## Chapter 6 Functional Categories in External Accounts ## Source details **Canonical URL:** [Chapter 6 Functional Categories in External Accounts](https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/chapter-6-functional-categories-in-external-accounts-v7.pdf) ## Other formats - [Markdown version](/-/media/files/data/statistics/bmp7/draft-chapters/chapter-6-functional-categories-in-external-accounts-v7.pdf.md) - [Structured JSON version](/-/media/files/data/statistics/bmp7/draft-chapters/chapter-6-functional-categories-in-external-accounts-v7.pdf.json) --- ### Functional categories overview - Five functional categories of investment in the international external accounts: - (a) direct investment - (b) portfolio investment - (c) financial derivatives (other than reserves) and employee stock options - (d) other investment - (e) reserve assets - Purpose and role: - Functional categories augment the financial assets and liabilities classification by adding relationship and motivation dimensions to distinguish different economic behaviors. - Reserve assets are shown separately because they serve the distinct motive to meet balance of payments financing needs and undertake market intervention to influence the exchange rate. - Compatibility with monetary and financial statistics and flow of funds data (which primarily use the instruments classification) is desirable. ### Linkages with instrument classification - Instruments from the 202508 SNA Financial Assets and Liabilities Classification map to functional categories (DI, PI, FD, OI, RA) with specific applicability: - AF1 Monetary gold and SDRs (AF11 Monetary gold; AF12 special drawing rights mapped as SDRs: assets = reserve assets; liabilities = other investment) - AF2 Currency and deposits (AF21 currency; AF221 interbank positions; AF229 other transferable deposits; AF29 other deposits) - AF3 Debt securities - AF4 Loans - AF5 Equity and investment fund shares (AF511 listed shares; AF512 unlisted shares; AF519 other equity) - AF52 Investment fund shares/units (AF521 money market fund shares/units; AF522 other investment fund shares/units) - AF6 Insurance, pension, and standard guarantee schemes (AF61–AF66) - AF7 Financial derivatives and employee stock options (AF71–AF72) - AF8 Other accounts receivable/payable (AF81 trade credit and advances; AF89 other accounts receivable/payable) - Note: X denotes applicable functional categories; x denotes cases considered relatively uncommon. - Comment: unlisted shares must be liquid, as stated in paragraph 6.87. ### Direct investment — definition, scope, and relationships - Definition: - Direct investment is cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise resident in another economy. - Included items: - equity that gives rise to control or influence - investment in indirectly influenced or controlled enterprises - investment in fellow enterprises - debt (except selected debt set out in paragraph 6.28) - reverse investment - Framework: - The Framework for Direct Investment Relationships (FDIR) provides criteria for determining direct investment relationships, based on control and influence. - The definition aligns with the fourth fifth edition of the OECD Benchmark Definition of Foreign Direct Investment. - Immediate and indirect relationships: - Immediate direct investment relationship threshold: ownership that entitles to 10 percent or more of the voting power. - Control: ownership of more than 50 percent of voting power. - Significant degree of influence: ownership from 10 to 50 percent of voting power. - Indirect relationships arise through ownership chains where control or influence is transmitted via intermediate enterprises. - Principles for transmission through chains: - (a) Control can be passed down a chain of ownership as long as control exists at each stage. - (b) Influence can be generated at any point down a chain of control. - (c) Influence can be passed only through a chain of control but not beyond. - Example: a chain with each link at 60 percent voting power implies control throughout despite progressively smaller indirect equity percentages. - Affiliates and classifications: - A direct investment enterprise relative to a direct investor is: - (a) a subsidiary — enterprise over which the investor can exercise control, or - (b) an associate — enterprise over which the investor can exercise a significant degree of influence, but not control. - Under FDIR, direct investor relationships include immediate subsidiaries/associates and specified indirect subsidiaries/associates; an associate of an associate is excluded. - Affiliates include direct investor(s), direct investment enterprises (immediate and indirect), and fellow enterprises (under the same immediate or indirect investor but not controlling each other). ### Practical methods, voting power, and who can be a direct investor - Practical methods: - Where FDIR cannot be fully applied, methods such as the participation multiplication method and the direct influence and indirect control method may be used. Operational details are available in the OECD Benchmark Definition and the IMF’s Coordinated Direct Investment Survey Guide. - Voting power issues: - Voting power is obtained through ownership of equity; proportionate under one-share one-vote. - Voting power may differ from share ownership due to unincorporated entities, “golden shares” or dual share classes, temporary repurchase agreements, warrants, and indirect ownership via intermediate entities. - Who can be a direct investor: - (a) an individual or household - (b) an enterprise, incorporated or unincorporated, public or private - (c) an investment fund - (d) a government, central bank, or international organization (special treatments noted) - (e) a nonprofit institution investing in a for-profit entity (relationship between two nonprofit institutions excluded) - (f) an estate, trustee in bankruptcy, or other trust - (g) any combination of two or more of the above ### Combinations, institutional classifications, and special cases - Combination treated as single direct investor only if: - they are in a direct investment relationship or have a family relationship (for individuals); and - they are resident in the same economy as each other. - A combination cannot include any investor resident of the same economy as the direct investment enterprise. - Equity held by a group acting in combination can be summed to establish control or influence; equity held by an associate is not summed with that from any other enterprise. - Institutional special cases: - Governments may be direct investors; government equity that could qualify as both direct investment and reserve assets is included in direct investment; debt instruments are classified as reserve assets if reserve criteria are met. - Nonprofit institutions may be direct investors in for-profit entities but may not be direct investment enterprises. - Direct investment enterprises are always corporations (statistical term) with enumerated exceptions (central banks, investment funds, households, NPISHs, governments may be direct investors but not DIEs; public corporations may sometimes be DIEs). ### Coverage of transactions, intercompany lending, exclusions, and pass-through funds - Coverage: - Direct investment includes most financial transactions and positions between affiliates resident in different economies and investment income associated with direct investment positions. - Intercompany lending: - Describes direct investment debt positions between affiliated enterprises; includes debt instrument transactions and positions other than those excluded by paragraph 6.28; identified separately for debt analysis. - Inclusion of debt and other claims: - Debt and other financial claims without voting power are included in direct investment if a direct investment relationship exists. - Transactions between affiliates in financial assets issued by an unrelated third party are not direct investment transactions. - Insurance technical reserves are included in direct investment when parties are in a direct investment relationship (e.g., captive insurance, affiliated reinsurance). - Exclusions — debt between selected affiliated financial corporations: - Debt between the following affiliated financial corporations is excluded from direct investment and included under portfolio or other investment: - (a) deposit-taking corporations (both central banks and deposit-taking corporations other than the central bank) - (b) investment funds - (c) other financial intermediaries except insurance corporations and pension funds - Both affiliated parties must be of the selected types for the exclusion to apply. - Pass-through funds (funds in transit): - Defined as funds that pass through a direct investment enterprise resident in an economy to an affiliate in another economy without staying in the first economy. - Included in direct investment in standard presentations to avoid distortion and promote symmetry. - Compilers in economies with large pass-through funds should consider compiling supplementary data and the Manual recommends a supplemental framework by UIE, UHE, and pass-through funds. ### Beginning, ending, reclassification, and types of transactions - Threshold and reclassification: - The whole of the transaction that reaches or surpasses the 10 percent voting-power threshold is included under direct investment. - Transactions before the threshold are generally not classified as direct investment (exceptions apply). - Prior positions are reclassified at the time the direct investment relationship comes into existence. - Example: a prior 9 percent holding with an acquisition of 2 percent results in a direct investment transaction involving 2 percent of voting power and reclassification entries reducing portfolio investment by the prior 9 percent and increasing direct investment correspondingly. - Once threshold crossed either upward or downward, related debt positions should be changed by a reclassification entry in the other changes in financial assets and liabilities account. - Classification by instrument and sector: - Direct investment is classified by instruments (equity and debt) and institutional sectors (central bank; deposit-taking corporations except the central bank; general government; other financial corporations; nonfinancial corporations; households and NPISHs). - Memorandum items include: - (a) investment by a direct investor in its direct investment enterprise - (b) reverse investment by a direct investment enterprise in its own immediate or indirect direct investor - (c) investment between resident and nonresident fellow enterprises (combining equity and debt) - Reinvestment of earnings: - Reinvestment of earnings should be reported as a memorandum item in the balance of payments’ financial