Money Market

Money and it’s function:

Money is anything that is generally acceptable as a means of payment in the settlement of all transactions including debt.

Acceptability of payment is a unique feature of money. Money commonly defined comprises coins and paper currency and demand deposit of banks.

Functions of money:

1. A medium of exchange

2.A unit of account

3. A standard of deferred payment

4. A store of value

Bank liabilities classification:

1.  Demand liabilities-

(A)         Demand deposit or demand liabilities:

i)                 All current accounts except from banks

ii)               All cash credit (CC) accounts

iii)              Saving bank accounts (Demand portion)

iv)             Fixed deposit accounts

v)               Call deposits accounts

vi)             Unclaimed balance accounts

vii)            Interest accured on above accounts

viii)          All other deposits payable to public on demand

ix)             Foreign currency deposit a/c

x)               Unsold balance of NFCD a/c.

xi)             Convertible Tk. a/c

(B)          Other demand liabilities:

i)                 Margin on LC

ii)               Margin on Guaranties

iii)              Locker key security deposits

iv)             Unclaimed dividend/ Dividend payable

v)               Security deposit a/c

vi)             Sundry deposit a/c.

vii)            Any other deposit a/c payable on demand

 

2. Time liabilities

(A) Time deposit (General)

i) Fixed deposits from customers

ii) SN Deposits (SND)

iii) Time deposit in saving a/c

iv) Short term

v) Recurring

vi) Interest accrued on above deposits

(B) Other Time liabilities

i) Employees Provident fund

ii) Staff pension fund

iii) Security fund

iv) Employee's security deposits

v) Contribution towards insurance fund

vi) Margin a/c- foreign currency.

 

Money Market Products-

i)                 call money / overnight Deal

ii)               Short notice money

iii)              Term money

iv)             Repo/ Reverse Repo

v)               Govt. Securities-a) Govt. T-Bills; b) Govt. T-Bonds c) BB bills

vi)              Commercial Papers

vii)             SWAP

CRR it'scomponents:

It is amount of money that the scheduled banks will have to deposit with central bank of the country at all times. It is the amount that cannot be invested anywhere or given as loans to the borrowers. At present, the required CRR is 4% on bi-weekly average basis of the average total demand and time liabilities. It is useful in dealing with the rate of inflation/ deflation and liquidity in the country.

Components:

Banks are allowed to maintain cash reserves with Local currency (TK) only. The day-end balance of the taka current accounts maintained with different offices of BB will be aggregated to compute the maintained cash reserve of the day. Banks failing to maintain CRR is liable to pay a Penalty to BB as per guidelines.

SLR Definition:

 It is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold and other securities, SLR is fixed by BB and is a form of control over the credit growth in Bangladesh. The Govt. uses the SLR to regulate inflation and indicating growth. Increasing the SLR will control inflation in the economy while decreasing SLR will cause growth in the economy. At Present, SLR rate 13% daily for conventional banks and  5.5% for Islamic Shariah based banks.

Why SLR is maintained

(1)  To growth of bank credit monitoring

(2)   To guarantee commercial bank's solvency

(3)  Tо compel banks to buy bonds and other types of govt. Securities,

(4)  To Stimulate demand and growth, that is accomplished by lowering the SLR to provide Liquidity at commercial banks.

Every scheduled bank has to maintain assets in cash or gold or in the form of unencumbered approved securities. Banks are advised to follow the circular issued by monetary Policy dept. of BB time to time in this regard.

SWAP = Simultaneous exchange of identical amounts of to one currency for another with two separate value dates is known as a foreign exchange SWAP in USD/BDT. SWAPS are not exchange-oriented and are exchange over the counter.

It can be used to protect against a variety of risks such as interest rate risk and currency risk. Two most popular types of swaps traded in the market are currency swaps and interest rate swaps.

The Payment system:

The Payment system is the set of institutional arrangements through which purchasing power is transferred from one transactor in exchange to another. The payment system is organized around the use of money. For faster payment, telegraphic transfers of money are also made. Other modes of payment are used as money orders and postal orders. The banking system Plays at a vital role in the payment system. The spread of banking in the country is important for not only the mobilization of savings of but also as a components of the payment system.

Demand for Money:.

The three motives behind the demand for money

i)                 The transaction motive - Normal Payment of money

ii)               The Precautionary motive - Money used in unexpected needs

iii)              The speculative motive- money can be used as a store of wealth

Govt. Security:

These securities come in two varieties - short-term (treasury bills) – 01-year validity and long-term (Govt. bonds) 01 year more

Major govt. securities in BD are:

a. Treasury Bills (T-Bills)

b. Bangladesh Govt. treasury Bond (BGTB),

c. BB bills.

Liabilities of offshore Banking operation:

1) Liabilities of OBU:

a) Customer deposit

b) Deposit from Banks

c) Borrowing from Banks

d) Deposit from Financial Institutions

e) Borrowing from financial Institutions

f) Other Payable Liabilities

2) Use of foreign currency for the maintenance of CRR

3) Use of nostro account credit balance for the maintenance of SLR.

4) Calculation of daily excess reserve (ER).

Repo/Reverse Repo:

Repurchase agreements are contracts between two banks or a bank and a central bank. Banks Provide assets like Treasury bills and treasury bonds in exchange for overnight loans from other banks or the central bank. Additionally, it is agreed that these securities will be repurchased at maturity for a fixed price. Repos and reverse repos are the same transaction but depend on which side of the transaction going on. It is a repurchase agreement for the party who first sold the security.

Commercial paper:

 It is an unsecured Promissory note with a specified maturity of no more than 270 days. This is currently not available for trading on our market.