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Money market

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This article is about the financial market. For the fund type, see Money market fund.
For the bank deposit account, see Money market account.

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v · d · e
The money market is a component of the financial markets for assets involved in
short-term borrowing and lending with original maturities of one year or shorter
time frames. Trading in the money markets involves Treasury bills, commercial
paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived
mortgage- and asset-backed securities.[1] It provides liquidity funding for the global
financial system.

Contents
[hide]
1 Overview
2 Common money market
instruments
3 See also
4 References
5 External links
[edit] Overview

The money market consists of financial institutions and dealers in money or credit
who wish to either borrow or lend. Participants borrow and lend for short periods of
time, typically up to thirteen months. Money market trades in short-term financial
instruments commonly called "paper." This contrasts with the capital market for
longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of banks borrowing and lending to each
other, using commercial paper, repurchase agreements and similar instruments.
These instruments are often benchmarked to (i.e. priced by reference to) the
London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

Finance companies, such as GMAC, typically fund themselves by issuing large

amounts of asset-backed commercial paper (ABCP) which is secured by the pledge
of eligible assets into an ABCP conduit. Examples of eligible assets include auto
loans, credit card receivables, residential/commercial mortgage loans, mortgage-
backed securities and similar financial assets. Certain large corporations with strong
credit ratings, such as General Electric, issue commercial paper on their own credit.
Other large corporations arrange for banks to issue commercial paper on their
behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet
funding needs. States and local governments issue municipal paper, while the US
Treasury issues Treasury bills to fund the US public debt.

Trading companies often purchase bankers' acceptances to be tendered for

payment to overseas suppliers.

Retail and institutional money market funds

Banks

Central banks

Cash management programs

Arbitrage ABCP conduits, which seek to buy higher yielding paper, while themselves
selling cheaper paper.

Merchant Banks

[edit] Common money market instruments

Certificate of deposit - Time deposits, commonly offered to consumers by banks,

thrift institutions, and credit unions.

Repurchase agreements - Short-term loans—normally for less than two weeks and
frequently for one day—arranged by selling securities to an investor with an
agreement to repurchase them at a fixed price on a fixed date.

Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270
days; usually sold at a discount from face value.

Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located
outside the United States.

Federal agency short-term securities - (in the U.S.). Short-term securities issued by
government sponsored enterprises such as the Farm Credit System, the Federal
Home Loan Banks and the Federal National Mortgage Association.

Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other
depository institutions at the Federal Reserve; these are immediately available
funds that institutions borrow or lend, usually on an overnight basis. They are lent
for the federal funds rate.
Municipal notes - (in the U.S.). Short-term notes issued by municipalities in
anticipation of tax receipts or other revenues.

Treasury bills - Short-term debt obligations of a national government that are issued
to mature in three to twelve months. For the U.S., see Treasury bills.

Money funds - Pooled short maturity, high quality investments which buy money
market securities on behalf of retail or institutional investors.

Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the
reversal of the exchange of currencies at a predetermined time in the future.

Short-lived mortgage- and asset-backed securities

[edit] See also

Liquidity crisis

Money market account

Money fund

Money supply

Overnight market

Sweep account

Lombard Street, A Description of the Money Market, one of the earliest popular
books on the money market

[edit] References

^ Frank J. Fabozzi, Steve V. Mann, Moorad Choudhry, The Global Money Markets,
Wiley Finance, Wiley & Sons (2002), ISBN 0-471-22093-0

[edit] External links

Money Market Funds Enter a World of Risk September 18, 2008, New York Times

Look up money market in Wiktionary, the free dictionary.

Retrieved from "http://en.wikipedia.org/wiki/Money_market"

Categories: Currency | Financial markets

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This page was last modified on 10 January 2011 at 16:37.

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