1

MONEY MARKET PARTICIPANTS AND

INSTRUMENTS

APRESENTATION BY:

JAGDISH BUDHIRAJA

2

What is Money Market?What is Money Market?

• As per RBI definitions “ A market for As per RBI definitions “ A market for short terms financial assets that are short terms financial assets that are close substitute for money, facilitates close substitute for money, facilitates the exchange of money in primary and the exchange of money in primary and secondary market”.secondary market”.

• No actual deal in cash or money.No actual deal in cash or money.

3

Features of Money MarketFeatures of Money Market• It is a market where banks lend or borrow short-terms funds or It is a market where banks lend or borrow short-terms funds or

financial assets called near money.financial assets called near money.• It is the same as capital market except that equity txns long It is the same as capital market except that equity txns long

term obligations customer loans are excluded.term obligations customer loans are excluded.• Maturity < one year. But it may not hold good, a bank treasuries Maturity < one year. But it may not hold good, a bank treasuries

buy & sell securities of >1 year maturity also.buy & sell securities of >1 year maturity also.• Interest rates are deregulated – determined by forces of demand Interest rates are deregulated – determined by forces of demand

& supply.& supply.• Function : To provide liquidity & investment opening for Function : To provide liquidity & investment opening for

individuals and corporations holding surplus cash to meet individuals and corporations holding surplus cash to meet short term requirements of deficit units in financial system i.e. short term requirements of deficit units in financial system i.e. to allocate funds from savings to investment - to allocate funds from savings to investment -

• Instruments like trade bills, BE, CDs, promissory notes, bank Instruments like trade bills, BE, CDs, promissory notes, bank notes call/ notice money, Repos, CPs, Inter-bank Participatory notes call/ notice money, Repos, CPs, Inter-bank Participatory Certificates MMFF & govt T. Bills & Dated Securities Certificates MMFF & govt T. Bills & Dated Securities

• OTC txns through oral and/ or written communication. No OTC txns through oral and/ or written communication. No concept of market driven by exchange like stock exchange.concept of market driven by exchange like stock exchange.

• Not a homogeneous market, it comprises of several submarket Not a homogeneous market, it comprises of several submarket like call/ notice money market, , securities market, acceptance like call/ notice money market, , securities market, acceptance & bill market.& bill market.

• Regulated by RBI & SEBI.Regulated by RBI & SEBI.

4

Objectives of Money MarketObjectives of Money Market• Parking short term surplus funds (earn reasonable income) Parking short term surplus funds (earn reasonable income)

with quick liquidity. with quick liquidity. • Overcoming short term deficit (avoid liquidity crisis and meet Overcoming short term deficit (avoid liquidity crisis and meet

CRR & SLR).CRR & SLR).• Enable flow of short term funds from surplus participants to Enable flow of short term funds from surplus participants to

deficit participants quickly, adequately & at reasonable cost deficit participants quickly, adequately & at reasonable cost (low txn cost).(low txn cost).

• It off-sets demand & supply imbalances and greatly influences It off-sets demand & supply imbalances and greatly influences liquidity and level of interest rates in economy. Provides an liquidity and level of interest rates in economy. Provides an equilibrating mechanism for evening out short term surpluses equilibrating mechanism for evening out short term surpluses and deficits. and deficits.

• As opposed to customer loans, markets are entirely objective As opposed to customer loans, markets are entirely objective and free from persona considerations for pricing – from the and free from persona considerations for pricing – from the lowest price seller to the highest price bidders.lowest price seller to the highest price bidders.

• Enable Central Bank (RBI) to influence and regulate liquidity – Enable Central Bank (RBI) to influence and regulate liquidity – augmenting or reducing supply of money through interest – augmenting or reducing supply of money through interest – open market operations an liquidity adjustment facility (LAF).open market operations an liquidity adjustment facility (LAF).

5

PARTICIPANTS IN MONEY MARKETPARTICIPANTS IN MONEY MARKET• Some restriction in participation e.g. call money market is open

to only banks. • Major participants : Central Govt, State Govt, PSUs, Scheduled

Commercial Banks, Corporates, Provident Funds, GICs, LIC, Mutual Funds, NBFCs, Primary Dealers.

