondary market, as well as those of the money market
instruments.
These institutions (eg. LIC, UTI, GIC, Development Banks, etc.) have been
allowed to participate in the call money market as lenders only.
Corporates
Companies create demand for funds from the banking system. They
raise short-term funds directly from the money market by issuing commercial
paper. Moreover, they accept public deposits and also indulge in intercorporate
deposits and investments.
Mutual Funds
Mutual funds also invest their surplus funds in variou~ money market
instruments for short periods. They are also permitted to participate in the Call
Money Market. Money Market Mutual Funds have been set up specifically for
the purpose of mobilisation of short-term funds for investment in money
market instruments.
UNORGANISED MONEY MARKET
The unorganized money market mostly finances short term financial needs
of farmers and small businessmen. The main constituents of unorganized
Money market are:
Indigenous Bankers (IBs)
The IBs are individuals or private firms who receive deposits and give loans and
thereby they operate as banks. Unlike moneylenders who only lend money, IBs accept
deposits as well as lend money. They operate mostly in urban areas, especially in
western and southern regions of the country. Over the years, IBs faced stiff
competition from cooperative banks and commercial banks. Borrowers are small
manufacturers and traders, who may not be able to obtain funds from the organised
banking sector, may be due to lack of security or some other reason.
Money Lenders (MLs)
MLs are important participants in unorganised money markets in India. There are
professional as well as non professional MLs. They lend money in rural areas as well as
urban areas. They normally charge an invariably high rate of interest ranging between
15% p.a. to 50% p.a. and even more. The borrowers are mostly poor farmers, artisans,
petty traders, manual workers and others who require short term funds and do not get
the same from organised sector.
Finance Brokers
They act as middlemen between lenders and borrowers. They charge commission for
their services. They are found mostly in urban markets, especially in cloth markets and
commodity markets.
Finance Companies
They operate throughout the country. They borrow or accept deposits and lend them
to others. They provide funds to small traders and others. They operate like indigenous
bankers.
Sub Market (Instruments):
INSTRUMENTS
Traditionally when a borrower takes a loan from a lender, he enters into
an agreement with the lender specifying when he would repay the loan and what
return (interest) he would provide the lender for providing the loan. This entire
structure can be converted into a form wherein the loan can be made tradable by
converting it into smaller units with pro rata allocation of interest and principal.
This tradable form of the loan is termed as a debt instrument. Therefore, debt
instruments are basically obligations undertaken by the issuer of the instrument
as regards certain future cash flows representing interest and principal, which
the issuer would pay to the legal owner of the instrument. Debt
instruments are of various types. The key terms that distinguish one
debt instrument from another are as follows:
By convention, the term "money market" refers to the market for short-term
requirement and deployment of funds. Money market instruments are those
instruments, which have a maturity period of less than one year. The most
active part of the money market is the market for overnight and term money
between banks and institutions (called call money) and the market for repo
transactions. The former is in the form of loans and the latter are sale and bu
back agreements - both are obviously not traded. The main traded
instruments are commercial papers (CPs), certificates of deposit (CDs) and
treasury bills (T-Bills). All of these are discounted instruments ie they are issued
at a discount to their maturity value and the difference between the issuing price
and the maturity/face value is the implicit interest. These are also completely
unsecured instruments. One of the important features of money market
instruments is their high liquidity and tradability. A key reason for this is
that these instruments are transferred by endorsement and delivery and there is
no stamp duty or any other transfer fee levied when the instrument changes
hands. Another important feature is that there is no tax deducted at source from
the interest component. A brief description of these instruments is as follows:
Certificate of Deposit
Commercial Papers,
Treasury Bills,
The certificates of deposit are basically time deposits that are issued by
the commercial banks with maturity periods ranging from 3 months to five
years. The return on the certificate of deposit is higher than the Treasury Bills
because it assumes Certificates of deposits process the following distinguishing
characteristics:
Negotiable instruments
CDs are negotiable term-deposit certificates Issued by commercial
bank/financial institutions at discount to face institutions. value at market rates.
The Negotiable Instruments Act governs CDs.
Maturity
The maturity period of CDs ranges from 15 days to one year.
Nature
CDs are in the form of usance promissory notes and hence easily
negotiable by endorsement and delivery.
Ideal source
CDs constitute a judicious source of investments as these
certificates are the liabilities of commercial
PROFILE
A distinguishing profile of Certificate of Deposit as operating in India is
presented below:
THE LAUNCH
The RBI launched the scheme of CDs with effect from March 27, 1989.
Following guidelines were laid down in this regard.
ELIGIBLE ISSUERS
The institutions that are eligible to issue CDs are scheduled commercial banks
(excluding RRBs) and specified all-India financial institutions, namely,
IDBI, IFCI, ICICI, SIDBI, IRBI, and EXIM bank.
ELIGIBLE SUBSCRIBERS
The parties who are eligible to buy CDs are individuals, associations,
companies, corporations, trust funds, etc. NRI an also subscribe to the CDs.
How ere, this is possible only on a non-repatriation basis. It is not possible
for an NRI to endorse CDs to another NRI in the secondary market.
NEGOTIATION
CDs are freely transferable by endorsement and delivery after the initial lock
in period of 15 days. The instrument can be purchased by any of the above
subscribers and DFHI in the secondary market.
MATURITY
The maturity period of CDs issued by banks ranges from 3 days to 12 months
and that issued by specified financial institutions can have a maturity period
up to 3 years. With the announcement of credit policy on April27, 2000 the
maturity period was reduced from 3 month to 15 days.
DISCOUNT
CDs are to be issued at a discount to face value, with the maturity period not
having any grace period.
