Global Swap Agreements
In 1994, the Federal Reserve established bilateral currency swap lines of $2 billion with the Bank of Canada and $3 billion with the Bank of Mexico to promote the order of foreign exchange markets. These lines were established under the North American Framework Agreement (NAFA). The Federal Open Market Committee is invited annually to renew the Federal Reserve`s nafa swap arrangements; The drawings on the lines are also subject to his authorization. Canada has never drawn its line; Mexico last used its line in 1995. In 1994, the U.S. Treasury set up a $3 billion nafa swap line with Mexico and increased it to $9 billion in 2018. An agreement where the payer regularly pays premiums, sometimes even or only a single or initial premium, to the protection seller on fictitious capital for a certain period of time, as long as no particular credit event has occurred.  The credit event may relate to an asset or a basket of assets, usually bonds. In the event of a delay, the payer is compensated, for example the amount of the principal, possibly increased by all fixed-rate payments until the end of the swap contract or in another way that corresponds to the buyer or both counterparties. The main purpose of a CDS is to transfer credit risk from one party to another. Currency swaps can also include the exchange of two variable-rate loans or fixed-rate loans for variable-rate loans. Consider a case where a company exchanges fixed-rate loans for variable-rate loans. On 12 December 2007, the Federal Bank of Germany extended swap lines to the European Central Bank (ECB) and the Swiss National Bank (SNB).
Demand for dollars from European banks has increased and the volatility of interest rates in US dollars has increased. Swap lines are expected to “cope with increased pressure on short-term refinancing markets,” without the Fed having to directly fund foreign banks. Suppose a portfolio manager holds a $1 million loan (face value) and wants to protect their portfolio from a possible default. You can look for a counterparty willing to issue them with a credit default swap (usually an insurance company) and pay the annual swap premium of 50 basis points to close the deal. A swap major participant (MSP or sometimes swap bank) is an umbrella term to describe a financial institution that facilitates swaps between counterparties. It maintains a considerable position in swaps for each of the main swap categories. A swap bank can be an international commercial bank, an investment bank, a trading bank or an independent operator. A swap bank serves as either a swap broker or a swap. As a broker, the swapbank is in agreement with the counterparties, but does not assume any swap risk. The swap broker receives a commission for this service.
Today, most swap banks are traders or market makers. As a market maker, a swap bank is willing to accept both parts of a swap and sell it later or compare it to a counterparty. As such, the swapbank takes a position in the swap and therefore takes certain risks. Traders` capacity is clearly riskier and the swapbank would receive a portion of the cash flows it manages to compensate them for this risk.   Swaps are used to hedge currency risks, speculate on the direction of a currency and increasingly access foreign currency financing. European banks do not have dollar-denominated deposits and dollar-denominated collateral to access other credit markets such as “repo” or repo transactions, so they often use FX swaps to lend dollars that can be transferred to customers. . . .