On every Wednesday RBI conducts auction to issue treasury bills.
Aggregation or interconnection risk refers to the risk that a disruption in one market, caused by the default of a major institution or some other event, might cause widespread difficulties throughout the OTC derivatives market or even spread to other financial markets.
Market liquidity risk is one source of interconnection risk. OTC derivatives dealers operate in many different markets at once.
Its a Global financial market for short term borrowing and lending. The money market is where short-term obligations such as treasury bills, commercial paper and banker's acceptances are bought and sold.
Before the enactment of recent amendments to the Bankruptcy Code, there was some question as to whether master swap agreement netting provisions would be legally enforceable in the event of bankruptcy. The U.S. Bankruptcy Code grants a firm in bankruptcy proceedings an "automatic stay" from the claims of its creditors. The automatic stay allows a bankrupt firm to postpone scheduled debt payments and overrides most other contractual obligations pending the resolution of all claims against the firm.
Following are the instruments of money market:-
•Certificate of deposits (1989)
•Commercial papers (1990)
•Forward rate agreement / interest rate swaps (1999)
Since the early 1960s large denomination ($100,000 or more) negotiable certificates of deposit (CDs) have been used by banks and other depository institutions as a source of purchased funds and as a me of managing their liability positions. Large negotiable CDs have also been an important component of the portfolios of money market investors. As of the end of 1992 outstanding large CDs at large banks were $114 billion.
Large CDs are generally divided into four classes based on the type of issuer because the rates paid, risk, and depth of the market vary considerably among the four types. The oldest of the four groups consists of CDs issued by U.S. banks domestically, which are called domestic CDs. Dollar-denominated CDs issued by banks abroad are known as Eurodollar CDs or Euro CDs. CDs issued by U.S. branches of foreign banks are known as Yankee CDs. Finally, CDs issued by savings and loan associations and savings banks are referred to as thrift CDs.
Commercial banks and thrift institutions are not subject to the provisions of the Bankruptcy Code. Instead, bank failure resolution is governed by federal and state banking laws, which gives the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC) (in the case of certain savings and loan institutions) considerable discretion in dealing with failing federally insured depository institutions.
Debt instruments are particular types of securities that require the issuer (the borrower) to pay the holder (the lender) certain fixed dollar amounts at regularly scheduled intervals until a specified time (the maturity date) is reached, regardless of the success or failure of any investment projects for which the borrowed funds are used.
Two methods of federal funds trfer are commonly used. To execute the first type of trfer, the lending institution authorizes the district Reserve Bank to debit its reserve account and to credit the reserve account of the borrowing institution. Fedwire, the Federal Reserve System's wire trfer network, is employed to complete a trfer.
The second method simply involves reclassifying respondent bank demand deposits at correspondent banks as federal funds borrowed. Here, the entire traction takes place on the books of the correspondent.
Primary markets are securities markets in which newly issued securities are offered for sale to buyers. Secondary markets are securities markets in which existing securities that have previously been issued are resold. The initial issuer raises funds only through the primary market.
Managing the credit risk associated with a position in an instrument such as an interest rate swap requires credit evaluation skills of the type commonly associated with bank lending. Thus, as the swaps market evolved into a dealer market where financial intermediaries assumed the role of counterparty to the end users of swap agreements, commercial banks, which have traditionally specialized in credit risk evaluation and have the capital reserves necessary to support credit risk management, came to dominate the market for swaps and other OTC derivatives.
The money market is the market for shorter-term securities, generally those with one year or less remaining to maturity.
The capital market is the market for longer-term securities, generally those with more than one year to maturity.
money loaned by a bank or other institution which is repayable on demand.
A swap counterparty's credit risk exposure is determined by the cost of replacing the agreement in the event of a default. The cost of obtaining a replacement swap is determined by the difference between the All-In-Cost of the old swap and the AIC on a replacement swap. As an illustration, consider the case of a fixed rate payer in a swap with one year left to maturity and a 7 percent AIC. If the floating-rate payer defaults when the prevailing market rate on a one-year replacement swap is 8 percent, the nondefaulting party will be required to pay an extra 1 percent per year on the notional principal to replace the swap. The replacement value of the swap is just the net present value of the difference in interest payments.
Short-term investment pools are a highly specialized group of money market intermediaries that includes money market mutual funds, local government investment pools, and short-term investment funds of bank trust departments. These intermediaries purchase large pools of money market instruments and sell shares in these instruments to investors. In doing so they enable individuals and other small investors to earn the yields available on money market instruments. These pools, which were virtually nonexistent before the mid- 1970s, have grown to be one of the largest financial intermediaries in the United States.
There is significant heterogeneity in the structures of money markets across the Asia-Pacific region. With only a few exceptions, they are smaller relative to the size of their economies than those in the United States and Europe.
Broadly speaking, cash markets for short-term debt securities tend to be the most developed in the region, followed by interbank markets. Repo and foreign exchange (FX) swap markets are, in most economies, the least developed.
Some money markets, including those of Australia and Japan, are closely integrated both with the domestic economy and with international financial markets. Others, such as the Chinese market, are integrated much less. The Australian and New Zealand onshore money markets are among the most internationalised, with significant participation by foreign borrowers and investors; this partly reflects strong demand among foreign investors for securities denominated in higher-yielding currencies. Borrowing in most other markets in the region is dominated by local entities; however, where their participation is not prohibited, foreigners are often important investors.
The buyer of an interest rate collar purchases an interest rate cap while selling a floor indexed to the same interest rate. Borrowers with variable-rate lo buy collars to limit effective borrowing rates to a range of interest rates between some maximum, determined by the cap rate, and a minimum, which is fixed by the floor strike price; hence, the term "collar." Although buying a collar limits a borrower's ability to benefit from a significant decline in market interest rates, it has the advantage of being less expensive than buying a cap alone because the borrower earns premium income from the sale of the floor that offsets the cost of the cap. A zero-cost collar results when the premium earned by selling a floor exactly offsets the cap premium.
The CD equivalent yield makes the quoted yield on a treasury bill more comparable to yield quotations on the other money market instrument that pay interest on a 360-day basis. It does this by taking into consideration the price of the treasury bill rather than its face value.