Global Economic Governance Initiative GEGI STUDY | February 2021 THE HIERARCHY OF THE OFFSHORE US-DOLLAR SYSTEM On Swap Lines, the FIMA Repo Facility and Special Drawing Rights Steffen Murau, Fabian Pape and Tobias Pforr Funded by German Research Foundation Global Economic Governance Initiative GEGI STUDY | February 2021 THE HIERARCHY OF THE OFFSHORE US-DOLLAR SYSTEM On Swap Lines, the FIMA Repo Facility and Special Drawing Rights Steffen Murau, Fabian Pape and Tobias Pforr Funded by German Research Foundation Table of Contents Abbreviations v Executive Summary vi Acknowledgments vii 1. Introduction 01 2. The Fed’s Central Bank Swap Lines 08 Outline 08 Historical overview 08 Technical details 09 Summary 10 3. The Fed’s FIMA Repo Facility 11 Outline 11 Historical overview 11 Technical details 13 Summary 14 4. The Special Drawing Rights System 15 Outline 15 Historical overview 15 Technical details 17 Summary 20 5. Conclusion 21 References 23 About the Authors 27 iii List of Figures and Tables Figure 1 — The hierarchy of the global Offshore US-Dollar System 04 Figure 2 — Assessing the international role of the US-Dollar in 2019-20 07 Figure 3 — Drawings on Fed swap lines, volume and price (2007-20) 09 Figure 4 — Balance sheet mechanism for central bank swap issuance 10 Figure 5 — Investment in the Fed's Foreign Repo Pool (2007-20) 12 Figure 6 — US treasury bond holdings of selected non-US central banks 13 Figure 7 — Balance sheet mechanism for foreign repo facilities 14 Figure 8 — Three historical rounds of SDR allocation, in SDR billion 16 Figure 9 — Balance sheet mechanism for SDR allocation 17 Figure 10 — Balance sheet mechanism for SDR drawing via first layer 18 Figure 11 — Balance sheet mechanism for SDR drawing via apex 18 Figure 12 — SDR drawings in relation to total SDR holdings (2007-20) 19 Figure 13 — Administrative process for SDR drawing (in working days) 20 Figure 14 — Borrowing costs via swap lines, the FIMA repo facility and SDRs 22 Table 1 — Comparison of the three mechanisms 21 iv Abbreviations BCEAO Banque Central des États de l'Afrique de l'Ouest GRA General Resource Account BD Bangladeshi IASS Institute for Advanced Sustainability Studies BIS Bank for International Settlement IMF International Monetary Fund BoC Bank of Canada IOER Interest on Excess Reserves BoE Bank of England IPE International Political Economy BoJ Bank of Japan JPY Japanese Yen C6 Swap network of six central banks LDC Low-Income Developing Countries C14 Recipients of Federal Reserve Swap Lines NCB National Eurozone Central Bank CBoB Central Bank of Bangladesh OBFAs Off-balance-sheet fiscal agencies CBoR Central Bank of Russia OIS Overnight Indexed Swap CN Chinese PBoC People's Bank of China COFER Currency Composition of Official Foreign QE Quantitative Easing Exchange Reserves RFA Regional Financing Arrangement DFG Deutsche Forschungsgemeinschaft RMB Chinese Renminbi EAEPE European Association for Evolutionary Political RRP Reverse Repos Economy RU Russian ECB European Central Bank SDR Special Drawing Rights (as instruments) EME Emerging Market Economies SN Senegalese ESF Exchange Stabilization Fund SNB Swiss National Bank ESRC Economic and Social Research Council SOMA System Open Market Account EUI European University Institute US United States EUR Euro USD US-Dollar EZ Eurozone VTA Voluntary Trading Arrangementr FDIC Federal Deposit Insurance Corporation Fed Federal Reserve $ US-Dollar FIMA Foreign and International Monetary Authorities € Euro FOMC Federal Open Market Committee ¥ Japanese Yen FRBNY Federal Reserve Bank of New York 元 Chinese Renminbi F-RRP Foreign Reverse Repo ₽ Russian ruble FX Foreign exchange ৳ Bangladeshi taka GBP British pound f West African CFA franc GDP Global Development Policy x Special Drawing Rights (as unit of account) GFSN Global Financial Safety Net ¤ Other units of account v Executive Summary he view that the international monetary system is Currently, there are three different mechanisms hierarchical has become increasingly common in for non-US central banks to access the Fed's balance TInternational Political Economy (IPE) scholarship. sheet to attain emergency USD liquidity. These create However, the nature, shape and origin of this hierarchy three peripheral layers in the Offshore USD System. remain often vague. Is it a hierarchy of currencies, The first-layer periphery can receive emergency states, or monetary jurisdictions? What determines USD liquidity via the Fed's central bank swap lines. hierarchy empirically? And what are its causes? With this mechanism, set up during the 2007-9 This study conceptualizes international monetary Financial Crisis, the Fed stands ready to create new hierarchy by focusing on different mechanisms to USD-denominated central bank deposits on demand, supply