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CTP - 7th Edition > Chapter 5 - Money Markets > Flashcards

Chapter 5 - Money Markets Flashcards

(67 cards)

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1
Q

Money Markets

A

Securities with less than one year maturity

Most often debt securities

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2
Q

The commercial book entry system allows for the simultaneous transfer of _________ and _________ against settlement

A

Value and Title

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3
Q

Treasury Bill vs. Treasury Note

A

Bill = < 1 year
Note = > 1 year

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4
Q

GSE

A

Government Sponsored Entities

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5
Q

GSE Examples

A

Fannie Mae

Freddie Mac

Federal Farm Credit Banks Funding Corporation

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6
Q

What are non-certified or book-entry form securities?

A

Securities that have been dematerialized

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7
Q

Who acts as the fiscal agent for the US Treasury?

A

The Federal Reserve

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8
Q

Which market does the FOMC participate in to enact monetary policy?

A

Secondary market

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9
Q

CSD

A

Central Securities Depositories

Companies that hold securities to enable book-entry transfer

Settlement and related services

May provide trade matching, clearing, and settlement

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10
Q

Two forms of CSDs

A

International (e.g. DTC)

National: can settle international securities through links to local CSDs

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11
Q

Two primary entities that provide for the processing and clearing of most money market investments:

A
  1. Federal Reserve’s Commercial Book-Entry Systems (CBES)
    Treasury/Reserve Automated Debt Entry System (TRADES)
    All Treasury securities
  2. DTCC
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12
Q

Euroclear

A

CSD for Europe

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13
Q

CBES

(Capital Markets)

A

Commercial Book-Entry System

Delivery system that allows for the simultaneous transfer of securities against the settlement of funds

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14
Q

CBES Pyramid Hierarchy

A

National Book-Entry System
Depository Institutions
Broker, Dealer, Financial Institutions for individual investors

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15
Q

Indirect Holding

A

Holding US Treasuries but there are intermediaries between the investor and the issuer

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16
Q

DTCC

(who is it owned by and what are its subsidiaries?)

A

Depository Trust and Clearing Corporation

Owned by member financial institutions

Parent company of DTC and NSCC

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17
Q

NSCC

(what roles does it perform?)

A

National Securities Clearing Corporation

central counterparty

nets trades and payments among its participants

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18
Q

What services does the DTCC provide?

A

Clearing, settlement, and information services for a variety of securities

Nets transactions

Legal depository

Provides custody and asset servicing

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19
Q

The DTCC services are regulated by which entity?

A

SEC

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20
Q

Is most commercial paper held to maturity or sold?

A

HTM

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21
Q

Credit Enhancement

A

Utilized to diminish risk that CP is not secured by establishing SBLC or backup line of credit

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22
Q

ABCP

(what is it usually secured with?)

A

Asset-Based Commercial Paper

Usually secured with trade receivables

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23
Q

ABCP is usually issued through a ________?

