The Use of Money Market Funds as Collateral

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 Participants 17

4.2 Market Overview 18

4.3 Risks and Risk Management 21

4.3.1 Problems with Cash Reinvestment 22

4.4 Legal Foundation and Regulation 23

5 Money Market Funds as Financial Collateral 25

5.1 General Description of Money Market Funds 25

5.1.1 Evolution 26

5.1.2 Participants 28

5.2 Market Overview 30

5.3 Share Valuation and Risks 32

5.4 Regulatory Framework 34

5.5 MMF Characteristics 34

6 Criteria to use MMFs as Collateral 37

6.1 Regulatory Requirements for Collateral Receiver 37

6.1.1 Impact of Future Regulation 42

6.2 Operational Requirements 44

6.3 Preliminary Findings 45

7 Practical Example 47

7.1 Operating Model 47

7.2 Performance, Liquidation and Risks 50

7.3 Discussion 52

8 Conclusion 54

References v

Appendix xiv

List of Figures

Figure 1: European Benchmark Rates (Percent per Annum) 5
Figure 2: The Function of Collateral Management for Market Participants 10
Figure 3: Overview Bilateral, Tri-party, and CCP Execution 12
Figure 4: Collateral Put Forward in the Eurosystem Credit Operations versus Outstanding Credit in Monetary Policy Operations 14
Figure 5: Global OTC Derivative Market

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