Please enable JavaScript.
Coggle requires JavaScript to display documents.
MONEY AND FOREIGN EXCHANGE MARKET - Coggle Diagram
MONEY AND FOREIGN EXCHANGE MARKET
DEVELOPMENT AND STRUCTURE OF MONEY MARKET
MONEY MARKET
Market for short-term mobilization of funds
◼ Trading financial instruments
Bankers acceptance (BA)
Khazanah bonds
Bank Negara bills
Treasury bills (T-Bills)
Cagamas bonds and cagamas notes
Maturity: overnight to 1 year
Changes in the basis for the variable rate in MM instruments:
KLIBOR (Kuala Lumpur Interbank Offered Rate) – also known as indicator of the interbank rate
KLIBOR – changed to Intervention Rate
New framework from 2004 – OPR as the target rate for the day-to-day liquidity
operations of BNM
DEVELOPMENT OF MM IN
MALAYSIA
Jan 1990 : Introduction of SPEEDS (Sistem Pemindahan Elektronik untuk Dana & Sekuriti)
Electronic fund transfer and scripless trading system.
Faster settlement of the MM instruments
SPEEDS was replaced by a new payment system called RENTAS (Real-Time Electronic
Transfer of Funds and Securities)
Fund transfers are settled IMMEDIATELY.
Jan 1994: Launched of the Islamic Interbank Money Market (IIMM)
Transactions are done using Islamic nterbank Cheque Clearing System (IICCS)
Sales and purchases of Islamic financial instruments
Investment activities
Cheques clearing
1989 : Appointment of selected FIs as Principal Dealers
Underwrite and create markets for the PRIMARY ISSUES of MGS, T-Bills and Cagamas Bonds
1990 : Formation of Rating Agency of Malaysia (RAM)
1995: Formation of Malaysian Rating Corporation Berhad (MARC)
Purpose of credit rating:To evaluate creditworthiness of corporate bond issues by issuing ratings to corporate bonds
Provide mechanism to investors to choose which bonds should be invested based on ratings
Ensure investors’ confidence in MM.
OBJECTIVES, OPERATIONS, PARTICIPANTS AND CATEGORIES OF MM
OBJECTIVES
Ensure participants are able to trading MM instruments
Lend out (obtain funds) at competitive rates
Maximize profits and minimize costs of funds
Manage liquidity position and reserve requirements
PARTICIPANTS OF MM OPERATIONS
BNM – supervising and controlling authority
Banking institutions (commercial and investment banks)
Non-bank financial institutions
Pension funds
Unit trust funds
Insurance companies
Corporations
Multinational
Small and medium scale enterprises
Cagamas Berhad
Money brokers – intermediaries to market participants
CATEGORIES OF MM OPERATIONS
DIRECT LENDING AND
BORROWING
Bank will lend (deposits) or borrow directly
from another bank.
Rate is agreed by both parties.
Transactions can be done directly or through
intermediaries (money brokers)
The amount that the lender can lend is LIMITED (called credit line or credit limit)- Normally depends on the financial strength &
size of the bank..
SALE AND PURCHASE OF MM
INSTRUMENTS
Done in securities market.
Indirect method of borrowing or lending funds.
2 types of securities market:
Outright S&P of instruments
Bank sell / purchase instruments
Repurchase agreement (REPO)
At maturity, bank repurchase MM instruments which were initially soldto customers at agreed price for a specified future date.
DESCRIPTION OF MM INSTRUMENTS
NEGOTIABLE INSTRUMENTS OF DEPOSITS (NIDs)
Yield instrument – interest bearing
Deposit document issued by a bank to a customer
Certain amount has been deposited with the bank at specific rate and maturity date.
Can be sold before maturity
Negotiable instrument – if sold before maturity at secondary market
Tenure range from 1 month to 10 years
Issued in multiple of RM 50,000
Minimum deposit is RM 100,000 per certificate
Maximum deposit is RM 10 million per certificate
Interest rate of NIDs depends on interbank rates
The higher the deposits, the better the rate.
Withholding tax
0% withholding tax for placement made by companies & 5% for placement by individuals
Banker's Acceptance
Discounted instrument – non-interest bearing
Discounted proceeds are paid upfront (not at maturity date)
Face value is paid at maturity
Rates discounted can be competitively around the interbank money market rates
Bill of exchange drawn on a bank
Created to finance a customer for trade transaction
Trade financing facility available to importers & exporters (buyers & sellers)
Provide competitive source of working capital
Negotiable instrument – can be sold to investors
Maturity: 21 days to 200 days,Issued in multiple of RM 1000 ,Minimum denomination is RM 30,000
MALAYSIAN GOVERNMENT SECURITIES
Yield instrument - Interest bearing
Issued by BNM to obtain funds from public specifically to finance national
development projects.
Government agreed to pay:
periodic interest to the instrument’s holder
Return of the par value upon maturity
Issued in multiples of RM 1,000
Quoted in price terms per RM 100 nominal value.
REPURCHASE AGREEMENT
Yield instrument
Sale of financial instrument by a bank with an undertaking to repurchase back
at agreed price on specified future date.
Period: number of days
Collaterized deposit arrangement
Deposit is collaterized by financial instruments such as NIDs, MGS, BA,
Cagamas Bonds and other allowed by BNM.
TREASURY BILLS
Discounted instrument – non-interest bearing
Discounted proceeds are paid upfront (not at maturity date)
Face value is paid at maturity
Issued by BNM on behalf of Malaysia government
Used to raise short-term funds to finance government’s expenditures
Maturity not exceeding a year
BANK NEGARA BILLS
Discounted instrument – non-interest bearing
Discounted proceeds are paid upfront (not at maturity date)
Face value is paid at maturity.
Issued by BNM
Maturity not exceeding a year
Often used for Open Market Operations (monetary policy tool)
Categorized as liquid asset for financial institution compliance of the liquidity
and SRR.
CALCULATIONS OF PROCEEDS OF YIELD INSTRUMENTS AND DISCOUNTED INSTRUMENTS
SIMPLE INTEREST
Used to calculate interest for NIDs, REPO, MGS
Interest = (principal x rate x number of days) / 36500
PROCEEDS OF NIDs
Used to calculate sales proceeds / cost of purchases of NIDs when they are traded in secondary market.
Proceeds = FV x (36500 + (T1 X R1)) / (36500 + (T2 X R2))
where FV = face value or principal amount
T1 = original issue rate
R1 = original tenor (in days)
T2 = rate at which the sale / purchase is agreed
R2 = remaining days to maturity
PROCEEDS OF THE
DISCOUNTED INSTRUMENTS
Used to calculate proceeds of the discounted instruments (BA, T Bills, Bank Negara bills)
Proceeds = FV X [(1/365000) – (r x t)]
where FV = face value or principal amount
r = maturity
t = rate agreed