Just as for the case of the $10.7 trillion worth of on-balance sheet debt, this additional dollar debt contracted through FX derivatives is to some extent supported by dollar revenues and/or assets, ie currency-matched. The previous analysis suggests that the whole amount of that shakepay review debt could be rationalised by hedging activity, be it trade or asset holdings. Such hedging can support financial stability, especially if maturities are matched. Experience shows that FX derivatives can also be used to take open positions, including in the form of carry trades.

Just how large is the missing dollar debt from FX swaps/forwards and currency swaps? At end-June 2022, dealer banks had $52 trillion in outstanding dollar positions with customers. Non-banks had dollar obligations of half of this amount, $26 trillion.4 This sum has been growing strongly, from $17 trillion in 2016 (Graph 2.B).

1. Other banks and large institutions use swaps for hedges or relatively cheaper financing.
2. The first source is the BIS derivatives statistics, which draw on reports from 73 global dealer banks.
3. 2 FX swaps and outright forwards cannot be distinguished in stocks data.
4. This most likely reflected a reduction in hedging needs, as both trade and asset prices collapsed.
5. Considering all currencies, outstanding amounts at end-June 2022 reached $97 trillion, up from $67 trillion in 2016 (Graph 1.A).

At issue is the definition of derivatives and control, which gives rise to the asymmetric treatment of cash and other claims in repo-like transactions. These questions, together with their regulatory implications, would merit further consideration. Thus, one can relate non-financial FX swaps/forwards and currency swaps, in an admittedly stylised fashion, to international trade and bond issuance, respectively (Table 1). If firms use $5.1 trillion of short-term FX forwards to hedge global trade of $21 trillion, then the ratio implies that importers and exporters hedge at most three months’ trade. Similarly, if firms and governments use $2.4 trillion of currency swaps to hedge $4.8 trillion of international bonds, then they hedge half or less. The outstanding amounts of FX swaps/forwards and currency swaps stood at $58 trillion at end-December 2016 (Graph 1, left-hand panel).

Short-Dated Foreign Exchange Swap

Likewise, Company B will not be able to attain a loan with a favorable interest rate in the U.S. market. Both parties can pay a fixed or floating rate, or one party may pay a floating rate while the other pays a fixed rate. US non-banks have sold only $600 billion in non-dollar-denominated kraken trading review debt to non-residents (US Treasury et al (2016)). Many leveraged accounts (eg Commodity Trading Advisor funds) sell dollars in the futures market rather than in the OTC market. The outstanding amount has quadrupled since the early 2000s but has grown unevenly (Graph 1, left-hand panel).

Why use currency swaps?

For banks headquartered outside the United States, dollar debt from these instruments is estimated at $39 trillion, more than double their on-balance sheet dollar debt and more than 10 times their capital. There are a few basic considerations that differentiate plain vanilla currency swaps from other types of swaps such as interest rate swaps and return based swaps. Currency-based legacy fx review instruments include an immediate and terminal exchange of notional principal. In the above example, the US$100 million and 160 million Brazilian real are exchanged when the contract is initiated. At termination, the notional principals are returned to the appropriate party. Company A would have to return the notional principal in real back to Company B, and vice versa.

Accounting treatment, data sources and gaps

In a total return swap, the total return from an asset is exchanged for a fixed interest rate. This gives the party paying the fixed-rate exposure to the underlying asset—a stock or an index. For example, an investor could pay a fixed rate to one party in return for the capital appreciation plus dividend payments of a pool of stocks. The management team finds another company, XYZ Inc., that is willing to pay ABC an annual rate of LIBOR​ plus 1.3% on a notional principal of $1 million for five years. In other words, XYZ will fund ABC’s interest payments on its latest bond issue. In exchange, ABC pays XYZ a fixed annual rate of 5% on a notional value of $1 million for five years.

The table shows the corresponding balance sheets, with the subscript X denoting foreign currency positions. This requires a more granular analysis of currency and maturity mismatches than the available data allow. Much of the missing dollar debt is likely to be hedging FX exposures, which, in principle, supports financial stability. Even so, rolling short-term hedges of long-term assets can generate or amplify funding and liquidity problems during times of stress.