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What is the Euromarket?


The Euromarket is the over-the-counter market for interbank deposits, loans, debt, equity and derivative instruments denominated in a currency foreign to the bank, debtor or issuer of the instrument.  Eurocurrency is any currency that is held on deposit with a bank that is foreign to the bank’s own domestic currency or the currency of a financial instrument foreign to that of the debtor’s or issuer’s home country.  With the advent of the euro as the currency of the Eurozone, the use of the prefix Euro- to refer to the Euromarket and the instruments that are traded in the market has caused great confusion for market practitioners, investors and educators.

Whereas most money market transactions occur domestically, money market instruments are also traded offshore.  Since most Euromarket instruments are unsecured obligations, generally only issuers with a high credit rating, such as governments, supranational entities and top multinational corporations, can access this market.  London is the leading Euromarket dealing center with New York, Tokyo and Singapore prominent in their respective time zones.

Choosing between the US Domestic Market and the Euromarket
The choice of market depends upon several criteria:
   1.   Relative pricing levels;
   2.   Amount required;
   3.   Choice of investor base;
   4.   Most appropriate maturity for your business;
   5.   Preferred currency, taking into account of the availability and cost of a currency swap;
   6.   Covenants;
   7.   Ease of documentation/management time; and
   8.   Need for a rating.
Source: Association of Corporate Treasurers (ACT)

Before the existence of the Euromarket, all international finance was directly subject to the rules, practices and institutional arrangements of the respective national markets.  In domestic markets, funds are denominated in the local currency and governed by the regulations applying to the domestic currency.  In the Euromarket, by contrast, funds are intermediated outside domestic central banking jurisdiction.

The Euromarket has is origins in the Cold War period of the 1950s, when Soviet Block institutions moved their holdings of US dollars from New York to London to avoid the risk of the US government freezing or seizing these assets.  Soviet Bloc countries feared that dollar deposits held in the US may be attached by US citizens with claims against Soviet governments.  The Eurobond market started in London in the early 1960s once the Eurocurrency deposits of the London merchant bankers had become large enough to provide long-term dollar-based financing.

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