Professional Documents
Culture Documents
RAJHASTHANI SAMMELANS
Ghanshyamdas Saraf College Affiliated to University of Mumbai ACCREDITED BY NAAC BY A GRADE & Durgadevi Saraf Junior College (ARTS & COMMERCE) S.V Road, Malad (W) Mumbai: 400 064 Year: 2012-2013
RAJHASTHANI SAMMELANS
Ghanshyamdas Saraf College Affiliated to University of Mumbai ACCREDITED BY NAAC BY A GRADE & Durgadevi Saraf Junior College (ARTS & COMMERCE) S.V Road, Malad (W) Mumbai: 400 064 Year: 2012-2013
CERTIFICATE
I Prof. Prasanna Choudhari here by certify that Ms. Priyanka Shantiswaroop Rajput a student of Ghanshyamdas Saraf College of T.Y.B.F.M (Semester V) has completed Project on STUDY OF MONEY MARKET in the Academic Year 2012-2013. This information submitted is true and original to the best of my knowledge
Principal:
College Seal:
ACKNOWLEDGEMENT
I take this opportunity to thank the UNIVERSITY OF MUMBAI for giving me a chance to do this project. I express my sincere gratitude to the Principal, course Coordinator Mrs. Deepti Soni Madam, Guide Prof. Prasanna Choudhari and our librarian and other teachers for their constant support and helping for completing the project. I am also grateful to my friends for giving support in my project. Lastly, I would like to thank each and every person who helped me in completing the project especially MY PARENTS
DECLARATION
I Miss Priyanka Shantiswaroop Rajput a student of Ghanshyamdas Saraf College of Arts and Commerce, Malad (W) T.Y.B.F.M (Semester V) hereby declare that I have completed the project on STUDY OF MONEY MARKET in the academic year 2012-2013. This information submitted is true and original to best of my knowledge.
Date:
EXECUTIVE SUMMARY
The seventh largest and second most populous country in the world, India has long been considered a country of unrealized potential. A new spirit of economic freedom is now stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. India's process of economic reform is firmly rooted in a political consensus that spans her diverse political parties. India's democracy is a known and stable factor, which has taken deep roots over nearly half a century. Importantly, India has no fundamental conflict between its political and economic systems. Its political institutions have fostered an open society with strong collective and individual rights and an environment supportive of free economic enterprise. India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments. These include a free and vibrant press, a judiciary which can and does overrule the government, a sophisticated legal and accounting system and a user friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its Gross Domestic Product and offers considerable scope for joint ventures and collaborations. Today, India is one of the most exciting emerging money markets in the world. Skilled managerial and technical manpower that match the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition. The average turnover of the money market in India is over Rs. 40,000 crores daily. This is more than 3 percents of the total money supply in
the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 percent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even fraction of the daily trading in developed markets.
To study about Money market To study about the structure of money market and its components To study about the money market instruments brief. To study about the role of Reserve bank of India in Indian Money market To study the defects of money market
Contents
Introduction History Meaning of Money Market Objectives of Money Market Characteristic Of Money Market Structure of Money Market Component of Money Market The Role of Reserve Bank of India in Indian Money Market Defects of Money Market Questionnaire Suggestion Conclusion Case Study Articles Bibliography
Page No
2 4 5 7 8 9 11 51
52 57 62 63
Introduction
The money market is a key component of the financial system as it is the fulcrum of monetar y operations conducted by the central bank in its pursuit of monetary policy objectives. The money market is a subsection of the fixed income market. We generally think of the term fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities.
Money market securities are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.
One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. The easiest way for us to gain access to the money market is with a money market mutual funds, or sometimes through a money market bank account.
These accounts and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like Treasury bills, may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets. There are several different instruments in the money market, offering different returns and different risks.
History
Till 1935, when the RBI was set up the Indian money market remained highly disintegrated, unorganized, narrow, shallow and therefore, very backward. The planned economic development that commenced in the year 1951 market an important beginning in the annals of the Indian money market. The nationalization of banks in 1969, setting up of various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the setting up of discount and finance house of India ltd. (1988), the securities trading corporation of India (1994) and the commencement of liberalization and globalization process in 1991 gave a further fillip for the integrated and efficient development of India money market. India has witnessed in the past two decades substantial changes in the money and capital markets. The money market scenario, which has emerged since 1980s, has witnessed new instruments and new directions have been chalked out. It is to be noted here that, strictly speaking, the money market deals with short term flow of funds whereas the capital market, embracing the stock market, deals with medium and long-term capital flows. But these two markets can not be placed in water tight compartments and there is often a spillover from one market to the other.
institutions
and
individuals
and
also
the
government
itself.
According to the Geoffrey, money market is the collective name given to the various firms and institutions that deal in the various grades of the near money.
To enable the Central Bank to influence and regulate liquidity in the economy through its intervention in this market.
To provide a reasonable access to users of Short-term funds to meet their requirements quickly, adequately and at reasonable costs.
It consists of various sub markets like call money market, bill market etc.
Central Bank, Commercial Bank, Financial institution are main constituents of money market.
(i) Financing Industry A well developed money market helps the industries to secure short term loans for meeting their working capital requirements. It thus saves a number of industrial units from becoming sick.
(ii) Financing trade An outward and a well knit money market system play an important role in financing the domestic as well as international trade. The traders can get short term finance from banks by discounting bills of exchange. The acceptance houses and discount market help in financing foreign trade.
(iii) Profitable investment The money market helps the commercial banks to earn profit by investing their surplus funds in the purchase of. Treasury bills and bills of exchange, these short term credit instruments are not only safe but also highly liquid. The banks can easily convert them into cash at a short notice.
(iv) Self sufficiency of banks The money market is useful for the commercial banks themselves. If the commercial banks are at any time in need of funds, they can meet their requirements by recalling their old short term loans from the money market.
(v) Effective implementation of monetary policy The well developed money market helps the central bank in shaping and controlling the flow of money in the country. The central bank mops up excess short term liquidity through the sale of treasury bills and injects liquidity by purchase of treasury bills.
(vi) Encourages economic growth If the money market is well organized, it safeguards the liquidity and safety of financial asset This encourages the twin functions of economic growth, savings and investments.
(vii) Help to government The organized money market helps the government of a country to borrow funds through the sale of Treasury bills at low rate of interest The government thus would not go for deficit financing through the printing of notes and issuing of more money which generally leads to rise in an increase in general prices.
The Indian money market is divided into two parts namely organized and unorganized. The organized sector consist of The Reserve Bank of India, Foreign Banks, Commercial Banks, Co-operative banks, Discount and Finance House of India, Mutual funds and finance Companies.
