A Primer on the Canadian Bankers’ Acceptance Market

OK I read this one because I thought it would be fully applicable to the Malaysian BA market. Although most of the Canadian BA market's mechanics are the same as the BA market that I operate in, I skimmed the last section, i.e. the sections on the CDOR. I have little interest in studying the benchmark rate of a mid-sized economy whereby I am uncertain whether it is applicable to MYOR or KLIBOR. But I learned a crucial piece of market information that I am unsure whether most HLB RMs even know of: that the bank sells BAs on the secondary market to investors. Thus the bank doesn't fund BAs using its own capital. Hence the COF of a BA is pre-programmed as 0 in the RORA spreadsheet. I do need to find the latest version of the RORA spreadsheet though to see if they still pre-program BA's COF as 0. And there's a lot to take in after doing some further research. Firstly, a central bank adding a certain money market instrument, say the BA, to its list of eligible collateral massively boosts that market. Cuz it makes it super liquid, cuz banks know that they can easily take that instrument and take it to the central bank for cash. This increases demand for that asset, and lowers its yield. So actual businesses get cheaper trade financing! (I just dont know how this works for our BAs, cuz they're priced in COF. Unless COF is also influenced by the demand for BAs in the money market.) Secondly, long story short, it turns out the Fed was PARTLY created to build a competitive US BA market, and initially they bought lots of BAs to kickstart the market. In 1977, the Fed stopped buying BAs ENTIRELY, cuz the BA market had become highly successful and stable on its own. Now, the BA market in the US is very insignificant, cuz the big US corps just issue commercial paper or LCs. My sense is that only developing markets like Malaysia still have a significant BA market, cuz our business landscape is still mainly SME-driven that dont have credit ratings to issue commercial paper. Furthermore, the Fed doesn't trade BAs anymore for its open market operations cuz it's just too small to move the needle anymore. Furthermore, when the Fed buys USTs, it is supporting general government debt which affects everyone equally. If the Fed buys BAs, it would be directly funding specific private banks and companies, which is picking winners and losers.