Term Paper ON: The Role of money market in Bangladesh

Term Paper ON:

The Role of money market in Bangladesh

(This term paper Is Submitted For the Partial Fulfillment of the Degree of Bachelor of Business of Administration with a Major in Finance

Submitted To:
Mrs Tanbina Tanasum Lecturer Faculty of Business Studies Premier University

Prepared By
Name: Student ID: Section: Semester: Batch no: Program: BBA a!or in finance Su"mission Date: Decem"er #1$ #%1&

PR' I'R (NI)'RSIT* +,ITTA-.N-

Chapter: 1

&

Introduction
1.1 Objective of the report
The specific objectives of this study are: To give an overall idea about the money mar et!its structures" functions" importance" etc# To identify the current situations of our money mar et of Bangladesh# To compare the relative conditions of Bangladesh money mar et to other countries of the $orld# To sort out the problems associated $ith our money l mar et# To suggest some practicable solutions to these problems#

1.2 Scope of the report

This report mainly talks about the participation of Citibank, N.A. in the Money Market of Bangladesh This report has been prepared using utmost caution, but the hugeness of the market is very well known. The report can be a primary reading for anyone who wants to know about l Money Market in the conte t of Bangladesh. !nder no circumstances can this report be the sole material for anyone who wants to "now the ins and outs of the market or work with the topic.

1.3 Methodology
# have prepared the report using various sources which include face to face interview, BB" guideline, various websites, newspaper articles, research papers and etc. # did not attend any seminar regarding the topic. My own research and thirst for knowledge has been my primary source of understanding.
Secondary data and information $ere used in preparing this seminar paper" and these $ere collected through team$or by adopting the follo$ing processes: / Visiting in person, the following organizations and respective key personnel: %ha a Stoc &'change (%S&) %ha a *hamber of *ommerce (%**) Bangladesh Ban (BB)

Monetary Policy %epartment (MP%)" BB

1.4 i!itation" of the report

This report contains the basic overview of Money Market and does not cover the whole banking industry of Bangladesh. As # have not attended any seminar on Money Market and page limitation is to be honored, the absolute details are absent from this report.

Chapter: 2

MARKET

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

TYPES OF MARKET
%n a routine basis we all work through different markets for different purposes. &ere are the brief e planation 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 e change of raw materials takes place is called the (oods ) Commodity Market. *e can call it a barter system as well for +ust understanding.

Fi!a!"ia# Market

A ,inancial Market is a place where buying and selling of ,inancial Assets takes place. Main e amples of these markets are stocks and bond market under the umbrella of Capital Market.

".

Forei$! Mo!ey Market

*here trading of any currency outside the regulations governing domestic markets in that currency takes place is called ,oreign Money Market. #ndividuals 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.

Forei$! E%"ha!$e Market

2

,oreign - change Market is a place where financial paper with a relatively short maturity is traded. #n ,oreign - change 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 ,oreign - change Market. #t is very clear that commercial banks .make a market/ in foreign e change market. e3

&eri'ati'e Market

#t is the part of the ,oreign - change Market. #t has the notional amount with speculation. 0erivatives are the financial instruments whose values are derived from the value of something else 1known as the underlying2. 0erivatives 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' ,orward %ption 3wap

(.

Mo!ey Market

The money market is a section of the fi ed income market. #t is a part of the global financial market, and is used for short$term cash solutions, often by governments and large institutions. #t is considered to be low risk 1safe2 in relation to other options such as the stock market. More realistically we can easily understand that the money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Money market trades in short$term financial instruments commonly called 4paper.4 This contrasts with the capital market for longer$term funding, which is supplied by bonds and e5uity. 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. #f 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 1rising prices2.

