1. How does an exchange line work?

First used extensively during the 2007-2008 financial crisis, swap lines are temporary lending facilities that allow central banks around the world to borrow dollars from the Fed in exchange for an equivalent amount of their local currencies. In March 2020, the Fed and five major central banks, including those in the Eurozone and Japan, announced that they would activate the program to ease pressure as demand for dollars increased. They then increased the frequency of seven-day forward trades from daily to weekly. The Fed also lowered the rate and added a longer maturity. Then it extended the swap line to nine other central banks, including Australia and Brazil, bringing the total to 14. The agreement with the other nine banks expired at the end of 2021, leaving what is known as the FIMA Repo Facility.

2. What is the FIMA Repo Facility?

It’s an agreement that allows a select set of counterparties – banks, currently – to exchange treasury bills for US dollars. (The official name is a repurchase agreement facility for foreign and international monetary authorities.) This facility was created in March 2020 as a temporary alternative source of liquidity for foreign holders of Treasury bills, who would otherwise have to sell these holdings on the free market.

Federal Reserve data made available on March 3 showed that no central bank had used the Fed’s FIMA reverse repo facility and demand for its swap lines was minimal. Yet Chairman Jerome Powell had said a day earlier that the mere existence and availability of the tools would support the smooth functioning of the market even in times of high volatility.

4. What are the dollar funding markets telling us?

After Western countries imposed sanctions on the Russian banking system, the cost of converting euro and yen payments into dollars using so-called three-month currency swaps has reached the lowest levels. higher since March 2020. The spread between Libor futures and Federal Reserve Interest rates, a key indicator of funding stress known as the FRA/OIS spread, also widened for one-year contracts. month at most since March 2020. Some spreads have retreated from these extreme levels, but geopolitical uncertainty could still put some pressure on the US. financing rate. Indeed, when investors get nervous, they tend to shorten their loan maturities and turn to more secure sources of funding. Barclays strategists said they expect demand for U.S. Treasuries and bank deposits to rise as participants seek those safe havens.