term, traditionally known as the money markets. Borrowers include corporations,
banks and governments. Investors include pension funds, insurance companies,
corporations, governments and some retail investors. Money dealers working for
major banks provide liquidity to the market by continuously taking in deposits and
making loans (also known as ‘placements’). Borrowers can also raise funds directly
from investors by issuing short-term debt securities which are tradable in secondary
markets. We look at key domestic money markets and also at the international market
for funds, known as the Eurocurrency market. A domestic market is one in which funds
are borrowed and lent in the domestic currency, subject to the authority of the central
bank. The largest in the world is for deals made in US dollars contracted inside the
United States. We consider the role of central banks such as the US Federal Reserve,
the European Central Bank, the Bank of England and the Bank of Japan in the day-today
operations of domestic money markets and in setting interest rates. We look at how
governments borrow on a short-term basis by issuing Treasury bills, and their repo
operations. The Eurocurrency market is an international wholesale market for
borrowing and lending and is based in major international financial centres such as
London. We explore some of the reasons for the growth of the Eurocurrency market
and the major types of financial instruments used in the market, including
Eurocurrency loans and deposits, certificates of deposit and Euro-commercial paper.
Domestic Money Market
The money markets are markets for borrowing and lending funds over the short term.
‘Short term’is usually taken to mean a maturity of one year or less, although in practice
some money market deals have maturities greater than one year. Major economies such
as the US, Germany, France, the UK and Japan have highly developed Domestic Money Market
in which short-term funds are borrowed and lent in the local currency, subject
to the control of the regulatory authorities of that country, normally the central bank.
These domestic money markets are quite distinct from the so-called Eurocurrency Market
which is an international market in which banks take deposits and make loans
in a range of currencies outside the home country for those currencies and outwith the
direct regulatory control of the central banks responsible for those currencies.
Market Participants
Borrowers using the money markets include:
- financial institutions such as commercial and investment banks;
- companies (often known as ‘corporates’in the banking world);
- governments, their agencies, state and regional authorities.
The main investors are organizations (and some individuals) with surplus cash to invest,
including:
- insurance companies, pension funds and mutual funds;
- the treasury departments of large multinational corporations;
- governments, their agencies, state and regional authorities.
Money dealers working for major investment banks and securities houses around the
world bring borrowers and investors together by ensuring that there is an active and
liquid market for money market instruments. Business is conducted by telephone and
through computer screens rather than on a physical marketplace. At the simplest level,
money dealers take in short-term deposits and make short-term loans (sometimes
known as ‘placements’). They may also trade a range of short-term interest rate
products such as Treasury bills, commercial paper and certificates of deposit.
US domestic Market
Activities in the US domestic money markets are dominated by the operations of the
Federal Reserve Systems, the US central bank. The ‘Fed’is increasingly used as a model
for central banks around the world, and many of the features of the system appear in
the new European System of Central Banks.
The Federal Reserve System was set up by Congress in 1913 and consists of 12
District Federal Reserve Banks and a Board of Governors appointed by the US
President and confirmed by the Senate. Major policy decisions affecting the supply of
credit and the cost of money in the US are taken by the Federal Open Market
Committee (FOMC) which includes the Governors, the President of the New York
Reserve Bank and the Presidents of four of the 11 other District Banks. Since 1980 the
FOMC has held eight regularly scheduled meetings each year at intervals of five to eight
weeks.
At its meetings the FOMC considers:
- the current and prospective business situation;
- conditions in the financial markets;
- economic trends such as income, spending, money supply, business investment;
- the prospects for inflation in the United States.
Read More : The Money Markets
