1

INTERNATIONAL MONEY MARKET

Presented By:Abhey Bansal (001) Anuragdeep Badyal (012) Vivek Rajguru (059)
Aditya Bidwai (060) Amarjeet Singh (106)

NAgenda
2

Introduction LIBOR calculation International financial centre Money market

products External commercial borrowing

NWhat is Financial market?

3

Financial markets facilitate the transfer of funds from savers to those who wish
to invest in capital goods. For instance, companies that wish to undertake
investment projects offer financial instruments to savers in exchange for funds
to finance the projects.

NWhat is International Money

Market? 4

The international money market is the market that handles the international
currency transactions between the various central banks of the nations. In the
international money market, the transactions are carried out mainly in currency.
Participants Banks Central banks Governments Multinational corporations
Currency speculators

NTypes of
Market 5

1.

Domestic market : Borrowing or lending in domestic market. Eurocurrency market :

Markets for bonds, loans, and deposits denominated in the currency of a given
nation but held and traded outside that nation’s borders.

2.

NReasons for development of International markets

6

International trade and investment Low marginal costs Limited domestic

market Defensive strategies

NWhat is LIBOR?
7

The London Interbank Offered Rate (LIBOR) is the primary benchmark for short
term interest rates globally. Whereas central banks (such as the BoE, the US
Federal Reserve and the European Central Bank) fix official base rates monthly,
LIBOR reflects the rates at which contributor banks can borrow money from each
other.

The BBA(British Banker’s Association) promotes a legislative and regulatory

system for banking and financial services in Europe and internationally.

NHow did bbalibor begin?

8

During 1984 it became apparent that an increasing number of banks were trading
actively in a variety of relatively new market instruments, notably Interest Rate
Swaps, Foreign Currency Options and Forward Rate Agreements. While recognising
that such instruments brought more business and greater depth to the London
interbank market, it was felt that future growth could be inhibited unless a
measure of uniformity was introduced.

In October 1984 the BBA working with other parties such as the Bank of England
established various working parties, which eventually culminated in the
production of the bbalibor.

NWhere is LIBOR
used? 9
LIBOR is not an interest rate; it is a benchmark used by banks, securities houses
and investors to gauge the cost of unsecured borrowing in the London interbank
market. LIBOR is the basis for a range of financial instruments. Derivatives based
on LIBOR are now traded on exchanges such as LIFFE and the Chicago Mercantile
Exchange (CME) as well as over-the-counter. LIBOR is also used as the basis for
many types of lending, from syndicated and commercial lending to residential
mortgages.
LIBOR is used as a barometer to measure strain in money markets and as a gauge
of market expectation for future central bank interest rates.

NHow LIBOR is
calculated? 10

Thomson Reuters

Thomson

Reuters

Contributor

Rate Submitted
between 11 and
11:10 daily

TR calculates rate, applying Government

protocols. Rated Published by 12:00 hrs

Thomson Reuters

Bank

Data is stored in TR historical database

NWhat is an International Financial

Centre? 11

There are many dimensions to an International Financial Centre, with various

factors integrating to provide the necessary infrastructure to support
international financial business. Characteristics of an International Financial
Centre include: A centre from which international financial business can be
conducted profitably, easily and efficiently.

A centre with deep liquid and sophisticated capital market and world competitive
tax and regulatory regimes with foreign investment and offshore business flow. A
centre with convivial and alluring environment for business It is inclusive of
offshore financial centre which essentially provides financial services by banks
and other
agents to non-residents, including the bank intermediation role of taking deposits
from non-residents and lending to non-residents. Other services provided include
fund management, insurance, trust business, asset protection, corporate planning
and tax planning..

NCategories of International Financial Centre

12

Global (GFCs ): These are centers that genuinely serve clients from all over the
world in the provision of the widest possible array of IFS; Regional
(RFCs) :they serve their regional rather than their national economies examples
of such Dubai, Hong Kong;

Non-global and non-regional, ordinary international IFCs: These are centers like
Paris, Frankfurt, Tokyo and Sydney that provide a wide range of IFS but cater
mainly to the needs of their national economies rather than their regions or the
world – one may call them national IFCs and
Offshore (OFCs) These are centers that are primarily tax havens for wealth
management and global tax management rather than providing the full array of
IFS.

