The major money market participants are the U.S. Treasury, the Federal Reserve, commercial banks, money market brokers and dealers, corporations, other financial institutions such as mutual funds, and individuals. Table 5–6 summarizes the role (issuer or investor) each of these participants plays in the markets for the various money market securities.
The U.S. Treasury
The U.S. Treasury raises significant amounts of funds in the money market when it issues T-bills. T-bills are the most actively traded of the money market securities. T-bills allow the U.S. government to raise money to meet unavoidable short-term expenditure needs prior to the receipt of tax revenues. Tax receipts are generally concentrated around quarterly dates, but government expenditures are more evenly distributed over the year
The U.S. Treasury
The U.S. Treasury raises significant amounts of funds in the money market when it issues T-bills. T-bills are the most actively traded of the money market securities. T-bills allow the U.S. government to raise money to meet unavoidable short-term expenditure needs prior to the receipt of tax revenues. Tax receipts are generally concentrated around quarterly dates, but government expenditures are more evenly distributed over the year
The Federal Reserve
The Federal Reserve is a key (arguably the most important) participant in the money markets. The Federal Reserve holds T-bills (as well as T-notes and T-bonds) to conduct open market transactions purchasing T-bills when it wants to increase the money supply and selling T-bills when it wants to decrease the money supply. The Federal Reserve often uses repurchase agreements and reverse repos to temporarily smooth interest rates and the money supply. Moreover, the Fed targets the federal funds rate as part of its overall monetary policy strategy, which can in turn affect other money market rates. Finally, the Fed operates the discount window, which it can use to influence the supply of bank reserves to commercial banks and ultimately the demand for and supply of fed funds and repos.
Commercial Banks
Commercial banks are the most diverse group of participants in the money markets. As Table 56 shows, banks participate as issuers and/or investors of almost all money market instruments discussed above. For example, banks are the major issuers of negotiable CDs, banker’s acceptances, federal funds, and repurchase agreements. The importance of banks in the money markets is driven in part by their need to meet reserve requirements imposed by regulation. For example, during periods of economic expansion, heavy loan demand can produce reserve deficiencies for banks (i.e., their actual reserve holdings are pushed below the minimums required by regulation). Additional reserves can be obtained by borrowing fed funds from other banks, engaging in a repurchase agreement, selling negotiable CDs, or selling commercial paper. 14 Conversely, during contractionary periods, many banks have excess reserves that they can use to purchase Treasury securities, trade fed funds, engage in reverse repos, and so on.
Money Market Mutual Funds
Money market mutual funds purchase large amounts of money market securities and sell shares in these pools based on the value of their underlying (money market) securities . In doing so, money market mutual funds allow small investors to invest in money market instruments. In 2010 money market mutual funds had $1.5 trillion invested in shortterm financial securities—such as repurchase agreements, negotiable CDs, open market paper (mostly commercial paper), and U.S. government securities. Money market mutual funds provide an alternative investment opportunity to interest-bearing deposits at commercial banks.
Brokers and Dealers
Brokers’ and dealers’ services are important to the smooth functioning of money markets. We have alluded to various categories of brokers and dealers in this chapter. First are the18 primary government security dealers. This group of participants plays a key role in marketing new issues of Treasury bills (and other Treasury securities). Primary government securities dealers also make the market in Treasury bills, buying securities from the Federal Reserve when they are issued and selling them in the secondary market. Secondary market transactions in the T-bill markets are transacted in the trading rooms of these primary dealers. These dealers also assist the Federal Reserve when it uses the repo market to temporarily increase or decrease the supply of bank reserves available
The second group of brokers and dealers are money and security brokers. The five major brokers in this group are Cantor Fitzgerald Securities Corp., Garban-Intercapital, Liberty, Prebon Yamane, and Hill Farber. When government securities dealers trade with each other, they often use this group of brokers as intermediaries. These brokers also play a major role in linking buyers and sellers in the fed funds market and assist secondary trading in other money market securities as well. These brokers never trade for their own account, and they keep the names of dealers involved in trades they handle confidential. The third group of brokers and dealers are the thousands of brokers and dealers who act as intermediaries in the money markets by linking buyers and sellers of money market securities (see Chapter 16 ). These brokers and dealers often act as the intermediaries for smaller investors who do not have sufficient funds to invest in primary issues of money market securities or who simply want to invest in the money markets.
Corporations
Nonfinancial and financial corporations raise large amounts of funds in the money markets, primarily in the form of commercial paper. Because corporate cash inflows rarely equal their cash outflows, they often invest their excess cash funds in money market securities, especially T-bills, repos, commercial paper, negotiable CDs, and banker’s acceptances.
