The money market

What is the money market?

The money market is a short-term borrowing market (less than 2 years) where banks, insurance companies, businesses, and states (through central banks and public treasuries) lend and borrow funds according to their needs.

How does the money market work?

The money market is composed of two markets: the interbank market and the market for Negotiable Debt Securities (NDS).

The interbank market

The interbank market is a market reserved for banks where short-term financial assets (between 1 day and 1 year) are exchanged. The European Central Bank plays a key role in it: it intervenes directly in the market by: • selling or buying liquidity; • setting key interest rates, including the refinancing rate which influences the borrowing rates of commercial banks at the ECB.

The market for Negotiable Debt Securities (NDS)

Negotiable debt securities are a source of short-term and medium-term financing for companies, states, and banks.  
There are different categories, but they all share two characteristics: a minimum amount of €150,000 and a fixed maturity.  
Among the negotiable debt securities, we find for example:  

- Certificates of deposit: Issued by credit institutions for a duration ranging from 1 day to 1 year. The interest rate is fixed and known in advance.  

- Commercial paper: Issued by companies on the money market for a duration that can range from 10 days to 1 year. Their remuneration is close to money market rates.  

- Negotiable Treasury bills: Issued by the state through the Public Treasury. Treasury bills represent the state's debt. They have a duration of less than or equal to 1 year.

The 3 main money market indices

€STER

The €STER is the daily reference rate for overnight interbank deposits in the euro area.

FED FUNDS

The FED FUNDS rate is the reference rate at which American banks lend funds they hold as reserves at the Federal Reserve to other American banks. It is set every 6 weeks by the Federal Reserve (FED).

EURIBOR

Average rate at which European banks lend to each other in euros for a specified maturity (between 1 week and 12 months). It is published by the European Central Bank (ECB) based on quotes provided daily by a panel of banks.