Money Market

As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter and is wholesale. . Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure.

Money market securities consist of negotiable certificates of deposit (CDs), Treasury bills, commercial paper, bankers’ acceptances, deposits, municipal notes, banker’s acceptance, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system.

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.

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 interbank lending—banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to the London Inter-Bank Offered Rate (LIBOR) for the appropriate term and currency.

Functions of the money market

The money market functions are:

  • Financing Industry
  • Financing Trade
  • Profitable Investment
  • Self-Sufficiency of Commercial Bank
  • Help to Central Bank

The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper.

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