Pension funds and other non-bank financial firms currently have over $80 trillion of hidden, off-balance sheet dollar debt in the form of FX swaps, according to the Bank for International Settlements’ (BIS) latest quarterly report.
The BIS estimates that banks headquartered outside the US carry $39 trillion of this debt — more than double their on-balance sheet obligations and ten times their capital.
Accounting conventions only require derivatives to be booked on a net basis, which means the full extent of the cash involved isn’t recorded on a balance sheet.
The report said that the $80 trillion-plus “hidden” debt estimate exceeds the stocks of dollar Treasury bills, repo and commercial paper combined, while the churn of deals was almost $5 trillion per day in April, two thirds of daily global FX turnover.
“There is a staggering volume of off-balance sheet dollar debt that is partly hidden, and FX risk settlement remains stubbornly high,” said Claudio Borio, head of the monetary and economic department at the BIS.
Other sections of the report focused on findings from its recent triennial survey and flagged settlement risk as another potential source of instability.
It estimated that $2.2 trillion worth of currency trades are at risk of failing to settle on any given day due to issues between counterparties, potentially undermining financial stability.
This represents about one third of total deliverable FX turnover and is up from $1.9 trillion from three years earlier when the last FX survey was conducted.
FX trading also continues to shift away from multilateral trading platforms towards “less visible” venues hindering policymakers “from appropriately monitoring FX markets,” it said.
The BIS paper noted payment-versus-payment arrangements, a settlement mechanism that coordinates transfers to ensure no one is left holding a claim, tend to be unsuitable or too expensive for certain trades.
“The return of meaningful volatility to the FX markets, perhaps for the first time in over a decade, has made it much harder for firms to obtain optimal pricing”, added Vikas Srivastava, ex- head of currency trading and risk management at Barclays Global now chief revenue officer (CRO) at FX technology firm Integral.
