What is a eurodollar?
A eurodollar is a U.S. dollar–denominated deposit held at a bank or branch located outside the United States. Because these deposits sit offshore, they are not subject to U.S. banking regulations such as Federal Reserve reserve requirements or FDIC insurance. The name “eurodollar” arose because dollar deposits outside the U.S. were originally concentrated in Europe, though eurodollars can be held anywhere offshore (Caribbean financial centers such as the Bahamas and the Cayman Islands are common locations). (Source: Investopedia)
Key takeaways
– Eurodollars = U.S. dollar deposits held outside the U.S., not subject to U.S. reserve rules or FDIC insurance. (Investopedia)
– Market is a major source of short‑term, unsecured USD funding for banks and corporations and is highly liquid. Average daily overnight volume has been about $150 billion (2019–2024). (Federal Reserve Bank of New York / Investopedia)
– Typical deposit sizes are very large (minimums often $100,000; commonly millions; single deposits of $500 million or more are not unusual). (Investopedia)
– Most transactions are overnight; maturities over six months are usually via CDs. (Investopedia)
– Eurodollars can offer higher yields than comparable U.S. deposits because of reduced regulation and protections, but they carry additional counterparty, liquidity and jurisdictional risk. (Investopedia)
Understanding the eurodollar market
What’s being traded
– Deposits and interbank loans denominated in USD, held at non‑U.S. locations (including foreign banks’ U.S. branches and U.S. banks’ offshore branches).
– Short-term interbank loans are common (overnight to a few days). Longer terms (over six months) are often issued as dollar‑denominated certificates of deposit (CDs).
How transactions clear
– Because the funds are USD, transfers between banks typically settle through U.S. payment systems (e.g., Fedwire, CHIPS), even though the accounts are offshore. (Investopedia)
Why eurodollars exist
– Post‑World War II expansion of USD abroad (e.g., Marshall Plan) led to large dollar balances outside U.S. jurisdiction.
– Offshore USD balances avoid some U.S. regulatory costs (reserve requirements, FDIC insurance), so banks can offer higher interest — and charge for unsecured borrowing — than in domestic markets. (Investopedia)
Importance as an international capital market
– The eurodollar market is one of the world’s primary international short‑term USD funding markets. Corporations and financial institutions use it for liquidity management and short-term borrowing.
– It also supports global funding and USD liquidity, which in turn affects global interest rates and borrowing costs for banks and firms active in USD markets. (Investopedia; FRBNY Liberty Street Economics)
Liquidity and market size
– The market is large and liquid for short maturities. According to the New York Fed, average daily volume of overnight eurodollar transactions (with selected deposit transactions) has been about $150 billion between 2019 and 2024. (Federal Reserve Bank of New York via Investopedia)
– Because the market depends on offshore deposit supply, sudden deposit withdrawals can strain liquidity at eurodollar banks.
Example (simple corporate use case)
– A U.S. exporter has $10 million in USD cash it won’t use for several days. It could place the funds as a dollar‑denominated deposit at an offshore branch of its bank (e.g., a Caribbean branch) to earn a higher overnight rate than the domestic account. The bank credits the offshore USD deposit and may re‑deploy the funds into the bank’s global operations or lend them in the eurodollar market. (Investopedia)
Brief history
– Eurodollars emerged after WWII as U.S. dollars circulated widely overseas. The offshore market grew because foreign holders of dollars wanted dollar‑denominated deposits outside U.S. jurisdiction. This historical development produced a global USD funding market less encumbered by U.S. regulation. (Investopedia)
Can Americans invest in eurodollars?
Direct deposits
– Individuals generally cannot access typical eurodollar deposits because minimums and counterparty standards are aimed at institutional investors (e.g., minimums of $100,000 and commonly many millions). Offshore access and large minimums make direct deposits impractical for most retail investors. (Investopedia)
Indirect exposure
– Retail and accredited investors can gain exposure via traded instruments:
– Eurodollar futures (CME) — widely used to trade and hedge short-term USD interest-rate expectations.
– Mutual funds or ETFs that invest in eurodollar futures or short-term USD derivatives.
– Opening a USD account with a foreign bank or obtaining an offshore USD CD may be possible for U.S. residents who can satisfy the bank’s KYC/AML and jurisdictional requirements, but these deposits are not FDIC insured and carry foreign jurisdictional risks. (Investopedia)
Who are the primary borrowers?
– A large part of eurodollar borrowing comes from U.S. branches and agencies of foreign banks (FOBs), which borrow heavily in eurodollar markets and also in domestic fed funds. Daily borrowing by these institutions has averaged roughly in the tens to low hundreds of billions ($50B–$200B) depending on the period. (Liberty Street Economics / FRBNY; Investopedia)
How risky are eurodollars?
