Currency Swap Lines- 101
Foreign currency liquidity swap lines are designed to provide the Federal Reserve with the capacity to offer liquidity in foreign currencies to U.S. financial institutions should the Federal Reserve judge that such actions are appropriate.
The Federal Open Market Committee has authorized arrangements between the Federal Reserve (NYSEARCA:USD) and the Bank of Canada (NYSEARCA:CAD), the Bank of England (GBP), the Bank of Japan (JPY), the European Central Bank (EUR), and the Swiss National Bank (CHF). In addition, these foreign central banks are also establishing bilateral swap arrangements with one another.
These swap lines are being implemented as a contingency measure, so that central banks can offer liquidity in foreign currencies if market conditions warrant such actions. These lines provide the Federal Reserve with the same ability to provide foreign currency, should the need arise, as foreign central banks currently have through the existing dollar swap lines with the Federal Reserve to provide dollar liquidity in their jurisdictions.
These five currencies (listed above) are used globally and account for the bulk of the foreign currency funding of U.S. financial institutions. There has not been a decision to activate the foreign currency (rather than USD-based) liquidity facilities. If the Federal Reserve were to decide to offer liquidity in foreign currencies to U.S. financial institutions, the details of the operations would be determined at that time in light of the prevailing circumstances.
The aggregate swap activity in each currency with foreign central banks will be published weekly. They will be found on the Federal Reserve Bank of New York’s Foreign Exchange Swap Agreement webpage. In addition, any liquidity-supplying operations in foreign currencies would be subject to the same disclosure requirements as the Federal Reserve’s dollar-based activities. These swap arrangements, along with the existing U.S. dollar swap arrangements, have been authorized through February 1, 2013.
Information, analysis and methodologies provided are for informational purposes only, obtained from sources believed to be reliable, and should not be used as a replacement for research by an individual investor or licensed investment professional. In no event should the content of this correspondence be construed as an express or implied promise, guarantee, or implication that profits or losses can be made or limited in any manner whatsoever. No guarantee of any kind is implied or possible where projections of future conditions are attempted.