IMF Executive Board Completes the 2010 Review of SDR Valuation

Public Information Notice (PIN) No. 10/149
November 17, 2010

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On November 15, 2010, the Executive Board of the International Monetary Fund (IMF) completed the quinquennial review of Special Drawing Right (SDR) valuation and approved the revised weights for the four currencies that determine the value of the SDR (see Press Release No. 10/434). The currencies and their weights in the valuation basket are reviewed every five years unless the Board decides otherwise. The Board discussion was based on the staff paper Review of the Method of Valuation of the SDR.

Background

The SDR currently derives its value from a basket of four currencies: the U.S. dollar, the euro, pound sterling and the Japanese yen. The basket contains fixed amounts of the currency units which are valued at prevailing market exchange rates and summed to obtain the SDR’s value. This “standard basket” method has been accepted as the method that best ensures the stability of the SDR in terms of the major currencies under floating exchange rates.

At previous reviews the Executive Board adopted the criterion that the currencies included in the SDR are the four currencies issued by Fund members, or by monetary unions that include Fund members, whose exports of goods and services during the five-year period ending 12 months before the effective date of the revision had the largest value, and which have been determined by the Fund to be freely usable currencies in accordance with Article XXX (f) of the Articles of Agreement. A freely usable currency is a member’s currency that the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets. The relative weights of component currencies are to be determined by combining the value of exports and official reserves held by monetary authorities outside the country or monetary union that issues the respective currency, each averaged over the relevant five-year period.

According to the criteria agreed by the Executive Board in previous reviews, the financial instruments in the interest rate basket should be broadly representative of the range of financial instruments that are actually available to investors in a particular currency, and the interest rate on the instrument should be responsive to changes in underlying credit conditions in the corresponding money market. Instruments should also have risk characteristics that are similar to the official standing of the SDR itself, and should also reflect the actual choice of reserve managers.

In addition to approving the revised weights for the four currencies that determine the value of the SDR, the Executive Board also discussed several issues relating to the valuation of the SDR and the SDR interest rate, which are expected to be taken up in further work during 2011, in parallel with discussions on the reform of the international monetary system.

Executive Board Assessment

Executive Directors concluded the quinquennial review of valuation of the Special Drawing Right (SDR). While the decision adopted follows the established methodology, Directors looked forward to a work program to be initiated in 2011 to review the indicators used to guide future decisions on the SDR valuation basket, taking account of the broader discussions of the reform of the international monetary system.

Directors agreed that the U.S. dollar, euro, pound sterling, and Japanese yen should continue to be included in the SDR basket, with their relative weights continuing to reflect the value of international reserves held in that currency and the value of exports of goods and services by the member issuing that currency. They agreed to round the initial currency weights to one decimal place, removing the need for significant adjustments under the former method of rounding to the nearest whole percentage point. Directors also considered that the financial instruments used in determining the SDR interest rate remain appropriate.

Directors noted that although China has become the third-largest exporter of goods and services on a five-year average basis and has taken steps to facilitate international use of its currency, the Chinese renminbi does not currently meet the criteria to be a freely usable currency and it would therefore not be included in the SDR basket at this time. Directors urged that this issue be kept under review in light of developments.

Directors welcomed the planned work program to review issues related to the valuation of the SDR and the SDR interest rate basket, and offered preliminary views on how to take it forward. This work program will cover a review of the indicators used to select new currencies for the SDR basket, the number of currencies in the basket, and the method of determining currency weights, including the relative roles of trade and financial indicators and the scope for considering supplementary financial indicators. Directors also supported future work on facilitating the replication of the official SDR interest rate in financial markets, including possible options to align the maturity of the underlying instruments with the frequency of adjustments in the SDR interest rate. A few Directors encouraged staff to consult more widely with reserve managers and SDR users, with a view to enhancing the attractiveness of the SDR as a reserve asset.

Directors supported further consideration of the scope for expanding the currency coverage of the Composition of Official Foreign Exchange Reserves (COFER) database. While improved data availability and accuracy are critical to these efforts, the right balance needs to be found so as not to impose an undue reporting burden on members. A number of Directors encouraged wider reporting by members of the currency composition of their reserves.

Directors agreed that the next review of the method of valuation of the SDR should take place by 2015, with some noting that an earlier review should be considered if warranted by developments.



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