MONEY MARKETS

Slide 1 (Definition) Yeye

MONEY MARKET
- A place for trading in money and short term financial assets that are close
substitutes of money
// It basically refers to a section of the financial market where financial instruments with high
liquidity and short-term maturities are traded.

- They provide means for lenders and borrowers to satisfy their short-term financial
needs
// Provides an opportunity for balancing the short term surplus funds of investors with short term
requirements of borrowers.

- These markets are described as “money markets” because the assets that are
bought and sold are short term
// with maturities ranging from a day to a year. It doesn’t actually deal in cash or money but
deals with substitutes of cash like trade bills, promissory notes and government papers which
can be converted into cash without any loss and at low transaction cost.

Slide 2 (Definition) Yeye

- Money market is not a place but an activity.

// It consists of negotiable instruments such as treasury bills, commercial papers, and
certificates of deposit that are used by participants such as companies in raising funds by selling
commercial papers in the market.

- The center for dealings, mainly short term character, in monetary assets; it meets
the short term requirements of borrowers and provides liquidity and cash to the
lenders.
// For the most part, money markets provide those with funds—banks, money managers, and
retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—
banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.

- Money market is an unregulated and informal market and not structured by capital
markets, where things are organized in a formal way.
// Money market gives lesser return to investors who invest in it but provides a variety of
products. The term money market is an umbrella that covers several market types, which vary
according to the needs of the lenders and borrowers. It is considered as a safe place to invest
due to the high liquidity of securities.

Slide 3 (Importance) Yeye

IMPORTANCE OF MONEY MARKET

Slide 4 (Importance) Yeye

1. Development of trade and industry
● Financing Trade
// Money Market plays a crucial role in financing both internal as well as international trade.
Commercial Finance is made available to the traders through bills of exchange, which are
discounted by the bill market.

● Financing Industry
// Money market helps in securing the short-term loans to meet their working capital
requirements through the system of finance bills, commercial papers, etc.

2. Development of Capital Market

● Profitable Investment
// Money market enables the commercial banks to use their excess reserves in profitable
investments. It gives reasonable access to users of short-term funds in meeting their
requirements quickly and adequately at a reasonable cost.

● Parking place for short term funds

// It provides a parking place to employ short term surplus funds and provides room for
overcoming short term deficits.

3. Smooth functioning of commercial banks

● —Self-sufficiency of commercial bank—
// Developed money market helps the commercial banks to become self-sufficient.

4. Effective central bank control

● —Help to central bank—
// It smoothens the functioning and increases the efficiency of the central bank. It enables the
central bank to influence and regulate liquidity in the economy through its intervention in this
market.

5. Formulation of suitable monetary policy

// It achieves sustainable economic growth by adjusting the money supply.

6. Source of finance to the government

// It issues instruments at a discount and is repaid at par at the time of maturity.

Slide (Characteristics) Sean

CHARACTERISTICS OF MONEY MARKET

● It is a market purely for short-terms funds or financial assets called near money.
● The money market instruments carry a maturity period of less than a year.
● These instruments are used to fund the short-term needs of the borrower.
● It has instruments like T-bills, certificate of deposits, inter-bank call money, etc.
● Transactions can not take place formally like a stock exchange
● Transactions have to be conducted without the help of brokers.
● Risk is comparatively lower due to the short-term maturity period
● Composed of commercial banks, acceptance houses & NBFC (Non-banking financial
companies
● It is not a single homogeneous market, it comprises several submarkets like call money
market, acceptance & bill market.

SCRIPT
1st Slide
So these are the characteristics of the Money Market. In terms of maturity of the
instruments, it deals with financial assets, having a maturity period of less than one year only.
Second, regarding the financial needs, the money market used instruments to fund the short-
term needs of the borrower. Examples of these instruments are treasury bills, commercial
papers, certificate of deposits, inter-bank and call money. So, if we will compare this to the stock
market, they have a lot of differences because in the stock market, the financing needs can be
used for long-term fund requirements and it does not use instruments since it uses a stock
which is an independently listed company. And lastly, transactions can not take place formally
like a stock exchange.