ORGANIZED SECTOR
UNORGANIZED SECTOR
SUB-MARKET (Instruments)
Commercial paper
Tbills
Repos
Certificate of deposit
MMMF s
The Unorganized sector consists of indigenous bankers, money lenders, nonbanking financial intermediaries like chit funds, nidhis etc. this sector is a hetrogenous sector. The organized sector of money market is well advanced. Its principal centres are Mumbai, Kolkata, Delhi, Chennai, Ahmedabad, and Bangalore. Of these centres the Mumbai centre is most active one
Commercial Banks
Commercial Banks and the CO-operative banks are the major participants in the Indian money market. They mobilize the savings of the people through acceptance of deposits and lend it to business houses for their short term working capital requirements. While a portion of these deposits is invested in medium and long-term Government securities and corporate shares and bonds, they provide short-term funds to the Government by investing in the Treasury Bills. They employ the short-term surpluses in various money market instruments.
Corporates
Companies create demand for funds from the banking system. They raise short-term funds directly from the money market by issuing commercial paper. Moreover, they accept public deposits and also indulge in intercorporate deposits and investments.
Mutual Funds
Mutual funds also invest their surplus funds in variou~ money market instruments for short periods. They are also permitted to participate in the Call Money Market. Money Market Mutual Funds have been set up specifically for the purpose of mobilisation of short-term funds for investment in money market instruments.
Finance Brokers
They act as middlemen between lenders and borrowers. They charge commission for their services. They are found mostly in urban markets, especially in cloth markets and commodity markets.
Finance Companies
They operate throughout the country. They borrow or accept deposits and lend them to others. They provide funds to small traders and others. They operate like indigenous bankers.
Issuer of the instrument Face value of the instrument Interest rate Repayment terms (and therefore maturity period/tenor) Security or collateral provided by the issuer
By convention, the term "money market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight and term money between banks and institutions (called call money) and the market for repo transactions. The former is in the form of loans and the latter are sale and bu back agreements both are obviously not traded. The main traded
instruments are commercial papers (CPs), certificates of deposit (CDs) and treasury bills (T-Bills). All of these are discounted instruments ie they are issued at a discount to their maturity value and the difference between the issuing price and the maturity/face value is the implicit interest. These are also completely unsecured instruments. One of the important features of money market instruments is their high liquidity and tradability. A key reason for this is that these instruments are transferred by endorsement and delivery and there is no stamp duty or any other transfer fee levied when the instrument changes hands. Another important feature is that there is no tax deducted at source from the interest component. A brief description of these instruments is as follows:
Certificate of Deposit Commercial Papers, Treasury Bills, Ready Forward Contracts (Repos) Call and Short Notice Market Money Market Mutual Funds (MMFS)
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 Certificates of deposits process the following distinguishing characteristics:
Negotiable instruments
CDs are negotiable term-deposit certificates Issued by commercial bank/financial institutions at discount to face institutions. value at market rates. The Negotiable Instruments Act governs CDs.
Maturity
The maturity period of CDs ranges from 15 days to one year.
Nature
CDs are in the form of usance promissory notes and hence easily negotiable by endorsement and delivery.
Ideal source
CDs constitute a judicious source of investments as these certificates are the liabilities of commercial
PROFILE
A distinguishing profile of Certificate of Deposit as operating in India is presented below:
THE VAGHUL WORKING GROUP The Vaghul Working Group set up in 1987, again reviewed the issue and expressed itself against the launch of the instrument by the RBI. The Group reported that the introduction of CDs as a money market instrument would be meaningful only where the short-term deposit rates were aligned with other rates in the financial system.The Group instead recommended, as a prelude, the setting up of a discount house and the alignment of short-term deposit rates. Based on the recommendations of the Group, the RBI constituted the Discount and Finance House of India Ltd. (DFHI) in the year 1988. In the same manner, RBI rationalized the interest rate structure in March 1989 by abolishing fixed deposits of shortest terms with maturity of 15 to 45 days.
THE LAUNCH
The RBI launched the scheme of CDs with effect from March 27, 1989. Following guidelines were laid down in this regard.
ELIGIBLE ISSUERS
The institutions that are eligible to issue CDs are scheduled commercial banks (excluding RRBs) and specified all-India financial institutions, namely, IDBI, IFCI, ICICI, SIDBI, IRBI, and EXIM bank.
ELIGIBLE SUBSCRIBERS
The parties who are eligible to buy CDs are individuals, associations, companies, corporations, trust funds, etc. NRI an also subscribe to the CDs. How ere, this is possible only on a non-repatriation basis. It is not possible for an NRI to endorse CDs to another NRI in the secondary market.
NEGOTIATION
CDs are freely transferable by endorsement and delivery after the initial lock in period of 15 days. The instrument can be purchased by any of the above subscribers and DFHI in the secondary market.
MATURITY
The maturity period of CDs issued by banks ranges from 3 days to 12 months and that issued by specified financial institutions can have a maturity period up to 3 years. With the announcement of credit policy on April27, 2000 the maturity period was reduced from 3 month to 15 days.
DISCOUNT
CDs are to be issued at a discount to face value, with the maturity period not having any grace period.
LIMITS OF ISSUE
The maximum amount of issue by a bank, which was originally fixed at 1 percent of its fortnightly aggregate average deposits, was raised to 10 percent in
1992. This was subsequently abolished totally. The minimum size of issue to a single investor, which was originally fixed at Rs.10 lakhs, was reduced to Rs. 5lakhs with effect from October 21, 1997. Issue of CDs above Rs.5 lakhs can now be made in multiples of Rs.1 lakhs. CDs can now be CRR on issue price of CDs for which there is no ceiling.
STAMP DUTY
Stamp duty is payable on CDs as applicable to any other negotiable instrument.
SECURITY PAPER
CDs are transferable by endorsement and delivery, and shall therefore be issued on a good quality security paper.
OTHER REQUIREMENTS
1. No loans can be granted by banks against CDs. 2. Banks cannot have any buyback arrangement of their own CDs before maturity. 3. Banks are to submit fortnightly report on their CDs to the RBI under section 42 of the RBI Act, 1935. 4. Banks are to show CDs under the head liabilities in the balance sheet.
YIELD
CDs are offered at interest rates higher than the time deposits of banks. However, the rate of interest is dependent upon many factors such as urgency of requirement for funds, alterative opportunities for investment of funds mobilized, etc. The rate of discount being deregulated is now determined by the demand and supply of CDs. CDs are issued at a discount to their face value and redeemed at par. CDs are issued at a front-end discount and in such a case; the effective rate of interest is higher than the quoted discount rate. Effective rate of interest may be calculated as follows. ERRR= [(1+QDR/100*N/M) N/M-1]*100 Where, ERR = Effective rate of interest QDR = Quoted discount rate N M = Total period in a year. Say 12 months or 365 days etc = Maturity period in months or days as the case may be
ROLE OF DFHI
The Discount and Finance House of India Ltd. Functions as a market maker in CDs market. It offers bid rate, the rate of discount at which it is prepared to buy CDs, and offer rate at which it would be willing to sell the CDs. The DFHI acts as an ideal conduit for disinvestments of CD holdings, which is done through their banker in Mumbai. DFHI also engages in buying CDs from the bank at its bid discount rate. Settlements are effected through RBI cheque.
