The Eurodollar: Soviet Cold War Accounts, Regulation Q and LIBOR's End

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A eurodollar is a U.S. dollar deposit held at a bank outside U.S. jurisdiction, free of Federal Reserve reserve requirements and deposit insurance fees, and paying more because it carries more risk. The market grew from Cold War fear of asset freezes. In 1949 Communist China moved dollars to a Soviet-owned Paris bank, the Banque Commerciale pour l'Europe du Nord, whose telex address, Eurobank, gave the market its name. On February 28, 1957, the Soviet Union moved roughly $800,000 to the Moscow Narodny Bank, a British-registered company it owned, so a London entity held legal title to dollars still sitting in New York.

An Italian banking cartel paid the Soviets a premium and lent the dollars on, and by the end of the 1960s the market reached an estimated $70 billion. Regulation Q caps on U.S. deposit rates pushed American banks to open branches in London and the Cayman Islands. After the 1974 failures of Franklin National Bank and Herstatt Bank, ten central banks agreed to backstop the market, and in 1981 the Chicago Mercantile Exchange launched eurodollar futures, the first cash-settled futures contract. The repeal of Regulation Q in 2011, zero reserve requirements in 2020 and the LIBOR scandal brought the era to a close.

• By 1997 nearly 90 percent of international loans were structured in eurodollars, and the market was estimated at $13.8 trillion in 2016.
• Banks used nightly sweep accounts to move idle corporate cash into offshore eurodollar deposits and back each morning.
• Domestic selected deposits made up nearly 85 percent of overnight volume by early 2024, up from about half in 2019.
• LIBOR was based on bank estimates rather than trades, which let traders ask colleagues to shade their submissions.
• Eurodollar futures on the CME were retired in April 2023 in favor of SOFR contracts based on actual repo trades.