Money Market

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What are money market investments?

Money market investments are highly liquid securitised or unsecuritised short-term investments. They are essentially debt obligations.

Money market instruments can serve as a 'stopover' for excess cash between longer-term investments.

• Call deposits: placements, movements (increase/decrease), and redemptions possible with 48 hours' notice.
• Time deposits: the money is lent for a specific period of time, usually between one week and one year.

Advantages / disadvantages

Important risks to consider

What to expect from money market investments

Important to know before investing in time and call deposits

A closer look at money market

Basic properties of money market investments

• Trading of money market instruments is done either over the counter (OTC), i.e. directly between the lender and the borrower (debtor), or at an exchange, if the product is standardised (e.g. US Treasury bills).
• The time to maturity is usually short (up to approximately one year).
• The main counterparties are larger institutions such as banks, other financial institutions, countries/governments, or industries.
• Contracts have a minimum denomination and size.

Interest and interest rates

Money market investments (like other instruments, e.g. fixed income) offer interest in return for a loan.

The basis of the interest rate offered is a reference rate minus a spread representing the service margin. Important reference rates are:

• LIBOR (London Interbank Offered Rate): the Libor is the interest rate at which banks offer each other short-term funding. It is fixed daily as an average of the rates offered by the reference banks.
• EURIBOR (Euro Interbank Offered Rate) is a reference rate of 41 large banks for fixed-term deposits.
• The LIBOR/EURIBOR interest-rate benchmarks will disappear and a transition to alternative reference rates (ARRs), also known as risk-free rates (RFRs), will take place. ARRs are overnight interest rates that incorporate little or no credit risk. Furthermore, the markets underlying the ARRs are significantly more active than the markets underpinning the IBORs. Hence, while IBORs rely significantly on expert judgement, ARRs are purely transaction-based.

Alternative interest rate

• Interest income is calculated by using specific day-count conventions, i.e. the number of days in a month/year.
• Day-count conventions have developed historically as a result of the need for easy calculation and time-period constancy.
• A number of different conventions exist, such as the '30/360 method' (counting 30 days for each month, and 360 days for the full year), the 'actual/actual method' (actual days of the months and 365—or 366 in leap years—for the year), and the 'actual/360 method' (actual days in month and 360 for full year).

How money market work

Example: Call and time deposits

• Call deposits have an undefined maturity. The money is callable within a notice period of 48 hours.
• Time deposits are made for a fixed period of time and are redeemed at the end of that period.

Specific properties — call and time deposits

Important risks to consider (I) — call and time deposits

Money market instruments are regarded as being among the safer investments. However, as with any investment, certain risks remain.

• There is a low risk on the capital invested: the default (credit) risk of the custody bank becoming insolvent.
• Since they are regarded as safe investments, returns are lower than for other types of investments. When investing for an extended period (by rolling over the investment), inflation can eat up part of the return from the investment.
• If the deposit is done in any currency other than the home currency, there is also a currency risk.
• Money market instruments are short-term investments. As debt obligations, however, they may be less liquid than other types of financial instrument.

Important risks to consider (II) — call and time deposits

The interest rate (return) of a money market deposit is known at the time of investment. However, interest rates change and thus affect reinvestment/roll-over. Below we outline three possible cases.

Best case — increasing and high interest rates

• Increasing return on reinvestment
• The higher the overall interest rate, the higher the return

Realistic case — volatile interest rates

• Varying returns on multiple reinvestments
• The higher the overall interest rate, the higher the return

Worst case — decreasing and low interest rates

• Decreasing return on reinvestment
• Low overall return

Fiduciary deposits

Fiduciary deposits are money market transactions done by a bank in its own name, with a third-party bank, but on the account and risk of the client (i.e. the investor bears the counterparty risk).

Both types of money market instruments previously described (i.e. call and time deposits) are available.

Advantages / disadvantages — fiduciary deposit

Certificate of deposits and repurchase agreement

Certificate of deposits

• A certificate of deposits (CDs) is a savings certificate entitling the bearer to receive interest. CDs are generally issued by a deposit institution (such as a bank, credit union, or a finance or insurance company).
• The deposit is short term, usually ranging from one to nine months and may be rolled over at the end of the term.
• The deposit is securitised by the issuing bank, i.e. it can be sold prior to maturity.
• High minimum denominations apply.
• Interest rates may be fixed or variable.
• Depending on the specific investment, CDs may be insured (minimising counterparty risk) or callable by the issuer (adding the risk of early termination by the debtor).

Repurchase agreement

• This is an agreement to sell a security and to repurchase it afterwards.
• The return offered is the 'repo rate', i.e. the difference between the sale and the repurchase price.
• Changes in the value of the security during the lifetime of the contract are compensated through a margin account. Thus, if the security loses value, the buyer (i.e. the lender) can generally issue a margin call and demand more money or securities to protect his or her investment.
• Note that due to the mark-to-market compensation, the seller of the agreement bears an additional risk to the ones already mentioned.

Registered money market claims and commercial papers

Registered money market claims

• These are debt obligations of the Swiss Confederation.
• They are unsecuritised discount papers with a maturity of up to 12 months that serve as short-term funding.
• They are issued using a tender process.

Commercial papers

• Commercial papers are issued by private companies (banks, industrial companies).
• They serve as short-term funding (up to nine months).
• They usually have high minimum denominations.
• Commercial papers are issued by sound entities. However, the investor bears the credit risk of the issuing counterparty.

Counterparty risks and ratings

• Money market investments aim to be short-term investments with low risk. They are thus only made with trustworthy counterparties.
• The instruments described in this document all have different counterparties. For example, in the case of registered money market claims, the counterparty is a state (in this case, the Swiss Confederation) that is regarded as among the safest counterparties, while commercial papers are issued by private companies.
• The credit quality of a counterparty for short-term debts is rated by an independent agency such as Moody's. The table below provides an example of such a rating.

• Note that ratings are not investment advice – they are just additional information for the investor.
• Short-term ratings differ from long-term ratings for the bond market. For more on the latter, please refer to U Wealth's educational material on fixed income.

Important legal information

Contact information

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