LIMITS OF ISSUE
The maximum amount of issue by a bank, which was originally fixed at 1
percent of its fortnightly aggregate average deposits, was raised to 10 percent in
1992. This was subsequently abolished totally. The minimum size of issue to a
single investor, which was originally fixed at Rs.10 lakhs, was reduced to Rs.
5lakhs with effect from October 21, 1997. Issue of CDs above Rs.5 lakhs can
now be made in multiples of Rs.1 lakhs. CDs can now be CRR on
issue price of CDs for which there is no ceiling.
STAMP DUTY
Stamp duty is payable on CDs as applicable to any other negotiable
instrument.
SECURITY PAPER
CDs are transferable by endorsement and delivery, and shall therefore be issued
on a good quality security paper.
OTHER REQUIREMENTS
1. No loans can be granted by banks against CDs.
2. Banks cannot have any buyback arrangement of their own CDs before
maturity.
3. Banks are to submit fortnightly report on their CDs to the RBI under section
42 of the RBI Act, 1935.
4. Banks are to show CDs under the head ‘liabilities’ in the balance sheet.
YIELD
CDs are offered at interest rates higher than the time deposits of banks.
However, the rate of interest is dependent upon many factors such as urgency of
requirement for funds, alterative opportunities for investment of funds
mobilized, etc. The rate of discount being deregulated is now determined by the
demand and supply of CDs. CDs are issued at a discount to their face
value and redeemed at par. CDs are issued at a front-end discount and in such a
case; the effective rate of interest is higher than the quoted discount rate.
Effective rate of interest may be calculated as follows.
ERRR= [(1+QDR/100*N/M) N/M-1]*100
Where,
ERR = Effective rate of interest
QDR = Quoted discount rate
N = Total period in a year. Say 12 months or 365 days etc
M = Maturity period in months or days as the case may be
ROLE OF DFHI
The Discount and Finance House of India Ltd. Functions as a market maker in
CDs market. It offers bid rate, the rate of discount at which it is prepared to buy
CDs, and offer rate at which it would be willing to sell the CDs. The DFHI acts
as an ideal conduit for disinvestments of CD holdings, which is done through
their banker in Mumbai. DFHI also engages in buying CDs
from the bank at its bid discount rate. Settlements are effected through RBI
cheque.
ROLE OF BANKS
Scheduled commercial banks are the active players in the realm of CDs
market segment. CDs are used as an important money market instrument. CDs
provide an ideal avenue of investment money market instrument. CDs provide
ideal avenue of investment for bankers. CDs are considered safe, liquid, and
attractive in returns for both scheduled commercial bank and
investors. It is not necessary for banks to encash CDs before maturity under the
RBI Act. Banks are under obligation to maintain usual reserve requirements
(SLR and CRR) on issue price of CDs. CDs offer the opportunity for banks for
the bulk mobilization of resources as part of effective fund management.
Besides, offering an attractive yield help bankers utilize them eligible assets for
determination of Net Demand and Time Liabilities (NDTL). According to the
RBI guidelines, it will not be possible for banks to enter into buyback
arrangement with the subscriber of CDs. Similarly, they cannot grant loans
against CDs issued by them. It is possible for investors to sell CDs in secondary
market before their maturity. This offers investors the advantage of
liquidity through ready marketability. However, the tendency on the part of
holders of CDs to hold the instruments till maturity date has not made possible
for the creation of an effective secondary market for them, although the primary
market for CDs has shown a considerable improvement.
COMMERCIAL PAPER
Debt instrument that are issued by corporate houses for raising short-term
financial resources from the money market are called Commercial Papers
(CPs).
FEATURES
Following are the features of commercial papers:
NATURE
These are unsecured debts of corporate. They are issued in the form of
promissory notes. These are redeemable at par to the holder at maturity. The
issuing company should have a minimum tangible net worth to the extent of
Rs.4 crores. Moreover, the working capital (fund-based) limit of the
company should not be less than Rs. 4 crores and this allows corporate to issue
CPs up to 100 per cent of their fund based working capital limits. CPs are
issued at a discount to face value in multiples of Rs.5 Lakhs. CPs attracts stamp
duty. No prior approval of RBI is needed to issue CPs and no
underwriting is mandatory. The issuing company has to bear all expense (Such
as dealers’ fees, rating agency fee and charges for provision of stand-
by facilities) relating to the issue of CP. The issue of CPs serves the purpose of
releasing the pressure on bank funds for small and medium sized
borrowers, besides allowing highly rated companies to borrow directly from the
market.-
MARKET
The market for the Cps comprises of issues made by public sector and private
sector enterprises CPs issued by top rated corporate are considered as sound
investments. Conditions attached to the issue are less stringent than those
applicable for raising CPs. Beginning from September 1996, Primary
Dealers(PDs) were also permitted by RBI to issue CPs for
augmenting their resources. This is one of the steps initiated by the RBI to
make the CPs market popular.
RATING
As per the guidelines of the RBI, CPs are required to be graded by the
organization issuing them. Accordingly, a rated CP is considered to be a quality
and sound instrument. With the liberalization of interest rate structure,
the rate of interest is market-determined. This causes wide variation in
the prevailing rates of interest.
INTEREST RATES
The rate of interest applicable to CPs varies greatly. This variation is
influenced by a large number of factors such as credit rating of the
instrument, economic phase, the prevailing rate of interest in CPs market, call
rates, the position in foreign exchange market, etc. It is however to be noted that
there is no benchmark for the interest rate.
