CHAPTER-I

EURO CURRENCY MARKET

Introduction
It is a market for Borrowing and Lending of currency at the center outside
the country in which the currency is issued. It is different than the Foreign
Exchange Market, wherein the currency is bought and sold. Euro is a single
currency which was launched on 1st Jan1999. (With 11 of 15 member countries of the
European Union participating in the experiment). Now Euro is the official currency of
16 of the 27 member states of the European Union (EU). These 16 states include
some of the most technologically advanced countries of the European continent
and are collectively known as the Euro zone. The Euro is an important
international reserve currency. Euros have surpassed the US dollar with the highest
combined value of cash in circulation in the world. The name euro was officially
adopted on 16 December 1995. The euro was introduced to world financial markets as
an accounting currency on 1 January 1999, replacing the former European Currency
Unit (ECU) at a ratio of 1:1.
The currency was introduced initially in non-physical forms, such as
travellers checks and electronic bank in Euro coins and banknotes entered
circulation on 1 January 2002.The Euro is administered by the European Central
Bank (ECB) based in Frankfurt, and the Euro system, comprising of the various
central banks of the Euro zone nations.
The states, known collectively as the Eurozone are Austria, Belgium, Cyprus,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the
Netherlands, Portugal, Slovakia, Slovenia and Spain. The currency is also used in a
further five European countries, with and without formal agreements. and is

1
consequently used daily by some 327 million Europeans. Over 175 million people
worldwide use currencies which are pegged to the euro, including more than 150
million people in Africa.
The Eurocurrency market can be described as an international financial
market which specializes in borrowing and lending of currencies from/ to non-
residents outside the country of issues of the currencies.This market consists of
specific banking operations of accepting deposits and giving loans in non-resident
currencies.Such deposits and loans are called euro-currency deposits/credit and the
banks undertaking the transactions are called Euro-bank. These Euro-banks
constitute the Euro-currency market.

HISTORY OF EURO-CURRENCY MARKET:

The Eurocurrency Market has its roots in the World War II era. While the
war was going on, political challenges caused by the takeover of the continent by
the Axis Powers meant that there was a limited marketplace for trading in foreign
currency. With no friendly government operations within the European
marketplace, the traditional economies of the nations were displaced, along with
the currencies. To combat this, especially due to the fact that many American
companies were tied to the well-being of business behind enemy lines, banks
across the world began to deposit large sums of foreign currency, creating a new
money market.

After World War II, the amount of US Dollars outside the United States
increased enormously, both as a result of the Marshall Plan and as a result of
imports into the USA. As a result, large sums of US Dollars were in custody of

2
foreign countries, including the Soviet Union, had deposits in US dollars in USA
banks.

After the invasion of Hungary in 1956, the Soviet Union feared that its
deposits in American banks could be frozen as retaliation. A British bank offered
the Soviets the possibility of receiving its US Dollar reserves as deposits, outside
the USA. This operation was considered the first to create so called Eurodollars.
Gradually, as a result of the successive commercial deficits of the United States,
the Eurodollar market expanded until today where it is available in virtually every
country. Today, Eurocurrency refers to deposits in any currency residing in banks
that are located outside the borders of the currencys country. For example, a
deposit denominated in Yen residing in an Australian bank is a Eurocurrency
deposit, or more specifically a Euro Yen deposit. Similar external deposits apply to
Euro Sterling, Euro-Euro, Euro Swiss Franc, etc.

While opening up of the domestic markets began only around the end of seventies,
a truly international financial market had already been born in the mid-fifties and
gradually grown in size and scope during sixties and seventies.

This refers to the well-known Eurocurrencies Market. It is the largest offshore

market. Prior to 1980, Eurocurrencies market was the only truly international
financial market of any significance. It is mainly an inter-bank market trading in
time deposits and various debt instruments. What matters is the location of the
bank neither the ownership of the bank nor ownership of the deposit. The prefix
Euro is now outdated since such deposits and loans are regularly traded outside
Europe.

Over the years, these markets have evolved a variety of instruments other than time
deposits and short-time loans, e.g. certificate of deposit (CDs), euro commercial

3
paper (ECP), medium-to long-term floating rate loans, Eurobonds, floating rate
notes and euro medium-term notes (EMTNs). The difference between Euro
markets and their domestic counterparts is one of regulation.

