Reciprocal Currency Arrangement


DEFINITION of 'Reciprocal Currency Arrangement'

Temporary arrangement between central banks to maintain a supply of a country's currency for trade with other central banks at a specified exchange rate. A reciprocal currency arrangement is only intended for overnight or short-term lending in order to maintain reserve requirements, liquidity and to keep financial markets functioning smoothly.

Also known as a swap line or swap network.

BREAKING DOWN 'Reciprocal Currency Arrangement'

Reciprocal currency arrangements exist to provide short-term access to foreign currencies. In the U.S., for example, a reciprocal currency arrangement entails both a spot (immediate delivery) transaction, where the Federal Reserve transfers dollars to a central bank and receives foreign currency in exchange; and a concurrent forward (future delivery) transaction, where the two central banks consent to reversing the spot transaction at a specified date. One purpose of a reciprocal currency arrangement is the support of a country's currency during periods of uncertainty or unusual market disruptions.

  1. Liquidity

    The degree to which an asset or security can be quickly bought ...
  2. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  3. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  4. Swap Network

    A worldwide network of central banks that establish a reciprocal ...
  5. Federal Open Market Committee - ...

    The branch of the Federal Reserve Board that determines the direction ...
  6. Central Bank

    The entity responsible for overseeing the monetary system for ...
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