MARKETABILITY
The marketability of the CPs is influenced by the rates prevailing in the call
money market and the foreign exchange market. Accordingly where
attractive interest rates prevail in these markets, the demand for Cps will be
affected. This is because; investors will divert their investment into these
markets.
CPS IN LIEU OF WC
The nature of credit policy announced by the RBI to allows highly rated
corporate to have the advantage of banks offering an automatic restoration of
working capital limits on the repayment of CP. Accordingly, short-term
working capital loans were substituted with cheaper CPs. This was done by the
RBI to hasten the growth of the CP market.
MATURITY
The CPs shall be issued for a maturity period ranging from 15 days to one year
from the dated is issue.
TARGET MARKET
The issue of CPs may be targeted to such persons as individuals, banks,
companies, other corporate bodies registered or incorporated in India and
unincorporated bodies and non-resident Indian (NRI) on non-repatriation
basis subject to the condition that it shall be transferable.
LIMITS OF ISSUE
Each issue of CPs (including renewal) shall be treated as a fresh issue. The CPs
issue may take place in multiples of Rs. 5 Lakhs. The investment by any single
investor shall be for a minimum amount of Rs. 25 Lakhs (face Value) and the
secondary market transactions may be dealt in for amounts of Rs. 5Lakhs or
multiples thereof. The RBI shall fix the total amount of issue. The issue amount
shall be raised within a period of 2 week from weeks from the date of approval
by the Reserve Bank or ma be issued on a single day or in parts on different
days as the case may be.
NATURE
The CPs shall be in the form of usance promissory note. It shall be negotiable
by endorsement and delivery. It is issued at discount to face value, discount
being determined by the SD issuing the CPs. The SDs shall bear the expenses of
the issue, including dealer’s fee, rating agency fee, etc.
TREASURY BILL
TREASURY BILLS (TBs)
A kind of finance bills, which are in the nature of promissory notes, issued by
the government under discount for a fixed period, not exceeding one year,
containing a promise to pay the amount stated therein to the bearer of the
instrument, are know as ‘treasury bills’.
GENERAL FEATURES
Treasury bills incorporate the following general features:
Issuer
TBs are issued by the government for raising short-term funds from institutions
or the public for bridging temporary gaps between receipts (both revenue and
capital) and expenditure.
Finance bills
TBs are in the nature of finance bills because they do not arise due any genuine
commercial transaction in goods.
Liquidity
TBs are not self-liquidating like genuine trade bills, although they
enjoy higher degree of liquidity.
Vital source
Treasury bills are an important source of raising short- term funds by the
government.
Monetary management
TBs serve as an important tool of monetary used by the central bank of the
county to infuse liquidity in to the economy.
FEATURES OF INDIAN TBs
HISTORY
It was in the year 1877 that Treasury Bills (TBs) came to be issued for the first
time in the world. Later, it acquired wide popularity around the world both in
developing and developed countries. TBs were first issued in India in
October1971. The issue aimed at raising resources for financing the First World
War efforts of the government and for mopping liquidity in the economy
due to heavy war expenditure.TBs that were initially sold by the government
had a maturity period of 3 months, 6 months, 9 months and 12 months. Later
on, with the setting up of the RBI in 1935, the issue profile of TBs underwent a
lot of changes. Accordingly, RBI came to issue two type of TBs such as Tap
Bills that were issued at all times and Intermediate Bill that were sold between
auctions, to nongoverment investors. However, in the year 1965, a sale of TBs
to public through auction was suspended and issue took place on top basis
at a discount. Thus commercial banks began to invest in them.
ISSUE
TBs, which were first up to 1935 by the Government of India directly, came to
be issued by the RBI since its inception in 1935. Thereafter, TBs are issued at a
discount by the RBI on behalf of the Government of India.
TYPES
There are two types of treasury bills. They are ordinary treasury bills and ad hoc
treasury bills. The freely marketable treasury bills that are issued by the
Government of India to the public, banks and other institution for raising
resources to meet the short-term finance needs takes the form of ordinary TBs.
MATURITY PERIOD
A lot of changes taken place in the realm of the periodicity of treasury bills,
changes having being brought about by the policy announcements made by RBI
from time to time. A brief account of the changes in the period of maturity of
TBs is outlined below:
1. Maturity period of TBs at the close of the First World War was of 3, 6, 9, and
12 month’s duration.
2. Maturity periods of tap bills and Intermediate Bills introduces by RBI
immediately after its inception was 91 days which was continued up to
November 1986.
3. Maturity period of 182 days recommended by Chakraborty Committee was
issued up to April 1992.
4. Maturity period of 365 days beginning from April 1992.
5. Maturity period of 14 days introduced in May 1997 and of 28 days
introduced on October21, 1997.
6. Maturity period of 182 days reintroduced with effect from May26, 1999.
PARTICIPANTS
The participants in the TBs market include the Reserve Bank of India, the State
Bank Of India, Commercial Banks, State Governments and othe approved
bodies, Discounts and Finance House of India as a market maker in TBs, the
Securities Trading Corporation of India (STCI), other financial institutions
such as, LIC, UTI, GIC, NABRAD, IDBI, IFCI, ICICI, etc
corporate entities and general public and Foreign Institutional Investors. Of the
above-mentioned participants, RBI and commercial banks are the most
popular players. This essentially arises from the nature of relationship
between them. TBs are least popular among the corporate entities and
the general public.
THE ISSUE PROCEDURE
The procedure followed by the RBI for successful issue of treasury bills is
briefly outlined below.
NOTIFICATION
The RBI issues notifications for the sale of 91day TBs on tap basis
throughout the week and the 14-days, 28- days, 91-days, and 364-days, TBs
through fortnightly auction. The notification mentions the date of auction
and the last date for submission of tenders.
