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Internship Report on Money Market, Interbank Market Page 1


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TABLE OF CONTENTSS.NO PARTICULARS PAGE #

1 Introduction 5

2 Market 6

3 National Bank of Pakistan 9

4 Money Market Deal Processing Cycle 10

5 Money Market Instruments 8

6 Treasury Operations 13

7 Treasury Procedure 15

8 Players of MM 15

9 Treasury Desk 16

10 Types of Transactions 17

11 Clean Placement Transaction 18

12 Settlement System 19

13 Accounting 20

14 Risk 21

15 Conclusion 22


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MARKETA market is a place where trading of goods and services takes place. Its a two -waycommunication through give and take. It can also be defined as the aggregate of allpossible buyers and sellers of a commodity and the transactions between them.

TYPES OF MARKETOn a routine basis we all work through different markets for different purposes. Here are

the brief explanation of these markets, which do affect an individual as well as the

nation and country as a whole:

a) Goods / Commodity Market

A place where exchange of raw materials takes place is called the Goods / Commodity

Market. We can call it a barter system as well for just understanding.

b) Financial Market

A Financial Market is a place where buying and selling of Financial Assets takes place.

Main examples of these markets are stocks and bond market under the umbrella of

Capital Market.

c) Foreign Money Market

Where trading of any currency outside the regulations governing domestic markets in

that currency takes place is called Foreign Money Market. Individuals typically do notparticipate in the foreign money markets because these markets are of a wholesale

nature and too large for individuals to invest in it. Normally commercial banks and

corporations participate in it as they have the capacity to do so.

d) Foreign Exchange Market

Foreign Exchange Market is a place where financial paper with a relatively short

maturity is traded. In Foreign Exchange Market, financial paper denominated in a given

currency is always traded against the other currency. Commercial Banks along with the

Central Bank are the main participants of the Foreign Exchange Market. It is very clearthat commercial banks make a market in foreign exchange market.


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e) Derivative Market

It is the part of the Foreign Exchange Market. It has the notional amount with

speculation. Derivatives are the financial instruments whose values are derived from thevalue of something else (known as the underlying). Derivatives can be used to counter

the risk of economic loss arising from changes in the value of the underlying. This

activity is known as hedging. There are three types of derivatives:

Forward

Option

Swap

f) Money MarketThe money market is a section of the fixed income market. It is a part of the global

financial market, and is used for short-term cash solutions, often by governments and

large institutions. It is considered to be low risk (safe) in relation to other options such as

the stock market. More realistically we can easily understand that the money market

consists of financial institutions and dealers in money or credit who wish to either

borrow or lend. Money market trades in short-term financial instruments commonly

called "paper." This contrasts with the capital market for longer-term funding, which is

supplied by bonds and equity.

The money available to consumers, investors, etc. to spend or invest in products is

known as the money supply of the market. This money supply includes credit available

to consumers. The lower the interest charged on credit facilities, the more consumers

are likely to use credit, and the higher the money supply in the country. An increase in

the money supply is referred to as a growth in the money supply.

If the money supply in the country is high, this could result in increased demand forproducts in the products market, which in turn could lead to inflation (rising prices).
http://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Financial_instrumenthttp://en.wikipedia.org/wiki/Financial_institution


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Money Market Instruments:

Following are money market instruments in Pakistan:

Treasury Bills: The Treasury bills are short-term money market instrument that

mature in a year or less than that. The purchase price is less than the face value. At

maturity the government pays the Treasury Bill holder the full face value. The Treasury

Bills are marketable, affordable and risk free. The security attached to the treasury bills

comes at the cost of very low returns. They are issued at the different maturities:

3-Months:

6-Months:

12-Months:

Certificate of Deposit: The certificates of deposit are basically time deposits that

are issued by the commercial banks with maturity periods ranging from 3 months to five

years. The return on the certificate of deposit is higher than the Treasury Bills because it

assumes a higher level of risk.

Commercial Paper: Commercial Paper is short-term loan that is issued by a

corporation use for financing accounts receivable and inventories. Commercial Papers

have higher denominations as compared to the Treasury Bills and the Certificate of

Deposit. The maturity periods of Commercial Papers are a maximum of 9 months. They

are very safe since the financial situation of the corporation can be anticipated over a

few months.

Acceptance: It is a short-term creditinvestment. It is guaranteed by a bank

to make payments. The Banker's Acceptance is traded in the Secondary market. The

banker's acceptance is mostly used to finance exports, imports and other transactions in

goods. The banker's acceptance need not be held till the maturity date but the holder

has the option to sell it off in the secondary market whenever he finds it suitable.

