Money Market and its Instruments Money Market: Money market means market where money or its equivalent

can be traded.Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and bankers acceptances are bought and sold. Benefits and functions of Money Market: Money markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of money market is to provide focal point for RBIs intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives Money Market Futures and Options: Active trading in money market futures and options occurs on number of commodity exchanges. They function in the similar manner like any other futures and options. Money Market Instruments: Investment in money market is done through money market instruments. Money market instrument meets short term requirements of the borrowers and provides liquidity to the lenders. Common Money Market Instruments are as follows: T reasury Bills (T-Bills): Treasury Bills, one of the safest money market instruments, are short term borrowing instruments of the Central Government of the Country issued through the Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not so attractive. It is available both in primary market as well as secondary market. It is a promise to pay a said sum after a specified period. T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturity periods. The Central Government issues T- Bills at a price less than their face value (par value). They are issued with a promise to pay full face value on maturity. So, when the T-Bills mature, the government pays the holder its face value. R epurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. C ommercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period 6 months. It will not be able to liquidate its receivables before 6 months. The company is in need of funds. It can issue commercial papers in form of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers easily. The company is able to liquidate its receivables immediately and the buyer is able to earn interest of Rs 10K over a period of 6 month C ertificate of Deposit: It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally

ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also. The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk. B ankers Acceptance: It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyers promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The person drawing the bill must have a good credit rating otherwise the Bankers Acceptance will not be tradable. The most common term for these instruments is 90 days. However, they can very from 30 days to180 days. An individual player cannot invest in majority of the Money Market Instruments, hence for retail market, money market instruments are repackaged into Money Market Funds. A money market fund is an investment fund that invests in low risk and low return bucket of securities viz money market instruments. * India's Financial System 1. Overview One of the major economic developments of this decade has been the recent takeoff of India, with growth rates averaging in excess of 8% for the last four years, a stock market that has risen over three-fold in as many years with a rising inflow of foreign investment. In 2006, total equity issuance reached $19.2bn in India, up 22 per cent. Merger and acquisition volume was a record $27.8bn, up 38 per cent, driven by a 371 per cent increase in outbound acquisitions exceeding for the first time inbound deal volumes. Debt issuance reached an all-time high of $13.7bn, up 28 per cent from a year earlier. Indian companies were also among the world's most active issuers of depositary receipts in the first half of 2006, accounting for one in three new issues globally, according to the Bank of New York. The questions and challenges that India faces in the first decade of the new millennium are therefore fundamentally different from those that it has wrestled with for decades after independence. Liberalization and globalization have breathed new life into the foreign exchange markets while simultaneously besetting them with new challenges. Commodity trading, particularly trade in commodity futures, have practically started from scratch to attain scale and attention. The banking industry has moved from an era of rigid controls and government interference to a more marketgoverned system. New private banks have made their presence felt in a very strong way and several foreign banks have entered the country. Over the years, microfinance has emerged as an important element of the Indian financial system increasing its outreach and providing much-needed financial services to millions of poor Indian households. Capital Markets Indian capital markets have been one of the best performing markets in the world in the last few years. Fuelled by strong economic growth and a large inflow of foreign institutional investors (FIIs) as well as the development of the domestic mutual funds industry, the Indian stock market indices have delivered truly explosive growth during the last 5 years rising over 3 times during the period. However, it would be a mistake to think that growth has happened only in valuation. During this period Indian capital markets have exhibited explosive growth in almost every respect. While the two major Indian exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) ranked 16th and 17th respectively among exchanges around the world in terms of market capitalization. The former has close to 5,000 stocks listed, of which about half actually trade. In terms of concentration (i.e. the share of top 5% of stocks in total trading) they are not out of line with other major exchanges, though in terms of turnover velocity, BSE is the lowest among the top 20 exchanges. The regional stock exchanges in India, numbering 20, have recently been relatively speaking devoid of action. In March 2006, the BSE market capitalization accounted for about 86% of Indian GDP while that of the NSE accounted for about 80%. In terms of risk and return, while the Indian markets have been more volatile than those in industrialized nations, the returns have been largely commensurate. Table 3.4 shows the growth in the number of players in the different segments of the Indian capital