Mo!ey Market )!str*me!ts:

#rea"ury $ill": The Treasury bills are short$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' 6$Months' 7$Months' 89$Months' Certificate of %epo"it: The certificates of deposit are basically time deposits that Are issued "y the commercial "anks 5ith maturity 6eriods ranging from & months to fi7e years3 The return on the certificate of de6osit is higher than the Treasury Bills "ecause it assumes a higher le7el of risk3 Co!!ercial &aper: Commercial :aper is short$term loan that is issued by a Corporation use for financing accounts receivable and inventories. Commercial :apers have higher denominations as compared to the Treasury Bills and the Certificate of 0eposit. The maturity periods of Commercial :apers are a ma imum of ; months. They are very safe since the financial situation of the corporation can be anticipated over a few months. 'cceptance: #t is a short$term credit investment. #t is guaranteed by a bank to make payments. The Banker<s Acceptance is traded in the 3econdary market. The banker<s acceptance is mostly used to finance e ports, 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 =epo 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. &ence the =epos have terms ranging from 8 night to 6> days. They are very safe due government backing.

TREAS+RY OPERAT)O,S ), -A,KS:.

13

Reser'e Ma!a$eme!t / )!'estme!t:

#t involves 1i2 Meeting C== ) 3?= obligations 1ii2 &aving an appropriate mi of investment portfolio to optimi@e yield and duration. 0uration is the weighted average Alife+ of a debt instrument over which investment in that instrument is recouped. 0uration Analysis is used as a tool to monitor the price sensitivity of an investment instrument to interest rate changes. 9. ?i5uidity B ,unds Management'

#t involves 1i2 Analysis of ma+or cash flows arising out of asset$liability transactions 1ii2 :roviding a balanced and well$diversified liability base to fund the various assets in the balance sheet of the bank 1iii2 :roviding policy inputs to strategic planning group of the bank on funding mi 1currency, tenor B cost2 and yield e pected in credit and investment.

6.

Asset ?iability Management B Term Money'

A?M calls for determining the optimal si@e and growth rate of the balance sheet and also prices the Assets and ?iabilities in accordance with prescribed guidelines. 3uccessive reduction in C== rates and A?M practices by banks increase the demand for funds for tenor of above 8C days 1Term Money2 to match duration of their assets. D. =isk Management E

#ntegrated 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 B liability mismatches. The market risk for assets can arise from 1i2 !nfavorable change in interest rates 1ii2 #ncreasing levels of disintermediation 1iii2 3ecuriti@ation of assets 1iv2 -mergence of credit derivatives etc.

13

Transfer :ricing'

An integrated Treasury unit has an idea of the bank +s overall funding needs as well as direct access to various markets 1like money market, capital market, fore market, credit market2. &ence, 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 #nterest =ate 3wap 1#=32 and other =upee based ) cross$currency derivative products for hedging Bank +s own e posures and also sell such products to customers)other banks 7. Capital Ade5uacy' This function focuses on 5uality of assets, with =eturn on Assets 1=oA2 being a key criterion for measuring the efficiency of deployed funds. An integrated treasury is a ma+or profit centre. #t has its own : B ? measurement. #t undertakes e posures through proprietary trading 1deals done to make profits out of movements in market interest ) e change rates2 that may not be re5uired for general banking.

+ha6ter: &

Overvie( of the Organi)ation

Citi is the leading global financial services company with some 9>> million customer accounts and does business in more than 8D> countries. Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. %n Fune 87, 8G89, with H9 million of capital, Citibank of New Iork opened for business in New Iork Citi. Through many different leaders and economic environments over the course its rich history, Citibank continues to grow and prosper

Mi""ion State!ent
Mission statement of Citi is .*e are your global bankJ we are Citi/.

&rinciple"
The four key principles that guide Citi to perform its mission are' Common :urpose$ %ne team, with one goal, serving clients and stakeholders. =esponsible ,inance$ Conduct that is transparent, prudent and dependable. #ngenuity$ -nhancing the clientsK lives through innovation that harnesses the breadth and depth of the information, global network and world class products. ?eadership$ Talented people with the best training who thrive in a diverse meritocracy that demands e cellence, initiative and courage.

