Topic: Money Market Instruments of Sweden

Subject: Security Analysis & Portfolio Management

School of Business, Public Policy & Social

Entrepreneurship

Ambedkar University Delhi (AUD)

Submitted By:
Neha Nagar
Pankaj Prashad
Srikant Sharma

Overview
In financial market place, the distinction is made between Capital market and
Money market.
Capital Market
Capital market deals with the medium-term and long-term financing in the form of
equity and debt securities which have maturity period of more than one year.
Money Market
Money market provides very short term funding to municipalities, corporations, and
the United States government. Money market instruments are securities issues with
maturity of one year or for less than one year.
In Sweden, the parliament is known as Riksdag and the government that decide
on these rules, laws and regulations and thus have ultimate responsibility for the
financial system. However, responsibility for safeguarding financial stability and
maintaining an effective financial system has been shared out between three
authorities:
1. Riksbank,
2. Swedish National Debt Office and
3. Finansinspektionen.
The Riksbank is responsible for providing liquidity in the system.
Finansinspektionen is responsible for macroprudential policy and the
supervision of the financial companies, while the Swedish National Debt Office,
together with the Government Offices, bears responsibility for more long-term
forms of support. Even if the authorities have different areas of responsibility,
they must cooperate to be able to efficiently promote financial stability.
The Riksbank
The Riksdag has delegated the responsibility for monetary policy to the Riksbank
and stipulated in legislation that the objective of the Riksbanks activities is to
maintain price stability. According to the Sveriges Riksbank Act, the Riksbank shall
also promote a safe and efficient payment system. The Riksbank has a
responsibility for the supply of cash and for supplying a central payment
system. The Riksbank, like other central banks, must therefore be able to manage
financial crises and other serious disruptions in the financial system so that the
payment system can continue to function even in such situations. A stable financial
system is also a prerequisite for the Riksbank to be able to conduct an effective
monetary policy. Promoting a safe and efficient payment system thus has a broad
meaning and is a matter of taking responsibility for promoting the stability of the
financial system. In addition to issuing banknotes and coins and providing a central
payment system, the Riksbank supports the financial system in several other ways.
Under normal conditions, the Riksbank works to prevent financial crises. The
Riksbank does this by identifying, analysing and counteracting risks in the financial
system as a whole, a process known as macroprudential policy. For example, the

Riksbank draws the attention of banks and other participants on the financial
markets to risks and efficiency losses that the Riksbank has identified. However, the
Riksbank has no binding statutory tools that it can use to influence the participants
on the financial markets but uses communication, publicly and in dialogue with the
participants concerned. For example, the Riksbank publishes a Financial Stability
Report twice a year and a Financial Infrastructure Report once a year. In the
Financial Stability Report, the Riksbank makes recommendations to the participants
in the financial system on the measures they should adopt to manage the risks the
Riksbank has identified. In the Financial Infrastructure Report, the Riksbank
publishes its assessments of the risks in and efficiency of the financial
infrastructure, with the intent of thereby encouraging continual improvement. The
Riksbank also presents its views on proposed legislation and regulations from the
EU, the Swedish Government and Finansinspektionen.

The Money Market: for short term maturities

The money market is a collective term for markets for interest bearing assets that
are usually issued with maturities of up to one year. One important task of the
money market is to facilitate liquidity management for the participants in the
economy. For example, banks need to maintain a state of preparedness for future
deposits and payments. The banks therefore invest in various assets depending on
their assessments of future payments. These investments can then easily be
converted into liquid funds when the payments fall due.
Issuers on the money market in Sweden
The central government, the mortgage institutions and the banks are the largest
borrowers on the money market. Central government borrowing takes place
through treasury bills. Other institutions borrow by issuing certificates
such as bank and mortgage certificates.
In 2014, the value of the total stock of money-market instruments rose by just over
SEK 6 billion, amounting to SEK 276 billion at the end of the year. The total stock
of money market instruments issued has fallen by almost half since 2006.
A treasury bill is a debt instrument that represents a short-term claim on the state
that can be bought and sold on the money market. Treasury bills are issued by the
Swedish National debt Office and are used, among other things, to manage
fluctuations in the governments short-term borrowing requirement. The
governments issue of treasury bills has declined in tandem with the fall in the
governments borrowing requirement over the last 10 years.
A certificate is the same kind of debt instrument as a treasury bill but is issued by
mortgage institutions and companies, for example. The mortgage institutions shortterm borrowing in certificates issued in Swedish kronor has substantially decreased
in recent years. The outstanding volume amounted to just over SEK 2 billion in
2014. The level for the banks certificates issued in Swedish kronor stayed relatively

unchanged between 2013 and 2014 and amounted to about SEK 32 billion at yearend.
Investors on the money market in Sweden
Swedish banks, insurance companies and foreign investors are important categories
of investors in the money market (see chart 2). The banks holdings of short-term
fixed-income securities constituted one-fifth of the total money market at the end of
2014, while the insurance companies holdings corresponded to about 10 per cent
of the market. The banks and insurance companies holdings amounted to SEK 59
billion an SEK 26 billion respectively at year-end 2014. Foreign investors accounted
for slightly less than 20 per cent of the markets total volume at year-end 2014.
The category companies, funds and others accounted for about half of the
outstanding stock at the same point in time, corresponding to SeK 141 billion. The
National Pension Funds (AP funds) have invested very little in short-term fixedincome securities over the last 10 years.15 at the end of 2014, their holdings
amounted to about SeK 4 billion, or 1 per cent of the total volume of short-term
fixed income securities.

Contract types for the money market shortest segment

It becomes less practical to trade ordinary securities when maturities on the money
market are reduced to a week or even less. Other contract solutions are used
instead, such as
1. Deposit contracts (deposits)
2. Repurchase agreements (repos)
These standardized contracts offer the participants greater flexibility in
borrowing or investing at the shortest periods of maturity.

Interest Rates for different money market instruments

Footnote:

Source: Thomson Reuters

Source: The Sveriges Riksbank