2nd Slide
As I have said, transactions cannot take place formally and have to be conducted
without the help of brokers since only through oral communication, relevant documents and
written communication are the mediums to carry out transactions. And lastly, in the money
market, risks are lower because banks use money from money market accounts to invest in
stable, short-term, low-risk securities that are very liquid that mature in a short period of time.

Structures of a developed money Market

● Developed commercial banking system

● Presence of a central bank
● Availability of ample resources
● Near money assets
● Existence of sub markets
● Existence of secondary markets
● Demand and supply fund
Script: Next are the characteristic features of a developed money market. First, the banking
system should be highly organized and developed. Second, it should have the presence of the
central bank since the central bank has the crucial role in ensuring economic and financial
stability. Third is the availability of ample resources. Ample means, enough or more than
enough, so to have a developed money market, it should have enough or more than enough
resources. Near money assets should also be perceived because they are the highly liquid
assets which are not cash but can easily be converted into cash since they are essential in
corporate financial statement analysis and money supply management. Next is sub markets
such as call money, notice money, and term money markets that provide funds for very short
term. Also, the existence of a secondary market is significant because it steers the price of an
asset toward its actual value through the natural workings of supply and demand as it is also an
indicator of a nation's economic wellbeing.

DEVELOPMENT OF MONEY MARKET OVER THE YEARS

Instruments under the money market play a huge role in the overall development of
the money market over the years. One example is the money market fund.

● Money market funds were designed and launched during the early 1970s in the U.S.
- With how easy it is for investors to purchase securities that provide better
returns compared to those securities from standard interest-bearing bank
accounts, money market funds easily became popular among investors. //
● Previously, money market funds held only government bonds.
- However, holding only government bonds resulted in higher yields and so
commercial paper became a common component of many money market
funds which then resulted in the Reserve Primary Fund crisis because of the
reliance on this. //
● SEC implemented some fundamental structural changes to the way they regulate
money market funds in 2016.
- The regulations also provided non-government money market fund boards
with new tools to address runs. The $1 per share policy was allowed to be
maintained for retail and government money market funds in the United
States.//
● Today, money market funds have become one of the core pillars of the present-day
capital markets.
- This is because many investors choose money market funds as a location to
lodge their cash until they decide on other assets or for funding needs that
may develop in the short-term.//

● During the decade spanning from 2000 to 2010, the monetary policies of the Federal
Reserve Bank led to short-term interest rates.
 -The rates banks pay to borrow money from one another—hovering around
0%. Money market fund investors witnessed returns that were much lower
than those seen in previous decades due to these almost-zero rates.
Furthermore, when rules tightened following the 2008 financial crisis, the
quantity of investable securities shrank.
● Another economic policy in recent years that has had an adverse impact on money
market funds is quantitative easing (QE).
- QE is a type of unconventional monetary policy in which a central bank buys
government bonds or other securities on the open market to lower interest
rates and expand the money supply.//
● This migration of funds led to interest rates remaining low for a long duration, and
the diminishing of returns from money market funds.
- As major economies across the globe—including the U.S.—followed QE
measures in the aftermath of the 2008 financial crisis, a good portion of the
QE money made its way into money market mutual funds as a haven.//

With these changes in the money market fund through the years, it sure made an impact in
the money market as a whole.

ICE BREAKER QUESTIONS:

1. A place for trading in money and short term financial assets that are close substitutes of
money.
Ans: Money Market

2. It is under the development of trade and industry.

Ans: Financing Industry

3. Money market helped it to function smoothly and become self-sufficient.

Ans: Commercial Bank

1. It is one of the instruments of the money market that has zero risk.

T - 💵💴

Answer: T-bills or Treasury Bills

1. Its presence is one of the characteristics of a developed money market.

🛤️🏦🛤️

Answer: Central Bank

give at least one example of money market globally

Answer: US Money Market

give at least one example of money market in the philippines

Answer: Land Bank Money Market Fund