ROLE OF BANKS
Scheduled commercial banks are the active players in the realm of CDs market segment. CDs are used as an important money market instrument. CDs provide an ideal avenue of investment money market instrument. CDs provide ideal avenue of investment for bankers. CDs are considered safe, liquid, and
attractive in returns for both scheduled commercial bank and investors. It is not necessary for banks to encash CDs before maturity under the RBI Act. Banks are under obligation to maintain usual reserve requirements (SLR and CRR) on issue price of CDs. CDs offer the opportunity for banks for the bulk mobilization of resources as part of effective fund management. Besides, offering an attractive yield help bankers utilize them eligible assets for determination of Net Demand and Time Liabilities (NDTL). According to the RBI guidelines, it will not be possible for banks to enter into buyback arrangement with the subscriber of CDs. Similarly, they cannot grant loans against CDs issued by them. It is possible for investors to sell CDs in secondary market before their maturity. This offers investors the advantage of liquidity through ready marketability. However, the tendency on the part of holders of CDs to hold the instruments till maturity date has not made possible for the creation of an effective secondary market for them, although the primary market for CDs has shown a considerable improvement.
COMMERCIAL PAPER
Debt instrument that are issued by corporate houses for raising short-term financial resources from the money market are called Commercial Papers (CPs).
FEATURES
Following are the features of commercial papers:
NATURE
These are unsecured debts of corporate. They are issued in the form of promissory notes. These are redeemable at par to the holder at maturity. The issuing company should have a minimum tangible net worth to the extent of Rs.4 crores. Moreover, the working capital (fund-based) limit of the company should not be less than Rs. 4 crores and this allows corporate to issue CPs up to 100 per cent of their fund based working capital limits. CPs are issued at a discount to face value in multiples of Rs.5 Lakhs. CPs attracts stamp duty. No prior approval of RBI is needed to issue CPs and no underwriting is mandatory. The issuing company has to bear all expense (Such as dealers fees, rating agency fee and charges for provision of standby facilities) relating to the issue of CP. The issue of CPs serves the purpose of releasing the pressure on bank funds for small and medium sized borrowers, besides allowing highly rated companies to borrow directly from the market.-
MARKET
The market for the Cps comprises of issues made by public sector and private sector enterprises CPs issued by top rated corporate are considered as sound investments. Conditions attached to the issue are less stringent than those applicable for raising CPs. Beginning from September 1996, Primary Dealers(PDs) were also permitted by RBI to issue CPs for augmenting their resources. This is one of the steps initiated by the RBI to make the CPs market popular.
RATING
As per the guidelines of the RBI, CPs are required to be graded by the organization issuing them. Accordingly, a rated CP is considered to be a quality and sound instrument. With the liberalization of interest rate structure, the rate of interest is market-determined. This causes wide variation in the prevailing rates of interest.
INTEREST RATES
The rate of interest applicable to CPs varies greatly. This variation is influenced by a large number of factors such as credit rating of the instrument, economic phase, the prevailing rate of interest in CPs market, call rates, the position in foreign exchange market, etc. It is however to be noted that there is no benchmark for the interest rate.
MARKETABILITY
The marketability of the CPs is influenced by the rates prevailing in the call money market and the foreign exchange market. Accordingly where attractive interest rates prevail in these markets, the demand for Cps will be affected. This is because; investors will divert their investment into these markets.
CPS IN LIEU OF WC
The nature of credit policy announced by the RBI to allows highly rated corporate to have the advantage of banks offering an automatic restoration of working capital limits on the repayment of CP. Accordingly, short-term working capital loans were substituted with cheaper CPs. This was done by the RBI to hasten the growth of the CP market.
RATING
In order that the satellite dealers are permitted to trade in CPs, it is essential that the issuing corporate obtain the minimum specified credit rating from a credit rating agency. Such a rating must have been approved by the months.
MATURITY
The CPs shall be issued for a maturity period ranging from 15 days to one year from the dated is issue.
TARGET MARKET
The issue of CPs may be targeted to such persons as individuals, banks, companies, other corporate bodies registered or incorporated in India and unincorporated bodies and non-resident Indian (NRI) on non-repatriation basis subject to the condition that it shall be transferable.
LIMITS OF ISSUE
Each issue of CPs (including renewal) shall be treated as a fresh issue. The CPs issue may take place in multiples of Rs. 5 Lakhs. The investment by any single investor shall be for a minimum amount of Rs. 25 Lakhs (face Value) and the secondary market transactions may be dealt in for amounts of Rs. 5Lakhs or multiples thereof. The RBI shall fix the total amount of issue. The issue amount shall be raised within a period of 2 week from weeks from the date of approval by the Reserve Bank or ma be issued on a single day or in parts on different days as the case may be.
NATURE
The CPs shall be in the form of usance promissory note. It shall be negotiable by endorsement and delivery. It is issued at discount to face value, discount being determined by the SD issuing the CPs. The SDs shall bear the expenses of the issue, including dealers fee, rating agency fee, etc.
TREASURY BILL
GENERAL FEATURES
Treasury bills incorporate the following general features:
Issuer
TBs are issued by the government for raising short-term funds from institutions or the public for bridging temporary gaps between receipts (both revenue and capital) and expenditure.
Finance bills
TBs are in the nature of finance bills because they do not arise due any genuine commercial transaction in goods.
Liquidity
TBs are not self-liquidating like genuine trade bills, although they enjoy higher degree of liquidity.
Vital source
Treasury bills are an important source of raising short- term funds by the government.
Monetary management
TBs serve as an important tool of monetary used by the central bank of the county to infuse liquidity in to the economy.
ISSUE
TBs, which were first up to 1935 by the Government of India directly, came to be issued by the RBI since its inception in 1935. Thereafter, TBs are issued at a discount by the RBI on behalf of the Government of India.
TYPES
There are two types of treasury bills. They are ordinary treasury bills and ad hoc treasury bills. The freely marketable treasury bills that are issued by the Government of India to the public, banks and other institution for raising resources to meet the short-term finance needs takes the form of ordinary TBs.
MATURITY PERIOD
A lot of changes taken place in the realm of the periodicity of treasury bills, changes having being brought about by the policy announcements made by RBI from time to time. A brief account of the changes in the period of maturity of TBs is outlined below: 1. Maturity period of TBs at the close of the First World War was of 3, 6, 9, and 12 months duration. 2. Maturity periods of tap bills and Intermediate Bills introduces by RBI immediately after its inception was 91 days which was continued up to November 1986. 3. Maturity period of 182 days recommended by Chakraborty Committee was issued up to April 1992. 4. Maturity period of 365 days beginning from April 1992. 5. Maturity period of 14 days introduced in May 1997 and of 28 days introduced on October21, 1997. 6. Maturity period of 182 days reintroduced with effect from May26, 1999.
PARTICIPANTS
The participants in the TBs market include the Reserve Bank of India, the State Bank Of India, Commercial Banks, State Governments and othe approved bodies, Discounts and Finance House of India as a market maker in TBs, the Securities Trading Corporation of India (STCI), other financial institutions such as, LIC, UTI, GIC, NABRAD, IDBI, IFCI, ICICI, etc corporate entities and general public and Foreign Institutional Investors. Of the above-mentioned participants, RBI and commercial banks are the most popular players. This essentially arises from the nature of relationship between them. TBs are least popular among the corporate entities and the general public.
