14 ms·

FX swap debt a $80T 'blind spot', global regulator says

94 points by anonymouse008 4y ago

PaulHoule 4y ago
Estimates of the risk from swaps tend to miss that there are many offsetting swaps. That is, if I am a market maker in swaps my positions mostly cancel out. That $80T might really be $2T or $8T. It is still a large amount but it isn’t really $80T. The trouble is we have no way of knowing how much the real liability is.
- HelloNurse 4y ago
  What serious problems (for compliant, prudent operators) can hide in this lack of visibility? Cowboys taking more risks than they should be allowed and making currency exchange more volatile and dangerous? Some form of failure chain reaction?
  - PaulHoule 4y ago
    The blow up with credit default swaps in the 2008 crisis was one example of a failure that was large but looked even larger than it was before the facts got in.
    - HelloNurse 4y ago
      The CDS crisis was mainly due to treating high risk assets, more or less by mistake or maliciously, as if they were less dangerous. Can something of the sort happen with foreign currencies? Who holds unbalanced, volatile portfolios of foreign exchange that could crash and bring them down, and why?
_5uxp 4y ago
[flagged]
- notyourwork 4y ago
  Maybe, maybe not. Without giving any substance, your post is easily disregarded. I'd suggest if you believe in crypto and want to further its position to provide factual reasons why.
  - _5uxp 4y ago
    Tbh I'm tired, even I or someone else explain it, I don't think it will change the decade old bias here. Any bad/misinformation filled crypto article gets lots of upvotes. Then with time stripe/paypal/visa etc. starts using and offers to business to accept it. After years, nobody think why they so late, why they offer now etc. So no point to prove any information to public here. Again it's ponzi, right? Simple. Just ponzi. Yet blocks are being mined without any interruption for more than a decade.
    - HhbozBlqtp 4y ago
      How is it biased to ask you to explain your point?
      - affinepplan 4y ago
        Because the second you try, about ten times as many other HN users come to tell you you're wrong and it's all just a Ponzi and anybody who is interested in crypto is just a grifter. I absolutely understand the exhaustion.
    - ferminaut 4y ago
      Small nit...There has been interruptions to block generation. In 2010 for 8hours 27 min In 2013 for 6hours 20 min But yes, almost 9 years without issue! Pretty impressive uptime regardless.
    - notyourwork 4y ago
      You can further your belief or not, choice is yours. Telling me you're tired doesn't help me convince myself crypto is anything but a toy for mainstream consumers. FDIC insurance, safe guards, there are lots of things crypto in fact makes worse for technically illiterate.
tejohnso 4y ago
> FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen in the “spot leg” before later repaying them, have a history of problems. This sounds speculative / risky. Is it? If so, why would a pension fund be involved with something like that in the first place? Is it typical to have a portion of a pension fund allocated to highly speculative risk?
- thehumanmeat 4y ago
  Look into the eurodollar system. Most "money" today is just swaps on bank ledger entries backed by counterparty trust and can-kicking. If you thought the dollar was a scam by not being backed by anything, wait till you check this out.
  - tru3_power 4y ago
    Are there any resources that can explain these systems clearly and with examples?
- cperciva 4y ago
  It's primarily a matter of reducing risk by hedging. Pension/insurance companies typically hold assets around the world but have liabilities concentrated where their customers are -- and thus denominated in their customers' primary currency.
- Nifty3929 4y ago
  Not necessarily - it certainly could be very risky, but sometimes these types of things actually reduce overall risk, if you happen to have an offsetting, inversely-correlated risk elsewhere. Like if you bet me $1M on a coin coming up heads, that could appear very risky on it's own. But if you already had a bet in place for $1M that it comes up tails, then overall the heads bet zeros out your risk.
  - danielmarkbruce 4y ago
    A slightly better example - if the Australian Future Fund owns $50 mill of Coke bonds, they probably need an fx swap so that every time Coke sends them some USD, they can swap it into AUD and know in advance how many AUD they are going to get. If the USD got stronger against the AUD, the swap the Future Fund are in becomes a liability for them, if viewed through a "mark to market" lens. But the USD they are receiving is worth more to them, so they could increase the value of the bond holding - this would mean everything was "on balance sheet". But there is a very good argument that this "on balance sheet" method is a bad representation of the true economics of the situation. So instead, they leave the value of the Coke bond on their balance sheet at the same level, and don't record the liability of the fx swap. Clearly the use of the FX derivative reduces the volatility for the Future Fund. Note this is a somewhat contrived example, but it illustrates why off balance sheet isn't a black hole per se. At the same time, if you think through a few issues that could come up in this case, it's easy to see why it can be manipulated by bad actors, and why counter party risk is a big deal.
qaq 4y ago
Is this actual thing or notional value of swaps? Cause scary numbers are good for clicks but might be fairly meaningless.
- lucozade 4y ago
  FX swaps swap the principal amounts. So a default between the spot and forward legs can leave you with a chunky liability. Unlike single currency interest rate swaps where the principal is notional in the sense that they aren't exchanged, they're just used to calculate the coupon exchange.
  - AnimalMuppet 4y ago
    OK, but "chunky" is still much less than the notional value, right? (I mean, if one currency suffered runaway inflation, it could approach 100%, but that should be rare...)
    - lucozade 4y ago
      It's not a notional principal for a fx swap, it's an actual principal that you swap. If your counterpart defaults, you're still liable for what you owe (usually multiple millions) but you won't receive the other side.
      - snake_doc 4y ago
        But in a sense, only the cost of capital is at risk, not the capital borrowed. The 80T number is capital borrowed. It’s definitely worthy of skepticism. It’s definitely a liquidity risk given the short term and principal swaps requirements, hence mostly a central bank issue as a backstop. But potential losses in economic terms seem smaller.
  - qaq 4y ago
    Thank you for the explanation, I guess time to be concerned.
secondcoming 4y ago
I fully expect to never see any of my pension. I still contribute to it as it's tax efficient (UK) but the financial fiasco caused by Liz Truss already lost my pension some money. Years ago I bought some gold for shits 'n giggles, but I may buy some more.
- lotsofpulp 4y ago
  You will receive a benefit, but you will not be able to purchase as much as you might have expected to with the benefit.
  - gitfan86 4y ago
