Essay on the Instruments and Structure of New York Money Market

The New York money market deals with a number of financial instruments, such as commercial papers, treasury bills, banker’s acceptances, certificates of deposit, federal funds, repurchase agreements, etc. Likewise, New York money market can be sub-divided into its component sectors on the basis of these financial institutions.

1. Commercial Paper Market:

Commercial paper market is the oldest form of New York money market. It deals in the short-term promissory notes of large, well-known business firms with high creditworthiness. Commercial papers are of three to six months maturity.

The business firms use this market for short-term borrowing by selling their papers through commercial paper dealers. These dealers resell the papers to the banks.

Traditionally, commercial banks were the buyers of commercial papers, but now other institutions, such as non-financial corporations, pension funds, insurance companies and foreign investors have also started supplying funds to the market.

Commercial paper market is a restricted seasonal market which has declined in importance over the years.

2. Acceptance Market:

Banker’s acceptances, which have been introduced only after the Federal Reserve System came into being in 1913, are mainly used for catering short-term financial needs of international trade.

A bank gives a letter of credit to its importer-customer through which it agrees to accept bills drawn by the exporter up to a certain amount.

The importer sends this letter of credit to the exporter assuring him that the bank will pay the specific amount. When the bank receives the bill drawn on it by the exporter, it signs or accepts the bill. Once accepted, the bill becomes banker’s acceptance, and a negotiable money market instrument.

There are no acceptance houses in New York, but a big acceptance market has developed, with New York as the central market. Trading in the acceptance market is done by several large banks and the dealers. Banker’s acceptances are mostly held by the investors.

3. Certificates of Deposit Market:

A large denomination (i.e., of $ 100,000 denomination or more) certificate of deposit is a negotiable instrument mainly used by financial institutions on the demand side of the money market. This instrument has been recently invented by main aggressive U.S. commercial banks in 1961.

The certificates of deposit are issued by the borrowing institutions and are mostly owned by business firms which invest their idle funds for short period. The business firms can further sell the certificates in the market. No legal interest rate ceiling applies to these certificates.

4. Treasury Bills Market:

U.S. Treasury bills market constitutes the largest sector of the New York money market. Treasury bills are the obligation of the U.S. Government or that of state government and are payable at par. They are the short-term U.S. Treasury securities issued for maturity periods of 3, 6, 9 months, as well as one year. These bills bear no interest.

Rather they are sold at a discount. After their issue the Treasury bills are discountable in the market and have a broad and active market. In the absence of discount houses, trading in Treasury bills takes place in the over-the-counter market.

Commercial banks are the largest participants in the Treasury bills market they both buy and sell bills unlike their counterparts in the London money market who only buy.

The Federal Reserve plays an important part in the market. They bring buyers and sellers of bills together. But unlike brokers, the dealers buy and sell securities for their own account as well as simply execute order for their customers.

5. Federal Funds Market:

The Federal Funds market is another relatively new form of money market. In this market the banks borrow from and lend to each other the reserve they have with the Federal Reserve Bank. Federal funds are the statutory balances which the banks have to maintain with the Federal Reserve Bank.

Banks with excess reserves come as lenders and banks with deficient resources come as borrowers. Funds are borrowed in the Federal Funds market for very short period and as an alternative to rediscount­ing with the Federal Reserve Bank. The banks make use of the Federal Funds market to meet reserve requirements or to earn interest over short period.

6. Repurchase Agreement Market:

Repurchase agreement market is still .another important constituent of New York money market in modem times. The repurchase agreement market enables a holder of securities to acquire funds by selling the securities and simultaneously agreeing to repurchase them at a later date.

This market, on the one hand, facilitates borrowing and lending for short periods, and, on the other hand, provides the lender with liquidity because the securities are obtained and returned the next day.

Under the repurchase agreement, a commercial bank sells government securities to a customer (e.g., to a corpora­tion) and promises to repurchase them after the next day at predetermined higher price.

The difference between today’s selling price and tomorrow’s repurchase price is the interest payment included in the repurchase price.