C16. Structure of the Wholesale Market Flashcards
what is wholesale market
defined as an institutional market, whereby financial institutions trade financial products among themselves & with other institutional parties.
In Malaysia, financial institutions are institutions subjected to BNM regulation & supervision under the FSA, IFSA and those institutions supervised by the SC under the CMSA.
The transactions usually involve large amounts and are conducted either through voice brokers, direct or through other electronic broking services.
what are some characteristics of wholesale market?
a) Transaction of approved financial products between 2 principals which are Approved Interbank Institutions (AII)35
b) Transaction between an AII and another corporation with the following conditions:
(i) The minimum amount of MYR 50,000
(ii) Negotiable and conducted orally or electronically by dealers
(iii) Oral agreement is deemed as binding to be followed by documentation
c) Any other transaction not meeting the above will be deemed as retail transactions
what are the common feature that all market participants share?
upholding of the integrity of the market to ensure high standards of professionalism & adoption of international best market practices as defined in Code of Conduct for Malaysia’s Wholesale Financial Markets and The FX Global Code.
who are the main participants trading in the wholesale interbank market?
a) Central Bank—BNM, regulator
b) Financial institutions:
(i). Commercial banks
(ii). Islamic banks
(iii). Investment banks
(iv). Selected insurance companies (some are appointed as AIIs, but they are only allowed to participate in interbank trading of FI securities)
* AIIs: approved interbank institutions *
(v). Selected Developmental Financial Institutions (DFIs)
c) Cagamas Berhad
d) The Islamic Corporation for the Development of the Private Sector (ICD)
e) Money brokers
The interbank participants in turn serve the corporate sector as their customers. Who are some of the corporates?
a) Local corporates
b) Multinational companies (MNCs)
c) Other insurance companies
d) Fund management companies
(e) Government agencies
e) Pension funds
Who are Approved Interbank Institutions (AIIs)?
Financial institutions that are appointed by BNM to participate in the interbank market.
The appointment of the AII is the sole prerogative of BNM and the appointment is based on certain conditions as defined by BNM, among others:
a) capital adequacy
b) management strength,
c) dealing &processing capacity
d) robust internal controls
e) good systems & sound reputation.
BNM may also appoint other financial intermediaries to be an AII on a case-by-case basis.
Currently, selected DFIs are SME Bank, Bank Rakyat, BSN and Bank Pembangunan.
what are the privileges of AIIs?
a) Borrow and lend with each other in short-term money including repurchase agreements (repos)
b) Allowed to act as agent for others dealing in financial products
c) Eligible to act or be appointed as Principal Dealer or Authorised Depository Institution (ADI)
d) Eligible to issue Negotiable Instruments of Deposits (NIDs)
Cagamas and the Islamic Corporation for the Development of the Private Sector (ICD) are appointed and allowed to take part in interbank market, but subject to certain privileges.
What are those privileges?
a) Allowed to deal in interbank deposits and repos
b) Allowed to deal in approved financial products with other AIIs
c) Not allowed to act as agent for third party
d) Not allowed to issue Negotiable Instruments of Deposits (NIDs)
a valid transaction is a transaction whereby one of the parties in the transaction of any financial products must be an AII.
what are Negotiable Instruments of Deposits (NIDs)
NIDs are deposit certificates used in the wholesale money market that are regularly purchased and traded by institutional investors and high-net-worth individuals in the stock market.
investors have the choice of depositing their money for a fixed period of time to generate a higher interest rate than those offered by banks for fixed deposits.
can be traded or sold back to the issuing bank prior to maturity with no penalty.
approved financial products traded in the interbank markets between AIIs and between AIIs and other corporations and government agencies are:
a) Ringgit interbank deposits
b) Foreign currency interbank deposits
c) NIDs
d) Bankers Acceptances (BAs)
e) Spot and forward foreignexchange
f) Derivatives products
g) Corporate bonds and sukuk (non-listed)
h) Scriptless Securities Depository System (SSDS) Securities
i) Repurchase agreements (repos)/Sell Buy Back Agreement (SBBA)
j) Securities borrowing and lending (SBL)
Scriptless Securities Depository System (SSDS) Securities include:
a) Malaysian government securities
b) Malaysian treasury bills
c) BNM notes
d) Government investment issues
e) Sukuk Perumahan Kerajaan
f) Non-listed corporate bonds and sukuk
g) Khazanah bonds
h) Cagamas bonds
i) Any other instruments approved by BNM
who are the people that participates in the wholesale interbank market?
dealers & brokers
what are the roles of dealers and brokers?
dealers are employed by the financial institutions whose role is to transact in any or all of the financial products in the market.
