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MONEY MARKET INSTRUMENT

Instruments of Pakistan.
1

Treasury bills.

Commercial paper

Repurchase agreement

Banker acceptance

Eurodollars deposited

Federal Funds

1. Treasury Bill:
T-bill are the Government debt securities that matures in one year or less from their issue
date.
Treasury bills differ from other types of investment in that they do not pay interest in the
traditional way. When an investor wishes to purchase a treasury bill, he buys it at discount
rate.
Key features of the market treasury bills.

Issuer government of Pakistan


Issued in accordance with public debt act 1944
Denomination: issued in multiples of PKR 5,000
Tenure 3, 6 and 12 month
Issued at discount
MTB are issued in scrip less (without physical) form
Auction schedule: regular auction of MTBs are held on fortnightly basis. A quarterly

schedule is published by SBP at the beginning of each quarter.


Income tax: income tax will be deduction as per existing law
Zakat: no compulsory deduction of zakat at source
Custodian: ultimate curtains is the SBP, but banks maintain these securities in the
investor portfolio of securities account on behalf of their customer

Investor can find out the latest auction yield of 3, 6 and 12 month tenors in the
auction

Investment Procedure:
Investor portfolio securities account.
The investor portfolio of securities account is necessary for investing in MTBs. Primary
dealers banks hold MTBs in IPS accounts on behalf of their customers. Customer is the
legal owner of the MTB held in the IPS account with banks in accordance with instructions
of SBP.
How to open an IPS account.
All primary dealers (PDs) of Government Securities, designated by State Bank of Pakistan
for each financial year are required to offer these account to their customers. Any person of
entity, which has PKR denominated account with a primary dealer or any scheduled bank
offering this facility, is entitled to open an IPS account.
Investors are advised to contact the treasury department of their bank or their respective
branch for the detailed guidelines for investments in the MTBs. IPS account opening
branch will provide activity statements of IPS accounts to each investor on a quarterly basis.
Charges levied by bank on IPS accounts, are explicitly mentioned in their respective
schedule of charges.
How to buy MTBs:
After open the IPS account, investor can instruct its bank to buy the MTBs either from the
primary market through non-competitive bidding process in regular auction conducted by
the SBP or from the secondary market.

Primary Market:
The non-competitive bidding process allows investor to take part in the primary auction of
the MTB through primary dealers. The quantum size of the non-competitive bids for the one
investor is liked with auction target 0.25% of the pre-announced auction target or PKR 25

million, whichever is higher subject to the maximum of PKR 250 million. The noncompetitive bids are sent to SBP separately from the normal bids before commencement of
the primary auction time with the name and amount of investor without quoting price.
The bids of any investor can be rejected if the investor submits more than one bid for a
signal tenor. These bids accepted at weighted average yield in each tenor as decided in the
primary auction.in case of the subscription, on-competitive bids are accepted in order lowest
to high amount or on pro-rate basis.

Secondary Market:
The investor can buy the MTB through the secondary market by the instructing its bank to
buy the MTB through the secondary market. The price and yield of MTBs and others
government securities in the secondary market.

Redemption:
MTBS are only redeemable at maturity .however, any investor can sell MTBS in secondary
market through its bank. If an investor holds MTB till maturity, The PKR value equivalent
to face value of the MTB will be credit the account of the investor through its bank on the
maturity of MTB.
Investment by non-resident investors:
Like the local investor, foreign investor can invest in the MTBS by opening IPS account.
Foreign investor are also required to open a special convertible rupee account with any
authorized dealers in Pakistan. The SCRA is open by foreigners in Pakistani rupee. The
amount are credit these account after conversion of foreign currency into Pakistani rupee,
for the purpose of investment in the government securities. Balance in these account can be
sent any time outside the country after conversion into foreign currency.

Benefits:
Guaranteed repayment:

The repayment of face value is guaranteed by the government of Pakistan.


Investment short term:
The MTBs are available short-term maturity period of 3, 6 and 12 months.
Higher Return:
These securities provide higher returns to the investor, as compared to most bank deposits.

