The Blubber

Per Reuters

The Bank for International Settlements (BIS) warns the public of high FX swap debt for pension funds and non-banking financial firms. This puts them at extreme risk since the amount of debt exceeds the stocks of dollar Treasury bills, repo, and commercial paper altogether.

The total FX swap debt these pension funds and non-banking financial firms have is $80 trillion. It was estimated that $2.2 trillion of currency trades risk settlement failure between counterparties, about a third of total deliverable FX turnover, and up by $1.9 trillion compared to its last FX survey three years ago.

The BIS serves as the bank for central banks, and it found that the amount was "hidden," with the churn of deals reaching around two-thirds of the global daily FX turnover at around $5 trillion per day in April.

Funding squeezes were spotted during March 2020 when COVID initially broke out, requiring the US Federal Reserve and other central banks to engage with dollar swap lines.

BIS: "The missing dollar debt from FX swaps/forwards and currency swaps is huge"

The international institution of direct information highlighted the main problem is not knowing where the locations are and lacking direct information regarding the scale. The warning describes the lack of information as a "blind spot" that risks a lack of clarity for policymakers.

The BIS has also commented about central banks' "forceful interest rate hikes." Claudio Borio, the head of BIS' Monetary and Economic Department, was asked about the state of the "tightening status" next year.

Borio: "The enemy is an old enemy and is known... but it's been a long time since we have been fighting this battle."

BIS' Head of Research and Economic Adviser Hyun Song Shin said recent market events like the crash of FTX and LUNA show similarities with most bank crashes.

Hyun Song highlighted "large leverage" and "maturity mismatch," showing that the recent crashes in the crypto market are very similar to those of the banking crashes experienced a decade ago. He described many coins as "DINO - decentralized in name only."

Resources:

Reuters

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