• (1) Central Govt : • Issues Dated Govt. Securities & Treasury Bills With Zero Credit

Risk (Sovereign).• Coupon Bearing And Non Coupon (Zero) Bearing Bonds. • Fixed Coupon And Floating Rate. • Benchmark For Other Financial Instruments. • Average Daily Traded Volumes Vary From Rs. 3000-10000

Crores.• (2) State Govt : • Issue state development loans – medium/ long term bonds of

State Govts. Securities issued by the RBI on behalf of the State Govt. Auction based issues. Not actively traded as most of these

securities are held to maturity – small issue sizes. The major buyers are Banks, LIC and Provident funds The spreads are generally in the range of 25-40 basis over the

corresponding G-sec yield.

6

MONEY MARKET PARTICIPANTSMONEY MARKET PARTICIPANTS

• (3) CENTRAL BANK (RBI)• Over-all regulation of the market.• Ensuring adequate liquidity & money supply through

interventions.• Operates in Money market generally on behalf of Govt.• As merchant banker to Govt, decides how best to raise/

maintain Govt borrowings economically.• Maintain short term interest rates• Maintain price stability• Ensure adequate flow of credit for economic growth

• MANAGING LIQUIDITY, INTT RATE MONEY SUPPLY BY RBI • Reserve requirements (CRR & SLR)• Liquidity Adjustment Facility (LAF) – Repo & Reverse Repo• Interest rates (Bank Rate, Repo Rates) • Open Mkt Operation• Refinance – quantum, intt rate & period

7

MAJOR PARTICIPANTS IN MONEY MAJOR PARTICIPANTS IN MONEY MARKETMARKET

• (4) PSUs : (4) PSUs : • Issue bonds (taxable & tax free). Issue bonds (taxable & tax free). • Issue CPs.Issue CPs.• Generate cash surpluses and invest in FDs, CDs, T. Bills. Generate cash surpluses and invest in FDs, CDs, T. Bills. • Some PSUs active in G. Sec also.Some PSUs active in G. Sec also.• (5) SCHEDULED COM. BANKS :(5) SCHEDULED COM. BANKS :• Issue CDs (unsecured & negotiable).Issue CDs (unsecured & negotiable).• Period 7 days to one year.Period 7 days to one year.• Participate in overnight call & term markets – both as lenders & Participate in overnight call & term markets – both as lenders &

borrowers.borrowers.• Banks use these funds for liquidity mgt. Call money very Banks use these funds for liquidity mgt. Call money very

important to manage CRR commitments.important to manage CRR commitments.• Banks invest in Govt Sec to maintain SLR & invest surplus Banks invest in Govt Sec to maintain SLR & invest surplus

funds.funds.• Invest in PSU bonds as investors of surplus.Invest in PSU bonds as investors of surplus.• Take trading position in G.Sec and PSU bonds to profit from Take trading position in G.Sec and PSU bonds to profit from

rate volatility.rate volatility.• Participate in forex markets and derivative market for covering Participate in forex markets and derivative market for covering

merchant txns and for risk mgt.merchant txns and for risk mgt.

8

MAJOR PARTICIPANTS IN MONEY MAJOR PARTICIPANTS IN MONEY MARKETMARKET

• (6) PRIMARY DEALERS : • PDs conceived and permitted by RBI in 1995.• Registered with RBI.• ROLE : • Deal in Govt securities both in primary & capital markets.• Commit participation as Principals in Govt issues through

bidding in auctions.• Underwrite issues and support development of underwriting

and market making for govt securities outside RBI.• Offer firm buy-sell / bid ask quotes for T. Bills & dated Govt

securities to improve secondary market trading system. Help price discovery, enhance liquidity & turnover and widen the investor base.

• Strengthen the infrastructure in securities to make it vibrant, liquid and broad based.

• To make PDs an effective conduit for RBI to conduct open market operations.

9

MAJOR PARTICIPANTS IN MONEY MAJOR PARTICIPANTS IN MONEY MARKETMARKET

• (7) CORPORATES (7) CORPORATES ((private) : private) : • Issue CPs & debentures to finance projects.Issue CPs & debentures to finance projects.• Debentures could be fuly / partly convertible or non –Debentures could be fuly / partly convertible or non –

convertible.convertible.• Bonds could be secured or unsecured.Bonds could be secured or unsecured.• Interest could fixed or floating.Interest could fixed or floating.• Some corporates are very cash rich and active investors in FD, Some corporates are very cash rich and active investors in FD,

CDs, T. Bills & other debt instruments.CDs, T. Bills & other debt instruments.