Accepted as collateral:
MTBs are acceptable by bank the as collateral.
Liquidity:
Highly liquidity and tradable in the secondary market.
Easy process of investment:
Local and foreign investor can easily invest in the MTBs by opening an IPS account in any bank
offering these services.in addition IPS account, foreign investor have also open a special
convertible rupee account with any authorized dealer in Pakistan.
Primary dealers:
Scheduled banks, DFIs, investment bank and listed brokerage houses are eligible to become a
primary dealer of government securities. Only PDs can participate in the auction of MTBs
conducted state bank of Pakistan. For each financial year, state bank of Pakistan designates the
financial institution to work as primary dealer of government securities.

2. Commercial Paper:
Commercial paper consists of short-term, t unsecured promissory notes issued by well-known
companies that are financially strong and carry high credit rating. Commercial paper is generally
used to meet immediate cash needs.

Funds raised from commercial paper are commonly used for current transactions i.e. to purchase
inventories, pay taxes and cover other short-term obligations rather than for capital transactions
like long-term investments. SBP and SECP started process of creating commercial paper market
in Pakistan in 2003.

Maturity Period:
The commercial paper shall be issued for maturities between 30 days and one year from the date
of subscription. Commercial papers are mainly in the primary market. Opportunities for resale in
secondary markets are very limited.
Who can issue commercial paper?

Only high rated companies and financial institutions can issue commercial paper, as it is
unsecured and investors can only depend upon the creditworthiness of the issuer.

The equity of the company is not less than Rs. 100 million as per the latest audited
balance sheet and the company maintains a minimum current ratio of 1:1 and debt/equity
ratio of 60:40.

The company has obtained the credit rating from rating agency. The minimum credit
rating of the issuer shall be A (medium to long term) and A2 (short term). At the time
of issue of Commercial Paper Company rating should not be more than two months old.

The company should have no overdue loan or default in the report obtained from the
credit information bureau (CIB) of the State Bank of Pakistan.

Size and Denomination:


The minimum size of the issue of commercial paper shall not be less than Rs. 10 million. The
commercial paper, in case of private placement, would be denominated in Rs. 100,000 (face
value) or in multiples thereof and in case of offer to general public, may be denominated in Rs.
5,000 or in multiples thereof.

Mode of issue and discount rate:


The commercial paper shall be in the form of a promissory note and be issued at such discount
to face value as may be determined by the issuer keeping in view the prevailing T-Bill rates,
KIBOR and its Credit Rating.
Investors in commercial paper:
Commercial paper may be issued by way of Public offer and/or to Scheduled Banks, Financial
Institutions, and/or such other persons as are specified for this purpose by the Commission by
notification in the official gazette under Section 120 of the Companies Ordinance, 1984.

3.Repurchase Agrement:
Repurchase agreement are agreement between a borrower and a lender where the borrower, in
effect, sells securities to the lender with the stipulation that the securities will be repurchased on
a specified date and at a specified higher price. The securities serves as collateral for the loan.
Major borrowers and lenders:
Major borrowers include government bond deales of treasuries and federal agency securities,
and larg banks. Government securities are the main collatral for most repos, along federal
agency securities and mortgage-backe securities ets. Active lender include state and local
governments, issuance companies, non-financial corporations and foreign financial institutions
who find the market a convient, relatively low risky way to invest temporary surplus cash that
may be thr retrives quickly when the need arises.

Types of repos (according to maturity):


Overnight repos:
Overnight repos are 1 day loans
Term Repos:
Term repos have term of greater than 1 day usually week to months

Open repos:
Open repos or continuing contracts are a contractual relationship that allows the borrower funds
up to a certain limit, without singing a new contract. However, each party has the right to
terminate the contract on a short notice. The interest rate on open repos is slightly higher than on
overnight repos.