&roduct" and Service"

#ran"action $an*ing Cash Management 3ervices :ayable At :ar -lectronic ,und Transfer :ay %rders And 0emand 0rafts Complementary Cash 0elivery And Che5ue :ick !p

 Anywhere, Anytime Account Access +oreign ,-change Service" #nward And %utward =emittances Multi Currency Account &edging :roducts ,oreign Currency 0raft ,oreign Currency Cash And Travelers Che5ue ,-port Service" - port Bill Collection 3ervices - port :acking Credit 1 :re 3hipment ,inance2 - port Bills Negotiation 1:ost 3hipment ,inance2 - port ?C Advising - port ?C Confirmation 3ervices - port 0ocument 3crutiny 3ervices I!port Service" #mport ?etter %f Credit #mport :ayment 3ervices 3upplier And Buyer Credit Bank (uarantee 0omestic Trade .or*ing Capital 'nd #er! oan 3ecured Term ?oan Luick ?oan %verdrafts 0rop ?ine %verdraft Non ,und Based ?ines 3hort Term ,inancing %ptions

Chapter: 4

Call Money Mar*et

Origin
There are thousands of financial institutions in the world. These organi@ations need to have a minimum fund in their accounts in order to continue their functions and to secure their participations. The call money market offers a means of securing finance for credit needs. The call money market is a mechanism that allows large financial institutions, such as banks, mutual funds and corporations to borrow and lend money that can be used for investment needs. The Call Money Market was named from the meaning of answering at once when calling 1Called it2. The necessity of the market rose because of the e perience of the financial panic in 8;>[Link] was a new introduction into the American financial market in the 8;M>s, and the first money market fund was established the following year. The creator of this new fund was Bruce Bent, who was then president of the =eserve ,und #nc. Call Money market funds gained popularity 5uickly because of their accessibility for small businesses who did not always have the funds to make large investments. The funds located through the money market can be utili@ed to provide financing for the purchase of securities that can be added to the portfolio of the investment firm, or as a resource that will cover the margin accounts of the firmKs clients. The loans in the call money market are very short, usually lasting no longer than a week and are often used to help banks meet reserve re5uirements. The rate at which funds are borrowed in this market is called Call Money =ate. The interbank interest rates and interest rates in the traditional market are interconnected. #f banks are short of li5uidity they lend less to the market and cause interest rates to rise. *hen Central bank provides funds to the discount market, less attractive terms are offered by banks. Thus they may choose other markets to invest and will cause the drop in interest rates. Call Money =ates are generally slightly higher and more volatile than interest rates in the traditional market. !nlike other instruments NtradedK in the money markets, interbank call money

transactions are not negotiable, that is they do not have a secondary market. A lending bank which wishes to retrieve its funds simply withdraws the deposit from the bank to which it was lent.

Major characteri"tic"
The ma+or characteristics of this market are' The transfer of immediately available fundsJ 3hort time hori@onsJ !nsecured transfers.

&articipant"
Call Money market participants include mainly commercial banks, mutual funds, credit institutions and other non bank financial institutions. !ltimate lenders in the call money market are financial institutions that have financial surplus which they want to lend, while ultimate borrowers are financial institutions with a financial deficit which need to borrow.

+unction"
Call Money Market is an important part of the economy. #t plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for ad+usting li5uidity to the banks, business corporations, non$banking financial institutions 1NB,s2 and other financial institutions along with investors. The ma+or functions of call money market are given below'$ To maintain monetary e5uilibrium. #t means to keep a balance between the demand for and supply of money for short term monetary transactions. To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.

 To provide help to Trade and #ndustry. Money market provides ade5uate finance to trade and industry. 3imilarly it also provides facility of discounting bills of e change for trade and industry. To help in implementing Monetary :olicy. #t provides a mechanism for an effective implementation of the monetary policy.

