Asset managers, eurodollars and unconventional monetary policy

BIS Working Papers No 578
August 2016

An asset manager's rapid liquidation in the weeks around the end of September 2014 of a very large position in eurodollar futures, a huge derivatives market that allows traders to position on the future path of dollar money rates, raises two questions. What is the profile of asset managers in this key market? And how has the Federal Reserve's unconventional monetary policy, including forward guidance about policy rates, affected this market? Asset managers generally hold the largest eurodollar positions among buy-side traders but play a lesser role in day-to-day trading. Second, the Fed's unconventional policy saw the average maturity of eurodollar contracts traded between 2008 and 2014 double and it has remained at an elevated maturity since then. Moreover, from 2012 into 2015 eurodollar turnover responded more strongly to Federal Reserve announcements than to macroeconomic news, a finding analogous to that of Filardo and Hofmann (2014) for yields. In 2015 asset managers took a large short position in eurodollar futures; this unprecedented position would profit if the Federal Reserve's own projections of policy rates ("dots") were realised. Judging from eurodollar futures, asset managers now play an important role in facilitating or hindering the transmission of monetary policy to market rates.

JEL classification: E43, E44, E52, F36, G23

Keywords: asset managers, mutual funds, derivatives, unconventional monetary policy, forward guidance, money market, eurodollar futures