Technically, Eurodollar deposits are dollar-denominated deposits held at non-U.S. banks, but regulatory and technological developments have made these deposits easily tradable even by U.S. banks and by many nonbank institutions not eligible to participate in the fed funds market. Accessible to a wide range of borrowers and lenders and operating virtually around the clock, the Eurodollar market has grown rapidly and become highly liquid.
Because large banks can trade in either the federal funds market or the Eurodollar market and because fed funds and Eurodollars are easily substitutable forms in which to hold short-term liquidity, it should not be surprising that overnight Eurodollar interest rates line up closely with the funds rate, even within the day (Bartolini, Gudell, Hilton, and Schwarz, 2005).