NTypologies of Financial
Centre 13

Teleological Perspective
Paper Center

Geographical Perspective
National or Domestic
Centre International
Centre

Historical Perspective

Functional Center

Traditional Centre

Financial Entrepôt

Offshore Banking Centre

Integrated Centre

Segregated Centre

Hong Kong

Shanghai

NWHAT ARE THE

CONSTRAINTS TO
BUILDING
INTERNATIONAL
FINANCIAL CENTRE
(IFC)?
14

A professional financial services workforce that can flexibly respond to changing

business conditions Low cost and efficient communication and information system;
Political and economic stability; Well established international stock exchange,
futures exchange and clearing houses; A very sophisticated and deregulated
domestic banking system; A commitment to business tax reform, with an
internationally responsive corporate tax rate and capital gains tax initiatives;
A strong, stable and transparent legal and regulatory system;

NLondon and the Global Capital Market

Today 15

World’s Largest Equity

Markets By value of share
trading

Location 1. NYSE 2. Nasdaq 3.

Shanghai 4. Tokyo 5. Shenzen
WFE: Statistics, 2010

Total Share of World $17.8 trillion (28.2%) $12.7 trillion (20.1%) $4.5
trillion (7.1%) $3.8 trillion (6.0%) $3.6 trillion (5.7%)

N16

London and the Global Money Market

Today Interbank Financial Activity
By total borrowing and lending between
banks

Location 1. London 2. New York 3. Tokyo

NLondon and the Global Money Market
Today 17

Foreign Exchange Turnover

Daily average of trading in April

Location 1. London 2. New York 3. Tokyo

BIS: Statistics, 2010

Total $1.9 trillion $0.9 trillion $0.3

trillion Share of World (36.7%) (17.9%)

(6.2%)

N18

London and New York Comparison

New York is the leading capital market in the world The NYSE and Nasdaq together
dominate the global securities market Investment banks located in Wall Street
dominate corporate finance and securities trading across the globe London is the
leading money market in the world The London inter-bank market is the largest in
the world The London foreign exchange market is the largest in the world

NSeizing the opportunity-India has considerable

potential 19

India’s globalization has presented a significant opportunity for the

financial sector:

The Mistry Report estimates the size of the IFS market at $13 billion in 2005/06
It conservatively projects that domestic demand for IFS will grow to $48 billion
by 2015

The Mistry Report argues that Mumbai has four key advantages:
Hinterland, a large and rapidly growing economy, creating a substantial demand
for IFS (the projected $48 billion) Human capital, including the extensive use
of English, generations of financial experience, and strong IT skills Location,
the ability to transact with Asia and Europe though the trading day Democracy
and rule of law, including open expression of views

NBut creating an IFC is

demanding 20

IFCs require a highly developed

Bond-CurrencyDerivative (BCD)
nexus

Every IFS customer generates a

currency transaction

This requires liquid currency

market, with a full range of
currency derivatives

IFCs attract global bond issuers

into the domestic market

This requires a liquid and arbitrage-free yield curve, backed by interest rate
and credit default protection derivatives

NWhere does India

stand? 21

The currency and bond

markets are
underdeveloped:
Indian currency spot turnover seldom exceeds $10 billion per day, compared with
$125 billion per day in Singapore The corporate bond market is small and not
very liquid, even when compared to other Asian emerging markets Many of the
important derivatives markets do not exist at all. For example:

There are no Indian counterparts to key interest rate contracts in the U.S.
– Eurodollar futures, Fed funds futures, Treasury notes, Treasury bonds

NIFCs also require a strong institutional investor

Institutional investors command enormous pools of capital. They bring
sophisticated analytical tools to bear on the task of price discovery They link
domestic finance with the rest of the world

The institutional investment base is small

For example, mutual funds have assets under management of just 9 percent of GDP,
not large enough to influence price formation Pension funds and insurance
companies are also small

NAdvantages of having an IFC in

Mumbai 23

Efforts to set up an IFC will promote

more efficient allocation of capital.
To whatever extent it is achieved, it will enhance fees generated and retained.
Does India want to be a developed country? Can Mumbai be an IFC without India
achieving a developed country status?

