Financial Sector Talent Enrichment Programme (FSTEP)

Introduction to Money Market in Malaysia

By

ADNAN OSMAN

9 January 2008
 FSTEP – Introduction to Money Market in Malaysia

Major Financial Markets

Stock/ Equity Derivative Market Capital/

Market Fixed Income Market

Global Financial Markets

Foreign Exchange Money Market Commodity Market

Market
 FSTEP – Introduction to Money Market in Malaysia

Function of Money Market

¾ Channeling of funds from surplus to deficit

parties
¾ Match and manage the combination of
maturity of bank’s assets and liabilities
¾ Distribution of funds at low transaction costs
¾ Function of liquidity distribution
 FSTEP – Introduction to Money Market in Malaysia

Structure of Money Market

9 Direct borrowing and lending of short term funds in the

secondary loans and deposits market
9 Sale and purchase of money market instruments
 FSTEP – Introduction to Money Market in Malaysia

Inter-Bank Money Market Operations

¾ A wholesale market
¾ Exchange of short term (normally of up to a year), high-
quality debt instruments
¾ Instruments are issued and traded Over-the-Counters
(OTC)
¾ Trading is backed by active secondary market
¾ Large volumes transaction, vary from RM1 million to
several RM billion a day
¾ Government can fund their debt through this market
¾ Central Bank to implement monetary policies
 FSTEP – Introduction to Money Market in Malaysia

Instruments in Money Market

¾ Deposits or Straight Placement (DEPOs)
¾ Government Papers
o Malaysian Government Securities (MGS)
o Malaysian Treasury Bills (MTBs)
o Bank Negara Monetary Notes (BNM Notes)

¾ Corporate Debt papers

o Cagamas Bonds and Notes
o Khazanah Bonds
o Bankers Acceptance (BAs)
o Negotiable Instruments of Deposits (NIDs)
o Corporate Bonds and Commercial Papers
 FSTEP – Introduction to Money Market in Malaysia

Monetary Management Instruments

BNM implements monetary policies by:

¾ Steering the Interest Rates
¾ Signaling monetary policy intentions (Overnight Policy
Rate OPR)
¾ Managing Liquidity in the market (Statutory Reserve
Requirement SRR)
 FSTEP – Introduction to Money Market in Malaysia

Statutory Reserve Requirement (SRR)

o Banking Institutions are required to maintain a certain

minimum percentage (currently 4%) of the bank’s eligible
liabilities (EL) as reserves with BNM
o Part of safety net put in place for the protection of depositors
o SRR can counter-influence the expansion of credit created by
the deposit money
 FSTEP – Introduction to Money Market in Malaysia

Scenarios on SRR
withdraws
9 SRR cash/reserves with BNM liquidity in sys
cash cause
Demand for credit cost of funds interest rates

injects
9 SRR cash/reserves with BNM liquidity in sys
cash cause
Stimulate demand for credit cost of funds int rates
 FSTEP – Introduction to Money Market in Malaysia

New Liquidity Framework (NLF)

Objectives of NLF
¾ Framework that gives recognition for institutions that better manages their
liquidity profile
¾ Create awareness among banking institutions of their funding structure
and their ability
¾ Provide BNM with a better means to assessing the present and future
liquidity position of banking institutions
 FSTEP – Introduction to Money Market in Malaysia

Concepts of the NLF focuses on:

¾ Banking Institution’s ability to match liquidity requirements arising from
maturity obligations with maturity assets
¾ Focuses on the analysis of cash in-flows & out-flows of bank’s entire
banking operations including off-balance sheet
¾ Primary focus is the ability to meet immediate cash requirements of up to
1 month
¾ Projection of up to 1 year of the maturity profile of banking institution’s
assets, liabilities and off-balance sheet commitments from a given position
¾ Ratios to monitor over-reliance on any particular funding source
 FSTEP – Introduction to Money Market in Malaysia

Money Market Risks and Control

Types of Risks:
¾ Credit Risks
o Counter Party Risks
o Country Risks
¾ Liquidity Risks
¾ Interest Rate Risks
o Investment Risks
o Income Risks
¾ Operational Risks
¾ Capital Related Risks
 FSTEP – Introduction to Money Market in Malaysia

Money Market Risks and Control (con’t)

Type of CREDIT LIQUIDITY INTEREST
Risks RATES
Category ƒ counterparty ƒ access to cash ƒ investment
ƒ country ƒ convert assets to ƒ income
cash

Control Establishing: ƒ Diversifying ƒ Money market

ƒ Credit Lines investments gap report &
ƒ Maturities ƒ Monitor market monthly gap
liquidity schedule reports
ƒ Amount
ƒ Transaction ƒ Spreading assets
maturity in a maturities
single day
 FSTEP – Introduction to Money Market in Malaysia

Money Market Risks and Control (con’t)

Type of Risks Operational Risks Capital

Category ƒ Poor management & ƒ Capital adequacy

inefficient back/middle ratio
office support ƒ return on assets
ƒ fraud, power failures
etc
Control ƒ Internal control- china ƒ Distribution of assets
wall ƒ Volume and quality
ƒ Quality staff and
system
 FSTEP – Introduction to Money Market in Malaysia

Thank You