account, consistent with the reinvested earnings component recorded in the earned income account. ### Reverse investment and directional principle presentation - Reverse investment: - Occurs when a direct investment enterprise acquires an equity or other financial claim on its own immediate or indirect direct investor, provided it does not own equity comprising 10 percent or more of the voting power in that direct investor. - If two enterprises each have 10 percent or more of the voting power in the other, there are two mutual direct investment relationships rather than reverse investment. - Data on reverse investment and investment between fellow enterprises should be separately published where significant. - Directional principle: - Organizes direct investment data by direction of the direct investment relationship (direct investment abroad — outward; direct investment in the reporting economy — inward), contrasting with asset-liability presentation. - Directional presentation accounts for control and influence and treats reverse investment as equivalent to withdrawal of investment. - Under the directional principle, direct investment abroad and direct investment in the reporting economy include both assets and liabilities (negative values may arise). - In principle treatment of fellow enterprises under directional principle: - All assets and liabilities between fellow enterprises are shown in direct investment abroad when the ultimate controlling parent is a resident; shown in direct investment in the reporting economy when the ultimate controlling parent is a nonresident. - If residence of the ultimate controlling parent is unknown: assets treated as direct investment abroad and liabilities treated as direct investment in the reporting economy (practical alternative). - Conversion formulas (asset/liability to directional): - Asset/liability presentation components: - Direct investment assets — Equity and debt instruments: A1 + A3 + A5; Debt instruments: A2 + A4 + A6 - Direct investment liabilities — Equity and debt instruments: L1 + L3 + L5; Debt instruments: L2 + L4 + L6 - Directional (in principle): - Direct investment abroad (equity and debt instruments): A1 – L3 + A5.1 – L5.2 - Direct investment abroad (debt instruments): A2 – L4 + A6.1 – L6.2 - Direct investment in the reporting economy (equity and debt instruments): L1 – A3 + L5.1 – A5.2 - Direct investment in the reporting economy (debt instruments): L2 – A4 + L6.1 – A6.2 - Acceptable practical alternative when ultimate controlling parent cannot be identified: - Direct investment abroad (equity and debt instruments): A1 – L3 + A5 - Direct investment abroad (debt instruments): A2 – L4 + A6 - Direct investment in the reporting economy (equity and debt instruments): L1 – A3 + L5 - Direct investment in the reporting economy (debt instruments): L2 – A4 + L6 ### Round tripping and non-qualifying relationships - Round tripping: - Channeling resident funds through an entity in another economy and reinvesting them back as direct investment. - May involve entities with limited operations and multiple intermediate economies. - Compilers should consider publishing supplementary information where significant. - Relationships that resemble but are not direct investment: - Board representation, common boards without formal relationships, participation in policymaking, material intercompany transactions, interchange of managerial personnel, technical information provision, or long-term loans below market rates do not qualify unless voting-power definition is met. - Creditors exercising influence in insolvency are not direct investors unless debt is converted to equity with voting power. - Substantial foreign ownership without any investor or group having a direct investment stake does not qualify. ### Supplementary classifications and topics - Use of Chapter 5 classifications for instrumental, maturity, and currency breakdowns is encouraged for reconciliation. - Intercompany lending should be separately identified per External Debt Statistics Guide. - Partner-economy classification may be by immediate or ultimate investor/host economy; see Annex 9 and OECD Benchmark Definition. - Industry classification: - ISIC (or regional/national equivalent) may be used; preferred to prepare both inward and outward on dual basis; if only one, prefer industry of the direct investment enterprise. - Supplementary topics: - Greenfield direct investment and extension of capacity definitions: greenfield/direct investment enterprises established within the last three years; capital injections to expand capacity for enterprises existing three years or more (Annex 6 guidance). - Cash pooling arrangements and their statistical treatments described in Annex 6. - Overlap with SNA subsectors: - Foreign-controlled corporations subsector includes all subsidiaries and branches resident in the economy and any associates or other enterprises under de facto foreign control. ### Classification of portfolio investment, financial derivatives, and other investment - Portfolio investment: - Defined as cross-border transactions and positions in debt or equity securities other than those in direct investment or reserve assets. - Investment fund shares/units evidenced by securities and not reserve assets or direct investment are included in portfolio investment; investments in investment fund shares are always treated as portfolio investment irrespective of ownership of voting power. - Exchange-traded financial derivatives are excluded from portfolio investment. - Financial derivatives and employee stock options: - Largely coincide with financial instrument classification. - Derivatives associated with reserve asset management are excluded and included in reserve assets. - No primary earned income accrues on financial derivatives; amounts accruing under contracts are classified as revaluations and included in other changes in financial assets and liabilities. - Recording derivatives separately for assets and liabilities is encouraged; net reporting acceptable if gross measurement infeasible. - Other investment: - Residual category including other equity, currency and deposits, loans (including use of IMF credit and loans from the IMF), insurance technical reserves and pension entitlements, trade credit and advances, other accounts receivable/payable, and SDR allocations (SDR holdings are included in reserve assets). - Other equity and equity in international organizations (not in the form of securities) is included in other investment when not direct investment or reserve assets (paragraph 6.62). - Transactions/positions in certain debt instruments between selected affiliated financial corporations and debt instruments associated with notional cash pooling arrangements are recorded as other investment. ### Reserve assets — definition, components, and qualifying criteria - Definition and main purposes: - Reserve assets are external assets readily available to and controlled by monetary authorities for: - meeting balance of payments financing needs; - intervention in exchange markets to affect the currency exchange rate; and - other related purposes such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing (paragraph 6.64). - Reserve assets must be foreign currency assets that actually exist; potential assets are excluded (paragraph 6.64). - Components (paragraph 6.76): - monetary gold - SDR holdings - reserve position in the IMF - currency and deposits - securities (including debt and equity securities) - financial derivatives - other financial claims (loans and other financial instruments) - Residence, control, availability criteria: - Residence: other than gold bullion, reserve assets must be financial claims on nonresidents; foreign currency claims on residents are not reserve assets (paragraph 6.65). - Definition of monetary authorities: encompasses the central bank and certain operations attributed to the central bank; supplementary information if extensive reserve assets are held outside the central bank (paragraph 6.66). - Control: resident entities’ assets may be treated as reserve assets if the resident can transact only with monetary authorities’ approval, authorities have access on demand, and agency role is confirmed by law or contract (paragraph 6.67). - Availability: reserve assets must be readily available, liquid, and usable with minimum cost and time without unduly affecting value (paragraph 6.69). - Reserve assets should generally be of high quality and denominated and settled in foreign currency (paragraphs 6.70, 6.71). ### Specific reserve-asset types and transactions - Monetary gold: - Consists of gold bullion (including gold coins, ingots, bars with a purity of at least 995/1,000, and gold bullion held in allocated and pool allocated gold accounts) and unallocated gold accounts that give title to claim delivery of gold (paragraph 6.78). - Allocated, pool allocated and unallocated gold accounts are distinct from accounts indexed to gold that do not give title to claim delivery of gold; the latter are classified as currency and deposits (paragraph 6.79). - If monetary authorities deposit gold bullion in an unallocated gold account, the gold bullion is demonetized and recorded in the other changes in assets account (paragraph 6.80). - Gold swap accounting: allocated and unallocated gold accounts out on swap for cash collateral are either included as reserve assets of the original owner (with the loan reported as a reserve-related liability as a memorandum item) if the liability is to a nonresident, or excluded and demonetized/reclassified if not readily available (paragraph 6.82). Any loan liability to a nonresident from a gold swap is recorded within “other investment,” with the foreign currency received recorded as an increase in currency and deposits within reserve assets, provided it meets reserve asset criteria (paragraph 6.82). - SDR holdings: - SDR holdings are reserve assets created by the IMF and are equivalent to liquid balances in convertible currencies in nearly every respect (paragraph 6.84). - Reserve position in the IMF: - Comprises the “reserve tranche” and any indebtedness of the IMF in the General Resources Account readily available to the member country, including lending under GAB and NAB (paragraph 6.85). - Deposits: - Included deposits are those held in foreign central banks, the BIS, and other nonresident deposit-taking corporations, and deposit agreements with IMF Trust Accounts readily callable to meet balance of payments financing needs (paragraph 6.86). ### Securities, repos, reverse repos, and securities lending - Securities: - Include liquid and marketable equity and debt securities issued by nonresidents; long-term securities (such as 30-year U.S. Treasury bonds) are included. - Unlisted securities are, in principle, excluded