Brokers act as the middle-man to facilitate transactions between the market participants but are not an actual party to the transaction.
brokers arrange deals between AIIs, between AIIs and corporate, insurance companies (for bonds only) and between AIIs and other offshore bank counterparties through international money brokers where they are affiliated.
what are the requirements of dealers and brokers?
have to be registered as members of Persatuan Pasaran Kewangan Malaysia (PPKM) /Financial Market Association Malaysia (FMAM).
Under the system of certification process, all dealers and brokers will have to pass the Pasaran Kewangan Malaysia Certification (PKMC) examination (organised jointly by PPKM and AICB) before they are authorised to deal in the interbank market & conduct transactions with corporate customers.
can provisional members negotiate or conclude deal on their own?
provisional members are not allowed to negotiate or conclude deal on their own in the interbank and with customers, however, they may be allowed to help the authorised dealers and brokers as per internal policies & controls of respective institutions.
when should institutions & money brokers submit a full list of their dealers & brokers to the secretariat of the PPKM/FMAM for onward submission to BNM?
twice a year as at 30 June and 31 December each year.
They are also required to inform the secretariat of PPKM/FMAM of any changes in between the reporting periods.
what are the objectives of the Principal Dealers (PDs) System?
to develop the primary and secondary markets of public debt securities, which includes building a stable demand for Government, BNM and BNM
Sukuk Berhad issuance & trading these papers in the secondary market to create liquidity.
how does banking institutions get selected as PDs and i-PDs?
BNM appoints banking institutions based on a set of criteria, including their ability to handle large-volume transactions as measured by their participation in the primary auctions, secondary market trading volumes and their overall risk management capabilities.
what are some of PDs and i-PDs obligations?
a) bidding for all Government and BNM papers in the primary market (i-PDs are required to bid for only Islamic Government and BNM papers)
b) provide 2-way price quotations for benchmark securities under all market conditions to ensure liquidity in the secondary market.
c) PDs are also required to bid for the money market and repo auctions conducted by BNM occasionally
what are some of the responsibilities of conventional PDs?
(i) All PDs must bid at least 8.5% in any primary issue of conventional specified Scriptless Securities Depository System (SSDS) securities, the total bids by all PDs to be at least 102%.
(ii) All PDs must bid at least 6.0% in primary issue of Islamic specified SSDS securities, the total bids by all PDs (both conventional and Islamic) to be at least 100%.
(iii) All PDs must provide two-way price quotations for the current benchmark specified SSDS securities at all time.
what are some of the responsibilities of islamic PDs?
(i) All iPDs must bid at least 4.0% in primary issue of Islamic specified Scriptless Securities Depository System (SSDS), so that total bids by all PDs (conventional and Islamic) to be at least 100%.
(ii) All Islamic PDs to provide 2-way price quotations for the most recent of GII papers on a ‘search and locate’ basis (i.e. on a best effort basis).
what are some of the privileges of PDs?
a) PDs are allowed to net-off their entire holdings of specified SSDS securities from their Eligible Liabilities (EL) base.
b) PDs are eligible to continuously view bid-cover ratio for each securities auction until closing time.
c) PDs can be both lender & borrower under the Securities Borrowing and Lending (SBL) programme.
d) PDs are accorded priority in the event that a PD’s bid is equal to a non-PD’s in the bidding of securities-driven repo with BNM.
e) PDs are allowed to amend customers’ original bids submitted through FAST for selected securities as specified by BNM. The amendment is subject to FAST rules.
(i) PDs must have in place procedures and controls to amend customer bids as such rules are not covered under FAST.
(ii) PDs have to enter into agreement with customers clearly stipulating the terms and conditions.
(iii) PDs are only allowed to change the bidding rate and not the amount.
f) PDs are eligible to participate in half-yearly consultation between BNM and PDs and iPDs.
what are the responsibilities of non-PDs?
non-PDs are not obliged to continuously quote 2-way prices at all times, they are encouraged to do so to enhance market liquidity.
The non-PDs are encouraged to also participate actively in the primary auction through the PDs.
what are the privileges offered to non-PDs?
a) Non-PDs are allowed to act as agent for third party orders
b) Non-PDs are allowed to issue NIDs
c) Non-PDs may be appointed as PDs if they fulfil certain criteria
d) Non-PDs may be appointed as Authorised Depository Institutions