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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

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.
- CyanBird 4y ago
  > they are not a very popular speculative investment. That's the thing that's being argued from bis. That they have become popular speculative investments in wallst
  - kasey_junk 4y ago
    It’s very much not being argued that the increase is due up speculative wall st bets. The bis report quite clearly points out that the vast majority of the swaps market dollar obligations are outside of the us and nothing about the report suggests it’s due to speculation. Rather it’s about the central bank policy issues with the way the swaps are accounted for and their short term nature.
pedro_hab 4y ago
I agree with your point here, but I am curious if there isn't space for people to gamble and not be hedged? Speculating naked with the contracts.
- kasey_junk 4y ago
  Sure, anything derivative can be misused but the regular currency markets and currency futures are much simpler and higher leverage.
spiantino 4y ago
Calling the total notional value of a pile of swaps "debt" is really misleading. If you and I do $1m in fx swaps, in no sense do either of us owe each other $1m. Currency swaps settle daily I think, so if one of us goes bust all that happens is that I don't get your payments and my currency risk goes back to what it was. Anyway, headline is sensational enough that I'm not willing to read the article
- spiantino 4y ago
  OK I lied and opened the article: "FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen before later repaying them, have a history of problems." Isn't this false? If we do a swap nobody borrows anything, we just agree to track the returns and pay the difference in one direction or another. An FX forward does the same thing, but actually involves borrowing from a bank, which is why the swap is easier. Anyway that's my understanding
  - kasey_junk 4y ago
    Most fx swaps have a future component, but either the rate will net out or the difference will be paid back. This minimizes credit costs and fx exposure by trading it for counterparty risk. The report is suggesting that a liquidity crunch specifically on dollars that need to be delivered in the future may create systematic counterparty risk that central banks will need to solve.

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.

CyanBird 4y ago
> they are not a very popular speculative investment. That's the thing that's being argued from bis. That they have become popular speculative investments in wallst
- kasey_junk 4y ago
  It’s very much not being argued that the increase is due up speculative wall st bets. The bis report quite clearly points out that the vast majority of the swaps market dollar obligations are outside of the us and nothing about the report suggests it’s due to speculation. Rather it’s about the central bank policy issues with the way the swaps are accounted for and their short term nature.

pedro_hab 4y ago

I agree with your point here, but I am curious if there isn't space for people to gamble and not be hedged? Speculating naked with the contracts.

kasey_junk 4y ago
Sure, anything derivative can be misused but the regular currency markets and currency futures are much simpler and higher leverage.

spiantino 4y ago

Calling the total notional value of a pile of swaps "debt" is really misleading. If you and I do $1m in fx swaps, in no sense do either of us owe each other $1m. Currency swaps settle daily I think, so if one of us goes bust all that happens is that I don't get your payments and my currency risk goes back to what it was. Anyway, headline is sensational enough that I'm not willing to read the article

spiantino 4y ago
OK I lied and opened the article: "FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen before later repaying them, have a history of problems." Isn't this false? If we do a swap nobody borrows anything, we just agree to track the returns and pay the difference in one direction or another. An FX forward does the same thing, but actually involves borrowing from a bank, which is why the swap is easier. Anyway that's my understanding
- kasey_junk 4y ago
  Most fx swaps have a future component, but either the rate will net out or the difference will be paid back. This minimizes credit costs and fx exposure by trading it for counterparty risk. The report is suggesting that a liquidity crunch specifically on dollars that need to be delivered in the future may create systematic counterparty risk that central banks will need to solve.