Friday Fun Fact: World’s Most-Traded Interest Rate Futures Contract Almost Failed

After a year of trading, the Eurodollar futures contract (not related to the Euro FX currency futures contract launched in 1999) averaged only 3,000 contracts a day. Many had given up on the contract. At that time, U.S. Treasury bill futures were the key short-term interest rate product at CME Group, reflecting the risk-free borrowing rate of the U.S. Government.

Prior to the launch of Eurodollar futures, however, the underlying borrowing/lending market in Europe and other money centers around the globe began quoting ICE LIBOR rates to reflect the growing amount of Eurodollar time deposits.

In time, ICE LIBOR became the key benchmark lending rate around the globe, while U.S. Treasury bill futures were only a rate at which Uncle Sam would borrow.; Not under the auspices of the U.S. regulators, Eurodollar time deposits (ICE LIBOR was the rate on those time deposits) grew substantially and borrowing amongst banks and corporates soon flocked to an ICE LIBOR-based rate.

By 1981, when futures on Eurodollars were launched, all the ingredients were in place for a large cash market. Consequently, asset/liability managers now had a need to hedge interest rate exposure in the growing ICE LIBOR market.

Moreover, traders began trading TED spreads (T-bill rates minus Eurodollar rates) as a way to profit from the spreads between a risk-free money market rate and a key short-term rate (ICE LIBOR).

So, despite the slow start, Eurodollar futures went on to become the most liquid futures contract in the history of the business and now trade over 2.3 million contracts a day, a far cry from the ADV in 1982 of 3,000 contracts a day.

About the Author

Dave Lerman, a CME Group employee for 32 years, has played a key role in numerous product launches, including Bitcoin, the E-mini S&P 500, the Micro E-mini, and the E-mini Russell. He has traveled the globe giving seminars and workshops on trading and risk management, and is the author of Exchange Traded Funds and E-mini Stock Index Futures.

Prior to joining CME Group, Dave was a member at the CBOT. He was a senior Portfolio Manager at Zavanelli Portfolio Research, taught investment management at Harper College and has lectured at the Northwestern University Kellogg Graduate School of Management.