Main risk categories
– Lack of U.S. regulatory protections: Not subject to Fed reserve rules or FDIC insurance — no U.S. government backstop if the foreign bank fails. (Investopedia)
– Counterparty risk: Risk that the bank or counterparty defaults.
– Liquidity risk: Offshore banks can face sudden deposit outflows or funding squeezes.
– Jurisdictional and political risk: Host-country regulation, capital controls, or political instability could impair access to funds.
– Operational and settlement risk: Cross‑border settlement relies on payment systems and operational links that can be disrupted.
Risk premium
– Because of these risks, eurodollar deposits typically pay higher rates than comparable U.S. onshore deposits; that premium compensates depositors and lenders for additional risk. (Investopedia)
Practical steps — corporate treasury or institutional participant
1) Define objectives and constraints
– Determine liquidity needs, target returns, acceptable counterparty and jurisdiction risk, and legal/regulatory constraints (including internal policy and any domestic reporting/FX rules).
2) Choose counterparties and jurisdictions
– Prefer large, well‑rated banks and stable offshore financial centers (e.g., Bahamas, Cayman Islands) with robust legal frameworks.
3) Due diligence
– Request financials, regulatory status of the bank’s offshore branch, legal opinion on enforceability of dollar claims, and operational details for settlement (Fedwire/CHIPS routing).
4) Establish documentation and accounts
– Complete KYC/AML, provide required corporate documentation, and set up dollar‑denominated accounts or deposit facilities at the offshore branch.
5) Manage tenor and diversification
– Use a maturity ladder (overnight, 1-week, 1-month, CDs) and diversify across counterparties and jurisdictions to limit concentration risk.
6) Liquidity backstops and contingency planning
– Keep a domestic liquidity buffer; define triggers to repatriate funds or draw on committed credit lines if offshore liquidity tightens.
7) Use hedging where appropriate
– For interest‑rate exposures, consider eurodollar futures, interest-rate swaps, or FRA contracts to hedge short-term USD interest-rate risk.
8) Ongoing monitoring and reporting
– Monitor counterparty credit metrics, market liquidity indicators, and regulatory/political developments in host jurisdictions.
Practical steps — how an individual investor can get exposure
1) Decide your goal
– Rate speculation, hedging, or seeking short‑term yield.
2) Consider instruments appropriate for your status
– Retail investors: eurodollar futures via a broker (suitable for experienced investors), mutual funds or ETFs that hold eurodollar futures, or short‑duration USD money market funds CD alternatives.
– Accredited investors: potentially open an offshore USD account with a bank that accepts retail clients if you meet the bank’s requirements.
3) Understand margin and leverage
– Futures are leveraged instruments with margin requirements and potential for large losses; read product specs and exchange rules (e.g., CME eurodollar futures).
4) Compare alternatives
– Compare yields and risks with domestic short‑term instruments: U.S. treasury bills, high‑quality money market funds, domestic CDs, and short-term corporate paper.
5) Check taxation and reporting
– Offshore accounts can have additional tax and reporting obligations (e.g., FBAR/FinCEN Form 114, FATCA). Consult a tax advisor.
Risk management best practices (both institutional and individual)
– Counterparty limits: cap exposure to any single bank or jurisdiction.
– Jurisdictional diversification: avoid concentrating deposits in a single offshore location.
– Liquidity buffers: maintain domestic cash or committed lines to meet unexpected needs.
– Legal review: obtain enforceability opinions for cross‑border claims and clarify collateral/priority rules.
– Use of derivatives: hedge short-term interest-rate exposure with futures/swaps when appropriate.
– Monitor regulatory and political developments in host countries.
The bottom line
Eurodollars are a long‑standing, global market for USD liquidity that arose from the historical circulation of dollars outside the U.S. They are a major source of short-term USD funding and offer potentially higher yields because of lighter U.S. regulation and lack of FDIC coverage — but that higher yield comes with material counterparty, liquidity and jurisdictional risk. Institutions commonly use eurodollars for funding and hedging; retail investors usually access the market indirectly through futures or funds. Robust due diligence, diversification and contingency planning are essential for anyone using or investing in the eurodollar market. (Investopedia; FRBNY Liberty Street Economics)
Selected sources
– Investopedia — “Eurodollar” (Joules Garcia). Source provided by user: https://www.investopedia.com/terms/e/eurodollar.asp
– Federal Reserve Bank of New York — Liberty Street Economics: research on who borrows and lends in the eurodollar market (FRBNY Liberty Street Economics)
– Desjardins — “Eurodollars” overview
If you’d like, I can:
– Draft a short checklist your treasury team can use to evaluate an offshore deposit counterparty; or
– Outline how eurodollar futures work (pricing, tick/value, margin) and compare them to holding actual eurodollar deposits. Which would you prefer?