Money Market Financial Instruments 

Financial Instruments are securities dealt with in the financial markets. These
are instruments or securities which are paper or electronic evidences of either debt or
equity covering financial transactions in the different market.
Money market instruments are issued by corporations and government units to obtain
short-term funds. Government securities are generally issued by the National Treasury.
In US, even municipal governments issued municipal instruments and federal agency
have their own issues.  The official website of the Philippine Treasury published the
details presented below including the figure on how dealings on government securities
are done. Included among the Philippine government securities are: 

1. Cash management Bills 

Cash management bills are government issued securities with maturities of less
than 91 days. They have maturities like 35 days or 42 days. These bills like treasury
bills are fully backed by the Philippine government and, as such, are theoretically
default free. Investing in these bills affords security and liquidity to the investors. They
can be turned into cash anytime the need arises. They are easy to sell. 

2. Treasury Bills 

Government securities (GS) are unconditional obligation of the government issuing

them.  They are backed up by the full taxing power of the issuing governments. As
such, they are essentially default free. They are generally sold to government
securities eligible dealers (GSEDs). These transactions are usually done online and
through bidding. The figure below shows how dealing in GS are done. 

Government Securities Eligible Dealers (GSED’s) – are SEC-licensed security dealers

belonging to service industry supervised by government (SEC, BSP, IC) which met the
following: a. 100 million unimpaired capital and surplus account. 
b. Statutory ratios prescribed for the industry 
c. The infrastructure for the electronic interface with the Automated Debt
Auction Processing System (ADAPS) and the official Registry of Scripless Securities
(Ross) both of the Bureau of Treasury Better) using Bridge Information System, and
acknowledge by the Better as eligible to participate in the primary auction of
government securities. 

The Philippine government issues two types of government securities – Treasury

bills, which are short term and Treasury Bonds, which are long term. 
Treasury bills
are short term government securities maturing in a year or less. They are zero
coupon securities because they have no coupon payments (generally denoting interest
payments) and only have face values. They are sold at a discount.  

The Philippine government issues three (3) types of treasury bills- 91-day T-
bills, 182-day T-bills, and 364-day T-bills. They are generally quoted either by their
yield rate, which is the discount, or by their price based on 100 points per unit.  

3. Commercial Paper  
These are IOUs issued by companies that need money in the short term to finance
accounts receivable, inventories, or other short-term needs. CPs are marketable
securities issued by highly financially secure firms to large investors. They have low
risk of default and can have maturity ranging from 30-270 days with a usual minimum
value of Php 25,000.  
Commercial papers are generally issued by industrial firms, finance companies,
public utilities and bank holding companies. They are sold either directly or through
dealers to a considerable range of investors with large amounts of money to invest for
short period of time. They are resorted by companies who would rather issue them
than borrow from banks, especially for larger amounts of money.

4. Banker’s Acceptances 
These are bank drafts issued by banks to help traders and other customer raise
funds to pay for current expenditures using bank credit. They are short term (time)
drafts drawn on and accepted by banks, hence, the term banker’s acceptances. Time
drafts mean they mature on a certain date.  
Banker’s acceptances are credit instrument that gives the borrower access to the
funds in the banking system as well as funds outside the banking system. Traditionally,
banker’s acceptances were used to finance imports and exports, but now they are no
longer limited to these transactions.  
5. Negotiable Certificates of Deposit 
It is a receipt issued by a commercial bank for the deposit of money. It is a time
deposit with a definite maturity date (up to one year) and a definite rate of interest. It
stipulates that the bearer is entitled to receive annual interest payments at the rate
indicated in the certificate, together with the principal upon maturity of the certificate. 
Bank issue negotiable CDs to attract additional funds to make additional loans or
to counteract the restrictive effect of deposit withdrawals. Banks began issuing
negotiable CD’s, which were not subject to statutory interest rate ceilings, in an effort to
halt the withdrawal of deposits.  