• (8) PROVIDENT FUNDS (8) PROVIDENT FUNDS ::• Invest their funds in short term and long term instruments as Invest their funds in short term and long term instruments as

per their internal guidelines.per their internal guidelines.• Apart from G. Sec, they invest in State Development Loans, Apart from G. Sec, they invest in State Development Loans,

bonds of PSUs/ FIs. bonds of PSUs/ FIs. • PFs can also invest in private sector bonds which are rated by PFs can also invest in private sector bonds which are rated by

at lest two rating agencies at acceptable rating.at lest two rating agencies at acceptable rating.

10

MAJOR PARTICIPANTS IN MONEY MAJOR PARTICIPANTS IN MONEY MARKETMARKET

• (9) GENERAL INSURANCE COMPANIES (9) GENERAL INSURANCE COMPANIES : : • Have to maintain certain amt of funds in approved investment.Have to maintain certain amt of funds in approved investment.• Also invest in G. Sec, bonds, money market as lenders. Also invest in G. Sec, bonds, money market as lenders.

• (10) LIC :(10) LIC :• Invest in G. Sec, bonds & money markets.Invest in G. Sec, bonds & money markets.• Certain pre-determined thresholds to invest in different Certain pre-determined thresholds to invest in different

categories.categories.

• (11(11) MUTUAL FUNDS : ) MUTUAL FUNDS : • Required to invest in money market & debt instruments.Required to invest in money market & debt instruments.• Pattern/ quantum of investment vary as declared in schemesPattern/ quantum of investment vary as declared in schemes

• (12) NBFCs :(12) NBFCs :• Required to investment minimum 15% in SLR investments.Required to investment minimum 15% in SLR investments.• Park their surplus funds in securities/ debts to earn income.Park their surplus funds in securities/ debts to earn income.•

11

Call Money Market • CALL MONEY IN INDIAN CONTEXT• It is a market wherein the money is lent borrowed between

participants, permitted to operate in Call/ Notice money market, tenors ranging from overnight to maximum 14 days

• Very short term funds generally overnight lending/ borrowing – Pre-determined maturity.

• Rates generally hover around RBI Repo range. Interest is driven by demand & supply of funds and determined on the basis of market conditions.

• MIBOR-Mumbai Inter-bank Overnight Rate. It is taken as a benchmark rate for short term borrowings.

• Notice Money: >1 day to 14 days – Undetermined maturity repayable on notice of 2-3 days by lender

• Banks mostly rely on call money to meet reserves requirement.

• Earlier financial institutions were allowed as lender. However, recently Call/ Notice money market has been made a pure inter-bank market – Commercial Banks, Primary Dealers, Coop Banks

12

Call Money Market …. Contd• Clean Lending (hence credit Risk) – no collateral. Each bank

fixes a prudential limit for counter party exposure i.e max amount it will lend to a specified borrower.

• REGULATORY BORROWING/ LENDING LIMIT : In a reporting fortnight, average borrowing by a bank cannot exceed 100% of its Tier I + Tier II capital of the previous financial year & on any day the borrowings should not exceed 125%.

• Similarly fortnight average lending should not exceed 25% of its Tier I & II capital and on any day should not exceed 50% of the same.

• Txns evidenced by call/ notice money receipt. Payment by a banker cheque, cheques drawn on RBI or RTGS.

• On the following day, payment is made by borrower along with interest and the lender returns the receipt duly discharged.

• I

13

TERM MONEY & FIXED DEPOSITS• TERM MONEY : • Inter bank borrowing/ lendings for tenors greater than 14 days.• Reasons & other aspects same as call money market.

• FIXED DEPOSITS• Fixed deposits are accepted by banks for tenor > 7 days.• Rates of interest as fixed by individual banks.• Fixed deposits are not transferable/ negotiable. • Prepayment is possible on payment of prefixed penalty.• Indeed this is not a money market as it cannot be traded. But

banks & FIs invest in fixed deposit when rates are favorable.

14

CERTIFICATES OF DEPOSITS (CDs) Negotiable Instrument Usance promissory notes issued at

a discount to face value in dematerialized form Issuers : Banks (excluding RRB & LAB) ,

Select AFIs – within umbrella limit fixed by RBI.

