Vous êtes sur la page 1sur 20

From the desk of Zaheer Swati

Lecture 11 Money Market of Pakistan

Financial Institution

Zaheer A. Swati
Unit 11

Efficient transfer of resources from those having idle resources to others who have a pressing need for them is
achieved through financial markets. Stated formally, financial markets provide channels for allocation of savings to
The Money market refers to the market where borrowers and lenders exchange short-term funds to solve their
liquidity needs
The securities in the money market are short term with high liquidity; therefore, they are close to being money
Money market securities are usually sold in large denominations
They have low default risk
They mature in one year or less from their issue date, although most mature in less than 120 days
Money market is not some preset place like commodity market but a collective name given to all financial
institutions dealing with short term debt financing
It performs various functions like divert saving into investment, brings financial stability by transferring credit from
one sector to other, easing the implementation of monetary policy, providing short term finance to governments,
lending the surplus funds ( if any) for short term etc
In Pakistan primary participants of money market are many like government of Pakistan, state bank of Pakistan,
commercial, cooperative and saving banks etc

11. Money Market Securities/Instruments in Pakistan
Money market instruments are defined as negotiable debt instruments with a maturity of one year or less
Money market instruments give businesses, financial institutions and governments a means to finance their short-
term cash requirements. Three important characteristics are:
Liquidity: Since they are fixed-income securities with short-term maturities of a year or less, money
market instruments are extremely liquid
Safety: They also provide a relatively high degree of safety because their issuers have the highest credit
Discount Pricing: A third characteristic they have in common is that they are issued at a discount to their
face value

Financial Institution

Zaheer A. Swati
Unit 11

11.1 Treasury Bills
The Government of Pakistan raise debts through the auctions of short term Government of Pakistan Market Treasury
Bills (MTBs)
MTBs are the Government of Pakistans debt securities that mature in one year or less from their issue date
A treasury bill differs from other types of investments in that they do not pay interest in the traditional way. When an
investor wishes to purchase a treasury bill, he buys it at a discount rate. when they mature; the government pays the
holder the full par value
Purchased by individuals, institutions and corporate bodies including banks irrespective of their residential status
Can be traded freely in the countrys secondary market
T-bills are issued through a competitive bidding process
Finally, the interest is the difference between the purchase price of the security and what you get at maturity. T-bills
are considered to be the safest investments, because in these Government confirms the holder of security to pay back
face value. Returns are less because Treasuries are usually safe
They are issued with the maturities of

11.1.1 Investment features of Treasury Bills:
o Following are three important features of T-Bills


M A R K E T S & M O N E T A R Y M A N A G E M E N T D I V I S I O N T E L 9 2 ~ 2 1 ~ 9 9 2 2 1 9 6 7
F A X 9 2 ~ 2 1 ~ 9 9 2 1 2 4 7 6


Auction Target calendar for sale of Government of Pakistan Market Treasury Bills 3Months, 6


2Apr14 03Apr14 94,217 30,783 125,000
16Apr14 17Apr14 644,951 (144,951) 500,000
02May14 321,020 28,980 350,000
14May14 15May14 483,048 (33,048) 450,000
28May14 29May14 382,392 17,608 400,000
11Jun14 12Jun14 222,149 27,851 250,000
25Jun14 26Jun14 71,163 128,837 200,000
2,218,940 56,060 2,275,000
AuctionDate SettlementDate MaturingAmount
Tenor 3Month 6Month 12Month
3Apr14 26Jun14 2Oct14 2Apr15
17Apr14 10Jul14 16Oct14 16Apr15
2May14 24Jul14 30Oct14 30Apr15
15May14 7Aug14 13Nov14 14May15
29May14 21Aug14 27Nov14 28May15
12Jun14 4Sep14 11Dec14 11Jun15
26Jun14 18Sep14 26Dec14 25Jun15

M A R K E T S & M O N E T A R Y M A N A G E M E N T D I V I S I O N T E L 9 2 ~ 2 1 ~ 3 2 4 5 3 4 9 1
F A X 9 2 ~ 2 1 ~ 9 9 2 1 2 4 7 6


were invited by the State Bank of Pakistan, Karachi through Primary Dealers on April 30, 2014. The
settlement date is May 02, 2014. Bids were opened at 12:00 hours on April 30, 2014 which was