Advantages of Repos:
The main benefit of Repo to borrowers is that the Repos rate is less than borrowing from
bank.
The main benefit to lender over other money market instruments is that the maturity of
repos can be precisely tailored to the lenders need.
Repo Facility MTBs/FIBs/PIBs (Outstanding):
They are the short term funding arrangement for getting funds on selling the security as
collateral and to buy back the same on maturity. The funds can be arranged under this by
using MTB/FIBs/PIBs. The reverse is called Reverse-repo

4. Bankers Acceptance:
The literal meaning of the term acceptance is approval. In financial terms acceptance means a
vow to pay a definite amount of money. The person who will pay is called as the promissory
while the one who will receive is the beneficiary.
The document which is the evidence of this promise is called a draft. When this draft tells the
promissory to pay the money on a predetermined specified date then this draft is termed as a time
draft. The promissory puts his
Signature
The word accepted on top of his signatures and
The date on which the amount will be paid.

Now the promissory is legally obliged to pay the amount as mentioned in the draft to the
beneficiary because it has been accepted properly by him according to all requirements of
official acceptance.
If the time draft is formally accepted by a bank then it becomes a bankers acceptance.
In case of a bankers acceptance the initial promissory is obliged to pay the sum of money and the
interest money charged before or on the maturity date to the bank while the bank is obliged to
pay the money to the beneficiary. The bank becomes the primary obligor.
Bankers acceptance is usually used in trade; mostly for international business but is also
frequently used for domestic dealing as well. The maturities of bankers acceptance mostly range
from 30 to 180 days. It allows the international as well as national dealers to trade with each
other. As the dealing firms have not met or may even never meet; have a problem of trusting
each other. So bankers acceptance minimizes their risk. The promissory uses the banks credit
worthiness instead. Hence the beneficiary is satisfied. Meanwhile the promissory also gets more
time to make the payments.
Example to Illustrate the Mechanism of Bankers Acceptance:
Suppose that you own a software house and you need computers. You order a dealer in Japan to
send you ten computers on credit. Now that dealer does not know your credit worthiness. A very
easy way to resolve this problem is that you go straight to your bank with which you have a very
good past record. There you get a time draft issued on which the date you will pay the money is
mentioned.
Most probably the date mentioned will be one or two weeks later after getting the shipment. The
bank trusts you because of your good credit rating and it signs the draft adds its signature and
mentions the date. This draft has now become a bankers acceptance. The draft is then sent to the
manufacturer who is very much satisfied now as he knows the banks credit rating.
According to Rose the importer secures a line of credit from his bank and sends the documents to
the importer. Now the foreign dealer can draw a time draft against the issuing bank. The exporter
goes to his bank which is called the accepting bank. Now this bank gives the importer that

specified sum of money and sends the shipment documents and the time draft to the issuing
bank.
The issuing bank after verifying stamps the word accepted on the draft. By doing this it has
become liable to paying that some of money to the bank. The accepting bank is paid that specific
sum of money.
So by deploying both of these ways a bankers acceptance can be created. In essence whenever
any bank will agree to pay any importer on behalf of the exporter that document having all these
abiding will be termed as the bankers acceptance.

Secondary Market for the Bankers Acceptance:


There is a very strong and affluent market for it. The issuing bank can either keep it in his
portfolio or sell the bankers acceptance in the money market. It is sold at a discount from the
value which will be payable on maturity. In this way the seller is getting funds from the money
market hence it provides liquidity to the seller.
BA provides a very low risk interest income to the buyer. They are mostly sold at a spread over
T-bills and this rate is referred to as the BA rate. Some banks also purchase the BAs which are
nearing their maturity in order to increase their liquidity.
If the accepting bank which is the primary obligor fails to pay the amount the holder of the BA
(assuming the bank has sold the BA in the open market) has recourse back to the issuer of the
draft the secondary obligor.
The secondary obligor has the unconditional responsibility to pay the acceptance if the primary
obligor dishonors it. This characteristic makes the BA; referred to as a two-name paper, a safe
investment instrument usually with lower rates than might be available in a direct borrowing.

The BAs marketability is limited only by the reputation of the accepting branch and the market
demand.

BA financing may be used by exporters, importers, domestic buyers and sellers, traders, shippers,
manufacturers, processors, distributors, or almost anyone involved in international or domestic
trade.

