Money Market Instruments: CP, BAs, CDs, and Repos for the SIE

Most study guides give commercial paper and bankers’ acceptances separate maturity rules. They share one. Both are exempt from SEC registration under Section 3(a)(3) of the Securities Act of 1933, and both must have a maturity of 270 days or less to qualify.

Two other things in this topic have gone stale. Plenty of guides still list T-bills as 4, 8, 13, 26 and 52 weeks, and the Treasury now also auctions 6-week and 17-week bills. And guides that describe money market funds freezing withdrawals are describing a power the SEC took away in 2023.

The SIE tests money market instruments as a comparison exercise: what each instrument is, who issues it, how it’s priced, and what stands behind it. Get those four columns right and the questions are quick points.

The short answer

Money market instruments are debt securities that mature in one year or less. Issuers use them for short-term borrowing and investors use them to park cash. Short maturity keeps interest rate risk low, which is why they sit at the safest end of the debt spectrum.

Five instruments carry most of the exam weight:

Instrument	Issuer	Maturity	Priced	What stands behind it
Treasury bill	U.S. Treasury	4 to 52 weeks	Discount	U.S. government
Commercial paper	Large corporations	270 days or less	Discount	Issuer’s credit only (unsecured)
Bankers’ acceptance	Banks, for trade finance	270 days or less	Discount	The accepting bank
Negotiable CD	Banks	Typically a year or less	Interest	The bank (FDIC covers up to $250,000)
Repurchase agreement	Dealers, banks	Often overnight to a few weeks	Interest (the price spread)	Collateral, usually Treasuries

Discount instruments are sold below face value and mature at face value. Your return is the difference. T-bills, commercial paper and bankers’ acceptances work this way. Negotiable CDs pay interest, and a repo’s interest is the gap between the sale and repurchase prices.

The full answer

The 270-day rule

Section 3(a)(3) of the Securities Act exempts certain short-term paper from registration, including notes, drafts and bankers’ acceptances that arise from current transactions and have a maturity of not more than nine months. In practice that’s treated as 270 days.

Two conditions apply:

• Maturity of 270 days or less at issuance
• Proceeds used for current transactions, meaning working capital such as payroll, inventory and receivables, not long-term assets like a new factory

This is why commercial paper is short. An issuer who wanted nine-month-plus money would have to register the offering or use a private placement. The exemption covers registration only. The antifraud rules still apply.

Commercial paper is also sold to institutions in large denominations, not to the general public.

Commercial paper

Commercial paper is a short-term, unsecured promissory note issued by a large corporation. Nothing backs it except the issuer’s ability to pay.

That’s why it is issued largely by strong credits, and why issuers typically keep backup lines of credit with banks to cover repayment if they can’t roll the paper over. Rating agencies grade it, and the highest-rated paper borrows at the lowest rates.

It’s sold at a discount. A corporation issues $1,000,000 face value paper for $990,000 with 90 days to maturity. The investor pays $990,000 and receives $1,000,000 at maturity, a $10,000 return.

The main risk is credit risk. A T-bill has none. Commercial paper has some, so it yields more than a T-bill of the same maturity.

Bankers’ acceptances

A bankers’ acceptance (BA) is a time draft drawn on a bank and accepted by it, most commonly to finance international trade.

Here’s the mechanism. An importer buys goods from an overseas exporter and doesn’t want to pay until the goods arrive. The importer’s bank accepts a draft promising payment on a future date. Once accepted, the draft is the bank’s obligation, not just the importer’s. The exporter can hold it to maturity or sell it at a discount for immediate cash.

Because a bank has guaranteed it, a BA is more secure than the importer’s own promise. A $1,000,000 BA due in 90 days might trade at $985,000, and the buyer’s $15,000 gain is the return.

BAs share the 270-day ceiling with commercial paper. Most are shorter, commonly 30 to 180 days.

Negotiable certificates of deposit

A negotiable CD, often called a jumbo CD, is a large time deposit issued by a bank that can be sold before maturity.

The details that matter:

• Minimum denomination of $100,000, with $1 million or more common
• Pays interest, unlike the three discount instruments above
• Negotiable, meaning it trades in a secondary market, which is what separates it from a retail CD that carries an early-withdrawal penalty
• FDIC insurance covers up to $250,000 per depositor, per insured bank, per ownership category

The last point is the exam favourite. A $1 million negotiable CD is mostly uninsured. Above the insured amount, you’re relying on the bank’s credit. Typical buyers are pension plans, funds and corporations, not individual savers.

Repurchase agreements and reverse repos

A repurchase agreement (repo) is a short-term loan secured by securities. One party sells securities and agrees to buy them back later at a higher price. The difference is the interest.

A dealer sells $10,000,000 of Treasuries for cash today and agrees to repurchase them tomorrow for $10,001,200. The $1,200 is the cost of borrowing overnight.

Look at who does what:

	Seller of the securities	Buyer of the securities
Role	Borrower of cash	Lender of cash
Calls it	Repo	Reverse repo

It’s the same transaction, labelled from each side. The party that sells now and repurchases later is doing a repo. The party on the other side, buying now and reselling later, is doing a reverse repo.

