Money market

The money market is that part of the market of the financial market, are traded on the short-term funds (assets and liabilities) with central bank cash balances. Supply and demand form above the money market rate. From the capital market, the money market is distinguished by a shorter maturity of the capital investment. The border between the two markets is usually drawn with maturities of a year or two. Actor actors on the money market, the central bank, credit institutions, financial intermediaries and large industrial companies.

Money market instruments

The money market are assigned to the following instruments:

• Day and time deposits.
• Repo and securities lending transactions
• Short-term securities (money market instruments )
• Facilities of the central bank (eg main refinancing operations of the ECB)
• Money market derivatives ( forward rate agreements, overnight index swaps, money market futures )
• Change

Functioning of the money market

The money market is the liquidity balance between commercial banks and their liquidity management is of central importance. The central element is the relationship between commercial banks and the central bank.

Basically, commercial banks offer different ways to meet their needs for short-term liquidity. In addition to the inclusion of central bank money via main refinancing operations ( in the euro zone over the so-called main refinancing instrument in Switzerland on repurchase agreements with the Swiss National Bank ) various central banks offer more short-term funding instruments; in the euro zone, these are the marginal lending facility in the United States, discount business with the Federal Reserve Banks.

In addition to these transactions with the central bank commercial banks to optimize their demand for central bank money via the money market. If a commercial bank is a need for central bank money in excess of the quota granted to it by the central bank, they tried this demand on the money market to cover by lending excess central bank money of other commercial banks.

In systems with bilateral refinancing commercial banks their central bank money contingent usually draw only from when it either for their own business need ( to secure their cash reserves) or reserve of central bank money or a higher interest rate than that at which they borrow it, even when the central bank must be able to lend in the money market to other banks.

Interest rate management by the central bank

The control of money market interest rates is one of the most important monetary policy activities of central banks. The European Central Bank controls money market rates over the triad of main refinancing rate, marginal lending rate and deposit rate, resulting in the Money Market always moves usually between the latter two interest rates, which together form the interest rate corridor.

The U.S. central bank controls the money market interest rates in addition to the quantitative method of the discount policy on a target range for the federal funds rate. The SNB is pursuing a similar strategy. Your quantitative control is via the aforementioned repurchase agreements, direct control of the interest rate on a target range for the three -month LIBOR.

Within the interest rate corridor, the money market interest rate depends on the ratio of central bank money supply and central bank demand for money, with the money market interest rate to be paid according to the shortest possible period of notice depends on which the money market loans must be repaid.

Market participants and properties

Market participants are particularly banks with interbank trading, also other financial intermediaries (such as insurance companies, investment companies) as well as large enterprises. However, the most important institutional single provider is the central bank, which is on the money market, the so-called central bank money to spend ( money supply ). Transactions are essentially over the counter, such as on the phone, completed by so-called money dealers. The traded minimum denomination amounts usually to 1,000,000 euros.

The money market is characterized by a high degree of institutionalization, solid commercial substances, impersonal relationship between debtor and creditor, high creditworthiness of market participants and standardized market instruments.

The outstanding on the money market receivables are attributed pursuant money supply definition M1 or M2. Deposits with longer maturity are usually assigned to the M3 and will not be part of money market placements.

The motivation of actors to participate in the money market is different:

• Companies and banks use the market to create or borrow large sums of money in the short term.
• The central bank occurs on the market in order to exert influence on the money creation and lending of banks. She wants on the one hand to achieve its policy goals and on the other hand ensure the stability of the financial sector.

Risks of market participants

All market participants are exposed to the default risk is monitored on the granting of mutual counterparty limits. Companies are so willing to another company to provide money up to a specified maximum amount. Some of the transactions are carried out on a secured basis (repos). Furthermore, they try deliberately to diversify their investments to spread the risk of default on as many market participants.

In addition, money market activities resulted in a net interest rate risk, due to the short time limits per se is relatively low but.

The money market is an important tool for managing liquidity risk, with money market activities may also establish liquidity risks.