money market
LexInter | December 1, 2008 | 0 Comments

MONEY MARKET

Money market

The money market is part of the capital market , it is the short-term capital market, unlike the   financial market which is the market on which medium or long-term securities are issued and traded, such as shares and the obligations.

The engine of money creation is credit, which fuels economic expansion. The money market helps control inflation, since prices depend on the relative speed of money creation and wealth creation (goods and services).

This is the market in which short-term interest rates are set. It includes two markets which are partially juxtaposed, the interbank market and the market for negotiable debt securities .

Access to the money market is regulated. Two types of intermediaries intervene in the money market, the agents of the interbank market and the principal organizers of the market.

It is on this market that financial institutions – national treasuries, central banks, banks, fund managers, insurers, etc. – and large companies obtain short-term financing.

The processed products

Cash Products

  • Among the spot instruments, which are therefore direct instruments for refinancing or investing cash, we find:

  • the interbank lending  which are following the markets to Euribor or Libor

  • repos, which are interbank loans guaranteed by assets identified but not delivered to the counterparty;

  • the pension delivered or rest ( repurchase or ” repurchase agreemen t “

  • the  negotiable debt in the short term products facto primarily ie treasury bills issued by the National Treasures (those of the French Treasury are the BTF and BTAN courts), certificates of deposit issued by banks and ticket cash issued by companies;

  • transferable securities, theoretically accessible to individuals, mainly short government bonds (for France, see: OAT ) but also short bonds issued by local authorities or companies;

  • foreign currency deposits 

Derivatives

  • Derivatives traded on the futures market are mainly

  • the forward exchange which corresponds to a combination of a virtual loan in one currency and a virtual loan in another currency;

  • and FRA, Forward rate agreements , 

  • the swap   interest rate, that is to say contracts of interest rate swap, usually a fixed rate against a variable rate based:

    • either on overnight rates

    • either on the rates of unregulated interbank loans, the Interbank Offered Rates (Interbank Offered Rates), also recorded and published by a central bank or a professional body (see Euribor , Libor )   

  • the futures and options on futures contracts on organized markets ( such as LIFFE and Eurex) 

  • options on   over-the-counter swaps ;

  • etc.

Euro area money market and US money market

The euro area money market and that of the United States are roughly the same in size. They are by far the most active and important in the world. On some instruments, such as repo, they together represent up to 90% of global transactions.

There are roughly two key short-term interest rate markets in each of these two markets:

  • in the very short term, that of day-to-day blank loans:

    The average rate for these loans in the euro area is Eonia   (formerly TMM Money Market Rate)

    They are called Fed Funds in the USA

  • in the longer term, that of futures contracts on IBOR

    • for the euro zone, on   LIFFE 3-month Euribor ;

    • for the USA, on the  3-month Libor  from the Chicago CBOT

Central bank operations

The control of monetary policy is made by central banks. For Europe it is done at the level of the European Central Bank. At the level of the United States it is the Federal Reserve.

Beyond the management of the payments system, a central bank uses the money market to:

  • manage the liquidity of the banking system on a daily basis, and by osmosis, of the economy in general (to fight inflation or deflation

  •  in the event of a financial crisis, provide sufficient liquidity to avoid a shutdown of the financial system, or even chain bankruptcies – which was done in particular on September 11, 2001,then in the context of the financial crisis resulting from the subprime crisis;

  • manage short-term interest rates

  • invest the foreign exchange reserves of foreign central banks. At the end of the 1990s, these had grown colossal, mainly in Asia, and a significant part of the

In addition, banks in the euro zone must set up minimum reserves with the ECB.

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