Introduction of Special Bonds. A limit of $10,000
per customer. Bonds could be redeemed at face value
on one month's notice after first interest payment. Dr. Coombs announces establishment of STMM with four dealer companies.
Discount Corporation of Australia Pty Ltd. (now .AMP Discount Corporation Ltd.) became the fifth authorised dealer.
First Federal Discount Company Pty Ltd. (now First Federation Discount Ltd.) became the sixth authorised dealer.
National Discount Corporation Pty Ltd. became the seventh authorised dealer.
a. OSTMM informed of pending issue of seasonal Treasury
notes.
b. In the future, shareholders funds, not paid up capital,
to be regarded as the basis for provision of margins and for portfolio and last resort limits.
c. A further provision of 50% of margins to be made from
share-holders funds or uncalled capital. First seasonal Treasury note issue.
a. First change in last resort rate. Initial rate of
3.75% increased to 4.50%.
b. The minimum period required to hold last resort loans
increased from 3 to 7 days.
Inter-dealer loans between the authorised dealers sanctioned by RBA.
All States Discount Pty Ltd. and City Discount Pty Ltd. (now Trans-City Discount Corporation Ltd.) became the eighth and ninth - and, to date, final - authorised dealers.
99 December 31 I960 April 19 1961 June 30 1961 September 14 1961 October I 1961 July 16 1962 February 24 1964 a. b. April 8 1964 June 8 1964 a. b. March 22 1965 a. b.
Gearing ratio reduced from 50:1 to 45:1
By this date, dealers required to have their cheque- paying bank deposits to be at 35% or less of their total deposits. This amount varied between dealers. With fears of withdrawal from non-bank sources very strong, RBA allowed dealers to increase their cheque-
paying bank liabilities by 25%. (Lasted approx. 2 weeks)
Announcement of new safe custody system with receipts available on bearer system in denominations ranging
from $200 to $500,000. The actual operative intro
duction was delayed until 1962.
Limit on portfolio of money market securities replaced by a limit on maximum deposits a dealer could accept - including a uniform limit of 35% of total portfolio on maximum deposits obtained from trading banks.
First issue of Treasury notes on a regular basis. A
’tap’ issue. Issue yield on 91 day notes 3.64%.
Aggregate limits of dealers increased (for the final time) from $310 million to $360 million.
A specific gearing ratio of 33:1 imposed on dealers. Trading banks permitted to offer interest on fixed deposits of one month - compared with a minimum term
of three months in the past. New rate on 30 day - < 3
months 3.75%.
Absolute limits on dealers withdrawn.
Approved levels on dealers portfolios to depend in
future on gearing ratio (33:1) of dealers. This
approved maximum on securities held was revised at least twice per annum, and on other specified occasions
(such as new capital introduced to the company dividend payments, etc.).
Introduction of bearer safe custody certificates (pre viously issued in the names of individual lenders).
Dealers permitted to hold up to 5% of their portfolios in bank-accepted bills of within 120 days to maturity. (This was increased in stages to 20% over the next few
June 1964 January 4 1966 March 13 I960 April 24 1969 a. b. c . d. e .
f.
September 1968 June 5 1970 January 26 1972 February I 1972 September 14 1973 August 1974 May 1974 April 8 1975 January 22 1976Specific ceilings on OSTMM portfolios removed Trading banks introduce a commitment fee, charging
up to I % in unused overdraft commitments.
Approval given to trading banks to issue certificates
of deposit. OSTMM allowed to deal in NCDs with up to
two years to maturity.
NCDs plus Bank bills not to exceed 7y% of portfolio limits.
Dealers permitted to hold government securities maturing within 5 (c.f. 3) years.
Only Government securities now acceptable as security for last resort loans.
Dealers permitted to hold up to 2— 6 of their portfolio limit in any securities.
The holdings of bank NCDs allowed to dealers permitted to hold bank NCDs maturing with 5 (c.f. 2) years.
Dealers permitted to hold new bank bills provided they mature within 180 days.
The formal limit on term to maturity of bank bills was removed.
The 10% in the $ tax rebate on Commonwealth loan
interest is discontinued. Securities issued after
November I, 1968 no longer carry the rebate.
