EUROCURRENCY MARKET

GROUP E

 SUBMITTED BY: GROUP E

NEHA AHSAN 25
FILZA 23
AMINA RASHEED 1
FATIMA SAEED 28
AQSA BASHARAT 27
Submitted To: MAM Rufiyaa
Department: Commerce
Semester: 8th Morning
Session: 2020-204

Government College Women

University Faisalabad
 INTRODUCTION

During the late 50s, the Russians were earning dollars by selling gold and other commodities
and wanted to use them in buying grains and other commodities from the westward countries
namely US. However they didn't want to keep dollars by way of deposits in the banks of new
York, as they feared that the US government might freeze the deposits if the cold war moves to
an intensified state. So they approached the banks in Britain and France who accepted their
deposits in the form as dollars. since these deposits were made in Europe, it was termed as euro
while the deposits were made in dollars so the term used were 'euro dollars' deposits. since the
late 80s these kinds of deposits were carried out only in Europe so it was specifically given name
as Euro Yen, Euro Rupee and in general it was termed as Eurocurrency deposits. However since
1990 there has been a great expansion in the market worldwide however the prefix "EURO" has
remained as it is. Eurocurrency markets are now global market and it does not only refer to
Europe any more. In the modern era it is clearly known as 'offshore' and not related to only
Europe.
 FACTORS RESPONSIBLE FOR ORIGINATION AND GROWTH
OF EUROCURRENCY MARKET

Factors related to the USA:

(1) Unwilling to hold dollars in USA reserve Banks:

Countries were reluctant to keep bank deposits in the United States, so they started keeping their dollar earnings
deposited in London. Eventually all other Euro dollar holders did the same, which became an obvious case when
the United States ran into constant balance of payments deficits.
(2) Regulation Q in the USA: The growth of the Eurocurrency market was also regulated by
certain monetary regulations in the United States called as 'Regulation Q' which had put a ceiling on the interest
rates on domestic deposits. So, such depositors were naturally attracted to Euro banks that were not bound by
Regulation Q. By sending off dollar deposits to their offshore branches the U.S. banks were able to avoid tying up
so much of their funds in reserve requirements at a zero rate.
(3) Regulation M in the USA: Regulation M in the US stipulated reserve to be maintained
against deposits accepted by banks in the US. This increased the cost on deposits for bank which broadened the
gap between the lending and deposits rate. This feature was mostly exploited by European Banks.
Factors related to other countries:

(4) Curtailment in UK: Constant balance of payments deficits made the United Kingdom government
limit British banks' external use of sterling, so they had a powerful incentive to develop business in foreign
currencies.

(5) Full Capital Account Convertibility adopted by developed countries:

By 1958 most of the important industrial countries had restored full convertibility of their currencies.

(6) Growth of tax heaven concept and offshore banking: At the end of the
1960s and during the early 1970s the Eurocurrency markets, expanded to a number of other
"offshore" banking centers. These were typically small territories that had, exchange control, tax
and laws regulating banking which were favorable to international banks. The business was
entrecotes in nature, with foreign currency funds deposited by one foreign source and then lent to
another.
 CHARACTERISTICS OF EUROCURRENCY MARKETS:

The various characteristics of Eurocurrency Markets are:

(1) Unregulated Market: It is a market across border. Hence the government does not have full
control over the transactions. Hence transacting entities escape from most of the stringent provisions and
regulations. Under euro currency government interference is minimal. Thus it is an unregulated market. (2)
Long Term Loans and Short Term Deposits: Eurocurrency loans are for longer period of time.
Deposits however in Eurocurrency markets are primarily for short term. This leads to asset-liability duration
mismatch problem for the banks.
(3) Massive wholesale market:. Transactions in Eurocurrency markets are huge. They are mostly
within Governments and Banks, Public Sector Organizations and large MNCs. This makes the market a wholesale
rather than a retail market.
(4)Time Deposits: The Eurocurrency market exists for savings and fixed deposits and recurring deposits in
banks. There is hardly any space in Euro market for demand deposits.
(5) Eurodollar and LIBOR based market: Eurocurrency interest rates are based on a variable
rate base such as the (LIBOR).i.e. London Inter bank Offer Rate. Under this interest rate risk is reduced. This
market is largely dominated by US Dollars over other currencies.
 COMPONENTS (COMPOSITION) OF EUROCURRENCY MARKETS:

