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Money Market
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

In a broad sense, any demand for and supply of funds and credit; in the technical sense, the open market, as contrasted to personalized borrower-lender relationships for short-term funds and the capital market for longer-term funds (government and municipal bonds, and corporate bonds and stocks) provided by dealers and underwriters (both outstanding and new issues).  The national money market in the U.S. is the New York money market.

Structurally, the New York money market has the following sectors:

            Federal funds
            Treasury bills
            Bankers acceptance (bills)
            Commercial paper
            Certificates of deposit
            Eurodollar certificates of deposit  

At one time, when open market call and time loans to brokers could be arranged through the money desk of the New York Stock Exchange, such brokers' loans could also be classified as part of the money market.  At the close of World War II, however, the money desk was discontinued, and such brokers' loans are now arranged directly between the banks and brokers concerned.

The primary dealers of U.S. government securities include the following banks and nonbanks (all of New York except where noted):


            Bank of
America NT & SA
            Bankers Trust Co.
            Chase Manhattan Government Securities Inc.
            Chemical Bank  
Citibank NA
            Continental Illinois National Bank and Trust Co., Chicago
            Crocker National Bank,
San Francisco
            First Interstate Bank of
California , Los Angeles
            First National Bank,
            Harris Trust and Savings Bank,
            Manufacturers Hanover Trust Co.
            Morgan Guaranty Trust Co.
            Security Pacific National Bank


            Bear, Stearns & Co.
            Briggs, Schaedle & Co., Inc.
            Carroll McEntee & McGinley Inc.
            Daiwa Securities
            Dean Witter Reynbolds Inc.
            Discount Corp of
New York
            Donaldson, Lufkins & Jenrette Securities Corp.
            Drexel Burnham Lambert Government Securities Corp.
            First Boston Corp.
            Greenwich Capital Markets Inc.,
Greenwich , Conn.
            Goldman, Sachs & Co.
            E.F. Hutton & Co. Inc.
            Kidder, Peabody & Co. Inc.
            Kleinwort Benson Government Securities Inc.
            Aubrey G. Lanston & Co. Inc.
            Lehman Government Securities Inc.
            Merrill Lynch Government Securities Inc.
            Morgan Stanley & Co. Inc.
            Nomura Securities International
            Paine Webber Inc.
            Wm. E. Pollock Government Securities Inc.
            Prudential-Bache Securities Inc.
            Refco Partners L.F.
            Rothschild, Unterberg, Towbin Salomon Brothers Inc.
            Smith Barney Government Securities Inc.
            Thomson McKinnon Securities

Federal Funds

These are immediately available claims upon reserve accounts of member banks at the Federal Reserve Bank.  Member banks resort to federal funds for the adjustment of reserve positions when needed for legal reserve purposes.  Lending banks, in turn, earn some return on idle excess reserves at the Fed without tying up the funds on the loan for more than a day.  For example, Bank A has excess reserves at the Fed; Bank B needs reserves for legal reserve requirements.  Bank A will make the desired sum available to checks:  Bank A draws a check on its reserve account at the Federal Reserve Bank, payable to Bank B, and delivers it to Bank B in return for Bank B's cashier's check, payable to Bank A, for the same principal sum plus one day's interest at the current federal funds rate.  Bank B will receive immediate credit to its reserve account for its Fed deposit of Bank A's check on the same day; Bank A will present Bank B's cashier's check at the clearinghouse and settlement will be made the following day.  Net result:  a loan of federal funds from Bank A to Bank B for one day at the prevailing rate for federal funds.

New York banks might borrow similarly from out-of-town banks or lend to out-of-town banks (usually correspondents).  Bank C in New York City needs reserves; Bank D in New York State has excess reserves.  Bank D telephones the New York Federal Reserve Bank (confirming by wire) to make available the desired amount to Bank C, which is done immediately.  The following day, Bank C will repay the principal sum plus interest for one day at the prevailing rate for federal funds; this may be done by simple credit to Bank D's correspondent account and credit Bank D's reserve account for the principal plus interest.

If the lending and borrowing banks are located in different Federal Reserve districts, the Federal reserve banks concerned will figure in the loan of federal funds.  Bank X in New York , having excess reserves, upon request from Bank Y in Chicago or from a money broker on Y's behalf, will instruct the New York Federal Reserve Bank to transfer the desired sum by the Federal Reserve System's wire transfer system to the Chicago Federal Reserve Bank, for credit to Bank Y's reserve account.  Bank Y will repay, the following day, the principal sum by reversing the wire transfer and the interest usually by check directly to Bank X or by credit to Bank X's correspondent account.

Money brokers, if they figure in federal funds deals, may charge no commission, in return for the expectation that the bank provided the service will continue to favor the broker with security orders (e.g., such brokers may be New York Stock exchange members, such as Garvin, Bantel & Co., which also deal in government securities), or may charge a fractional commission (annual rate of 1/16th or  ⅛th of 1%).  Banks acting as brokers in such federal funds deals do so without charge for correspondents.  See MONEY BROKER.

Alternative methods of obtaining reserves might involve two or more days; federal funds, if available, provide the quickest and cheapest way for member banks to obtain reserves at the Fed.

