Institutional model of the money market

2. The institutional model of the money market reflects
the relationships between money market entities that
are realized through cash flows and instruments.
Financial market channels through which cash
flows from savings owners to borrowers are
divided into two main sectors:
- direct financing;
- indirect financing.

3. Direct financing sector
In this model, three groups of economic
entities interact:
- lenders - have temporarily saved free
money;
- borrowers - those who temporarily need
additional cash resources;
- financial intermediaries.

4. Arrows showing the movement of money,
directed from lenders to borrowers, and
directed by arrows that reflect the movement
of instruments from borrowers to cash.

5. In the direct financing sector, the relationship between
sellers and buyers of money is made directly, and they solve
all the buying and selling issues on their own. Brokers and
dealers working here are more likely to play the technical
role of ordinary intermediaries, helping them find each
other faster.

6. There are two channels of money
flow in this sector:
• the equity financing channel through which
buyers raise funds for their use for this purpose
is used as an instrument for this purpose;
• a borrowing channel for which buyers
temporarily raise funds in their circulation,
using bonds and other similar securities as their
instrument.
With the help of stocks, buyers of money forever
attract investors' funds into their turnover. And the
borrowing channel attracts money for a certain
amount of time. For this purpose, money buyers use
bonds and similar debt securities.

7. In general, the direct financing sector
plays an important role.
- for borrowers, the sector's economic
resources expand the ability to select the
most profitable borrowers and reduce the
cost of borrowing;
- money sellers are given the choice of the
most reliable borrower, avoids risks, and
increased competition in the borrowing
market, including among financial
intermediaries, forces them to reduce their
prices and expand their range of services.

8. In the indirect financing sector, links between
sellers and buyers of money are made through
financial intermediaries who first accumulate
resources available on the market and then sell
them to final buyers on their own behalf.
They create their own obligations and
requirements, which can be separate instruments
of the money market to cause new cash flows.
Therefore, financial intermediaries in this sector
are significantly different from the technical
intermediaries of the first sector in their role in
the economy and technological processes of
operation.

9. The indirect financing sector is an
objectively necessary component of the
money market.
Not only does it complement the direct finance sector, it also creates a
special mechanism for those links between lenders and borrowers that
cannot be made through the direct financing sector.
First, it is a relationship that requires a lot of money and time to find and
study a contractor, or whose implementation involves significant risks.
Through the activities of financial intermediaries, you can fully realize all
the opportunities and benefits inherent in the money market as a whole.
Therefore, not only competition but also integration processes exist
between the direct and indirect financing sectors, in particular the active
penetration of financial intermediaries into the direct financing sector as
technical intermediaries, lenders and borrowers.

10. By characteristics, all money market instruments are a
definition of the buyer's obligations to the money providers,
depending on the types of liabilities.
1) non-debt - obligations that have the right to
participate in the management of the buyer's
money and its income, so that the seller retains
not only the ownership of them, but also the right
to dispose of them;
2) debt - is the obligation under which the buyer
of money undertakes to return to the seller
a certain amount received and pay for it income.
Such obligations form the transactions of purchase
and sale of money with the transfer of the right to
dispose of them for a definite period.

11. Debt liabilities can be divided into:
- deposit, on which sellers transfer money in full
order to the buyer on condition of return (with or
without due date) and payment or without
payment of a percentage of income;
- debt, for which sellers, passing money to buyers,
make some restrictions in the latter to dispose of
this money:
-determine the purpose for which they will be used;
-require special guarantees for their return;
-determine the degree of efficiency or return on costs
or projects financed by borrowing.

12. There are many types of financial intermediaries by the nature of
intermediation operations: banks, insurance companies, investment,
financial and target companies, pension funds, credit companies, and
more.
By place in the money market, they can be divided into
two groups:
- banks
- non-bank financial institutions.
The division of banks into a single group is explained by the fact that they
have a much greater capacity to act in the money market than other
institutions. Therefore, banks play a key role in the indirect finance sector.
This is due to two peculiarities inherent in banks:
1) they can not only accumulate free creditors' funds, but also create
deposits in the course of credit activity;
2) 2) they provide cash and settlement services to all other financial
institutions, and therefore can mobilize and thereby temporarily use the
latter's free funds.