Composition is broken apart in 3 areas, viz., (I) Market Participants, (II) Euro financial- instruments and (III)
transactional structure. (1)
Market Participant: (1)
Commercial Banks: The institutional core of the market is formed by the Commercial banks. Banks enter the
euro currency market both as lenders and as depositors. Around 20 of the world's largest banks play a vital role in the
Euromarkets. They attract a disproportionate volume of primary deposits which are then re lent to other Euro banks.
These banks connect the external with the domestic market, taking funds from one market and placing them in another
market. The depth of the interbank market enables banks to adjust liquidity positions with great ease.
(2) Corporate: Eurocurrencies are mainly borrowed by Corporations whose name, size and good standing enable
banks to make loans to them with little more than a superficial analysis of creditworthiness. But during recent times the
range of corporate and government borrowers have widened to hold less good names. The main reason for this is the vast
amount of funds available for lending.
(3) Governments and central banks: Central banks and Governments are also lenders in the
Eurocurrency markets. In addition, international institutions such as the World Bank and other regional development
banks, and institutions associated with the EU, have been borrowers on regular basis. In the last decade the market has
also seen an enlargement in20government and government - related borrowers. This is especially true of the medium term
Euro Credits market, which has become very famous for infrastructure projects and for financing balance of payments
deficits. (4)Private Individuals: Minor participants in the Eurodollar markets are known as private individual.
High net worth individuals are no doubted been significant participants as investors in the Eurobond market, where the
fact that payment of interest is without deduction of tax and securities are bearer securities gives the market anonymity
and an most probable attractiveness from a tax point of view.
(2) EURO FINANCAIL-INSTRUMENTS:
(1) Euro deposits: Most deposits in the Eurocurrency market are Fixed deposits at fixed interest rates,
whose maturity is of a short period. Around three-quarters of deposits in London Euro banks have maturities
of less than three months. Many of these deposits are on call .i.e. thus they can be withdrawn without notice.
These types of time deposits are mostly made by other bank, but many are made by governments and their
central banks as well as Multi-national Corporation. A few are made by very high income individuals, often
through Swiss bank. Deposits come in many forms. Other than negotiable Eurodollar certificates of deposit,
there are many similar certificates of deposit.
(2) Euro loans: Many Eurodollar loans are direct on the basis of formal lines of credit. However, the
technique of loan syndication has been developed for larger currencies by the market. Interest on syndicated
loans is usually calculated by adding a spread to LIBOR, although the US prime rate is also used as a basis
for interest pricing. Interest rates under LIBOR change continuously.
(3) Eurobonds: Eurobonds are international bonds denominated in a currency which is different from
that of the country in which they were issued. Eurobonds are securities which are easily transferable, and the
Eurobond market is a vital factor in international finance as the size of the Eurobond market in the
international market exceeds that of the U.S. bond market.
(4) Other Instruments: Other Euro financial instruments consist of Euro certificates of deposits,
Euro commercial papers, etc.

(III) Transactional structure of Euro Markets: The Euro currency market is completely a
wholesale market. Transactions made are very rarely to be for less than $1 million while at times they are for
$100 million and more. Like the foreign exchange markets, the vast bulk is operated to inter bank operations.
The largest on-banking companies have to deal via banks. Borrowers are the very high goodwill corporate
names carrying the lowest credit risks. The market is liked by telephone or telecommunication and is focused
upon London, which has a share of around 1/3 of the Eurocurrency market. All Euro currency transaction are
unsecured credits in nature, hence the lenders pay a lot of attention to borrowers status and name.
 FUNCTION OF EUROCURRENCY MARKET:

Given below are some of the functions of the Eurocurrency markets:

(1) Cheap Source of working capital: Lesser interest rate is attracted by Euro currency
loans than the loans of the domestic economy. This is due to low overhead costs. Since dealings are
between good credit rating and the banks, the costs of credit checking and processing are lesser.
Lending rates can thus be fixed lower than domestic market.

(2)Liquidity: Financial institutions find it highly profitable to hold their idle resources in Euromarkets.
Moreover due to fewer restrictions in the markets, investors can make investments in bearer securities. With
the absence of tax withholding on interest there is an advantage in this form. Most of the Euro deposits have
varied maturities period ranging from less than a day to couple of months. On an average 80 per cent of these
deposits have maturity of 6months.

(3)Facilitates International Trade: Eurocurrency markets make easy availability of loans

which helps in smoother working of international trade. Most banks prefer this form of financing to
traditional forms such as letter of credit. It's mainly for two reasons: (a) Lower interest rate and (b)
easy procedural formalities.
EUROBANKING / OFFSHORE BANKING:
Euro banking offers many vital advantages to the various stakeholders. Depositors try to evade
from the tax-net of their own country of domicile. Borrowers get liquid money for capital
investments as well for working capital at a highly competitive interest rate.
To grab this kind of business, banks offer banking services to non- residents. Depositors would
deposit their own home currency or US Dollar and thus Eurodollar deposit or Eurocurrency
deposit is created. This is then lent to an appropriate borrower by the bank.

ADNANTAGES OF OFFSHORE BANKING:

(1) Access to politically and economically stable jurisdictions: Offshore banks

provide easy access to politically and economically stable jurisdictions. This may turn advantageous for
those residing in apolitical turmoil areas where there is a risk and fear of getting their assets frozen,
seized or disappear.
(2) Higher interest on deposits: Some offshore banks may operate with a lower cost and
greater interest rates than the official rate in the home country due to lower overheads and a lack of
intervention by the government. Also in most of the offshore banking centers, there is a lack of control
in the interest rate. Banks are free to decide their interest rates. This is a great advantage for the banks.
(3) Evasion of Tax: Usually Interest is by
offshore banks without deducting tax. This is an advantage to individuals who evade the payment. tax
on worldwide income. Popular Offshore banking centers also save on their own direct taxes.
(4) Non-conventional Facilities: Some
offshore banks offer banking services which are non-available from domestic banks such as anonymous
bank accounts. (5) Other advantages to
the banks: In most offshore banking centers; banks get exemption from reserve requirements, entry
is easy to establish a branch, license fees are low, etc.
DISADVANTAGES OF OFFSHORE BANKING:

(1) Crime and illegal activities: Offshore banking has been associated with the crime
economy and organized crime, through money laundering. Following September 11, 2001, tax
heavens and offshore banks, along with clearing houses, have been accused of helping various
organized terrorist groups, crime gangs, and other state or non-state actors.

(2) Tax loss to Governments: Tax evasion is been promoted by Offshore banking, by giving tax
evaders with an attractive place to deposit their hidden income.

(3) Capital outflow and volatility: Developing countries may suffer due to the speed at
which money can be transferred in and out of their economy.

(4) Widens rich-poor gap: Offshore banking is usually more accessible to those on high
incomes, because of the costs of establishing and maintaining offshore accounts. Middle-income groups
suffer the most on account of the tax burden in developed countries.