Eurobonds are free from rating and a disclosure requirement applicable to many
domestic issues as well as registration with securities exchange authorities.

ORIGIN OF EURO CURRENCY MARKET

a) During the Bretton Woods era, the USD was the primary means of
international settlements, Most countries had reserves in USD, invested in
financial assets in the US.
b) There were certain governments that were not politically sync with the US
governments and were always apprehensive about their USD assets being
frozen by the US administrative in case of adverse developments between
the governments.
c) Such governments needed a mechanism by which they would have access to
their USD resources without the US regulators being able to identify and
freeze such accounts.
d) Thus, the need for developing such markets came from the desire to disguise
ownership of foreign currency deposits while continuing to have claim on
such deposits.
e) This Euro market provides an environment to create assets and liabilities
outside the regulatory supervision of the monitoring authority pertaining to a
currency.

4
 Are Euro
UusDollars
US dollarsr Deposited in UK Dollars

U UK
Are Euro
British Deposited in JAPAN STERLING
pound UK
sterling
K Are Euro
AUSTRA
JAPANESE Deposited in LIA YENS
YENS

CHAPTER-II

5
 FEATURES EUROCURRENCY MARKETS

Features of the Market

The following are the special features of the Eurocurrency market:

1. Types of transactions: Transactions in each currency take place outside the

country if its issue. For example, dollars earned by a Japanese firm from
exports may be deposited with a bank in London. The London bank is free to
use the funds for lending to any other bank. The bank may use it for lending
to French Bank. Thus the utility of the currency is entirely outside the
control of the central bank of the country issuing the currency. For this
reason, Eurcurrencies are also referred to as offshore currencies.
2. Huge amount of transaction: Generally they are only in millions of USD.
This has led to syndication of loans, where large numbers of banks
participate in the lending operations. It also consists of pool of large number
of short term deposits, which provides the biggest single source of funds for
commercial banks.
3. Highly competitive market: Eurocurrency market is a highly competitive
market with free access for new institutions in the market. There are no entry
barriers. The lending rates are low and deposit rate are high, thus allowing a
wafer thin margin for operations. Consequently, the margin between the
interest rates on deposits and advances has narrowed down considerably.
Consumers, i.e. investors and borrowers derive advantage out of this
situation.
4. Floating rates of interest based on LIBOR: The rate of interest is linked
to a base rate, usually the London Inter-Bank Offered Rate (LIBOR). The
interest on the deposit or the advance would be reviewed periodically and
changed in accordance with change, if any, LIBOR.

6
5. Dominance of Dollar denominated transactions: US dollar remains the
leading currency traded in the Eurocurrency market, even though its share is
declining. However, other currencies are now emerging thus reducing the
role of dollar. Other currencies traded in the market on large scale are
Deutsche mark, Japanese Yen, Pound Sterling and Swiss France.
6. Four different segments: The Eurocurrency market can broadly be divided
into four segments:
i. Euro credit markets, where international group of banks engage in
lending for medium and long term
ii. Euro bond market, where banks raise funds on behalf o international
borrowers by issuing bonds
iii. Eurocurrency (deposits) market, where banks accept deposits, mostly
for short term
iv. Euro notes market, where corporate raise funds.
7. Control of the country of issue of the currency: Even though the currency
is utilised outside the country of its origin, it has to be held only in the
country of its issue. For example, the Japanese firm deposits its dollar
earnings with the bank in London. The London bank will keep the funds in a
New York bank in its own name. When the London bank lends the amount
to the French bank, it will give suitable instructions to the New York bank.
On receipt of the instructions, the New York bank will debit the account of
the London bank and credit it to the account of the French bank. Thus
ultimately the settlement of all dollars transactions takes place in New York.
Similarly, settlement of all Eurosterling is made in London.