/i"*"
The ma+or risk regarding Call Money Market is the absence of collateral. To keep up the speed of the transfer and the costs of transfer down, the interbank market transfers are made unsecured, that is they are not backed by any collateral and donKt have much protection against default by the borrowing bank. Again, the call money rates are usually higher more volatile than the traditional market rates. oney arket in the +onte9t of Bangladesh

+all money market in Bangladesh 5as "asically de7elo6ed under com6etiti7e en7ironment of the financial market3 The market e96erienced a tremendous gro5th since 1:8%;s3 In 1:::$ a total of a"out 2%%% "ranches of the scheduled "anks 6ro7ided short<term credit throughout the country3 The rates of interest are determined "y the indi7idual "anks and as such the market is =uite com6etiti7e3 'ach "ank maintains its li=uidity and su66ly of fund is arranged throughout the country 5ith the hel6 of an interconnected net5ork of "ranches3 BAN->AD'S, Bank as central "ank of the country e9ercises its role in this market through the use of instruments such as "ank rate$ o6en market o6erations etc3

&articipant" of the !ar*et

3tructurally, call money market in Bangladesh is composed of a number of institutions which include 1up to 8;;;2 the Bangladesh Bank at the ape , D natioanlised commercial banks, 9M domestic and 89 foreign private

commercial banks, ; specialised 1development2 banks, 9D N ,#NANC#A? #N3T#T!T#%Ns, a number of non$scheduled banks.

%N$BAN"

Scope
A good num"er of 6layers from the "anking as 5ell as the non<"ank financial sector acti7ely 6artici6ate in the +all money market on a regular "asis3 Initially$ this market de7elo6ed as an inter<"ank market 5here the "anks in tem6orary deficit of cash resorted to "orro5ing from other "anks ha7ing sur6lus funds3 As "anks 5ere in the 6u"lic sector until the "eginning of the 1:8%s$ the Bangladesh Bank 6ro7ided them 5ith li"eral refinance facilities at confessional rates3 There 5as hardly any need for raising funds from the call money market during this 6eriod3 oreo7er$ administered interest rate regime$ easy a7aila"ility of "orro5ing from central "ank and its directi7e to 6ro7ide credit to 6riority sectors 5ere the ma!or im6ediments in de7elo6ment of a call money market in the country3 Not5ithstanding the fact$ "anks 6artici6ated in a limited scale in the call money market mainly to 5i6e out the tem6orary mismatch in their assets and lia"ilities3 A turning 6oint 5as the denationali?ation of (ttara and Pu"ali Bank in 1:8& and 1:80 res6ecti7ely and the go7ernment decision to allo5 6ri7ate "anks to o6erate in the country3 @ormation of 6ri7ate "anks during the 1:8%s 6ro7ided ne5 o66ortunities to de7elo6 this segment of money market3 In 1:81$ t5o in7estment com6anies and Ain one leasing com6any 5ere allo5ed to 6artici6ate in the call money market3 At 6resent$ all "anks including s6eciali?ed ones and non<"ank financial institutions are allo5ed to 6artici6ate in this market3

$a"ic feature"
The call money market in Bangladesh is not strongly organi@ed and in terms of transaction is not very large. ,rom the very beginning all the scheduled commercial banks and the two speciali@ed banks were involved in this market. #n 8;GC two investment companies 1Bangladesh Bank, 8;GC$G72 and in 8;G;$;> one leasing company were allowed to participate in this market to widen its scope of operation 1Bangladesh Bank, 8;GG$G;2.

At present all the banks and financial institutions are participating in this market. 0espite this, the volume of transaction, the market did not e pand significantly.

The transactions of call money market are mainly 0haka based. 3ince, the head offices of all banks and financial institutions are located in 0haka, the branches of the banks and financial institutions from all over the country remit their e cess funds to their respective head offices at 0haka for investment. The head offices, after meeting their usual li5uidity re5uirement invest the surplus funds in the call money market. As there is no brokerage house or intermediary organi@ation, the transactions in call money market usually take place on the basis of bilateral negotiations. 3ince call loans are made on clean basis that is without any security lending institutions)banks are always cautious in the selection of borrowing banks)institutions.

