BY Dwaipayan Regmi
Between 2005 and 2011, prominent banks such as Barclays, UBS, and others engaged in the manipulation of Libor rates to favour their trading positions, creating a misleading impression of their financial health. Taking financial deception to a new level, Société Générale's junior trader Jérôme Kerviel initiated unauthorised trades in equity index and futures, utilising his own knowledge to bypass the bank's risk monitoring.His unauthorised trading positions brought huge volatility to the market with the collapse of the subprime mortgage market in the United States. Thankfully, the Nepali money market has not yet faced any such frightening issue.
Often regarded as a market where financial instruments having a high set of liquidity and short-term maturity are traded, the money market does have existence in the Nepalese context too. Carried out by the Treasury Department's dealer of banks, the operations that get involved here have direct linkage with Treasury Bills and Interbank lending. With the huge volume of transactions, these units also seek the next crucial space through which they contribute to the bank’s profit – directly or indirectly. They just don’t make investments, but also set market practices.
The formulation of a code of ethics varies depending on each bank's bylaws, with the primary aim being the advancement of the banks' interests. Consequently, there is no 'Universal Code of Ethics' specifically tailored for the money market as a whole. Instead, there are general principles that set standards to govern ethical behaviour in this domain. What was seen just a month back was interbank lending rates dropped drastically from 7% to almost 2%. While it's understandable that an increase in liquidity would lead to a decline in the rate, such a significant drop raises concerns about the integrity and ethical conduct of banks. While it's true that the market determines the rate, the pursuit of competitiveness has occasionally led to various malpractices in the market. These actions reflect a short-term perspective focused on individual gain, potentially undermining the integrity of the market as a whole.
Questions regarding standards can come out unless the dealers and practitioners involved in the money market develop integrity. Beyond complying with relevant laws and regulations, a robust framework for maintaining confidentiality and data privacy is essential for effective operations. To curtail unethical practices like utilising a Statutory Liquid Facility (SLF) to invest with Central Bank funds, the central bank introduced an Overnight Liquidity Facility (OLF). This move aimed to restrain banks that borrowed from the Central Bank at a lower rate (bank rate) and invested in Treasury Bills at a higher rate, revealing the prevalence of unethical conduct. Presently, certain banks continue to seek higher returns through investments without adequate funds, resorting to the use of OLF or interbank lending facilities. For them, any percentage above the borrowing rate translates to profit. Consequently, they bid at 7 percent while seeking funds from the market at 5 percent. This repeated occurrence reflects intentional arbitrage, which is regarded as unethical.
The behaviour of these banks is perplexing. They exhibit an inclination to bid Repo or other instruments as low as 3.6784 percent (T Bill rate, 28 days, June 26) at one instance, only to bid a significantly higher rate at another. Be it in the case of the Repo rate, or Bond rate - any scientific approach fails to make enough justification here – because there are no binding principles that make any type of obligation among the bidders. Casual exchange of information among market makers is expected, but when bidding has to be done on two separate platforms, questions of confidentiality might arise.
A sincere and ethical approach towards Foreign Currency (FCY) rates is imperative. While the Foreign Exchange and Money Dealers Association (FEDAN) aims to establish an average and uniform rate, it has come to light that certain banks are striving to manipulate rates by allowing a fluctuation of 10 paise in their favour. This practice is unethical and must be constrained through appropriate restrictions. The integrity and trustworthiness of the market should be upheld above all else.
The significance of the interbank lending market goes beyond mere interest rates. It plays a vital role in providing essential liquidity, allowing each financial institution to effectively manage its liquidity funds. This dynamic not only enhances financial stability but also promotes price discovery and market efficiency. Serving as facilitators for the implementation of monetary policy, these markets also foster interbank relationships. Despite the seemingly modest scale of Nepal's interbank and money markets, they are pivotal in the government's internal debt collection process.
While a code of conduct for dealers is clearly outlined in Human Resource bylaws, there lacks a defined code of conduct specifically tailored for money market participants. The sole effort of the central bank may not be sufficient. Achieving a robust money market in Nepal necessitates a collaborative approach involving the government, banks, FEDAN, and the central bank. It's essential to recognize that the objective should not solely revolve around profit-making; fair practices must also be introduced.
(Regmi is Deputy Manager at Rastriya Banijya Bank Ltd.)