TENDERING
Immediately after the issue of notification by theRBI, investors are permitted
to submit bids through separate tenders. The result of the auction
mentioning the price up to which the bids have been accepted is displayed. The
successful bidders are expected to collect letter of acceptance from the
RBI and deposit the same together with a cheque on RBI.
SGL
SGL is maintained by the RBI for facilitating the purchases and sales of TBs by
the investors like Commercial Banks, DFHI, STCI and other financial
institutions.
DFHI
Where the SGL facility is not available to certain investors, purchase and sale
takes DFHI. TBs sold to such investors are held by DFHI on their behalf, which
pays the proceeds of the TBs held, to the investor on the date of maturity. DFHI
takes an active part in the primary auctions of TBs, besides operating in the
secondary market by quoting tow-way rates. In addition, the DFHI also gives
buyback and sell-back commitments for periods up to 14 days at negotiated
interest rates, to commercial banks, financial institutions and public sector
undertakings.
AUCTIONING METHOD’s.
UNIFORM PRICE AUCTION
The system of uniform price auction system in respect of 97-days, TBs was
introduced as to broaden market participation. (‘Winners’ curse is a
phenomenon whereby those bidding at lower than the cut-off, end up paying a
premium.) The introduction of uniform price auction is expected to reduce
uncertainty associated with the bidding process. This is peculiar to the
underdeveloped nature of Indian money market, which is afflicted by the lack
of reliable information, causing wide differences in the yiel
expectations before the auctions. The amounts of issue are notified in respect of
97-days TBs auctions and the dated securities auctions.
TREASURY BILLS
AUCTION
Auction in TBs takes place both on ‘Competitive’ as well as on
‘noncompetitive’ basis. The State Governments, Provident Funds and the
Nepal Rastra Bank are the ‘noncompetitive’ bidders. Commercial banks and
other financial institutions comprise ‘competitive bidders’. It is to be noted that
the merits of enhanced market efficiency and price discovery take place through
the competitive bids.
POLICY MEASURES
With a view to improving the depth and liquidity in the government
securities market, RBI announced the following policy measures relating to
Treasury Bills with effect from October1999:
1. Price based auction of government – dated securities.
2. Auction of 182-day Treasury Bills.
3. A calendar of Treasury Bills Issuance
TB RATE
The discount rate at which the RBI sells TBs known as Treasury Bills rate. The
effective yield on TBs depends on such factors as the rate of discount,
difference between the issue price and the redemption value, and time period of
their maturity. The treasury bills rate is computed as follows:
Y= {[(FV-IP)/IP]*[364/MP]}*100.
Where,
FV = Face Value TBs
IP = Issue Price of TBs
MP = Maturity Period of TBs in days
D = Discount.
BENEFITS
TBs being an important money market instruments provide the following
benefits:
LIQUIDITY
Treasury bills command high liquidity. A number of institutions such as RBI,
the DFHI, STCI, commercial banks, etc take part in the TB market. In addition,
the Central bank is always prepared to purchased or discount TBs.
NO DEFAULT RISK
Since there is a guarantee by the central government, TBs are absolutely free
from the risk of default of payment by the issuer. Moreover, the government
itself issues the TBs.
AVAILABILITY
RBI has the policy of making available on a steady basis, the TBs especially
through the ‘Tap’ route since July 12, 1965. This greatly helps banks and other
institutions to park their funds temporarily in TBs.
LOW COST
Trading in TBs involves less transaction costs. This is because two-way quotes
with a fine margin are offered by the DFHI on a daily basis.
SAFE RETURN
The biggest advantage of TBs is that they offer a steady and sage return to
investors. There are not many fluctuations in the discount rate. It is also
possible for the investors to earn attractive return by keeping investment in
nonearning cash to the minimum and supplementing it with TBs.
NO CAPITAL DEPRECIATION
Since TBs command high order of liquidity, safely and yield, there is very little
scope for capital depreciation in them.
SLR ELIGBILITY
TBs are of great attraction to commercial banks as it helps them park their funds
(Net Demand and Time Liabilities) as per the norms or SLR
announced b the RBI from time to time. This reason makes commercial banks
dominate dealers in TBs.
FUNDS MOBILIZATION
TBs are used as an ideal tool by the government for raising short-term funds
required for meeting temporary budget deficit.
MONETARY MANAGEMENT
It is also possible for the government to mop up excess liquidity in the
economy through the issue of TBs. Since TBs are subscribed by the investors
other than the RBI, the issue would neither lead to inflationary pressure nor
result in monetization.
BETTER SPREAD
TBs facilitate proper spread of asset mix different maturity as they are
available on tap basis as well as in fortnightly auctions.
PERFECT HEDGE
TBs can be used as a hedge against volatility of call loan market and interest
rate fluctuations.
FUND MANAGEMENT
TBs serve as effective tools of fund management because of the following
reasons:
1. Ready market availability, both for sale and purchase at market driven prices,
thus imparting flexibility.
2. Facility of rediscounting TBs on ‘tap basis’.
3. Facility of refinancing from the RBI.
4. Plethora of options available to fund managers to invest in TBs and for
raising funds against TBs especially through and with the help of DFHI
5. Ideally suited for investment of temporary surplus
6. Possibility of building up portfolio of TBs with dates of maturities matching
the dates of payment of liabilities, such as certificates of deposits and deposits
of short-term maturities.
