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b1ackfyre OP t1_iz0x778 wrote

Reply to comment by Jealous-Elephant in FX swap debt a $80 trillion 'blind spot' global regulator says by b1ackfyre

You’re more or less correct, or so I believe. Hope someone else smarter can chime in as well and correct me if need be.

Here’s how I understand it. When a country accesses a foreign country’s market, currency swaps have to be made. There’s not a transparent system for who owes who and for how much, etc. Since we’re talking about 10s and 10s of trillions of dollars in swaps and IOUs, a massive scale, the lack of transparency could spell bad news. Imagine if there’s corruption involved anywhere. Imagine if there’s a further downturn, mass liquidations, mass swaps for native currency, a crunch on dollars as firms raise capital etc. Seems like very messy accounting that’s difficult for regulators to audit and keep track of and difficult for central banks to support in times of crisis.

TLDR: There are tens of trillions of dollars in currency swaps and liabilities that are difficult to audit and account for. Because of the scale of money and lack of transparency, there’s a lot of room for something to go wrong.

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Jealous-Elephant t1_iz0y6kq wrote

Keep the smarter than train rolling. Thanks! Seems like it involves a lot of trust. I wish I had that!

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b1ackfyre OP t1_iz0ys8a wrote

More info here, but paywall: https://www.bloomberg.com/news/articles/2022-12-05/-missing-65-trillion-in-derivatives-dollar-debt-sparks-concern

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Jealous-Elephant t1_iz0z4z2 wrote

Derivatives in the headline!! haha. It’s alright imma keep my eye out and try and learn more cause that’s a lot of trillions. Thanks stranger

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Darkekf111 t1_iz13l2k wrote

https://12ft.io/ is a great way to remove most paywalls.

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oniwolf382 t1_iz3al41 wrote

From what i'm recalling in my international finance classes, undergrad and masters:

Basically, when a company needs to do business with a company in another country, they sign a contract to do business at an agreed upon price in the target countries currency. Their finance department can then do some risk analysis and purchase contracts and derivatives to lock in favorable rates now if they believe exchange rates will rise at the time they must pay their contract in 6-months or 12 monts etc.

If the rate declines, their derivatives premiums are the only cost they're out, and they pay market rate, and it's no skin off their back.

That's how non speculators are supposed to use these tools.

Now this debt swap stuff, is chasing what are called PIPS. tiny adjustments in the rates between currencies. Basically .0001. So it requires large sums of capital to to profit from small changes in the market. These firms are are providing liquidity and speculating on the market for companies like above (who are using derivatives as insurance products) to turn a profit.

The off the books stuff is worrisome, as that's where regulators should be focusing one some auditing. As the creditworthiness of those firms providing liquidity could be janky to say the least.

All in all, it's a functional market, as you need speculators and hedgers for a market to work. But again, greed in the forex market is huge as there's always a market open, and the make stock trades look tiny in comparison. (200B for stocks, vs 5T for forex per day)

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