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JPM Explains The Novel Feature In Today's Fed Liquidity Swap Line Expansion

Tyler Durden's picture


As JPM's Michael Feroli, he move to cut the Fed's swap lines rate from OIS+100 to OIS+50 should not come as a surprise: it was already in the works, the only question is when it would be enacted. As it so happens it was decided on Monday, and was announced today after unfounded rumors of a potential bank failure in Europe became apparent. There was however a twist: "The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today's announcement. The Fed's official statement is that these are being implemented as a "contingency measure." There are no plans to make these operational in the near term, but are apparently being set up as a backup plan in the event of a worsening in global financial conditions." What this means remains unclear but the Fed never changes policy without reason. Which then begs the question: while everyone is focusing on foreign bank lack of USD liquidity, should the real focus be on US bank lack of foreign currency liquidity?

Full note:

The Fed took three actions this morning to support global financial markets: the first and by far most important was lowering the interest rate charged on its dollar liquidity swap lines with the ECB and other central banks from OIS+100bps to OIS+50bps, second it extended the availability of those facilities from August of 2012 to February of 2013, and third it has agreed with other central banks on creating swap lines whereby the Fed can lend foreign currencies to US financial institutions.


Regarding the first of these moves, there had been a fair bit of speculation that the Fed would lower the interest rate charged on these lines, though the timing of such a move was uncertain. Throughout the crises there has been a relatively low hurdle for introducing or making more generous the swap lines, which may be due in part to the fact that such swap lines have historically been considered a normal part of the Fed's toolbox. In addition, the Fed takes no credit risk with these swap lines, as it faces the ECB, not the private European banks that draw on these lines. So from a purely pecuniary view -- which is what is not what is motivating the Fed -- the reduction in the 50bps earned on the lines could be offset by an increase in the amount of risk-free lending done through the swap lines. (We are sometimes asked who is liable to the Fed if the eurozone were to disband. This is not specified in the swap agreements -- which are posted on the NY Fed website -- as seems appropriate given it is still a pretty far-fetched contingency. Presumably the national central banks that comprise the eurosystem would still be liable).


Any increase in usage of the swap lines will result in an increase in reserves held by the US banking system: for European banks that do not have accounts at the Fed, liquidity is provided through US correspondent banks. The fact that the discount rate is 75bps whereas OIS+50 is under 60bps creates some odd optics, as it is cheaper now for European banks to borrow dollars from the ECB than for US banks to borrow dollars from the Fed. The press releases states that "U.S. financial institutions currently do not face difficulty obtaining liquidity" but if conditions deteriorate the Fed has tools which they "are prepared to use," -- which we read as saying a cut in the discount rate is not imminent, but would readily be forthcoming if US banks began to face funding difficulties as well.


The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today's announcement. The Fed's official statement is that these are being implemented as a "contingency measure." There are no plans to make these operational in the near term, but are apparently being set up as a backup plan in the event of a worsening in global financial conditions.


Richmond Fed President Lacker (voting in Plosser's place) dissented. Not too much should be read into this, as he has always had an issue with swap lines, having in the past voted against the long-standing North American lines of $2 billion with the Bank of Canada and $3 billion with the Bank of Mexico.


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Wed, 11/30/2011 - 14:55 | 1931559 Manthong
Manthong's picture

One World, One Bank, One Supreme Leader.

Wed, 11/30/2011 - 14:58 | 1931579 Momauguin Joe
Momauguin Joe's picture

The octopuss now sits atop the entire globe.

Wed, 11/30/2011 - 15:11 | 1931643 strannick
strannick's picture

Like Hank Paulson's bazooka, the liquidity available in foreign currencies will only be available as a contingency.

Like Hank Paulson's bazooka, the liquidity will be drained shortly.

Like Hank Paulsons bazooka, the insiders will know of this event in advance

Wed, 11/30/2011 - 16:19 | 1932020 syntaxattack
syntaxattack's picture

There people go again, confusing an octopus and a vampire squid.

Sat, 03/03/2012 - 01:04 | 2219185 Yen Cross
Yen Cross's picture

Lighten up Francis!

Wed, 11/30/2011 - 15:15 | 1931672 Sunset chaser
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If the banks have to sell assets in order to cover runs on money, what assets will they sell? Houses or other marked to fantasy items?