7. Possibility of meeting the temporary difficulties of funds by entering into
buyback transactions for surplus TBs and reversing the transactions
when the financial need is over
8. Possibility of making enhanced profit by indulging in quick raising of money
against TBs for investing in call money market when call rates are high and
doing the reverse when call rates dip.
REPOS
Contract
The Repo contract provides the seller – bank to get money by partying with its
security and the buyer – bank in turn to get the security by parting with its
money. It becomes a Reserve Repo deal for the purchaser of the security.
Securities are sold first to a buyer bank and simultaneously another contract is
entered in to with buyer to repurchase them at a predetermine date and price in
future. The price of the sale and repurchase of securities is determined before
entering into deal.
Safety
Repo is an almost risk free instrument used to even out liquidity
changes in the system. Repos offer short-term outlet for temporary excess
cash at close to the market interest rate.
Hedge tool
As purchaser of the repo requires title to the securities for the term of agreement
and as the repurchase price is locked in at a time of sale itself. It is possible to
use repos as an effective hedge-tool to arrange the others repos or to sell them
outright or to deliver them to another party to fulfill the delivery commitment in
respect of a forward or future contract or a short sale or a maturing reveres repo.
Period
The minimum period for Ready Forward Transaction Bill willbe 3 day.
However, RBI withdraws this restriction for the minimum period with the effect
from October 30, 1998.
Liquidity Control
The RBI uses Repo as a tool of liquidity control for absorbing surplus liquidity
from the banking system in a flexible way and thereby preventing interest
rate arbitraging. All Repo transaction are to be effected at Mumbai only and
the deals are to be necessary put through the subsidiary General Ledger (SGL)
account with the Reserve Bank of India.
The Reserve Bank of India introduced the Money Market Mutual Funds
(MMMFs) scheme in April 1972. The schemes aim at providing additional
short-term avenues to individual investor in order to bring Money Market
Instrument within their reach. MMMFs are expected to be more attractive to
banks and financial institutions, ho would find them providing greater
liquidity and depth to the money market.
FEATURES
The Silent features of the MMMFs are as follows.
Eligibility
The MMMFs can be set up by schedule commercial banks and
publicfinancial institution as define under section 4A of the companies Act,
1956, either directly or through their existing Mutual Funds / Subsidiaries who
are engaged in fund management. In addition, private sector Mutual Funds may
also set up MMMFs with the prior approval of RBI, subject to fulfillment of
certain terms and conditions. SEBI’s clearance is required in the event of
MMMFs being set up in the private sector.
Structure
MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or
Money Market Mutual Funds (MMMFs)
Size
There is no ceiling prescribed for the MMMFs for raising resources.
Investors
The MMMFs are primary indented to serve as a vehicle for individual
investor to participate in the Money Market, the units / shares of MMMFs can
be issued only to individuals. In addition, individual Non Resident Indian
(NRIs) may also subscribe to the share / units of MMMFs. The dividend /
income on such subscription will be allowed to be repatriated, through the
principle amount of subscription will be allowed to be repatriated, though the
principal amount of subscription will not.
Minimum Size of Investment
MMMFs would be free to determine the minimum size of the investment by
single investor. The investor cannot be guaranteed of a minimum rate of return,
the minimum lock-in period for the investment would be 46 days.
Investment by MMMFs
The resources mobilized by MMMFs should be invested exclusively in the
various money market instruments as listed below.
1. Treasury Bills and dated Government Securities having an unexpired
maturity up to 1 year with no minimum limit
2. call / notice money with no maximum limit
3. Commercial Paper with no maximum limit, the exposure to the
commercial paper issue by the individual company being limited to 3% of the
resources of the MMMFs as the prudential requirement
4. Commercial bills arising out of genuine trade / commercial
transactions and accepted / co-accepted by banks with no – maximum limits.
Reserve Requirements
In the MMMFs set up by banks, the resources mobilized by them would not to
be consider part of their net demand, and time liabilities, and as such would be
free of any reserve requirement.
Stamp duty
The share / units issued by MMMFs would be subject to Stamp duty.
Regulatory Authority
RBI is the regulatory that gives the approval for the setting of MMMFs. Beside
this, banks their subsidiaries and public financial institution would also be
required to comply with the guidelines and directives that may be issued by RBI
from time to time for the setting and operation of MMMFs. Similarly, the
Private Sector MMMFs would need to clearance of SEBI, as also approval of
RBI.
Call money market is for very short term funds, known as money on call. The
rate at which funds are borrowed in this market is called `Call Money rate'. The
size of the market for these funds in India is between Rs 60,000 million to Rs
70,000 million, of which public sector banks account for 80% of borrowings
and foreign banks/private sector banks account for the balance 20%. Non-bank
financial institutions like IDBI, LIC, and GIC etc participate only as lenders in
this market. 80% of the requirement of call money funds is met by the non-
bank participants and 20% from the banking system.
Call markets represent the most active segment of the money markets. Though
the demand for funds in the call market is mainly governed by the banks' need
for resources to meet their statutory reserve requirements, it also offers to
some participants a regular funding source for building up short -term assets.
However, the demand for funds for reserve requirements dominates any other
demand in the market.. Figure 4.1 displays the average daily volumes in the
call markets.
Figure 4.2: Average Daily Volumes in the Call Market (Rs. cr.)
The call money market for India was first recommended by the Sukhumoy
Chakravarty Committee, which was set up in 1982 to review the working of
the monetary system. They felt that allowing additional non-bank participants
into the call market would not dilute the strength of monetary regulation by
the RBI, as resources from non-bank participants do not represent any
additional resource for the system as a whole, and their participation in call
money market would only imply a redistribution of existing resources from
one participant to another. In view of this, the Chakravarty Committee
recommended that additional non-bank participants may be allowed to
participate in call money market.