: The Repo or the repurchase agreement is used by the government security

holder when he sells the security to a lender and promises to repurchase from him

overnight. Hence the Repos have terms ranging from 1 night to 30 days. They are verysafe due government backing.
http://www.economywatch.com/market/money-market/money-market-instruments.htmlhttp://www.economywatch.com/market/money-market/money-market-instruments.htmlhttp://www.economywatch.com/market/money-market/money-market-instruments.htmlhttp://www.economywatch.com/market/money-market/money-market-instruments.html


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MONEY MARKET DEAL PROCESSING CYCLE

The money market deal is processed through three offices. They are:

Front Office It is an input area where front line operations are done.Middle Office It is the processing area where money market dealers transact the

deals received from front office. Most of the times middle office doliaison between the front & back office.

Back Office It is the finalization area where all the deals are settled.

The above process works on Real Time Gross Settlement (RTGS) to make the moneymarket position accurate and realistic.

.

RSF, TTs, Clearing,Inflows/ Outflows,FCA, Central Bank

Balances

FX deals hittingPKR position, $

/PKR swap, Ready,Spot sell/ Purchase

of

Brokers MarketQuotes

Banks MarketQuotes

Money MarketDesk

Front Office

Deals inMoneyMarket

Deal processing &Settlement at

Money MarketBack Office


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DEBT INSTRUMENTS:

Following are money market instruments in Pakistan and practiced in NBP. The maintypes of Government securities that our customers can invest in are:

Treasury Bills (T-Bills)

Treasury bills are zero coupon instruments issued by the Government of Pakistan andsold through the State Bank of Pakistan via fortnightly auctions.

T-Bills are issued with maturities of 3-months, 6-months and 1 Year and are priced at adiscount. T-Bills are risk free, SLR eligible securities that are actively traded in the

secondary market and are therefore highly liquid.

They are issued with a minimum denomination of Rs.100, 000.

Certificate of Deposit: The certificates of deposit are basically time deposits that are

issued by the National Bank of Pakistan to individual and corporate with maturity

periods ranging from 3 months to five years. The return on the certificate of deposit is

higher than the Treasury Bills because it assumes a higher level of risk and

0%2%4%6%8%

10%12%14%

16%

Risk level will increase withmaturity period

5Year

Return


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Pakistan Investment Bond: The Government of Pakistan issues these bonds.Previously it was issued by the name of FIBs (Federal Investment Bonds) PIBs are long

term bonds issued by the Government of Pakistan and sold through the State Bank ofPakistan via periodic auctions.

PIBs are issued with tenors of 3, 5, 7, 10, 15, 20 and 30 Years. Being backed by theGovernment of Pakistan, they present a low risk long term investment option.

The Pakistan Investment Bonds offer a fixed semiannual coupon and repayment ofprincipal at maturity. They are highly liquid SLR eligible securities that are activelytraded in the secondary market.

The minimum denomination of PIBs is Rs.100, 000.

TFC (Term Finance Certificates):The banks issue these certificates, whether they arethe primary dealers or the secondary dealers. Usually they are for long-term periodsand profit on these certificates is paid on semi-annually basis.


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TREASURY OPERATIONS IN BANKS:-

1. Reserve Management & Investment:It involves(i) Meeting CRR / SLR obligations

(ii) Having an appropriate mix of investment portfolio to optimize yield and duration.

Duration is the weighted average life of a debt instrument over which investment in that

instrument is recouped. Duration Analysis is used as a tool to monitor the price

sensitivity of an investment instrument to interest rate changes.

2. Liquidity & Funds Management:

It involves

(i) Analysis of major cash flows arising out of asset-liability transactions

(ii) Providing a balanced and well-diversified liability base to fund the various assets in

the balance sheet of the bank

(iii) Providing policy inputs to strategic planning group of the bank on funding mix

(currency, tenor & cost) and yield expected in credit and investment.

3. Asset Liability Management & Term Money:

ALM calls for determining the optimal size and growth rate of the balance sheet and

also prices the Assets and Liabilities in accordance with prescribed guidelines.

Successive reduction in CRR rates and ALM practices by banks increase the demand

for funds for tenor of above 15 days (Term Money) to match duration of their assets.