6. Repurchase Agreements 
Also known as Repos or RPs, were created by brokerage houses and popularized
by commercial banks, which are agreements involving the sale of securities at a
specified date and price. RPs are legal contracts that involve the actual sale of
securities by a borrower to the lender with a commitment on the part of the borrower to
repurchase the securities at the contract price plus a stated interest charge. The
contract price of the securities that makes up the arrangement is fixed for the duration
of transaction. 
Anyone who buys an RP is protected from market price fluctuations throughout the
contract period. This makes it a sound alternative investment for funds that re freed up
for every short period of time. An RP is usually a short-term loan (often overnight) from
a corporation, state or local government, or other large entity that has idle funds to a
commercial bank, securities dealer, or other financial institution. The borrower provides
the lender collateral in the form of GS, making the loan free of default.  
RPs are free from interest rate ceilings and are not subject to reserve
requirements, as long as the collateral are GS. Term RPs have a maturity greater than
one day. The difference between overnight RPs and Term RPs is the same difference
between demand deposits and time deposits.  Term RPs are one way of circumventing
the interest rate ceilings on time deposits. One of the benefits of MMDAs is the
insurance provided by the PDIC which provides investors the feeling of being safe. 

7. Money Market Deposit Accounts (MMDAs) 

This is also called money market accounts (MMAs), usually refer to a liquid funds
account placed in a form of savings account that is held with a retail financial
institution, usually a bank, a savings and loan corporation, or credit unions that offer a
higher rate of interest than ordinary bank savings account, but are equivalent to and
competitive with money market mutual funds (MMMFs). MMDAs are a type of hybrid
account combining some elements of a savings account and a checking account.  

8. Money Market Mutual Funds (MMMFs) 

These are offered by investment companies. These are investment pools that buy
safe, short term securities, such as Treasury bills, certificates of deposits, and
commercial papers. Unlike 
money market deposit accounts, but like other investment accounts MMMFs are not
insured by the government. 
The income earned on MMMFs varies based on the performance of the underlying
investments. But because these investments are fairly safe, they do not pay high
returns, although the yields are bit higher than in MMDAs. 

9. Exchange Traded Fund (ETF) 

ETF are investment funds that are traded on stock exchanges such as NASDAQ
just like individual stocks are traded every day. An ETF is an exchange-traded fund
traded on various stock markets. It combines the feature of mutual funds and stocks
because it is a fund of stocks which matches an index such as S&P 500 index.  
ETF is a highly complex financial instrument that can be invested in and can
create significant income but has sizable impact on taxes. 

10. Certificate of Assignment 

It is an agreement that transfers the right of the seller over a security in favor of
the buyer.  The underlying security carries a promise to pay a certain sum of money on
a fixed date like a promissory note. The arrangement allows the buyer to hold the
security as a guaranteed source of repayment and acts like a collateral. The buyer has
the option to force the liquidation of the underlying security to ensure repayment. 
For example: ABC corporation owns certain securities, say T-bills worth
Php100,000. ABC company goes to a bank and borrows money corresponding to the
amount of the T-bills. ABC corporation executes a certificate of assignment, assigning
the right over the T-bills to the bank.  The maturity and amount of the loan needs to
match the maturity and amount of the T-bills. Upon maturity, ABC corporation will pay
the bank Php100,000 that it borrowed and gets back the cancelled certificate of
assignment. 
  
11. Certificate of Participation 
It is an instrument that gives the buyer a share in a security that promises to pay a
certain sum of money on a fixed date. The transaction is between the buyer and the
original issuer of the security. A dealer issues the certificate of participation. The
dealer’s liability of two vouch for the integrity of the original security rather than to repay
the loan if the issuer defaults. 
For example: DEF corporation issued a promissory note for Php300 million to a
bank. The bank later sold Php 5 million of this instrument to RST company, Inc. The
bank would issue a certificate of participation in DEF’s promissory note to RST
company, Inc. The bank’s certificate of participation does not make the bank liable in
case DEF corporation defaults on its note.