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 TABLE OF CONTENTS
S.NO PARTICULARS PAGE #

1 Introduction 5

2 Market 6

3 National Bank of Pakistan 9

4 Money Market Deal Processing Cycle 10

5 Money Market Instruments 8

6 Treasury Operations 13

7 Treasury Procedure 15

8 Players of MM 15

9 Treasury Desk 16

10 Types of Transactions 17

11 Clean Placement Transaction 18

12 Settlement System 19

13 Accounting 20

14 Risk 21

15 Conclusion 22

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INTRODUCTION
Treasury in a company is key in determining the firm‟s financial strategy and financial
policy – advising on what businesses to invest in, organizing the appropriate funding for
this, and controlling the risk in the organization. With the growth of international
business and the spread of the multinational enterprise the treasury function has
acquired a new meaning. Treasury functions not only includes the borrowing and
placing of funds but also includes a diversity of currencies which can be converted into
one another through the exchange markets and which are transacted in many money
markets. Besides others, Money Market plays an important role domestically in the
economic growth of the country.

Strength of any country primarily depends upon its economic growth. The said
economic growth can only be achieved through well-set economic principles. Money
Market operations are the lifeblood of an economy through which economic stability can
be achieved.

Dependent on the risk environment, treasury will create an appropriate capital structure
of debt and equity in order to fund the business, getting the optimum balance between
cost and risk. This translates into the need to ensure that at all times the company has
the liquidity and cash to meet its obligations as they fall due, taking in funding from
equity or debt capital markets activities, bank borrowings, through to day-to-day cash
management and investment.

Treasury is responsible for the identification of risks associated with this activity and for
controlling risks that could erode financial strength, using mitigation and hedging
techniques and encouraging a culture of sound financial practice.In essence treasury
management is all about handling the banking requirements, the funding for the
business and managing financial risk. It therefore incorporates raising and managing
money, currency, commodity and interest rate risk management and dealing, and, in
some organisations, the related areas of insurance, pensions, property and taxation.

This report includes the understanding about the Money Market, its functions &
operations, its participants, its instruments and many other things relating to it along
with the specific understanding on Pakistani scenario.

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MARKET
A market is a place where trading of goods and services takes place. It‟s a two-way
communication through give and take. It can also be defined as the aggregate of all
possible buyers and sellers of a commodity and the transactions between them.

TYPES OF MARKET
On a routine basis we all work through different markets for different purposes. Here are
the brief explanation of these markets, which do affect an individual as well as the
nation and country as a whole:

a) Goods / Commodity Market

A place where exchange of raw materials takes place is called the Goods / Commodity
Market. We can call it a barter system as well for just understanding.

b) Financial Market
A Financial Market is a place where buying and selling of Financial Assets takes place.
Main examples of these markets are stocks and bond market under the umbrella of
Capital Market.

c) Foreign Money Market

Where trading of any currency outside the regulations governing domestic markets in
that currency takes place is called Foreign Money Market. Individuals typically do not
participate in the foreign money markets because these markets are of a wholesale
nature and too large for individuals to invest in it. Normally commercial banks and
corporations participate in it as they have the capacity to do so.

d) Foreign Exchange Market

Foreign Exchange Market is a place where financial paper with a relatively short
maturity is traded. In Foreign Exchange Market, financial paper denominated in a given
currency is always traded against the other currency. Commercial Banks along with the
Central Bank are the main participants of the Foreign Exchange Market. It is very clear
that commercial banks “make a market” in foreign exchange market.

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e) Derivative Market
It is the part of the Foreign Exchange Market. It has the notional amount with
speculation. Derivatives are the financial instruments whose values are derived from the
value of something else (known as the underlying). Derivatives can be used to counter
the risk of economic loss arising from changes in the value of the underlying. This
activity is known as hedging. There are three types of derivatives:

 Forward

 Option

 Swap

f) Money Market
The money market is a section of the fixed income market. It is a part of the global
financial market, and is used for short-term cash solutions, often by governments and
large institutions. It is considered to be low risk (safe) in relation to other options such as
the stock market. More realistically we can easily understand that 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.

The money available to consumers, investors, etc. to spend or invest in products is

known as the money supply of the market. This money supply includes credit available
to consumers. The lower the interest charged on credit facilities, the more consumers
are likely to use credit, and the higher the money supply in the country. An increase in
the money supply is referred to as a growth in the money supply.