unless liquid enough to qualify as reserve assets (paragraph 6.87). - Repos and reverse repos: - Securities transferred under repurchase agreements remain assets of the original authorities but are generally not readily available for reserve purposes; accounting options depend on availability and counterparty residency (paragraph 6.88). - Foreign currency received as cash collateral that meets reserve criteria should be recorded as an increase in currency and deposits within reserve assets; loan liabilities should be recorded under other investment (paragraph 6.88). - For reverse repos, funds provided are recorded as a decrease in currency and deposits within reserve assets unless the repo asset is liquid and available on demand, in which case it can be part of reserve assets in "other financial claims" (paragraph 6.89). - Securities lending without cash: - No transaction is reported; securities lent remain assets of original authorities; collateral received is not included as reserve assets of the receiving authorities (paragraph 6.90). - Financial derivatives in reserve assets: - Recorded only if pertaining to reserve management, integral to valuation of such assets, and under effective control of monetary authorities; recorded on a net basis at market value (paragraph 6.91). - Other financial claims: - Include loans to nonresident non-deposit-taking corporations, long-term loans to IMF Trust Accounts such as the Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST) that are readily repayable, loans arising from reverse repos (unless classified as deposits), and other foreign currency assets available for immediate use (paragraph 6.92). ### Special purpose government funds (sovereign wealth funds) and pooled assets - Special purpose government funds (SWFs): - Created and owned by general government for macroeconomic purposes and commonly invest in foreign financial assets; often established from balance of payments surpluses, official foreign currency operations, proceeds of privatizations, fiscal surpluses, and/or commodity export receipts (paragraph 6.93). - Key determination: whether legal or administrative guidance encumbers assets so they are not readily available to the monetary authorities (paragraph 6.94). - If assets are on central bank books or agency allowing monetary authorities control, presumption is inclusion as reserve assets (if other criteria met). If held in long-term fund with separate legal identity, presumption is exclusion from reserve assets (paragraphs 6.95–6.96). - Final determination depends on readiness of availability and whether a liquid claim in foreign currency on nonresidents exists; earmarked assets that could be used to meet balance of payments financing needs are reserve assets absent legal impediments (paragraphs 6.97–6.98). - Classification by nature (deposits, securities, other) for assets that meet reserve definition; others are classified in the financial account and IIP under appropriate instrument and functional category (paragraph 6.98). - Pooled assets: - Participant’s financial claim on the investment vehicle must be readily available and a liquid foreign-currency claim on nonresidents to qualify as reserve assets (paragraphs 6.99–6.100). - Factors affecting inclusion include ability to raise external liquidity in foreign currency and concentration of underlying assets in domestic claims or domestic currency (paragraph 6.100). - If transaction requires selling the claim back to the vehicle, the claim might be classified as a nonnegotiable investment fund share ("other financial claim"); claims that do not meet reserve criteria are classified by nature in the financial account (paragraph 6.101). ### Central bank swap arrangements and related transactions - Off-market reciprocal central bank currency swap arrangements: - When activated and money drawn, recorded as an exchange of deposits with maintenance of value; deposits acquired by the initiating central bank are treated as reserve assets because they provide usable assets for balance of payments financing needs (paragraph 6.102). - The liability deposit account in domestic currency fully indexed to a foreign currency should be treated as denominated in that foreign currency; periodic revaluation adjustments to the liability should reflect total domestic currency needed to buy the foreign currency including any interest payment (paragraph 6.102). - If exchange does not meet reserve criteria (e.g., subject to counterpart authorization), the deposit is recorded as "other investment" (paragraph 6.102-1). - Standard market-priced swap contracts are recorded as standard currency/foreign exchange swaps (exchange of deposits with simultaneous creation of a forward contract) (paragraph 6.102-2). - Reciprocal currency arrangements may take the form of securities repurchase agreements and should be treated as collateralized loans; cash-taking central bank can include foreign currency received in reserve assets if criteria are met; cash-receiving central bank should reclassify repoed-out securities from reserve assets to portfolio investment if no longer available for reserve use; cash-providing central bank should not include securities received as collateral in its reserve assets because economic ownership has not changed (paragraph 6.103). - Acquisitions/disposals by a central bank of liquid foreign currency claims from a domestic bank that change reserve composition are recorded through the other changes in volume account and are not recorded in the balance of payments because the transaction is between residents (paragraph 6.104). ### Foreign assets that do not qualify, pledged/frozen assets, and exclusions - Non-qualifying assets: - Lines of credit (including IMF arrangements such as the Flexible Credit Line and the Precautionary and Liquidity Line) and foreign exchange resources obtainable under swap agreements are not reserve assets because they are not existing financial claims (paragraph 6.105). - Real estate and precious metals/stones (silver, diamonds) are not reserve assets (paragraph 6.105). - Capital subscriptions to international organizations not readily available are not reserve assets and are included in other investment unless in securities form (paragraph 6.106). - Pledged and frozen assets: - Encumbered assets that are not readily available should be excluded from reserve assets (paragraph 6.107). - Examples include collateral used for third-party loans/payments when encumbered; assets pledged by monetary authorities as condition for investing in domestic securities if encumbered; assets lent by monetary authorities not available until maturity; assets provided as collateral under reverse transactions not available for reserve use (paragraph 6.108). - Exclusion limited to value of pledge (example: if pledge valued at 100, maximum excluded from reserve assets is 100) (paragraph 6.109). - Assets frozen by foreign governments or international organizations (e.g., frozen SDR holdings, reserve positions in the IMF) should be reclassified to the relevant functional category such as portfolio investment or other investment; frozen monetary gold is demonetized or reclassified accordingly (paragraph 6.110). ### Additional exclusions and special considerations - Window dressing: - Foreign currency claims transferred to monetary authorities just prior to certain reporting dates with reversals soon after should not be counted as reserve assets (paragraph 6.111). - Regional payments arrangements and bilateral payments agreements: - Net creditor positions in regional payments arrangements classified as loans in other investment and not included in reserve assets unless readily available; net asset balances in bilateral payments agreements conventionally excluded from reserve assets (paragraph 6.112). - Working balances of government agencies are not included in reserve assets (paragraph 6.112). - Assets owned by monetary authorities that do not meet reserve criteria are classified in the financial account and IIP under appropriate instrument and functional category (paragraph 6.113). - Currency unions and adopted-currency arrangements raise specific reserve-asset issues (paragraph 6.114). ### Reserve-related liabilities and Net International Reserves (NIR) - Reserve-related liabilities — definition and components: - Foreign currency liabilities of the monetary authorities that can be considered direct claims by nonresidents on reserve assets (paragraph 6.115). - Components include: - the value of the SDR allocation and loans from the IMF to monetary authorities - foreign currency loan and deposit liabilities of monetary authorities to nonresidents, including those from foreign currency swaps with other central banks, loans from BIS, and from other deposit-takers - foreign currency loan liabilities to nonresidents associated with securities the monetary authorities have repoed out - foreign currency securities issued by monetary authorities owed to nonresidents - other foreign currency liabilities to nonresidents, including foreign currency accounts payable and financial derivatives recorded on a net basis (paragraph 6.116) - Exclusions: liabilities to residents and liabilities both denominated and settled in domestic currency (paragraph 6.116). - Short-term reserve-related liabilities on a remaining maturity basis are a memorandum item to the IIP (paragraph 6.115). - Net International Reserves (NIR) — standardized definition: - Net International Reserves = Reserve assets minus predetermined short-term net foreign currency drains. - Predetermined short-term net foreign currency drains (FCD) are contractual foreign currency obligations scheduled to come due during the 12 months ahead recorded at cash-flow value when flows take place (IRFCL Template). - FCD include short-term on- and off-balance-sheet foreign currency obligations to residents and nonresidents; they also include short-term obligations of the central government as payment would usually involve use of RA. - Avoiding double counting: - When notional values of forwards/swaps are in FCD, corresponding market values of those derivatives recorded in RA should be excluded from NIR calculation to avoid double counting (only market values of foreign exchange forwards/swaps for which notional values are in Section II.2 should be excluded; market values of other derivative types remain in RA). - Where notional values of non-deliverable forwards (NDFs) are included in FCD, they should be excluded in NIR calculation as payment at maturity would involve market value of the contract (market value included in RA if contract settled in foreign currency). - Relationship to frameworks: - Concepts covered by the Manual and Guidelines for the IRFCL Template; compilation of IRFCL Template required for SDDS and SDDS Plus subscribers (practical data collection note). - Decomposition: - Section II of IRFCL Template allows decomposition between monetary authorities and central government drains though often not provided; in rare cases where central government has sufficient short-term FX assets held overseas, central government short-term liabilities may be excluded from FCD in NIR calculation (liabilities still recorded in IRFCL Template). *Source: International Monetary Fund — Chapter 6, Functional Categories in External Accounts* ### Chapter 6 Functional Categories in External Accounts ### Chapter 6 Functional Categories in External Accounts ### Functional categories overview - Five functional categories of investment in the international external accounts: - (a) direct investment - (b) portfolio investment - (c) financial derivatives (other than reserves) and employee stock options - (d) other investment - (e) reserve assets - Functional categories augment the financial assets and liabilities classification (Chapter 5) by adding relationship and motivation dimensions to distinguish different economic behaviors. - Purpose: facilitate analysis by distinguishing categories that exhibit different economic motivations and patterns of behavior. - Reserve assets are shown separately because they serve the distinct motive to meet balance of payments financing needs and undertake market intervention to influence the exchange rate. - Monetary and financial statistics and flow of funds data primarily use the instruments classification; compatibility with international external accounts is desirable. ### Linkages with instrument classification - Functional categories are linked to the 202508 SNA Financial Assets and Liabilities Classification; instruments map to functional categories (DI, PI, FD, OI, RA) with specific applicability noted for: - AF1 Monetary gold and SDRs (AF11 Monetary gold; AF12 special drawing rights mapped as SDRs: assets = reserve assets; liabilities = other investment) - AF2 Currency and deposits (AF21 currency; AF221 interbank positions; AF229 other transferable deposits; AF29 other deposits) - AF3 Debt securities - AF4 Loans - AF5 Equity and investment fund shares (AF511 listed shares; AF512 unlisted shares; AF519 other equity) - AF52 Investment fund shares/units (AF521 money market fund shares/units; AF522 other investment fund shares/units) - AF6 Insurance, pension, and standard guarantee schemes (AF61–AF66) - AF7 Financial derivatives and employee stock options (AF71–AF72) - AF8 Other accounts receivable/payable (AF81 trade credit and advances; AF89 other accounts receivable/payable) - Note: X shows applicable functional categories; x shows cases considered to be relatively uncommon. - Comment: unlisted shares must be liquid, as stated in paragraph 6.87. ### Direct investment — definition and scope - Direct investment is cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise resident in another economy. - Direct investment includes: - equity that gives rise to control or influence - investment in indirectly influenced or controlled enterprises - investment in fellow enterprises - debt (except selected debt set out in paragraph 6.28) - reverse investment - The Framework for Direct Investment Relationships (FDIR) provides criteria for determining whether cross-border ownership results in a direct investment relationship, based on control and influence. - The definition aligns with the fourth fifth edition of the OECD Benchmark Definition of Foreign Direct Investment. ### Direct investment relationships and affiliates - A direct investment relationship arises when an investor resident in one economy makes an investment that gives control or a significant degree of influence on the management of an enterprise resident in another economy. - Enterprises in a direct investment relationship are called affiliates or affiliated enterprises. - All enterprises under the control or influence of the same direct investor are in a direct investment relationship with each other. ### Definitions of control and significant degree of influence - Two forms of immediate direct investment relationships: - Immediate direct investment relationships arise when a direct investor directly owns equity that entitles it to 10 percent or more of the voting power in the direct investment enterprise. - Control is determined to exist if the direct investor owns more than 50 percent of the voting power in the direct investment enterprise. - A significant degree of influence is determined to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise. - Indirect direct investment relationships arise through ownership chains where an entity is able to exercise indirect control or influence via intermediate enterprises. ### Principles for indirect transmission of control and influence - (a) Control can be passed down a chain of ownership as long as control exists at each stage. - (b) Influence can be generated at any point down a chain of control. - (c) Influence can be passed only through a chain of control but not beyond. - The FDIR applies a 10 percent threshold for immediate relationships; transmission through chains of ownership is based on whether a chain of control exists (not on a fixed equity share at each level). Example: a chain with each link at 60 percent voting power implies control throughout despite progressively smaller indirect equity percentages. ### Subsidiaries, associates, and fellow enterprises - In relation to a direct investor, a direct investment enterprise is either: - (a) a subsidiary — an enterprise over which the direct investor is able to exercise control, or - (b) an associate — an enterprise over which the direct investor is able to exercise a significant degree of influence, but not control. - Under the FDIR, an entity is a direct investor in another entity where the second entity is: - (a) an immediate subsidiary of the direct investor; - (b) an immediate associate of the direct investor; - (c) a subsidiary of a subsidiary of the direct investor (indirect subsidiary); - (d) a subsidiary of an associate of the direct investor (indirect associate); - (e) an associate of a subsidiary of the direct investor (indirect associate). - No direct investor–direct investment enterprise relationship exists where the entity is an associate of an associate of the direct investor (influence considered too diluted). - Affiliates consist of: - (a) direct investor(s), immediate and indirect; - (b) direct investment enterprises (subsidiaries, associates, subsidiaries of associates), immediate and indirect; - (c) fellow enterprises — enterprises under the control or influence of the same immediate or indirect investor but not controlling or influencing each other. ### Practical application and methods - Practical difficulties in applying the FDIR fully may lead to using methods such as the participation multiplication method and the direct influence and indirect control method. - For operational details, see the OECD Benchmark Definition of Foreign Direct Investment and the IMF’s Coordinated Direct Investment Survey Guide. ### Requirements and examples concerning voting power - Voting power is obtained through ownership of equity; under one-share one-vote, voting power is proportional to ownership of ordinary shares. - Voting power may differ from share ownership due to: - unincorporated entities (no shares), - “golden shares” or dual classes of shares (disproportionate voting power), - temporary repurchase agreements (voting power not recognized because no change in economic ownership), - holding of warrants (no voting power until warrants exercised). - Voting power can be obtained indirectly via ownership of shares in intermediate entities or through chains of intermediate entities. ### Who can be a direct investor - A direct investor could be: - (a) an individual or household; - (b) an enterprise, incorporated or unincorporated, public or private; - (c) an investment fund; - (d) a government, central bank, or international organization (with special treatments for governments that have direct investment enterprises for fiscal purposes discussed in paragraphs 8.24–8.26); - (e) a nonprofit institution investing in an enterprise that operates for profit (relationship between two nonprofit institutions is excluded from direct investment); - (f) an estate, trustee in bankruptcy, or other trust; - (g) any combination of two or more of the above. *International Monetary Fund — Chapter 6, Functional Categories in External Accounts* ### 6.21 For two or more individuals or other entities to be considered a combination, and thus be regarded ### chapter-6-functional-categories-in-external-accounts-v7 - 6.21–6.42 ### Definitions and scope of a combination as a single direct investor - Two or more individuals or other entities are considered a combination, and thus regarded as a single direct investor, only if: - they are in a direct investment relationship or have a family relationship (for individuals); and - they are resident in the same economy as each other. - A combination cannot include any investor that is resident of the same economy as the direct investment enterprise. - Equity ownership held by a group of related investors acting in combination can be summed to establish either control or influence. - Equity held by an associate is not summed with that from any other enterprise to establish either control or influence. ### Institutional classifications and special cases - Governments: - A government may be a direct investor. - If a government equity holding could qualify as both direct investment and reserve assets, it is included in direct investment; debt instruments are classified as reserve assets if reserve criteria are met. - Nonprofit institutions: - A nonprofit institution may not be a direct investment enterprise because it is not created with the intention of repatriating earnings to its investor. - A nonprofit institution may be a direct investor in a for-profit entity. - Direct investment enterprise (DIE) definition and exceptions: - A direct investment enterprise is always a corporation (statistical term includes branches, notional resident units, trusts, quasi-corporations, investment funds, and incorporated entities) with exceptions: - Central banks can be direct investors, but cannot be direct investment enterprises. - Investment funds (MMF and non-MMF) can be direct investors, but cannot be direct investment enterprises because investments in investment fund shares are considered portfolio investment. - Households, NPISHs, or governments can be direct investors, but they cannot be direct investment enterprises. - A public corporation may, in some instances, be a direct investment enterprise. ### Coverage of direct investment flows and positions - Direct investment includes most financial