A

Conduit - sponsoring financial institution rather than the issuer

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24
Q

Single Seller vs. Multi-Seller ABCP

A

Singe Seller: one company’s assets
Multi-Seller: multiple company assets

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25
Downsides to ABCP
Much more complex Difficult to monitor credit risk Liquidity is impacted as market is smaller
26
Common Tenor and Maximum Tenor for CP
Average is under 45 days Up to 270 or 397 for private placement
27
Is commercial paper issued at a discount?
Yes
28
Bank paper
certificates of deposit, banker's acceptances, repurchase agreements
29
Are savings accounts considered a time deposit within the confines of bank paper?
Yes, though they must have an associated security in order to be traded
30
Negotiable CDs | (what face value multiples is it traded under and is the market active?)
Usually traded in multiples of $100K Active secondary market
31
Eurodollars
USD-denominated deposits held in financial institutions outside the US negotiable or non-negotiable
32
Why do Eurodollars and Yankee CDs have higher yields?
No reserve requirements, less regulation Yankee CDs difference has mostly gone away
33
Banker’s Acceptances (BAs)
Time draft that is issued by a purchaser of goods to pay a supplier and that has been accepted by the bank on which the draft is drawn Traded at a discount
34
Is government paper typically issued at a discount?
Yes
35
How are US T-bills sold?
Multiple price, sealed-bid auction
36
Competitive vs. Noncompetitive T-bill Bidding
Competitive - bids are accepted starting at the highest price (lowest yield) Noncompetitive - bidder is guaranteed to receive desired amount at average price from competitive bids
37
In general, which will be higher for a dealer in relation to T-bills: the bid discount or the ask discount?
The bid discount because this is the price they would want to buy at
38
How big is the secondary market for US Treasuries?
One of the largest in the world
39
Municipal notes typically have what tenor?
3 months to 1 year
40
VRDOs | (also typically supported by what?)
Variable Rate Demand Obligations Generally tax exempt Put option to allow for security to be liquidated earlier Typically supported by a credit facility
41
FRNs | (how long is the tenor in relative terms and what is the actual return?)
Floating Rate Notes Generally sit at the longer term side of the money market maturity spectrum Actual return is the coupon interest rate and the discount from the secondary market
42
How are FRN interest rates calculated?
Fixed spread over a reference rate
43
Can FRNs be secured?
Yes
44
The bid-offer spread will tend to be greatest for which type of money market security?
FRNs Continued reselling will erode the yield
45
Reverse Repo Agreement
Repo from the perspective of the investor
46
Repurchase Agreement Term Classifications
Overnight Term Open
47
What is typically used as the security for a repurchase agreement?
Government security
48
Settlement Risk
Risk that counterparty defaults and is unable to pay at maturity
49
Are repurchase agreements generally over-collateralized?
Yes
50
Two ways of structuring a repurchase agreement
Bilateral Tri-lateral (broker-dealer)
51
Are bilateral or tri-lateral repos more common in the US? In the EU?
Tri-lateral are common in the US Not very common in the EU
52
For floating rate instruments, when is their maturity date?
At the next interest rate reset
53
Money Market Funds are regulated by which entity and under which rule?
SEC Rule 2a-7
54
European equivalent to the US SEC?
ESMA
55
WAM vs. WAL
Weighted average maturity takes into account interest rate resets
56
LVNAV
Low-volatility net asset value MTM remains within 0.20% of the constant price
57
Rule 2a-7 Overview
Permitted investments and diversification rules Portfolio rules regarding WAM and WAL Liquidity requirements Fund pricing – all funds are permitted to value to a floating or variable net asset value
58
What did further revisions to Rule 2a-7 in 2016 do?
Required floating NAV for non-government MMFs Liquidity fees if a fund’s weekly liquid assets fall below a threshold Suspend redemptions (redemption gates) for up to 10 days
59
Are US government money market funds subject to the Rule 2a-7 provisions regarding floating NAV, liquidity fees, and redemption gates?
No
60
Describe the following funds 1. US Treasury Funds 2. Government Funds 3. Institutional Prime Funds 4. Institutional Municipal/Tax-Exempt Funds 5. Retail Funds
US Treasury Funds Government Funds Institutional Prime Funds floating NAV mix of corporate and government Institutional Municipal/Tax-Exempt Funds floating NAV Retail funds Individuals
61
EU Two Types of Money Market Funds
Short-term MMF Maximum WAM of 60 days and maximum WAL of 120 days Public debt CNAV funds, LVNAV, and VNAV Standard MMF Maximum WAM of 6 months and a maximum WAL of one year All funds are VNAV
62
Short-duration money market fund
Invest in securities that are longer than most money market securities Average maturity of securities is 1 to 3 years
63
Short-Duration MMF vs. Short-Term MMF
Short-Duration – longer than one year Short-Term – EU classification
64
What does interest-bearing mean?
Pays interest Does not apply to securities issued at discount to create yield (e.g. CP)
65
Three types of securities issued at a discount
Government paper Commercial paper Banker's Acceptances
66
Fiduciary
Counterparty where property is given to hold in trust according to trust agreement
67
Does ABCP utilize liens?
No, it is secured by a specific pool of receivable assets

CTP - 7th Edition (27 decks)

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