Repos are low risk because the lender holds Treasury or similar collateral. The remaining risks are a counterparty that fails to repurchase, and collateral that loses value.

The Fed’s version flips the way people expect. When the Federal Reserve does a repo, it buys securities temporarily, which adds reserves to the banking system. When it does a reverse repo, it sells securities temporarily, which drains reserves. The New York Fed also runs a standing repo facility that works as a ceiling on overnight rates and an overnight reverse repo facility that works as a floor. Our post on the Fed and monetary policy covers the wider picture.

Federal funds and Eurodollars

Two more short-term markets can appear as one-line questions:

Federal funds. Overnight loans of reserve balances between banks. The rate banks charge each other is the federal funds rate, which the Fed targets to implement monetary policy.

Eurodollars. U.S. dollar deposits held at banks outside the United States. They’re named for where the deposit sits, not the euro currency.

Treasury bills in this group

T-bills are the benchmark for the whole market. They’re issued at a discount, mature in one year or less, and are backed by the U.S. government. The regular terms are 4, 6, 8, 13, 17, 26 and 52 weeks, which matches our Treasury and government securities post. Interest is exempt from state and local tax.

Money market funds

A money market fund invests in the instruments above. It’s an open-end fund, so it redeems shares at NAV, as explained in our closed-end vs UIT vs open-end funds post.

SEC Rule 2a-7 limits what these funds can hold: securities with a remaining maturity of no more than 397 days, a weighted average maturity of no more than 60 days, and a weighted average life of no more than 120 days.

Two points the exam likes:

• Government and retail money market funds aim to hold a stable $1.00 NAV. Institutional prime and institutional tax-exempt funds use a floating NAV.
• Money market funds are not FDIC insured and not guaranteed. It’s possible to lose money, and a fund whose NAV falls below $1.00 has “broken the buck.”

The 2023 reforms. In July 2023 the SEC adopted changes that took effect from October 2, 2023, with later compliance dates in 2024:

• Redemption gates were eliminated. Funds can no longer temporarily suspend redemptions
• The link between low weekly liquid assets and fees was removed
• Mandatory liquidity fees now apply to institutional prime and institutional tax-exempt funds when daily net redemptions exceed 5% of net assets
• Minimum liquidity requirements rose to 25% in daily liquid assets and 50% in weekly liquid assets

If a guide says money market funds can “gate” redemptions, its source predates this.

Which risk goes with which instrument

Instrument	Main risk
T-bill	Almost none. Reinvestment risk is the practical concern
Commercial paper	Issuer credit risk, since it’s unsecured
Bankers’ acceptance	Bank credit risk, reduced by the importer’s backing
Negotiable CD	Bank credit risk above the $250,000 insured amount
Repo	Counterparty and collateral risk

All five carry little interest rate risk, since a short maturity limits how far prices can move when rates change. Our bond price vs yield post explains why shorter maturities move less.

Common misconceptions

“Commercial paper is secured.” It’s unsecured. Only the issuer’s credit and any backup credit lines support it.

“Commercial paper can run up to a year.” To stay exempt from registration, maturity is 270 days or less.

“Bankers’ acceptances are an ordinary bank loan.” A BA is a draft accepted by a bank, used mostly to finance trade, and it can be sold at a discount before maturity.

“Negotiable CDs are fully FDIC insured.” Only up to $250,000 per depositor, per bank, per ownership category. A $1 million jumbo CD is mostly uninsured.

“A repo means the dealer is lending cash.” The party selling securities is borrowing. The label depends on which side you’re on.

“When the Fed does a repo, it drains reserves.” A Fed repo adds reserves. A Fed reverse repo drains them.

“T-bills come in 4, 8, 13, 26 and 52 weeks.” That list is out of date. The 6-week and 17-week bills are regular terms now.

“Money market funds can freeze withdrawals and can’t lose money.” Gates were eliminated in 2023, and the funds are not insured. A floating or stable NAV can still fall.

What to do with this info

1. Memorise the five-row table. Issuer, maturity, discount or interest, and what stands behind it are the four things questions ask.
2. Sort by pricing. T-bills, commercial paper and bankers’ acceptances are discount instruments. Negotiable CDs pay interest. A repo pays the price spread.
3. Tie 270 days to Section 3(a)(3). One number covers both commercial paper and bankers’ acceptances.
4. Use the perspective test for repos. Who is selling the securities now? That party is borrowing. Flip the viewpoint for the label.
5. Rank credit risk. T-bill, then bank-backed instruments, then unsecured commercial paper.
6. Take a domain-scored diagnostic. Money market instruments sit in the 44% products domain, so errors here cost points that are easy to avoid.

Related resources

• U.S. Treasury and government securities — T-bills, notes, bonds, and the discount basis
• Economic factors: the Fed and monetary policy — how the Fed uses repos and reverse repos
• Closed-end funds vs UITs vs open-end funds — where money market funds fit
• Bond price vs yield — why short maturities carry little interest rate risk
• Systematic vs unsystematic risk — credit risk and interest rate risk in context
• Free SIE practice exam — a domain-scored diagnostic