NRecommendations of Mistry
Report 24

Enhance competition in the Indian financial sector. A practical way to progress

would be to promote entry of domestic private sector banks including allowing entry
to corporates with appropriate regulatory controls. Also allow unrestricted entry
to global legal and accounting- auditing firms. A separate public debt management
office needs to be set up

NCapital Account Convertibility

25

For an IFC, it may not be enough for the INR to be fully convertible on the capital
account. The INR probably has to be an international reserve currency. With a
Government bond market that is deep and liquid at long maturities which provides
AAA instruments for hedging purposes. Even as we move towards a full-fledged IFC,
specific attention needs to be paid to promote Mumbai as a Business Process
Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) center. Back-office and
Middle-office. Front-office can follow

NTax Regime
26

Indian taxes are now comparable with many other jurisdictions. However, there are
frequent legal challenges to existing rules/ regulations. GST stamp duties etc.
need to rationalized. Many of the Report’s sweeping recommendations refer to the
need to improve governance. These go much beyond the financial sector. Financial
Inclusion needs to be included Develop the investor base. The investment base

could be extended to foreigners

NFuture Prospects
27

India is globalizing at an astonishing pace, it is truly creating a “new India”

This new India requires new ways of thinking, about opportunities, risks, and the
appropriate ways to manage these risks On the opportunity side, globalization is
creating the chance for the financial sector to grow to meet the demand for IFS

NWhat is the money market?

28

A market for short-term funds and financial instruments that are close
substitutes for money Maturity period varies from one day to less than one year
Earlier predominantly telephone market; now moved to screen-based Not a physical
location; more of an activity A wholesale market

NFeatures of the
market 29

A very liquid market An equilibrating mechanism for demand and supply of short-
term funds Enables borrowers and lenders of short-term funds to fulfill their
borrowing and investment requirements at an efficient market-clearing price Main
avenue for intervention by the central bank for influencing liquidity and level
of interest rates in the economy

NMoney market
instruments 30

Call money (Federal Funds market) Treasury Bills (T-Bills) Commercial Paper (CPs)
Certificates of Deposit (CDs) Collateralised Borrowing and Lending Obligation
(CBLO)

NFederal funds market

31
The money market in which banks borrow from and lend to each other deposits that
they hold at Federal Reserve banks. Generally very short loans, often overnight
Basically a market for excess reserves: banks that are short on excess reserves
borrow from banks with such reserves Borrowing bank pays an interest rate known
as the Federal Funds rate

NDetermination of call
rates 32

Freely determined by forces of demand and supply Demand side factors: Tax
outflows, size of government borrowing in a particular week/fortnight, non-food
credit offtake, seasonal fluctuations Supply-side factors: deposit
mobililization, capital flows etc Changes in Reserve Requirement affect the
liquidity in the system and hence the call rates as well

NTreasury
Bills 33

Short-term instruments issued by Central Bank on behalf of government Purpose is

to tide over short-term liquidity shortfalls Issued at a discount and repaid at
par on maturity No TDS on discount

NFeatures of T-
Bills 34
Negotiable securities Highly liquid due to short maturity No default risk Assured
yield, low transaction cost, eligibility for including in securities for SLR
Issued and traded through the Subsidiary General Ledger (SGL) account

NCommercial Paper
35

Unsecured, short-term promissory note Issued by leading and highly rated corporate
bodies Issued either directly to investors or sold through intermediaries like
merchant banks Negotiable and transferable by endorsement and delivery Fixed
maturity period Issued at a discount and repaid at par Corporates, PDs and all-
India Fis allowed to issue CPs

NCertificates of deposit
(CDs) 36

Time

deposits issued by banks and other depository institutions that are

negotiable instruments traded in secondary markets.
Can

be resold in secondary market Minimum denomination of $100,000 (in practice, to

trade in secondary market the minimum is $2,000,000)

N37

Features of Certificates of Deposit (India)

Negotiable instruments issued in demat form or usance promissory note Can be

issued by scheduled commercial banks (excluding RRBs) and select all-india Fis
Minimum amount Rs.1 lakh Maturity : 7 days to 1 year Issued at discount to face
value Banks have to maintain CRR and SLR on issue amount of CDs
NCBLO segment
38

Instrument launched by the CCIL to provide liquidity to non-bank entities barred

from call market CCIL provides the trading platform for CBLO and guarantees
settlement CBLO rates aligned with repo rates due to collateralized nature of
borrowing Number of participants increased steadily from 30 in July 2003 to 153
by March 2007 PDs and nationalized banks predominant borrowers while mutual
funds and insurance companies major lenders in CBLO

NRepurchase agreement
39

A contract to sell a financial asset with the understanding that the seller will
buy back the asset at a later date and, typically, at a higher price. Usually the
financial asset sold is a government security.
Used

by banks and large corporations

NBanker’s acceptance
40

bank loan typically

used by a company to
finance storage or
shipment of goods.
Instruments

created in course of financing international trade Bankers acceptance is a bank

draft, like a check, guaranteeing future payment Active secondary market

NInternational Money
Markets 41

Capital mobility:
The
extent to which savers can move funds across national borders for the purpose
of buying financial instruments issued in other countries.

