The need for a money market arises because receipts of economic units do not coincide with their expenditures. Money market instruments are generally characterized by a high degree of safety of principal. Maturities range from one day to one year; the most common are three months or less. Active secondary markets for most of the instruments allow them to be sold prior to maturity. Unlike organized securities or commodities exchanges, the money market has no specific location. Trading in the money markets involves Treasury bills (MTB), commercial paper (CP), bankers’ acceptances (BA), and negotiable certificate of deposit (NCD). It provides liquidity funding for the financial system. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Money market trades in short-term financial instruments commonly called “paper.” This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. Surplus units can hold money balance, transactions balances in the form of currency, demand deposits, or other form of money market instrument to insure that planned expenditures can be maintained independently of cash receipts. Surplus units holdings of money market instruments that can be converted to cash quickly and at a relatively low cost and that have low price risk due to their short maturities. Economic units can also meet their short-term cash demands by maintaining access to the money market and raising funds there when required. The money market encompasses a group of short-term credit market instruments, futures market instruments, and the Bank Negara Malaysia (BNM) discount window. The major participants in the money market are commercial banks, governments, corporations, government-sponsored enterprises, money market mutual funds, futures market exchanges, brokers and dealers, and BNM. Financial institutions play three important roles in the money market. First, they borrow in the money market to fund their loan portfolios and to acquire funds to satisfy noninterest bearing (commercial bank are allowed to provide current account which noninterest bearing). Banks are the major participants in the money market activities, which are very short-term, overnight loans from other financial institution, funds that can be transferred between banks within a single business day. The funds market efficiently distributes reserves throughout the banking system. The borrowing and lending of reserves takes place at a competitively determined interest rate known as the Overnight Policy Rate (OPR). Financial institutions can also borrow on a short-term basis at the BNM discount window and pay a rate of interest set by the BNM called the discount rate. A bank’s decision to borrow at the discount window depends on the relation of the discount rate to the OPR rate, as well as on the administrative arrangements surrounding the use of the window. Financial institutions also borrow funds in the money market for longer periods by issuing large NCD and by acquiring funds in the money market. A large denomination NCD is a certificate issued by a financial institution as evidence that a certain amount of money has been deposited for a period of time, usually ranging from one to six months and will be redeemed with interest at maturity.
The recent events in the financial markets and their adverse effect on many dealers in money market have raised questions about the future of the money market industry, as well as calls for regulatory reform. The existing money market model has proven to be hugely popular with investors, and aspects of that model are likely to survive any review. It is clear, however, that the money market industry and BNM will consider several variations on the existing product that may address some of the shortcomings that have been exposed in globalization and liberalization environment. The adverse impact of the recent financial crisis on money market especially during Asian financial crisis has exposed risks inherent in their regulatory scheme. As a result, the money market industry and BNM are keeping updating changes to the existing regulatory money market product. The BNM review the extraordinary steps taken in recent years by regulators to address the crisis and discuss changes in the business and regulation of money market in response to recent financial market developments.
According to Joseph R. Fleming, John V. O’Hanlon, and Hila Shamir (2009) “The Future Of Money Market: Implications Of The Recent Turmoil”, BNM took a series of extraordinary steps designed to stabilize the financial system. During this period money market faced special challenges. A steep decline in the market value of shares of companies across a broad spectrum of the economy placed downward pressure on the valuations of corporate debt held by money market at the same time that investor insecurity resulted in record redemption requests from all funds, including money market securities. The impact of the market turmoil on two large, high-profile money market funds was widely reported. Many other money market were on the brink of breaking the buck, and avoided that fate only by obtaining capital support from their management companies or affiliates. The crisis facing money market highlighted the crucial role the funds play in the modern economy. By serving as the primary purchasers of commercial paper (CP) issued by corporate, money market provide the short-term financing that a broad range of companies rely on to run their day-to-day operations. When this critical source of funding began to dry up, concerns over the prospect of a “credit crunch” hobbling the economy became acute. In response, BNM took a series of steps in an attempt to support price stability and restore liquidity of money market funds According to G. David MacEwen, American Century Investment (2009) “Money Market: Reviewing Their Role in Your Investment Portfolio”, Investor sentiment has been on the change and riskier assets, including high-yield CP, have rebounded sharply. Yet, investors in high-quality cash equivalent securities continue to face stubbornly low yields. This scenario owes its existence to BNM, government, and market responses to the changes on rule and regulation and global recession. “Significant sections of the financial markets are still functioning largely because of government support and accommodative monetary policy from BNM. In particular, the Asian financial crisis prompted the BNM to slash the OPR rate target to a range of 13% to 4%. The BNM unprecedented action was designed to stimulate the economy, bolster the profitability of financial services companies, and increase liquidity in the financial system. Meanwhile, yields for Malaysia Treasury Bill (MTB) are already at rock-bottom levels, and yields for other taxable and tax-exempt money market continue to decline, and could fall further. On top of that, the extraordinary market and economic events forced many investors to abandon the time-tested strategy of diversification. Maintaining a long-term view has been tough, and many investors sat on the sidelines or overloaded their portfolios with cash-equivalent investments (MTB, CP, NCD, and BA). The heightened demand for these conservative investments, combined with BNM monetary policies, sent their yields to record lows, creating challenges for investors who value income above all else.
