FX swap debt a $80 trillion ‘blind spot’ global regulator says

The Bank for International Settlements (BIS) said that pension funds and other "non-bank" financial institutions have concealed, off-balance sheet dollar debt in FX swaps totaling more than $80 trillion.

The BIS, known as the central bank to the world's central banks, stated in its most recent quarterly report that the market turmoil of 2022 had been successfully managed for the most part without significant problems.

After frequently urging central banks to take decisive action to reduce inflation, it adopted a more cautious stance and ignored the turbulence in the cryptocurrency market and the UK bond market in September.

Its biggest concern was what it called the "blind spot" in FX swap debt that may leave decision-makers in a "fog."

There has been a history of issues with FX swap markets, when, for instance, a Dutch pension fund or a Japanese insurer borrows dollars and lends euro or yen before subsequently returning them.

Both the global financial crisis and the COVID-19 pandemic, which caused devastation and forced central banks like the U.S. Federal Reserve to act via dollar exchange lines, caused funding shortages for them.

According to the BIS, the estimated "hidden" debt of more than $80 trillion outweighs the amount of USD Treasury notes, repo, and commercial paper put together. It has increased from just over $55 trillion ten years ago, and in April, FX swap trades accounted for about $5 trillion of the daily global FX turnover.

It calculated that dollar commitments from FX swaps are now treble their on-balance sheet dollar debt for both non-U.S. banks and non-U.S. "non-banks" such pension funds.

The institution with its headquarters in Switzerland stated, "The missing dollar debt from FX swaps/forwards and currency swaps is substantial," adding that the main difficulty was the absence of direct knowledge about the scope and location of the issues.