markets since 1993. In the new century, a huge derivative market has been created from scratch, foreign institutional investors have almost doubled in number, venture capital funds have made their appearance and exhibited sound growth, and the number of portfolio managers has risen over three-fold. The entire industry has therefore gone through a major transformation during the period. During 2005-06, Indian corporations mobilized over Rs. 1237 trillion ($ 30.93 trillion) from the markets (which accounted for close to 4% of the GDP at factor cost in 23 current prices) of which close to 78% was debt, all of which was privately placed (see Table 3.5). Of equity issues amounting to over Rs. 273 trillion ($ 6.825 trillion), about 40% were IPOs and the remainder seasoned offerings. Close to 25% of these latter were rights offerings. Qualitatively, these proportions have remained more or less stable over the years. The liberalization and subsequent growth of the Mutual Funds industry, for decades monopolized by the state-owned Unit Trust of India (UTI), since the turn of the century has been one of major stories of Indian capital markets (see table 3.6). From the turn of the century, assets under management have more than tripled, in pace with and fuelling the rise of the markets.The biggest development in the Indian capital markets in recent years is undoubtedly the introduction of derivatives futures and options both on indexes as well as individual stocks with turnovers growing 50 to 70 times in the past 5 years and the derivatives segments quickly becoming a crucial part of the Indian capital markets (see table 3.7).The rapid growth in Indian capital markets, and the spread of equity culture has doubtlessly strained its infrastructure and regulatory resources.. .Some of the measures taken in the primary market include: Entry norms for capital issues were tightened Disclosure requirements were improved Regulations were framed and code of conduct laid down for merchant bankers, underwriters, mutual funds, bankers to the issue and other intermediaries In relation to the secondary market too, several changes were introduced: Capital adequacy and prudential regulations were introduced for brokers, sub-brokers and other intermediaries Dematerialization of scrips was initiated with the creation of a legislative framework and the setting up of the first depository On-line trading was introduced at all stock exchanges. Margining system was rigorously enforced. 3.1 Institutional Features The transactions in secondary markets like NSE and BSE go through clearing at clearing corporations (National Securities Clearing Corporation Limited (NSCCL) for NSE trades, for instance) where determination of funds and securities obligations of the trading members and settlement of the latter take place. All the securities are being traded and settled under T+2 rolling settlement. Dematerialized, trading of securities, i.e. paper-less trading using electronic accounts, now accounts for virtually all equity transactions. 3.2 Debt Market he debt market in India has remained predominantly a wholesale market. During 2005-2006, the government and corporate sector collectively has mobilized Rs 2.6 trillion from the primary debt market. Of which, 69.6% were raised by government and the balance by the corporate sector. But in terms of turnover in the secondary market, government securities dominate. The secondary market for corporate bonds is practically non-existent 3.3 Derivatives Market The derivatives segment in India is not very old. In the year 2000, NSE started its operation in derivatives contracts and introduced futures contracts on the Nifty index. 8 Intermediaries in government securities.27 The total exchange traded derivatives volume witnessed an increase (88.14%) to over Rs 48 trillion ($ 1.2 trillion) during 200506 as against Rs 25.6 trillion ($ 640 billion) during the preceding year. In terms of products, Stock and Index Futures contracts together account for 89 % of the total turnover in derivatives Understanding Trading and Settlement of Equities

