Special drawing rights

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Special Drawing Rights (SDRs) are potential claims on the freely usable currencies of International Monetary Fund members. SDRs have the ISO 4217 currency code -- XDR.

Contents

Definition

SDRs are defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are, by weight, the United States dollar, the euro, the Japanese yen, and the pound sterling.

Before the introduction of the euro in 1999, the Deutsche Mark and the French franc were included in the basket. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance. The determination of the currencies in the SDR basket and their amounts is made by the IMF Executive Board every five years.

The exact amounts of each currency in the basket, and their approximate relative contributions to the value of an SDR, in the past were and currently are:Special Drawing Rights: The SDR Fact Sheet

Quinquennial SDR rebalancing: dollar share drops to 41.9%

With effect from January 1, 2011, the IMF has determined that the four currencies that meet the selection criterion for inclusion in the SDR valuation basket will be assigned the following weights based on their roles in international trade and finance:

  • U.S. dollar 41.9 percent (compared with 44 percent at the 2005 review)
  • Euro 37.4 percent (compared with 34 percent at the 2005 review)
  • Pound sterling 11.3 percent (compared with 11 percent at the 2005 review)
  • Japanese yen 9.4 percent (compared with 11 percent at the 2005 review)

General and special SDR allocations

Source: General and Special SDR Allocations IMF, August 28, 2009

General and Special SDR Allocations

A general allocation of Special Drawing Rights (SDRs) equivalent to US$250 billion became effective on August 28, 2009.

The allocation is designed to provide liquidity to the global economic system by supplementing the Fund’s member countries’ foreign exchange reserves.

The general SDR allocation was made to IMF members that are participants in the Special Drawing Rights Department (currently all 186 members) in proportion to their existing quotas in the Fund, which are based broadly on their relative size in the global economy.

Separately, the Fourth Amendment to the IMF Articles of Agreement providing for a special one-time allocation of SDRs entered into force on August 10, 2009. The special allocation will be made to IMF members on September 9, 2009. The total of SDRs created under the special allocation would amount to SDR 21.5 billion (about US$33 billion; see column 3 in the table here).


Source: Special Drawing Rights (SDRs) IMF, August 27, 2009

The role of the SDR

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR, serves as the unit of account of the IMF and some other international organizations.

Basket of currencies determines the value of the SDR

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on the IMF’s website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. In the most recent review (in November 2005), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF. These changes became effective on January 1, 2006. The next review will take place in late 2010.

The SDR interest rate

The SDR interest rate provides the basis for calculating the interest charged to members on regular (non-concessional) IMF loans, the interest paid and charged to members on their SDR holdings, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

SDR allocations to IMF members

Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF quotas. Such an allocation provides each member with a costless asset. However, if a member’s SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall.

There are two kinds of allocations:

General allocations of SDRs.

General allocations have to be based on a long-term global need to supplement existing reserve assets. Decisions to allocate SDRs have been made three times.

  • The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72 in yearly installments.
  • The second allocation, for SDR 12.1 billion, was distributed in 1979–81 in yearly installments.
  • The third general allocation was approved on August 7, 2009 for an amount of SDR 161.2 billion and will take place on August 28, 2009. The allocation would mean a simultaneous increase in eligible members’ SDR holdings and in their cumulative SDR allocation by about 74.13 percent of their quota.

Special allocations of SDRs.

A proposal for a special one-time allocation of SDRs was approved by the IMF’s Board of Governors in September 1997 through the proposed Fourth Amendment of the Articles of Agreement. Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund after 1981—more than one-fifth of the current IMF membership—have never received an SDR allocation. This allocation would increase members' cumulative SDR allocations by SDR 21.5 billion using a common benchmark ratio as described in the amendment.

The Fourth Amendment became effective for all members on August 10, 2009 when the Fund certified that at least three-fifths of the IMF membership (112 members) with 85 percent of the total voting power accepted it. On August 5, 2009, the United States joined 133 other members in supporting the Amendment. The special allocation will be implemented on September 9, 2009. Buying and selling SDRs

IMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish to sell SDRs in order to adjust the composition of their reserves. The IMF acts as a broker between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. For more than two decades, the SDR market has functioned through voluntary trading arrangements. Under these arrangements a number of members and one prescribed holder have volunteered to buy or sell SDRs within limits defined by the arrangement. In view of the expected increase in the volume of transactions following the 2009 SDR allocations, the number and size of the voluntary arrangements is being expanded to ensure continued liquidity of the voluntary SDR market.

In the event that there is insufficient capacity under the voluntary trading arrangements, the Fund can activate the designation mechanism. Under this mechanism, members with sufficiently strong external positions are designated by the Fund to buy SDRs with freely usable currencies up to certain amounts from members with weak external positions. This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.

Framework for the Fund’s Issuance of Notes

This paper sets out a framework for issuing notes to the official sector in order to facilitate a broadening of the Fund’s sources of supplementary resources.

Under the proposed framework the Executive Board would approve a common set of General Terms and Conditions (GTC) for two series of IMF notes (“Series A” and “Series B”). The Executive Board would further authorize the Managing Director to conclude individual Note Purchase Agreements (NPAs) with qualifying members or their central banks that are consistent with the terms of the Form NPA set forth in the Attachment, 2 ** up to a cumulative ceiling on total commitments under NPAs, as well as a ceiling on the maximum amount of Series A notes issued under a single NPA; the latter limit is consistent with the general per agreement limit on immediate encashability of borrowing that has been proposed for adoption by the Executive Board.

References

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