OSTMM permitted to deal in public authorities securities to a maximum of 5% of their portfolio limits.
Bank bills, NCDs permitted to cover daylight overdrafts, but not last resort loans.
Security margins requirements by OSTMM dealers with RBA discontinued.
Ceiling on bank negotiable certificates of deposit removed.
Financial Corporations Act came into force (passed 3.4.74).
RBA enters bank bill market for first time.
Dealers allowed to subscribe up to 5% in AIDC stock. Australian Savings Bonds introduced.
IOI
C H A P T E R III
S H O R T - T E R M M O N E Y M A R K E T S E C U R I T I E S
This chapter looks at those securities which form the basis of most STMM
dealers' portfolios. The list is not exhaustive for even authorised dealers
are permitted to hold a small percentage of their portfolio in any form they
desire. Thus it is possible for portfolios to include such diverse assets as
mortgages or gold bullion. However the main securities traded or held in port
folios throughout the period under examination have been government securities
and private sector bills of exchange. This chapter first examines the nature of
these securities and the development of markets in them. It then goes on to
analyse some of the irregularities of trading in them and the imperfections in marketing procedures.
3.1 STMM Securities: Description and Development
Introduction
This section is designed to examine the main securities traded in the STMM. The two main securities covered are Australian government securities (AGS) and bills of exchange, but there will be a brief summary of the introduction of, and markets in, Treasury notes, bank Negotiable Certificates of Deposit (NCDs) and semi-government securities.
The appendix to this chapter sets out the major characteristics of each, from
the viewpoint of the money market dealers themselves. It does not include the
promissory note market, which commenced in February 1977, and which is therefore
outside the present study. These notes will be examined at a later stage, in
relation to the general structure of the market.
(a) B ills of Exchange
A bill of exchange is defined by the Bills of Exchange Act 1958 (and
identically by the U.K. Bills of Exchccrige Act 1882 ) as:
"An unconditional order in writing addressed by one person to another and signed by the person giving it requiring the person to whom it is addressed to pay on demand or at
a fixed and determinable future time a sum certain in money to or to the order of a specified person or to the bearer."
There are 4 main types of bills:
(1) Bank bills, either bank-accepted or bank endorsed
(2) Acceptance Credit Bills
(3) Trade Bills
(4) Accommodation Bills.
The term "commercial bills" will be used to cover all 4 types.
1. A bank bill is one either accepted or endorsed by one of the major trad
ing banks. While the bank is required to honour both types of bill if called
upon to do so, legally the former appears in the bank's balance sheet as a
current liability, while the latter remains a contingent liability. When the
RBA entered the market it would only buy bank-accepted bills, and this fact -
plus some losses in 1973 and 1974 following company failures in respect of trade
bills - has consolidated the distinction between the two. In a crisis, it is now
held that bank-endorsed bills will not be bought by the RBA should they enter the
market. Thus bank-accepted bills command a finer rate in the market of between
0.05% and 0.2% ([300], p.6).
A bank-accepted bill arises through a trading bank agreeing to provide a line of credit with a specific company - often on a roll-over basis (or re
volving credit). Thus the bank will accept bills to a certain value, and the
firm may then either discount (or sell) the bill in the market, or perhaps even
to the same bank or another bank. Alternatively, the bank may agree to endorse
a trade bill, thus increasing its marketability. Many MMCs have endorsement
lines with the banks, with endorsement fees ranging between !— ■% and 2-^-% p.a.
depending on the strength of the bill - that is, the parties to the bill and the term to maturity.
2. Trade Bills. These are bills of exchange which do not bear a bank signa
ture, but involve two companies of varying degrees of standing. Generally they
do not involve supporting legal documentation. Certain companies in Australia
are considered to be of first-grade quality, and they are accorded the 'prime
103
a r c 22 r e c o g n i s e d a c c e p t i n g h o u s e s i n A u s t r a l i a , and t h e s e c o m p r i s e t h e A c c e p t i n g House A s s o c i a t i o n o f A u s t r a l i a . S h ou ld an A c c e p t a n c e H o u s e ' s name a p p e a r on a t r a d e b i l l , i t becomes an:
3. A c c e p t a n c e B i l l . The a c c e p t a n c e h o u s e may i t s e l f l e n d money on t h e b i l l , o r i t may s i m p l y add i t s name.