That's going to be hard or impossible, because they don't have anywhere near the value of assets they claim they do. In fact, these machinations may ultimately be shown to be efforts to conceal the insolvency of many large banks.

They are on the brink now, and by closing the POMO one must assume the FED is very near the end of the rope it has to play with too. I'm betting collapse sometime in the next six months.

Wed, 11/30/2011 - 15:27 | 1931747 Yikes
Yikes's picture

You don't get it.  They're doing this specificallly so they DON"t have to sell assets.  To keep the balance sheet illusion going.  This is the ECB saying to the FED " Hey, I'll give you some of my fake money if you give some of your's"  

Wed, 11/30/2011 - 15:51 | 1931854 Chief KnocAHoma
Chief KnocAHoma's picture

I have been hearing that "Fed is at the end of the rope" or "out of bullets" for five years now.

This will not end well, but it also will not end soon. The disease is rooted deep in the lives of every person in the western world and we all are afraid of the pain we will be forced to endure to end this oppression.

I know people that agree with me 100% that the Fed must end and a new system must be established, until I discuss that when that happens, they will lose the value of their bank holdings.

Then I lose them.

Wed, 11/30/2011 - 16:24 | 1932058 12ToothAssassin
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Isnt that a bit like a person keeping 2 checking accounts at different banks and writing checks to themselves daily and using the money during the 'float' time between deposit and cashing of said checks? It works for a while, then its a Felony. Unless youre a banker.

Wed, 11/30/2011 - 16:13 | 1931986 SmoothCoolSmoke
SmoothCoolSmoke's picture

Fed on the brink anytime in the next 6 to infinity months.   Hey I'm short....and I cannot count the "brinks" since I went short.

Wed, 11/30/2011 - 17:20 | 1932419 economics1996
economics1996's picture

Banking fiascos take three to five years.  Look for a collapse in 2012 or 2013.  We are missing the main lesson here, the Fed is doing an incredible juggling act and we should marvel at the talent of these PhD's as they juggle six, seven, eight plates up in the air without a fall.  It will end soon enough; in the meantime enjoy the show.

Wed, 11/30/2011 - 14:55 | 1931562 Ancona
Ancona's picture

That translates to "We kicked the fucking can down the fucking road, and all you bastards get to pay for it. Now shut up and get back to work"

Wed, 11/30/2011 - 14:56 | 1931565 IndicaTive
IndicaTive's picture

I'd like to plug back in to the Matrix now please.


Wed, 11/30/2011 - 15:54 | 1931870 Falcon15
Falcon15's picture


Wed, 11/30/2011 - 14:57 | 1931567 hedgeless_horseman
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The new foreign liquidity swaps, whereby the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks, is a novel step and a curious feature of today's announcement.

Let's all lash our boats together, that way if one of them sinks...

Wed, 11/30/2011 - 15:01 | 1931594 kralizec
kralizec's picture

That shared misery crap really torks me off!

Wed, 11/30/2011 - 15:02 | 1931600 hedgeless_horseman
hedgeless_horseman's picture



Synchronized of the future.

Wed, 11/30/2011 - 16:13 | 1931989 Thomas
Thomas's picture

It all torks me off.

Wed, 11/30/2011 - 15:27 | 1931749 AldoHux_IV
AldoHux_IV's picture

In an era where CB morons want to inflate the debts rather than deal with them in an adult manner, it becomes a race to the bottom in terms of currency so this 'I scratch your back you inflate my $' shit can only work for so long because it's not a solution nor will it help in dealing with the solvency issue.  It's another form of a 'controlled default' slowly but surely.

End the fed, other CB's, the IMF, and the Worldbank they continue to be cancerous upon the real economy and society at large.

Wed, 11/30/2011 - 16:26 | 1932071 Joe Sixpack
Joe Sixpack's picture

Mutually Assured Destruction of Federal Finances = MADOFF

Wed, 11/30/2011 - 14:57 | 1931571 Irish66
Irish66's picture

should the real focus be on US bank lack of foreign currency liquidity?  absolutely

Wed, 11/30/2011 - 14:57 | 1931572 King_of_simpletons
King_of_simpletons's picture

Your junk for our junk. It's all in perception management.

Wed, 11/30/2011 - 15:29 | 1931760 infinity8
infinity8's picture

Swap meet!

