Wed | Jun 7, 2023

BOJ institutes foreign exchange swap arrangement

Published:Friday | January 24, 2020 | 12:34 AMMcPherse Thompson - Assistant Editor – Business
John Robinson, senior deputy governor, Bank of Jamaica.
File John Robinson, senior deputy governor, Bank of Jamaica.

The Bank of Jamaica, BOJ, has introduced a new instrument available to foreign exchange authorised dealers called a FX swap arrangement to enhance the central bank’s management of the market.

The instrument came into effect on Wednesday and is intended to provide US dollar liquidity to the market through authorised dealers which are deposit-taking institutions via a swap arrangement.

Under the arrangement, the BOJ said it will sell US dollars to authorised dealers within a predetermined limit at the prevailing market rate, with an agreement to buy back the same amount at a time in the future and at an agreed forward rate.

In addition to the BOJ’s Foreign Exchange Intervention and Trading Tool operations, the central bank said it will utilise the FX swap arrangement to smooth out excess volatility and restore orderly conditions in the market.

Senior Deputy Governor of the BOJ, John Robinson, told the Financial Gleaner that “it’s an arrangement that can facilitate the introduction of more liquidity in the FX market at a point when it is tight, and gives the participants, whoever wants to apply the opportunity to get access to liquidity today which can be repaid at some point in the future. It is negotiable at a standard rate, a rate that the parties can agree on.”

He said that given that the foreign exchange market is characterised by periods where there is tightness and a period when there is an oversupply, “this kind of swap is another option on the table to enable the market to even out that kind of imbalance”.

Robinson said the BOJ had been discussing with the dealers about their own implementation of swaps among themselves to enable them to deepen the market. “So, for example, one person (dealer) will be flushed, another one short, but they have an obligation further along, so they can institute swaps among themselves. They can also use it as the basis of entering into forward contracts with clients.”

The forward contracts with clients allow them more certainty about future transactions, said Robinson, adding that swaps among dealers allow them to free up their liquidity and allow them to back some of these forward contracts, and then, as a backstop, dealers can enter into swaps with BOJ in periods when liquidity conditions change.

“We are encouraging clients to enter into forward contracts with dealers, encouraging dealers to enter into swaps and forwards among themselves, and we stand ready to even out spikes and troughs as necessary,” Robinson said.

The FX swap arrangement came into effect on Wednesday.

The central banker said that if price movements are being pushed by liquidity shortages “then this product has the ability to ease that. It’s an intervention method which allows us to recover whatever we put out at an appropriate time”.

The weighted average selling rate of the Jamaica dollar vis-à-vis the US dollar was $140.10 at midday on Thursday.

Asked what was causing the depreciation of the Jamaica dollar to reach the $140 band at this time, Robinson said it was a combination of things, including the need for dealers to recover from overselling, meaning that some have gone short in December last year and there is a need for them to rebalance their books.

The BOJ said cambios are not included in the swap arrangement because they are not authorised dealers. “Only authorised dealers are allowed to deal, borrow or lend foreign currency or foreign currency instruments as per Part IVA, Section 22A (2). FX swaps are foreign currency instruments. Cambios, therefore, would not participate in an FX swap with BOJ,” the central bank said.

Comment sought from Jamaica Bankers Association President Jerome Smalling on the likely impact of the foreign exchange swap on authorised dealers was not forthcoming up to press time.