transactions and positions between affiliates resident in different economies and investment income associated with direct investment positions. - Intercompany lending: - Intercompany lending describes direct investment debt positions between affiliated enterprises; it includes debt instrument transactions and positions other than those excluded by paragraph 6.28 and is not limited to loans. - Intercompany lending is identified separately for debt analysis because it has different implications for risk and vulnerability compared with debt between unrelated parties. - Inclusion of debt and other financial claims: - Debt and other financial claims that do not involve voting power are included in direct investment transactions and positions if a direct investment relationship exists between the parties. - Debt instruments other than monetary gold, SDRs, currency, interbank positions, and pension and related entitlements potentially can be included in direct investment. - Transactions between affiliates in financial assets issued by an unrelated third party are not direct investment transactions. - Insurance technical reserves are included in direct investment when the parties are in a direct investment relationship (e.g., reinsurance between affiliated insurance corporations; captive insurance). ### Exclusions: debt between selected affiliated financial corporations - Debt between the following affiliated financial corporations is not classified as direct investment and is included under portfolio or other investment: - (a) deposit-taking corporations (both central banks and deposit-taking corporations other than the central bank); - (b) investment funds; and - (c) other financial intermediaries except insurance corporations and pension funds. - All debt positions between the selected types of affiliated financial corporations are excluded from direct investment; both affiliated parties must be one of the selected types (they need not be the same type). - Table 6.2 summary (functional category of debt between affiliated enterprises): - Direct investment liabilities (rows) vs Direct investment assets (columns) matrix entries: - When "Other sectors" lend to Deposit-taking corporations, Investment funds, Other financial intermediaries, the functional category is DI. - When Deposit-taking corporations, Investment funds, or Other financial intermediaries lend to Deposit-taking corporations, Investment funds, or Other financial intermediaries, the category is OI (or PI). - Note: DI—direct investment; PI—portfolio investment; OI—other investment. - "Other sectors" include General Government (S13), Other financial institutions (S126/S127/S128/S129), Non-financial corporations (S11) and households and Non-profit Institutions Serving Households (S14/S15). ### Other instrument coverage and special investment types - Exclusions: - Financial derivatives and employee stock options are excluded from direct investment and included in the functional category financial derivatives (other than reserves) and employee stock options. - Investment funds: - Investment funds may be direct investors or direct investment enterprises (with caveats above). - A “fund of funds” may be a direct investor in one of the funds it invests in. - In a master-feeder arrangement, a feeder fund that has 10 percent or more of the voting power in the master fund meets the FDIR definition of a direct investor. - Retail funds holding 10 percent or more of voting power in an enterprise are direct investors. - Real estate: - Direct investment may include real estate investment, including investment properties and vacation homes. - The normal ownership threshold for influence or control under the FDIR is applied. - If real estate investment is significant, compilers may publish such investment separately on a supplementary basis. - Equity in international organizations: - Equity in international organizations is excluded from direct investment, even when voting power is 10 percent or more. - Such equity is included in portfolio investment (if in the form of securities) or other investment—other equity and equity in international organizations (if not in the form of securities). - Equity in international organizations would not generally qualify as reserve assets because of lack of ready availability. ### Pass-through funds (funds in transit) - Definition and characteristics: - “Pass-through funds” or “funds in transit” are funds that pass through a direct investment enterprise resident in an economy to an affiliate in another economy, so the funds do not stay in the economy of the first enterprise. - These flows often have little impact on the economy they pass through and are associated with special purpose entities, holding companies, and financial institutions serving nonfinancial affiliates. - Identifying these flows in practice is complicated; there are no standard definitions or methods at the time of writing. - Treatment and rationale: - Pass-through funds are included in direct investment in standard presentations because: - (a) they are an integral part of a direct investor’s financial transactions and positions with affiliated enterprises; - (b) exclusion would distort and substantially understate direct investment financial flows and positions at aggregate levels; and - (c) inclusion promotes symmetry and consistency among economies. - For economies through which funds pass, it is useful to identify inflows and outflows not intended for use by the entity concerned. - Compilers in economies with large values of pass-through funds should consider compiling supplementary data on funds in transit, based on national definitions. - The Manual recommends a supplemental framework for statistics by ultimate investing economy (UIE), ultimate host economy (UHE), and pass-through funds; Annex 6 and the OECD Benchmark Definition provide detailed guidance on this supplemental framework. ### Domestic ownership links and chains of control - The FDIR does not exclude ownership links between enterprises resident in the same economy when identifying direct investment relationships. - A resident-to-resident link in a chain of control or influence does not preclude a direct investment relationship between enterprises resident in different economies. ### Beginning, ending, and reclassification of direct investment relationships - Threshold and treatment: - The whole of the transaction that reaches or surpasses the threshold of 10 percent or more of voting power is included under direct investment. - Transactions before that threshold are not generally classified as direct investment (exceptions: reverse investment and investment in other affiliates). - Prior positions are reclassified at the time the direct investment relationship comes into existence. - Example with exact numbers: - If a direct investor previously had 9 percent of voting power, then acquired 2 percent more, there would be a direct investment transaction by the purchaser involving 2 percent of voting power. - Reclassification entries in the other changes in financial assets and liabilities account would show a reduction of portfolio investment involving the previously held 9 percent and a corresponding increase in direct investment. - Subsequent transactions up to and including one that takes voting power below 10 percent are classified as direct investment. - Once the direct investment equity threshold has been crossed (either upward or downward), any debt positions between the parties should also be changed by a reclassification entry in the other changes in volume account. ### Types of direct investment transactions and memorandum items - Classification: - Direct investment is classified according to instruments (equity and debt instruments) and sectors (central bank; deposit-taking corporations except the central bank; general government; other financial corporations; nonfinancial corporations; and households and NPISHs). - Memorandum items (based on investor–entity relationships) include: - (a) investment by a direct investor in its direct investment enterprise (immediate relationship or not); - (b) reverse investment by a direct investment enterprise in its own immediate or indirect direct investor; and - (c) investment between resident and nonresident fellow enterprises, combining equity and debt investment. - Reinvestment of earnings: - Reinvestment of earnings should be reported as a memorandum item in the balance of payments’ financial account, consistent with the standard component reinvested earnings recorded in the earned income account. ### Reverse investment - Definition and conditions: - A direct investment enterprise may acquire an equity or other financial claim on its own immediate or indirect direct investor (reverse investment). - Reverse investment occurs when a direct investment enterprise lends funds to or acquires equity in its immediate or indirect direct investor, provided it does not own equity comprising 10 percent or more of the voting power in that direct investor. - If two enterprises each have 10 percent or more of the voting power in the other, there are two mutual direct investment relationships rather than reverse investment; each enterprise is both a direct investor and direct investment enterprise of the other. - Reporting: - Data on reverse investment and investment between fellow enterprises should be separately published, where significant. - Issues associated with investment income on reverse investment and investment between fellow enterprises (direct investment equity and debt instruments) are addressed in subsequent paragraphs. ### Directional principle presentation - Overview: - The directional principle organizes direct investment data according to the direction of the direct investment relationship, contrasting with the asset-liability presentation. - Differences between asset-liability and directional presentations arise from treatment of reverse investment and some investment between fellow enterprises. - The directional principle can be applied to the IIP, financial account, and investment income. - Definitions: - Direct investment abroad (outward direct investment): - Covers assets and liabilities between resident direct investors and their direct investment enterprises. - Also covers assets and liabilities between resident and nonresident fellow enterprises if the ultimate controlling parent is resident. - Direct investment in the reporting economy (inward direct investment): - Includes all liabilities and assets between resident direct investment enterprises and their direct investors. - Also covers assets and liabilities between resident and nonresident fellow enterprises if the ultimate controlling parent is nonresident. *Chapter 6 Functional Categories in External Accounts, International Monetary Fund* ### 6.43 The