emergency US-Dollar (USD) liquidity from the while accepting deposits of the partnering central Federal Reserve (Fed) to non-US central banks. To banks as collateral, which are denominated in their this end, it takes on board insights of critical macro- respective unit of account and created on the spot. finance and develops a model of the global financial The second-layer periphery can make use of the architecture as a web of interlocking balance sheets. Fed's new repo facility for Foreign and International We perceive the international monetary system Monetary Authorities (FIMA) to access emergency as a world-spanning payments system in which daily USD liquidity. Set up in March 2020, the Fed creates money flows are settled mainly through interactions new central bank deposits on the spot against US of private financial institutions. In its current shape, treasury bonds which non-US central banks have to we call it the 'Offshore USD System' as it is based on accumulate beforehand and pledge as collateral. using and creating USD-denominated credit money The third-layer periphery can access emergency instruments ‘offshore’, i.e. outside the US. USD liquidity from the Fed only via the Special Drawing The centrality of the USD as global 'key currency' Rights (SDR) system, set up in 1969 and administered places the US monetary jurisdiction at the apex of the by the International Monetary Fund (IMF). Non- global payments system. It enables US institutions to US central banks have to sell previously allocated provide the ultimate means of settlement and makes SDR holdings and can interact with the Exchange the Fed the system's hierarchically highest balance Stabilization Fund (ESF), which acts as gatekeeper for sheet. At the same time, it pushes all other monetary the Fed. New central bank deposits are only created if jurisdictions into a peripheral position. the Fed buys SDR Certificates issued by the ESF. While private credit money creation is the default This is the first study to integrate swap lines, the mechanism in normal times, central banks become FIMA repo facility and the SDR system into a single paramount when private credit money instruments framework of interlocking balance sheets. It clarifies are about to endogenously implode in a crisis. Private the functional relationship between the Fed and the institutions have mechanisms to supply emergency IMF in the Offshore USD System. While the Fed is USD liquidity to each other in smaller crises, but in a the hierarchically highest balance sheet in the global larger systemic crisis public credit money becomes payments system and ultimate source for emergency essential for the provision of emergency USD liquidity. USD liqudity, we interpret the IMF as an off-balance- The international hierarchy below the apex is sheet fiscal agency in the US monetary jurisdiction. determined by the mechanisms through which non-US Our analysis of the three mechanisms has the central banks can access emergency USD liquidity from potential to contribute to future research in various the Fed. Not only are they important when they are strands of IPE. Insights into the nature, shape and actually used in systemic crises but they also matter in causes of international hierarchy are of relevance normal times. Peripheral monetary jurisdictions which to the literature on the Global Financial Safety Net are higher up in the international hierarchy receive a (GFSN), studies on the changing role of the IMF, more favorable implicit liquidity guarantee that grants a analyses of the international role of the USD, as well higher elasticity space to their banking systems. as theories on international monetary power. vi Acknowledgments his study is part of the research project 'Hierarchical and Hybrid Money on a Fractured Continent: Europe’s Monetary Architecture after the Eurocrisis' (2019-21), funded by Deutsche Forschungsgemeinschaft T(DFG) and carried out at the Global Development Policy (GDP) Center of Boston University. Adopting an institutionalist research paradigm by using the conceptual framework of interlocking balance sheets, the analytical interest of the project is to examine the international and European financial architecture as a genuine credit money system. The study applies the methodology developed in the first piece of the series, titled 'A Macro-financial Model of the Eurozone Architecture Embedded in the Global Offshore US-Dollar System', to investigate how central bank swap lines, the FIMA repo facility and the Special Drawing Rights (SDR) system create a hierarchy among different monetary jurisdictions in the global financial architecture. Our collaboration has greatly benefited from Steffen Murau’s Research Fellowship at the Bank for International Settlement (BIS) and