Functions of the Eurocurrency Markets

The Eurocurrency market serves several important functions:

7
 Its very nature allows market forces a fuller play than the counterpart
domestic market constrained with regulations and laws. Thus, it gives a
more accurate reading of market forces. Indeed, the more opaque the
domestic market due to distortions, the more critical the role of the
Eurocurrency market as a barometer of market forces. A paradox should be
noted here. Since this market owes its existence to impediments in the
domestic markets, it stands to reason that any reduction (if not removal) in
regulations in the domestic markets in recent years should decrease the
relevance of the Eurocurrency market. However, its significance has
increased rather than diminished over time. It is likely that taxes and
transaction costs have assumed a much more pivotal role than ever before
because of pressures on bank profits created by intensified competition.
The Eurocurrency markets are well connected and efficient. As a result, the
market can be used for hedging purposes. Banks can buy and sell foreign
currency denominated assets and liabilities of different maturities and
amounts for managing their exposure to interest rate and currency risk.
The Eurocurrency markets are well funded, and thus are convenient sources
for funding a banks domestic and international loans.
Finally, new products are needed by the banks clientele to contain exposure
resulting from globalization, and such products may have legal, regulatory,
or tax implications that make them unsuitable for introduction in the
domestic market.

FACTORS CONTRIBUTING TOWARDS GROWTH OF EURO

CURRENCY MARKET.

8
Countries Responsible for the Growth of the Eurocurrency Market

1. China (fear that its Fx in USD would be blocked).

2. Korea (War broke out in 1950)
3. Russia (erstwhile USSR){because of their banking presence in Paris and
London}
4. UK (policy of not granting sterling loan outside sterling area in 1957).
5. USA (indeed blocked identifiable Fx in USD in 1950, Federal Reserve
Act, regulation Q and M; control and restrictions on borrowing funds
in US in 1965 and introduction of interest equalization tax in 1963)

China, Korea And Russia:

Since 1949, China feared that its dollar earnings would be blocked by USA. So
China shifted its dollar earnings to Paris in the Russian Banks. Korean war broke
in 1950. So USA indeed blocked Chinese indentifiable dollar deposits in USA.
Russian banks in Paris and London started disguising their balances by placing
them in western European banks rather than in New York. So the communist
countries had dollar claim on the western European banks and western European
banks had similar claim on USA.
United Kingdom
British Government in 1957, decided not to grant sterling pound loans
outside sterling area.
During the same period, however, Western European banks were permitted
to foreign currency deposits (say bank in London will accept dollar deposit).
So the banks in London offered loans to their non-sterling area customers.

United States Of America (USA)

9
Federal Reserve Act: Regulation Q

This act was about restriction on payment of interest on dollar deposits as

well as other currency deposits.
No interest was payable on deposits having maturity of 30 days or less.
There were restrictions and ceilings on interest payments on deposits having
maturity above 30 days.
Therefore, the dollar deposits of Non Resident US citizens got shifted to
Europe as the banks in Europe offered higher rates of interest on dollar
deposits
Foreign (for US) investors also shifted their dollar deposits from US to
centres outside US, mostly to banks in London.
London Banks used these deposits for lending to its customers in non-
sterling areas.
Thus London got the prominence in borrowing and lending Euro-dollar.

Federal Reserve Act: Regulation M

This act was about reserve requirement of the banks on their deposits.
The act required US banks to block more money in reserves, than European
banks.
US banking regulation was not very tight then (and it is not so even now)
American banks found it beneficial to move the deposits of Non Resident
US citizens as well as those of resident citizens to banks in Europe.
Insure Deposits: There was mandatory regulation on all banks in the US
to insure deposits accepted by them from public, on the other hand European
markets were unregulated. With no burden of insurance costs, deposits in
Euro currency markets were encouraged.
10
 Interest Equalization Tax: This tax was introduced by US monetary
authority in 1963 increasing the cost of borrowing there for non-resident
entities. They approached offshore markets, where no such burden was
there, for their funding needs.
International Borrowing: The Voluntary Restraint Program was
introduced in the US in 1965 in terms of which, borrowing in US dollars for
financial international projects was restricted and US banks were reluctant to
provide loans to international borrowers. This ensured that US
multinationals would also look upon for borrowing funds from the Euro
currency market.

