The International Money Market: Scope, Crisis and Opportunities

International Money Market International Money Markets IMM
International Money Market International Money Markets IMM
International Money Market International Money Markets IMM
International Money Market

A money market is one of the safest financial markets for currency transactions. It is frequently used by large financial institutions, corporations, and national governments. Money market investments are typically for a very short period and thus are commonly referred to as cash investments.

International Money Market

The international money market is a market in which numerous central banks of countries conduct international currency transactions. The transactions are primarily undertaken in gold or US dollars as a base. The money borrowed or lent by governments or large financial institutions is one of the basic operations of the international money market.

The transnational monetary transaction policies of various nations’ currencies govern the international money market. The primary responsibility of the international money market is to handle currency trading between countries. Forex trading is the process of exchanging one country’s currency for another.

In contrast to stock markets, the international money market sees massive funds transfers. The market’s players are not individuals; instead, they are large financial institutions. International money market investments are less risky, and as a result, the returns on investment are lower. Money market mutual funds or treasury bills are the best and most popular ways to invest in the international money market.

It should be noted that the international money market handles massive amounts of international currency trading daily. According to the Bank for International Settlements, the daily turnover of a traditional exchange market is approximately $1880 billion.

Some of the most crucial international money market participants are as follows:

Regularly, the international money market monitors the exchange rates between currency pairs. Currency bands, fixed exchange rates, exchange rate regimes, linked exchange rates, and floating exchange rates are standard indices that subtly govern the international money market.

International Monetary Market

The International Monetary Market (IMM) was founded in May 1972 after being formed in December 1971. However, the origins of IMM can be traced back to the end of Bretton Woods via the 1971 Smithsonian Agreement and Nixon’s removal of the US dollar’s convertibility to gold.

The Chicago Mercantile Exchange established the IMM as a separate entity (CME). By the end of 2009, The International Monetary Market (IMM) was the world’s second-largest futures exchange in terms of currency volume. The IMM’s primary purpose is to trade currency futures. It is a relatively new product that was previously studied by academics as a tool to operate a freely traded exchange market in order to initiate trade among nations.

The first futures transactions included trades of currencies such as the British Pound, Swiss Franc, German Deutschmark, Canadian Dollar, Japanese Yen, and French Franc against the US dollar. Later introduced were the Australian Dollar, Euro, and emerging market currencies such as the Russian Ruble, Brazilian Real, Turkish Lira, Hungarian Forint, Polish Zloty, Mexican Peso, and South African Rand.

Currency Futures’ Drawbacks

The IMM’s challenge was to link the values of IMM foreign exchange contracts to the interbank market, which was the dominant method of currency trading in the 1970s. Another consideration was how to allow the IMM to become the best and a free-floating exchange.

To address these issues, clearing member firms were permitted to act as arbitrageurs between central banks and The International Monetary Market, allowing for orderly markets between the bid and ask spreads.

Later, the Continental Bank of Chicago was formed as a contract delivery agent. These early successes sparked intense competition for new futures products.

One of the competitors was the Chicago Board Options Exchange. It had been granted the official right to trade US 30-year bond futures, whereas the IMM had been granted the official right to trade Eurodollar contracts. The Eurodollars were a 90-day interest rate contract settled in cash rather than in any physical delivery.

Eurodollars later evolved into the “Eurocurrency Market,” primarily used by the Organization of Petroleum Exporting Countries (OPEC). OPEC demanded that oil be paid for in US dollars.

This cash settlement aspect later led to the introduction of index futures known as the IMM Index. Cash settlements also allowed the IMM to be known as a “cash market” because the trades were short-term interest-rate sensitive instruments.

A Transactional System

As competition increased, The International Monetary Market (IMM) required a transaction system to handle transactions. As a result, Post-Market Trade (PMT) was introduced by the CME and Reuters Holdings for global electronic automated transactions. The system evolved into a single clearing entity that linked major financial centers such as Tokyo and London.

PMT is now known as Globex, and it handles not only clearing but also electronic trading for traders worldwide. US T-bills were first traded on the IMM in 1976. T-bill futures were approved by the Commodities Futures Trading Commission (CFTC) in April 1986.

The Forex Market’s Growth

The real breakthrough came in the mid-1980s when options began trading on currency futures contracts. By 2003, the notional value of foreign exchange trading had reached $347.5 billion.

The International Monetary Market experienced explosive growth during the 1990s as a result of three global events:

  • Basel I which was established in July 1988. The European Central Bank governors from the 12 member countries agreed to standardize banking guidelines. The bank’s capital had to be equal to 4% of its assets.
  • The Single European Act of 1992. This act allowed capital to flow freely across national borders and allowed all banks to establish themselves in any EU country.
  • Basel II which was the second edition of the Basel Convention. This is intended to control risk by preventing losses, and its implementation is still in the works.

The role of a bank is to transfer funds from depositors to borrowers. Depositors may include governments, government agencies, and multinational corporations with the passage of these new laws.  To meet the demands of financing capital requirements, new loan structures, and new interest rate structures such as overnight lending rates, the role of banks in this new international arena exploded; increasingly, IMM was used for all finance needs.

In addition, lots of new trading instruments, such as money market swaps to lock in or reduce borrowing costs and swaps to arbitrage against futures or hedge risk, were introduced. However, currency swaps would not be available until the 2000s.

Liquidity and Financial Crises

In times of financial crisis, central bankers must provide liquidity to stabilize markets because risk may trade at premiums to a bank’s target rates, known as money rates, which central bankers cannot control. The central bankers then provide liquidity to the banks that trade and control interest rates. These are known as repo rates, and they are traded on The International Monetary Market. Repo markets enable participants to refinance quickly in the interbank market to stabilize the system independent of credit limits. To continue operations, a borrower pledges securitized assets such as stocks in exchange for cash.

Asian Money Markets and the International Monetary Fund

The Asian money markets joined The International Monetary Market because Asian governments, banks, and businesses needed to speed up business and trade rather than borrow US dollar deposits from European banks. Asian banks, like European banks, were burdened with dollar-denominated deposits because all trades were dollar-denominated due to the dominance of the US dollar. As a result, additional trades were required to facilitate trade in other currencies, particularly euros. Asia and the European Union would go on to share not only a surge in trade but also two of the most widely traded world currencies on the IMM. As a result, the Japanese yen is quoted in US dollars, whereas eurodollar futures are quoted using the IMM Index, which is a function of the three-month LIBOR.

To ensure that bid prices are lower than asking prices, the IMM Index base of 100 is subtracted from the three-month LIBOR. These are standard procedures used to ensure market stability in other widely traded instruments on the IMM.

In conclusion

The IMM transitioned from a nonprofit to a for-profit, membership-based, and shareholder-owned entity in June 2000. It opens for trading at 8:20 a.m. Eastern Time to reflect major U.S. economic data released at 8:30 a.m. Its various products are used by banks, central bankers, multinational corporations, traders, financial risk managers, speculators, and other institutions to borrow, lend, trade, profit, finance, speculate, and hedge risks.

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