Impact of money market funds on commercial paper markets in United States and South Korea

Abstract

The focus of this study is on Commercial Paper markets which are used by financial and non financial firms to manage working capital and maturity transformation. We explore how the primary investors in CP in the US, the Money Market Mutual Funds (MMMFs) have influenced the markets. We see how CP usage has changed post the advent of MMMFs and how they have grown with growth in MMMFs assets. We also try to understand what made MMMFs in the US successful and what has led to their tremendous growth. We then move on to study South Korean CP markets and try to see if there are similar characteristics emerging in the markets with the establishment of short term money funds. South Korea gives a window into Asia to judge if it would be prudent for Asian countries to adapt from the US market structure to spur the CP markets locally. With the tremendous growth taking place in emerging Asia, the requirement for short term capital markets is growing and hence the importance of adapting from successful markets. We do see from the study that post MMMFs establishment there is a greater use of CP among business in both economies. There is also a greater holding of CP as assets by firms in the economy. MMMFs tend to hold large volumes of CP and may have led to greater CP market access for firms. Liquidity, yield and safety come out as the vital characteristics which make MMMFs a preferred investment conduit for money market instruments.