    This is the right way to look at the issue. It is the same way you should look at Bitcoin. It is very possible Bitcoin will hit 100k someday. But the interesting measurements will be how many loaves of bread can you buy with that one Bitcoin at that time.
_448 4y ago
Just yesterday I was watching this: https://www.youtube.com/watch?v=U1dpWiZoiJU https://www.youtube.com/watch?v=U1dpWiZoiJU Looks like the can is being kicked down the road since 2008 by the politicians/decision/policy makers so that it becomes some one else's problem to clear the mess.
LatteLazy 4y ago
I think this is Exposure, not Debt right? If you borrow in USD and lend in non-USD, then the asset and the debt balance (roughly) and you are Exposed by $X to fluctuations in the value of USD. But you only actually lose $X if the other currency (Euro, Yen etc) becomes worthless. Also, how reliable are these numbers? If I borrow 1tn USD and turn it into 1.1tn EUR, then borrow 1.1tn EUR and turn it into 1tn USD then my actual exposure net is zero in either currency. But journalists and sensationalists like to pretend that is 2tn USD and 2.2tn EUR... Finally, and this is just my ignorance: why are swaps not on balance sheets? It's pretty simple with an FX swap like these to just list the (USD) liability and (non USD) asset and convert using today's rate to whatever actual currency you report in. I understand that swaps are a dumb way for pension funds to ratchet up their risk while pretending they are investing in low risk securities but that should not change how they are reported...
- mikeyouse 4y ago
  It's been too long since I've studied the details, but it's my recollection that the value at risk is on the balance sheet, it's just the notional amounts that aren't. The BIS hypothetical is that if markets freeze up and you can't buy one leg to cover your swap, you could be left with a huge liability. Edit -- actually BIS has a little accounting example with two options noting that most people use the net basis as I remembered but they would prefer the gross basis: https://www.bis.org/publ/qtrpdf/r_qt1709x.htm https://www.bis.org/publ/qtrpdf/r_qt1709x.htm
  - naveen99 4y ago
    Maybe the balance excel sheet needs a column for notional value / leverage also.
- tomojola 4y ago
  I agree that hte headline is deceiving, $80TN is not the right number The correct number is closer to $26 tn , based on the BIS report and the REAL risk is the market risk exposure to equity from the assets that these loans fund. In these contracts the borrowers lose money when the value of the asset they hold deviates from FX. if you borrow $500mm to buy AAPL stock and AAPL stock is down 10% you lose $50mm dollars. You needed to post 476MM EUR at the beginning with the expectation of receiving the same amount in 7 days and on that same day you would pay the USD 500mm you borrowed back. You expect to do this 1000's of times, or until you sell AAPL stock. If at the same time EURUSD moves from 1.05 to 1 when it comes time to "roll" your transaction, you need to find an extra 25mm EUR. Now the $500mm of debt requires 500mm EUR of collateral. If AAPL was up, you could sell some of it to cover the roll, if its down like in my example you have a $50mm and EUR 25mm are real equity losses. I think these swaps are not on balance sheet because of accounting history. Generally the swap is described above woudl be held as a EUR 25mm derivatives payable. so on the balance sheet it goes from 0 to $25mm liability. The REAL balance sheet, in addition show a EUR 475mm asset, a loan receivable & a 500mm borrowing a loan payable. Unlike single currency derivatives , you MUST pay the full notional at maturity, you do not get to just net the $25mm owed, so generally your only options are to buy USD outright, using equity or local currency borrowing, in the entire size then send it to the counterparty, or to sell the USD asset to cover. Also you are getting margined every day so it eats into equity...
amar-laksh 4y ago
Here's the original BIS report, I don't understand anything, hopefully someone will: https://www.bis.org/publ/qtrpdf/r_qt2212.pdf https://www.bis.org/publ/qtrpdf/r_qt2212.pdf
ShaneMcGowan 4y ago
At what point does one give up on this whole “global economy” thing and just move to the woods?
- andyjsong 4y ago
  Once you have self-sustaining energy, water, and food source with the same cost parity as your current living situation. Extra points if you can convince a group of people to join you to create a community.
  - mikeyouse 4y ago
    It would be even better if that community became skilled at producing a certain set of goods or services and traded them with the outside world to gain wealth and increase quality of life for its inhabitants. You could take payment in advance for the services, but in case of international currencies, it would probably be prudent to hedge that currency timing risk with FX swaps...
    - salawat 4y ago
      Back to square one. We were getting away from the drug addicted financiers with a gambling problem, and a serious misunderstanding of the concept of risk, remember?
      - mikeyouse 4y ago
        (That's the joke - these systems all exist for a reason, it's a silly fantasy to try to avoid them rather than just spending effort to ensure they're robust and resistant to failure)
        salawat 4y ago
        And yet, the joke is reliant on presupposing the lack of merit to getting away from the thing being escaped from. I'm not entirely convinced that the system as is is worth trying to prop up. At least not while preserving the status and role of the same idiots who prove so adept at reinventing and perpetuating the same risky, destabilizing shit every decade.
treebeard901 4y ago
There are many liquidity problems brewing that when combined create a dangerous and uncommon financial environment. Other than the changes happening with the U.S Dollar as global reserve currency, some of this manifests itself in the Reverse Repo Market. You can see over the last several years and since the 2008 crisis that it has grown exponentially. This typically can be used as an indirect measure of Treasury Liquidity as a whole, which Yellen at the Treasury has been warning about. With this comes an unwinding of quanatitiavive easing, also in place for over a decade and will continue to have unknown effects. It's safe to assume that much of the economy and zombie companies were able to exist on basically free money. As all of this comes together, and if the robbing peter to pay Paul economy continues where trillions can be created just by modifying a balance sheet, then things could end very poorly. Pension funds, real estate both commercial and residential, and many other factors could lead to a bond market crash and a debt crisis that would have no way out since everything is so over leveraged on easy money already. While the future of inflation is up in the air, it remains to be seen if the Fed can manage all of these actions without causing a severe recession. We might find that a bandaid was put on the global economy after 2008 and much of the structural problems remain. Government spending on all kinds of things will have to be reduced along with the Feds balance sheet and where this leads is unknown.
- Workaccount2 4y ago