UMBRELLA LIMIT FOR AFIs : An FI may issue CDs within the overall umbrella limit fixed by RBI. CDs together with other instruments Term money, term deposits, com.papers and ICDs not to exceed 100% of Net owned funds as per latest audited balance sheet.

Issue Amount – Rs 1 lakh or multiples. Subscribers – Individuals, Corps, Trusts, Funds, Assns, &

NRIs (Non-Repatriable). Maturity – 7 days to 1 year (FIs 1-3 years) – no min lock in.

Interest : As determined between the parties. No cap on interest rates.

Transferability – Endorsement and Delivery. Currently, as per RBI guidelines, issued in demat form.

Loan facility against CD available. Buy back of own CDs before maturity not permitted.

15

COMMERCIAL PAPER (CPs) Unsecured Negotiable Usance promissory note Instrument

issued at a discount to face value or issued in demat form through DPs approved by SEBI.

Banks & PDs can hold CPs only In demat form as RBI guidelines.

Issuers : Corporates, AIFIs (issue or investment within umbrella limit) and PDs

Tangible Net Worth of issuer not <Rs. 4 crores, Sanctioned working capital limits of corporates should be

available.

Classification of asset : Standard. CP can be issued as a stand alone product also within overall

limit fixed by its Board of Directors or quantum indicated by Rating Agency.

CPs may be issued on single date or different dates within a fortnight but with same maturity date.

Every issue including renewal is treated as fresh issue. Issue Amount – minimum Rs 5 lakhs or multiples.

16

COMMERCIAL PAPER (CPs) Contd Subscribers – Individuals, Banks, Corps, NRIs, FIIs, Rating Compulsory – Min P-2 of CRISIL or its equivalent by

ICRA, CARE or FITCH Rating India P Ltd or other agencies approved by RBI.

Maturity – 7 days to 1 year.

Transferability – Endorsement and Delivery or through Depositories.

No Underwriting or Co-acceptance – Credit Enhancement Possible by way of standby assistance/ credit.

Non banking companies permitted to provide guarantee for credit enhancement. Guarantor’s rating should be one notch higher. Full disclosures as per SEBI guidelines to be made.

Every issuer must appoint an IPA (Issue & Pay Agent) which could only a bank.

CP is to be stamped as per rates of Indian Stamp Act. CPs are issued to meet short term requirements.

Issue should be as per guidelines of RBI.

17

BILLS REDISCOUNTING SCHEME (BRDS) To provide liquidity and to promote bills culture, RBI

formulated a scheme known as BRDS whereby bank may raise funds from RBI or other banks & permitted financial entities by issue of Usance Promissory Notes in convenient lots & maturity on the strength of genuine unencumbered trade bills discounted by it.

Trade bill holding is furnished by way of certificate that the bank holds unencumbered eligible bills of equal amount arising out of bonafide commercial or trade txns not fallen due for payment. The bank availing this facility maintains a register containing full particulars of bills for verification.

Tenor : Minimum 15 days to 90 days. The unexpired tenor of bills should not be >90 days.

Advance is shown on lender’s (refinancing) books and gets reduced on the books of borrowing bank.

Interest is calculated on actual/365 basis. Interest calculated on front-end & rounded off to rupees. Borrower receives principal minus interest. Lender receives back principal amt on maturity. Effective yield is higher than the discount rate (being front

ended).

18

INTER BANK PARTICIPATION CERTIFICATES (IBPCs)

In this, a Bank can sell loan on its books, participation basis, to another bank for temporary period.

IBPC could be with risk sharing basis or non risk sharing. The period of IBPC can be 91 days to 180 days on risk

sharing basis and for non risk sharing basis, total period is limited to 90 days.

Maximum participation in loan / cash credit : 40% of outstanding amt or of limit whichever is lower. Account to be standard asset only.

The security documents executed by the borrower should have a suitable enabling clause for shifting the loan to another bank.

Interest market determined. Both banks to execute participation contract. IBPC are not transferable and cannot be redeemed before

maturity. If balance of borrower comes down, the issuer bank must

repay the excess amount so that participation is not >40%. Unless the risk has materialized (in case of risk sharing),

issuing bank makes payment along with agreed interest on due date.

