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.
Eurocurrency Market Explained
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 of the Eurocurrency Market
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.
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.
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.