Eurocurrency Market Characteristics

The Euro-currency market has no geographical limits or a common market place. Business is done by telex, telephone and other communication systems. Internationally-reputed brokers put through the transactions for the banks. Deposits are secured for the banks operating in the market by the general guarantee of its parent or holding company and in some cases, by its central bank and /or the government of the concerned country. Similarly, loans to commercial parties are guaranteed by their respective governments. Deposits and loans to banks are, however, not guaranteed except by the banks parent companies or their exchange control authorities.

The amounts of loans and the periods of maturity vary over a wide range from a few thousands to millions of dollars and from call loans to maturities extending up to 10-15 years. Some of the loans may be syndicated and jointly sponsored by a number of banks. There are also varied interest rates of floating rate notes.

The Euro-currency market has growth enormously since its inception in 1958. The principal agencies for collection of data on operations in this market are the Bank for International Settlements and the Bank of England. Starting with less than $ 1 billion in 1958, the market has growth to $ 100 billion (net size) by 1972 and further to a few thousand billion (net size) by 1972 and further to a few thousand billion early in Nineties. About two-thirds to three-quarters of these funds are in dollars and the rest in various other convertible currencies. In the seventies, the relative importance of non-dollar currencies had increased due to the decline in confidence in dollar and the abandonment of the old Bretton Woods System. The importance of the Bond market has also been growing in recent years. Loans of more than 3 years now constitute a larger portion of total loans than before.

Techniques of Operations

Deposits of currencies are made against a certificate given by the bank. These certificates of deposits are bearer bonds and transferable by endorsement and a market has been developed in them. This is the secondary market which imparts liquidity to the depositors as these certificates can be discounted with the banks dealing in this market.

The loan operations are concluded mostly for short-term duration and if necessary on a revolving basis. Some loans are transacted on a floating interest clause which enable the rate to be varied depending upon the daily interest rates prevailing in the market or on a quarterly or six monthly interest rate review. The long-term loans or bond issues are facilitated by the introduction of revolving credit nature. The increases use of floating rate of interest clause and revolving credit facility and approved performance of the US dollar in the foreign exchange market were responsible for the increase in bond issues in recent years. Multi-currency clause and floating interest rate clauses afford protection to both the borrowers and lenders in the market against a sharp fall or rise in interest rates as well as exchange rates in any currency which influences the Euro-currency market. Basically, short-term funds in the form of deposits are converted into term loans in this market.

Internationally reputed brokers are constantly in touch with the banks dealing in Euro-currencies. Their quotations for borrowing and lending, rates of interest in each currency are advised to the banks early at the start of the trading hours of the day. These quotations give separately for each of the maturities and for each currency are the starting point for offer and bids in the inter-bank market which is the center piece of Euro-currency market mechanism and which accounts for 80 per cent of the total transactions in the market. The commercial market consisting of loans to the public — both short and medium-term — is arranged on a syndicated or a consortium basis if the loan is for large amounts. The syndicated loans have become an important segment of the market in more recent years.

In addition to the revolving credit facilities, fixed term facility extending upto 5 or more years has subsequently developed. Such large scale credit arrangements are made possible by banks operations in the inter-bank market — one bank helping the other banks — or by the syndicated or consortium arrangements among banks. The bulk of growth of the Euro-dollar market must be attributed to the revolving nature of the credits and the gearing ratio on which banks operate.

Importance of Euro-currency Market

The growth of Euro-currency market has produced far reaching effects on the international financial system and the monetary scene. Firstly, these floating funds have augmented the official international liquidity and helped the financing of deficits in the balance of payments of countries. Secondly, these Euro-currency funds are found useful for private corporate investments and for working capital purposes. Thirdly, the quick and efficient source of funds provided by this market has helped the easing of pressures on the international monetary system, particularly on the dollar and other currencies under strain. Fourthly, it has provided a channel for profitable investment for excess funds of governments, central banks and business corporations. This market has finally opened up avenues for greater international monetary co-operation and integration.

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