,oreign banks are the main source of li5uidity in the call money market. Costs of funds for foreign banks are very low as compared to the indigenous banks and as such they can hold a substantial amount of e cess li5uidity for lending in the call money market. #n case of borrowing they are also at a very advantageous situation as compared to the local banks. ,oreign banks have in their portfolio lower amount of non$ performing loans compared to domestic private banks and nationalised banks. ?ocal private banks appear to be the regular borrowers in the call money market. #nformation systems of banks in Bangladesh are outdated. Market players therefore, do not know much about the demand for and supply of fund. Banks and financial institutions having surplus funds take advantage of the market imperfection of domestic deficit banks.

Bangladesh Bank has circulated some guidelines to the lending and borrowing banks and financial institutions regarding operations in the call money market. Although it is not compulsory for banks to participate in the call market, they are advised to provide call loans considering li5uidity, solvency and sources of repayment of borrowings by the borrowing institutions. The demand for and supply of funds in the call market remains volatile throughout the year with some occasional turbulence. The transactions and the rate of interest are largely linked with government treasury bill market, seasonality in demand for bank loans, central bank<s monetary policy, variation in discount rate, open market operations, changes in statutory reserve re5uirements, e cess li5uidity position of the banks etc. The transactions and the variations of the rate of interest in call money market normally remain high during November to April and as such the rate of interest during this period also goes up. The underdeveloped nature of the inter$bank market in Bangladesh is evident from the large spread between the highest and lowest rates in the call money market. The lowest call money market rate always remained higher than the Bank =ate during the period from 3eptember 8;GC to Fune 8;;9. %ne notable feature of the call money market is that the spread between lowest and highest call money market rate has been larger during the reform period. #t is because of the fact that with the implementation of ,3=:, the need for funds of banks other than the Bangladesh Bank increased with abolition of easy refinance facility from the central bank. Thereafter, the lowest inter$bank call money rate remained lower than the bank rate. The inter$bank call money rate varied with rise in e cess cash reserves of banks. - perience suggests that when there was sufficient e cess reserves with

banks, the inter$bank rate came down but the rate denoted increase with the accentuation of short$ fall in reserves position of banks. Compared to nationalised banks and domestic private banks, the foreign banks in general, and #slami banks in particular, held higher e cess reserves with them. ,oreign banks are the ma+or sources of supplier of funds to the inter$ bank market in recent years. Before the introduction of financial sector reforms, foreign banks preferred preserving e cess li5uidity to lending to inter$bank market partly because of lack of confidence and partly because of instructions from their head office. #n addition, the information gap between borrowing and lending banks also discouraged transactions in the inter$bank market. The rate of interest in the inter$bank call money market reached a ma imum of 98O in November 8;;M. 0uring the first half of 8;;G, there was a tremendous pressure in the call money market of the country. The rate of interest reached 9MO in ,ebruary 8;;G. A large number of domestic private and foreign banks borrowed at the rates of 9>O and above up to April 8;;G. 0uring 8;;M$;G, Bangladesh Bank followed a restrictive monetary policy. #n view of e pansion of domestic credit, bank rate was raised to GO from [Link] in November 8;;M and tightened the discount window for the banks. The government also borrowed substantial amount of funds from the banking sector to meet its budgetary shortfall in the second half of 8;;M$;G. Total outstanding treasury bill holding by the scheduled banks which was only Tk [Link] billion at the end of Fune 8;;M. reached the level of Tk 9C.88 billion at the end of Fanuary 8;;G, and further to Tk 9M.;D billion at the end of Fune 8;;G. &owever, during 8;;G$;;, the pressure in call money market eased substantially. The rates of interest amidst fluctuations reached a ma imum of 8MO during 8;;G$;;. 0ue to prolonged and devastating floods at the beginning of 8;;G$;;, the country<s monetary policy was rela ed to enable banks to

provide necessary credit for early recovery of economic activities. -asy access of the scheduled banks to the discount window of the Bangladesh Bank helped them holding li5uidity position at a comfortable level. The banks borrowed an amount of Tk ;.8C billion from the Bangladesh Bank during 8;;G$;; as compared to a much lower amount of Tk 8.86 billion during 8;;M$;G. Moreover, e cess reserve position of the banks increased by Tk D.;7 billion during 8;;G$;; as compared to an increase of Tk ;.MG billion in the preceding year. As a result, the call money market witnessed a lower pressure during 8;;G$;;.

