On September 16, 2008, two days after the collapse of Lehman Brothers, the Federal Open Market Committee (FOMC) gave the Foreign Exchange Subcommittee the power to “enter into swap agreements with foreign central banks if necessary to deal with pressures on money markets in other courts.” This allowed the subcommittee to extend swap lines to other central banks and expand the size of existing swap lines without the entire FOMC having to vote on them. The oral agreement was that the subcommittee would have the power to extend swap lines to the central banks of the Group of Ten (G10), but that swaps, beyond this group, would require the approval of the entire FOMC. Two days after granting this power to the subcommittee, the Fed expanded swap lines with the ECB and SNB and expanded three new swap lines in Canada, the United Kingdom and Japan. On 24 September 2008, other swap lines were extended to Australia, Denmark, Norway and Sweden. On 28 October 2008, a change line to New Zealand was extended. Until China fully opens its capital accounts and strengthens its international support for the use of RMB, BSA`s partners are unlikely to have a strong incentive to use their swaps. But if China`s RMB internationalization goals are met, it is likely that BSAs will have a much greater impact on trade. Learn more about what currency exchange means and how it helps optimize investments in China. Bilateral trade between China and the European Union has already resulted in total trade of $337.99 billion. By 2020, the two countries also expect a broader investment agreement between the EU and China.
This investment agreement, which began in 2013, aims to give both China and European countries free access to markets. On 18 February 2014, the Australian Securities Exchange Limited (ASX) and BoC signed a clearing and settlement agreement with RMB (Australia). In April, the RBA announced that it would invest up to 5% of its foreign exchange reserves in RMB government bonds.  On November 17, RBA and PBoC signed a Memorandum of Understanding establishing formal RMB clearing agreements in Australia and PBoC granted Australia an RQFII quota of €50 billion. RMB, which will allow licensed Australian IFs to invest with RMB in China`s domestic bond and equity markets.  A similar situation arose in Argentina in 2014. Faced with extreme peso inflation and on the brink of an economic crisis, the nation has not been able to obtain US dollars, which has prevented importers from buying vital consumer goods. Argentina relied on its BSA with China, but, like Pakistan, instead of using it to facilitate trade between the two countries, the RMB was instead part of Argentina`s dual approach to introducing the USD into its domestic economy. In both cases, China did not protest against the transformation of the RMB into USD, but pointed out how the agreements could strengthen international trade between nations. Since the 2007 financial crisis, swaps have been used by central banks to raise foreign currency, increase reserves and lend to domestic banks and companies.
While the terms of swap arrangements are intended to protect the two central banks participating in the swap against losses due to fluctuations in monetary values, there is some risk that a central bank will refuse or be unable to comply with the terms of the arrangement. This is why lending through currency swaps is an important sign of trust between governments. But it can also be a sensitive subject of domestic policy; Lawmakers in the United States and even public commentators in China have raised concerns about the risk that their respective central banks will take by stretching swap lines to certain nations. . . .