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The French money market
The French money market is fairly well established, but its size is restricted by the fact that in France currency still plays an important role in the money supply, whereas by regulations the nonfinancial private sector of the economy is excluded from dealing in the market. Banks as well as a few public or semipublic agencies working in the financial sphere and intermediaries—brokers and discount houses—constitute the market. Transactions take place in commercial paper and in treasury bills. The monetary authorities maintain a special bookkeeping system for all the treasury bills held by banks and other financial institutions, under which such bills are not represented by actual certificates but by entries in special accounts administered by the Banque de France for the treasury.
The central bank’s open-market operations, which were normally limited to smoothing out disturbances in the local money market, have gained importance in recent years. Open-market transactions are effected to keep domestic money market rates in line with international rates, in an effort to prevent unwanted capital flows. The possibilities of the central bank’s influencing the monetary situation through the money market are limited to the large government needs for short-term funds, no market for long-term government borrowing being established.
The term money marketis actually a misnomer. Money - currency- is not traded in the money markets. Because the securitiesthat do trade there are short-term and highly liquid, however, they are close to being money. Money market securities have three basic characteristics in common:
· They are usually sold in large denominations.
· They have low default risk.
· They mature in one year or less from their original issue date. Most money market instruments mature in less than 120 days.
Money market transactions do not take place in any one particular location or building. Instead, traders usually arrange purchases and sales between participants over the phone and complete them electronically. Because of this characteristic, money market securities usually have an active secondary market..
Another characteristic of the money markets is that they are wholesale markets. This means that most transactions are very large, usually in excess of $1 million. The size of these transactions prevents most individual investors from participating directly in the money markets. Instead, dealers and brokers, operating in the trading rooms of large banks and brokerage houses, bring customers together.
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 issues Treasury bills (often called T-bills). Short-term issues enable the government to raise funds until tax revenues are received and such issues can also be used to replace maturing issues.
The Federal Reserve is the Treasury's agent for the distribution of all government securities. It uses Treasury securities to regulate money supply.
Commercial banks hold a larger percentage of U.S. government securities and are also the major issuers of negotiable certificates of deposit (CDs), banker's acceptances, federal funds, and repurchase agreements.
Many businesses buy and sell securities in the money markets.