If the money supply in the country is high, this could result in increased demand for
products in the products market, which in turn could lead to inflation (rising prices).

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Money Market Instruments:
Following are money market instruments in Pakistan:

Treasury Bills: The Treasury bills are short-term money market instrument that
mature in a year or less than that. The purchase price is less than the face value. At
maturity the government pays the Treasury Bill holder the full face value. The Treasury
Bills are marketable, affordable and risk free. The security attached to the treasury bills
comes at the cost of very low returns. They are issued at the different maturities:

3-Months:

6-Months:

12-Months:

Certificate of Deposit: The certificates of deposit are basically time deposits that
are issued by the commercial banks with maturity periods ranging from 3 months to five
years. The return on the certificate of deposit is higher than the Treasury Bills because it
assumes a higher level of risk.

Commercial Paper: Commercial Paper is short-term loan that is issued by a

corporation use for financing accounts receivable and inventories. Commercial Papers
have higher denominations as compared to the Treasury Bills and the Certificate of
Deposit. The maturity periods of Commercial Papers are a maximum of 9 months. They
are very safe since the financial situation of the corporation can be anticipated over a
few months.

Acceptance: It is a short-term credit investment. It is guaranteed by a bank

to make payments. The Banker's Acceptance is traded in the Secondary market. The
banker's acceptance is mostly used to finance exports, imports and other transactions in
goods. The banker's acceptance need not be held till the maturity date but the holder
has the option to sell it off in the secondary market whenever he finds it suitable.

: The Repo or the repurchase agreement is used by the government security

holder when he sells the security to a lender and promises to repurchase from him
overnight. Hence the Repos have terms ranging from 1 night to 30 days. They are very
safe due government backing.

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MONEY MARKET DEAL PROCESSING CYCLE

RSF, TT’s, Clearing,

Inflows/ Outflows, Deals in
FCA, Central Bank Money
Balances Market
Money Market Middle
Desk Office
FX deals hitting Front Office
PKR position, $
/PKR swap, Ready,
Spot sell/ Purchase
of $

Brokers Market
Quotes Deal processing &
Settlement at
Money Market
Back Office
Banks Market
Quotes
The money market deal is processed through three offices. They are:

Front Office It is an input area where front line operations are done.
Middle Office It is the processing area where money market dealers transact the
deals received from front office. Most of the times middle office do
liaison between the front & back office.
Back Office It is the finalization area where all the deals are settled.

The above process works on Real Time Gross Settlement (RTGS) to make the money
market position accurate and realistic.

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DEBT INSTRUMENTS:

Following are money market instruments in Pakistan and practiced in NBP. The main
types of Government securities that our customers can invest in are:

Treasury Bills (T-Bills)

Treasury bills are zero coupon instruments issued by the Government of Pakistan and
sold through the State Bank of Pakistan via fortnightly auctions.

T-Bills are issued with maturities of 3-months, 6-months and 1 Year and are priced at a
discount. T-Bills are risk free, SLR eligible securities that are actively traded in the
secondary market and are therefore highly liquid.

They are issued with a minimum denomination of Rs.100, 000.

Certificate of Deposit: The certificates of deposit are basically time deposits that are
issued by the National Bank of Pakistan to individual and corporate with maturity
periods ranging from 3 months to five years. The return on the certificate of deposit is
higher than the Treasury Bills because it assumes a higher level of risk and
16%
14%
12%
10%
8% Return
6%
4%
2%
0%
Risk level will increase with 5Year
maturity period

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Pakistan Investment Bond: The Government of Pakistan issues these bonds.
Previously it was issued by the name of FIB‟s (Federal Investment Bonds) PIBs are long
term bonds issued by the Government of Pakistan and sold through the State Bank of
Pakistan via periodic auctions.

PIBs are issued with tenors of 3, 5, 7, 10, 15, 20 and 30 Years. Being backed by the
Government of Pakistan, they present a low risk long term investment option.

The Pakistan Investment Bonds offer a fixed semiannual coupon and repayment of
principal at maturity. They are highly liquid SLR eligible securities that are actively
traded in the secondary market.

The minimum denomination of PIBs is Rs.100, 000.

TFC (Term Finance Certificates):The banks issue these certificates, whether they are
the primary dealers or the secondary dealers. Usually they are for long-term periods
and profit on these certificates is paid on semi-annually basis.

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TREASURY OPERATIONS IN BANKS:-
1. Reserve Management & Investment:

It involves
(i) Meeting CRR / SLR obligations
(ii) Having an appropriate mix of investment portfolio to optimize yield and duration.

