Demystifying Money Markets

a primer on the rates powering the monetary plumbing

We thought it would be valuable to release a guide for our readers to help them navigate our upcoming and future articles without being in the dark on some essential money market terminology. In the first of many “subscriber explainers”, we’ll provide an overview, in plain English, of every major rate in money markets, while also debunking the jargon you will unfortunately encounter.

To help accomplish this, below is an infographic from our upcoming piece, an overview of the most crucial dollar funding market: repo. We’ll use it to demystify the various rates that make up the arcane U.S. money market complex.

But before we begin, some context. Money markets are markets for lending and borrowing money efficiently. For this to occur, dealers must provide liquidity by running “matched books,” which look like a typical balance sheet (see the “triparty repo market makers” section in the infographic). Dealers borrow cash using a repo and lend it out in a reverse repo, earning a profit from the spread they charge — the difference between the rate they lent and borrowed.

Going forward, everything makes a lot more sense when you think in terms of liquidity providers making markets (and trying to earn a spread) by intermediating between cash borrowers and cash lenders.

Now, with that in mind, let’s decipher every money market rate.