International money markets:

Markets

for cross-border exchange of financial instruments with maturities of less than

one year. Many such instruments traded, the biggest being the market for foreign
exchange. International derivative securities, whose returns are derived from
other instruments, are sometimes classified here as well.

NThe Eurocurrency Markets

42

Eurocurrency markets:

Markets for bonds, loans, and deposits denominated in the currency of a given
nation but held and traded outside that nation’s borders. A short-term debt
instrument issued by a firm and denominated in a currency other than that of the
country where the firm is located.
Bank deposits denominated in the currency of one nation but located in a
different nation.

Eurocommercial paper:

Eurocurrency deposits:

NOverview of
ECB 43

Foreign currency borrowings raised by the Indian companies from sources outside
India are called External Commercial Borrowings (ECBs). These are commercial
loans with minimum average maturity of 3 years. The ECBs include
Bank Loans Buyer’s Credit Supplier’s Credit Securitized instruments (e.g.
floating rate notes and fixed rate bonds) Commercial borrowings from the private
sector window of multilateral financial institutions Investment by Foreign
Institutional Investors (FIIs) in dedicated debt funds FCCBs Foreign Currency
Exchange Bonds

NECB Raising
44

Automatic

Route Approval

Route

NAutomatic Route
45

Eligible
Borrowers

Lender

s
Interna
tional
Banks
Interna
tional
Capital
markets
Multila
teral
Financi
al
Institu
tions
Export
Credit
Agencie
s
Foreign
Collabo
rators

Corporate in manufacture, including those in the hotel, hospital, software

sectors (registered under the Companies Act, 1956) Infrastructure Finance
Companies (IFCs) except for financial intermediaries
Units in Special Economic Zones( SEZ) NGOs engaged in micro finance activities
46

Amount
Corporate in Industrial Sector or Infrastructure Sector-USD 750 mn per
annum Corporate in specified Service Sector-USD 200 mn per annum

Maturit

y
ECBs up
to USD
20
million
– 3
years
ECBs
between
USD 20
million
and USD
750
million
–5
years

NIndustrial Sectors permitted

47 •

ECB can be raised for Capex in Industrial sector, Infrastructure sector and
Specified service sectors Infrastructure sector is defined as – (i) Power (ii)
Telecommunication (iii) Railways (iv) Roads including bridges (v) Sea port and
airport (vi) Industrial parks (vii) Urban infrastructure (water supply,
sanitation)
(viii) Mining, exploration and refining (ix) Cold storage or cold room
facility, including for farm level pre-cooling

N48

End Uses Not Permitted

•

• •
Guarantees
•

Securities
• •

NApproval
Route 49

Eligible
Borrowers
On lending by the EXIM Bank for specific purposes will
be considered on a case by case basis

Banks and financial institutions which had participated in

the textile or steel sector restructuring package

•

ECB with minimum average maturity of 5 years by Non-Banking Financial

Companies (NBFCs) for leasing to infrastructure

projects
• •

Cases falling outside the purview of the automatic route limits Multi-
State Co-operative Societies engaged in manufacturing

NCompliance with ECB Guidelines

50
•

The primary responsibility to ensure that ECB raised/utilised are in conformity

with the ECB guidelines and the Reserve Bank regulations / directions is that of
the borrower concerned

Conversion of ECB into Equity

Conversion of ECB into equity is permitted subject to the following conditions:The
activity of the company is covered under the Automatic Route Foreign Direct
Investment or Government (FIPB) approval for foreign equity participation has been
obtained by the company, wherever applicable The foreign equity holding after
such conversion of debt into equity is within the sectoral cap, if any Pricing of
shares is as per the pricing guidelines issued under FEMA, 1999 in the case of
listed/ unlisted companies
•

N 51

N 52