250 The Management of Bond Investments and Trading of Debt
some reserve banks, Banque de France and Banca d’Italia being examples, put the
short term at 6 months.
In a broad sense, the money market denotes all available facilities for borrowing
and lending money within the timeframe in reference. In certain cases, this tends to
include also longer-term borrowing or lending. Increasingly, however, economists and
bankers refer to the market for long-term funds as the capital market, restricting the
term money market to the market for short-term money. In this latter case, the money
market consists of two sectors:
The direct, or customers’ loan market, characterized by the close and personal
connection between borrowing customers and their bank, and
The indirect, or open money market, with objective relations between borrower
and lender, where the loan is usually negotiated through intermediaries and the
lender and borrower do not meet.
With this distinction, the indirect money market is impersonal and it is not
necessarily formally organized. This means that, for the most part, there is no well-
established meeting place, like an exchange, at which intermediaries come together.
An example of buying and selling securities in a formal meeting place would be the
The way it works with all open markets, there is a group of borrowers in the
money market providing demand for funds, and competing among themselves for
financial resources. There is also a group of lenders providing supply of money, com-
peting in the placement of their funds. Moreover, there is a group of intermediaries,
who act as brokers, providing facilities for bringing together the bids and offers of
borrowers and lenders:
The money market provides an outlet for demand and offer of funds, and
Negotiations are carried on in the offices of brokers, dealers, and bankers or
through the use of on-line facilities.
Through money market transactions, funds are made mobile. Both borrowers and
lenders, therefore debtors and creditors, obtain access to the money market which
may operate on a local, regional, national or global scale. The more financial transac-
tions get internationalized, the less the money market has geographical boundaries –
unless different jurisdictions impose artificial ones, largely related to their currency.
Market transactions are used by market participants, such as commercial and
investment banks, insurance firms, manufacturing companies, service enterprises,
public authorities, or institutional investors, for liquidity management. An important
distinction is between:
Money market transactions, which are central bank money, such as credit balances
with the central bank, and
Those involving transactions based on bank deposits, which enable non-bank enti-
ties to synchronize their payment flows.
But to face some of their clients’ currency needs, and to comply with their mini-
mum reserve requirements, credit institutions additionally need central bank money.