The Currency Exchange Fund (TCX) was established in 2007 by a consortium of development finance institutions (DFIs), governments, microfinance investment vehicles and donors to address precisely this challenge to provide hedging instruments that convert hard currency lending by development actors into local currency-denominated obligations for borrowers.
The Currency Exchange Fund
Abstract
A recurring challenge in development finance, especially in emerging and frontier countries, is currency mismatches. Loans in these sectors are frequently denominated in hard currency, exposing borrowers to substantial foreign exchange (FX) risk. This volatility can undermine the financial sustainability of development projects and discourage private investment. In markets where local capital markets are shallow or underdeveloped, local currency solutions remain limited or prohibitively expensive. The challenge lies in enabling local currency financing without relying solely on domestic financial systems or bearing the full risk at the borrower level, while still mobilising capital at scale.
The Currency Exchange Fund (TCX) was established in 2007 by a consortium of development finance institutions (DFIs), governments, microfinance investment vehicles and donors to address precisely this challenge. TCX provides hedging instruments - primarily non-deliverable cross-currency swaps and forward contracts -that convert hard currency lending by development actors into local currency-denominated obligations for borrowers. This allows DFIs and other lenders to continue raising and disbursing funds in hard currency while transferring the FX risk away from borrowers. TCX assumes this risk on its own balance sheet, protecting clients in low- and middle-income countries from exchange rate volatility and supporting more predictable debt service obligations.
With a capital base of USD 1.8 billion and a USD 5 billion balance sheet, the fund specifically targets currencies and tenors where commercial hedging options are absent or insufficient, ensuring its operations are additional and do not crowd out domestic financial institutions. Because of its diverse portfolio across more than 70 countries and careful risk management, TCX is able to bear about USD 5 of gross currency exposure for every USD 1 of capital. The fund offers fixed rate hedges with tenors of up to 25 years or longer if necessary, and it can hedge individual deals up to USD 200 million. Additionally, by progressively shifting some of its foreign exchange risk to private investors, TCX not only controls its own risk but also encourages private sector involvement in currency risk reduction, which is a major goal of integrated finance strategies.
Through the provision of hedging solutions across more than 140 frontier and emerging market currencies, TCX assisted clients in obtaining more than USD 10 billion in local currency funding by 2024. By absorbing currency risk, the fund has directly supported investments in sectors such as microfinance, renewable energy, housing and infrastructure. In addition to mobilizing substantial private capital, TCX's model has transferred over USD 3.5 billion in hedging transactions to private counterparties, demonstrating its role as a private sector catalyst and market enabler in mitigating foreign exchange risk across difficult frontier markets.
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