NOTIFICATION
The RBI issues notifications for the sale of 91day TBs on tap basis throughout the week and the 14-days, 28- days, 91-days, and 364-days, TBs through fortnightly auction. The notification mentions the date of auction and the last date for submission of tenders.
TENDERING
Immediately after the issue of notification by theRBI, investors are permitted to submit bids through separate tenders. The result of the auction mentioning the price up to which the bids have been accepted is displayed. The successful bidders are expected to collect letter of acceptance from the RBI and deposit the same together with a cheque on RBI.
SGL
SGL is maintained by the RBI for facilitating the purchases and sales of TBs by the investors like Commercial Banks, DFHI, STCI and other financial institutions.
DFHI
Where the SGL facility is not available to certain investors, purchase and sale takes DFHI. TBs sold to such investors are held by DFHI on their behalf, which pays the proceeds of the TBs held, to the investor on the date of maturity. DFHI takes an active part in the primary auctions of TBs, besides operating in the secondary market by quoting tow-way rates. In addition, the DFHI also gives buyback and sell-back commitments for periods up to 14 days at negotiated interest rates, to commercial banks, financial institutions and public sector undertakings.
POLICY MEASURES
With a view to improving the depth and liquidity in the government securities market, RBI announced the following policy measures relating to Treasury Bills with effect from October1999: 1. Price based auction of government dated securities. 2. Auction of 182-day Treasury Bills. 3. A calendar of Treasury Bills Issuance
TB RATE
The discount rate at which the RBI sells TBs known as Treasury Bills rate. The effective yield on TBs depends on such factors as the rate of discount,
difference between the issue price and the redemption value, and time period of their maturity. The treasury bills rate is computed as follows: Y= {[(FV-IP)/IP]*[364/MP]}*100. Where, FV = Face Value TBs IP = Issue Price of TBs MP = Maturity Period of TBs in days D = Discount.
BENEFITS
TBs being an important money market instruments provide the following benefits:
LIQUIDITY
Treasury bills command high liquidity. A number of institutions such as RBI, the DFHI, STCI, commercial banks, etc take part in the TB market. In addition, the Central bank is always prepared to purchased or discount TBs.
NO DEFAULT RISK
Since there is a guarantee by the central government, TBs are absolutely free from the risk of default of payment by the issuer. Moreover, the government itself issues the TBs.
AVAILABILITY
RBI has the policy of making available on a steady basis, the TBs especially through the Tap route since July 12, 1965. This greatly helps banks and other institutions to park their funds temporarily in TBs.
LOW COST
Trading in TBs involves less transaction costs. This is because two-way quotes with a fine margin are offered by the DFHI on a daily basis.
SAFE RETURN
The biggest advantage of TBs is that they offer a steady and sage return to investors. There are not many fluctuations in the discount rate. It is also possible for the investors to earn attractive return by keeping investment in
NO CAPITAL DEPRECIATION
Since TBs command high order of liquidity, safely and yield, there is very little scope for capital depreciation in them.
SLR ELIGBILITY
TBs are of great attraction to commercial banks as it helps them park their funds (Net Demand and Time Liabilities) as per the norms or SLR announced b the RBI from time to time. This reason makes commercial banks dominate dealers in TBs.
FUNDS MOBILIZATION
TBs are used as an ideal tool by the government for raising short-term funds required for meeting temporary budget deficit.
MONETARY MANAGEMENT
It is also possible for the government to mop up excess liquidity in the economy through the issue of TBs. Since TBs are subscribed by the investors other than the RBI, the issue would neither lead to inflationary pressure nor result in monetization.
BETTER SPREAD
TBs facilitate proper spread of asset mix different maturity as they are available on tap basis as well as in fortnightly auctions.
PERFECT HEDGE
TBs can be used as a hedge against volatility of call loan market and interest rate fluctuations.
FUND MANAGEMENT
TBs serve as effective tools of fund management because of the following reasons: 1. Ready market availability, both for sale and purchase at market driven prices, thus imparting flexibility. 2. Facility of rediscounting TBs on tap basis. 3. Facility of refinancing from the RBI. 4. Plethora of options available to fund managers to invest in TBs and for raising funds against TBs especially through and with the help of DFHI
5. Ideally suited for investment of temporary surplus 6. Possibility of building up portfolio of TBs with dates of maturities matching the dates of payment of liabilities, such as certificates of deposits and deposits of short-term maturities. 7. Possibility of meeting the temporary difficulties of funds by entering into buyback transactions for surplus TBs and reversing the transactions when the financial need is over 8. Possibility of making enhanced profit by indulging in quick raising of money against TBs for investing in call money market when call rates are high and doing the reverse when call rates dip.
REPOS
The term Repo is used as an abbreviation for Repurchase Agreement or Ready Forward. A Repo involves a simultaneous sales and repurchaseagreements. A Repo works as follow as follows. Party A needs short-term funds and PartyB wants to make a short-term investment. Party A sells securities to Party B at a certain price and simultaneously agrees to repurchase the same after a specified time at a slightly higher price. The difference between the sale price and repurchase price represent the interest cost to Party A (the party doing the repo) and conversely the interest income for Party B (the party doing the Reverse Repo). Reverse Repos are a safe and convenient form of short-term investment.
Contract
The Repo contract provides the seller bank to get money by partying with its security and the buyer bank in turn to get the security by parting with its money. It becomes a Reserve Repo deal for the purchaser of the security. Securities are sold first to a buyer bank and simultaneously another contract is entered in to with buyer to repurchase them at a predetermine date and price in future. The price of the sale and repurchase of securities is determined before entering into deal.
Safety
Repo is an almost risk free instrument used to even out liquidity changes in the system. Repos offer short-term outlet for temporary excess cash at close to the market interest rate.
Hedge tool
As purchaser of the repo requires title to the securities for the term of agreement and as the repurchase price is locked in at a time of sale itself. It is possible to use repos as an effective hedge-tool to arrange the others repos or to sell them outright or to deliver them to another party to fulfill the delivery commitment in respect of a forward or future contract or a short sale or a maturing reveres repo.
Period
The minimum period for Ready Forward Transaction Bill willbe 3 day. However, RBI withdraws this restriction for the minimum period with the effect from October 30, 1998.
Liquidity Control
The RBI uses Repo as a tool of liquidity control for absorbing surplus liquidity from the banking system in a flexible way and thereby preventing interest rate arbitraging. All Repo transaction are to be effected at Mumbai only and the deals are to be necessary put through the subsidiary General Ledger (SGL) account with the Reserve Bank of India.
The Reserve Bank of India introduced the Money Market Mutual Funds (MMMFs) scheme in April 1972. The schemes aim at providing additional short-term avenues to individual investor in order to bring Money Market Instrument within their reach. MMMFs are expected to be more attractive to banks and financial institutions, ho would find them providing greater liquidity and depth to the money market.
