FX swap vs FX loans – popularity – off balance sheet

(labels – FX)

One of the best-known motivation/attraction of FX swap over traditional FX loans is – off balance sheet.

The Trac consultancy trainers gave many specific examples. Context is commercial banking, because unlike listed securities, a “buy-side” has no way to trade FX swap on some exchange without a big bank facilitating. Most FX inventories are held by banks (even more than governments apparently). The biggest players are invariably the international banks + central banks, not big funds.

Specifically, the context is a client (like IBM) coming to a commercial bank for a FX solution. Commercial banks are heavily regulated, more so than investment banks. One of the regulations is capital adequacy. Traditional loans would tie up too much capital – capital inefficiency. Even for the client (IBM), I feel borrowing would often require collaterals.

FX swap in contrast requires much less capital.

A different form of IRS off-balance-sheet benefit is given in http://bigblog.tanbin.com/2014/05/irs-off-balancesheet-briefly.html, applicable for a buy-side as well.

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