WHO PARTICIPATES IN THE MONEY MARKETS?

Date: 2015-10-07; view: 535.

The primary money market players are the U.S. Treasury, the Federal Reserve System, commercial banks, businesses, investments and securities firms, and individuals.

The U.S. Treasury Department is unique because it is always a demander of money market funds and never a supplier. It issues Treasury bills (often called T-bills) and other securities that are popular with other money market participants. Short-term issues enable the government to raise funds until tax revenues are received. The Treasury also issues T-bills to replace maturing issues.

The Federal Reserve is the Treasury's agent for the distribution of all government securities. The Fed holds vast quantities of Treasury securities that it sells if it believes that the money supply should be reduced. Similarly, the Fed will purchase Treasury securities if it believes that the money supply should be expanded. The Federal Reserve's role is in controlling the economy through open market operations.

Commercial banks hold a larger percentage of U.S. government securities than any other group of financial institutions, approximately 12%. Banks are prohibited from owning risky securities, such as stocks or corporate bonds. Banks are also the major issuers of negotiable certificates of deposit (CDs), banker's acceptances, federal funds, and repurchase agreements. In addition to using money market securities to help manage their own liquidity, many banks trade on behalf of their customers.

Many businesses buy and sell securities in the money markets. The money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.

Investment Companies.Large diversified brokerage firms are active in the money markets. The primary function of these dealers is to "make a market" for money market securities by maintaining an inventory from which to buy or sell. These firms are very important to the liquidity of the money market because they ensure that both buyers and sellers can readily market their securities.

Finance companies raise funds in the money markets primarily by selling commercial paper. They then lend the funds to consumers for the purchase of durable goods such as cars, boats, or home improvements.

Property and casualty insurance companies must maintain liquidity because of their unpredictable need for funds. To meet the demand for funds, the insurance companies sell some of their money market securities to raise cash.

Pension funds invest a portion of their cash in the money markets so that they can take advantage of investment opportunities that they may identify in the stock or bond markets. Like insurance companies, pension funds must have sufficient liquidity to meet their obligations.