Eurocurrency Market

What is the 'Eurocurrency Market'

The eurocurrency market is the money market in which currency held in banks outside of the country where it is legal tender is borrowed and lent by banks. The eurocurrency market is utilized by banks, multinational corporations, mutual funds and hedge funds that wish to circumvent regulatory requirements, tax laws and interest rate caps often present in domestic banking, particularly in the United States. The term eurocurrency has nothing to do with the euro currency or Europe, and the market functions in many financial centers around the world.

BREAKING DOWN 'Eurocurrency Market'

Interest rates paid on deposits in the eurocurrency market are typically higher than in the domestic market because the depositor is not protected by domestic banking laws and does not have governmental deposit insurance. Rates on eurocurrency loans are typically lower than those in the domestic market for essentially the same reasons: banks are not subject to reserve requirements and do not have to pay deposit insurance premiums.

Background

The eurocurrency market originated in the aftermath of World War II when the Marshall Plan to rebuild Europe sent a flood of dollars overseas. The market developed first in London as banks needed a market for dollar deposits outside the United States. Dollars held outside the United States are referred to as eurodollars, even if they are held in Asian markets such as Singapore or Caribbean markets such as Grand Cayman.

The eurocurrency market has expanded to include other currencies such as the yen and the British pound whenever they trade outside of their home market. However, the eurodollar market remains the largest.

Size

The eurodollar trades mostly overnight, although deposits and loans out to 12 months are possible. Even though deposits are domiciled off-shore, much of the activity actually takes place in New York trading rooms while being booked into off-shore accounts. A 2016 study by the Federal Reserve Bank indicated the average daily turnover in the eurodollar market was $140 billion. Transactions are usually for a minimum of $25 million, and can top $1 billion in a single deposit.

Eurobond Market

There is an active bond market for companies and financial institutions to borrow in currencies outside of their domestic market. The first such bond was by the Italian company Autostrade in 1963. It borrowed $15 million for 15 years in a deal arranged in London and listed on the Luxembourg stock exchange. In 2014, Apple was able to borrow $3.5 billion in the eurodollar bond market.

RELATED TERMS
  1. London Interbank Bid Rate - LIBID

    The average interest rate which major London banks borrow Eurocurrency ...
  2. Eurocurrency

    Currency deposited by national governments or corporations in ...
  3. Euroyen

    Japanese yen-denominated deposits held in banks outside Japan. ...
  4. Eurodollar

    U.S.-dollar denominated deposits at foreign banks or foreign ...
  5. Note Issuance Facility - NIF

    A syndicate of commercial banks that have agreed to purchase ...
  6. Revolving Underwriting Facility ...

    A form of revolving credit in which a group of underwriters agrees ...
Related Articles
  1. Retirement

    Money Market: Eurodollars

    Contrary to the name, eurodollars have very little to do with the euro or European countries. Eurodollars are U.S.-dollar denominated deposits at banks outside of the United States. This market ...
  2. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  3. Markets

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  4. Markets

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  5. Personal Finance

    How the Federal Deposit Insurance Corporation (FDIC) Works

    Learn more about the Federal Deposit Insurance Corporation (FDIC) and what happens to your deposits over $250,000 if a member bank fails.
  6. Markets

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  7. Personal Finance

    Where To Put Your Cash: Call Deposit Vs Time Deposit Accounts

    Time deposit accounts and call deposit accounts allow customers to earn higher interest in exchange for less access to their cash.
  8. Markets

    Explaining the Reserve Ratio

    Reserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
  9. Retirement

    The History Of The FDIC

    Find out why this corporation was developed and how it protects depositors from bank failure.
  10. Markets

    Insurance Companies Vs. Banks: Separate And Not Equal

    Insurance companies and banks are both financial intermediaries. However, they don't always face the same risks and are regulated by different authorities.
RELATED FAQS
  1. What is the difference between LIBID and LIBOR?

    Both LIBID and LIBOR are rates primarily used by banks in the London interbank market. The London interbank market is a wholesale ... Read Answer >>
  2. Are eurodollars related to the currency called the euro?

    Eurodollars have little to do with the official currency of the European Union, the euro (EUR). In 1999, the euro was implemented ... Read Answer >>
  3. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  4. How does the deposit multiplier affect a bank's profitability?

    Find out how a deposit multiplier affects bank profitability, how it increases the supply of money in the economy and why ... Read Answer >>
  5. What is the difference between a demand deposit and a term deposit?

    Understand the meaning of demand deposits and term deposits, and learn about the major differences between these two types ... Read Answer >>
  6. What are the Federal Reserve's guidelines on demand deposit accounts?

    Read about some of the Federal Reserve's requirements and guidelines regarding the treatment, safeguarding and processing ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center