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Tuesday, 23 April, 2024

Reflecting on our accomplishments…

Money Market Development: Roles of treasury & technology

by Faruk Ahmed
  08 Oct 2023, 00:00

With cash visibility and control more important than ever, and with risk management becoming an increasing part of the corporate treasurer's job, technology is playing an ever more pivotal role to develop a sound and efficient money market. As its sophistication grows, treasury technology has become at the focal point in banking operations as it is now indispensable for treasury professionals to better manage cash, accounts, FX and transaction flows. In an environment where every company executive is tasked to "do more with less", the role of technology is crucial in facilitating both operational and strategic enhancements to the business. In Bangladesh the role of treasury has expanded in recent times and with technology advancement, treasury professionals are playing vital role in developing the money market, which has just passed its nascent stage thanks to pragmatic and techno-friendly policies of the central bank. Since the markets are interlinked, so the efficiency in money market is crucial to the development of capital market and bond market, which is an important agenda of Bangladesh Bank. And the ultimate solution is technology in treasury.

Historically, treasurers have been responsible for managing cash and market risk and ensuring that the company has access to sufficient sources of funding as well as dealing with complex compliance issues. Dealing room is an integral part of the treasury where efficient smart dealers operate buy/sell operations to ensure higher returns of its assets and cut the cost of funds. Now we are seeing more treasury technology deployments in hosted private cloud environments, which helps remove the weight of IT maintenance from the treasurer's shoulders and allows for more focus on liquidity management. In this race, Bangladesh money market is lagging far behind in comparison with the market of our neighbouring countries. In 1992, when two foreign banks- Standard Chartered Bank and American Express Bank installed sophisticated dealing room in their treasury offices and decorated those with Reuters Dealing platform, local banks started to focus on the dealing room. In 1997, these foreign banks earned nearly 40% of their total profits from money market operations through their small dealing rooms when local treasuries had no dealing rooms and fund managers took part in pricing was with a huge amount of surplus funds with a telephone. This encouraged the NCBs at first and later a significant number of private banks to add dealing rooms in their treasury offices. Today all most all banks have sophisticated dealing rooms and most of them are equipped with most innovative software tools and multi-linked online platforms to manage currencies efficiently.

Central bank's proactive role

Bangladesh Bank has been playing vital role to encourage banks to deploy technology tools in dealing rooms as part of its plan to make the central bank as a completely digital central bank. Bangladesh Bank governor Dr. Atiur Rahman in 2008 formulated a 5-year strategic plan for the financial sector based on advanced technological applications to deliver services with utmost efficiency. By this time, BB has introduced e-commerce, e-banking, automated clearing house etc. and mobile banking.; a historic move towards achieving higher productivity across all economic sectors including agriculture and SME through use of ICTs. A fast, secure and modern payment system has been built through the introduction of automated clearing house and fund transfer network. National payment switch has been installed to popularize the use of e-banking and e-commerce. Online CIB service has been launched to facilitate faster decision making in the process of loan sanctioning by the banks. Installation of Bangladesh Automated Clearing House (BACH) is another remarkable event in the history of the financial sector in Bangladesh.

Despite this development, Bangladesh interbank money market is lagging behind in comparison with the developments of other areas. The market is yet to be sound, efficient and transparent as a large number of treasuries are not using advanced technology tools in their dealing operations. For dealing foreign currency and local currency, dealers of most banks still depend on OTC trading system with Telephone, e-mail etc, which is not conducive to the development of an efficient money market. As treasury and technology are interrelated so the roles of dealing rooms in market development are indispensable. All trading and transactions should be quick but transparent, easy but automated to increase efficiency in the market. These are the pre-conditions for the development of sound, efficient and vibrant markets for money, forex and bond.

Technology & efficiency

Financial markets are complex organizations with their own economic and institutional structures that play a critical role in determining how prices are established-or discovered. Buy- and sell-side professionals demand the best execution across multiple asset classes. That means access to fragmented pools of liquidity, predictive analytics and the ability to assess strategy performance-historically and in real-time.

For example, when money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or beat, the market. However, market efficiency-championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else.

In the real world, markets cannot be absolutely efficient or wholly inefficient. It might be reasonable to see markets as essentially a mixture of both, wherein daily decisions and events cannot always be reflected immediately into a market. If all participants were to believe that the market is efficient, no one would seek extraordinary profits, which is the force that keeps the wheels of the market turning.

