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Development of Money Markets


Money market rates are a useful indicator of expectations regarding future monetary ... affects the stability of the money market. and ... – PowerPoint PPT presentation

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Title: Development of Money Markets

Development of Money Markets
  • Mats Filipsson
  • International Monetary Fund
  • Monetary and Financial System Department
  • Workshop on Developing Government Bond Markets in
    Sub-Saharan Africa
  • Johannesburg, June 17-19, 2003

Overview of Presentation
  • Benefits of money markets
  • Conditions for money market development
  • Role of central bank in developing money markets
  • Coordination between monetary operations and
    government cash management

Benefits of Money Markets
  • Promote financial stability and development
  • Financial institutions can cover their short-term
    liquidity needs
  • Facilitate development of a liquid bond market
  • Reason Enable to obtain regular financing of
    bond inventories to carry out their market making

Benefits of Money Markets (cont.)
  • Consequentlymoney markets could help to
  • Reduce the need to use monetary financing /
    foreign currency debt
  • Reduce the cost of government financing (lower
    liquidity premium)

Benefits of Money Markets (cont.)
  • Moreover.. effective monetary policy
  • First step of transmission of monetary actions to
  • Money market rates are a useful indicator of
    expectations regarding future monetary actions

Conditions for Money Market Development
  • Conditions for developing a well-functioning
    money market
  • Financial institutions commercially motivated to
    to actively manage risk and maximize profits.
  • Sound financial institutions.
  • Use of indirect monetary policy instruments.
  • Sound government cash management and good

Role of the Central Bank
  • Stability oriented monetary policy
  • Liquidity management of central bank
  • affects the stability of the money market
  • and
  • the incentives to use the money market to manage

Role of the Central Bank (cont.)
  • Standing facilities
  • penalty rates should provide incentives for
    interbank activity
  • wide enough corridor should encourage trading

Role of the Central Bank (cont.)
  • Open market operations
  • foster the development of secondary markets
  • foster collateralized money markets (repos,
    buy/sell backs)
  • Need for coordination

Role of the Central Bank (cont.)
  • Reserve requirements
  • Trading in overnight market will be influenced by
  • Length of reserve maintenance period
  • Averaging provisions for meeting reserve

Role of the Central Bank (cont.)
  • Importance of accurate liquidity forecasts
  • Liquidity management decision are based on
    liquidity forecasts
  • Govt. cash flows large impact on the autonomous
    component of liquidity supply
  • Often difficult to predict govt. cash flows

Coordination between monetary operations and
govt. cash management
  • Government cash flows often unpredictable
  • can be a major source of uncertainty in liquidity
  • adds volatility
  • To reduce volatility
  • Coordination central bank ? government
  • Effective information-sharing and coordination
    between CB, MoF, and debt managers is critical
    (see Guidelines for Public Debt Management)

Coordination between monetary operations and
govt. cash management (cont.)
  • Ways of coordination
  • CB acts as fiscal agent information of debt
    calendar is available.
  • Govt. shares cash flow projections with CB on a
    daily basis and promptly informs about new
    information (liquidity-forecasting committee can
    be useful).
  • Uncertainty is reduced when overdraft is limited
    or prohibited and govt. deposits not held with CB
    (but problem when banks are weak).

  • Factors for money market development
  • Profit oriented and sound banks
  • Monetary operations through market based
  • Incentive structure for interbank trading
    provided through CBs operating procedure
  • Coordination between government cash management
    and monetary operations

(No Transcript)
Stylized balance sheet of the central bank
  • Supply of bank reserves NFA NPG OIN C

Assets Liabilities
Net foreign assets (NFA) Currency (C)
Net position of the govt. (NPG) Bank reserves (R)
Lending to banks (L)
Other items net (OIN)
Policy position
Autonomous position
Repurchase Transactions (Repos)
  • Definition A repurchase transaction involves a
    buyer" agreeing to buy securities from the
    seller for a certain price at a certain time
    and, also, agreeing to sell those same securities
    back to the seller at some future point, at an
    agreed price and seller agreeing to pay interest
    at specified rate on sales amount between initial
    sale and repurchase dates.

Master Repurchase Agreement
  • Definition A master repurchase agreement is a
    single document signed between two counterparties
    for the purpose of conducting repurchase
    transactions. It sets out rights and obligations
    of each party. Advantages include netting legal
    effect of which is to aggregate all deals
    transacted between the two parties and to treat
    them as one
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