/ecent Change"
#n recent years, call money rate rose abnormally due to high demand for cash by some banks and financial institutions. #n the beginning of 9>>C, the interest rate in the call money market has suddenly +umped to abnormal level reflecting high demand for cash of the banks and financial institutions. The weighted average interest rate for borrowing of call money market stood at 69 percent and the highest rate was nearly 76 per cent during that period. The rate reached a new high of 8G> percent at the end of 9>88beating the old record of 8MC percent. There were many factors which contributed to the increase in interest rate in such unusual way. 3ome of the reasons are' weak performance of the banks in case of deposit mobili@ation, loan disbursement, investment etcJ availability of fundJ greater participation of NB,#sJ and application of central bankKs monetary policy. Moreover, the cash demand for financially weak banks and NB,#s played an important role for pulling up the interest rate by others. 3ome well recogni@ed, financially sound banks played as intermediaries in the money market and also helped to increase the interest rate abnormally high. 3easonal cash demand by the public also influenced the banks to borrow money from call money market.

I"la!ic Interban* +und Mar*et

The central bank has introduced a new call money market, #slamic #nterbank ,und Market 1##,M2, for shariah$based banks and financial institutions at the end of 9>[Link] Bank 1BB2 laid out a set of rules for it. The decision to introduce the ##,M has been taken to discipline the li5uidity management of all shariah$based banks, financial institutions and #slamic banking branches of the traditional financial institutions and banks operating in Bangladesh. #t said the transactions would be based on profit instead of interest. According to the rules, if a bank has e cess funds, it will invest the amount in the ##,M for a day, allowing another cash$starved #slamic bank to borrow for the same period.

0o( Citiban*1 2.'. en"ure" it" "ecured participation in the Call Money Mar*et of $anglade"h
Citibank, N.A. is one of the participants in the Call Money Market of Bangladesh. #t borrows and lend at call in the money market to maintain the cash reserve ratio. #f the bank is negatively gapped, the Treasury can fund the position of the bank by borrowing term money for a tenor matching the gap. Alternatively, the Treasury can e pose itself to the day to day money market movements and cover the gap on a daily basis. Also, even if the bank is s5uare or surplus, the Treasury may further borrow longer term money in e pectation of higher overnight rates and lend it for shorter tenors. 3imilarly, if the bank is positively gapped, the Treasury can lend when money is dear. Apart from these, the treasury can borrow or lend on

its own and s5uare the position possibly at a better rate. The process flow and programs that Citibank, N.A. follows to ensure its secured participation in the market is discussed in this chapter.

Cu"to!er $a"e:
The ma+or participants in this market are as follows' 2ationali)ed $an*": Nationali@ed banks like 3onali Bank, Agrani Bank, Fanata Bank, are the ma+or participants in the market given the si@e of their deposit base and conse5uently their reserve re5uirements. 0eal settlements are done through BB" che5ues for these banks. +oreign $an*": The foreign banks like 3tandard Chartered Bank, *oori Bank are also the participants for which deal settlements are done through BB che5ues as well. &rivate $an*": There are a number of private banks, like Mutual Trust bank, :rime Bank, 3outheast Bank etc, that are operating actively in the market. Although some of them don not have their credit ratings up to the mark, but as a whole their contribution to the li5uidity of the money market is significant. ,or these banks, deal settlements are done through BB che5ues. 2$+I: 3ome Non Bank ,inancial #nstitutions like #CB and others are also the participants of the market

+unding and i3uidity Manage!ent i!it":

Mar*et 'cce"" /eport 4M'/5: ?i5uidity risk is created when the tenor of assets e ceeds the tenor of liabilities so that there is the risk that maturing liabilities can not be rolled over in order to fund the portfolio and represent the borrowings from the markets 1 internal or e ternal2 re5uired to replace the maturing liabilities.