Characteristics of Euro currency Market

Unregulated market: It is a cross border market hence no government

has full control over the transactions. As a result there is minimal
government interference. Essentially it is an unregulated market.
Short term deposits and long term loans : Deposits in Euro currency
markets are primarily for short term. Eurocurrency loans, however, are for
longer period of time. This leads to asset-liability mismatch problems for
the banks.
Largely wholesale market: Transactions in Euro currency markets are
very large. They are mostly among banks, and Governments, Public Sector

11
 Organization and large MNCs. This feature makes it a wholesale rather than
a retail market.
Time deposits: This market exists for savings and time deposits, fixed
deposits and recurring deposits.
Eurodollar and LIBOR based market : Euro currency interest rates
are tied to a variable rate base such as London Interbank offer Rate
(LIBOR). This reduces interest rate risks.

Components of Euro-currency Markets

Components of Euromarkets are described in three areas, viz.,

A) Market Participants consisting of commercial banks, corporate banks,

government and central banks and private individuals.
B) Euro Financial Instruments and

Interbank Market
Euro
Currency
Markets
eurobond Market

Euro
security Euro notes Euro commercial
markets Market paper

C) Transactional structure of Euro Markets the Euro Currency market is

entirely a wholesale market.

Transactions in the market are telephone linked or telecommunications linked.

12
 They are focused upon London. London boasts of around one third of the Euro
currency markets. All Euro currency transactions are unsecured credits and
hence lenders pay particular attention to borrowers status, name and reputation.

CHAPTER-III

SEGMENTS OF EUROCURRENCY MARKETS

1) Euro-Credit Markets : Medium and Long Term Loans [upto 10-15 years 10%
of loans, 5-8 years 85% of loans, 1-5 years 5% of loans] provided by group of
banks.

1. Amount: It is a wholesale sector of the international capital market.

2. Security: Loans are provided without any primary or collateral security.
Credit rating is the essence of lending
3. Type of loan: a) revolving [like cash credit]
b) Term Credit

4. Interest Rate: Generally 1% above the reference rate rolled over every 6

months
13
 5. Currency: Generally USD, but can be any other currency as required by

the borrower and ability of the lender.

Syndcation of Loan:

Managing banks, as desired by the borrower

Lead bank, generally who takes the largest share of lending
Agent bank, as required to take interest of the banks in syndication and
comply with the procedure
Common assessment of the borrower and his country
Common documentation
In very few cases co-financing with IMF and IBRD is possible.

2) Euro-Bonds

Euro-Bonds are unsecured securities

They are therefore issued by borrowers of high financial standing
When they are issued by government corporation or local bodies, they are
guaranteed by the government of the country concerned
Euro-Bond is outside the regulation of a single country. The investors are
spread worldwide.
However, foreign bonds are issued in only one country and are subject to the
regulation of the country of issue.
Selling of EB is through syndicates of the banks
Lead manager advices about size, terms and timing of the issue.
Entire issue is underwritten.
Lead managgers fees, underwriting commission is somewhere between 2%
and 2.5% of the value of the issue

14
 Lead manager allocates the bonds to all members of the selling group at face
value less their commission.
Thereafter every member is on is own.
They can sell to investors at whatever price they can obtain
Thus no two investors in the Euro-Bond market need to pay the same price
for the newly issued bonds.

Features of Euro-Bonds:
Most Euro-Bonds are Bearer securities
Most bonds are denominated in USD 10,000
Average maturity of the Euro-Bond is 5-6 years
In some cases maturity extends to 15 years

Types of Euro-Bonds:
Straight or fixed rate bonds
1. These are fixed interest bearing securities
2. Interest is normally payable yearly
3. Year is considered of 360 days
4. Maturities range from 3-25 years
5. Right of redemption before maturity may be there or may not be
there
6. If the right of redemption is there then redemption is done by
offering a premium

Convertible bonds
1. These are fixed interest bearing securities
2. Investor has an option to convert bonds into equity shares of
borrowing company
3. The conversion is done at the stipulated price and during the
stipulated period.
4. Conversion price is normally kept higher than the market price.
5. The rate of interest is lower than the rate of interest on comparable
straight bond.
15
 6. Sometimes the bonds are issued in a currency other than the
currency of the share. This provides an opportunity to diversify the
currency risk asthese bonds are issued with fixed exchange rate of
conversion.
7. Bonds with warrants: warrant is part of the bond but is detachable
and traded separately, when the conversion takes place. The investor
can keep the bond and trade the warrant for shares.