RealizedValue FaceValue
5,976.999 6,112.675
56,306.199 59,090.000
272,578.140 299,650.000
334,861.338 364,852.675

9.9383 9.9383 246.113 251.675
9.9675 9.9675 49,993.899 52,465.000
9.9932 9.9865 272,578.140 299,650.000
322,818.152 352,366.675


Tenor RealizedValue FaceValue Price

03Month 4,422.333 4,522.275 97.79
06Month 2,532.589 2,657.770 95.29
12Month 1,653.261 1,817.370 90.97
Total 8,608.183 8,997.415
Financial Institution

Zaheer A. Swati
Unit 11

11.1.2 How to calculate return on T-Bills?
As we have studied earlier that T-Bills do not carry any interest rate but instead are sold at a discount from their par
value or face value
Thus their yield is based on their appreciation in price between time of issue and the time they mature or are sold by
the investor
Bill yields are determined by the discount method; which ignores the compounding of interest rates, treats the par
value as the investment base, and uses a 360-day year for simplicity
The Discount Rate for T-Bills can be calculated by the following formula:

Discount Rate = X

Example 11.1: Suppose you buy a 12 Weeks T-bill at Rs.98 and keep it until maturity having face value of rs.100. Then
the discount rate on this bill can be calculated as:


11.1.3 How T-Bills are traded in Pakistan?
At start, Treasury bills were issued on tap basis for six months at 6 percent per year
Afterwards when the government moved to a market-based system as part of the process of economic deregulation,
disinvestment, and decentralization in April 1991 then the following changes were made:
o Introduce the American-style Auction-Based System (ABS)
o Primary dealers were appointed
State Bank of Pakistan use following two methods to trade T-bills.
Auction System
Open Market Operations(OMO)

360 Par Value-Purchase Price
Par Value Number of Days to Maturity
Financial Institution

Zaheer A. Swati
Unit 11 Auction System: SBP is acting as an agent on behalf of the government for raising short term funds from the
market. The MTBs are sold by SBP to approved Primary Dealers through multiple price sealed bids auction Open Market Operation:
SBP conducted the first formal open-market operation (OMO) sale of government securities in 1995. Although
OMOs were meant to support interest-rate policy, the MOF first used them only as a borrowing vehicle
In Open Market Operations rather sale of securities Government can purchase treasuries back to increase the money
When money is invested in treasuries, it is considered to be out of circulation since it is held by the government
When treasuries are purchased by the government, the investor will probably then invest that money in some sort of
securities and if the securities are checking accounts, savings accounts, money market accounts, or CDs, that
increases the money supply to banks, allow banks to loan more money
In OMO Government fix the discount rate before the announcing the new securities and can be issued when they
need funds

11.2 Commercial Paper
Commercial paper consists of short-term, 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
The commercial paper shall be issued for maturities between 30 days and one year from the date of subscription
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

Financial Institution

Zaheer A. Swati
Unit 11

11.2.1 Calculation of rate of return on commercial papers
Most commercial paper is issued at discount from par and Yield to investor can be calculated by bank discount
method just like treasury bills
Investors yield arises from the price of security between its purchase date and maturity date

Example 11.2: If Rs. 1,000,000 commercial paper with a maturity of 120 days is acquired by an investor at a discount
price of Rs. 950,000. What will be the discount rate of return on commercial paper?


11.3 Bankers Acceptances
The meaning of the term acceptance is approval. In financial terms acceptance means a promise to pay a specific
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
The word accepted on top of his signatures and
The date on which the amount will be paid.
Now the promissory is legally bound 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 to pay the sum of money and the interest money charged
before or on the maturity date to the bank while the bank is bound to pay the money to the beneficiary.
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 day
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.