The Vaghul Committee Report
Various reform measures have imparted stability to the call money market.
With the transformation of the call money market into a pure inter-bank
market, the turnover in the call/notice money market has declined
significantly. The activity has migrated to other overnight collateralized
market segments such as market repo and CBLO
F
Category Bank PD MF Corporate Total
I
I.
154 19 - - - 173
Borrower
2
II. Lender 154 19 35 50 277
0
Source: Report of the Technical Group on Phasing Out of Non-banks from
Call/Notice Money Market, March 2001.
Banks and PDs technically can operate on both sides of the call
market, though in reality, only the P Ds borrow and lend in the call markets.
The bank participants are divided into two categories: banks which are pre-
dominantly lenders (mostly the public sector banks) and banks which are pre-
dominantly borrowers (foreign and private sector banks). Currently, the
participants in the call/notice money market currently include banks
(excluding RRBs) and Primary Dealers (PDs) both as borrowers and lenders.
The rate of interest on call funds is called money rate. Call money rates
are characteristics in that they are found to be having seasonal and daily
variations requiring intervention by RBI and other institutions.
During normal times, call rates hover in a range between the repo rate
and the reverse repo rate. The repo rate represents an avenue for parking short
-term funds, and during periods of easy liquidity, call rates are only slightly
above the repo rates. During periods of tight liquidity, call rates move towards
the reverse repo rate. Table 4.3 provides data on the behaviour of call rates.
Figure 4.3displays the trend of average monthly call rates.
The behaviour of call rates has historically been influenced by liquidity
conditions in the market. Call rates touched a peak of about 35% in May 1992,
reflecting tight liquidity on account of high levels of statutory pre-emptions
and withdrawal of all refinance facilities, barring export credit refinance. Call
rates again came under pressure in November 1995 when the rates were 35%
par.
The Reserve Bank of India introduced the Money Market Mutual Funds
(MMMFs) scheme in April 1972. The schemes aim at providing additional
short-term avenues to individual investor in order to bring Money Market
Instrument within their reach. MMMFs are expected to be more attractive to
banks and financial institutions, ho would find them providing greater
liquidity and depth to the money market.
FEATURES
The Silent features of the MMMFs are as follows.
Eligibility
The MMMFs can be set up by schedule commercial banks and
publicfinancial institution as define under section 4A of the companies Act,
1956, either directly or through their existing Mutual Funds / Subsidiaries who
are engaged in fund management. In addition, private sector Mutual Funds may
also set up MMMFs with the prior approval of RBI, subject to fulfillment of
certain terms and conditions. SEBI’s clearance is required in the event of
MMMFs being set up in the private sector.
Structure
MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or
Money Market Mutual Funds (MMMFs)
Size
There is no ceiling prescribed for the MMMFs for raising resources.
Investors
The MMMFs are primary indented to serve as a vehicle for individual
investor to participate in the Money Market, the units / shares of MMMFs can
be issued only to individuals. In addition, individual Non Resident Indian
(NRIs) may also subscribe to the share / units of MMMFs. The dividend /
income on such subscription will be allowed to be repatriated, through the
principle amount of subscription will be allowed to be repatriated, though the
principal amount of subscription will not.
Reserve Requirements
In the MMMFs set up by banks, the resources mobilized by them would not to
be consider part of their net demand, and time liabilities, and as such would be
free of any reserve requirement.
Stamp duty
The share / units issued by MMMFs would be subject to Stamp duty.
Regulatory Authority
RBI is the regulatory that gives the approval for the setting of MMMFs. Beside
this, banks their subsidiaries and public financial institution would also be
required to comply with the guidelines and directives that may be issued by RBI
from time to time for the setting and operation of MMMFs. Similarly, the
Private Sector MMMFs would need to clearance of SEBI, as also approval of
RBI.
The aims of the Reserve Bank’s operations in the money market are:
To ensure that liquidity and short term interest rates are maintained at levels
consistent with the monetary policy objectives of maintaining price stability.
The Reserve Bank of India influence liquidity and interest rates through a
number of operating instruments - cash reserve requirement (CRR) of banks,
conduct of open market operations (OMOs), repos, change in bank rates and at
times, foreign exchange swap operations.
D
E
Dichotomy between organized and
F
unorganized sector
E
Predominance of unorganized sector
C
Wasteful Competition
T
Absence of All-India Market
S
Inadequate banking facilities
O Seasonal shortage of funds
F Diversity of Interest rates
Absence of Bill market
M
M
o Wasteful Competition
Wasteful competition exists not only between the organised and
unorganised sectors, but also among the members of the two sectors. The
relation between various segments of the money market are not cordial; they
are loosely connected with each other and generally follow separatist
tendencies. For example, even today, the State Bank of Indian and other
commercial banks look down upon each other as rivals. Similarly, competition
exists between the Indian commercial banks and foreign banks.
(ii) Cash credit is the main form of borrowing from the banks. Cash credit is
given by the banks against the security of commodities. No bills are involved
in this type of credit.
(iii)The practice of advancing loans by the sellers also limits the use of bills.
(vii) In their desire to ensure greater liquidity and public confidence, the Indian
banks prefer to invest their funds in first class government securities than in
exchange bills.
(viii) The Reserve Bank of India also prefers to extend rediscounting facility to
the commercial banks against approved securities
QUESTIONNAIRE
Age: Gender:
□ below 1 lakhs
□ above 5 lakhs
□ Deposits in Banks
□ Yes
□ No
4) How long would you like to hold your Money Market Instruments?