Duration is the weighted average „life‟ of a debt instrument over which investment in that
instrument is recouped. Duration Analysis is used as a tool to monitor the price
sensitivity of an investment instrument to interest rate changes.

2. Liquidity & Funds Management:

It involves
(i) Analysis of major cash flows arising out of asset-liability transactions
(ii) Providing a balanced and well-diversified liability base to fund the various assets in
the balance sheet of the bank
(iii) Providing policy inputs to strategic planning group of the bank on funding mix
(currency, tenor & cost) and yield expected in credit and investment.

3. Asset Liability Management & Term Money:

ALM calls for determining the optimal size and growth rate of the balance sheet and
also prices the Assets and Liabilities in accordance with prescribed guidelines.
Successive reduction in CRR rates and ALM practices by banks increase the demand
for funds for tenor of above 15 days (Term Money) to match duration of their assets.

4. Risk Management –

Integrated treasury manages all market risks associated with a bank‟s liabilities and
assets. The market risk of liabilities pertains to floating interest rate risks and asset &
liability mismatches. The market risk for assets can arise from
(i) Unfavorable change in interest rates
(ii) Increasing levels of disintermediation
(iii) Securitization of assets
(iv) Emergence of credit derivatives etc.

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5. Transfer Pricing:

An integrated Treasury unit has an idea of the bank‟s overall funding needs as well as
direct access to various markets (like money market, capital market, forex market, credit
market). Hence, ideally treasury should provide benchmark rates, after assuming
market risk, to various business groups and product categories about the correct
business strategy to adopt. Treasury can develop Interest Rate Swap (IRS) and other
Rupee based / cross-currency derivative products for hedging Bank‟s own exposures
and also sell such products to customers/other banks

6. Capital Adequacy: This function focuses on quality of assets, with Return on Assets
(RoA) being a key criterion for measuring the efficiency of deployed funds.

An integrated treasury is a major profit centre. It has its own P & L measurement. It
undertakes exposures through proprietary trading (deals done to make profits out of
movements in market interest / exchange rates) that may not be required for general
banking.

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TREASURY PROCEDURE:

National Bank of Pakistan bank involves short term lending and borrowing of funds;
Overnight, Weekly, One Month, Two Month, Three Month and Six Month up to one Year
in order to meet regulatory environment and to utilize static cash flow in a profit
generating manner. The most significant function of any money market is to provide
economic units with a market place to manage funds. Almost every economic unit-
government, corporations, financial institutions even a small industry or business has a
regular and recurring need for liquidity management and National Bank of Pakistan
issues surplus funds(if any) at the disposal of financial and other institutions are offered
by borrowers.

PLAYERS OF MM:

National Bank of Pakistan carries out their financial transactions with the players of MM
in Pakistan. Money market players and experts observed that devaluation against
regional currencies was a clear sign of poor performance of economy, even poorer than
Bangladesh which was not considered a competitor of Pakistan in the recent past,
weakening economy and terrorism are the main causes of sinking rupee which
witnessed sharp devaluation even in the local economy as buying capacity of the
currency eroded during a couple of years.

 Central Bank (State Bank of Pakistan).

 Commercial Banks, Co-operative Banks and Primary Dealers are allowed to
borrow and lend.
 Non- Banking Financial Institutions.
 Development Financial Institutions.
 Intermediaries (Brokerage Houses).
 Large Corporate and Business Houses.

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 DESK

The FDI Bank money market desk
provides its customers with a variety of
advisory and investment services. We
offer our customers competitive quotes
and investment advice based on their
specific needs. We also allow our
customers to invest in Government
securities by opening an IPS (Investor
Portfolio Services) account on their
behalf with the State Bank of Pakistan
FDI has one of the most active inter
bank and corporate desks among the
upcoming banks of the industry, offering
its customers a wide variety of foreign
exchange products and services. The
FDI FX desk offers some of the
narrowest bid offer spreads and
quickest online quotes to meet the
needs of its customers, whether they
are related to trade, remittances or
other forex flows.

The desk is involved in the following

activities:

 Management of statutory
reserves viz. (CRR) and Statutory
Liquidity Ratio (SLR).
 Daily Funds Management for the
Bank.
 Balance Sheet Management
 Debt Securities Trading

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 Money Market can be spread into following areas; which are currently practiced in
NBP..