Other Financial Institutions
Because their liability payments are relatively unpredictable, property-casualty (PC) insurance companies, and to a lesser extent life insurance companies, must maintain large balances of liquid assets). To accomplish this, insurance companies invest heavily in highly liquid money market securities, especially T-bills, repos, commercial paper, and negotiable CDs. Since finance companies are not banks and cannot issue deposits, they raise large amounts of funds in the money markets), especially through the issuance of commercial paper.
Individuals
Individual investors participate in the money markets through direct investments in these securities (e.g., negotiable CDs) or through investments in money marketmutual funds, which contain a mix of all types of money market securities
The Federal Reserve is a key (arguably the most important) participant in the money markets. The Federal Reserve holds T-bills (as well as T-notes and T-bonds) to conduct open market transactions purchasing T-bills when it wants to increase the money supply and selling T-bills when it wants to decrease the money supply. The Federal Reserve often uses repurchase agreements and reverse repos to temporarily smooth interest rates and the money supply. Moreover, the Fed targets the federal funds rate as part of its overall monetary policy strategy, which can in turn affect other money market rates. Finally, the Fed operates the discount window, which it can use to influence the supply of bank reserves to commercial banks and ultimately the demand for and supply of fed funds and repos.
Commercial Banks
Commercial banks are the most diverse group of participants in the money markets. As Table 56 shows, banks participate as issuers and/or investors of almost all money market instruments discussed above. For example, banks are the major issuers of negotiable CDs, banker’s acceptances, federal funds, and repurchase agreements. The importance of banks in the money markets is driven in part by their need to meet reserve requirements imposed by regulation. For example, during periods of economic expansion, heavy loan demand can produce reserve deficiencies for banks (i.e., their actual reserve holdings are pushed below the minimums required by regulation). Additional reserves can be obtained by borrowing fed funds from other banks, engaging in a repurchase agreement, selling negotiable CDs, or selling commercial paper. 14 Conversely, during contractionary periods, many banks have excess reserves that they can use to purchase Treasury securities, trade fed funds, engage in reverse repos, and so on.
Money Market Mutual Funds
Money market mutual funds purchase large amounts of money market securities and sell shares in these pools based on the value of their underlying (money market) securities . In doing so, money market mutual funds allow small investors to invest in money market instruments. In 2010 money market mutual funds had $1.5 trillion invested in shortterm financial securities—such as repurchase agreements, negotiable CDs, open market paper (mostly commercial paper), and U.S. government securities. Money market mutual funds provide an alternative investment opportunity to interest-bearing deposits at commercial banks.
Brokers and Dealers
Brokers’ and dealers’ services are important to the smooth functioning of money markets. We have alluded to various categories of brokers and dealers in this chapter. First are the18 primary government security dealers. This group of participants plays a key role in marketing new issues of Treasury bills (and other Treasury securities). Primary government securities dealers also make the market in Treasury bills, buying securities from the Federal Reserve when they are issued and selling them in the secondary market. Secondary market transactions in the T-bill markets are transacted in the trading rooms of these primary dealers. These dealers also assist the Federal Reserve when it uses the repo market to temporarily increase or decrease the supply of bank reserves available
The second group of brokers and dealers are money and security brokers. The five major brokers in this group are Cantor Fitzgerald Securities Corp., Garban-Intercapital, Liberty, Prebon Yamane, and Hill Farber. When government securities dealers trade with each other, they often use this group of brokers as intermediaries. These brokers also play a major role in linking buyers and sellers in the fed funds market and assist secondary trading in other money market securities as well. These brokers never trade for their own account, and they keep the names of dealers involved in trades they handle confidential. The third group of brokers and dealers are the thousands of brokers and dealers who act as intermediaries in the money markets by linking buyers and sellers of money market securities (see Chapter 16 ). These brokers and dealers often act as the intermediaries for smaller investors who do not have sufficient funds to invest in primary issues of money market securities or who simply want to invest in the money markets.
Corporations
Nonfinancial and financial corporations raise large amounts of funds in the money markets, primarily in the form of commercial paper. Because corporate cash inflows rarely equal their cash outflows, they often invest their excess cash funds in money market securities, especially T-bills, repos, commercial paper, negotiable CDs, and banker’s acceptances.
Other Financial Institutions
Because their liability payments are relatively unpredictable, property-casualty (PC) insurance companies, and to a lesser extent life insurance companies, must maintain large balances of liquid assets). To accomplish this, insurance companies invest heavily in highly liquid money market securities, especially T-bills, repos, commercial paper, and negotiable CDs. Since finance companies are not banks and cannot issue deposits, they raise large amounts of funds in the money markets), especially through the issuance of commercial paper.
Individuals
Individual investors participate in the money markets through direct investments in these securities (e.g., negotiable CDs) or through investments in money marketmutual funds, which contain a mix of all types of money market securities
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