Federal Reserve Liquidity Swaps Explained

Federal Reserve Liquidity Swap Lines

 There are two types of Liquidity Swaps the Federal Reserve by way of the Federal Open Market Committee has established: Dollar Liquidity Swap Lines and Foreign-Currency Liquidity Swap Lines.


Dollar Liquidity Swap Lines

A few months after the credit crunch first began, December 12th 2007, the Federal Reserve established agreements with 14 other central banks to provide them with US dollars in exchange for the equivalent amount of their currency for a period of time ranging from overnight to 3 months.  The equivalent amount of their currency is determined by the Foreign Exchange (FX) rate at that point in time and when the swap reaches maturity (overnight to 3 months), the currencies are exchanged at the original FX rate.  Another words, if any of the markets regulated by the other 14 central banks needed US dollars, their central banks would be able to obtain them directly from the Federal Reserve at a fixed rate and for a fixed period.  The Federal Reserve charges a “market-based rate” to the foreign central bank in exchange for this product.  The goal is to assist the other 14 central banks in providing US dollar liquidity to their respective markets.  The 14 other central banks with access to US dollars through this program are: 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, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank.  The FOMC has set this program to expire on February 1st 2010.  The current amounts of dollars drawn by other banks from the Federal Reserve are reported on their weekly Thursday 4:30pm EST published balance sheet.


Foreign-Currency Liquidity Swap Lines

A year and 5 months after the Dollar Liquidity Swap program, April 6th 2009, the Federal Reserve announced foreign currency liquidity swaps with 4 other central banks.  Essentially, this allows the Federal Reserve to exchange US dollars for foreign currency at a fixed amount for a fixed period.  In a way, this is exactly opposite the original dollar liquidity swap program.  The goal is to provide the Federal Reserve with sufficient liquidity in the foreign currency for U.S. institutions and markets.  The 4 central banks in this program are: the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.  These swap lines will extend until February 1 2010.


Federal Reserve Liquidity Program Detials: http://www.federalreserve.gov/monetarypolicy/bst.htm

Federal Reserve US Dollary Liquidity Swap FAQ: http://www.federalreserve.gov/newsevents/reform_swaplines.htm

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