INTERBANK TRANSACTIONS:

CLEAN TRANSACTIONS OPEN MARKET TRANSACTIONS

1. Clean Placement(Lending) 1. Treasury Bills(Reverse Repo)

2. Clean Borrowing 2. Pakistan Investment Bond
3. Certificate of Investment 3. Murhabaha Agreement
4. Certificate of Deposits. 4. Federal Investment Bond
5. Treasury Bills(Repo)

These banks are involved with NBP in interbank transactions.

COMMERCIAL
BANKS

HBL FDIBL HMB MCB ASKARI

Running Running
Finance Finance
Facility Facility

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CLEAN PLACEMENT TRANSACTIONS :

BORROWING OF PKR 50 MILLION

Investment and Risk Characteristics:

Term: Mostly Short Term i.e. overnight
Security: Depends upon the issuer
Marketability: Good
Volatility: High since the term is short (Unsecuritized)
Inflation: Low impact of inflation as term is short
Expected Return: Negotiable/Equivalent to bank deposit
Currency: Available in PKR currencies

Amount: 50 Million
Type: Letter of Placement
Date of Transaction: 04/08/10
Date of Maturity: 04/09/10
Rate: 12%
Broker: AKD

The Six Horses: Why, What, Who, Which, How and Where ?

• Why: The Need

(There was maturity of Client investments, so NBP has to payoff them so, NBP
arranged overnight transaction which has maturity after one month.)
• What: The Definition

• Which and How: The Product and Process

(It was clean Placement Transactions which considered as unsecuritized )
Where: The Resources
(The bank as resources was HMB)

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SETTLEMENT SYSTEM:
All transactions work are done by The RTGS (Real Time Gross Settlement) system is a
funds transfer system that is able to provide continuous intra-day finality for individual
transfers. In this system, payment instructions between banks are processed and
settled individually and continuously throughout the day. This is in contrast to net
settlements where payment instructions are processed throughout the day but inter-
bank settlement takes place only later typically at the end of the day.

Transactions across RTGS move only where the remitting (sending) bank has liquidity.
Thus RTGS is an approach to risk reduction and it aims at reducing inter-bank
settlement risk . In the RTGS system, payee banks and their customers receive funds
with certainty, or so-called finality, during the day, enabling them to use the funds
immediately without exposing themselves to risk.

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ACCOUNTING FOR NBP:
Recording Money Market Transactions

Every individual investment and borrowing involved in money market operations

must be recorded in a general book which can be called money market position book.

Measuring Profits in Money Market Operations

Profits and losses in money market operations can be classified as realized and
unrealized profits and losses. Realized profits and losses originate from securities
which have been liquidated within the reporting period; unrealized profits and losses
are associated with securities, which remain in inventory at the end of the period.

Bookkeeping for Money Market Operations

Whenever we acquire a security, the traditional accounting entries are to:

Debit = Marketable Securities

Credit = Bank

Whenever we acquire a security, the traditional accounting entries are to:

Debit = Bank
Credit = Marketable Securities
Credit = Profits on Securities

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CONCLUSION
 The money market specializes in debt securities that mature in less than one
year.
 Money market securities are very liquid, and are considered very safe. As a
result, they offer a lower return than other securities.
 The easiest way for individuals to gain access to the money market is through a
money market mutual fund.
 T-bills are short-term government securities that mature in one year or less
from their issue date.
 T-bills are considered to be one of the safest investments - they don't provide a
great return.
 A certificate of deposit (CD) is a time deposit with a bank.
 Annual percentage yield (APY) takes into account compound interest, annual
percentage rate (APR) does not.
 CDs are safe, but the returns aren't great, and your money is tied up for the
length of the CD.
 Commercial paper is an unsecured, short-term loan issued by a corporation.
Returns are higher than T-bills because of the higher default risk.
 Banker's acceptances (BA) are negotiable time draft for financing transactions
in goods.
 BAs are used frequently in international trade and are generally only available to
individuals through money market funds.
 Eurodollars are U.S. dollar-denominated deposit at banks outside of the United
States.
 The average Eurodollar deposit is very large. The only way for individuals to
invest in this market is indirectly through a money market fund.
 Repurchase agreements (repos) are a form of overnight borrowing backed by
government securities.

The money market is a vibrant market, affecting our everyday lives. As the short-term
market for money, money changes hands in a short time frame and the players in the
market have to be alert to changes, up to date with news and innovative with
strategies and products.

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