Money and Debt Markets Introduction

Study Notes

The money market deals in short-term discount securities such as Treasury notes, bank bills, and promissory notes.
Major participants in this market include the Reserve Bank of Australia, banks, superannuation funds, insurance companies, investment trusts, investment banks, building societies, and large corporates.

The cash rate is the interest rate which banks pay to borrow funds from other banks in the money market on an overnight basis.
The cash rate is the Reserve Bank of Australia's operational target for the implementation of monetary policy.
It is an important financial benchmark in the Australian financial markets.

Monetary policy is conducted by the Reserve Bank to influence interest rates and achieve economic objectives such as stability of the currency, maintenance of full employment, economic prosperity, and welfare of the Australian people, and maintaining inflation within a 2-3% range over the business cycle.
The Reserve Bank can affect rates of longer-term securities by impacting the cash rate.
Monetary policy can be directed at the overnight cash rate, which has an influence on output, employment, and prices through various channels (monetary policy, credit, wealth, and foreign exchange channels).

Open market operations are conducted primarily by repurchase agreements (repos) on nominated debt securities, outright or direct transactions in short-dated Commonwealth Government securities (CGSs), and foreign exchange swaps.
The Reserve Bank holds and manages a portfolio of CGSs to maintain system liquidity and effect monetary policy.
The Reserve Bank achieves this by purchasing CGSs in the secondary market and occasionally taking an allotment at tender.

A repurchase agreement (repo) is the sale of CGSs to the Reserve Bank on condition that the seller will normally buy them back by day's end or a later date.
It provides intra-day liquidity for same-day funds for exchange settlement account holders.
A reverse repo is the purchase of CGSs from the Reserve Bank on condition that the buyer will normally sell them back by day's end or a later date.
It absorbs intra-day liquidity for same-day funds for exchange settlement account holders.

A foreign exchange swap is similar to a repo, except that the Reserve Bank agrees to swap foreign currency for Australian dollars with an agreement that the transaction will be reversed at a specific exchange rate at a later date.

The payments system facilitates the transfer of value of a financial instrument, used in transactions for goods and services, from one party to another.
Transactions may be cash or non-cash instruments.
The payments clearing system in Australia is called the Australian Payments Network (AusPayNet).
Payments are classified by the Reserve Bank in two ways: high-value (large-value transactions for assets cleared by real-time gross settlements) and low-value (day-to-day payments for goods and services, particularly by the household sector).
Exchange settlement accounts are special accounts held with the Reserve Bank to facilitate the settlement of value transactions within the payments system.