Currency option bonds

1. They are similar to straight bonds
2. Generally issued in one currency and option to take interest and
principal in another currency
3. Exchange rate is either fixed (generally not) or is spot rate prevailing
in the market three business days before the due date of payment of
interest and principal.

Floating rate notes:

1. FRN is similar to straight bonds with respect to maturity and
denomination
2. Rate of interest however varies and is based on LIBOR+1/8%, 1/4%,
1.5%...
3. Rate of interest is adjusted every 6months
4. Minimum interest rate clause may be included
5. Drop lock clause may also be included, which means if minimum
interest rate happens to be paid then it is locked for the remaining
period of the bond
6. Generally it is found that banks issue and invest in FRNs

Euro-currency Deposits

16
 1. Euro-bonds represent the funds amassed by the bank on behalf of
international borrower. Euro-currency deposits represent the funds accepted
by the bank themselves.
2. The Euro-currency market consists of all deposits of currencies placed with
the banks outside their home currency.
3. The deposits are accepted in Euro-currencies aa well as currency cocktails
(SDR, ECU etc.)
4. The deposits are placed at call (overnight, two days or seven days notice)
for USD, Sterling Pound, Canadian dollars and Japanese Yen and of two
days in any other currencies
5. Time deposits are accepted for periods of 1,3,6 and 12 months for ll
currencies
6. USD and Sterling pound can be placed for a period of 5 years
7. Minimum size of deposit is USD 50,000 or its equivalent

Euro-Currency Deposits Certificate of Deposit

1. It is a negotiable instrument
2. They are bearer instrument and can be traded in the secondary market
3. Period: 1 year(1month through 12 months)
4. Minimum amount: USD 50,000
5. Currencies: USD, Sterling Pound, Yen
6. Interest rate: 1/8% below LIBOR
7. Tranche CD: carries different rates of interest for cash tranche
8. Discount CD: they are issued at discount.

3) Euro- Notes Market

1. This market constitutes the instruments of borrowing issued by the corporate

in the Euro-currency market
2. The instrument issue may be underwritten or may not be underwritten
3. The borrowers directly approach the lenders without the intermediation of
the banks or financial institution
4. Instruments are of the following categories:
i. Commercial paper

17
 ii. Note issuance facilities
iii. Medium term notes
Commercial paper
1. It is a promissory note with maturity less than a year, generally the
period varies between 90days to 180 days
2. Generally issue is not underwritten
3. Amount: USD 100,000 or equivalent
4. Issued on Discount to Yield basis, but interest rate works out lesser
than that is paid on bank borrowing nd higher than that is paid by the
bank on deposits
5. They are unsecured instrument

Note Issuance Facilities (NIF)

1. Borrowers place short term notes of 3-6 months maturity directly with the
investors and the notes are rolled over on maturity
2. The banks underwrite at the time of issue as well as when the note are rolled
over
3. With slight variation they are lso known as:
i. Revolving underwriting facility(RUF)
ii. Standby Note Issuance Facility(SNIF)
iii. Note Purchase Facility (NPF)

Medium Term Notes

1. MTN represents Long Term, Non Underwritten and fixed interest rate source
of raising finance
2. It can be comparable with Euro-bonds with a difference that Eurobonds
issue is underwritten, where as MYN issue is ot underwritten
3. Their maturity is somewhere between short term CPs(less than one year) and
long term Euro bonds(more than 5 years)
4. They are privately placed and have great flexibility

TYPES OF FOREIGN BONDS

18
 YANKEE BONDS: These are us dollar dominated issue bonds by foreign
borrowers in the us bonds markets. Foreign issuer has to adapt us accounting
practices and us rating agencies will have to rate these bonds. These bonds
are sponsored by us domestic under-writing syndicate and require securities
exchange board registration prior to selling them in domestic us markets.
Eg. Reliance Industries Ltd has been the most successful Indian corporate to
tap this instrument with fifty years fifty million dollar yankee bond issue.

SAMURAI BONDS: Yen denominated bond issued in the Japanese

domestic markets by the non-Japanese companies are known as Samurai
Bonds. The borrowers have a minimum investment grade rating (Grade A).
The maturities range between three to twenty years.
Since this instruments is for public and the arrangements have to be made
for underwriting and selling involving documentation, its issuing costs are
the highest.