Global financial environment characterized by unstable money markets, increasingly frequent episodes of financial stress and structural financial imbalances and the profound changes arising from advances in technology and the globalization process, the issue of money market stability has been accorded the highest priority. Indeed, the global community is presented with the challenge of regulatory reform to address the increasingly complex and heightened risks following these developments. Achieving an efficient, effective and stable financial sector is a fundamental enabling requirement for sustainable money market growth. The regulation of financial institutions is most effective where there is already a sound regulatory framework in place that provides for adequate reporting, monitoring of capital adequacy, risk management controls and customer disclosure so that in order to ensure that institutions know their customers to prevent money laundering. Sound regulation can help ensure problems of asymmetric information are overcome, as if customers lack confidence in a financial institution then this may result in a financial panic, in the case of a bank a run on deposits threatening the collapse of the institution. During the G-20 Finance Ministers and Governors Meeting in November 2009, the IMF has crafted seven principles for exit policies which are “Intended to Establish Common Ground for the Design and Implementation of Policies During the Exit from the Extraordinary Support Measures Taken During The Crisis”. The recommends that the timing of exits be dependent on the state of the economy and the financial system, and should err on the side of further supporting demand and financial repair. Policy stimulus and other critical support measures should be withdrawn only when there is firm evidence of durable financial stability and a self-sustaining recovery in private demand. To anchor market expectation, it is important to stress the need for the exit plans to be well established early and communicated clearly by the policy makers to the public. Financial institutions have demonstrated that they are vulnerable to the collective draw to money market activities aggressively when times are good, only to excessively less trading when the economic cycle experiences a downturn. This behavior amplifies the impact of the economic cycle on bank lending and is termed as “pro-cyclicality”. The recent sub-prime crisis underscores the severity of the boom and bust consequences of the pro-cyclicality feature of money market in particular and activities of the financial institutions in general. Unfortunately, present available measures and regulations are gravely inadequate to manage this pro-cyclicality. Many have argued, for instance, that the Basel II capital adequacy requirement (CAR) is inadequate, especially during a financial crisis or economic slowdown. The ‘risk-weighted averages’ is incomplete as it does not attach sufficient weight to macro prudential risk and liquidity risk. The Basel II capital requirement focuses solely on the relative weight charged against different classes of assets. Moreover, many reports have also drawn attention to different ‘interpretations’ of the weights associated with different assets of different BNM. Furthermore, there has been too much focus on the risk associated with commercial paper, rather than on the level of leverage building up in the whole financial system. In particular, the regulation evaluates each bank independently and in isolation, largely without much regard to spillover and feedback effects. In any case, until recently, many believed that when financial institutions are strong, it is a sufficient condition for financial stability. By contrast, on a wider perspective, the objective of regulation is to reduce the probability of distress for the entire financial system. The source of distress incorporates a host of potential channels, including interdependence and linkages among financial institutions through clearing and settlement systems, and common exposures.
