Eurodollar futures were standardized interest rate contracts that let banks, corporations, and traders hedge or speculate on short-term U.S. dollar borrowing costs, with pricing tied to three-month LIBOR. For roughly four decades they were the most heavily traded futures contract in the world. After LIBOR was discontinued on June 30, 2023, CME Group converted the remaining open interest into Three-Month SOFR futures and delisted the Eurodollar contract entirely.1CME Group. CME Group Completes Key Milestones in Conversion of Eurodollar Futures The contract no longer trades, but its mechanics still matter because the successor product inherited them almost verbatim.
What a Eurodollar Deposit Actually Is
Eurodollars are U.S. dollar deposits held at banks outside the United States. The name has no connection to the euro currency or to Europe specifically. Any dollar-denominated time deposit sitting in a foreign bank branch qualifies, whether the branch is in London, Tokyo, or the Cayman Islands.
Federal Reserve rules exempt deposits “payable only at an office located outside the United States” from reserve requirements.2eCFR. 12 CFR Part 204 – Reserve Requirements of Depository Institutions (Regulation D) Banks holding Eurodollars don’t set aside non-interest-bearing reserves against them and don’t pay FDIC insurance premiums on those balances, which historically translated into slightly better rates on both sides of the balance sheet compared to purely domestic deposits.
How the Contract Worked
Each Eurodollar futures contract represented a notional $1,000,000 three-month deposit. The price was quoted as an index: 100 minus the annualized interest rate the market expected for that deposit period. A quote of 98.50 meant a 1.50% implied rate. A quote of 96.00 meant 4.00%.3CME Group. Eurodollar Futures: Foundational Concepts
Every basis point of rate movement was worth exactly $25 per contract. That figure held constant regardless of the rate level or the expiration. The minimum price increment varied by expiration proximity: contracts within four months of expiry moved in quarter-basis-point ticks worth $6.25, while longer-dated contracts moved in half-basis-point ticks worth $12.50.3CME Group. Eurodollar Futures: Foundational Concepts
Contracts expired on a quarterly cycle in March, June, September, and December, with additional serial (non-quarterly) months available for shorter-dated hedging. CME listed Eurodollar futures as far as ten years into the future, which made them a common tool for building yield curves and pricing longer-term interest rate swaps.
No actual bank deposit ever changed hands. The contract settled in cash. Throughout the life of a position, the exchange marked it to market each day, crediting or debiting your account based on the settlement price move. The CME Clearing House sat between every buyer and seller, so exposure was to the clearinghouse rather than to the anonymous trader on the other side.4CME Group. Daily Settlements
Why Price Moved Opposite to Rates
Because the price formula was 100 minus the rate, prices moved in the opposite direction of interest rates. When rates rose, the index price fell. When rates dropped, the price climbed. A trader expecting the Federal Reserve to tighten policy would sell contracts to profit from the resulting price decline. A trader expecting cuts would buy.
This made position sizing simple. Sell 100 contracts, watch rates rise 50 basis points, and the gain is $25 × 50 × 100 = $125,000. Losses worked the same way. That predictability is what made the contract useful for hedging: a corporate treasurer expecting to borrow $100 million in six months could sell 100 contracts and know exactly how much the futures position would offset if rates moved against the company.
One subtlety mattered for anyone using long-dated contracts to build yield curves. Daily mark-to-market means gains and losses are realized immediately, while a forward rate agreement settles only at maturity. That timing difference creates a small systematic gap between the futures-implied rate and the true forward rate, and the gap widens with expiration length.3CME Group. Eurodollar Futures: Foundational Concepts Dealers applied convexity adjustments to account for it. For short-dated contracts the effect was small enough to ignore.
Why Eurodollar Futures No Longer Trade
Eurodollar futures settled against three-month U.S. dollar LIBOR, the rate at which major banks reported lending to each other in London. LIBOR was based on bank submissions rather than actual transactions, and after regulators uncovered widespread manipulation of those submissions in the early 2010s, the search began for a replacement grounded in real market data.
The Federal Reserve Bank of New York, working with the Alternative Reference Rates Committee, selected the Secured Overnight Financing Rate as the preferred alternative.5Federal Reserve Bank of New York. Alternative Reference Rates Committee SOFR is calculated daily as a volume-weighted median of overnight Treasury repurchase agreement transactions, including tri-party repo, GCF Repo, and bilateral Treasury repos cleared through the Fixed Income Clearing Corporation.6Federal Reserve Bank of New York. Secured Overnight Financing Rate Data Because it reflects hundreds of billions of dollars in actual daily trades rather than estimates, SOFR is much harder to manipulate.
The U.K. Financial Conduct Authority confirmed that the USD LIBOR panel ceased on June 30, 2023.7Financial Conduct Authority. The USD LIBOR Panel Ceases at End-June 2023 In April 2023, CME converted 7.5 million open Eurodollar futures and options contracts into corresponding SOFR positions, applying a fixed spread adjustment of 26.161 basis points to bridge the difference between the two benchmarks.8CME Group. Eurodollar Fallbacks Implementation Plan The remaining May and June 2023 contracts traded to their natural expiry. CME formally delisted the product on June 26, 2023, with all contracts removed from Globex by June 30.9CME Group. Eurodollar Futures Delisting Notice
What Trades in Their Place
Three-Month SOFR futures, launched by CME in May 2018, now occupy the role Eurodollar futures once played. The mechanics will feel familiar. Pricing still follows the 100-minus-rate convention. One basis point of rate movement is still worth $25. Quarterly expirations still run in the March, June, September, and December cycle, with 39 consecutive quarters listed plus six serial monthly contracts.10CME Group. Three-Month SOFR Futures – Contract Specs Tick sizes mirror the old structure: quarter-basis-point increments worth $6.25 in the front months, half-basis-point increments worth $12.50 further out.
The important structural difference is how final settlement is calculated. Rather than locking in a rate on a single fixing date, the SOFR contract’s final settlement price reflects the compounded daily SOFR values across the entire reference quarter. CME compounds each day’s published SOFR over the quarter, annualizes the result, and subtracts it from 100.11CME Group. SOFR Futures Settlement Calculation Methodologies The final settlement value isn’t known until the last day of the reference quarter, whereas Eurodollar futures had settled on a single LIBOR fixing two business days before expiry.
Adoption was rapid. By early 2023, average daily volume for SOFR futures and options exceeded 6 million contracts, surpassing the highest annual average Eurodollar volume in the product’s four-decade history.1CME Group. CME Group Completes Key Milestones in Conversion of Eurodollar Futures
Tax Treatment
Both Eurodollar and SOFR futures qualify as Section 1256 contracts under the Internal Revenue Code, which carries two distinctive rules. First, any position held at year-end is treated as if you sold it at fair market value on December 31, even if the trade is still open. Unrealized gains become taxable that year.12Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
Second, regardless of holding period, any gain or loss splits 60/40: 60% is taxed at the long-term capital gains rate and 40% at the short-term rate, which is your ordinary income rate.12Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market For active traders who hold positions for days or weeks, that blended treatment usually beats being taxed entirely at short-term rates. Gains and losses are reported on IRS Form 6781.13Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
The year-end mark-to-market rule catches some traders off guard. A large position entered in November that shows a substantial unrealized gain on December 31 generates a tax bill for that year even though the trade is still open. Worth remembering when rates move sharply in the final quarter.