The money market itself is the global financial market for short-term borrowing and lending. The money market consists of financial institutions and dealers in money and credit that are looking to either borrow funds or provide funds. The money market provides short term liquid funding for the U.S. and global financial marketplace. The money market is where short-term obligations such as Treasury bills, commercial paper and bankers’ acceptances are bought and sold. The size of this market is in the number of securities bought and sold as well as the dollar amount is enormous.
The money market is generally considered a subsection of the fixed income market. Bonds of what type of another are the most common type of fixed income security. A bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities, debt that matures in less than one year. Bonds are interest bearing debts or debts that are sold at a discount that have maturities of one year or longer. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short term financial instruments of various types and qualities. The capital market is the opposite end of the money market and is used mostly for longer-term funding, which is supplied by bonds and equity. Money market investments are also called cash investments because of their short maturities.
A money market fund derives its name in the mutual fund industry because they invest solely in cash and cash equivalent securities, which are referred to as money market instruments. Many of the money market instruments are quite specialized, and they are typically traded only by large financial institutions that have the knowledge of the money market.
The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. Money market securities are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.
Some of the factors that determine the investment also contain the overall risk. These conditions limit risk in a money market fund’s portfolio by governing the credit quality, diversification, and maturity of money market fund investments.
Money market funds are required to hold high-quality securities. In general, money market funds may invest in: securities that have been rated in one of the two highest short-term rating categories by two NRSROs or securities of comparable quality, as determined by the money market fund’s board of directors. NRSRO is an acronym used by the Securities Exchange Commission and by banking and securities regulators to refer to nationally recognized statistical rating organizations. The most well known NRSROs are Standard & Poor’s and Moody’s.
Money market funds must maintain a diversified portfolio. This requirement limits a fund’s economic exposure to any single issuer. For instance, in general, money market funds may not invest more than 5 percent of assets in the securities of any single issuer, with the exception of securities issued by the federal government.
Money market funds must invest in securities that are considered short-term. In general, money market funds cannot acquire a portfolio security with a remaining maturity of greater than 397 days. In addition, a money market fund’s weighted average maturity average of the maturities of all securities held in the portfolio, weighted by each security’s percentage of net assets-must not exceed 90 days.
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