An FX swap is a pair of simultaneously agreed exchanges of two currencies: a near leg at (or near) spot, and a far leg back at a pre-agreed forward rate on a future date. Both are agreed today. No interest is paid as such; the entire funding cost is embedded in the difference between the two rates, the forward points. (Contrast a cross-currency swap, which runs for years, exchanges periodic interest in each currency and re-exchanges principal; and a currency forward, a single future exchange with no near leg. Three different instruments; conflating them is a standard professional error. Common Mistake 3.)
Now re-read it as a loan. Party A has yen and wants dollars for three months; Party B the reverse. A gives B yen today and receives dollars today; in three months A returns the dollars and receives the yen back at the pre-agreed rate. Strip the labels and A has borrowed dollars for three months and pledged yen as collateral, with the "interest" paid through the forward points. If A fails to deliver at the far leg, B simply keeps the yen, the transaction is self-collateralising, which makes an FX swap a senior, secured claim and the funding instrument of choice for institutions whose unsecured credit is questioned.
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How are FX swaps recorded on the balance sheet?
Whose balance sheet expands? Both book the near-leg exchange as an actual cash transfer, and both carry a forward obligation. Here is the measurement scandal, stated by the BIS itself: under prevailing accounting standards the forward leg is recorded as a derivative measured at fair value, not as debt. On day one that fair value is approximately zero. So an obligation to repay a very large sum of dollars on a date certain appears as a near-zero derivative line, and in the world's debt statistics not at all.
The BIS quantified the hole in Dollar debt in FX swaps and forwards: huge, missing and growing (BIS Quarterly Review, December 2022). At end-June 2022, outstanding FX swaps, forwards and currency swaps totalled $97 trillion, of which $85 trillion: 87.6%: was dollar-denominated. Non-banks outside the United States carried $26 trillion of off-balance-sheet dollar obligation, up from $17 trillion in 2016, against just $13 trillion on balance sheet, twice as much hidden as disclosed. Banks headquartered outside the United States carried $39 trillion off balance sheet against $15 trillion on it, a ratio of 2.6×, amounting to 42.4% of their $92 trillion of total liabilities. Almost four fifths matured within one year; in April 2022 turnover data, swaps maturing within one week were about 70% of FX swap turnover and overnight maturities alone exceeded 30%.
Read that slowly. Tens of trillions of dollars of short-dated, rollover-dependent dollar debt, owed by entities the Fed does not supervise and cannot lend to, recorded nowhere as debt. When rolling becomes difficult it becomes difficult everywhere at once, because the maturities are all short and every counterparty needs the same currency on the same morning.
Where is FX swap trading concentrated?
The flow numbers confirm where the activity sits. In the 2025 Triennial, FX swaps were the largest single instrument at about $4 trillion per day of the $9.6 trillion total, with spot at 31% and outright forwards at 19% of turnover; the dollar was on one side of 89% of all trades, the euro 28.9%, the yen 16.8% and sterling 10.2% (shares sum to 200% because every trade has two currencies). Four sales-desk locations (the United Kingdom (38%), the United States, Singapore and Hong Kong SAR) accounted for 75% of all FX trading (BIS press release, 30 September 2025). Note what that geography means: the dominant venue for dollar funding is not in the United States.