FEATURES
The Silent features of the MMMFs are as follows.
Eligibility
The MMMFs can be set up by schedule commercial banks and publicfinancial institution as define under section 4A of the companies Act, 1956, either directly or through their existing Mutual Funds / Subsidiaries who are engaged in fund management. In addition, private sector Mutual Funds may also set up MMMFs with the prior approval of RBI, subject to fulfillment of certain terms and conditions. SEBIs clearance is required in the event of MMMFs being set up in the private sector.
Structure
MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or Money Market Mutual Funds (MMMFs)
Size
There is no ceiling prescribed for the MMMFs for raising resources.
Investors
The MMMFs are primary indented to serve as a vehicle for individual investor to participate in the Money Market, the units / shares of MMMFs can
be issued only to individuals. In addition, individual Non Resident Indian (NRIs) may also subscribe to the share / units of MMMFs. The dividend / income on such subscription will be allowed to be repatriated, through the principle amount of subscription will be allowed to be repatriated, though the principal amount of subscription will not.
Investment by MMMFs
The resources mobilized by MMMFs should be invested exclusively in the various money market instruments as listed below. 1. Treasury Bills and dated Government Securities having an unexpired maturity up to 1 year with no minimum limit 2. call / notice money with no maximum limit 3. Commercial Paper with no maximum limit, the exposure to the commercial paper issue by the individual company being limited to 3% of the resources of the MMMFs as the prudential requirement 4. Commercial bills arising out of genuine trade / commercial transactions and accepted / co-accepted by banks with no maximum limits.
Reserve Requirements
In the MMMFs set up by banks, the resources mobilized by them would not to be consider part of their net demand, and time liabilities, and as such would be free of any reserve requirement.
Stamp duty
The share / units issued by MMMFs would be subject to Stamp duty.
Regulatory Authority
RBI is the regulatory that gives the approval for the setting of MMMFs. Beside
this, banks their subsidiaries and public financial institution would also be required to comply with the guidelines and directives that may be issued by RBI from time to time for the setting and operation of MMMFs. Similarly, the Private Sector MMMFs would need to clearance of SEBI, as also approval of RBI.
one to one negotiation, real time quote and trade information, preferred counterparty setup, online exposure limit monitoring, online regulatory limit monitoring, dealing in call, notice and term money, dealing facilitated for T+0 settlement type for Call Money and dealing facilitated for T+0 and T+1 settlement type for Notice and Term Money. Information on previous dealt rates, ongoing bids/offers on re al time basis imparts greater transparency and facilitates better rate discovery in the call money market. The system has also helped to improve the ease of transactions, increased operational efficiency and resolve problems associated with asymmetry of information. However, participation on this platform is optional and currently both the electronic platform and the telephonic market are co-existing. After the introduction of NDS-CALL, market participants have increasingly started using this new system more so during times of high volatility in call rates.
Figure 4.2: Average Daily Volumes in the Call Market (Rs. cr.) Committee Recommendation on Call Money Market:
There are various committee suggested recommendation on Call Money Market are as follow:
market, the turnover in the call/notice money market has declined significantly. The activity has migrated to other overnight collateralized market segments such as market repo and CBLO
participating in the call markets. Then from 1991 onwards, corporates were allowed to lend in the call markets, initially through the DFHI, and later through any of the PDs. In order to be able to lend, corporates had to provide proof of bulk lendable resources to the RBI and were not suppose to have any outstanding borrowings with the banking system. The minimum amount corporates had to lend was reduced from Rs. 20 crore, in a phased manner to Rs. 3 crore in 1998. There were 50 corporates eligible to lend in the call markets, through the primary dealers. The corporates which were allowed to route their transactions through PDs, were phased out by end June 2001.
Bank
PD
MF
Corporate
Total
154
19
173
154
19
35
50
277
Source: Report of the Technical Group on Phasing Out of Non-banks from Call/Notice Money Market, March 2001.
Banks and PDs technically can operate on both sides of the call market, though in reality, only the P Ds borrow and lend in the call markets. The bank participants are divided into two categories: banks which are predominantly lenders (mostly the public sector banks) and banks which are predominantly borrowers (foreign and private sector banks). Currently, the participants in the call/notice money market currently include banks (excluding RRBs) and Primary Dealers (PDs) both as borrowers and lenders.
important players is a significant influence on quantity as well as price. This leads to a lack of depth and high levels of volatility in call rates, when the participant structure on the lending or borrowing side alters.
Short-term liquidity conditions impact the call rates the most. On the supply side the call rates are influenced by factors such as: deposit mobilization of banks, capital flows, and banks reserve requirements ; and on the demand side, call rates are influenced by tax outflows, government borrowing programme, seasonal fluctuations in credit off take. The external situation and the behaviour of exchange rates also have an influence on call rates, as most players in this market run integrated treasuries that hold short term positions in both rupee and forex markets, deploying and borrowing funds through call markets. Table 4.3: Call Money Rates Year Maximum (% p.a.) Minimum Year Average (% p.a.) (% p.a.) Bank rate
1996 - 97 1997 - 98 1998 - 99 1999 - 00 2000 - 01 2001 - 02 2002 - 03 2003 -04 2004 - 05
Source: Handbook of Statistics on Indian Economy, 2006-07, RBI During normal times, call rates hover in a range between the repo rate and the reverse repo rate. The repo rate represents an avenue for parking short -term funds, and during periods of easy liquidity, call rates are only slightly
towards the reverse repo rate. Table 4.3 provides data on the behaviour of call rates. Figure 4.3displays the trend of average monthly call rates. The behaviour of call rates has historically been influenced by liquidity conditions in the market. Call rates touched a peak of about 35% in May 1992, reflecting tight liquidity on account of high levels of statutory pre-emptions and withdrawal of all refinance facilities, barring export credit refinance. Call rates again came under pressure in November 1995 when the rates were 35% par.
The Reserve Bank of India introduced the Money Market Mutual Funds (MMMFs) scheme in April 1972. The schemes aim at providing additional short-term avenues to individual investor in order to bring Money Market Instrument within their reach. MMMFs are expected to be more attractive to banks and financial institutions, ho would find them providing greater liquidity and depth to the money market.
FEATURES
The Silent features of the MMMFs are as follows.
Eligibility
The MMMFs can be set up by schedule commercial banks and publicfinancial institution as define under section 4A of the companies Act, 1956, either directly or through their existing Mutual Funds / Subsidiaries who are engaged in fund management. In addition, private sector Mutual Funds may also set up MMMFs with the prior approval of RBI, subject to fulfillment of certain terms and conditions. SEBIs clearance is required in the event of MMMFs being set up in the private sector.
Structure
MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or Money Market Mutual Funds (MMMFs)
Size
There is no ceiling prescribed for the MMMFs for raising resources.
Investors
The MMMFs are primary indented to serve as a vehicle for individual investor to participate in the Money Market, the units / shares of MMMFs can be issued only to individuals. In addition, individual Non Resident Indian (NRIs) may also subscribe to the share / units of MMMFs. The dividend / income on such subscription will be allowed to be repatriated, through the principle amount of subscription will be allowed to be repatriated, though the principal amount of subscription will not.