treatment of fellow enterprises under the directional principle is as follows: ### 6.43 The treatment of fellow enterprises under the directional principle ### Treatment of fellow enterprises under the directional principle - In principle, all assets and liabilities between fellow enterprises are shown in direct investment abroad when the ultimate controlling parent is a resident. Rationale: control and influence are exercised from the economy of the resident, so an investment in a fellow enterprise abroad is viewed as part of outward investment. - In principle, all assets and liabilities between fellow enterprises are shown in direct investment in the reporting economy when the ultimate controlling parent is a nonresident. Rationale: control and influence are exercised from another economy, so investment with the fellow enterprise abroad is viewed as part of inward investment. - If the residence of the ultimate controlling parent is unknown, assets are treated as direct investment abroad and liabilities are treated as direct investment in the reporting economy. This practical alternative is allowed because some economies may not be able to identify ultimate controlling parents and therefore cannot implement the preferred “in principle” basis. ### Analytical use of asset/liability and directional presentations (paragraphs 6.44–6.45) - Asset and liability presentation: - Consistent with monetary, financial, and other balance sheet data, facilitating comparison across datasets. - Needed on an immediate counterparty basis to adequately monitor flows and positions. - Important where SPEs transform characteristics of instruments (e.g., debt to equity, long-term to short-term, local to foreign currency, fixed to variable rates), because such transformations alter risk characteristics. - Directional principle presentation: - Assists in understanding motivation for direct investment and accounts for direction of control and influence. - Allows reverse investment to be interpreted as equivalent to withdrawal of investment. - Particularly useful for economies that host direct investment enterprises that lend to fellow enterprises or host direct investors that borrow from affiliates with large values of pass-through funds or round tripping, since large gross flows into and out of an economy may not be of primary interest to analysts. - Presentation status: - The directional presentation appears as supplementary items in the Manual. - Under the directional principle, direct investment abroad and direct investment in the reporting economy include both assets and liabilities, and thus negative values may arise. - Conversion details and further guidance are available in the OECD Benchmark Definition of Foreign Direct Investment. ### Calculations and Box 6.4: relationship between asset/liability and directional presentations - Asset/liability presentation components (as in Box 6.4): - Direct investment assets — Equity and debt instruments: A1 + A3 + A5; Debt instruments: A2 + A4 + A6 - Direct investment liabilities — Equity and debt instruments: L1 + L3 + L5; Debt instruments: L2 + L4 + L6 - Directional principle (in principle) formulas: - Direct investment abroad (outward direct investment): - Equity and debt instruments: A1 – L3 + A5.1 – L5.2 - Debt instruments: A2 – L4 + A6.1 – L6.2 - Direct investment in the reporting economy (inward direct investment): - Equity and debt instruments: L1 – A3 + L5.1 – A5.2 - Debt instruments: L2 – A4 + L6.1 – A6.2 - Acceptable practical alternative when ultimate controlling parent cannot be identified: - Direct investment abroad: - Equity and debt instruments: A1 – L3 + A5 - Debt instruments: A2 – L4 + A6 - Direct investment in the reporting economy: - Equity and debt instruments: L1 – A3 + L5 - Debt instruments: L2 – A4 + L6 ### Round tripping and related issues (paragraphs 6.46–6.47) - Round tripping: - Defined as channeling resident funds through an entity in another economy and then reinvesting them back into the original economy as direct investment. - The intermediate entity often has limited operations and may involve one or more intermediate economies. - Where significant, compilers should consider publishing supplementary information on the extent of round tripping. - Round tripping results in an economy being its own ultimate host economy or ultimate investing economy in partner data. - Relationships that resemble but are not direct investment: - Arrangements such as board representation, common boards without formal relationships, participation in policymaking, material intercompany transactions, interchange of managerial personnel, provision of technical information, or long-term loans below market rates do not qualify as direct investment unless they meet the control or influence definition via voting power. - Creditors exercising influence or control of an insolvent company are not direct investors unless debt is converted to equity with voting power. - Substantial foreign ownership without any individual investor or group having a direct investment stake does not qualify as direct investment. ### Additional detail and classifications for direct investment (paragraphs 6.48–6.52-2, 6.53–6.57) - Instrumental, maturity, and currency classifications from Chapter 5 can be used for direct investment; compilers should break down debt instruments relating to direct investment according to the SNA/MFSM instrument classification on a supplementary basis to reconcile with financial account, flow of funds, and sector balance sheets. - Intercompany lending should be identified separately (per External Debt Statistics: Guide for Compilers and Users). - Partner-economy classification for direct investment can be by immediate or ultimate investor or host economy; further detail in Annex 9 and the OECD Benchmark Definition of Foreign Direct Investment. - Industry classification: - ISIC (or regional/national equivalent) may be used. - Preferable to prepare estimates on both inward and outward direct investment on a dual basis (industry of direct investment enterprise and industry of direct investor). - If only one basis is feasible, the preferred industry classification is that of the direct investment enterprise. - Classify enterprises by predominant activity when involved in multiple activities. - Supplementary direct investment topics: - Greenfield direct investment and extension of capacity defined: greenfield/direct investment enterprises established within the last three years; capital injections used to expand capacity for enterprises existing three years or more (Annex 6 provides guidance). - Cash pooling arrangements (single legal account, physical cash pool, notional cash pool) and their statistical treatments are described in Annex 6. - Overlap with SNA subsectors: - The foreign-controlled corporations subsector in the SNA includes all subsidiaries and branches resident in the economy, and any associates or other enterprises under de facto foreign control. ### Classification of other functional categories (briefly) - Portfolio investment (paragraphs 6.54–6.57): - Defined as cross-border transactions and positions in debt or equity securities other than those in direct investment or reserve assets. - Investment fund shares/units evidenced by securities and not reserve assets or direct investment are included in portfolio investment; investments in investment fund shares are always treated as portfolio investment irrespective of ownership of voting power (see paragraph 6.24). - Exchange-traded financial derivatives are excluded from portfolio investment and classified separately. - Portfolio investment may be presented by instrument, maturity, or institutional sector. - Financial derivatives and employee stock options (paragraphs 6.58–6.60-1): - Largely coincide with the financial instrument classification; derivatives associated with reserve asset management are excluded and included in reserve assets (paragraph 6.91). - No primary earned income accrues on financial derivatives; amounts accruing under contracts are classified as revaluations and included in other changes in financial assets and liabilities. - Recording derivatives separately for assets and liabilities is encouraged; net reporting is acceptable if gross measurement is infeasible. - Other investment (paragraph 6.61): - Residual category including other equity, currency and deposits, loans (including use of IMF credit and loans from the IMF), insurance technical reserves and pension entitlements, trade credit and advances, other accounts receivable/payable, and SDR allocations (SDR holdings are included in reserve assets). *IMF — Chapter 6, Functional Categories in External Accounts* ### 6.62 Other equity and equity in international organizations is included in other investment, when it is not ### chapter-6-functional-categories-in-external-accounts-v7 - 6.62 Other equity and equity in international organizations is included in other investment, when it is not ### Classification of other equity and equity in international organizations - Other equity and equity in international organizations, as defined in paragraph 5.26, is not in the form of securities and therefore is not included in portfolio investment; it is included in other investment when it is not direct investment or reserve assets (paragraph 6.62). - Participation in some international organizations (e.g., ownership of currency union central banks) that is not in the form of securities tradable shares is classified as other equity in this item (paragraph 6.62). - Equity in some international organizations (for example, the BIS) may be in the form of unlisted shares; if the equity is not tradable by member countries, it is classified in other equity (paragraph 6.62). - Equity in quasi-corporations for branches and notional units for ownership of land, real estate, and other natural resources is usually included in direct investment; however, it is included in other investment if the share of voting power is less than 10 percent (paragraph 6.62). ### Treatment of affiliated financial corporation transactions and cash pooling - Transactions/positions in certain debt instruments (e.g., deposits, loans, other accounts receivable/payable) between selected affiliated financial corporations are included under other investment (see paragraph 6.28 referenced in paragraph 6.62-1). - Debt instruments associated with notional cash pooling arrangements (e.g., deposits and loans) are recorded as other investment (paragraph 6.62-1). - Cash pooling arrangements and their types are discussed elsewhere (paragraph 6.xx and Annex 6) and related debt instruments are treated as other investment (paragraph 6.62-1). ### Scope and links of other investment statistics - Other investment may be split by financial asset or liability class, original