  Watching congress grill Powell, it doesn't look like the government is keen on doing anything except blame the fed. Early on I was hoping that Biden, seeing the writing on the wall that he can't do a second term, would step up and be the fall guy for the "terrible policy" of cutting spending and raising taxes. Looks like that isn't going to happen though.
  - mistrial9 4y ago
    Joe Biden and his people have historical roots with the same groups that participate in the economy of Argentina, modern Spain and a host of small other countries. The M.O. is to be the great protector, incapable of error.. meanwhile slick PR to gloss over, dismiss or ignore any and all problems, as long as the leadership remains intact. I believe the original authors of the Constitution of the USA would be familiar with much of this, from a command and control perspective. Elaborate insurance and futures markets were already several hundred years old at that time, right?
danielmarkbruce 4y ago
They should mention that each "debt" has a counter party that has an "asset". Ie, net zero. Which doesn't resolve the liquidity issue, but it's not a black hole like they make out. In addition, it's not clear they are netting across all transactions. Many of the players in this market have offsetting positions. It's derivatives. It is what it is. Marking everything to market all the time isn't a great answer either.
- naveen99 4y ago
  If some of those counter parties go chapter 11, the resulting black hole will cause some tidal waves as it pulls the dominoes.
  - danielmarkbruce 4y ago
    Yep, that's the derivatives market. And the insurance market. And many other markets where transactions are set up and then play out over time. It is what it is.
    - thfuran 4y ago
      But is it what it should be?
      - danielmarkbruce 4y ago
        It's all that it can be.
      - vkou 4y ago
        If we're going to pick finance apart into 'Socially useful' and 'Socially damaging' parts, I think insurance would generally fall towards the left side of that spectrum. It's possible that our particular implementation of the insurance markets is deeply flawed, but a general concept of 'Pay X now to be backstopped in the event of catastrophe' is incredibly useful.
        4y ago
kasey_junk 4y ago
This feels pretty sensationalist to me. The report is irritating because it lumps 80% of the fx ‘debt’ into 1 big bucket of “less than 1 year”. But a huge swath of those transactions are cleared in days. One of the main reasons to do a currency swap is to handle liquidity mismatched more efficiently than going to the currency markets. Firm a has x dollars now but needs to pay out a fixed y currency 2 days from now. Another firm (or set of firms) has the opposite problem. A currency swap is agreed to with a fixed exchange rate/ fees which can be much much lower than the market rate as there is no fx rate exposure to hedge. That’s why it’s off balance sheet. It’s perfectly 1:1. There is counterparty risk but it’s much much cheaper and less risky to deal with that than the corresponding credit line plus fx exchange that the swap is replacing. I can see how it makes central bankers nervous because they don’t have insight into it, but it’s strictly less risky than the alternative.
- blitzar 4y ago
  CLS is very well collateralised and covers effectively all of the short dated FX. If central bankers want an insight it is a phone call away and there is nothing to see there.
- naveen99 4y ago
  Global gdp is around $100 trillion. I would think you need about a year to roll over $80 trillion. Don’t think you can do a lot more than 2-4% / week.
  - whatshisface 4y ago
    GDP calculations don't include this kind of stuff.
- WastingMyTime89 4y ago
  Yes, it’s a completely sensational headline. Anyone with a modicum of knowledge about international finance knows that FX swaps are used to hedge currency risk. As far as I know (not much to be fair - my business school education is far away and I don’t work in the field), they are not a very popular speculative investment.
googlryas 4y ago
The fact that Wallstreetbets and superstonk have picked up on this is a sure indication to me that this means absolutely nothing at all. Their track record approaches 0%
- tyleo 4y ago
  What? Sure there is a lot of chaos in WSB but they really were onto something with GME and literally squeezed some institutional investors into bankruptcy. Sure, they are mostly smoke but their mere interest in something doesn’t disqualify it.
  - mox1 4y ago
    So 'superstonk' was created after all that. It was basically the crazies from WSB after the WSB mods wanted to tone down the conspiracy theories. Prior to the GME squeeze, the talk on WallStreeBets was basically "GME is sound fundamentally, its got +revenue AND its shorted to hell, conditions are right for upward movement". It wasn't about sticking it to anyone, screwing hedge funds, etc, it was like "we think short sellers are perhaps screwing up here, we suggest you buy some GME".
  - ixnay 4y ago
    They weren't on to something with GME, their enthusiasm was its cause.
    - tyleo 4y ago
      This is plainly wrong. Their enthusiasm did not create short interest in GameStop, they simply took advantage of it.
      - brookst 4y ago
        Sure, but it was self-fulfilling. It wasn't a brilliant analysis, it was a demonstration that a large group of loosely coordinated individual investors can move markets by collective action.
  - 4y ago
rundmc 4y ago
The OECD has just published it's updated Pensions Outlook which explains to governments how to implement Asset Backed Tontine style pensions to make the global pensions sector more financially robust and to better serve the needs of retirees. The team here at Tontine Trust (https://tontine.com https://tontine.com) are committed to adding a "Proof of Reserves" feature that will prevent the above quoted shenanigans by exposing the assumptions being relied upon to keep the auditors happy but that the pension funds may not want their members or the public at large to know. https://www.oecd.org/pensions/oecd-pensions-outlook-23137649.htm?utm_term=pac&utm_medium=social&utm_content=pensions%2C1-Non-CampaignDirectorateContent%2C2-Well-FunctioningGlobalMarkets%2C3-DAF&utm_source=linkedin https://www.oecd.org/pensions/oecd-pensions-outlook-23137649...
- etothepii 4y ago
  Tontine's are illegal in the UK. Edit: since the passage of the Life Assurance Act 1774 tontines have been illegal in the UK.
  - rundmc 4y ago
    Perhaps you should send your supporting evidence to the UK government because right now they are going all in on shifting the pensions industry to a Tontine style CDC model. The email of The Pension Regulator is report@tpr.gov.uk Don't forget to come back here to update your comment once you get a response. https://www.oecd-ilibrary.org/sites/20c7f443-en/1/3/5/index.html?itemId=/content/publication/20c7f443-en&_csp_=f2b27c8bfaae83ab6fff909cad93f284&itemIGO=oecd&itemContentType=book#section-d1e17543 https://www.oecd-ilibrary.org/sites/20c7f443-en/1/3/5/index....
snake_doc 4y ago
Most of the swaps are foreign entities borrowing US dollars to hedge their own currencies’ FX volatility. This simply conveys the incredible US dollar dominance in global markets. Also because FX swaps are collateralized with up front principal, the leverage is very low. The primary risk is short term liquidity and not default risk, which makes this a central bank issue, hence the BIS warning.
