The Use of Money Market Funds as Collateral

21523 Words87 Pages
Table of Contents

List of Figures iii

List of Tables iv

List of Abbreviation v

Abstract vii

1 Introduction 1

2 The Money Market 3

2.1 General Description of the Money Market and its Instruments 3

2.2 Participants and their Main Activities 4

2.3 Trading, Clearing and Settlement 6

2.4 Risks and Risk Mitigation 7

3 Collateral Management 9

3.1 General Description of the Collateral Management Function 9

3.2 Quality and Risks of Collateral 10

3.3 Transaction, Execution and Legal Issues 11

3.4 Valuation of Collateral 13

3.5 Users and Trends 14

4 The Role of Collateral in OTC Derivative Transactions 16

4.1 General Description of OTC Derivatives 16

4.1.1 Structure and
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Recent market developments have highlighted the 'Flight for Security ' of market participants by means of financial collateral. While cash represents the preferred source of collateral in 82% of all OTC derivatives transactions, it needs to be returned with interest to the collateral giver. At the same time this creates a re-investment risk for the collateral receiver. When accepting MMFs as collateral, collateral receivers are not exposed to any reinvestment risk because the fund offers competitive rates of returns. Compared to their
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