The Malaysian Financial Sector Masterplan represents the blueprint for the development of the financial sector over a 10- year period. The plan, which was launched in 2001, places importance on the development of Malaysia Banking and Money market sector as an important component in the financial system. To achieve this objective, emphasis is being given to financial infrastructure and institutional development, aimed at enhancing efficiency of the system and building the internal resilience and competitive position of the money market operators, while meeting the needs of the nation. This includes providing the foundations for the development of the financial markets and strengthening the institutional development. As part of this process, the benchmarking exercise is an important tool to enhance performance and to guide the money market operators on improvement of their business strategies. To reinforce this, a service quality index has also been initiated to promote the development of world-class products and services. This is also complemented with a comprehensive consumer education programme so as to promote product transparency and increase accountability. The introduction of financial advisers is also a further element to facilitate consumer access to a wider range of financial products. Money Market is ascending to greater prominence in the global financial system and has fast extended beyond major industrial economies. This growing significance is a manifestation of the viability of money market as a financial intermediation channel that supports economic growth and development of nations. While it was initially developed to fulfill the needs of the investor, money market has now gained universal acceptance. The appreciation of its promising potential has prompted interest amongst financial institutions to venture into this fast expanding market. At the heart of this expansion emerged the need for the development of the regulatory dimension to explicitly address the unique features product offers by money market. At present, money market has to a large extent, been governed by the regulatory framework, and reinforced by accounting standards. However, Islamic money market come in force, is distinct from money makret activities in terms of its underlying philosophy on the prohibition of interest, which in turn shapes the nature of its financial transactions, and its risk attributes. It believes money market compasses 80% of overall conventional and Islamic money market activities. The forces of globalization, financial liberalization, technological advancements, greater competition and financial innovation have created new risks which are more complex and which have more profound systemic implications. Accordingly, to manage these risks, prudential regulation and supervisory oversight have become more demanding and challenging. To ensure the money market regulators and supervisors are able to respond effectively to the changing environment, the Basel Committee has revised its Capital Accord to be more riskfocused and risk-sensitive. The evolution of an appropriate financial structure would need to take into account the role of the money market in the economy and the objectives that need to be achieved. The appropriate financial structure, particularly in emerging market economies, needs to be designed to meet the requirements of the need of investor in investing in money market. The financial system needs to be in a position to support the real sector, changing and evolving with the changing needs of the economy. The strategy adopted by BNM is to develop a comprehensive financial system that is able to operate in parallel with the Islamic financial system The Malaysian Financial Sector Masterplan further provides the environment that will encourage active participation in financial institutions in the secondary money instruments. The next phase in this development is the raising of funds from this market by multinational corporations and multilateral institutions. As the volume increases, it would strengthen the inter-linkages and integration amongst the financial centres. In addition to structuring a variety of attractive off-the-shelf instruments, efforts need to be intensified to create a benchmark yield curve for future issues. With a well developed system, the trading of instruments would encourage the free flow of capital movements and would in turn facilitate greater Islamic fund management activities.
Dynamic financial system is to achieve the ultimate objectives of developing an money market that will be able to contribute significantly to the overall development of our economy through the intermediation process. Thus money market needs to extend its agenda towards the development of a comprehensive financial system. The money market should strive to add value towards enhancing greater integration to the economy and the financial system. To harness the potential fully, genuine endeavours to develop and innovate money market instruments and activities that are able to fulfill the changing requirements of the economy and the emerging needs of the contemporary global market place need to be continuously pursued. Conferences such as this can contribute invaluable ideas to foster new initiatives towards the development of the financial system. With the acceleration of its global integration, it will provide the synergies and opportunities for the money market industry to evolve into an important component of the international financial system that can contribute to enhance prospects for balanced global growth and shared prosperity. Amongst the most imminent challenges is the creation of the critical mass in the market to allow for meaningful cross-border alliances at the regional and global level. The establishment of an adequate number of money market operators in the market is also crucial to provide the groundwork for the setting up of more operators, in terms of sustaining business support and providing the economies of scale in order for the money market industry to develop. On top of that, government play important role in the development of the money market industy. The role of the government is, amongst others to provide the enabling environment and put in place from the outset, the necessary infrastructure through the formulation of a comprehensive set of legal and regulatory framework for money market. In addition, this framework needs to be reinforced by a BASEL framework to ensure that all financial transactions are acceptable by investor. The challenge to develop regulatory standards that remain to efficiency of money market is an important element in the development and growth of the financial institution. The development of financial system that is able to contribute towards stability and balanced global growth needs to be achieved in the context of a rigorous and robust legal, regulatory and supervisory regime. This is reinforced by effective supervision, strong framework and an efficient judiciary system that promote confidence and soundness in the Islamic financial system. It is with the combined commitment and concerted efforts by the regulators, the industry and market participants that these goals can be achieved.
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