or remaining maturity, or institutional sector (paragraph 6.63). - Information on other investment is linked to: - Chapter 7 concerning valuation of positions, particularly loans; - Chapter 8 concerning financial account transactions; and - Chapter 11 12 concerning primary earned income (paragraph 6.63). ### Reserve assets: definition and components - Reserve assets are external assets readily available to and controlled by monetary authorities for: - meeting balance of payments financing needs; - intervention in exchange markets to affect the currency exchange rate; and - other related purposes such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing (paragraph 6.64). - Reserve assets must be foreign currency assets that actually exist; potential assets are excluded (paragraph 6.64). - Reserve assets are composed of: - monetary gold; - SDR holdings; - reserve position in the IMF; - currency and deposits; - securities (including debt and equity securities); - financial derivatives; and - other financial claims (loans and other financial instruments) (paragraph 6.76). ### Residence, control, and availability criteria for reserve assets - Residence: Reserve assets, other than gold bullion, must be financial claims on nonresidents; foreign currency claims on residents are not reserve assets but can be presented as supplementary items to the IIP (paragraph 6.65). - Definition of monetary authorities: encompasses the central bank and certain operations attributed to the central bank but sometimes carried out by other government institutions or commercial banks; supplementary information should be provided if extensive reserve assets are held outside the central bank (paragraph 6.66). - Control: Assets owned by resident entities may be treated as reserve assets if: - the resident entity can transact only on terms specified by the monetary authorities or with their express approval; - the authorities have access on demand to these financial claims to meet balance of payments financing needs; and - a prior law or legally binding contractual arrangement confirms this agency role (paragraph 6.67). - Availability for use: Reserve assets must be readily available in the most unconditional form and liquid—able to be bought, sold, and liquidated for foreign currency with minimum cost and time without unduly affecting value (paragraph 6.69). - To qualify as reserve assets they generally should be of high quality and denominated and settled in foreign currency (paragraphs 6.70, 6.71). ### Specific clarifications on types of reserve assets and transactions - Monetary gold: - Consists of gold bullion (including gold coins, ingots, bars with a purity of at least 995/1,000, and gold bullion held in allocated and pool allocated gold accounts) and unallocated gold accounts that give title to claim delivery of gold (paragraph 6.78). - Allocated, pool allocated and unallocated gold accounts are distinct from accounts indexed to gold that do not give title to claim delivery of gold; the latter are classified as currency and deposits (paragraph 6.79). - If monetary authorities deposit gold bullion in an unallocated gold account, the gold bullion is demonetized and recorded in the other changes in assets account (paragraph 6.80). - Allocated and unallocated gold accounts out on swap for cash collateral are either: - included as reserve assets of the original owner with the loan reported as a reserve-related liability (a memorandum item) if the liability is to a nonresident, or - excluded from reserve assets and demonetized or reclassified if the gold accounts are not readily available for meeting balance of payments financing needs (paragraph 6.82). - Any loan liability to a nonresident from a gold swap is recorded within “other investment,” with the foreign currency received recorded as an increase in currency and deposits within reserve assets, provided it meets criteria for reserve assets (paragraph 6.82). - SDR holdings are reserve assets created by the IMF and are equivalent to liquid balances in convertible currencies in nearly every respect (paragraph 6.84). - Reserve position in the IMF comprises: - the “reserve tranche” (foreign currency, including SDRs, amounts a member may draw at short notice), and - any indebtedness of the IMF in the General Resources Account that is readily available to the member country, including lending under GAB and NAB (paragraph 6.85). - Deposits included in reserve assets are those held in foreign central banks, the BIS, and other nonresident deposit-taking corporations, and deposit agreements with IMF Trust Accounts that are readily callable to meet a balance of payments financing need (paragraph 6.86). *Source: IMF — Chapter 6, Functional Categories in External Accounts (extract).* ### Chapter 6 Functional Categories in External Accounts ### Chapter 6 Functional Categories in External Accounts ### Reserve assets: definition, scope, and components - Reserve assets include foreign currency deposits, securities, and other foreign currency financial claims held by the monetary authorities that are readily available to meet balance of payments financing needs (see paragraph 6.86). - Short-term foreign currency loans redeemable upon demand made by the monetary authorities to nonresident deposit-taking corporations should be reported as deposits in reserve assets when there is uncertainty between a loan and a deposit (consistent with the treatment of interbank positions; see paragraph 5.42). - Short-term foreign currency loans available on demand to nonresident non-deposit-taking corporations, and long-term loans to IMF Trust Accounts that are readily repayable to meet a balance of payments financing need, can qualify as reserve assets ("other financial claims"). Other long-term loans by the monetary authorities to nonresidents not readily available to meet balance of payments financing needs are not reserve assets (paragraph 6.86 and related text). ### Securities, repos, reverse repos, and securities lending - Securities include liquid and marketable equity and debt securities issued by nonresidents; long-term securities (such as 30-year U.S. Treasury bonds) are included. Unlisted securities are, in principle, excluded unless liquid enough to qualify as reserve assets (paragraph 6.87). - Securities transferred under repurchase agreements (repos) or reverse transactions remain assets of the original authorities, but they are generally not readily available for meeting balance of payments financing needs (paragraph 6.88). - Such securities may be either: - included as reserve assets of the original owner with the loan generated reported as a reserve-related liability (a memorandum item) if the liability is to a nonresident, or - excluded from reserve assets and reclassified as portfolio investment assets through the end of the transaction. In either case, any loan liability to a nonresident is recorded within "other investment" (paragraph 6.88). - Foreign currency received as cash collateral that meets reserve asset criteria should be recorded as an increase in currency and deposits within reserve assets, while a loan liability should be recorded under "other investment" (paragraph 6.88). - For reverse repos: funds provided to the counterparty should be recorded as a decrease in currency and deposits within reserve assets, but if the financial claim (repo asset) is liquid and available on demand to the monetary authorities, it is considered part of reserve assets in "other financial claims" (or "deposits" in national measures of broad money) (paragraph 6.89). - When securities are lent or borrowed in exchange for other securities and no cash is exchanged, no transaction is reported; securities lent remain assets of the original authorities, and securities collateral received are not included as reserve assets of the receiving monetary authorities (paragraph 6.90). - Financial derivatives are recorded in reserve assets only if they pertain to the management of reserve assets, are integral to the valuation of such assets, and are under the effective control of the monetary authorities; such transactions and positions are recorded on a net basis at market value (paragraph 6.91). - Other financial claims include loans to nonresident non-deposit-taking corporations, long-term loans to IMF Trust Accounts such as the Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST) that are readily repayable to meet balance of payments financing needs, loans arising from a reverse repo (unless classified as deposits), and other foreign currency assets available for immediate use (paragraph 6.92). ### Presentation and cross-references - Reserve assets may be presented as per the component details in Box 6.5. Further information on reserve assets is included in Chapter 7 (positions), Chapter 8 (financial account transactions), and Chapter 12 (earned income) (paragraph 6.92-1). ### Special purpose government funds (sovereign wealth funds) - Special purpose government funds (SWFs) are created and owned by the general government for macroeconomic purposes and commonly invest in foreign financial assets; they are often established from balance of payments surpluses, official foreign currency operations, proceeds of privatizations, fiscal surpluses, and/or commodity export receipts (paragraph 6.93). - Key determination: whether legal or administrative guidance encumbers assets so they are not readily available to the monetary authorities (paragraph 6.94). - If a special purpose government fund’s external assets are on the books of the central bank or an agency of the central government that allows monetary authorities control over disposition, the presumption is that the assets are reserve assets (provided all other criteria are met). If held in a long-term fund with separate legal identity, the presumption is they should not be included in reserve assets (paragraph 6.95). - Agreements that allow assets invested in a separate investment corporation to be readily called back can affect classification; assets withdrawable during the annual budgetary process also affect availability (paragraph 6.96). - Final determination depends on whether the asset is readily available to monetary authorities and whether there is a liquid claim of a resident entity on a nonresident in foreign currency. In absence of legal or administrative impediments and given fungibility, earmarked assets that could be used to meet balance of payments financing needs are reserve assets (paragraph 6.97). - Assets held in special purpose government funds that meet the definition of reserve assets are classified within reserve assets by nature (deposits, securities, other). Assets that are financial claims on nonresidents but do not meet reserve criteria are classified in the financial account and IIP under the appropriate