FOB 7/B CHAPTER 12

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payment system
money markets
and
sa'adah (243189)

GROUP 7/B
YEE CHING (245018)
NAJIHAH (252793)
FATIHAH (255567)
ANGIE TAN (245369)
Concept, Characteristics and structure of Money Market
Most governments , corporations international organizations , supranational , banks , financial institutions and individuals at some time need to raise money to fund their activities for many different reasons .

Different types of financial market
•	Financial Market refers to the market in which money is raises or traded

Different types of financial market
•	Example : where funds may be ultimately exchanged between issuers of financial instruments (borrowers) and investors who buy the instruments (lenders)

2017
The ways organizations raise money separates the financial market into 3 groups 
ways organizations raise money
1
Money market : These are characterized by borrowing and lending large amount of money for short periods – typically one day (or overnight ) up to , and including 12 months .
ways organizations raise money
2
Bond or Debt Markets : These are characterized by instruments that generally pay interest for fixed period of time for loan periods over 12 months onwards to , may be over 30 years . For this reason, these markets are also known as Fixed Income Markets and involve medium to long term borrowing . Generally , 1 to 10 year instruments are called notes and instruments exceeding 10 years in maturity are called bonds .
ways organizations raise money
3
Equity Markets : These markets also involve medium to long term borrowing but in this case interest is not paid to the lender . Instead the organization borrowing the money issues , stocks or shares to investors who become part owners of the organization . Investors may or may not be paid dividend on their shares depending on how well the organization performs .
a. short –         term             debt 
b. 1 day              to 1                  year

Money Markets
1
2
Bond Markets
3
Equity Markets
 a. Medium to              long term 
b. Non –                          Permanent   
      funding 
c. Fixed Income 
      Market 
d. 1 year to 30 
     years

a. Long –                 Term 
b. Permanent       funding 
c. Very long           term

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Role of a bank
Bank acts as intermediary between its customers who comprise both depositors and borrowers .

Depositors earn a return , illustrated in the form of a rate of interest , for placing their surplus funds with the bank , whereas borrowers have to pay a price , also illustrated as a rate of interest , for using someone else's money through the bank .

ROLE OF BANK AS A INTERMEDIARIES
Depositors (Customer)
Intermediary (bank)
Borrower (customer)
- an arena consisting of lenders and borrowers, where money flows from those with surplus to those in deficit, at a price called ‘interest rates’.

- sellers and buyers of one commodity meet at a common place to transact business

- the physical location of money market does not exist.

- transactions are conducted by means of telephone communications.

- The market readily provides opportunities for those with temporary surplus funds to earn income rather than holding them in non-interest earning demand deposits.

- Eligible borrowers can also raise funds by borrowing or selling their holdings of financial instruments in the market.

Function of money market
- To reconcile the interest of the surplus and the deficient units
- To provide the necessary financial instruments and intermediaries to allow each unit to satisfy their needs 
- To provide the Central Bank with an avenue to intervene and to influence the state of the economy via open market operations.

Activities in the Money Market
Through the money market, participants are able to:
 
i) borrow and lend funds; and 
ii) buy and sell money market instruments.

i) overnight (or 1 day); 
ii) 1 week; 
iii) 2 weeks; 
iv) 3 weeks; 
v) 1 month; 
vi) 3 months; 
vii) 6 months; 
viii) 12 months.

The common tenors for lending and borrowing in the Malaysian money market are:
- Maturities of longer than 12 months can also be transacted, but they are less active.
- In the local money markets, the borrowing and lending of funds refer to the borrowing and lending of Malaysian Ringgit among financial institutions that participate in the interbank money market.
- Commercial banks - borrow and lend US Dollar funds to square their non Ringgit books.

- To square means to cover the deficit amount of US Dollar at the end of a trading day.

- The buying and selling of money market instruments refer to the trading of approved instruments among interbank as well as among the other money market participants.

