Money markets refer to the trading of short-term debt investments. Money markets are organized exchanges that allow participants to lend and borrow short-term, high-quality debt securities with maturities of one year or less. The assets traded in these markets are highly liquid and include instruments, such as treasury bills (T-bills), certificates of deposit (CDs), commercial paper, and repurchase agreements (repos).

The primary purpose of money markets is to provide a platform for governments, banks, corporations, and other large institutions to raise funds to meet their short-term cash flow needs. They also offer individual investors an opportunity to invest in low-risk, short-term securities.

Here are some of the functions that money markets serve in the financial system.

1. Money markets can provide short-term financing for domestic and international trade, as well as working capital for industries. 

2. Money markets allow commercial banks to invest their excess reserves in money market instruments to earn interest while maintaining liquidity. 

3. Money markets enable central banks to influence short-term interest rates and implement monetary policy.

Money markets operate through various financial instruments traded over-the-counter (OTC). Prices and interest rates in money markets are influenced by supply and demand, central bank policies, and economic conditions. Here are some of the commonly traded instruments.

1. Treasury Bills (T-bills). Short-term government securities with maturities ranging from 4 to 52 weeks, considered among the safest money market instruments. 

2. Certificates of Deposit (CDs). Issued by banks and credit unions, CDs are time deposits that pay interest upon maturity, typically ranging from a few weeks to several months. 

3. Commercial Paper. Unsecured, short-term debt instruments issued by corporations to finance working capital needs. 

4. Repurchase Agreements (Repos). Short-term agreements where one party sells securities to another with a commitment to repurchase them at a later date and higher price.

Learn more: What Are Money Markets?