25556 Chap.8 Money Market Securities and Dealer Trading
Money Market Securities and Dealer Trading
Topic 4 turns to the market for debt that matures within a year.
It is a wholesale market used by banks, fund managers and the Reserve Bank, and it matters far more than its size suggests because it holds the banks' liquid reserves, funds them through certificates of deposit, sets the BBSW benchmark and carries monetary policy into the economy.
This chapter sorts the main securities by who issues them and whose credit stands behind them: negotiable certificates of deposit, bank-accepted bills, Treasury notes, commercial paper and asset-backed paper.
It then shows how acceptance and bill facilities work for a company, how the BBSW was reformed after the LIBOR scandal, and how dealers quote, hold inventory and settle trades, ending with repurchase agreements as short secured loans.
What this chapter covers
- 01
Four roles of the money market
- 02
Negotiable certificates of deposit and bank-accepted bills
- 03
Treasury notes, commercial paper and asset-backed paper
- 04
The BBSW benchmark and the LIBOR scandal
- 05
Bill facilities and acceptance fees
- 06
Dealer quotes, repos and same-day settlement
Worked example · free
Put a dollar price on each rung of the money market yield ladder
- 1Treasury notes: 1,000,000 divided by (1 + 0.0388 × 90/365) = $990,523.54.
- 1NCDs at BBSW: 1,000,000 divided by (1 + 0.041 × 90/365) = $989,991.59.
- 1Commercial paper: 1,000,000 divided by (1 + 0.0432 × 90/365) = $989,460.22.
- 1Steps down the ladder: Commonwealth to bank credit costs 990,523.54 − 989,991.59 = $531.95; bank to company credit costs 989,991.59 − 989,460.22 = $531.37; the full step is $1,063.32 per $1,000,000 for 90 days.
Key terms
- Bank bill swap rate
- Australia's main short-term benchmark, calculated by the ASX from the yields on actual trades in bank bills and NCDs for terms of one to six months.
- Acceptance fee
- The charge a bank makes for guaranteeing a company's bill, usually quoted as extra yield added to the market rate.
- Treasury note
- Commonwealth debt with a term under a year, sold at a discount by competitive tender and treated as free of default risk.
- Commercial paper
- An unsecured promissory note sold by a low-risk company directly to money market investors.
- Bill facility
- An arrangement in which a bank agrees to keep accepting replacement bills for a company over an agreed period.
- Repurchase agreement
- A sale of securities with a binding promise to buy them back later at a higher agreed price, which works as a short secured loan.
Money Market Securities and Dealer Trading FAQ
Why is a bank-accepted bill not a source of funds for the bank?
The bank only guarantees the bill. It can sell the accepted bill to investors in the money market, so the company's cash comes from those investors while the bank earns a fee for lending its name and carries the company's credit risk.
Why do Treasury notes trade at a lower yield than BBSW?
They are backed by the Commonwealth and treated as free of default risk, while BBSW reflects the bank credit behind bills and NCDs. Investors accept a lower return for the safer promise, so Treasury notes sit below the benchmark on the yield ladder.
What changed in Australia after the LIBOR scandal?
The scandal showed that a benchmark built from banks' own estimates could be manipulated. Australia moved the calculation of BBSW to the ASX and now bases it on the yields of real trades in bank bills and NCDs instead of dealer submissions.
What does 'bid high, offer low' mean for a money market dealer?
Dealers quote yields, and a higher yield means a lower price. Buying at the higher yield and selling at the lower one lets the dealer buy cheap and sell dear, so the gap between the two quoted yields is where its trading profit comes from.
How does a repo give the seller cash?
The seller delivers securities, usually Commonwealth bonds, and receives cash now, then buys them back at a higher agreed price later. The buyer holds the bonds as collateral in the meantime, and the difference between the two prices is the interest on the loan.
Exam move
Build a one-line card for each money market security: who issues it, whose credit backs it, whether it funds a bank, and where it sits against BBSW. Then practise the single pricing formula until it is automatic, with the 365-day year and the yield entered as a decimal. Price an accepted bill twice, once at the market yield and once with the fee added, so you can always say what the investor pays and what the company receives.
Finish by explaining a repo and a bill facility aloud, each in two sentences, naming who gives cash and who gives securities or promises at each date.
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