Financial Institution

Zaheer A. Swati
Unit 11

Mechanism of Bankers Acceptance

Bankers acceptances are short-term, negotiable securities issued by a bank for a customer, usually to finance
export/import financing. The draft can be traded in the secondary market and represents an outstanding liability of
the issuing bank. They are typically traded at a discount from face value
The BAs marketability is limited only by the reputation of the accepting branch and the market demand
The net proceeds after the sale = the face amount of the acceptance - the discount rate (interest rate*days into
maturity*face amount) + the banks acceptance commission
The combination of these is called the all in rate

11.4 Repurchase Agreements
Repurchase agreements are agreements between a borrower and a lender where the borrower, in effect, sells
securities to the lender with the requirement that the securities will be repurchased on a specified date and at a
specified, higher price
The securities serve as collateral for the loan. Most Repo agreements mark the collateral to market daily. If the value
of the collateral drops below the required margin, then the borrower must send more securities to the lender to
maintain margin or some money to reduce the principal outstanding

Example 11.3: We assume a financial institution has Rs 1 million cash surplus. The borrowing dealer and lending
company agree on 1 million RP loan collateralized by treasury bills, with the dealer agreeing to buy back the bills within
a few days and the interest on loan.
Financial Institution

Zaheer A. Swati
Unit 11

Financial Institution Security Dealer
- Rs. 1 million + Rs 1 million
+ Securities worth 1 million - Securities worth 1 million

After Maturity of Agreement
+ Rs. 1 million - Rs 1million
- Securities worth 1 million + Securities worth 1 million

11.4.1 Types of Repo (In Term of Maturity)
Overnight repos
Overnight repos are 1 day loans

Term repos
Term repos have terms of greater than 1 dayusually weeks to months

Open repo
Open repo or continuing contracts are a contractual relationship that allows the borrower to borrow funds up to a certain
limit, without signing 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.

11.4.2 Calculating Repo Interest Income
The difference between the underlying securities current price and repurchase price is the amount of interest paid by
the borrower to the lender
Interest income from repurchase agreement can be determined by this formula

RP Interest income = Amount of loan x Current Repo Rate x (Repo Term in days/360 days)

Example 11.4: An overnight loan of Rs 1 million to a dealer at 12% Repo rate would yield interest income?

Financial Institution

Zaheer A. Swati
Unit 11

11.5 Eurodollar Deposits
o Eurodollars are the leading component of the Eurocurrency markets today
o There is a need for Eurocurrency markets because funds are required in international currencies worldwide mainly in
Dollars, Euros and Pounds
o Eurodollars are the deposits of US dollars in banks which are located outside United States.
o These can also be the branches of the US banks located outside US. The deposits are recorded in the denomination
of dollars rather than their home currency. Generally, the "euro" prefix can be used to indicate any currency held in a
country where it is not the official currency
o The daily cost of funds derived from Eurodollars is

Amount to be loaned * interest rate * 1/360

Mechanism of Eurodollar Deposits

11.6 Federal Funds
Federal funds refer to the overnight borrowings which are undertaken in order to meet the state banks reserve
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 in the federal funds market is the commercial banks. Other financial institutions,
security dealers, business corporations and the local government provide readily available funds for lending in the
federal market.
The banks and DFIs are legally obliged to keep a certain amount of funds in the reserve account which is kept with
the state bank of Pakistan. This is equal to the fraction of the deposits which are kept with a bank
To meet the requirement of this legal reserve ratio the banks borrow funds mostly on overnight basis from the
federal funds market. Most federal funds are for overnight basis and they have a fixed interest rate
Today the online system has made it very easy to know that which institutions are short of funds and which have
surplus. The one who is short gets the benefit that its immediate requirement of money is fulfilled while the one with
surplus gets interest income on its funds and thus earns it through the federal fund market
Financial Institution

Zaheer A. Swati
Unit 11

11.7 Certificates of Deposit
Negotiable certificates of deposit are money market instruments sold by banks, typically in maturities less than six
These negotiable instruments are traded in the secondary market and are a major tool used by large banks to manage
their liquidity

Instruments Pricing Issuer Characteristic
Full Faith and Credit of the Pakistans
Short term corporate debt
Finances self-liquidating transaction
Certificate of
Borrowing by banks from investors
Borrowing by Banks from other banks
Money Market Dealers
Borrowing with financial assets as
collateral in order to lend at a higher rate