13. By economic purpose of resources distinguish:
• The money market is a part of the financial market
where short-term credit transactions take place.
• The capital market is the part of the financial
market where medium- and long-term credit
operations take place. Both transactions and
securities are subject to these transactions. There is
a close relationship between these markets.
The capital market is the most important source of long-term
investment resources. If the money market primarily supports
liquidity in the financial market, then the capital market
promotes the advantageous use or allocation of funds. This
means that the expected return on investment, given the risk
involved, should at least correspond to the percentage of the
capital market.

14. • The accounting market is part of the money market, with
some short-term resources being redistributed between credit
institutions that buy and sell large quantities of securities with
repayment terminals, typically up to one year.
The accounting market and its institutions help finance businesses through
short-term capital raising - promissory notes. With the help of commercial
accounts, raw materials are purchased, they are returned due to sales of
finished goods. The promissory note loan is mainly provided to suppliers.
The institutional structure of the accounting market includes
the following elements:
• the central bank;
• commercial banks;
• special credit institutions, the funds of which are
formed by attracting oncology loans and 7-day bank
loan.

15. • The interbank market is the part of the financial market
where the temporarily free cash resources of credit
institutions are attracted and placed by banks mainly in the
form of short-term interbank deposits.
In Ukraine, the subjects of the interbank market are commercial
banks, which act as financial intermediaries in the redistribution
of funds and make payments on the financial market.
NBU conducts commercial bank refinancing operations. Credit
resources are provided in the form of direct and pawnshop loans,
conversion of bills and conducting of credit auctions.
These operations are conducted when commercial banks have
difficulties and are unable to attract resources from other sources
in a short time.
The NBU plays the role of the lender of last resort. Such loans
are short-term, issued at high interest rates and require
collateral.

16. • Currency market
It covers the operations of buying and
selling currencies and payment
documents, which serve a wide range of
foreign economic transactions, currency
risk insurance, diversification of foreign
exchange reserves, and movement of
currency liquidity.

17. • Securities Market
It covers part of the credit market and fully the real estate
market. In other words, this market integrates operations in the
issue and circulation of debt instruments, equity instruments and
their derivatives.
Debt instruments include, first of all, bonds, promissory notes,
certificates.
Mutual instruments are all types of stocks, their derivatives are
options, futures and other similar securities.
In Ukraine, the following groups of securities may be involved in
civil circulation: equity securities, debt securities, derivative
securities, commodities, securities, part of profits, in particular, in
the form of dividends, and part of property in liquidation by the
issuer.
According to the above definition, shares and an investment
certificate are now classified as securities.

18. An investment institute may conduct its
intermediary activities in the securities market
as:
- financial broker;
- investment consultant;
- investment company.
In addition, commercial banks may also act as
professional intermediaries in the securities
market.

19. Depending on the nature of economic behavior, securities
market entities may be issuers, investors and financial
intermediaries.
An investor is a legal or natural person who buys securities on its own behalf
and at its own expense. According to the legislation of Ukraine, investors can be
not only domestic legal entities and individuals, but also foreign ones. Investors
are divided into:
• individuals
• corporate
• institutional
Among the listed investor groups, the most representative and influential is the
institutional investor group. Institutional investors can be various financial institutions:
pension funds, insurance companies, target companies. On the one hand, they attract the
funds of their clients, and on the other hand, a considerable part of their funds is
invested in different values of equity, without harming the interests of their clients.
Issuers and investors, as a rule, rarely enter the stock market on their own. Most often
they resort to professional intermediaries. The legislation of Ukraine as the main
intermediary in the stock market is approved by an investment institution - a legal
entity created in any organizational and legal form in accordance with the Economic
Code of Ukraine.

20. Therefore, the institutional
money market model
reflects the interconnections
between money market
entities that are realized
through cash flows and
financial market
instruments.
In general, the institutional
model of the money market
can be represented as a
scheme of flows of money
and instruments between
three groups of economic
entities: money-savers;
borrowers of money;
financial intermediaries.