By jck on Alea:
Long overdue, but it works as I explained somewhere in comments on the same principle as xccy basis swaps.
Each swap arrangement involves two transactions. When a foreign central bank draws on (obtains funding under) the swap line, it sells a certain amount of its currency to the Federal Reserve at the prevailing market exchange rate in exchange for dollars. This market rate becomes the swap exchange rate. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction in which the foreign central bank is obligated to repurchase the foreign currency at a specified future date. The second transaction is done at the swap exchange rate—that is, the same exchange rate as in the first transaction.
In addition, the Fed H.4.1 now clearly shows on a separate line the total outstanding dollar value of c.b. liquidity swaps valued at their respective swap exchange rates, as well as the maturity distribution of these swaps.
Previously, foreign currency acquired under c.b. liquidity swaps, revalued daily at current market exchange rates, was included in “Other Federal Reserve assets”. In addition, each day, an exchange translation account recognized that the foreign currency would be repurchased by the foreign central bank at the swap exchange rate, which generally would differ from that day’s market exchange rate. If that day’s foreign exchange value of the dollar were above the swap exchange rate, then the dollar value of the foreign currency holdings would understate the value of the dollars that would be booked at the maturity of the swap drawing. In this case, the exchange translation amount would be booked as an asset in “Other Federal Reserve assets”. Alternatively, if that day’s foreign exchange value of the dollar were below the swap exchange rate, then that day’s value of the foreign currency holdings would overstate the value of the dollars that would be received at the maturity of the swap drawing. In this case, the exchange translation amount would be booked as a liability in “Other liabilities and capital” and as a liability in “Other liabilities and accrued dividends”. The dollar value of c.b. liquidity swaps valued at the swap exchange rates combines the exchange translation account and the value of the swaps at current market exchange rates so exchange translation amounts are no longer included in the asset and liability categories referenced above.
Picture: historical c.b. swaps outstanding in millions of dollars, since start of program to date