Dollar Debt in FX Swaps and Forwards: Huge, Missing and Growing

Embedded in the foreign exchange (FX) market is huge, unseen dollar borrowing. In an FX swap, for instance, a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen in the “spot leg”, and later repays the dollars and receives euro or yen in the “forward leg.” Thus, an FX swap, along with its close cousin, a currency swap, resembles a repurchase agreement, or repo, with a currency rather than a security as “collateral.”

FX swap markets are vulnerable to funding squeezes. This was evident during the Global Financial Crisis (GFC) and again in March 2020 when the COVID-19 pandemic wrought havoc on the world economy. In both cases, swaps emerged as flash points, with dollar borrowers forced to pay high rates, if they could borrow at all. To restore market functioning, central bank swap lines funneled US dollar to non-US banks offshore, which on-lent to those scrambling for dollars. This off-balance sheet dollar debt poses particular policy challenges, as it is not accounted for in standard debt statistics. The missing dollar debt from FX swaps, forwards and currency swaps is huge, adding to the vulnerabilities created by on-balance sheet dollar debts of non-US borrowers.

A new journal article in BIS Quarterly Review by Robert McCauley, Claudio Borio and Patrick McGuire draws on the comprehensive data in the 2022 Bank for International Settlements (BIS) Triennial Survey to update the stylized facts concerning FX swaps, forwards and currency swaps. The authors also measure the missing dollar debt for non-banks resident outside the United States and for banks headquartered outside the US.

Key findings:

• FX swaps, forwards and currency swaps give rise to dollar obligations that were backstopped in 2008 and 2020 by central banks acting on little information about who owed debt.
• For non-banks outside the US, dollar obligations from FX swaps, forwards and currency swaps have grown fast, reaching $26 trillion or double their on-balance sheet dollar debt.
• In mid-2022, non-US banks with direct access to Federal Reserve credit only in their US operations owed an estimated $39 trillion in dollars from FX swaps, forwards and currency swaps.

In all, the GFC and the COVID-19 pandemic point to a need for statistics that track the geography of outstanding short-term dollar payment obligations.