□ Low
□ Average
□ Medium
□ High
□ below 10 %
□ between 10 % - 20%
□ above 30%.
□ Poor
□ Average
□ Good
□ Excellent
□ Yes
□ No
Sampling objective: to find out individual investors for the age group of
18 -55 years.
Particular No. of
s investors
Deposits in 13
Banks
Investmen 07
t in
Real
Estate
Investmen 11
t in
Capital Investment of Savings
Market
Investment in
Investmen
Money Market 09 in
Deposits
t in
23% Banks
32%
Money
Market
Investment in
Investment in
Capital Market
Real Estate
27%
18%
Risk No. of
Involvemen Investors
t
Low 03
Average 05
Medium 15
High 17
Suggestion
In a view of the various defects in the Indian money market, the following
suggestions have been made for its proper development:
The activities of the indigenous banks should be brought under the effective
control of the Reserve Bank of India.
Hundies used in the money market should be standardised and written in the
uniform manner in order to develop an all-India money market.
For raising the efficiency of the money market, the number of the clearing
houses in the country should be increased and their working improved.
Conclusion
Money market securities are very liquid, and are considered very safe. As a
result, they offer a lower return than other securities.
The easiest way for individuals to gain access to the money market is
through a money market mutual fund.
CDs are safe, but the returns aren't great, and your money is tied up for the
length of the CD.
Commercial paper is an unsecured, short-term loan issued by a corporation.
Returns are higher than T-bills because of the higher default risk.
BAs are used frequently in international trade and are generally only
available to individuals through money market funds.
The average eurodollar deposit is very large. The only way for individuals
to invest in this market is indirectly through a money market fund.
Nothing the government can do will prevent every future financial crisis; they
have been with us since the advent of money and financial markets. But the
government is even having trouble fixing things that made the last crisis so
devastating.
Financial crises can't be prevented, but can the government make changes to
make their impact less devastating? David Wessel reports on The News Hub.
Photo: Bloomberg.
But Ms. Schapiro had only one other vote. The swing voter was Luis Aguilar, a
former general counsel of Invesco, which has a money-market fund. He said
Wednesday he would oppose the Schapiro proposal; she called off a vote that
had been tentatively set for next week.
In September 2008, the original money fund, Reserve Primary Fund, had so
much of its money—1.2% of its $63 billion—in Lehman Brothers that when
Lehman went down it "broke the buck." Reserve ended up with 97 cents for
every $1 its remaining customers had invested. That contributed to a run on
prime money-market funds, the ones that invest in securities other than U.S.
Treasurys. In one week, $310 billion, or 15%, fled.
That endangered the big companies hooked on borrowing from the funds, and
led the Treasury to extend an extraordinary taxpayer guarantee to those with
money in the funds.
No one wants to go through that again. So in 2010, the SEC, with industry
backing, required funds to have more ready cash (essentially, securities that are
about to mature or are issued by the government) in case a lot of investors
suddenly want to pull money out.
The industry says that solved the problem, a view that Mr. Aguilar says the
SEC hasn't thoroughly studied. Ms. Schapiro says it solved only one—liquidity
—but didn't solve another: the risk the funds take that some company to which
they have lent money defaults (excluding, of course, funds that limit holdings
to U.S. Treasurys).
As Eric Rosengren, president of the Federal Reserve Bank of Boston, puts it:
Prime money-market funds are trying to do three things—to promise to return
$1 for every $1 invested, to invest in securities with some credit risk and to
hold no capital cushion to absorb losses. The three are incompatible.
The industry notes that only two funds have ever broken the buck—and argues
this is much ado about nothing.Yet that doesn't mean other funds didn't come
close. A Boston Fed study—unchallenged by the industry—found "frequent
and significant" cases in which companies that sponsor money funds had to
bail them out. At least $4.4 billion was provided between 2007 and 2011 to at
least 78 funds.That's good for shareholders, but will sponsors always be there?
"If sponsor support were explicitly required and planned for, and all sponsors
had the consistent ability to provide support, such a business model might not
be viewed as problematic," the Fed economists said. "But the current model…
reinforces investor confidence in the stability of the product without the ability
of all sponsors to consistently deliver." The industry also argues the 2010 rule
changes were sufficient.
Agence France-Presse/Getty Images
Yet the Treasury's Office of Financial Research found that in April 2012—after
those SEC changes had been implemented—there were 105 money-market
funds with combined assets of more than $1 trillion that were at risk of
breaking the buck if any of the top 20 outfits in which they invested defaulted.
Of those, 14 were at risk of breaking the buck if any of the top 30 outfits in
which they invested did so.
Ms. Schapiro offered two options. One, forbid money-market funds from fixing
share prices at $1 and, instead, let them fluctuate with the market value of their
holdings. The industry hates this, and so do many of those who put money in
the funds. Or, two, require the funds to set aside some capital to absorb losses.
The industry doesn't much like this either because it's expensive. Mr. Aguilar
said either would have sent big bucks into unregulated money funds, and that
would have made the system riskier.The next move is up to the Financial
Stability Oversight Council, created after the crisis to look over the shoulders
of the SEC and other regulators. Ms. Schapiro late Wednesday called for
FSOC's help. "The issue is too important to investors, to our economy and to
taxpayers to put our head in the sand and wish it away," she said.
2. Scrutiny of money market funds continues
The failure of SEC chair's plan to tighten rules underscores an ongoing
investor risk.
The risk is that funds could "break the buck," or push their value below a dollar
a share, as happened with one high-profile fund during the financial crisis in
late 2008.
Investors may not be worried about the funds' safety, but they have noticed
their extremely low yields.
