MONEY MARKET

A market for short term mobilization of

funds among market participants
Maturity of instruments traded from
overnight to one year
Participants comprised of:
- BNM, banking Institutions, Non-bank
Institutions, Corporations, Private
investors
Development of MM
Roles of MM in tandem with economic trend;
economic activities increase, more financing
needed, demand and supply of instruments
increase
Introduction of an electronic transfer and
scripless trading system – SPEEDS –
RENTAS for efficient settlement and clearing
system
Islamic Interbank Money Market launched in
1994
…continue
 principal dealers were selected among a
few financial institutions to underwrite
and create markets in the issue of MGS,
TBs and Cagamas Bonds
Formation of rating agencies (RAM) and
(MARC) to evaluate new bond issues
Features of MM:
◦ there must be lenders and borrowers and
buyers and sellers
◦ a ‘commodity’ is traded, that is, money and
price is attached, that is, interest rates
◦ focuses on short term funds (immediate
liquidity requirement)
Objectives of MM:
 To provide an outlet for participation of
MM instruments
 To be able to lend out and/or obtain
funds at competitive rates
 To maximize profits and minimize cost
of funds
 To manage liquidity position and reserve
requirement
2 categories of MM operation
Outright sale and purchase
Involved the trading of instruments
directly by buying and selling the
instruments among the participants
If a party is in need of fund sell the MM
instruments; if has excess funds (need to
invest) buy the instruments
REPO – Repurchase Agreement
 An undertaking by a bank to repurchase MM instrument
initially sold to a customer at an agreed price for a
specified future date
Initially:
bank sells fin. instrument
Bank customer
bank receives $$$

At maturity:
bank buys back fin. instrument
Bank customer
bank payback $$$
(principal + interest)
Instruments of MM
NIDs
BAs
MGS
REPO
TBs
BNBs
Cagamas bonds & notes
Khazanah bonds
 YIELD VS DISCOUNTED INSTRUMENTS
Yield Instruments (interest bearing)
 interest is payable or receivable at the maturity date plus the principal
 Issuer receives principal/face value amount (full amount)
 example of instruments : NIDs, notes and bonds
 Par value = RM1000, Coupon = 10% (10% x PV)
 Now, investor will pay RM1000. ON maturity, investor will receive
RM1,100 (1000 + 100)

Discounted Instruments (non interest bearing)

 discounted amount/discounted proceeds is paid or received upfront, not
at maturity
 Issuer receives slightly short of principal amount (lesser)
 face value amount is received/paid at the maturity date
 example: Treasury Bills, BAs, commercial papers
 Par value = RM1000, Coupon = 0% (0% x PV)
 Now, investor will pay RM800. ON maturity, investor will receive
RM1,000 . Profit = RM200
Negotiable Instruments of Deposits
(NIDs)
A document issued by a bank to certify a
customer has deposited a sum of money at
a specific rate for specified period
Can be sold before maturity in the
secondary market
Interest rates influenced by inter bank
rates
Better rates for large amount of deposits
Malaysian Government Securities
(MGS)
Issued by BNM to obtain funds to finance
national expenditure
An interest bearing instrument;
government pay periodic interest and
return par value at maturity
A scripless security issued in multiples of
RM 1,000
REPO
Suitable to manage short term funds
A sale of instrument by a bank with an
intention to repurchase it later at an agreed
price
A collateralized deposit arrangement; the
collateral being the MM instruments – NIDs,
MGS, Cagamas Bonds, Bas and others
Using simple interest formula of calculation
MM Risks
Credit risk – non payment of
loan/financing
Liquidity risk – inability to convert assets
to cash; inability to have access to funds
Interest rate risk – fluctuations leads to
adverse value of assets
Operational risk – bad system &
manpower problems
Management of MM risk
Credit risk – establish credit limits
Liquidity risk – balance of short and long
term assets
Interest rate risk - have tools to predict
rates and to run a matched book
Operational risk – provide training &
update system