college_physics 4y ago
The BIS has been fretting about what might be lurking in shadow banking for a long time. The cynical view is that they just want to expand their regulatory surface. But the recent events in the UK pension funds universe (had to be summarily bailed-out without much ado - though interest rate, not FX derivative related) suggests they might know what they are worried about...
Pixie_Dust 4y ago
Was this "financial instrument" designed by the same people that designed credit default swaps. All it does is kick the risk down the road not even mitigate it, just disguises the fact that it isn't "risk-free lending". "It is useful for risk-free lending, as the swapped amounts are used as collateral for repayment" https://corporatefinanceinstitute.com/resources/derivatives/foreign-currency-swap/ https://corporatefinanceinstitute.com/resources/derivatives/...
naveen99 4y ago
So accounting books != balance sheet Book - balance sheet = “hidden” “leverage ratio” as defined by pension accounting standards doesn’t include currency / counterparty risk.
reset2023 4y ago
Can someone please ELI5 this article?
ThePhysicist 4y ago
-
- drexlspivey 4y ago
  And this relates to the article how?
  - chuckSu 4y ago
newsclues 4y ago
I'm not an economist, but I feel like we talk about sustainability a lot when it comes to the environment, but not about the economic aspects. As someone born in the 80s, it seems like every financial crisis hasn't been corrected, just the can gets kicked down the road.
grumple 4y ago
Has the article been removed? The link leads me to a Reuters page with no content.
JakeAl 4y ago
If you're not familiar, read up on how things went down in Greece and Italy and dare I say, Argentina with their economic collapses. The concern becomes getting your money out of the bank and prices skyrocketing between the shelf and cash register. The good news is I think Greece (maybe it was Italy) got rid of their government for 18 months to cut wasteful spending. No government = no government spending which is where all the debt came from.
djyaz1200 4y ago
Can someone explain to me how the debt holder would service (pay for) a debt without having it on the books? If they don't service the debt wouldn't it just roll over indefinitely and compound, and if so why would a counter party allow that?
fnordpiglet 4y ago
Notionals on a swap have nothing to do with their risk exposure, but they have everything to do with clickbaiting the public and getting politicians elected.
- dang 4y ago
  Can you explain more? When a story is clickbait, it's helpful if knowledgeable people help the rest of us understand.
  - fnordpiglet 4y ago
    Yes sorry I was going to do that as an edit after I had a chance to read other comments. First, the article meanders through a lot of unrelated stuff like crypto markets and interest rates and inflation. These add nothing to the subject, please do not be confused by it. Second, what’s being quoted is a notional on a swap, which is the reference amount being indexed on in the contract. Some background: There are different types of swaps, some of which have been standardized via ISDA agreements, or are being cleared on an exchange or other multiparty platform that provides some standardization and doesn’t require a “bilateral” contract that’s between two counter parties, often paired by a securities market maker - but historically they’re “over the counter” and bilateral in that there’s no market or exchange, it’s just an agreement. I’m that agreement or contract there’s a reference currency pair in the case of fx swaps. Say it’s USD/EUR - I.e., the exchange rate between USD and Euros. The notional is the amount of that indexed pair. They’re are often enormous amounts. Much more money than either actually have on hand. But, they’re often used against things like non repatriated earnings - which can be enormous. Those earnings are never involved in the contract mind you, but are instead referenced as the notional. The two counter parties in the contract agree to swap a risk in a swap. Typically they can be conceived of the seller gives the buyer currency at the current exchange rate. The buyer simultaneously issues forward contracts to the seller. The difference between the two is the swap point. This swap point is where profit and losses lie, and it’s a very small percentage of the notional. I’m not as familiar with OTC swaps in FX, but typically there’s no need to actually swap assets but rather agree to pay the PNL without owning the underlying assets. What’s at risk is the payouts, which are no where near the notional value of the swap. The article however implies notional values are somehow debt owed. They further imply that they’re “hidden,” but generally bilateral contracts aren’t disclosed securities by many participants in the market. The real ask is embedded deep in the article which is BIS wants to see more of these transactions settled via a standardized clearing house or exchange that usually have reporting requirements. The BIS is worried this returns us to some of the opacity before the financial crisis. As someone who worked many years as a quant in the space of credit default swaps, which has largely standardized to my understanding, I do not agree. OTC has its place and cleared has its place. Some markets don’t have a successful place to clear in the open. But it’s not hiding anything, and it’s absolutely not hiding debt, nor are these instruments dangerous.
firstSpeaker 4y ago
Can someone with more literacy explain what is the impact of this on an average Joe?
TacticalCoder 4y ago
> Pension funds and other 'non-bank' financial firms have more than $80 trillion of hidden, off-balance sheet dollar debt in FX swaps, the Bank for International Settlements (BIS) said. Ah yup pension funds. In some countries they're mandatory: money is forcibly taken out of your salary to put into pension funds. Which may or may not give money back to you in 30 years once you retire. A few weeks ago the governor of the bank of England said pension funds were "hours away from collapsing". Why the fuck was that? Can't pension just simply DCA reputable stocks and call it a day? No. They have to do crazy things. Like that Canadian teachers pension fund who put $95m into... FTX. Yup. FTX. I don't know about you but I'd rather not have the state use its monopoly of violence to confiscate my money and put it in a pension fund, which I see as a complete and total ponzi. I'd rather, instead, like to pay less taxes and be able to do what the fuck I want with that money. Like buying stocks, gold, Bitcoin or splurge at the casino. I think about just anything I can think of, even lighting my money on fire, would be more moral than participating in the gigantic ponzi that pension funds are. But I've got no choice as in the EU these ponzi are mandated and often run by the state and you cannot opt out.
- justincormack 4y ago
  The pension funds that had an issue were "defined benefit" funds, which are not usually available to people now, versus the normal "defined contribution" ones where you get to choose how you invest the money and take the risks yourself.