4. Risk Management

Integrated treasury manages all market risks associated with a banks liabilities and

assets. The market risk of liabilities pertains to floating interest rate risks and asset &

liability mismatches. The market risk for assets can arise from(i) Unfavorable change in interest rates

(ii) Increasing levels of disintermediation

(iii) Securitization of assets

(iv) Emergence of credit derivatives etc.


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5. Transfer Pricing:

An integrated Treasury unit has an idea of the banks overall funding needs as well as

direct access to various markets (like money market, capital market, forex market, credit

market). Hence, ideally treasury should provide benchmark rates, after assuming

market risk, to various business groups and product categories about the correct

business strategy to adopt. Treasury can develop Interest Rate Swap (IRS) and other

Rupee based / cross-currency derivative products for hedging Banks own exposures

and also sell such products to customers/other banks

6. Capital Adequacy: This function focuses on quality of assets, with Return on Assets

(RoA) being a key criterion for measuring the efficiency of deployed funds.

An integrated treasury is a major profit centre. It has its own P & L measurement. It

undertakes exposures through proprietary trading (deals done to make profits out of

movements in market interest / exchange rates) that may not be required for general

banking.


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TREASURY PROCEDURE:

National Bank of Pakistan bank involves short term lending and borrowing of funds;Overnight, Weekly, One Month, Two Month, Three Month and Six Month up to one Year

in order to meet regulatory environment and to utilize static cash flow in a profitgenerating manner. The most significant function of any money market is to provideeconomic units with a market place to manage funds. Almost every economic unit-government, corporations, financial institutions even a small industry or business has aregular and recurring need for liquidity management and National Bank of Pakistanissues surplus funds(if any) at the disposal of financial and other institutions are offeredby borrowers.

PLAYERS OF MM:

National Bank of Pakistan carries out their financial transactions with the players of MMin Pakistan. Money market players and experts observed that devaluation againstregional currencies was a clear sign of poor performance of economy, even poorer thanBangladesh which was not considered a competitor of Pakistan in the recent past,weakening economy and terrorism are the main causes of sinking rupee whichwitnessed sharp devaluation even in the local economy as buying capacity of thecurrency eroded during a couple of years.

Central Bank (State Bank of Pakistan). Commercial Banks, Co-operative Banks and Primary Dealers are allowed to

borrow and lend.

Non- Banking Financial Institutions. Development Financial Institutions. Intermediaries (Brokerage Houses).

Large Corporate and Business Houses.


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DESK

The FDI Bank money market deskprovides its customers with a variety ofadvisory and investment services. Weoffer our customers competitive quotesand investment advice based on theirspecific needs. We also allow ourcustomers to invest in Governmentsecurities by opening an IPS (InvestorPortfolio Services) account on theirbehalf with the State Bank of Pakistan

FDI has one of the most active interbank and corporate desks among theupcoming banks of the industry, offeringits customers a wide variety of foreign

exchange products and services. TheFDI FX desk offers some of thenarrowest bid offer spreads andquickest online quotes to meet theneeds of its customers, whether theyare related to trade, remittances orother forex flows.

The desk is involved in the followingactivities:

Management of statutoryreserves viz. (CRR) and StatutoryLiquidity Ratio (SLR).

Daily Funds Management for theBank.

Balance Sheet Management Debt Securities Trading


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COMMERCIALBANKS

HBL

RunningFinanceFacility

FDIBL

RunningFinanceFacility

HMB MCB ASKARI

Money Market can be spread into following areas; which are currently practiced inNBP..

INTERBANK TRANSACTIONS:

CLEAN TRANSACTIONS OPEN MARKET TRANSACTIONS

1. Clean Placement(Lending)2. Clean Borrowing3. Certificate of Investment4. Certificate of Deposits.5. Treasury Bills(Repo)

1. Treasury Bills(Reverse Repo)2. Pakistan Investment Bond3. Murhabaha Agreement4. Federal Investment Bond

These banks are involved with NBP in interbank transactions.


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CLEAN PLACEMENT TRANSACTIONS :

BORROWING OF PKR 50 MILLION

Investment and Risk Characteristics:

Term: Mostly Short Term i.e. overnight

Security: Depends upon the issuer

Marketability: Good

Volatility: High since the term is short (Unsecuritized)

Inflation: Low impact of inflation as term is short

Expected Return: Negotiable/Equivalent to bank deposit

Currency: Available in PKR currencies

Amount: 50 MillionType: Letter of PlacementDate of Transaction: 04/08/10Date of Maturity: 04/09/10Rate: 12%Broker: AKD

The Six Horses: Why, What, Who, Which, How and Where ?