Investors have shifted $1.3 trillion into bank savings accounts since the crisis,
leaving $2.6 trillion in money-market funds, according to Peter Crane,
president of Crane Data, a research firm in Westboro, Mass.
"They're much more concerned about the low yields than they are the remote
risk of at some point losing a penny on the dollar," Crane said.
Money-market funds historically have paid investors 1% to 2% more than bank
savings rates. But since the financial crisis, interest rates have been at historic
lows, bringing the fund yields closer in line with — if not slightly below —
savings accounts rates, which are insured by the Federal Deposit Insurance
Corp.
The average money-market fund yields 0.06%, whereas the average bank
savings rate is about 0.1%, analysts said.
Schapiro and other federal regulators say the funds remain a weak link in the
financial system four years after the collapse of Lehman Bros. sent financial
markets — and the economy — into a free fall.
Prior to the trouble of the Primary Reserve Fund in 2008, only one other
money-market fund had broken the buck from 1983 to 2008, according to the
SEC. It was a small fund and had no widespread impact. The Primary Reserve
Fund and other funds faced widespread investor panic, forcing the U.S.
Treasury to guarantee accounts.
The proposal also would have prevented investors from withdrawing their
entire accounts at once to prevent runs.
"The issue is too important to investors, to our economy and to taxpayers to put
our head in the sand and wish it away," Schapiro said in a statement. "Money
market funds' susceptibility to runs needs to be addressed."
The U.S. Treasury said Thursday that it would press further to revamp
regulations.
Some analysts said the SEC's regulations could have unintended consequences
that could potentially harm investors and companies' sources of short-term
capital.
"It would diminish the appeal to individual investors greatly," said Greg
McBride, senior financial analyst at Bankrate.com. "And it would also make it
a lot more difficult for money market fund providers to make a profit."
Although historical stock market gains hover around 8 %, steep declining beark
markets, such as the one we are experiencing in 2008, can result in extreme
negative earnings for equities. Due to the recent credit crisis, stock market
indices have experienced declines of up to 40 % year-over-year. Fortunately,
during these tough economic times, there are financial instruments that actually
yield a positive gain - the intruments that provide such gain are known as
money market instruments. These instruments act as a capital preservation
vehicle during bear markets, and also provide a great source of liquidity, since
these instruments permit redemption in a couple of business days.
Money markets are debt securities of the shor-term variety (one year maturity
or less), and are very liquid instruments, which can be cashed out of at any
time. Their reputation is one of safety, and they typically issued by
government, large corporations, or financial banking institutions. These funds
are usually procured through bank accounts or through mutual funds.
Over the years, the rates of money market funds have moved up and down
consistent with the interest rates of the times. Of late, interest rates for these
funds have been at historical lows, since interest rates have been quite low the
last couple of years. The value of a money market fund is always maintained at
$ 1/share by default, with appropriate interest earned on it, based on the
prevailing rate.
Since all money market funds are effectively insured now, it is a prudent time
to park excess cash (or cash that you wish to preserve during the market
downturn) in these funds. Moreover, it is your best bet to invest in bank-issued
money market funds, which are FDIC-insured up to $ 500,000 (for joint
accounts). These are rock-solid investments that will cater to capital
preservation, and provide a very liquid stream of assets.
4. Money Market Reforms Seen Harming an Alternative to Banks
Big businesses' miss givings about large banks show through when the
conversation turns to regulation.
Two trade groups for corporate treasurers have sounded the alarm about
proposed reforms of money market funds, warning that proposed regulations
could reduce large companies' financing options — and add to their
dependence on megabanks.
"We are mindful of the need for a healthy banking system, but we're also
mindful of needs for healthy alternatives to the banking system," says Thomas
C. Deas, Jr., the treasurer of chemical company FMC Corp. (FMC) and the
chairman of the National Association of Corporate Treasurers.
The Securities and Exchange Commission has proposed rules that would
revamp the $2.6 trillion U.S. money market fund industry, arguing it remains a
risk to the financial system. Last month, Deas testified before a House
subcommittee that the reforms — such as floating the funds' net asset value or
imposing new capital requirements — would "have a significant negative
impact on the ongoing viability of these funds, and also adversely affect the
corporate commercial paper market."
"The cumulative effect of the proposed changes will drive money market fund
investors to bank deposits, concentrating risk in a sector where over the past 40
years there have been 2,800 failures, costing taxpayers $188 billion," he said in
testimony before the House Financial Services' subcommittee on capital
markets.
Jeff A. Glenzer, who oversees public policy for the Association for Financial
Professionals, raised similar concerns. Though the AFP doesn't "have a
position" on whether big banks should be broken up, "for people who are
worried about 'too big to fail,' that [money-market fund reform] would
exacerbate it," he says.
More than 50% of corporate cash is already held in bank deposits, according to
the association.
Deas also points out how little visibility corporate treasurers sometimes have
into the health of their bank partners.
"A money market fund's public financial statements, giving what their
investments are and duration and credit quality, are very straightforward to
read," Deas said in an interview. Banks' financials can be hard to read, he says,
invoking the massive trading losses that dragged JPMorgan Chase into public
scrutiny this spring and helped re-ignite public discussion about separating
banks' commercial and investment functions.
"Obviously even [JPMorgan Chief Executive] Jamie Dimon, with all of his
access not only to public financial statements but to internal reports and daily
value-at-risk analyses that he receives, was unable to perceive the trouble in
their London trading operation," Deas says. "That's why it's important to us to
have money market funds as an alternative, both for investments and for their
ability in some respects to disintermediate the banks."
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