Reserve Requirements
In the MMMFs set up by banks, the resources mobilized by them would not to be consider part of their net demand, and time liabilities, and as such would be free of any reserve requirement.
Stamp duty
The share / units issued by MMMFs would be subject to Stamp duty.
Regulatory Authority
RBI is the regulatory that gives the approval for the setting of MMMFs. Beside this, banks their subsidiaries and public financial institution would also be required to comply with the guidelines and directives that may be issued by RBI from time to time for the setting and operation of MMMFs. Similarly, the Private Sector MMMFs would need to clearance of SEBI, as also approval of RBI.
The Reserve Bank of India is the most important constituent of the money market. The market comes within the direct preview of the Reserve Bank of India regulations. The aims of the Reserve Banks operations in the money market are: To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability. To ensure an adequate flow of credit to the productive sector of the economy and To bring about order in the foreign exchange market. The Reserve Bank of India influence liquidity and interest rates through a number of operating instruments - cash reserve requirement (CRR) of banks, conduct of open market operations (OMOs), repos, change in bank rates and at times, foreign exchange swap operations.
A well-developed money market is a necessary pre-condition for the effective implementation of monetary policy. The central bank controls and regulates the money supply in the country through the money market. However, unfortunately, the Indian money market is inadequately developed, loosely organised and suffers from many weaknesses. Major defects are discussed below: D E F E C T S O F Dichotomy between organized and unorganized sector Predominance of unorganized sector Wasteful Competition Absence of All-India Market Inadequate banking facilities Seasonal shortage of funds Diversity of Interest rates Absence of Bill market M M
o Wasteful Competition Wasteful competition exists not only between the organised and unorganised sectors, but also among the members of the two sectors. The relation between various segments of the money market are not cordial; they are loosely connected with each other and generally follow separatist tendencies. For example, even today, the State Bank of Indian and other commercial banks look down upon each other as rivals. Similarly, competition exists between the Indian commercial banks and foreign banks.
in the bigger cities, like, Bombay, Madras, and Calcutta and those in smaller towns.
o Seasonal Shortage of Funds A Major drawback of the Indian money market is the seasonal stringency of credit and higher interest rates during a part of the year. Such a shortage invariably appears during the busy months from November to June when there is excess demand for credit for carrying on the harvesting and marketing operations in agriculture. As a result, the interest rates rise in this period. On the contrary, during the slack season, from July to October, the demand for credit and the rate of interest decline sharply.
for bills of small trader of 10 per cent can exist simultaneously indicates an extraordinary sluggishness of the movement of credit between various markets." The interest rates also differ in various centres like Bombay, Calcutta, etc. Variations in the interest rate structure is largely due to the credit immobility because of inadequate, costly and time-consuming means of transferring money. Disparities in the interest rates adversely affect the smooth and effective functioning of the money market.
Many factors are responsible for the underdeveloped bill market in India
(i) Most of the commercial transactions are made in terms of cash. (ii) Cash credit is the main form of borrowing from the banks. Cash credit is given by the banks against the security of commodities. No bills are involved in this type of credit. (iii)The practice of advancing loans by the sellers also limits the use of bills. (iv) There is lack of uniformity in drawing bills (bundles) in different parts of the country. (v) Heavy stamp duty discourages the use of exchange bills. (vi) Absence of acceptance houses is another factor responsible for the underdevelopment of bill market in India.
(vii) In their desire to ensure greater liquidity and public confidence, the Indian banks prefer to invest their funds in first class government securities than in exchange bills. (viii) The Reserve Bank of India also prefers to extend rediscounting facility to the commercial banks against approved securities
QUESTIONNAIRE
1) What is your annual income? below 1 lakhs between 1 lakhs- 3 lakhs between 3 lakhs- 5 lakhs above 5 lakhs
2) How do you invest your savings? Deposits in Banks Invest in Real Estate Invest in Capital Market Invest in Money Market Mutual Funds
3) Do you have any knowledge about Money Market Instruments? Yes No Heard but not know
4) How long would you like to hold your Money Market Instruments? Long term period Short term period 5) How much risk would you be willing to take? Low Average Medium High
6) In your opinion, what is expected rate of return in a year? below 10 % between 10 % - 20% between 20% - 30% above 30%.
7) How would rate your experience with Indian Money Market? Poor Average Good Excellent
8) Is recession had affected your investment decision? Yes No Sampling objective: to find out individual investors for the age group of 18 -55 years. Sampling area: Mumbai
Particulars
No.
of
investors Deposits in Banks Investment in Real Estate Investment in Capital Market Investment in Money Market 09 11 07 13
Investment of Savings
Investment in Money Market 23%
Investment in Real Estate 18% Investment in Real Estate Investment in Money Market
The above pie diagram show how the pattern of investment of saving by individual investors in various field of investment
No.
of
Investors 03 05 15 17
Risk Involvement
Average 13%
Medium 37%
Low
Average
Medium
High
Suggestion
In a view of the various defects in the Indian money market, the following suggestions have been made for its proper development:
The activities of the indigenous banks should be brought under the effective control of the Reserve Bank of India. Hundies used in the money market should be standardised and written in the uniform manner in order to develop an all-India money market. Banking facilities should be expanded especially in the unbanked and neglected areas. Discounting and rediscounting facilities should be expanded in a big way to develop the bill market in the country. For raising the efficiency of the money market, the number of the clearing houses in the country should be increased and their working improved. Adequate and less costly remittance facilities should be provided to the businessmen to increase the mobility of capital. Variations in the interest rates should be reduced.
Conclusion
money market specializes in debt securities that mature in less than one year.
liquid, and are considered very safe. As a result, they offer a lower return than other securities.
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.
Annual percentage yield (APY) takes into account compound interest, annual percentage rate (APR) does not.
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.
Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States.
Repurchase agreements (repos) are a form of overnight borrowing backed by government securities
Nothing the government can do will prevent every future financial crisis; they have been with us since the advent of money and financial markets. But the government is even having trouble fixing things that made the last crisis so devastating.
Financial crises can't be prevented, but can the government make changes to make their impact less devastating? David Wessel reports on The News Hub. Photo: Bloomberg. Outnumbered 3-2, Securities and Exchange Commission Chairman Mary Schapiro on Wednesday abandoned her effort to propose rule changes for money-market mutual funds, the $1-a-share funds that currently hold $2.6 trillion from individuals and institutions.Backed by the Treasury secretary and Federal Reserve chairman, Ms. Schapiro had argued changes were needed to prevent a repeat of the destabilizing September 2008 run on the funds. The industry is resisting strenuously, arguing the changes would render the funds less desirable, if not unusable.