19

COLLATERALIZED BORROWING & LENDING OBLIGATIONS (CBLO)

CBLO is approved by RBI. This product is developed by CCIL (Clearing Corporation of

India Ltd) for those financial entities who have been phased out of call money market or have restricted participation in terms of ceiling on call money borrowing & lending.

• Collateralized Borrowing and Lending Operations against G. Sec placed with CCIL.

• Counter-party: CCIL who provides Dealing System through INFINET, a closed user group to the members of Negotiated Dealing System (NDS).

• Membership of CBLO segment to Banks/ PDs/ Mutual Funds/ Insurance Companies, NBFCs, etc.

• Members are required to open Constituent SGL A/c with CCIL for depositing securities which are offered as collateral/ margin for borrowing lending.

• Associate members are required to open a CA with a settlement designated by CCIL.

• Very Low Credit Risk as there is exchange of securities while borrowing.

20

COLLATERALIZED BORROWING & LENDING OBLIGATIONS (CBLO)

Issued by C. Govt through RBI to raise funds to meet liquidity mismatch.

It is issued on discount to its face value of (usually) Rs. 100/- The tenors of these securities are 14 days, 28 days, 91 days /

182 days / 364 days. Auctioned by Reserve Bank every week (Wednesday 91 d) &

alternating week (Wednesday 182 & 364 d).

Interest is rate is market determined. Market participants have to bid for discounted price and the cut off is determined by RBI where the notified amount is fully bid for.

The 91 days and 364 days treasury bills taken as benchmark for short-term loans to corporates.

Secondary market for T bills is moderately active and trades on yield basis.

Transfer of T Bills is through SGL mechanism. Of late T Bills is also included as part of Market Stabilization

Scheme (MSS). This scheme was introduced to enable the RBI to mop up excess liquidity from the market.

Instrument for parking surplus liquidity for investors. Reckoned for SLR investment. Safe investment.

21

REPURCHASE AGREEMENT (REPO) Repo is a money market mechanism which enables

collateralized short term borrowing and lending between money market participants through sale/purchase operations against the underlying G.Sec, PSU bonds, Corporate bonds, equity ,etc.

It is not a instrument but a process/ mechanism & is also called a “READY FORWARD” txn. The holder of securities sells them to the investor with an agreement to repurchase back the same securities for the same at predetermined date.

• Structured as sell-buy transaction of securities with agreement to repurchase on predetermined maturity.

Essentially a lending & borrowing txn at agreed rate of interest known as Repo. Forward clean price of bond is set at a price which includes interest payable by borrower.

The discount/ Repo rate is market determined - generally lower than unsecured inter bank borrowings.

Credit-worthiness of borrower, liquidity of collateral and prevailing rates of other money market instruments also influence the repo rate.

A reverse repo is reverse image of Repo – depends on who initiated first leg of txn.

22

REPURCHASE AGREEMENT (REPO) When reverse repo txn matures, the counterparty receives its

cash with spread and returns the securities. READY FORWARD TXN : so called because it is a means of

funding by selling security on spot (ready) basis and repurchasing the same on forward basis.

DOUBLE READY FORWARD : When an entity sells a security to another entity on repurchase agreement basis and simultaneously purchases some other security from the same entity on resell basis is called a double ready forward txn.

LIQUIDITY ADJUSTMENT FACILITY (LAF) : (a) REPO is also undertaken by RBI to control liquidity in the

market as also to help banks in need of liquidity. (b) Reverse Repo for RBI (repo lending against securities) is

known as LIQUIDITY ADJUSTMENT FACILITY (c) LAF is a monetary tool in the hands of RBI to ease or

control liquidity by changing interest rate frequently.

REPO can be between banks & FIs; NBFCs can also lend to other eligible counterparties (but not borrow).

23

REPURCHASE AGREEMENT (REPO) REPO PRICING : Two legs of txn : selling and purchasing back securities. Txn

is complete when SGLs are complete or transfer in demat form is complete.

(a) Ready leg proceeds : Prevailing market price of security plus accrued interest on security

(b) Forward leg proceeds : Ready leg price + Repo interest amount

FOUR TYPES OF REPO : Buy-sell back repo, classic repo, bond borrowing and lending, & tripartite repo.

(TO BE COMPLETED)

24

THANK YOU

APRESENTATION BY:

JAGDISH BUDHIRAJA