BULL DOG BONDS: Pound denominated bonds issued in the United

Kingdom domestic markets by the foreign (non-UK) companies are known
as Bull Dog bonds. The tenure range between five to twenty five years.
These bonds are subscribed by long term institutional investors such as
Pension Funds
Life Insurance Corporation of India
They have redemption on bullet basis.

KANGAROO BONDS: A type of foreign bonds that is issued in the

Australian market by foreign (non-Australlian) companies and is
denominated in Australian currency. The bonds is subject to Australian laws
and regulations. These bonds are alternatively known as Matilda Bonds

KANGAROO ARE MATILDA

SAME
BONDS BONDS
AS 19
 MAPLE BONDS: A type of bonds that is issued in the Canadian market by
foreign (non-Canadian) companies and is sold by foreign financial
institutions and companies. The Maple bond provides an opportunity to
domestic (Canadian) investors to invest in foreign companies without
worrying about effects of currency exchange fluctuations. Foreign
companies can use Maple bonds to raise Canadian Dollars for setting up
operations in Canada.

PANDA BONDS: A Panda bond is a Chinese renminbi denominated bond

from a non-Chinese user, sold in China. It was agreed eventually, that funds
cannot be repatriated from China.

REMBRANDT BONDS: A foreign bond denominated in Euros and traded

in the Netherlands is known as Rembrandt bond. A non-Dutch Company
can choose to sell this bond to raise capital from Dutch investors.

MATADOR BONDS: A term used to identify a foreign bond issued in Spain

by a company that is not domiciled in Spain. Matador bonds were bonds
denominated in Pesetas and were usually corporate bonds. The name
matador originated from bull fighters in Spain. Spain followed a systematic
approach when accepting new foreign issuers. Spain initially allowed only
AAA rated super nationals to issue Matador bonds. After a few years sub
AAA multinational were allowed access to spains debt market and
eventually, allowed non-investment sovereigns to issue bonds.

20
 MATRIOSHKA BONDS: Matrioshka bond, a Russian Rouble denominated
bond issues in the Russian Federation by non-Russian entities. The name
derives from Russian wooden dolls popular with overseas visitors to Russia.

ARIRANG BOND: It is a won denominated bond issued in South Korea

named after a Korean folk song. The market is very small. The Asian
Development Bank was the first to issue Arirang seven-years bonds in 1995
for won 80 billion.

KAURI BOND: A similar bond but issued in New Zealand in 2004 named
after trees and denominated in NZ dollars.

TAX HAVENS

1. A country that offers foreign individuals and businesses little or no tax

liability in a politically and economically stable environment is known as a
Tax Haven. These tax havens provide little or no financial information to
foreign tax authorities.
2. Individuals and businesses that do not reside a tax haven, can take advantage
of these countries tax regimes to avoid paying taxes in their home countries.
Tax havens do not require that an individuals reside in or a business operate
out of that country in order to benefit from its tax policies.
3. Both residents and non-residents enjoy very low income tax rates. They
provide a very high degree of financial freedom combined with limited
regulations whose enforcement is less stringent.
4. They offer limited wholesale banking services to non-residents with near
zero tax on income. The non residents financial institutions located at such
centers are not integrated with the financial systems of the host country.

21
 5. They promise strict secrecy regarding financial transactions of non-resident
bank customers which means there is lack of effective exchange of financial
information with foreign tax authorities.
6. Alaska, the Bahamas, Belize, the British Virgin Islands, the Cayman Islands
the Channel Islands, United Arab Emirates, the Cook Islands, Hong Kong,
the Isle of Man, Mauritius, Lichtenstein, Monaco, Panama, Switzerland and
St. Kitts and Nevis are all considered tax havens.

PETRODOLLARS

The Organizations of Petroleum Exporting Countries (OPEC) was formed

in 1960at the Baghdad conference in Iraq. This group has had a significant
influence on crude oil/petroleum prices. The first major hike in petroleum prices
was introduced in 1973.

This event had a major impact on the flow of international funds. Since
petroleum trading was invoiced in USD, these surplus funds generated out of
petroleum sales and recycled between exporters and importers, were caked Petro
Dollars.