Wed, 11/30/2011 - 14:59 | 1931584 The Axe
The Axe's picture

I getting very confused Buckwheat

Wed, 11/30/2011 - 15:00 | 1931589 JS1234
JS1234's picture

Well I'm sure the Europeans will be very appreciative of us saving their asses and be very respectful to the US just like they have been for WWI, WWII, the Marshall Plan, and the Cold war.

Wed, 11/30/2011 - 15:00 | 1931591 CvlDobd
CvlDobd's picture

iPath needs to get going on a corruption ETN

Wed, 11/30/2011 - 15:01 | 1931596 Jonas Parker
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Like swapping Puffs for Kleenex - look out for the snot on your hands...

Wed, 11/30/2011 - 15:02 | 1931601 max2205
max2205's picture

Good thought TD. This could be the hail Mary pass without anyone in or knowing where the end zone is....

Wed, 11/30/2011 - 15:04 | 1931609 Bansters-in-my-...
Bansters-in-my- feces's picture

...Long story made short...= " we've been jewed"

Wed, 11/30/2011 - 15:04 | 1931610 midgetrannyporn
midgetrannyporn's picture

Mark assets to fantasy - check

Copious liquidity - check

Sell bonds, buy stocks - check

Squeeze shorts - check

Conjure earnings? - oops


Skittish Toombs, very skittish. [/Riddick]

Wed, 11/30/2011 - 15:05 | 1931617 willien1derland
willien1derland's picture

Or perhaps this may be related to FX Derivative positions - Morgan Stanley (per the OCC latest report) had a HUGE FX Derivative exposure - Perhaps this was needed for rebalancing?

It is a GREAT POST TD - Totally agree with the author - The FED always has a reason if it modifies policy...although I can't shake this dark forboding...I have my own idea of the magnitude of the financial crisis which is ever expanding...I now capitulate my position as I am overwhelmed...the issue MUST be far greater than I could ever perceived...if ANYONE could offer their perspective on a workable value of exposure it would be greatly appreciated...Many thanks in advance

Wed, 11/30/2011 - 15:19 | 1931704 Lazarus Long
Lazarus Long's picture

the size is everything everywhere. my gut feeling is that the world blew up in 08, and the the CB are trying everything they can. the reason is that they are building a legal case so that the people don't hang them literally.

Wed, 11/30/2011 - 15:06 | 1931621 fbrothers
fbrothers's picture

Something is going to explode. Or, maybe implode.

Wed, 11/30/2011 - 15:16 | 1931686 Dr. Engali
Dr. Engali's picture

A big bet was placed yesterday on BAC.

Wed, 11/30/2011 - 15:07 | 1931623 Dick Darlington
Dick Darlington's picture

The night of the living dead. Zombie banks everywhere as far as the eye can see.

Wed, 11/30/2011 - 15:07 | 1931626 Caviar Emptor
Caviar Emptor's picture

The banks must be in Some Hole! 

Wed, 11/30/2011 - 15:09 | 1931633 SheepDog-One
SheepDog-One's picture

Hey JP Morgan, go fuck yourselves!

Wed, 11/30/2011 - 15:16 | 1931680 Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture

<----- agrees wholeheartedly!

Wed, 11/30/2011 - 15:19 | 1931701 the not so migh...
the not so mighty maximiza's picture

Short and sweet Sheep

Sat, 03/03/2012 - 01:06 | 2219199 Yen Cross
Yen Cross's picture

Sweet! -2

Wed, 11/30/2011 - 15:14 | 1931663 sudzee
sudzee's picture

CB's readying a fix rate for coversion to new worlwide currency.

Wed, 11/30/2011 - 15:15 | 1931670 Stoploss
Stoploss's picture

I guess it's just me, but no one seems to realize that there is a shortage of 'dollars'. EU banks dumping euro's and gold to buy the dollar, guess what, short term supply issue right now with dollars, there aren't any. Hence, overnight EU bank failure, drop the swaps today, and oh yeah, go ahead and cancel that repo, there isn't any liquidity available to remove.. Is it sinkin' in?

Wed, 11/30/2011 - 15:19 | 1931700 hedgeless_horseman
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...short term supply issue right now with dollars, there aren't any..

"We can fix that," says Bernanke and Geithner.

Wed, 11/30/2011 - 17:55 | 1932671 sleepingbeauty
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We've been printing like maniacs for 3 years and still not enough. Fire up the ludicrous speed printers.