In the age of information technology (IT), however, markets all over the world are gaining greater efficiency. IT allows for a more effective, faster means to disseminate information, and electronic trading allows for prices to adjust more quickly to news entering the market. However, while the pace at which we receive information and make transactions quickens, IT also restricts the time it takes to verify the information used to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the information we use no longer allows us to make profit-generating decisions. To develop a sound money market, efficiency of the market is necessary and proper utilisation of technology in treasury management.

As efficiency in one market affects other markets, so efficiency in money market is crucial to develop capital market and bond market in Bangladesh, which is an important agenda of Bangladesh Bank. And this efficiency depends on the attitudes of dealers, performance of technology and above all the role of treasury.

But in Bangladesh money market, technology is yet to play its due roles. In case of foreign exchange market, traders follow OTC trading and most transactions are made manually with Telephone as most banks do not use Reuters dealing tool. In bond market, the volume of trade through online platform still remained at low level. The situation in the call money market is totally different as there is no dealing platform to borrow/lend call money, which is many time larger than the foreign exchange market in terms of volume and participants. This hindrances the growth of efficiency in the money market of Bangladesh.

Focus on bond market

A proper domestic bond market can speed up financial development of a country like Bangladesh, so the government's concern is to develop a vibrant and attractive bond market through 15 primary dealers (PDs). But it has failed to get desired response from potential investors. The BB partly blamed the financial institutions engaged as PDs for the poor response while the government is blamed for its policy which discourages the investors to push up the market. Treasury professionals say high saving rate, low interest rate of government securities and lack of necessary policy supports are the main obstacles to the growth of a bond market in Bangladesh. This has been aggravated due to OTC trading culture and poor participation in online trading. Bangladesh Bank introduced the TWS on December 17 last year. But, a low volume of securities have so far been transacted during the last one year through the TWS. Treasury executives say the clients are reluctant to invest in the treasury bills and treasury bonds. So the volume of trade is lower. Most interesting is that most transactions were made through Telephone and dealers just put their deal data in the system. Besides, corporate business houses are not much aware about the benefits of investment in secondary bond market.

Focus on Call Money market

The interbank call money market remained as a very insignificant part of the financial market in Bangladesh until the beginning of the eighties because of a narrow base and less diversified financial system. By this time, the market has been expanded significantly in comparison with foreign exchange markets. Now, the daily volume of interbank call money market ranges between Tk 5000.00 crore and Tk 7000.00 crore- which is much higher than the volume of transactions in interbank Forex market. More than 80 banks and FIs are very active in the interbank call money market every day keeping the space to develop it further.

Lack of fund flow information, delay in clearing house settlement, misuse of surplus funds push up the call money rate, from time to time, to its abnormal high level that increase the cost of borrowing and also pushed down to its lowest level to increase the interest expense. In 1997, the call money rate shot up to its high at 37% while it jumped to 50% in 2003, 80% in 2004 when the market experienced a huge amount of surplus liquidity ranging between Tk 9,000 crore to Tk 10,000. In 2010, investment was decreased by 11.61 percent while, borrowings increased by 30.96 percent compared with 2009. This excess of borrowing growth over lending growth in the banking sector evinces the misuse of excess liquidity by banks.

In call money market, a dealer uses a telephone as a dealing tool to manage or invest funds from the market of more than 100 dealers of more than 80 banks and FIs. The process of negotiating by phone or electronic message is bilateral trading, others are not privy to the trade. The rate is fixed on the basis of remour, dealer can not settled deals at better rates and therefore the existing call money rate does not necessarily reflected the market pulse- which gives wrong signals to the policy makers and money dealers. To develop a sound and efficient money market, call money rate should be market driven, competitive and consistent with policy rates. And the combined role of treasury and technology are essential. An efficient trading platform can help the treasury to trade call money at competitive market rate as it brings all funds in a single location. Market participant and policy makers should sit together to improve efficiency in the call money market by introducing e-trading practice. As a guardian of the financial sector, Bangladesh Bank monitor the market operations to keep policy actions and market operations in right way, therefore it can promote the banks and FIs to use technology in call money operations and support private entrepreneurs in line with its private-public partnership policy.