LIBOR (London Interbank Offered Rate)

The interest rate at which prime bank offers dollar deposits to other prime
bank in London is known as LIBOR. This rate is used as the basis for
pricing Eurodollar and other Eurocurrency loans. The lender and the
borrower agree to a mark up (specific percentage or basis percentage i.e

22
 1% = 100 basis points) over the LIBOR; and total of LIBOR and the mark
up is the effective interest rate for the loans.
It represents the average rate at which bank can obtain unsecured funding in
a given currency for a given period.
A panel of eight to sixteen Euro-banks in London market have been
designated by the British Bankers Association (BBA) based on scale of
market activity, credit rating and perceived expertise in the currency to
contributed the rates at which they would be willing to transact funds in the
interbank market.

SIBOR (Singapore Interbank Offered Rate)

SIBOR stands for Singapore Interbank offered Rate and is a daily reference
rate based on Interest rates at which banks offer to lend unsecured funds to other
banks in Singapore wholesale money market (or interbank market). It is set by the
Association of Banks in Singapore (ASB). Using SIBOR is more common in the
Asian region.

23
ADVANTAGE

1. It helped the economies to solve the liquidity problems:

2. It provided better investment opportunities.

3. Funds are also by the commercial banks of various countries for domestic
credit creation and window dressing.

4. This facilitated the growth and development of various countries like Brazil,
South Korea, Taiwan, and Mexico etc

5. Its International acceptance has helped in the international trade to expand

and accelerated the process of globalization.

DISADVANTAGE

1. For many economies it is a new concept.

2. For many economies also considered that the speed of its growth or
expansion is TOO fast.

3. For many economies, they feel this market gives a chance to avoid many a
regulations that they try to impose on their national money market.

24
 CHAPTER-IV

DIFFERENCE BETWEEN

Euro Bonds VS Euro Credits

NO Euro-Bonds Euro-Credits
1 Euro-bonds are medium to long Euro-credits are short to medium
term instruments to long term term transactions provided for
instruments issued for periods five to eight years.
from five to forty years.
2 Euro-bonds often provide for Euro-credits are always given on
fixed coupon/interest rates. floating rate basis.
3 Liability for interest on the Interest liability on each
entire amount begins from the component begins from the date
day of the receipt. of drawing.
4 Bonds cannot be issued in Loans can be availed of in
multiple currencies. different currencies.
5 Coupon rates on bonds are Euro-credit interest rates are
based on deposit rates and are, based on borrowing rates and are,
therefore, lower than rates therefore, higher than bond rates.
payable on loans.
6 Bonds have to be marketed to Loans syndications can be
international investors; raising completed in a very short span of
finance through issue of bonds time.
is a slower process.

Euro-Currency Bonds VS Euro-Currency Notes

NO Euro-Currency Bonds Euro-Currency Notes

25
 1 Bonds are sold by the borrower to Notes are sold by the borrower
a syndicate of underwriting banks. without any underwriting support.

2 Borrower sells the issue to the Borrower sells instruments directly

underwriters who thereafter sell to retail investors without any
the instruments to retail investors. intermediation.
3 Issue risk is assumed by the The sale of notes is based on the
underwriters and credit rating of credit rating of the borrower and
borrower is of limited importance. hence is critical to the issue.
4 Price discovery takes place Since there is no intermediation, the
through demand/supply. cost of acquiring notes is the same
for all investors.

Euro-Currency Market VS Foreign Exchange Market

NO Euro-Currency Market Foreign Exchange Market

1 This market deals with This market deals with purchase

26
 borrowing and lending and sale of currencies.
Country
currencies. Name
USA 2 It is an unregulated
Federal Reserve Bank
market. These markets are regulated by
UK Bank of England
JAPAN Bank of Japan the respective national monetary
SWITZERLAND Swiss National Bankauthorities.
EURO-AREA
3 This market European
functions Central Bank market functions on
on This
CHINA Peoples Bank of China
interest rates. exchange rates.
AUSTRALIA Reserve Bank of Australia
4 It is essential a wholesale It operates at both retail and
NORWAY Bank of Norway
INDIA market. wholesale levels.
Reserve Bank of India
5 Transactions are mainly done in Transactions at retail level are
standard quantities. customized.
6 Lending is not security oriented. Security based approach to
lending.