The rediscount rate of the New York Federal Reserve Bank normally acts as the ceiling for the New York Federal funds rate, for the alternatives of loans or advances at the bank would be cheaper if the federal funds rate went higher.  Whenever money is easy, the federal funds rate will be well below the rediscount rate, reflecting an ample supply of excess reserves of member banks.  Because of its sensitive reflection of member banks' money positions, the federal funds rate is regarded highly by the New York Federal Reserve Bank as an indicator of money market conditions, although its attention in latest years has primarily been on the monetary aggregates for purposes of MONETARY POLICY.

Repurchase agreements (sales by government securities dealers to member banks, with an agreement to buy back the securities one of more days later) and loans by out-of-town banks to government securities dealers are often settled in federal funds.  The New York Federal Reserve Bank also utilizes such repurchase agreements to assist the money position of U.S. government securities dealers.

Treasury Bills

These shortest term of the U.S. government's obligations (see TREASURY BILLS, UNITED STATES GOVERNMENT SECURITIES) provide the heaviest volume of outstanding and trading activity of the money market.  Open market operations of the FEDERAL RESERVE SYSTEM are normally conducted in Treasury bills.  Commercial banks are their largest buyers and sellers, operating through government securities dealers to adjust their reserve positions or secondary reserves.  Weekly new offerings are bid for competitively on Mondays, awards are made Tuesdays, and payment therefore is made on Thursdays, either in federal funds or in maEagle Tradersg bills.  Major money market money flows, therefore, occur through the medium of Treasury bills.

Negotiable Time Certificates of Deposit  

Beginning in 1961, the larger banks began to offer negotiable time certificates of deposit (CDs), a new money market instrument intended to attract and to keep corporate funds that otherwise would find investments in other money market instruments.  Time CDs have short-term maturities, with yields which increase in proportion to the length of the maturities, and are issued in larger denominations of $0,5-$1.0 million minimum for the larger banks (no less than $100,000 for smaller banks).

Certificates of Deposit  

First introduced to the domestic money market in 1961, negotiable certificates of deposit issued by U.S. banks domestically have become among the most important sources of funds of U.S. money market banks in recent years.  The instrument specifies the amount of the deposit, the length of the maturity, the rate of interest (domestic certificate of deposit rates are quoted on an interest-bearing basis, rather than on a discount basis), and the terms of calculation of the interest (actual number of days to maturity, on a 360-day year basis, fixed or variable when paid, etc.).  Rates are free to reflect prevailing levels of money rates on such certificates of deposit above $100,000 although the minimum denomination for market trading is actually $1,000,000.  Since the offering bank can tailor the maturity and yield to compete successfully with Treasury bills of comparable maturity (for example, a return 25 basis points better than that on the bills), the offering bank can be successful in keeping the deposits of large corporate depositors that otherwise would leave to be invested in the bills; and by changing the classification of the deposits from demand to time, the bank can gain excess reserves because of the lower legal reserve requirements on time deposits compared to demand deposits.

Eurodollar Certificates of Deposit  

These are dollar-denominated negotiable certificates of deposit issued by banks abroad, either by foreign branches of U.S. banks or by foreign banks, with the market centered in London .  Also called Euro CDs, Eurodollar certificates of deposit were introduced to the market in London in 1966 by a U.S. bank and trading therein has grown substantially in recent years.

Bankers Acceptance  

These are obligations of those banks which accept drafts drawn pursuant to commercial letters of credit (largely in foreign trade).  Instead of holding them for investment until their final maturity and payment, their holders may sell them to bill dealers in the money market, who in turn sell them largely to other banks desiring such a high-grade short-term obligation for investment, especially foreign banks.  Bill volume is secondary in size and activity to that in Treasury bills.  See LETTER OF CREDIT.

Commercial Paper  

These are short-term promissory notes (four- to six-month maturities as a rule) of nationally known and highly rated companies, placed through commercial paper dealers, who in turn sell the paper to commercial banks and other buyers.  The largest finance companies place their own paper directly with investors in the New York money market without using dealers.  Some major industrial conglomerates have also taken to direct placement of their commercial paper.  The volume of commercial paper is larger than that of bankers acceptances, but both are by far secondary to volume and activity to Treasury bills.


The appended tables compare average annual rates for various sectors of the money market and annual money market instruments amounts outstanding for selected years.


COOK, T.Q., and ROWE, T.D. Instruments of the Money Market.  Federal Reserve Bank of Richmond , 1986.
DARST, D.M. The Handbook of the Bond and Money Markets.  McGraw Hill Book Co.,
New York , NY , 1981.
DUFEY, G., and GIDDY, I.H. The International Money Market, Prentice Hall, Inc.,
Englewood Cliffs, NJ, 1978.
DUFFIELD, J.G., and SUMMERS.  "Bankers' Acceptances."  Instruments of the Money Market, 1981.
FEDERAL RESERVE BANK OF RICHMOND .  Instruments of the Money Market. STIGUM, M.  The Money Market.  Dow Jones-Irwin, Inc., Homewood , IL , 1983.
VAN HORNE, J.C. Financial Market Rates and Flows.  Prentice Hall, Inc.,
Englewood Cliffs, NJ, 1984.  

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