Stock market is a trading platform which provides an opportunity to buyers and sellers of securities to do transactions. As of now there are 23 recognised stock exchanges in India and 24th is likely to get functional soon. However the majority of transactions in securities happen only on the National Stock Exchange. The Bombay stock Exchange is the second largest contributor in the overall pie of total transactions. However it's contribution is restricted to 5 to 7 percent only. There are three types of instruments that are traded on National Stock Exchange namely equities, derivatives and debt instruments. This article attempts to explain the procedure involved in trading and settlement of equities. Before understanding the procedure of trading and settlement, it is important to have an overview of changes that have taken place in Indian securities market in last ten years. Three most noticeable changes which have taken place are 1) Dematerialisation , 2) Introduction of screen based trading and 3) Shortening of trading and settlement cycles. The Depositories Act was passed by the parliament in 1995 and this paved the way for conversion of physical securities into electronic. These two factors combined together helped in reducing the trading and settlement cycle in Indian securities market which got reduced from as long as 22 days to 2 days currently. Presently in India, stock exchanges follow T+2 days settlement cycle. Under this system, trading happens on every business day, excluding Saturday, Sunday and exchange notified holidays. The trading schedule is between 10:00 a.m. in the morning to 3:30 p.m. in the evening. During this period , shares of the companies listed on a particular stock exchange can be bought and sold. The SEBI has made it mandatory that only brokers and sub-brokers registered with it can buy and sell shares in the stock exchange. A person desirous of buying or selling shares on the stock market needs to get himself registered with one of these brokers / sub-brokers. There is a provision for signing of broker/sub-broker - client agreement form. Trading of securities happen on the first day while settlement of the same happens two days after. This means that a security bought on Monday will be received by the client earliest on Wednesday which is called pay out day by the exchange. Settlement of securities is done by the clearing corporation of the exchange. Settlement of funds is done by a panel of banks registered with the exchange. Clearing corporation identifies payable/ receivable position of brokers based on which obligation report for brokers are created. On T+2 days all the brokers who has transacted two days before receive shares or give shares to the clearing corporation of exchange. This all is done through automated set up Depository which involves NSDL and CDSL. Trading system on NSE The NSE provides a facility for screen based trading with order matching facility. The members are connected from their respective offices at dispersed locations to the main system at the NSE premises through a high- speed efficient satellite telecommunication network. The trading system is an order driven, automated order matching system which does not reveal the identity of parties to an order or a trade. This helps orders whether large or small to be placed without the members being disadvantaged by disclosure of their identity. Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not find a match it remains in the system and is displayed to the whole market, till a fresh order which matches, comes in or the earlier order is cancelled or modified. The trading system provides tremendous flexibility to the users in terms of the type of orders that can be placed on the system. Several time related, price related or volume related conditions can easily be placed on an order. The trading system also provides

complete on-line market information through various inquiry facilities Users of the NSE trading system The trading system recognizes three types of users - Trader, Privileged and Inquiry. Trading Members can have all the three user types whereas Participants are allowed privileged and inquiry users only. The user-id of a trader gives access for entering orders or trades on the trading system. The privileged user has the exclusive right to set up counter party exposure limits. The Inquiry user can only view the market information and set up the market watch screen but cannot enter orders or trade or set up exposure limits. Type of the market The trades in the NSE trading system can be executed in the continuos or the negotiated market. In the continuous market, orders entered by the trading members are matched by the trading system. For each order entering the trading system, the system scans for a probable match in the order books. On finding a match, a trade takes place. In case, the order does not find a suitable counter order in the order books, it is added to the order books and is called a passive order. This could later match with any future order entering the order book and result into a trade. This future order, which results in matching of an existing order is called the active order. Settlement on NSE Primary responsibility of settling trades concluded in the WDM segment rests directly with the participants and the exchange monitors the settlements. Trades are settled gross, i.e. on trade for trade basis directly between the constituents/participants to the trade and not through any Clearing House mechanism. Thus, each transaction is settled individually and netting of transactions is not allowed. Settlement is on a rolling basis, i.e. there is no account period settlement. Each order has a unique settlement date specified upfront at the time of order entry and used as a matching parameter. It is mandatory for trades to be settled on the predefined settlement date. The Exchange currently allows settlement periods ranging from same day (T+0) settlement to a maximum of six working days (T+5).On the scheduled settlement date, the Exchange provides data/information to the respective member/participant regarding trades to be settled on that day with details like security, counterparty and consideration. Users of the NSE trading system:The trading system recognizes three types of users - Trader, Privileged and Inquiry. Trading Members can have all the three user types whereas Participants are allowed privileged and inquiry users only. The user-id of a trader gives access for entering orders or trades on the trading system. The privileged user has the exclusive right to set up counter party exposure limits. The Inquiry user can only view the market information and set up the market watch screen but cannot enter orders or trade or set up exposure limits. Settlement on NSE Primary responsibility of settling trades concluded in the WDM segment rests directly with the participants and the exchange monitors the settlements. Trades are settled gross, i.e. on trade for trade basis directly between the constituents/participants to the trade and not through any Clearing House mechanism. Thus, each transaction is settled individually and netting of transactions is not allowed. Settlement is on a rolling basis, i.e. there is no account period settlement. Each order has a unique settlement date specified upfront at the time of order entry and used as a matching parameter. It is mandatory for trades to be settled on the predefined settlement date. The Exchange currently allows settlement periods ranging from same day (T+0) settlement to a maximum of six working days (T+5).On the scheduled settlement date, the Exchange provides data/information to the respective member/participant regarding trades to be settled on that day with details like security, counterparty and consideration.