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What circumstances led to the implementation of these facilities? Who authorized the use of the swaps? Which central banks could engage in swaps? How were the swaps structured? How did foreign central banks distribute the U.S. dollar funding they received through these swaps? What revenues and costs arose for the Federal Reserve? What was the impact of swaps on U.S. monetary operations? What was the purpose of the dollar liquidity swap lines? The dollar liquidity swap lines were designed to improve liquidity conditions in U.S. and foreign financial markets by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress. Back to FAQs What circumstances led to the implementation of these facilities? The swap arrangements were introduced to address stresses in U.S. dollar funding in overseas markets. These difficulties were adding materially to pressures in funding and credit markets in the United States and abroad. Back to FAQs Who authorized the use of the swaps? The arrangements were authorized by the Federal Open Market Committee (FOMC) of the Federal Reserve System and the policy boards or executives of the respective foreign central banks. The Federal Reserve had the right to approve or deny requests by foreign central banks to draw on their swap lines. The FOMC authorized these arrangements through February 1, 2010. The foreign central banks could request draws on their swap lines up to that date. Back to FAQs Which central banks could engage in swaps? The Federal Reserve established swap arrangements with the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. Back to FAQs How were the swaps structured? The Federal Reserve provided U.S. dollars to a foreign central bank. At the same time, the foreign central bank provided the equivalent amount of funds in its currency to the Federal Reserve, based on the market exchange rate at the time of the transaction. The parties agreed to swap back these quantities of their two currencies at a specified date in the future, which was the next day or as far ahead as three months, using the same exchange rate as in the first transaction. Because the terms of this second transaction were set in advance, fluctuations in exchange rates during the interim did not alter the eventual payments. Accordingly, these swap operations carried no exchange rate or other market risks. Back to FAQs How did foreign central banks distribute the U.S. dollar funding they received through these swaps? The foreign central banks distributed the U.S. dollars they drew through a variety of methods, including variable-rate tenders, fixed-rate tenders, bilateral transactions, and foreign exchange swap tenders against various types of collateral, including both foreign currency and securities denominated in foreign currency. In each case, the arrangement was between the foreign central bank and the institutions obtaining the funding in these operations. The foreign central banks determined the acceptability of the collateral offered and the eligibility of the institutions to participate in the operations they conducted. The terms on which funds were tendered were released to the public by the foreign central banks. The Federal Reserve's contractual relationship was with the foreign central bank and not with the institutions obtaining dollar funding in these operations. Back to FAQs What revenues and costs arose for the Federal Reserve? When a foreign central bank drew on its swap line to fund its dollar tender operations, it paid interest to the Federal Reserve in an amount equal to the interest the foreign central bank earned on its tender operations. For its part, the Federal Reserve did not pay interest and committed to hold the foreign currency that it acquired in the swap transaction at the foreign central bank (rather than lending it or investing it in private markets). The structure of the arrangement served to avoid domestic currency reserve management difficulties for foreign central banks that could have arisen if the Federal Reserve had actively invested the foreign currency holdings in the marketplace. Back to FAQs What was the impact of swaps on U.S. monetary operations? The drawing of U.S. dollars by a foreign central bank resulted in an increase in the level of reserve balances held at the Reserve Banks. Similarly, the repayment of U.S. dollars to the Federal Reserve when a swap was unwound resulted in a drain of these balances. Back to FAQs Last update: February 17, 2010 Home | Monetary Policy Accessibility Contact us Disclaimer Linking Policy FOIA PDF Reader
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