But Ms. Schapiro had only one other vote. The swing voter was Luis Aguilar, a former general counsel of Invesco, which has a money-market fund. He said Wednesday he would oppose the Schapiro proposal; she called off a vote that had been tentatively set for next week. Money-market funds pool investors' money and put it in short-term government and corporate debt. They generally offer investors (here's the rub) $1 back for every $1 they invest, a feature unique among mutual funds. Customers often view them like banks and can write checks on their accountsbut, unlike banks, the funds aren't backed by government deposit insurance and don't have cushions to cover any losses on their holdings. In September 2008, the original money fund, Reserve Primary Fund, had so much of its money1.2% of its $63 billionin Lehman Brothers that when Lehman went down it "broke the buck." Reserve ended up with 97 cents for every $1 its remaining customers had invested. That contributed to a run on prime money-market funds, the ones that invest in securities other than U.S. Treasurys. In one week, $310 billion, or 15%, fled. That endangered the big companies hooked on borrowing from the funds, and led the Treasury to extend an extraordinary taxpayer guarantee to those with money in the funds.
No one wants to go through that again. So in 2010, the SEC, with industry backing, required funds to have more ready cash (essentially, securities that are about to mature or are issued by the government) in case a lot of investors suddenly want to pull money out. The industry says that solved the problem, a view that Mr. Aguilar says the SEC hasn't thoroughly studied. Ms. Schapiro says it solved only one liquiditybut didn't solve another: the risk the funds take that some company to which they have lent money defaults (excluding, of course, funds that limit holdings to U.S. Treasurys). As Eric Rosengren, president of the Federal Reserve Bank of Boston, puts it: Prime money-market funds are trying to do three thingsto promise to return $1 for every $1 invested, to invest in securities with some credit risk and to hold no capital cushion to absorb losses. The three are incompatible. The industry notes that only two funds have ever broken the buckand argues this is much ado about nothing.Yet that doesn't mean other funds didn't come close. A Boston Fed studyunchallenged by the industryfound "frequent and significant" cases in which companies that sponsor money funds had to bail them out. At least $4.4 billion was provided between 2007 and 2011 to at least 78 funds.That's good for shareholders, but will sponsors always be there? "If sponsor support were explicitly required and planned for, and all sponsors had the consistent ability to provide support, such a business model might not be viewed as problematic," the Fed economists said. "But the current modelreinforces investor confidence in the stability of the product without the ability of all sponsors to consistently deliver." The industry also argues the 2010 rule changes were sufficient.
Agence France-Presse/Getty Images SEC Chairman Mary Schapiro during testimony before a House committee hearing in June. Yet the Treasury's Office of Financial Research found that in April 2012after those SEC changes had been implementedthere were 105 money-market funds with combined assets of more than $1 trillion that were at risk of breaking the buck if any of the top 20 outfits in which they invested defaulted. Of those, 14 were at risk of breaking the buck if any of the top 30 outfits in which they invested did so. In ordinary times, that may be OK. In a crisis, it spells trouble, particularly since the funds tend to invest in the same securities. Ms. Schapiro offered two options. One, forbid money-market funds from fixing share prices at $1 and, instead, let them fluctuate with the market value of their holdings. The industry hates this, and so do many of those who put money in the funds. Or, two, require the funds to set aside some capital to absorb losses. The industry doesn't much like this either because it's expensive. Mr. Aguilar said either would have sent big bucks into unregulated money funds, and that would have made the system riskier.The next move is up to the Financial Stability Oversight Council, created after the crisis to look over the shoulders of the SEC and other regulators. Ms. Schapiro late Wednesday called for FSOC's help. "The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away," she said.
An unsuccessful effort to tighten rules for money-market mutual funds raises an unpleasant issue for the millions of investors who rely on the funds. Should investors keep billions of dollars in a low-yielding investment that could be far riskier than it seems? The head of the Securities and Exchange Commission was forced to scrap a plan to revamp the structure and inner workings of money-market mutual funds after failing to garner enough support for the plan. SEC Chairwoman Mary L. Schapiro had argued that money-market funds are vulnerable to losses during financial panics, which could cause investors to lose money. The risk is that funds could "break the buck," or push their value below a dollar a share, as happened with one high-profile fund during the financial crisis in late 2008. Unexpected losses in money-market funds would be a blow to the millions of Americans who have long relied on the funds as the virtual equivalent of bank savings accounts. Investors may not be worried about the funds' safety, but they have noticed their extremely low yields. Investors have shifted $1.3 trillion into bank savings accounts since the crisis, leaving $2.6 trillion in money-market funds, according to Peter Crane, president of Crane Data, a research firm in Westboro, Mass. "They're much more concerned about the low yields than they are the remote risk of at some point losing a penny on the dollar," Crane said.
Money-market funds historically have paid investors 1% to 2% more than bank savings rates. But since the financial crisis, interest rates have been at historic lows, bringing the fund yields closer in line with if not slightly below savings accounts rates, which are insured by the Federal Deposit Insurance Corp. The average money-market fund yields 0.06%, whereas the average bank savings rate is about 0.1%, analysts said. Schapiro on Wednesday canceled a vote on her proposed money-market fund rules after being unable to get three needed votes from the commission. Schapiro and other federal regulators say the funds remain a weak link in the financial system four years after the collapse of Lehman Bros. sent financial markets and the economy into a free fall. Prior to the trouble of the Primary Reserve Fund in 2008, only one other money-market fund had broken the buck from 1983 to 2008, according to the SEC. It was a small fund and had no widespread impact. The Primary Reserve Fund and other funds faced widespread investor panic, forcing the U.S. Treasury to guarantee accounts. As with other types of mutual funds, Schapiro wanted money-market funds to have floating values. Instead of $1 a share, a fund could drop to, say, 98 cents if its underlying investments had lost money. Schapiro also wanted the companies managing money funds to post more capital to cover investor losses. The proposal also would have prevented investors from withdrawing their entire accounts at once to prevent runs. "The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away," Schapiro said in a statement. "Money market funds' susceptibility to runs needs to be addressed."
The U.S. Treasury said Thursday that it would press further to revamp regulations. "Treasury is in the process of consulting with the Federal Reserve Board, the Securities and Exchange Commission and other regulatory agencies to consider the appropriate next steps to reduce risks to financial stability from money market funds," spokeswoman Suzanne Elio said in a statement. Money-market funds play an important role in finance. They invest in shortterm assets, including U.S. government bonds and commercial paper that companies use to finance immediate cash needs. Some analysts said the SEC's regulations could have unintended consequences that could potentially harm investors and companies' sources of short-term capital. "It would diminish the appeal to individual investors greatly," said Greg McBride, senior financial analyst at Bankrate.com. "And it would also make it a lot more difficult for money market fund providers to make a profit."
Although historical stock market gains hover around 8 %, steep declining beark markets, such as the one we are experiencing in 2008, can result in extreme negative earnings for equities. Due to the recent credit crisis, stock market indices have experienced declines of up to 40 % year-over-year. Fortunately, during these tough economic times, there are financial instruments that actually yield a positive gain - the intruments that provide such gain are known as money market instruments. These instruments act as a capital preservation vehicle during bear markets, and also provide a great source of liquidity, since these instruments permit redemption in a couple of business days.