Wed, 11/30/2011 - 15:16 | 1931673 wang (not verified)
wang's picture

as I type   SPX +39.47 /  notwithstanding  a 200k jobs number friday how soon before this is given back 

good el erian reaction from Bbg this am

Wed, 11/30/2011 - 16:09 | 1931965 Manthong
Manthong's picture

Thanks for that.

Wed, 11/30/2011 - 15:19 | 1931681 equity_momo
equity_momo's picture

*channels Trav7777*


JFC , these sellside asshats are clueless. There is a lack of currency liquidity per se. Whether thats dollars , euros , yen , pounds or malaysian fuckin ringits.



Ergo , the BIS get their minions together and tell them to make available whatever peice of shit paper is needed for whatever piece of shit bank needs it to prevent whatever piece of shit society thats unfolding from unfolding. And its a big fail because 7 billion useless eaters have outgrown the host. And oils over 100. /whatever

Wed, 11/30/2011 - 15:18 | 1931695 slaughterer
slaughterer's picture

Hey Feroli Fonz-meister, you forgot one thing: Whoever borrows from this swap facility is branded with a stigma which reads "Short Me, Now."

Wed, 11/30/2011 - 16:31 | 1932104 12ToothAssassin
12ToothAssassin's picture

Only if they are known by name...

Wed, 11/30/2011 - 15:20 | 1931707 Dr. Gonzo
Dr. Gonzo's picture

So anyone "conenected" can get cheap easy access to irredemible currency in electronic form to prop up their struggling Ponzi at the expense of savers mostly in America . It's why we fight and die and what the dream is all about...for them.

Wed, 11/30/2011 - 15:25 | 1931738 midgetrannyporn
midgetrannyporn's picture the expense of savers mostly in America.


Savers in America. Funny!

Wed, 11/30/2011 - 15:25 | 1931737 Mark123
Mark123's picture

I think of the western banking system (G10?) as a closed system, so this latest move is just making sure that the system remains liquid...nothing has been resolved and we still have the same debts, and I don't see how this helps service all that debt. 

Wed, 11/30/2011 - 15:25 | 1931739 Snakeeyes
Snakeeyes's picture

We can't save Europe from overspending and too much debt. Look at Italian Industrial Production for a snapshot from why none of this will work.

Global Central Banks “Last Tango in Paris” – “Fire up the printing presses, gang!” Or at Least Lower Swaps Rates 1/2%

Wed, 11/30/2011 - 15:32 | 1931770 electricgorilla
electricgorilla's picture

These so called swap lines would be another great way for the Vaticans bankers to launder money.


Wed, 11/30/2011 - 15:37 | 1931799 pmcgoohan
pmcgoohan's picture

Am I right in thinking that these swap lines are in no way inflationary?

The same amount of loans are being made, just at better rates. And the loans are overnight, so if any money is being created by the debt it is destroyed the next day.

The market seems to be treating this like it's QE when it's not.

Wed, 11/30/2011 - 15:56 | 1931883 Steroid
Steroid's picture

I can't see anything but the potential of a violent unwinding of the Yen carry that need that much reverse action.

Is there something stinky in Japan?

Wed, 11/30/2011 - 16:24 | 1932059 Manthong
Manthong's picture

What does cesium, strontium, iodine and plutonium smell like?

Wait, maybe it's the Americium.

Sat, 03/03/2012 - 01:08 | 2219204 Yen Cross
Yen Cross's picture

 Hell if I know, but shoot that damn Skunk that gassed my house at midnight!

Wed, 11/30/2011 - 18:19 | 1932771 Cult of Criminality
Cult of Criminality's picture

Quote ; "I can't see anything but the potential of a violent unwinding of the Yen carry that need that much reverse action.

Is there something stinky in Japan?"

Yes, a tremendous amount of radiation.

Wed, 11/30/2011 - 16:18 | 1932018 Jim in MN
Jim in MN's picture

the Fed can offer euros, yen, loonies, pounds or swiss francs to US banks


And marks, and French francs, and drachma, and so on, and so on....load those leftover templates!  Good thing they kept 'em around.

Wed, 11/30/2011 - 16:19 | 1932021 slewie the pi-rat
slewie the pi-rat's picture

it's novel all right!

like a whoopee cushion for fuking banksters!

Fri, 09/28/2012 - 01:51 | 2837772 Yen Cross
Yen Cross's picture

 Slewie lives! Yeaa. People are looking for ya! In a good way!

