Money Market Securities

MEANING – Money Market Securities are part of Financial Market where Instruments with high liquidity and very short term maturity are traded.
It’s a place where large financial institutions, dealers and government participate and meet their short term cash needs.
According to Crowther : “The money market is the collective name given to the various firms and institutions that deal in the various grades of near money.”

TYPES OF MONEY MARKET SECURITIES

• TREASURY BILL
• COMMERCIAL PAPERS
• REPURCHASE AGREEMENT (REPO)
• BANKERS ACCEPTANCE
• CERTIFICATE OF DEPOSIT
• TREASURY BILL
  • Treasury bill is nothing but a promissory note issued by central government under discount for a specified period stated therein.
  •  The government promises to pay the specified amount mentioned therein to the bearer of the Instrument on the due date.
  • The period does not exceed one year.
  • Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).

   

  • The Treasury bill rates or the rate of discount is fixed by the RBI from time to time.
  • T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system. Non-competitive bids are routed through the respective custodians or any bank.COMMERCIAL PAPERS
    • Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
    • It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.
    • CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year
    • CP can be issued in denominations of Rs.5 lakh or multiples thereof.
    • Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.
    • CP facilitates securitisation of loans resulting in creation of secondary market for paper and efficient movement of funds providing cash surplus to cash deficit entities
      REPURCHASE AGREEMENT (REPO)
    • REPO are transactions where the borrower places certain security with the lender against funds borrowed.
    • Both the parties agree to reverse the transaction on a pre-determined date and rate.
    • A reverse repo is mirror image of repo, for in a reverse repo securities are acquired with a simultaneous commitment to resell
    • These transactions are of short period and flexible to suit lender and borrower.
    • The term in the contract are in terms of repo rate representing the money market borrowing/lending rate.
    • Repo also helps in equilibrating between demand and supply of short term funds.
    • Repos are of 2 types : Interbank repo and RBI repo
    • The repo rate in India as of May’13 was 7.50%
    • BANKERS ACCEPTANCE 
      • BA is a time draft or bill of Exchange drawn on and ‘accepted’ by a bank as its commitment to pay a third party
      • The parties involved in a banker’s acceptance are the Drawer (the bank’s customer – importer or exporter), the Acceptor (a bank or an Acceptance House), the Discounter (a bank which could be the accepting bank itself or a different bank or a discount house) and the Re-discounter (another bank, discount house or the Central Bank).
      • Its like a short term investment plan created by non financial firms, backed by a guarantee from the bank.
      • Banker’s Acceptance, being a tradable money market instrument, its liquidity and pricing in the secondary market would largely hinge upon the rating of the bank that grants the acceptance.
      • These securities come with maturities between 30 and 180 days and most common is 90 days.
      • CERTIFICATE OF DEPOSIT
      • Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period.
      • .Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time.
      • CDs can be issued by (i) scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}; and (ii) select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit.
      • Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter.
      • The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue.
      • The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.