94 points by anonymouse008 4y ago

Estimates of the risk from swaps tend to miss that there are many offsetting swaps. That is, if I am a market maker in swaps my positions mostly cancel out. That $80T might really be $2T or $8T. It is still a large amount but it isn’t really $80T. The trouble is we have no way of knowing how much the real liability is.

HelloNurse 4y ago
What serious problems (for compliant, prudent operators) can hide in this lack of visibility? Cowboys taking more risks than they should be allowed and making currency exchange more volatile and dangerous? Some form of failure chain reaction?
- PaulHoule 4y ago
  The blow up with credit default swaps in the 2008 crisis was one example of a failure that was large but looked even larger than it was before the facts got in.
  - HelloNurse 4y ago
    The CDS crisis was mainly due to treating high risk assets, more or less by mistake or maliciously, as if they were less dangerous. Can something of the sort happen with foreign currencies? Who holds unbalanced, volatile portfolios of foreign exchange that could crash and bring them down, and why?

_5uxp 4y ago

[flagged]

notyourwork 4y ago
Maybe, maybe not. Without giving any substance, your post is easily disregarded. I'd suggest if you believe in crypto and want to further its position to provide factual reasons why.
- _5uxp 4y ago
  Tbh I'm tired, even I or someone else explain it, I don't think it will change the decade old bias here. Any bad/misinformation filled crypto article gets lots of upvotes. Then with time stripe/paypal/visa etc. starts using and offers to business to accept it. After years, nobody think why they so late, why they offer now etc. So no point to prove any information to public here. Again it's ponzi, right? Simple. Just ponzi. Yet blocks are being mined without any interruption for more than a decade.
  - HhbozBlqtp 4y ago
    How is it biased to ask you to explain your point?
    - affinepplan 4y ago
      Because the second you try, about ten times as many other HN users come to tell you you're wrong and it's all just a Ponzi and anybody who is interested in crypto is just a grifter. I absolutely understand the exhaustion.
  - ferminaut 4y ago
    Small nit...There has been interruptions to block generation. In 2010 for 8hours 27 min In 2013 for 6hours 20 min But yes, almost 9 years without issue! Pretty impressive uptime regardless.
  - notyourwork 4y ago
    You can further your belief or not, choice is yours. Telling me you're tired doesn't help me convince myself crypto is anything but a toy for mainstream consumers. FDIC insurance, safe guards, there are lots of things crypto in fact makes worse for technically illiterate.

tejohnso 4y ago

> FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen in the “spot leg” before later repaying them, have a history of problems. This sounds speculative / risky. Is it? If so, why would a pension fund be involved with something like that in the first place? Is it typical to have a portion of a pension fund allocated to highly speculative risk?

thehumanmeat 4y ago
Look into the eurodollar system. Most "money" today is just swaps on bank ledger entries backed by counterparty trust and can-kicking. If you thought the dollar was a scam by not being backed by anything, wait till you check this out.
- tru3_power 4y ago
  Are there any resources that can explain these systems clearly and with examples?
cperciva 4y ago
It's primarily a matter of reducing risk by hedging. Pension/insurance companies typically hold assets around the world but have liabilities concentrated where their customers are -- and thus denominated in their customers' primary currency.
Nifty3929 4y ago
Not necessarily - it certainly could be very risky, but sometimes these types of things actually reduce overall risk, if you happen to have an offsetting, inversely-correlated risk elsewhere. Like if you bet me $1M on a coin coming up heads, that could appear very risky on it's own. But if you already had a bet in place for $1M that it comes up tails, then overall the heads bet zeros out your risk.
- danielmarkbruce 4y ago
  A slightly better example - if the Australian Future Fund owns $50 mill of Coke bonds, they probably need an fx swap so that every time Coke sends them some USD, they can swap it into AUD and know in advance how many AUD they are going to get. If the USD got stronger against the AUD, the swap the Future Fund are in becomes a liability for them, if viewed through a "mark to market" lens. But the USD they are receiving is worth more to them, so they could increase the value of the bond holding - this would mean everything was "on balance sheet". But there is a very good argument that this "on balance sheet" method is a bad representation of the true economics of the situation. So instead, they leave the value of the Coke bond on their balance sheet at the same level, and don't record the liability of the fx swap. Clearly the use of the FX derivative reduces the volatility for the Future Fund. Note this is a somewhat contrived example, but it illustrates why off balance sheet isn't a black hole per se. At the same time, if you think through a few issues that could come up in this case, it's easy to see why it can be manipulated by bad actors, and why counter party risk is a big deal.

qaq 4y ago

Is this actual thing or notional value of swaps? Cause scary numbers are good for clicks but might be fairly meaningless.

lucozade 4y ago
FX swaps swap the principal amounts. So a default between the spot and forward legs can leave you with a chunky liability. Unlike single currency interest rate swaps where the principal is notional in the sense that they aren't exchanged, they're just used to calculate the coupon exchange.
- AnimalMuppet 4y ago
  OK, but "chunky" is still much less than the notional value, right? (I mean, if one currency suffered runaway inflation, it could approach 100%, but that should be rare...)
  - lucozade 4y ago
    It's not a notional principal for a fx swap, it's an actual principal that you swap. If your counterpart defaults, you're still liable for what you owe (usually multiple millions) but you won't receive the other side.
    - snake_doc 4y ago
      But in a sense, only the cost of capital is at risk, not the capital borrowed. The 80T number is capital borrowed. It’s definitely worthy of skepticism. It’s definitely a liquidity risk given the short term and principal swaps requirements, hence mostly a central bank issue as a backstop. But potential losses in economic terms seem smaller.
- qaq 4y ago
  Thank you for the explanation, I guess time to be concerned.

secondcoming 4y ago

I fully expect to never see any of my pension. I still contribute to it as it's tax efficient (UK) but the financial fiasco caused by Liz Truss already lost my pension some money. Years ago I bought some gold for shits 'n giggles, but I may buy some more.

lotsofpulp 4y ago
You will receive a benefit, but you will not be able to purchase as much as you might have expected to with the benefit.
- gitfan86 4y ago
  This is the right way to look at the issue. It is the same way you should look at Bitcoin. It is very possible Bitcoin will hit 100k someday. But the interesting measurements will be how many loaves of bread can you buy with that one Bitcoin at that time.