?i5uidity risk may e ist independently of price risk. Market Access =eports 1MA=2 are to be monitored daily and currency wise against the li5uidity limits. Intere"t /ate ,-po"ure 4I/,5: #nterest rate e posure measures the potential pre$ta earning impact, over a specified reporting period, for the accrual positions, from a defined change in the yield curve. #t is a forward looking measure, analogous to ,actor 3ensitivity on the trading portfolios. #otal /eturn: Total return is made up of the change$in$Palue$at$Close, Accrued =evenue and (ains)?osses on Asset 3ales or ?iability Cancellations. Palue$at$Close is the economic or NfairK value of a position, analogous to the Nmark$to$marketK on a trading portfolio. &lace!ent i!it: The ma imum 5uantum of placement that may be made with a specific counterparty for a specific tenor. ,cono!ic 6alue Sen"itivity 4,6S5: -conomic Palue 3ensitivity 1-P32 measures the potential change in economic value of the accruals portfolio for a pre$defined change in interest rates. The pre$ defined changes may either be NstandardK shifts of NstressK shifts. Changes in Neconomic valueK are defined as either change in market value, or change in future financial income on a present value basis.

+unction" of #rea"ury:
Money Mar*et place!ent7 borro(ing: The process that Treasury follows in closing placement) borrowing transactions in the Money Market is discussed here. :rior to closing a placement transaction, the trader will ensure that all applicable lines for the counterparty are available.

Monitoring of lines will be facilitated by the ,?-QC!B- ?imit e cess report which will be forwarded daily by C=M3. The report will indicate the following details for each counterparty' :lacement and Clearing ?ines < Balance outstanding < Balance available. The process flow in handling both placements and borrowings is identical. The transaction may be closed on =euters 0ealing 3ystem, phone or tele . The following steps will be taken to record the transaction' -nter transaction in money market blotter #nform Treasury %perations through email :repare deal slip in duplicate. Time stamp deal slip #f available, attach copy of =euters 0ealing 3ystem conversation or tele to the original deal slip ,orward both copies of deal slip to Treasury %perations, who will acknowledge receipt of original deal slip by signature on duplicate =eceive duplicate of deal slip and file in date or other appropriate order i3uidation of Money Mar*et &lace!ent7 $orro(ing: *here a transaction is concluded for a fi ed maturity date, entries for

li5uidation are generated automatically by the system. #f however a transaction is booked as an overnight call transaction, appropriate li5uidation instructions would need to be provided by the trader. A transaction on call could be either rolled over or li5uidated. *here a transaction is rolled over, repayment of principal does not take place. =ollover at new rate could be done either by changing the rate effective from rollover date without any cash flow or by settlement of outstanding interest payment without movement of principal. %n li5uidation, both principal and interest Ror

balance interestS will be settled. =ecording of the transaction will be as in the case of booking.

+unction" of #rea"ury Operation"7 Ca"h Manage!ent Operation":

-veryday T=%:3 and cash management operations will inform Treasury of all movements in the BB 00A account. Any re5uest that affects the 00A balance will be immediately updated to Treasury by T=%:3) cash management operations over telephone and followed$up in writing through the 0aily =eport to Treasury R0=TS. 0=T will also include the daily clearing activity results. $oo*ing of tran"action": The following steps will be adopted in booking transactions' %btain a printout of the email containing transaction details -nsure that the email is sent by authori@ed dealer Book transaction in ,?-QC!B- Rentries will be automatically generatedS and have transaction authori@ed #n the case of local currency placements' ? :repare Bangladesh Bank che5ues, in favor of each counter party, for the amount placed. :ayments to the same counterparty may be amalgamated ? &andover checks to representatives of counterparties against acknowledgment 1money receipts2 #n the case of local currency borrowings, che5ues for amounts borrowed would need to be collected from respective counterparties' ? :rint manifold through ,?-QC!B-. "eep original of second manifold as register copy and forward duplicate of second manifold to #C! ? 0ispatch authori@ed messenger with the bankKs confirmation copy to counterparty and collect the che5ues at the same time

