Interest Rate Futures Contracts Explained
They are the world's most heavily traded short-term interest rate futures contracts and extend up to ten years. Subscribe to Fed Prime Rate. In one version, the first booking traces back to Communist China , which, in , managed to move almost all of its U.
Use Eurodollar in a sentence
Consequently, such deposits are subject to much less regulation than similar deposits within the U. The term was originally coined for U. There is no connection with the euro currency or the eurozone. More generally, the euro- prefix can be used to indicate any currency held in a country where it is not the official currency: As a result, large amounts of U. Some foreign countries, including the Soviet Union , also had deposits in U. Various history myths exist for the first Eurodollar creation, or booking, but most trace back to Communist governments keeping dollar deposits abroad: In one version, the first booking traces back to Communist China , which, in , managed to move almost all of its U.
In another version, the first booking traces back to the Soviet Union during the Cold War period, especially after the invasion of Hungary in , as the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank , a Soviet-owned bank with a British charter.
The British bank would then deposit that money in the U. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. Initially dubbed "Eurbank dollars" after the bank's telex address, they eventually became known as "eurodollars"  as such deposits were at first held mostly by European banks and financial institutions.
In the mids, Eurodollar trading and its development into a dominant world currency began when the Soviet Union wanted better interest rates on their Eurodollars and convinced an Italian banking cartel to give them more interest than what could have been earned if the dollars were deposited in the U. The Italian bankers then had to find customers ready to borrow the Soviet dollars and pay above the U. Eurodollars can have a higher interest rate attached to them because of the fact that they are out of reach from the Federal Reserve.
These required reserves and Fed backing make U. Dollar deposits in U. By the end of , billion eurodollars were booked offshore. Several factors led Eurodollars to overtake certificates of deposit CDs issued by U. By December the Eurocurrency market was estimated by Morgan Guaranty bank to have a net size of 1.
Delayed Quotes Block Trades. Learn Practice Trading Follow the Markets. Trading Challenge Event Calendar Podcasts. Related Information Term Mid-Curve Options Three-, six-, and nine-month Mid-Curve options offer flexibility to trade short-dated month options on white quarterly Eurodollar futures.
Get Started with Eurodollar Futures. Contact the Interest Rates Team. Contact a Market Maker. Submit a request to receive applicable contact information for our market makers. According to the British Bankers' Association, other proxies for financial health, such as the default-credit-insurance market, are not necessarily more sound than Libor at times of financial crisis, though they are more widely used in Latin America, especially the Ecuadorian and Bolivian markets. Additionally, some other authorities contradicted the Wall Street Journal article.
In its March Quarterly Review, The Bank for International Settlements has stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings. On 27 July , the Financial Times published an article by a former trader which stated that Libor manipulation had been common since at least Wheatley has now called for the British Bankers' Association to lose its power to determine Libor and for the FSA to be able to impose criminal sanctions as well as other changes in a ten-point overhaul plan.
On 28 September, Wheatley's independent review was published, recommending that an independent organisation with government and regulator representation, called the Tender Committee , manage the process of setting LIBOR under a new external oversight process for transparency and accountability. Banks that make submissions to LIBOR would be required to base them on actual inter-bank deposit market transactions and keep records of their transactions supporting those submissions.
The review also recommended that individual banks' LIBOR submissions be published, but only after three months, to reduce the risk that they would be used as a measure of the submitting banks' creditworthiness.
The review left open the possibility that regulators might compel additional banks to participate in submissions if an insufficient number do voluntarily. The review recommended criminal sanctions specifically for manipulation of benchmark interest rates such as the LIBOR, saying that existing criminal regulations for manipulation of financial instruments were inadequate. On 28 February , it was revealed that the US Department of Justice was conducting a criminal investigation into Libor abuse.
One trader's messages indicated that for each basis point 0. Marcus Agius will fill his post until a replacement is found. By 4 July the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal. They accused Geithner of knowledge of the rate-fixing, and inaction which contributed to litigation that "threatens to clog our courts with multi-billion dollar class action lawsuits" alleging that the manipulated rates harmed state, municipal and local governments.
The senators said that an American-based interest rate index is a better alternative which they would take steps towards creating. In the U. On March 7, the ARRC announced that the committee had been reconstituted and the following groups were participating.
In its justification for this choice the ARRC said:. SOFR is a fully transactions based rate that will have the widest coverage of any Treasury repo rate available and it will be published on a daily basis by the Federal Reserve Bank of New York beginning April 3, Because of its range of coverage, SOFR is a good representation of the general funding conditions of the overnight Treasury repo market.
As such it will reflect an economic cost of lending and borrowing relevant to a wide array of market participants active in these markets, including broker dealers, money market funds, asset managers, insurance companies, securities lenders and pension funds. From the end of July , only five currencies and seven maturities will be quoted every day 35 rates , reduced from different Libor rates — 15 maturities for each of ten currencies, making it more likely that the rates submitted are underpinned by real trades.
Since the beginning of July , each individual submission that comes in from the banks is embargoed for three months to reduce the motivation to submit a false rate to portray a flattering picture of creditworthiness.
A new code of conduct, introduced by a new interim oversight committee, builds on this by outlining the systems and controls firms need to have in place around Libor. For example, each bank must now have a named person responsible for Libor, accountable if there is any wrongdoing. The banks must keep records so that they can be audited by the regulators if necessary. The scandal also led to the European Commission proposal of EU-wide benchmark regulation,  that may affect Libor as well.
From Wikipedia, the free encyclopedia. For the Libor manipulation scandal, see Libor scandal. For the personal name, see Libor name. The estimates, and the resulting Libor rates, cover a number of currencies and a range of borrowing periods. Note in particular that it is an estimated borrowing rate, not an estimated lending rate. The average rate is computed after excluding the highest and lowest quartile of these estimates—for much of its history, there were sixteen banks in each panel, so the highest and lowest four were removed.
What is Libor, and how does it affect you? Archived from the original on 11 July Archived from the original on 27 June Retrieved 27 June Archived from the original on 2 April Retrieved 6 April The New York Times.
Archived from the original on 12 July Archived from the original on 30 June Archived from the original on 13 July Archived from the original on 28 June Archived from the original on 29 September Retrieved 26 September Archived from the original on 4 November Retrieved 20 July The British Bankers' Association.
Archived from the original on 22 June Retrieved 25 July Creating stronger and safer banks". Archived from the original on 17 October Retrieved 21 July Archived from the original on 7 July Retrieved 22 July
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