_448 4y ago

Just yesterday I was watching this: https://www.youtube.com/watch?v=U1dpWiZoiJU https://www.youtube.com/watch?v=U1dpWiZoiJU Looks like the can is being kicked down the road since 2008 by the politicians/decision/policy makers so that it becomes some one else's problem to clear the mess.

LatteLazy 4y ago

I think this is Exposure, not Debt right? If you borrow in USD and lend in non-USD, then the asset and the debt balance (roughly) and you are Exposed by $X to fluctuations in the value of USD. But you only actually lose $X if the other currency (Euro, Yen etc) becomes worthless. Also, how reliable are these numbers? If I borrow 1tn USD and turn it into 1.1tn EUR, then borrow 1.1tn EUR and turn it into 1tn USD then my actual exposure net is zero in either currency. But journalists and sensationalists like to pretend that is 2tn USD and 2.2tn EUR... Finally, and this is just my ignorance: why are swaps not on balance sheets? It's pretty simple with an FX swap like these to just list the (USD) liability and (non USD) asset and convert using today's rate to whatever actual currency you report in. I understand that swaps are a dumb way for pension funds to ratchet up their risk while pretending they are investing in low risk securities but that should not change how they are reported...

mikeyouse 4y ago
It's been too long since I've studied the details, but it's my recollection that the value at risk is on the balance sheet, it's just the notional amounts that aren't. The BIS hypothetical is that if markets freeze up and you can't buy one leg to cover your swap, you could be left with a huge liability. Edit -- actually BIS has a little accounting example with two options noting that most people use the net basis as I remembered but they would prefer the gross basis: https://www.bis.org/publ/qtrpdf/r_qt1709x.htm https://www.bis.org/publ/qtrpdf/r_qt1709x.htm
- naveen99 4y ago
  Maybe the balance excel sheet needs a column for notional value / leverage also.
tomojola 4y ago
I agree that hte headline is deceiving, $80TN is not the right number The correct number is closer to $26 tn , based on the BIS report and the REAL risk is the market risk exposure to equity from the assets that these loans fund. In these contracts the borrowers lose money when the value of the asset they hold deviates from FX. if you borrow $500mm to buy AAPL stock and AAPL stock is down 10% you lose $50mm dollars. You needed to post 476MM EUR at the beginning with the expectation of receiving the same amount in 7 days and on that same day you would pay the USD 500mm you borrowed back. You expect to do this 1000's of times, or until you sell AAPL stock. If at the same time EURUSD moves from 1.05 to 1 when it comes time to "roll" your transaction, you need to find an extra 25mm EUR. Now the $500mm of debt requires 500mm EUR of collateral. If AAPL was up, you could sell some of it to cover the roll, if its down like in my example you have a $50mm and EUR 25mm are real equity losses. I think these swaps are not on balance sheet because of accounting history. Generally the swap is described above woudl be held as a EUR 25mm derivatives payable. so on the balance sheet it goes from 0 to $25mm liability. The REAL balance sheet, in addition show a EUR 475mm asset, a loan receivable & a 500mm borrowing a loan payable. Unlike single currency derivatives , you MUST pay the full notional at maturity, you do not get to just net the $25mm owed, so generally your only options are to buy USD outright, using equity or local currency borrowing, in the entire size then send it to the counterparty, or to sell the USD asset to cover. Also you are getting margined every day so it eats into equity...

amar-laksh 4y ago

Here's the original BIS report, I don't understand anything, hopefully someone will: https://www.bis.org/publ/qtrpdf/r_qt2212.pdf https://www.bis.org/publ/qtrpdf/r_qt2212.pdf

ShaneMcGowan 4y ago

At what point does one give up on this whole “global economy” thing and just move to the woods?

andyjsong 4y ago
Once you have self-sustaining energy, water, and food source with the same cost parity as your current living situation. Extra points if you can convince a group of people to join you to create a community.
- mikeyouse 4y ago
  It would be even better if that community became skilled at producing a certain set of goods or services and traded them with the outside world to gain wealth and increase quality of life for its inhabitants. You could take payment in advance for the services, but in case of international currencies, it would probably be prudent to hedge that currency timing risk with FX swaps...
  - salawat 4y ago
    Back to square one. We were getting away from the drug addicted financiers with a gambling problem, and a serious misunderstanding of the concept of risk, remember?
    - mikeyouse 4y ago
      (That's the joke - these systems all exist for a reason, it's a silly fantasy to try to avoid them rather than just spending effort to ensure they're robust and resistant to failure)
      - salawat 4y ago
        And yet, the joke is reliant on presupposing the lack of merit to getting away from the thing being escaped from. I'm not entirely convinced that the system as is is worth trying to prop up. At least not while preserving the status and role of the same idiots who prove so adept at reinventing and perpetuating the same risky, destabilizing shit every decade.

treebeard901 4y ago

There are many liquidity problems brewing that when combined create a dangerous and uncommon financial environment. Other than the changes happening with the U.S Dollar as global reserve currency, some of this manifests itself in the Reverse Repo Market. You can see over the last several years and since the 2008 crisis that it has grown exponentially. This typically can be used as an indirect measure of Treasury Liquidity as a whole, which Yellen at the Treasury has been warning about. With this comes an unwinding of quanatitiavive easing, also in place for over a decade and will continue to have unknown effects. It's safe to assume that much of the economy and zombie companies were able to exist on basically free money. As all of this comes together, and if the robbing peter to pay Paul economy continues where trillions can be created just by modifying a balance sheet, then things could end very poorly. Pension funds, real estate both commercial and residential, and many other factors could lead to a bond market crash and a debt crisis that would have no way out since everything is so over leveraged on easy money already. While the future of inflation is up in the air, it remains to be seen if the Fed can manage all of these actions without causing a severe recession. We might find that a bandaid was put on the global economy after 2008 and much of the structural problems remain. Government spending on all kinds of things will have to be reduced along with the Feds balance sheet and where this leads is unknown.