? %n receipt of che5ues, review same to confirm that amount is correct and that the che5ue is properly drawn ? Complete BB deposit slips, have che5ues endorsed and forward che5ues together with deposit slips for deposit into our account with BB ? ,ile acknowledgment received from BB, along with related register copy ? ,ile register copies by transaction type Rplacement) borrowingS by currency and booking date

=eceive deal slips Rin duplicateS from Treasury Time stamp deal slip %fficer will acknowledge receipt on duplicate and return same to Treasury Perify signature of trader

Perify that se5uence number for the deal slip is maintained Rmark bar sheetS -nsure that canceled deal slips Rif anyS are forwarded to the department $ forward these to #C! for filing i3uidation of tran"action": All transactions with fi ed maturity dates will be automatically li5uidated by ,?-QC!B-. ?ocal currency transactions committed on a call basis will be either li5uidated or rolled over as appropriate, on receipt of a deal slip from the Treasury. #n the event of a roll over, the e isting transaction will be li5uidated, and a new transaction will be booked. The process for the booking of the new transaction will be as outlined in the section above on booking. #n the case of local currency borrowings, che5ues for interest) principal plus interest Ras appropriateS need to be prepared ? :repare BB che5ues, in favor of each counterparty

? &andover che5ues to representatives of counterparties, against acknowledgment. The borrowing receipt Radvice copy of our manifoldS should be returned duly discharged by the counterparty #n the case of local currency placements, che5ues for interest) principal plus interest Ras appropriateS would need to be collected from counterparties. :repare a reversal ticket for the amount to be received from counterparty, since the amount will be booked in the placement clearing account automatically on li5uidation ? 0ischarge counterpartyKs borrowing receipt, indicating that payment has been received ? 0ispatch authori@ed messenger to collect such che5ues. The messenger will carry discharged receipt and hand over to counterparty ? %n receipt of che5ues, review same to ensure that the amounts are correct and that the che5ues are properly drawn ? Complete BB deposit slips, have checks endorsed and forward che5ues together with deposit slips to BB for deposit to our account with them ? Che5ues received from counterparties are deposited with BB immediately 1efforts will be made to deposit before 89 noon, assuming such che5ues are received in time2 ? Treasury is advised of dishonoring of che5ues as soon as this is known by telephone followed immediately by a memo from operations ? ,ile acknowledgment received from BB along with register copy and reverse out the entry from the placement clearing account. ,ile paid register copies together with all attachments in a .:aid/ file, by currency and counterparty in order of maturity date T=%:3 will initiate follow up for confirmation on the basis of report from #C!

of non$ receipt of confirmation. *eekly follow up will be maintained till the receipt of counter party confirmation, or receipt of counter value, whichever is earlier %i"honor of che3ue": #n the event that the che5ue is not honored by the end of the day, T=%:3 will advise the Treasurer, 3C%% B the related treasury trader immediately, so that appropriate action may be initiated. Amounts unsettled may remain in the :lacement Clearing Account only upto the validity of the Clearing ?ine. ,or e ample, if the Clearing ?ine has a .6 day/ validity, transactions outstanding that have been earmarked against this line should be reversed on the 6rd day from date of booking. #n any event, interest will be claimed from the counterparty for the period from original due date of the placement, upto the date on which settlement is finally received. The penalty interest rate to be charged will be approved by the Treasurer. #n the absence of the Treasurer the acting treasurer will approve such rates. Cancellation of Contract": Contracts may be cancelled by mutual agreement with the counterparty and re5uires the approval of a designated officer not connected with money market trading. Country Treasurer will review such transaction. - ception will be in cases where Treasurer is absent and there is no 0eputy Treasurer. 3uch deals including the ones done by