5. Eurodollars deposits:
Eurodollars are the leading component of the Eurocurrency marketst o d a y.
T h e r e i s a n e e d f o r E u r o c u r r e n c y m a r k e t s b e c a u s e f u n d s a r e require
d i n i n t e r n a t i o n a l c u r r e n c i e s w o r l d w i d e m a i n l y i n D o l l a r s , E u r o s and Pounds.
Eurodollars are the deposits of US dollars in banks which are located outside United
States. These can also be the branches of the US banks located outside US. The
d e p o s i t s a r e r e c o r d e d i n t h e d e n o m i n a t i o n o f d o l l a r s r a t h e r t h a n t h e i r home
currency. Generally, the "euro" prefix can be used to indicate any currency held in a
country where it is not the official currency. These deposits are loaned to the home offices of the
banks in US, lent to business enterprises that have to make their payments in dollars. It
can b e r e t a i n e d a s w e l l t o m e e t t h e r e s e r v e r e q u i r e m e n t s a n d t o m a i n t a i n
l i q u i d i t y. T h e s e c a n b e l e n t t o g o v e r n m e n t i f i t n e e d s d o l l a r s a n d t o private
investors as well. The Eurodollar deposits are always moving in the form of loans.
Mechanism of Eurodollar Deposits:
We suppose that you own a textile firm in Pakistan. To keep the example simple we assume
that you shipped an assignment worth one million to the American importer. Here we
also suppose that you have an account in a n e A m e r i c a n b a n k a s w e l l . T h e i m p o r t e r
p a ys t h e b i l l s i n d o l l a r s a n d d e p o s i t s i t i n y o u r a c c o u n t h e l d a t t h e
A m e r i c a n b a n k . Af t e r a l l t h e s e transactions a Eurodollar deposit has not been created.
If we further mature the same example and presume that you transfer that one
million dollars in your bank in Pakistan then the deposit that is now created in
Pakistan is a Eurodollar deposit. As it is a dollar account maintained outside US. The
dollar amount in the Pakistani account can be given as a loan to an investor who is liable to pay
the money in
dollars.I n a l l t h e s e t r a n s a c t i o n s t h i s f a c t s h o u l d b e a c k n o w l e d g e d t h a

t t h e amount of dollars was merely transferred in between the banks but the original
dollar amount remained the same. Eurodollar activity did not alter the total reserves of the
US banking system. The chain of Eurocurrency and Eurodollars will remain
functioning until they are in demand and funds are being deposited in the
internationalb a n k i n g s y s t e m . T h e E u r o c u r r e n c y a c c o u n t s a r e f o r m e d b y g i v i
ng outloans and are destroyed when the loan is repaid. Hence they did not
create money but they act as an efficient distributor of liquidity. Eurocurrency deposits are
usually held from one day till one year so they are pure money market instruments. Many are
held for one month that
ist h e u s u a l t i m e p e r i o d f o r t h e s h i p m e n t o f g o o d s . T h e y a r e
m o s t l y interbank liabilities when loaned so a fixed interest rate is charge
d onthem. There is no central location for the
trading of the Eurocurrencyd e p o s i t s . T h e y m o v e r a p i d l y f r o m o n e b a n
k to another to meet theliquidity requirements of corporations, go
v e r n m e n t s a n d E u r o b a n k s themselves.Eurocurrencies are not without risk. They
are volatile and sensitive to fluctuations in interest rates and currency values.
Difference of interstate or value between two countries can initiate the massive flow of funds
from one to another. There is a political risk as well that the governments might restrict the flow
of money across borders.

6. Federal fund:
Federal funds refer to the overnight borrowings which are undertaken in
order to meet the state banks reserve requirements. These are
transferred from the lending institutions account to the borrowers
account. The funds are not physically transferred. When they are repaid then an entry
in books satisfies the whole loan. The most important borrower
int h e f e d e r a l f u n d s m a r k e t i s t h e c o m m e r c i a l b a n k s . O t h e r f i n a n c i a
l institution, security dealer, Business Corporation, and the local
government provide readily available funds of the lending in the
federal market.

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