Workaccount2 4y ago
Watching congress grill Powell, it doesn't look like the government is keen on doing anything except blame the fed. Early on I was hoping that Biden, seeing the writing on the wall that he can't do a second term, would step up and be the fall guy for the "terrible policy" of cutting spending and raising taxes. Looks like that isn't going to happen though.
- mistrial9 4y ago
  Joe Biden and his people have historical roots with the same groups that participate in the economy of Argentina, modern Spain and a host of small other countries. The M.O. is to be the great protector, incapable of error.. meanwhile slick PR to gloss over, dismiss or ignore any and all problems, as long as the leadership remains intact. I believe the original authors of the Constitution of the USA would be familiar with much of this, from a command and control perspective. Elaborate insurance and futures markets were already several hundred years old at that time, right?

danielmarkbruce 4y ago

They should mention that each "debt" has a counter party that has an "asset". Ie, net zero. Which doesn't resolve the liquidity issue, but it's not a black hole like they make out. In addition, it's not clear they are netting across all transactions. Many of the players in this market have offsetting positions. It's derivatives. It is what it is. Marking everything to market all the time isn't a great answer either.

naveen99 4y ago
If some of those counter parties go chapter 11, the resulting black hole will cause some tidal waves as it pulls the dominoes.
- danielmarkbruce 4y ago
  Yep, that's the derivatives market. And the insurance market. And many other markets where transactions are set up and then play out over time. It is what it is.
  - thfuran 4y ago
    But is it what it should be?
    - danielmarkbruce 4y ago
      It's all that it can be.
    - vkou 4y ago
      If we're going to pick finance apart into 'Socially useful' and 'Socially damaging' parts, I think insurance would generally fall towards the left side of that spectrum. It's possible that our particular implementation of the insurance markets is deeply flawed, but a general concept of 'Pay X now to be backstopped in the event of catastrophe' is incredibly useful.
      - 4y ago

kasey_junk 4y ago

This feels pretty sensationalist to me. The report is irritating because it lumps 80% of the fx ‘debt’ into 1 big bucket of “less than 1 year”. But a huge swath of those transactions are cleared in days. One of the main reasons to do a currency swap is to handle liquidity mismatched more efficiently than going to the currency markets. Firm a has x dollars now but needs to pay out a fixed y currency 2 days from now. Another firm (or set of firms) has the opposite problem. A currency swap is agreed to with a fixed exchange rate/ fees which can be much much lower than the market rate as there is no fx rate exposure to hedge. That’s why it’s off balance sheet. It’s perfectly 1:1. There is counterparty risk but it’s much much cheaper and less risky to deal with that than the corresponding credit line plus fx exchange that the swap is replacing. I can see how it makes central bankers nervous because they don’t have insight into it, but it’s strictly less risky than the alternative.

blitzar 4y ago
CLS is very well collateralised and covers effectively all of the short dated FX. If central bankers want an insight it is a phone call away and there is nothing to see there.
naveen99 4y ago
Global gdp is around $100 trillion. I would think you need about a year to roll over $80 trillion. Don’t think you can do a lot more than 2-4% / week.
- whatshisface 4y ago
  GDP calculations don't include this kind of stuff.
WastingMyTime89 4y ago
Yes, it’s a completely sensational headline. Anyone with a modicum of knowledge about international finance knows that FX swaps are used to hedge currency risk. As far as I know (not much to be fair - my business school education is far away and I don’t work in the field), they are not a very popular speculative investment.

googlryas 4y ago

The fact that Wallstreetbets and superstonk have picked up on this is a sure indication to me that this means absolutely nothing at all. Their track record approaches 0%

tyleo 4y ago
What? Sure there is a lot of chaos in WSB but they really were onto something with GME and literally squeezed some institutional investors into bankruptcy. Sure, they are mostly smoke but their mere interest in something doesn’t disqualify it.
- mox1 4y ago
  So 'superstonk' was created after all that. It was basically the crazies from WSB after the WSB mods wanted to tone down the conspiracy theories. Prior to the GME squeeze, the talk on WallStreeBets was basically "GME is sound fundamentally, its got +revenue AND its shorted to hell, conditions are right for upward movement". It wasn't about sticking it to anyone, screwing hedge funds, etc, it was like "we think short sellers are perhaps screwing up here, we suggest you buy some GME".
- ixnay 4y ago
  They weren't on to something with GME, their enthusiasm was its cause.
  - tyleo 4y ago
    This is plainly wrong. Their enthusiasm did not create short interest in GameStop, they simply took advantage of it.
    - brookst 4y ago
      Sure, but it was self-fulfilling. It wasn't a brilliant analysis, it was a demonstration that a large group of loosely coordinated individual investors can move markets by collective action.
- 4y ago

rundmc 4y ago

The OECD has just published it's updated Pensions Outlook which explains to governments how to implement Asset Backed Tontine style pensions to make the global pensions sector more financially robust and to better serve the needs of retirees. The team here at Tontine Trust (https://tontine.com https://tontine.com) are committed to adding a "Proof of Reserves" feature that will prevent the above quoted shenanigans by exposing the assumptions being relied upon to keep the auditors happy but that the pension funds may not want their members or the public at large to know. https://www.oecd.org/pensions/oecd-pensions-outlook-23137649.htm?utm_term=pac&utm_medium=social&utm_content=pensions%2C1-Non-CampaignDirectorateContent%2C2-Well-FunctioningGlobalMarkets%2C3-DAF&utm_source=linkedin https://www.oecd.org/pensions/oecd-pensions-outlook-23137649...

etothepii 4y ago
Tontine's are illegal in the UK. Edit: since the passage of the Life Assurance Act 1774 tontines have been illegal in the UK.
- rundmc 4y ago
  Perhaps you should send your supporting evidence to the UK government because right now they are going all in on shifting the pensions industry to a Tontine style CDC model. The email of The Pension Regulator is report@tpr.gov.uk Don't forget to come back here to update your comment once you get a response. https://www.oecd-ilibrary.org/sites/20c7f443-en/1/3/5/index.html?itemId=/content/publication/20c7f443-en&_csp_=f2b27c8bfaae83ab6fff909cad93f284&itemIGO=oecd&itemContentType=book#section-d1e17543 https://www.oecd-ilibrary.org/sites/20c7f443-en/1/3/5/index....

snake_doc 4y ago

Most of the swaps are foreign entities borrowing US dollars to hedge their own currencies’ FX volatility. This simply conveys the incredible US dollar dominance in global markets. Also because FX swaps are collateralized with up front principal, the leverage is very low. The primary risk is short term liquidity and not default risk, which makes this a central bank issue, hence the BIS warning.

college_physics 4y ago

The BIS has been fretting about what might be lurking in shadow banking for a long time. The cynical view is that they just want to expand their regulatory surface. But the recent events in the UK pension funds universe (had to be summarily bailed-out without much ado - though interest rate, not FX derivative related) suggests they might know what they are worried about...

