Prior to 1980, Eurocurrencies market was the only truly international financial market of any significance. It is mainly an interbank market trading in time deposits and various debt instruments. A “Eurocurrency Deposit” deposit is a deposit in the relevant currency with a bank outside the home country of that currency. Thus, a US dollar deposit with a bank in London is a Eurodollar deposit, a Deutschemark deposit with a bank in Luxembourg is a Euromark deposit. Note that what matters is the location of the bank neither the ownership of the bank nor ownership of the deposit. Thus a dollar deposit belonging to an American company held with the Paris subsidiary of an American bank is still a Eurodollar deposit. Similarly a Eurodollar Loan is a dollar loan made by a bank outside the US to a customer or another bank. The prefix “Euro” is now outdated4 since such deposits and loans are regularly traded outside
Europe, for instance, in Singapore and Hong Kong (These are sometimes called Asian dollar markets). While London continues to be the main Euromarket centre, for tax reasons, loans negotiated in London are often booked in tax-haven centers such as Grand Cayman and Nassau [See Stigum (1990)].
Over the years, these markets have evolved a variety of instruments other than time deposits and shortterm loans. Among them are Certificates of Deposit (CDs), Euro Commercial Paper
(ECP), medium to long-term floating rate loans, Eurobonds5, Floating Rate Notes (FRNs) and Euro Medium-Term Notes (EMTNs). Of these, the short-term instruments like ECP and CDs will be briefly discussed later in this chapter.
As mentioned above, the key difference between Euromarkets and their domestic counterparts is one of regulation. For instance, Eurobanks are free from regulatory provisions such as cash reserve ratio, deposit insurance and so on, which effectively reduces their cost of funds. Eurobonds are free from rating and disclosure requirements applicable to many domestic issues as well as registration with securities exchange authorities. This feature makes it an attractive source of funding for many borrower and a preferred investment vehicle for some investors compared to a bond issue in the respective domestic markets.