Money Market

- Money market cover markets for short-term debt instruments

- Consists of a network of institutions and facilities for trading debt securities with a
maturity of one year or less.
- They are financial institutions and dealers in money or credit who wish to either
lend or borrow.

Characteristics of Money Market

• Liquidity - Since they are fixed-income securities with short-term maturities of a year or
less, money market instruments are extremely liquid.
• Safety - They also provide a relatively high degree of safety because their issuers have
the highest credit ratings.
• Discount Pricing - A third characteristic they have in common is that they are issued at a
discount to their face value.

Functions of Money Market

• To maintain monetary equilibrium. It means to keep a balance between the demand for
and supply of money for short term monetary transactions.
• To promote economic growth. Money market can do this by making funds available to
various units in the economy such as agriculture, small scale industries, etc.
• To provide help to Trade and Industry. Money market provides adequate finance to
trade and industry. Similarly, it also provides facility of discounting bills of exchange for
trade and industry.
• To help in implementing Monetary Policy. It provides a mechanism for an effective
implementation of the monetary policy.
• To help in Capital Formation. Money market makes available investment avenues for
short term period. It helps in generating savings and investments in the economy.
• Money market provides non-inflationary sources of finance to government. It is
possible by issuing treasury bills in order to raise short loans. However, this does not lead
to increases in the prices.
• Apart from those, money market is an arrangement which accommodates banks and
financial institutions dealing in short term monetary activities such as the demand for and
supply of money.
Importance of Money Market

• Development of trade and industry

• Development of capital market
• Smooth functioning of commercial banks
• Effective central bank control
• Formulation of suitable monetary policy
• Non-inflationary source of finance to government

Common Money Market Instruments

1. Cash Management Bills

- It is government-issued securities with maturities with less than 91 days. They have
maturities like 35 days or 42 days.
- These bills, like Treasury bills are fully backed by the Philippine Government and,
as such, are theoretically default free.
- Investing in these bills affords security and liquidity to the investors.
- They can be turned into cash anytime the need arises.
- They are easy to sell

2. Treasury Bills
- Are short-term government-issued securities maturing in a year or less.
- They have zero coupon securities because they have no coupon payments (generally
denoting interest payment) and only have face values.
- They are sold at a discount, which means that their purchase price is less than their
face value.

3 Tenors of Treasury Bills

- 91-day Treasury Bill
- 182-day Treasury Bill
- 364-day Treasury Bill

3. Certificate of Deposit
- A receipt issued by a commercial bank for the deposit of money
- Time deposit with a definite maturity date (up to one year); and
- Time deposit with a definite rate of interest.
- Can be issued in any denominations (₱100,000; ₱500,000; ₱1,000,000)
- Advantage: safety and high interest rate
 - Original maturity of CDs ranges from 1-18 months
- Issued to: individuals, corporations, trusts, funds, and associations

4. Commercial Papers
- Issued by companies that need money in the short term to finance accounts
receivable, inventories, or other short-term needs (industrial firms, finance
companies, public utilities, and bank holding company)
- Short-term unsecured promissory notes
- Maturities from 30 to 270 days with a minimum value of ₱25,000
- Issued to large inventors

5. Repurchase Agreements
- Also known as repos or RPs, were created by brokerage houses and popularized by
commercial banks
- Agreements involving the sale of securities from one party to another
- RPs are legal contracts that involve the actual sale of securities by a borrower to the
lender with a commitment on the part of borrower to repurchase the securities at the
contract price plus interest
- Protected from market price fluctuations
- Short-term loan (often overnight)

6. Banker’s Acceptances
- Bank drafts issued by banks to help traders and other customers raise funds to pay
for current expenditures using bank credit.
- They are short-term drafts drawn on and accepted by banks
- Before, it is used to finance imports and exports, but now, they are no longer
limited to these transactions
- They may also finance shipments of goods within a country and between two
countries

7. Municipal Notes
- Debt issued by state and local governments to finance capital expenditures such as
construction projects. Municipal notes are appealing to investors because they
mature in one year or less, offer fixed income and are often exempt from income
tax at the local, state and/or federal levels.
History of Money Market in the Philippines

• The Philippine Money Market started in 1965 primarily as a facility for trading excess
funds among commercial banks.
• Bangko Sentral ng Pilipinas requires banks to maintain a daily minimum cash reserve as
a set of percentage of deposit liabilities.
• Interbank Call Market is a money market that issued by banks with temporary cash
surpluses led commercial banks to set up the money market as an auction house for
excess reserves.
• Interbank Call Loans are credits of one bank to another for a period not exceeding four
days.
• Deposit substitutes are alternative ways of getting money from the public other than
traditional bank deposits.
• The Securities and Exchange Commission requires corporate borrowers in the money
market to register their issues unless they are specifically exempted from doing so.

References:
Akrani, G. (2010). Money Market - Concept, Meaning, Definitions and Functions. Kalyan-
city.blogspot.com. Retrieved from http://kalyan-city.blogspot.com/2010/09/money-market-
concept-meaning.html?m=1
Ali, Z. (2015). Money Market and its Objectives, importance and instruments, Slideshare.net.
Retrieved from https://www.slideshare.net/zainkahanho/money-market-and-its-objectives-
importance-its-instruments
Mariano, N. 2014. Elements of Finance. Manila: Rex Book Store, Inc.
Money Market Instruments. Investopedia. Retrieved from https://www.investopedia.com/exam-
guide/finra-series-6/investment-securities/money-market-instruments.asp#ixzz54yx5ewHP
Municipal Note. Investopedia. Retrieved from
https://www.investopedia.com/terms/m/municipal-note.asp#ixzz54z9vjRbX
Notes on Money Market: Meaning, Functions and Benefits. Essays, Research Papers and
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http://www.businessmanagementideas.com/notes/market/notes-on-money-market-meaning-
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