Money market
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In finance, the money market is the global financial market for short-term borrowing and lending. It provides short-term liquid funding for the global financial system. The money market is where short-term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold.
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.
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[edit] Participants
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 the London Interbank Offered Rate (LIBOR).
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.
Trading takes place between banks in the "money centers" (London, New York, and Tokyo).
[edit] Common money market instruments
- Bankers' acceptance - A draft issued by a bank that will be accepted for payment, effectively the same as a cashier's check.
- Certificate of deposit - A time deposit at a bank with a specific maturity date; large-denomination certificates of deposits can be sold before maturity.
- 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 - An 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 US). 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 US). 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 US). 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 3 to 12 months. For the U.S., see Treasury bills.
- Money market mutual 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.
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