The term money market refers to the net work of corporations, financial institutions, investors and governments which deal with flow of short term capital. The money markets have expanded very vastly in the last two decades mainly on account of outflow of money from the banking industry. Financial deregulation has caused banks to lose market share in both deposit gathering and lending.
There is an identifiable money market for each currency in each country, because interest rates vary from one another. These markets are dependent as both investors and borrowers will shift from one currency to another depending upon relative interest rates.
In some countries, regulations do impact the ability of investors to hold foreign currency instruments and where the regulations do not impact, the investors are concerned to minimize any risk of loss as a result of exchange rate fluctuations. For these reasons, most money market transactions occur in the investor’s home currency
The money markets do not exist in a particular place or operate according to a single set of rules. They are basically OTC markets.
Money markets in United States of America handle largest volume transactions in the world. In the table furnished below, one can get a fair view of the structure of markets – products and participants.
| Products | Participants |
| Federal Funds (Tenor – Mostly overnight. There are also long term for few weeks) | Banks and other depository institutions |
| Discount window (Tenor – usually overnight) | Banks and other depository institutions |
| Certificates of deposits (Tenor – Mostly 1-12 months. Some have 5 years of more) | Banks – Money centre banks and large regional banks |
| Negotiable certificates of deposits (Tenor – 1 -12 months) | Well capitalised banks |
| Euro dollar Certificates of deposits (Tenor –Mostly 3-6 months. Some have long term) | Banks (foreign branches US banks or foreign banks located abroad). These are sold to brokers, investment banks, institutional investors and large corporations |
| Euro dollar time deposits (Tenor – overnight, 1 week, 1-6 months and longer) | Banks |
| Repurchase agreements (Tenor – short term – overnight or a few days. Longer term – 1,2,3-weeks and 1,2,3,6 months) | Banks, securities dealers, non-financial corporations and governments (principal participants) |
| Treasury bills (Tenor 4,13 and 26 weeks) | US Government and primary dealers |
| Municipal notes (Tenor 30 days to 1 year) | State/Local governments |
| Commercial paper (Tenor Mostly 270 days – average 30 days) | Non financial and financial businesses (corporations and foreign governments) |
| Bankers acceptances (Tenor upto 270 days) | Non financial and financial businesses (firms involved in imports and exports) |
| Government sponsored enterprise securities, discount notes (Tenor 30 to 360 days), bonds (Tenor More than one year) | Farm credit system, Federal home loan bank system and Federal national mortgage association |
| Shares in money market instruments, money market mutual funds (Tenor less than 90 days), local government investment pools (TenorAverage 318 days – 1 to 1044 days) | Money market mutual funds and local government investment pools |
| Futures contracts (Tenor 3 months) | Dealers and banks |
| Options (Tenor Exercise at strike price on or before pre arranged expiration date) | Dealers, banks and non banks |
| Interest rate swaps (Exchange of interest streams over the life span of the underlying debt issue) | Dealers, banks and non banks |