FMO CHAPTER 1_PART 2 (PDF)

DPF30033 Chapter 1 Financial Market Environment Structure of Financial Market Primary Secondary Market Market Over The Exchanges Counter (OTC)...

DPF30033 Chapter 1 Financial Market Environment Structure of Financial Market Primary Secondary Market Market Over The Exchanges Counter (OTC) 2 Primary Market ✔ The primary market is the part of the capital market that deals with the issuance and sale of equity-backed securities to investors directly by the issuer. Investors buy securities that were never traded before. ✔ i.e. Companies sell stocks to the public for the first time. 3 Secondary Market ✔ The secondary market is where investors buy and sell securities they already own. ✔ i.e. Investor and traders buy and sell stocks to each other. 4 Exchanges ✔ Trading with exchanges refers to the process of buying and selling financial instruments, such as stocks, currencies, commodities, or derivatives, through a regulated exchange platform. ✔ These exchanges serve as intermediaries that facilitate the matching of buyers and sellers, ensuring transparent and orderly markets. ✔ Bursa Malaysia is the country's primary exchange, where you can trade equities (stocks) and other related instruments. 5 Over The Counter (OTC) ✔ Over-the-counter or off-exchanges trading is done directly between two parties, without the supervision of an exchange. ✔ It is contrasted with exchange trading, which occurs via exchanges. ✔ Securities that are traded over-the-counter are traded via a broker- dealer network as opposed to on a centralized exchange. 6 Functions of Financial Market ✔ Allows transfers of funds from person or business without investment opportunities to one who has them ✔ Improves economic 7 2.2 Roles of Central Bank Let’s start with the second set of slides Roles of Central Bank (BNM) in Financial Market ✔ BNM attempts to create a sound and conducive environment for the development of a country by implementing the right mix of monetary policies ✔ BNM often resort to foreign exchange and interest rate interventions as monetary tools/instruments to bring about the desired level of exchange rate for the country 9 Types of Monetary Instruments Statutory Liquidity Open Market Reserve Coverage Operations Requirement Ratio Interest Rate Discount Moral Management Operation Persuasion 10 Statutory Reserves Requirement (SRR) ✔ Statutory Reserve Requirement (SRR) in Malaysia is a monetary policy tool used by Bank Negara Malaysia (BNM), to regulate the amount of funds that financial institutions, particularly commercial banks, must keep as reserves with the central bank. ✔ The SRR is one of the tools used by BNM to control the money supply and influence liquidity in the financial system. 11 Liquidity Coverage Ratio (LCR) ✔ The Liquidity Coverage Ratio (LCR) is an important regulatory requirement in the field of banking and finance aimed at ensuring the short-term liquidity stability of financial institutions. ✔ In Malaysia, the LCR is implemented as part of the Basel III framework and is regulated by Bank Negara Malaysia (BNM), the country's central bank. ✔ The LCR is designed to ensure that banks have sufficient high-quality liquid assets (HQLA) to meet their short-term liquidity needs during times of financial stress. 12 IMPACT OF SRR/LCR ON ECONOMICS CONDITIONS ✔ SRR/LCR inflation ✔ SRR/LCR employment 13 Interest Rate Management (IRM) ✔ Interest rate management in Malaysia, like in many other countries, is a critical aspect of monetary policy and financial regulation. ✔ Interest rates play a significant role in influencing the country's economic conditions, inflation, and financial stability. ✔ Bank Negara Malaysia (BNM), the central bank of Malaysia, is responsible for managing interest rates and implementing monetary policy to achieve its policy objectives. ✔ BNM uses the Overnight Policy Rate (OPR) as its primary tool for influencing interest rates. 14 IMPACT OF IRM ON ECONOMICS CONDITIONS ✔ OPR inflation ✔ OPR employment 15 OPEN MARKET OPERATIONS (OMO) ✔ OMO involves the buying and selling of government securities and other financial instruments in the open market. ✔ The primary purpose of open market operations is to influence the liquidity and interest rate conditions in the financial system. ✔ By buying or selling government securities, BNM can inject or withdraw funds from the banking system, affecting the supply of money and short-term interest rates. ✔ When BNM buys government securities in an OMO, it injects funds into the banking system, increasing the supply of money. This can put downward pressure on short-term interest rates, making borrowing cheaper, vice versa. 16 Discount Operations (DOs) ✔ Discount operations are a part of the central bank's monetary policy toolkit and are conducted by Bank Negara Malaysia (BNM). ✔ Discount operations are a mechanism through which BNM provides short-term financing to financial institutions, typically commercial banks, to manage their liquidity needs or to influence market interest rates. The short-term financing are at a discount. ✔ BNM serves as the "lender of last resort" by offering financial institutions a source of liquidity during times of stress. ✔ This role is crucial in preventing systemic financial crises and bank runs. 17 IMPACT OF OMO/DOs ON ECONOMICS CONDITIONS ✔ OMO/DOs inflation ✔ OMO/DOs employment 18 MORAL PERSUASION ✔ Moral persuasion, is a non-coercive tool used by central banks and regulatory authorities to influence the behavior of financial institutions and market participants. ✔ It relies on persuasion, guidance, and informal communication to encourage banks and other financial entities to voluntarily adhere to certain policy objectives and standards. ✔ In Malaysia, moral persuasion plays a role in shaping the behavior of financial institutions and achieving regulatory goals. 19 MORAL PERSUASION ✔ The primary purpose of moral persuasion is to encourage financial institutions to act in accordance with the monetary policy and regulatory objectives set by Bank Negara Malaysia (BNM). ✔ The effectiveness of moral persuasion depends on the willingness of financial institutions to heed the guidance and the credibility and reputation of the central bank or regulatory authority delivering the message. ✔ Moratorium is an example of moral persuasion imply by BNM when covid 19 pandemic crisis. 20 Thanks! 21