TERMS AND HISTORY OF NEGOTIABLE CERTIFICATES OF DEPOSIT

Date: 2015-10-07; view: 533.

Restore the order of repo agreement transactions.

A repo is a combination of two transactions. The dealer hopes to find a long-term buyer for the securities before repurchasing them.

a. A dealer sells securities to a long-term buyer.

b. A short-term investor sells securities back to a dealer a few days or weeks later.

c. A dealer has unsold securities and tries to find a long-term buyer for the securities.

d. A dealer sells securities, agreeing to repurchase them at a higher price on a fixed future date.

e. A dealer repurchases securities.

f. A short-term investor buys securities. Amount an investor lends to a dealer, by buying securities, is less than the market value of the securities. This is so an investor avoids a loss if price of securities, and their value as a collateral, falls.

10. Say in a few words what the main text is about. Use the following opening phrases:

The text looks at the (the problem of)…;

The text deals with the issue of…;

It is clear from the text that…;

Among other things the text raises the issue of…;

The problem of…is of great importance;

One of the main points to be singled out is…;

In this connection, I'd like to say…;

I find the question of…very important because…;

I think that…should be mentioned here as a very important mechanism of…

The denominations of negotiable certificates of deposit range from $100,000 to $10 million. Few negotiable CDs are denominated less than $1 million. The reason that these instruments are so large is that dealers have established the round lot size to be $1 million. A round lot is the minimum quantity that can be traded without incurring higher than normal brokerage fees.

Negotiable CDs typically have a maturity of one to four months. Some have six-month maturities, but there is little demand for ones with longer maturities.

Citibank issued the first large certificates of deposit in 1961. The bank offered the CD to counter the long-term trend of declining demand deposits at large banks. Corporate treasurers were minimizing their cash balances and investing their excess funds in safe, income-generating money market instruments such as T-bills. The attraction of the CD was that it paid a market interest rate. There was a problem, however. The rate of interest that banks could pay on CDs was restricted by Regulation Q. As long as interest rates on most securities were low, this regulation did not affect demand. But when interest rates rose above the level permitted by Regulation Q, the market for these certificates of deposit evaporated. In response, banks began offering the certificates overseas, where they were exempt from Regulation Q limits. In 1970, Congress amended Regulation Q to exempt certificates of deposit over $100,000. By 1972, the CD represented approximately 40% of all bank deposits. The certificate of deposit is now the second most popular money market instrument, behind only the T-bill.

The rates paid on negotiable CDs are negotiated between the bank and the customer. They are similar to the rate paid on other money market instruments because the level of risk is relatively low. Large money center banks can offer rates a little lower than other banks because many investors in the market believe that the government would never allow one of the nation's largest banks to fail. This belief makes these banks' obligations less risky. CD rates tend to be slightly above the T-bill rate because of the slightly greater chance of default.

A round lot – повний лот, стандартна партія цінних паперів, яка є одиницею виміру угод на біржі.

to exempt – звільняти від (податків, мита, обов'язків)

to evaporate– випаровуватись, зникати

Regulation Q – правило Q - заборона на виплату відсотків по вкладам до запитання

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Federal Reserve Board regulation imposing caps on the rates that banks may pay on savings and time deposits. Currently time deposits with a denomination of $100,000 or more are exempt from Reg Q.

Regulation Q is Title 12, part 217 of the United States Code of Federal Regulations. It prohibits banks from paying interest on demand deposits in accordance with Section 11 of the Glass–Steagall Act (12 U.S.C. 371a).

The imposed zero rate on demand deposits encouraged the emergence of money market funds and the growth of substitutes for and alternatives to banks. Regulation Q ceilings for savings accounts were for the most part phased out in the early 1980s by the Monetary Control Act of 1980. Banks found a variety of ways to get around Regulation Q restrictions and compete for deposits. These include creating Negotiable Order of Withdrawal accounts and money market accounts which are not considered checking accounts.

Regulation D was modified to include portions of Regulation Q, which governed (among other things) the type of entities that may own/maintain interest bearing NOW accounts. Regulation Q no longer exists as it once did; all aspects of the regulation are now part of Regulation D.