 

Comments

Celebrating 29 Years of Unwavering Progress
Reflecting on our accomplishments… / Shadow Banking At Crossroads: Where to go from here?
The Bangladesh Express is more than a newspaper brand but a movement
Reflecting on our accomplishments…

Money Market Development: Roles of treasury & technology

by Faruk Ahmed
  08 Oct 2023, 00:00

With cash visibility and control more important than ever, and with risk management becoming an increasing part of the corporate treasurer's job, technology is playing an ever more pivotal role to develop a sound and efficient money market. As its sophistication grows, treasury technology has become at the focal point in banking operations as it is now indispensable for treasury professionals to better manage cash, accounts, FX and transaction flows. In an environment where every company executive is tasked to "do more with less", the role of technology is crucial in facilitating both operational and strategic enhancements to the business. In Bangladesh the role of treasury has expanded in recent times and with technology advancement, treasury professionals are playing vital role in developing the money market, which has just passed its nascent stage thanks to pragmatic and techno-friendly policies of the central bank. Since the markets are interlinked, so the efficiency in money market is crucial to the development of capital market and bond market, which is an important agenda of Bangladesh Bank. And the ultimate solution is technology in treasury.

Historically, treasurers have been responsible for managing cash and market risk and ensuring that the company has access to sufficient sources of funding as well as dealing with complex compliance issues. Dealing room is an integral part of the treasury where efficient smart dealers operate buy/sell operations to ensure higher returns of its assets and cut the cost of funds. Now we are seeing more treasury technology deployments in hosted private cloud environments, which helps remove the weight of IT maintenance from the treasurer's shoulders and allows for more focus on liquidity management. In this race, Bangladesh money market is lagging far behind in comparison with the market of our neighbouring countries. In 1992, when two foreign banks- Standard Chartered Bank and American Express Bank installed sophisticated dealing room in their treasury offices and decorated those with Reuters Dealing platform, local banks started to focus on the dealing room. In 1997, these foreign banks earned nearly 40% of their total profits from money market operations through their small dealing rooms when local treasuries had no dealing rooms and fund managers took part in pricing was with a huge amount of surplus funds with a telephone. This encouraged the NCBs at first and later a significant number of private banks to add dealing rooms in their treasury offices. Today all most all banks have sophisticated dealing rooms and most of them are equipped with most innovative software tools and multi-linked online platforms to manage currencies efficiently.

Central bank's proactive role

Bangladesh Bank has been playing vital role to encourage banks to deploy technology tools in dealing rooms as part of its plan to make the central bank as a completely digital central bank. Bangladesh Bank governor Dr. Atiur Rahman in 2008 formulated a 5-year strategic plan for the financial sector based on advanced technological applications to deliver services with utmost efficiency. By this time, BB has introduced e-commerce, e-banking, automated clearing house etc. and mobile banking.; a historic move towards achieving higher productivity across all economic sectors including agriculture and SME through use of ICTs. A fast, secure and modern payment system has been built through the introduction of automated clearing house and fund transfer network. National payment switch has been installed to popularize the use of e-banking and e-commerce. Online CIB service has been launched to facilitate faster decision making in the process of loan sanctioning by the banks. Installation of Bangladesh Automated Clearing House (BACH) is another remarkable event in the history of the financial sector in Bangladesh.

Despite this development, Bangladesh interbank money market is lagging behind in comparison with the developments of other areas. The market is yet to be sound, efficient and transparent as a large number of treasuries are not using advanced technology tools in their dealing operations. For dealing foreign currency and local currency, dealers of most banks still depend on OTC trading system with Telephone, e-mail etc, which is not conducive to the development of an efficient money market. As treasury and technology are interrelated so the roles of dealing rooms in market development are indispensable. All trading and transactions should be quick but transparent, easy but automated to increase efficiency in the market. These are the pre-conditions for the development of sound, efficient and vibrant markets for money, forex and bond.

Technology & efficiency

Financial markets are complex organizations with their own economic and institutional structures that play a critical role in determining how prices are established-or discovered. Buy- and sell-side professionals demand the best execution across multiple asset classes. That means access to fragmented pools of liquidity, predictive analytics and the ability to assess strategy performance-historically and in real-time.

For example, when money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or beat, the market. However, market efficiency-championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else.

In the real world, markets cannot be absolutely efficient or wholly inefficient. It might be reasonable to see markets as essentially a mixture of both, wherein daily decisions and events cannot always be reflected immediately into a market. If all participants were to believe that the market is efficient, no one would seek extraordinary profits, which is the force that keeps the wheels of the market turning.