Wed, 11/30/2011 - 16:21 | 1932035 Chupacabra-322
Chupacabra-322's picture

" Chic Click", you hear that.  That's me putting a fresh 30rd mag into my Colt AR-15.  Lock & load people. 

Wed, 11/30/2011 - 16:28 | 1932084 ZeroPower
ZeroPower's picture

Well this should be enough for anyone to jaw-drop and yell GTFO:

The fact that the discount rate is 75bps whereas OIS+50 is under 60bps creates some odd optics, as it is cheaper now for European banks to borrow dollars from the ECB than for US banks to borrow dollars from the Fed

Wed, 11/30/2011 - 16:34 | 1932115 adr
adr's picture

Why does cheaper swap lines equate to a 10% jump in the stock market? Why is this bullish for oil? I mean on a fundamental level. The only reason for the stock market to jump is that banks get a lot of money they can use to buy stocks and commodities which they then sell immediatly to book profits. Which is why we have had the incredible jumps at the open and then sideways trading for the rest of the day. What I want to know is who is buying the stocks from the banks and letting them book profits. Sure isn't retail traders. The only answer I can come up with is the Fed loans money to banks so they can buy stocks and then the Fed buys the stocks back from the banks at a higher price. Later the Fed sells the stocks back to the banks after they borrow more money. As long as the stocks keep increasing in value the system works. Is it really that simply fucked up?

Wed, 11/30/2011 - 17:05 | 1932308 GCT
GCT's picture

This has nothing to do with finances but politics as usual.   The Fed is going to keep this market swinging high until the end of the elections.  This is not going to change as they do not want their puppet responsible for the bad markets as well.  This will continue thru 2012 first quarter 2013.  We cannot have this administration looking any worse then it already is. After that look out we are in for one hell of a ride.  Well I am happy today about Gold!

Wed, 11/30/2011 - 19:06 | 1932974 grid-b-gone
grid-b-gone's picture

Today's move adds another tool for repatriating foreign profits without spiking the dollar and driving down equities. It also sends a message to China that if they want to join in on currency-and liquidity-neutral plans, they need a floating currency.  

Hugh Hendry calls Bernanke "an evil genius" and, wow, he is playing one hell of a chess match. 

The article states that the Fed does not make policy changes without reason, and that is exactly correct.

As mentioned by several posters, the political angle is important. OWS may have delayed foreign profits repatriation, along with the need to avoid a foreign (especially EU) liquidity drain.

One of the few remaining negatives is that these moves confirm to the average Joe that only PMs protect against central bank actions. The value of cash will be eroded by continued printing.

As Fed governors continue chanting "Bernanke leviosa", today's policy change lends evedence that the new world order and single currency destiny may remain largely U.S. and dollar-centric.  

Wed, 11/30/2011 - 23:40 | 1933745 qussl3
qussl3's picture

Very insightful.

I've always believed the FED was fighting the economic war with China, Americans can endure MUCH more inflation, food and energy is unlikely to ever be an real issue, sure some cant drive or buy useless crap, but in China people go hungry.

China is about to enter the mother of all stagflationary spirals, there is so much slosh there its ridiculous, imagine 20+% RRR and still you get double digit inflation.

The little bit of slosh that does leak in the form of bribes is insane, the Chinese wrote the book on bureaucracy and corruption, they've been at it from way before Rome.

Their export markets are collapsing and they know it, no one it going to raise tariffs, instead they'll fight the trade war in the currency markets, and see how much inflation China is willing to import.

Wed, 11/30/2011 - 22:22 | 1933561 Vlad
Vlad's picture

Doesn't this imply that US banks that have activity in Europe can also borrow from the ECB below Fed rate?

Sat, 03/03/2012 - 01:09 | 2219206 Yen Cross
Yen Cross's picture


Wed, 11/30/2011 - 23:25 | 1933718 qussl3
qussl3's picture

Fucking derivatives.

When the damn derivatives market is orders of magnitudes larger than the underlying and the real global economy in nominal terms what the hell can we expect to happen.

If the laws continue to support these claims its inevitable that the unwind takes a shit on the real economy.


Fri, 09/28/2012 - 01:55 | 2266528 Yen Cross
Yen Cross's picture

  i'M THE ( sUCCUBUS) My Father  FUCKED my Brother! European Politics 101 BITCHEZZZ!

 You ass clowns thought? LMAO  ( speed bump)

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