Pixie_Dust 4y ago

Was this "financial instrument" designed by the same people that designed credit default swaps. All it does is kick the risk down the road not even mitigate it, just disguises the fact that it isn't "risk-free lending". "It is useful for risk-free lending, as the swapped amounts are used as collateral for repayment" https://corporatefinanceinstitute.com/resources/derivatives/foreign-currency-swap/ https://corporatefinanceinstitute.com/resources/derivatives/...

naveen99 4y ago

So accounting books != balance sheet Book - balance sheet = “hidden” “leverage ratio” as defined by pension accounting standards doesn’t include currency / counterparty risk.

reset2023 4y ago

Can someone please ELI5 this article?

ThePhysicist 4y ago

drexlspivey 4y ago
And this relates to the article how?
- chuckSu 4y ago

newsclues 4y ago

I'm not an economist, but I feel like we talk about sustainability a lot when it comes to the environment, but not about the economic aspects. As someone born in the 80s, it seems like every financial crisis hasn't been corrected, just the can gets kicked down the road.

grumple 4y ago

Has the article been removed? The link leads me to a Reuters page with no content.

JakeAl 4y ago

If you're not familiar, read up on how things went down in Greece and Italy and dare I say, Argentina with their economic collapses. The concern becomes getting your money out of the bank and prices skyrocketing between the shelf and cash register. The good news is I think Greece (maybe it was Italy) got rid of their government for 18 months to cut wasteful spending. No government = no government spending which is where all the debt came from.

djyaz1200 4y ago

Can someone explain to me how the debt holder would service (pay for) a debt without having it on the books? If they don't service the debt wouldn't it just roll over indefinitely and compound, and if so why would a counter party allow that?

fnordpiglet 4y ago

Notionals on a swap have nothing to do with their risk exposure, but they have everything to do with clickbaiting the public and getting politicians elected.

dang 4y ago
Can you explain more? When a story is clickbait, it's helpful if knowledgeable people help the rest of us understand.
- fnordpiglet 4y ago
  Yes sorry I was going to do that as an edit after I had a chance to read other comments. First, the article meanders through a lot of unrelated stuff like crypto markets and interest rates and inflation. These add nothing to the subject, please do not be confused by it. Second, what’s being quoted is a notional on a swap, which is the reference amount being indexed on in the contract. Some background: There are different types of swaps, some of which have been standardized via ISDA agreements, or are being cleared on an exchange or other multiparty platform that provides some standardization and doesn’t require a “bilateral” contract that’s between two counter parties, often paired by a securities market maker - but historically they’re “over the counter” and bilateral in that there’s no market or exchange, it’s just an agreement. I’m that agreement or contract there’s a reference currency pair in the case of fx swaps. Say it’s USD/EUR - I.e., the exchange rate between USD and Euros. The notional is the amount of that indexed pair. They’re are often enormous amounts. Much more money than either actually have on hand. But, they’re often used against things like non repatriated earnings - which can be enormous. Those earnings are never involved in the contract mind you, but are instead referenced as the notional. The two counter parties in the contract agree to swap a risk in a swap. Typically they can be conceived of the seller gives the buyer currency at the current exchange rate. The buyer simultaneously issues forward contracts to the seller. The difference between the two is the swap point. This swap point is where profit and losses lie, and it’s a very small percentage of the notional. I’m not as familiar with OTC swaps in FX, but typically there’s no need to actually swap assets but rather agree to pay the PNL without owning the underlying assets. What’s at risk is the payouts, which are no where near the notional value of the swap. The article however implies notional values are somehow debt owed. They further imply that they’re “hidden,” but generally bilateral contracts aren’t disclosed securities by many participants in the market. The real ask is embedded deep in the article which is BIS wants to see more of these transactions settled via a standardized clearing house or exchange that usually have reporting requirements. The BIS is worried this returns us to some of the opacity before the financial crisis. As someone who worked many years as a quant in the space of credit default swaps, which has largely standardized to my understanding, I do not agree. OTC has its place and cleared has its place. Some markets don’t have a successful place to clear in the open. But it’s not hiding anything, and it’s absolutely not hiding debt, nor are these instruments dangerous.

firstSpeaker 4y ago

Can someone with more literacy explain what is the impact of this on an average Joe?

TacticalCoder 4y ago

> Pension funds and other 'non-bank' financial firms have more than $80 trillion of hidden, off-balance sheet dollar debt in FX swaps, the Bank for International Settlements (BIS) said. Ah yup pension funds. In some countries they're mandatory: money is forcibly taken out of your salary to put into pension funds. Which may or may not give money back to you in 30 years once you retire. A few weeks ago the governor of the bank of England said pension funds were "hours away from collapsing". Why the fuck was that? Can't pension just simply DCA reputable stocks and call it a day? No. They have to do crazy things. Like that Canadian teachers pension fund who put $95m into... FTX. Yup. FTX. I don't know about you but I'd rather not have the state use its monopoly of violence to confiscate my money and put it in a pension fund, which I see as a complete and total ponzi. I'd rather, instead, like to pay less taxes and be able to do what the fuck I want with that money. Like buying stocks, gold, Bitcoin or splurge at the casino. I think about just anything I can think of, even lighting my money on fire, would be more moral than participating in the gigantic ponzi that pension funds are. But I've got no choice as in the EU these ponzi are mandated and often run by the state and you cannot opt out.

justincormack 4y ago
The pension funds that had an issue were "defined benefit" funds, which are not usually available to people now, versus the normal "defined contribution" ones where you get to choose how you invest the money and take the risks yourself.