In the age of information technology (IT), however, markets all over the world are gaining greater efficiency. IT allows for a more effective, faster means to disseminate information, and electronic trading allows for prices to adjust more quickly to news entering the market. However, while the pace at which we receive information and make transactions quickens, IT also restricts the time it takes to verify the information used to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the information we use no longer allows us to make profit-generating decisions. To develop a sound money market, efficiency of the market is necessary and proper utilisation of technology in treasury management.

As efficiency in one market affects other markets, so efficiency in money market is crucial to develop capital market and bond market in Bangladesh, which is an important agenda of Bangladesh Bank. And this efficiency depends on the attitudes of dealers, performance of technology and above all the role of treasury.

But in Bangladesh money market, technology is yet to play its due roles. In case of foreign exchange market, traders follow OTC trading and most transactions are made manually with Telephone as most banks do not use Reuters dealing tool. In bond market, the volume of trade through online platform still remained at low level. The situation in the call money market is totally different as there is no dealing platform to borrow/lend call money, which is many time larger than the foreign exchange market in terms of volume and participants. This hindrances the growth of efficiency in the money market of Bangladesh.

Focus on bond market

A proper domestic bond market can speed up financial development of a country like Bangladesh, so the government's concern is to develop a vibrant and attractive bond market through 15 primary dealers (PDs). But it has failed to get desired response from potential investors. The BB partly blamed the financial institutions engaged as PDs for the poor response while the government is blamed for its policy which discourages the investors to push up the market. Treasury professionals say high saving rate, low interest rate of government securities and lack of necessary policy supports are the main obstacles to the growth of a bond market in Bangladesh. This has been aggravated due to OTC trading culture and poor participation in online trading. Bangladesh Bank introduced the TWS on December 17 last year. But, a low volume of securities have so far been transacted during the last one year through the TWS. Treasury executives say the clients are reluctant to invest in the treasury bills and treasury bonds. So the volume of trade is lower. Most interesting is that most transactions were made through Telephone and dealers just put their deal data in the system. Besides, corporate business houses are not much aware about the benefits of investment in secondary bond market.

Focus on Call Money market

The interbank call money market remained as a very insignificant part of the financial market in Bangladesh until the beginning of the eighties because of a narrow base and less diversified financial system. By this time, the market has been expanded significantly in comparison with foreign exchange markets. Now, the daily volume of interbank call money market ranges between Tk 5000.00 crore and Tk 7000.00 crore- which is much higher than the volume of transactions in interbank Forex market. More than 80 banks and FIs are very active in the interbank call money market every day keeping the space to develop it further.

Lack of fund flow information, delay in clearing house settlement, misuse of surplus funds push up the call money rate, from time to time, to its abnormal high level that increase the cost of borrowing and also pushed down to its lowest level to increase the interest expense. In 1997, the call money rate shot up to its high at 37% while it jumped to 50% in 2003, 80% in 2004 when the market experienced a huge amount of surplus liquidity ranging between Tk 9,000 crore to Tk 10,000. In 2010, investment was decreased by 11.61 percent while, borrowings increased by 30.96 percent compared with 2009. This excess of borrowing growth over lending growth in the banking sector evinces the misuse of excess liquidity by banks.

In call money market, a dealer uses a telephone as a dealing tool to manage or invest funds from the market of more than 100 dealers of more than 80 banks and FIs. The process of negotiating by phone or electronic message is bilateral trading, others are not privy to the trade. The rate is fixed on the basis of remour, dealer can not settled deals at better rates and therefore the existing call money rate does not necessarily reflected the market pulse- which gives wrong signals to the policy makers and money dealers. To develop a sound and efficient money market, call money rate should be market driven, competitive and consistent with policy rates. And the combined role of treasury and technology are essential. An efficient trading platform can help the treasury to trade call money at competitive market rate as it brings all funds in a single location. Market participant and policy makers should sit together to improve efficiency in the call money market by introducing e-trading practice. As a guardian of the financial sector, Bangladesh Bank monitor the market operations to keep policy actions and market operations in right way, therefore it can promote the banks and FIs to use technology in call money operations and support private entrepreneurs in line with its private-public partnership policy.

 

Comments

Celebrating 29 Years of Unwavering Progress
Reflecting on our accomplishments… / Shadow Banking At Crossroads: Where to go from here?
The Bangladesh Express is more than a newspaper brand but a movement