Why: The Need

(There was maturity of Client investments, so NBP has to payoff them so, NBP

arranged overnight transaction which has maturity after one month.)

What: The Definition

Which and How: The Product and Process

(It was clean Placement Transactions which considered as unsecuritized )

Where: The Resources

(The bank as resources was HMB)


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SETTLEMENT SYSTEM:

All transactions work are done by The RTGS (Real Time Gross Settlement) system is a

funds transfer system that is able to provide continuous intra-day finality for individualtransfers. In this system, payment instructions between banks are processed andsettled individually and continuously throughout the day. This is in contrast to netsettlements where payment instructions are processed throughout the day but inter-bank settlement takes place only later typically at the end of the day.

Transactions across RTGS move only where the remitting (sending) bank has liquidity.Thus RTGS is an approach to risk reduction and it aims at reducing inter-banksettlement risk . In the RTGS system, payee banks and their customers receive fundswith certainty, or so-called finality, during the day, enabling them to use the fundsimmediately without exposing themselves to risk.


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ACCOUNTING FOR NBP:

Recording Money Market Transactions

Every individual investment and borrowing involved in money market operationsmust be recorded in a general book which can be called money market position book.

Measuring Profits in Money Market Operations

Profits and losses in money market operations can be classified as realized andunrealized profits and losses. Realized profits and losses originate from securities

which have been liquidated within the reporting period; unrealized profits and lossesare associated with securities, which remain in inventory at the end of the period.

Bookkeeping for Money Market Operations

Whenever we acquire a security, the traditional accounting entries are to:

Debit = Marketable SecuritiesCredit = Bank

Whenever we acquire a security, the traditional accounting entries are to:

Debit = BankCredit = Marketable SecuritiesCredit = Profits on Securities


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CONCLUSION

The money market specializes in debt securities that mature in less than oneyear.

Money market securities are very liquid, and are considered very safe. As aresult, they offer a lower return than other securities. The easiest way for individuals to gain access to the money market is through a

money market mutual fund. T-bills are short-term government securities that mature in one year or less

from their issue date. T-bills are considered to be one of the safest investments - they don't provide a

great return. A certificate of deposit (CD) is a time deposit with a bank. Annual percentage yield (APY) takes into account compound interest, annual

percentage rate (APR) does not. CDs are safe, but the returns aren't great, and your money is tied up for the

length of the CD. Commercial paper is an unsecured, short-term loan issued by a corporation.

Returns are higher than T-bills because of the higher default risk. Banker's acceptances (BA) are negotiable time draft for financing transactions

in goods. BAs are used frequently in international trade and are generally only available to

individuals through money market funds. Eurodollars are U.S. dollar-denominated deposit at banks outside of the United

States. The average Eurodollar deposit is very large. The only way for individuals to

invest in this market is indirectly through a money market fund. Repurchase agreements (repos) are a form of overnight borrowing backed by

government securities.

The money market is a vibrant market, affecting our everyday lives. As the short-termmarket for money, money changes hands in a short time frame and the players in themarket have to be alert to changes, up to date with news and innovative with

strategies and products.
http://www.investopedia.com/terms/m/moneymarket.asphttp://www.investopedia.com/terms/l/liquidity.asphttp://www.investopedia.com/terms/m/money-marketfund.asphttp://www.investopedia.com/terms/t/treasurybill.asphttp://www.investopedia.com/terms/c/certificateofdeposit.asphttp://www.investopedia.com/terms/a/apy.asphttp://www.investopedia.com/terms/a/apr.asphttp://www.investopedia.com/terms/a/apr.asphttp://www.investopedia.com/terms/c/commercialpaper.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/b/bankersacceptance.asphttp://www.investopedia.com/terms/e/eurodollar.asphttp://www.investopedia.com/terms/r/repurchaseagreement.asphttp://www.investopedia.com/terms/r/repurchaseagreement.asphttp://www.investopedia.com/terms/e/eurodollar.asphttp://www.investopedia.com/terms/b/bankersacceptance.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/c/commercialpaper.asphttp://www.investopedia.com/terms/a/apr.asphttp://www.investopedia.com/terms/a/apr.asphttp://www.investopedia.com/terms/a/apy.asphttp://www.investopedia.com/terms/c/certificateofdeposit.asphttp://www.investopedia.com/terms/t/treasurybill.asphttp://www.investopedia.com/terms/m/money-marketfund.asphttp://www.investopedia.com/terms/l/liquidity.asphttp://www.investopedia.com/terms/m/moneymarket.asp


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