7 Euro-banks face a permanent No such limitations.

asset liability mismatch
problem.

List of Some Important Central Banks

27
 Country Agency
USA Securities and Exchange Commission (SEC)
UK Financial Services Authority (FSA)
JAPAN 1)Financial Services Authority
2)Securities and Exchange Surveillance
Commission (SESC)
SWITZERLAND Federal Department of Finance
CANADA 1)Canadian securities Administrators (CSA)
2)Investment Industry Regulatory Organization
Of Canada (IIROC)
AUSTRALIA 1)Australian Prudential Regulation Authority
(APRA)
2)Australian Securities and Investment
Commission (ASIC)
GERMANY Federal Financial Supervisory Authority
FRANCE 1)Autorite Des Marches Financiers (AMF)
- Financial Markets Authority.
INDIA Securities and Exchange Board of India.

List of Some Regulatory Authorities

28
 CONCLUSION

The creation and growth of the Eurocurrency market has been an important
side effect of the increase of international economic activity over the past few
decades. The market has expanded largely as a means of avoiding the regulatory
costs involved in dollar-denominated financial. Due to the size and importance of
the foreign exchange market, it remains largely unregulated. There is no
29
international organization to look over it or any institutions that sets rules. The
name Eurocurrency market is given to any bank deposits in any country held in a
different countrys currency. An example of this is United States dollar depositing
in a British bank. These banks are called Euro banks. The emergence of eurobanks
has facilitated trade and investment between countries. A Eurocurrency is any
currency that is deposited outside of the home country. Since approximately two
thirds of Eurocurrency is U.S. dollars, central banks and regulators are concerned
about Eurocurrency because they are stateless money. Eurocurrency market has
very little regulation, such as taxes, restrictions on capital movements and
exchange controls. Thus, the market attracts more investors. It is easier for banks
around the world to use the Eurocurrency market to move and store funds more
profitably than they could in many countries. Since the market is relatively free of
regulation, Eurodollar market must operate on narrower margins than banks in the
United States. The Eurocurrency market gives investors the opportunity to hold
short-term claims on commercial banks, which also act as intermediaries to
transform these deposits into long-term claims on final borrowers. Not only does
Eurocurrency market allow for more convenient borrowing, it also improves the
international flow of capital for trade between countries and companies. This
market also attracts domestic deposits because it offers a higher interest rate. The
largest Eurocurrency markets are located in London, New York, and Tokyo.
This report discussed various issues related to the Eurocurrency market.
Specifically, it explained development as well as the features of the Eurocurrency
market. The growth of the Eurocurrency results from government-induced
impediments and it requires sustenance from benign indifference on the part of
the government issuing the currency. Institutional setting of various geographic
centres was described to highlight the requisite ingredients for development of
such centres. The traits of interest rates were discussed with respect to time (term
30
structure), space (other currencies), and impediments (domestic versus offshore).
Interrelationships among the three were brought out through arbitrage activities
facilitated by new tools based on conventional concepts of term structure and
interest parity theories. Finally, the role of the Eurocurrency market in the
development of new products was discussed with illustrations of NIFs, Euro-CP,
asset securitization, and Eurobonds. It was suggested that it is not the far-reaching
novelty of these products that is important, but what they symbolize: a change in
the bank attitude that marks a break with the past.
The main problem for the Euro crash was not sub-optimal currency areas nor
profligate government spending but fatal flaws in monetary design and an
appalling series of policy mistakes by the European Central Bank (ECB). The
inflation-targeting regime established by the ECB right at the start, coupled with
the reckless dismantling of the old Bundesbank's monetary framework, contributed
decisively to the ensuing gross failures. Further factors in the fatal cocktail
included long-term French monetary nationalism, empowered by a French
President at the head of the ECB, and the succumbing of euro officials to the same
deflation phobia which had gripped the Federal Reserve. There is only one way
which has any real prospect of salvaging European monetary integration - that is to
start again.

BIBLIOGRAPHY

www.wikipedia.com
www.google.com
www.scrib.com
Economics textbook

31
 www.safari.com

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