Chapter 5 - Money Markets Flashcards
Money Markets
Securities with less than one year maturity
Most often debt securities
The commercial book entry system allows for the simultaneous transfer of _________ and _________ against settlement
Value and Title
Treasury Bill vs. Treasury Note
Bill = < 1 year
Note = > 1 year
GSE
Government Sponsored Entities
GSE Examples
Fannie Mae
Freddie Mac
Federal Farm Credit Banks Funding Corporation
What are non-certified or book-entry form securities?
Securities that have been dematerialized
Who acts as the fiscal agent for the US Treasury?
The Federal Reserve
Which market does the FOMC participate in to enact monetary policy?
Secondary market
CSD
Central Securities Depositories
Companies that hold securities to enable book-entry transfer
Settlement and related services
May provide trade matching, clearing, and settlement
Two forms of CSDs
International (e.g. DTC)
National: can settle international securities through links to local CSDs
Two primary entities that provide for the processing and clearing of most money market investments:
- Federal Reserve’s Commercial Book-Entry Systems (CBES)
Treasury/Reserve Automated Debt Entry System (TRADES)
All Treasury securities - DTCC
Euroclear
CSD for Europe
CBES
(Capital Markets)
Commercial Book-Entry System
Delivery system that allows for the simultaneous transfer of securities against the settlement of funds
CBES Pyramid Hierarchy
National Book-Entry System
Depository Institutions
Broker, Dealer, Financial Institutions for individual investors
Indirect Holding
Holding US Treasuries but there are intermediaries between the investor and the issuer
DTCC
Depository Trust and Clearing Corporation
Owned by member financial institutions
Parent company of DTC and NSCC
NSCC
National Securities Clearing Corporation
central counterparty
nets trades and payments among its participants
What services does the DTCC provide?
Clearing, settlement, and information services for a variety of securities
Nets transactions
Legal depository
Provides custody and asset servicing
The DTCC services are regulated by which entity?
SEC
Is most commercial paper held to maturity or sold?
HTM
Credit Enhancement
Utilized to diminish risk that CP is not secured by establishing SBLC or backup line of credit
ABCP
Asset-Based Commercial Paper
Usually secured with trade receivables
ABCP is usually issued through a ________?
Conduit - sponsoring financial institution rather than the issuer
Single Seller vs. Multi-Seller ABCP
Singe Seller: one company’s assets
Multi-Seller: multiple company assets
Downsides to ABCP
Much more complex
Difficult to monitor credit risk
Liquidity is impacted as market is smaller
Common Tenor and Maximum Tenor for CP
Average is under 45 days
Up to 270 or 397 for private placement
Is commercial paper issued at a discount?
Yes
Bank paper
certificates of deposit, banker’s acceptances, repurchase agreements
Are savings accounts considered a time deposit within the confines of bank paper?
Yes, though they must have an associated security in order to be traded
Negotiable CDs
Usually traded in multiples of $100K
Active secondary market
Eurodollars
USD-denominated deposits held in financial institutions outside the US
negotiable or non-negotiable
Why do Eurodollars and Yankee CDs have higher yields?
No reserve requirements, less regulation
Yankee CDs difference has mostly gone away
Banker’s Acceptances (BAs)
Time draft that is issued by a purchaser of goods to pay a supplier and that has been accepted by the bank on which the draft is drawn
Traded at a discount
Is government paper typically issued at a discount?
Yes
How are US T-bills sold?
Multiple price, sealed-bid auction
Competitive vs. Noncompetitive T-bill Bidding
Competitive - bids are accepted starting at the highest price (lowest yield)
Noncompetitive - bidder is guaranteed to receive desired amount at average price from competitive bids
In general, which will be higher for a dealer in relation to T-bills: the bid discount or the ask discount?
The bid discount because this is the price they would want to buy at
How big is the secondary market for US Treasuries?
One of the largest in the world
Municipal notes typically have what tenor?
3 months to 1 year
VRDOs
Variable Rate Demand Obligations
Generally tax exempt
Put option to allow for security to be liquidated earlier
Typically supported by a credit facility
FRNs
Floating Rate Notes
Generally sit at the longer term side of the money market maturity spectrum
Actual return is the coupon interest rate and the discount from the secondary market
How are FRNs priced?
Fixed spread over a reference rate
Can FRNs be secured?
Yes
The bid-offer spread will tend to be greatest for which type of money market security?
FRNs
Continued reselling will erode the yield
Reverse Repo Agreement
Repo from the perspective of the investor
Repurchase Agreement Term Classifications
Overnight
Term
Open
What is typically used as the security for a repurchase agreement?
Government security
Settlement Risk
Risk that counterparty defaults and is unable to pay at maturity
Are repurchase agreements generally over-collateralized?
Yes
Two ways of structuring a repurchase agreement
Bilateral
Tri-lateral (broker-dealer)
Are bilateral or tri-lateral repos more common in the US? In the EU?
Tri-lateral are common in the US
Not very common in the EU
For floating rate instruments, when is their maturity date?
At the next interest rate reset
Money Market Funds are regulated by which entity and under which rule?
SEC
Rule 2a-7
European equivalent to the US SEC?
ESMA
WAM vs. WAL
Weighted average maturity takes into account interest rate resets
LVNAV
Low-volatility net asset value
MTM remains within 0.20% of the constant price
Rule 2a-7 Overview
Permitted investments and diversification rules
Portfolio rules regarding WAM and WAL
Liquidity requirements
Fund pricing – all funds are permitted to value to a floating or variable net asset value
What did further revisions to Rule 2a-7 in 2016 do?
Required floating NAV for non-government MMFs
Liquidity fees if a fund’s weekly liquid assets fall below a threshold
Suspend redemptions (redemption gates) for up to 10 days
Are US government money market funds subject to the Rule 2a-7 provisions regarding floating NAV, liquidity fees, and redemption gates?
No
Describe the following funds
- US Treasury Funds
- Government Funds
- Institutional Prime Funds
- Institutional Municipal/Tax-Exempt Funds
- Retail Funds
US Treasury Funds
Government Funds
Institutional Prime Funds
floating NAV
mix of corporate and government
Institutional Municipal/Tax-Exempt Funds
floating NAV
Retail funds
Individuals
EU Two Types of Money Market Funds
Short-term MMF
Maximum WAM of 60 days and maximum WAL of 120 days
Public debt CNAV funds, LVNAV, and VNAV
Standard MMF
Maximum WAM of 6 months and a maximum WAL of one year
All funds are VNAV
Short-duration money market fund
Invest in securities that are longer than most money market securities
Average maturity of securities is 1 to 3 years
Short-Duration MMF vs. Short-Term MMF
Short-Duration – longer than one year
Short-Term – EU classification
What does interest-bearing mean?
Pays interest
Does not apply to securities issued at discount to create yield (e.g. CP)
Three types of securities issued at a discount
Government paper
Commercial paper
Banker’s Acceptances