Money markets are debt securities of the shor-term variety (one year maturity or less), and are very liquid instruments, which can be cashed out of at any time. Their reputation is one of safety, and they typically issued by government, large corporations, or financial banking institutions. These funds are usually procured through bank accounts or through mutual funds. Over the years, the rates of money market funds have moved up and down consistent with the interest rates of the times. Of late, interest rates for these funds have been at historical lows, since interest rates have been quite low the last couple of years. The value of a money market fund is always maintained at $ 1/share by default, with appropriate interest earned on it, based on the prevailing rate. Although historically most government-based and corporate-based money market funds have not been guaranteed, bank-issued money market rates are almost always FDIC-insured. However, since the great credit crisis of 2008 has been bestowed up on us, the government has decided to pony up and insure all money market funds for at least a year, with a dedicated emergency pool of money that has been made available. Recently, a well-established multual fund, the Reserve Primary Fund, "broke-the-buck", when they couldn't meet the redemption requirements of the fund, after a mass exodus of investors took place. This breaking-of-the buck resulted from the fund holding debt that was exposed to Lehman Brothers, an institutional brokerage that went belly-up. Hence, the government decided to step in quell the storm, by insuring all money market funds, for a period of at least a year. Since all money market funds are effectively insured now, it is a prudent time to park excess cash (or cash that you wish to preserve during the market downturn) in these funds. Moreover, it is your best bet to invest in bank-issued money market funds, which are FDIC-insured up to $ 500,000 (for joint accounts). These are rock-solid investments that will cater to capital preservation, and provide a very liquid stream of assets.
Big businesses' miss givings about large banks show through when the conversation turns to regulation. Two trade groups for corporate treasurers have sounded the alarm about proposed reforms of money market funds, warning that proposed regulations could reduce large companies' financing options and add to their dependence on megabanks. "We are mindful of the need for a healthy banking system, but we're also mindful of needs for healthy alternatives to the banking system," says Thomas C. Deas, Jr., the treasurer of chemical company FMC Corp. (FMC) and the chairman of the National Association of Corporate Treasurers. The Securities and Exchange Commission has proposed rules that would revamp the $2.6 trillion U.S. money market fund industry, arguing it remains a risk to the financial system. Last month, Deas testified before a House subcommittee that the reforms such as floating the funds' net asset value or imposing new capital requirements would "have a significant negative impact on the ongoing viability of these funds, and also adversely affect the corporate commercial paper market." "The cumulative effect of the proposed changes will drive money market fund investors to bank deposits, concentrating risk in a sector where over the past 40 years there have been 2,800 failures, costing taxpayers $188 billion," he said in testimony before the House Financial Services' subcommittee on capital markets. Jeff A. Glenzer, who oversees public policy for the Association for Financial Professionals, raised similar concerns. Though the AFP doesn't "have a position" on whether big banks should be broken up, "for people who are
worried about 'too big to fail,' that [money-market fund reform] would exacerbate it," he says. More than 50% of corporate cash is already held in bank deposits, according to the association. Deas also points out how little visibility corporate treasurers sometimes have into the health of their bank partners. "A money market fund's public financial statements, giving what their investments are and duration and credit quality, are very straightforward to read," Deas said in an interview. Banks' financials can be hard to read, he says, invoking the massive trading losses that dragged JPMorgan Chase into public scrutiny this spring and helped re-ignite public discussion about separating banks' commercial and investment functions. "Obviously even [JPMorgan Chief Executive] Jamie Dimon, with all of his access not only to public financial statements but to internal reports and daily value-at-risk analyses that he receives, was unable to perceive the trouble in their London trading operation," Deas says. "That's why it's important to us to have money market funds as an alternative, both for investments and for their ability in some respects to disintermediate the banks."
The SEC has dropped plans for new regulations on money market accounts after a majority of commission members announced they would vote against the proposal. NEW YORK (CNNMoney) -- In a setback for advocates of Wall Street reform, a proposal to regulate money-market mutual funds has been tabled by the Securities and Exchange Commission because there weren't enough votes to approve it. SEC chairman Mary Schapiro expressed regret for the proposal's withdrawal. In a statement Wednesday night, she said the 2008 financial crisis highlighted the need for the reform proposal, which was two years in the making. "I consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis," she said. She urged other policymakers to take up the effort. Money-market mutual funds, which invest in Treasuries and other debt securities, played a big role in the 2008 crisis. Shortly after Lehman Bros. filed for bankruptcy in September of that year, one key fund announced its clients could get back only 97 cents of every dollar they had put in the fund -- a move known as "breaking the buck." That triggered a $300 billion run on other money market funds that led to a virtual freeze in financial markets. The SEC staff had proposed alternatives to try to reduce the threat of runs on the funds and the need for more federal intervention in the future. One would have required money funds to disclose their share prices like other mutual funds, making it clearer that the funds were investment accounts, not banking accounts with an implied guarantee.
The other proposal would have required the firms to hold more capital to protect against losses. And customers who wanted to close out their accounts would have had to wait 30 days to get a portion of their cash back, which was seen as reducing the risk of a run on the accounts. Investment firms that offer money-market accounts fought the proposals. The Investment Company Institute, an industry trade group, said it was pleased the SEC would no longer try to implement the rules, saying they would have had "adverse consequences...for investors, [debt] issuers and the economy." Jaret Seiberg, a financial services analyst with Guggenheim Washington Research Group, said there is about $1.6 trillion in the money market accounts most directly affected by the proposed rules. He said while the accounts are popular with individual investors, they're not likely to respond one way or the other to rule changes. The debate is what would happen to hundreds of billions of corporate cash that is also in the funds. "The industry believes this would have been devastating, that money would have flowed out of money market funds and gone to unregulated investments overseas," Seiberg said. But he said such moves would pose their own risks for investors, so it's not clear the funds would have been hurt by the rules. Seiberg said the push to regulate the funds is not over. He said Schapiro could start the process again, or it could move to the Financial Stability Oversight Council, which was created by the Dodd-Frank financial reform act. "We're in round three. There's a lot more of this fight to go," Seiberg said. Schapiro's statement did not identify which three members of the five-member commission opposed the reforms. Besides the two Republican members long seen as opponents, Luis Aguilar, a Democratic member, was quoted by The Wall Street Journal and The New York Times as believing the SEC staff had not adequately studied the issue. Before being appointed by President George W. Bush in 2008 and reappointed by President Obama, Aguilar served as general counsel, executive vice president and corporate secretary of the investment firmInvesco (IVZ). Among
investment firms that trade shares, Federated Investors (FII)rose 5.3% in early trading Among investment firms that trade shares, Federated
BIBLIOGRAGHY
BOOKS REFERENCE:
o o o o DYNAMICS OF INDIAN FINANCIAL SYSTEM BY - PREETY SINGH INDIAN FINANCIAL SYSTEM BY BHARATI V. PATHAK FINANCIAL SERVICE AND MARKET-BY DR.S.GURUSWAMY NSE DEBT MARKET (BASIC MODULE) WORK BOOK
WEBSITES:
o o