4. Accommodation B i l l . T h e s e a r e u s u a l l y drawn b e t w e e n a p a r e n t company and a s u b s i d i a r y . They a r e known i n London as ' P i g on P o r k ' . The i m p l i c a t i o n i s t h a t t h e two names on t h e b i l l a r e i n t i m a t e l y c o n n e c t e d , and t h e r e f o r e t h e y a r e n o t t r u e two name b i l l s . The f i r m a c c e p t i n g o r s i g n i n g t h e b i l l i s t h e g u a r a n t o r , and does n o t r e c e i v e any c o n s i d e r a t i o n .
The b i l l m a r k e t h a s a h i s t o r y in A u s t r a l i a d a t i n g b a c k t o t h e I 9 t h c e n t u r y . T r a d e i n b i l l s r e m a i n e d d e s u l t o r y , e x c e p t in t h e f i n a n c i n g o f i n t e r n a t i o n a l
t r a n s a c t i o n s .
The ma jo r d i s i n c e n t i v e t o t h e f o r m a t i o n o f a b i l l m a r k e t i n t h e I 9 5 0 ' s was t h e stamp d u t y c h a r g e on e a c h b i l l . I n V i c t o r i a , u n t i l 1964 t h e s tamp d u t y
d f
was 4 i n t h e £ o r 0.2% ad v a l o r e m . On a 3 months b i l l , t h i s gave an a n n u a l r a t e o f 0.82%. In NSW t h e r a t e was 0.3% ad . v a l o r e m , o r 1.25% p . a . Th es e d u t i e s d e t e r r e d any s u b s t a n t i a l a d v a nc e i n t h e m a r k e t u n t i l , i n 1964, s t am p d u t i e s i n b o t h V i c t o r i a and NSW wer e r e d u c e d t o 0.1% ad. v a l o r e m . The t r a d i n g ban ks d i d have some m a r k e t in bank b i l l s , b u t t h e y d i d n o t a t t e m p t t o a c t i v e l y t r a d e t h e b i l l s , i n g e n e r a l p r e f e r r i n g t o h o l d them t o m a t u r i t y . The b i l l s wer e s e e n as a s u p p l e m e n t t o t h e t r a d i n g b a n k ' s a d v a n c e s , and n o t as a s e p a r a t e m a r k e t . T h i s in t u r n s t u l t i f i e d t h e d e v e l o p m e n t o f s p e c i a l i s t b i l l d e a l e r s , f o r u n l e s s t h e y wer e a b l e t o o b t a i n a r e g u l a r s u p p l y o f bank as w e l l as t r a d e b i l l s , t h e y f ound i t d i f f i c u l t t o d e v e l o p a s u f f i c i e n t l y d i v e r s i f i e d p o r t f o l i o . When t h e l a c k o f bank s u p p o r t f o r a m a r k e t was t a k e n i n c o n c e r t w i t h t h e h i g h stamp d u t i e s , t h e combined d i s i n c e n t i v e k e p t t r a d e i n b i l l s a t a l e v e l s u b s t a n t i a l l y b el o w t h a t which t h e f i n a n c i a l s e c t o r was a b l e t o s u s t a i n , g i v e n t h e s t r u c t u r e o f b o r r o w i n g and l e n d i n g r a t e s . At one end o f t h e m a r k e t , t h e i n t e r
company m a rk e t i s in t h e o r y c o n f i n e d t o a v e r y s h o r t - t e r m , b e c a u s e a f t e r 6 - 8 weeks, t h e f u n c t i o n o r c a p a c i t y o f n e g o t i a b i l i t y becomes an i n c r e a s i n g l y i m p o r t i n ' c o n s i d e r a t i o n f o r a company, w h i l e a t t h e o t h e r en d, t h e r e was- a l a r g e gap b e t w e a t h e t h r e e month f i x e d d e p o s i t r a t e a t t h e t r a d i n g b a n k s and t h e ba nk o v e r d r a f t