Eurodollars are financial instruments representing deposits of U.S. dollars held in banks outside of the United States. They were a cornerstone of the U.S. interest-rates market for a generation of traders.
Because they were held outside the United States, eurodollars were not subject to regulation by the Federal Reserve Board, including reserve requirements. Dollar-denominated deposits not subject to U.S. banking regulations were originally held almost exclusively in Europe, hence the name eurodollar. They came to be widely held in branches located in the Bahamas and the Cayman Islands as well. The eurodollar market's relative freedom from regulation meant such deposits could pay higher interest.
The CME Eurodollar futures contract reflects the London Interbank Offered Rate (Libor) for a three-month, $1 million offshore deposit. The contracts are often used as a means to take a view on Federal Reserve interest rate policies. They have long served as a benchmark interest rate for corporate funding.
The Eurodollar will for the most part cease to exist at the end of Friday, April 14, 2023. Derivatives contracts linked to the Eurodollar are being phased out as part of the long-planned transition away from the Libor benchmark. April 14 is when CME Group Inc., where the bulk of Eurodollar futures and options volume is transacted, will convert those expiring after June 2023 to futures or options on the Secured Overnight Financing Rate (SOFR), which have overtaken Eurodollars in trading volume. In 2017, a panel of industry representatives and regulators picked SOFR to replace U.S. dollar Libor.
Options on eurodollar and SOFR futures are the only products for which CME still maintains a trading floor in Chicago, although they also trade on CME's electronic platform.
Eurodollar futures, developed and launched by the Chicago Mercantile Exchange in 1981, were the world's first cash-settled futures contracts. They became the CME's biggest product in volume and open interest by 1988. They are futures on the three-month US dollar Libor, long used as a reference rate for bonds, loans and other forms of credit.
Eurodollar futures and options are the most actively traded futures contracts in the world. Most of their volume is transacted on CME Group.
The Eurodollar is considered one of the reasons behind the growth in the international short-term capital market. It was also useful for financing foreign trade. It allowed greater flexibility to adjust cash/liquidity positions for financial institutions, helped funding for arbitrage, and was a source of funds for financial institutions.
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