LeoGlossary: Eurodollar System (Market)

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This is the most important market in the world. It is the single, largest source of global funding. There is nothing even close to what the Eurodollar market produces. Since it is outside the control of any single entity, it is impossible to know exactly how large it is. However, it is estimated that more than 90% of global trade is financed through the Eurodollar system.

In other words, it is the world's primary capital market. For this reason, the banks require a steady flow of deposits. Failure to achieve that, liquidity issues will arise, creating other problems.

How Big Is Eurodollar Market?

Deposits in Eurodollars amount to hundreds of billions per day. It is not uncommon for banks to accept deposits for $500 million or more.

Short-term lending in the Eurodollar market also reaches some insane proportions. We see, through tri-lateral data assembled from primary dealers along with the custodian (Bank of New York Mellon), that it can reach $5 trillion daily. Since much of this market operates outside the view of these entities, we can presume it is significantly higher.

When Did The Eurodollar System Start?

Like size, there is really no firm point in time where we can say the Eurodollar system began. We know that Eurodollars came primarily into being after World War 2. During that time, because of the Marshall Plan, billions of USD banknotes were sent over the Europe. These ended up as time deposits in European banks.

As the bankers realized they were sitting on a plethora of cash, the idea to start utilizing them came into being. Where this kicked off is unknown other than the fact we know the Soviet Union and China were looking to get their dollars out of the reach of the US Government. The Eurodollar system provided the perfect solution.

Over the ensuing decades, the system grew in size. Banks started to engage in loans, collateralization, swaps, futures, remittance, and cross-border payments. Much of this was based upon relationships between individuals at the different banks. It also mostly occurred off balance sheet.

The futures are traded on the Chicago Mercantile Exchange (CME). These are derivatives of the interest rates paid on the Eurodollar deposits. It is a cash settled contract that has price moves in response to the LIBOR interest rate.


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