Instruments are bought and sold for the purpose of either,
liquidity requirements (in complying to statutory requirements especially papers that can easily turn into cash when the need arises).
short term investments (of which the paper is mainly used to satisfy funding requirements due to ‘deficit positions’ discussed above)
Instruments are bought and sold for the purpose of either,
long term investments (of which the paper is kept until maturity)
liquidity requirements (in complying to statutory requirements especially papers that can easily turn into cash when the need arises).
short term investments (of which the paper is mainly used to satisfy funding requirements due to ‘deficit positions’ discussed above)
trading (of which the paper is acquired or disposed for quick profits)
Most of the trading of instruments in the primary and secondary markets takes place Over-TheCounter (OTC), i.e., deals are conducted by telephone or electronically using quote screens such as those provided by Reuters, Bloomberg or other services.
However, some instruments are listed on organized exchanges, such as the Bursa Derivatif Malaysia and Malaysian Stock Exchange, and are traded the same way as stocks and shares.
The trading of these instruments is said to have taken place in the form of Exchange Traded Contract (ETC).
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Typical Money Market Operations of a Banking Institution
Functions of bank’s money market dealing team
-	Manage liquid assets of bank 
-	Monitor statutory reserve of bank in central bank 
-	Provide sufficient liquidity to bank 
-	Manage bank’s exposure to interest rate risks 
-	Provide investment outlet for cash

-rich customers 
-	Manage bank’s clearing account with central bank
-	Constantly seek profitable opportunities to invest bank’s surplus funds

Functions of bank’s money market dealing team
Observing Statutory Reserve Requirements
Observing Statutory Reserve Requirements
Minimum Statutory Reserve Requirements
-keeping of some portion of liabilities in the form of reserves with central bank 
(Reserve Requirement)
 
-holding of approved liquid assets by banking institution 
(Liquidity Requirement)

Observing Statutory Reserve Requirements
-	to ensure banking institutions are prepared at all times to meet obligations
 
-	to control the level of liquidity in banking system

Objectives
Reserve requirement
-	set aside a certain portion of deposits and placed them with central bank 
-	earns nil returns to banking institution 
-	minimum amount of reserve required is determined by central bank and depends on net eligible liabilities of banking institutions 
-	differs between commercial banks and investment banks.

Observing Statutory Reserve Requirements
Liquidity requirement
-	allocate a certain percentage of assets in the form of approved liquid assets
 
-	grouped as primary and secondary liquid assets

Observing Statutory Reserve Requirements
Components of primary liquid assets
-	Earns NIL returns (Cash, Balances in Clearing Account with Central Bank) 
-	Earns some marginal return and earns returns in the form of interest or profit (Call Deposits with commercial / investment banks, Govt Securities / T-Bills with maturities 
< 1 year, Selected Bonds & Notes with maturities < 1 year)

Observing Statutory Reserve Requirements
Components of 
secondary liquid assets
Government Securities / Selected Corporate Bonds with maturities more than 1 year 
Bankers’ Acceptances (Bas) with less than 90 days to expiry.
Observing Statutory Reserve Requirements
Amount of funds put aside for provision of reserves and liquid assets affect
-	amount of funds banking institutions can lend

-	cost of funds which directly affect profit margin on loans

Observing Statutory Reserve Requirements
Management
Liquidity 
-	Banking institutions accept deposits and give out loans 
-	To ensure that enough liquidity is available to meet deposit withdrawals and unusual credit demand 
-	The availability of short term funds in the money market enables an institution to borrow

How does SPICK operated ?
-Banks deliver cheques for clearing to e-SPICK by 18.00 
-Cheques for clearing are processed,cheque image stored in CD-rom and data is sent to banks through the Financial Instituition Network (FINET)

How does SPICK operated ?
-At 9.00 on the following business day, the net clearing balance are settled through the accounts of member banks maintained at Bank Negara Malaysia with unpaid cheques cleared at 15.30 on the same day
-Banks deliver cheques for clearing to e-SPICK by 18.00 
-Cheques for clearing are processed,cheque image stored in CD-rom and data is sent to banks through the Financial Instituition Network (FINET)

Introduced by central bank in November 1997
To expedite the clearing of cheques in banking systems
2
1
Cheque Clearing Systems (espick)
Introduced by central bank in November 1997
To expedite the clearing of cheques in banking systems
The cheque processing phase has migrated from physically sending cheques for clearing centres into a fully image-based cheque clearing process
Enables customers to receive funds from the cheques deposited during business hours on the next business day
4
3
2
1
Cheque Clearing Systems (espick)
THANK YOU

FOB 7/B CHAPTER 12

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