instrument and functional category. In the hierarchy between direct investment and reserve assets, equity securities should be classified as direct investment ahead of reserve assets, and debt securities should be classified as reserve assets ahead of direct investment (paragraph 6.98; see also paragraph 6.22). ### Pooled assets - Pooled asset arrangements are collective investment schemes where participants have a financial claim on the investment vehicle; the legal and institutional framework must be examined to determine if the financial claim meets the definition of reserve assets (paragraph 6.99). - The financial claim must be readily available to the monetary authorities and be a liquid claim in foreign currency on nonresidents (paragraph 6.100). - Additional factors affecting inclusion: - The ability to use pooled assets to raise external liquidity in foreign currency; a high concentration of underlying assets in claims on the domestic economy or domestic currency can cast doubt on inclusion. - Whether assets are truly foreign currency claims; de facto claims in domestic currency render classification as reserve assets inappropriate (paragraph 6.100). - Classification depends on nature: if participant can transact only by selling its claim back to the investment vehicle, the claim might be classified as a nonnegotiable investment fund share ("other financial claim"). Financial claims on nonresidents that do not meet reserve criteria are classified in the financial account according to their nature (paragraph 6.101). ### Central bank swap arrangements and related transactions - Off-market reciprocal central bank currency swap arrangements are recorded as an exchange of deposits with maintenance of value once activated and money is drawn. Deposits (in foreign exchange) acquired by the central bank initiating the arrangement are treated as reserve assets because they provide assets usable to meet balance of payments financing needs; each central bank acquires a foreign asset in foreign currency and creates a foreign liability in domestic currency (paragraph 6.102). - The liability deposit account in domestic currency that is fully indexed to a foreign currency should be treated as denominated in that foreign currency; periodic revaluation adjustments to the liability should be carried out to reflect the total domestic currency needed to buy the foreign currency to be delivered, including any interest payment (paragraph 6.102). - If the exchange does not meet reserve asset criteria (e.g., funds not readily available because subject to counterpart authorization), the deposit should be recorded as "other investment". Reciprocal deposits acquired by the partner central bank are considered reserve assets if they meet general criteria, including being denominated and settled in a convertible currency (paragraph 6.102-1). - If the swap arrangement has the characteristics of a standard (market priced) swap contract, it is recorded as a standard currency/foreign exchange swap (an exchange of deposits with simultaneous creation of a forward contract) (paragraph 6.102-2). - Reciprocal currency arrangements may take the form of securities repurchase agreements; these should be treated as collateralized loans. The cash-taking central bank can include foreign currency received in reserve assets if criteria are met. The cash-receiving central bank should reclassify repoed out securities from reserve assets to portfolio investment if they are no longer readily available for meeting balance of payments financing needs. The cash-providing central bank should not include securities received as collateral in its reserve assets because economic ownership has not changed (paragraph 6.103; see also paragraph 6.90 and paragraph 5.54). - Acquisitions or disposals by a central bank of liquid foreign currency claims from a domestic bank that change composition of reserve assets are recorded through the other changes in volume account and are not recorded in the balance of payments because the transaction is between residents (paragraph 6.104). ### Foreign assets that do not qualify as reserve assets; pledged and frozen assets - Lines of credit (including IMF arrangements such as the Flexible Credit Line and the Precautionary and Liquidity Line) and foreign exchange resources obtainable under swap agreements are not reserve assets because they do not constitute existing financial claims (paragraph 6.105). - Real estate owned by the monetary authorities is not included in reserve assets because real estate is not considered a liquid asset; silver bullion, diamonds, and other precious metals and stones are not included because they are considered goods, not financial assets (paragraph 6.105). - Capital subscriptions to international organizations that are not readily available to monetary authorities do not meet the definition of reserve assets and are included in other investment, unless in the form of securities, in which case they are classified as portfolio investment other equity and equity in international organizations (paragraph 6.106). - Pledged assets that are encumbered and therefore not readily available should be excluded from reserve assets; encumbered assets are distinguished from reserve assets pledged under securities lending arrangements and repurchase agreements (paragraph 6.107). - Examples of pledged assets to be excluded when encumbered include: - collateral used for third-party loans and third-party payments when encumbered; - assets pledged by the monetary authorities to investors as a condition for investing in securities issued by domestic entities if considered encumbered; - assets lent by the monetary authorities to a third party that are not available until maturity; - assets provided as collateral under reverse transactions (e.g., repos) that are not readily available for meeting balance of payments financing needs (paragraph 6.108). - Pledged assets should be excluded only to the extent of the value of the pledge; e.g., if the pledge is valued at 100, the maximum amount to be excluded from reserve assets is 100 (paragraph 6.109). - Assets held as reserve assets that are "frozen" by a foreign government or international organization (for example, SDR holdings and reserve positions in the IMF) should be reclassified to the relevant functional category, such as "portfolio investment" or "other investment" if securities, bank deposits, SDR holdings, and the reserve position in the IMF are frozen. If monetary gold is frozen, it is either demonetized (gold bullion) or reclassified as other investment, currency and deposits, assets (unallocated gold accounts) (paragraph 6.110). *Chapter 6, "Functional Categories in External Accounts," IMF.* ### Chapter 6 Functional Categories in External Accounts ### Chapter 6 Functional Categories in External Accounts ### Reserve assets: exclusions and classification - Foreign currency claims transferred to the monetary authorities by other institutional units in the reporting economy just prior to certain accounting or reporting dates, with accompanying reversals soon after those dates (commonly known as “window dressing”), should not be counted as reserve assets (paragraph 6.111). - Net creditor positions in regional payments arrangements that involve reciprocal lines of credit—a characteristic of loan arrangements—are classified as loans in other investment and are not included in reserve assets, except when considered readily available to the monetary authorities to meet a balance of payments need and other related purposes (paragraph 6.112). - Net asset balances in bilateral payments agreements are conventionally excluded from reserve assets because they resemble tied loans made to stimulate exports, provide aid, or further government policy (paragraph 6.112). - Working balances of government agencies are not included in reserve assets owing to their nature (paragraph 6.112). - Assets owned by the monetary authorities that do not meet the criteria to be classified as reserve assets are classified in the financial account and IIP under the appropriate instrument and functional category (paragraph 6.113). - Currency unions and economies that adopt another currency (such as dollarization and euroization) raise specific issues for the concept of reserve assets; these issues are discussed in Appendix 3 (paragraph 6.114). ### Reserve-related liabilities: definition and components - Definition: Reserve-related liabilities are foreign currency liabilities of the monetary authorities that can be considered direct claims by nonresidents on the reserve assets of an economy (paragraph 6.115). - Presentation and monitoring: - Reserve-related liabilities can be presented by instrument and maturity (see Appendix 914, Table V) (paragraph 6.115). - Short-term reserve-related liabilities on a remaining maturity basis are a memorandum item to the IIP (as shown in Box 6.5) (paragraph 6.115). - Some economies may choose to present the full table of foreign currency assets and liabilities in Appendix 914, Table V, separately identifying the short-term reserve-related liabilities (paragraph 6.115). - Components included in reserve-related liabilities (paragraph 6.116): - The value of the SDR allocation and loans from the IMF to monetary authorities. - Foreign currency loan and deposit liabilities of the monetary authorities to nonresidents, including those arising from foreign currency swaps with other central banks, loans from BIS, and from other deposit-takers. - Foreign currency loan liabilities to nonresidents associated with securities that the monetary authorities have repoed out. - Foreign currency securities issued by the monetary authorities and owed to nonresidents. - Other foreign currency liabilities to nonresidents, including foreign currency accounts payable and financial derivatives—recorded on a net basis (liabilities less assets)—settled in foreign currency and associated with, but not within the definition of, reserve assets (see paragraph 6.91). Such financial derivatives could include those that are not sufficiently liquid or are not integral to the valuation of reserves assets. - Exclusions: Liabilities to residents and liabilities that are both denominated and settled in domestic currency are not included (paragraph 6.116). - Note: Net debtor positions in regional payments arrangements are also classified as loans (footnote 26). ### Net International Reserves (NIR): standardized statistical definition and calculation - Core definition: - Net International Reserves = Reserve assets minus predetermined short-term net foreign currency drains. - Components and measurement: - Reserve assets (RA) minus predetermined short-term net foreign currency drains (FCD). - FCD are predetermined contractual foreign currency obligations (foreign currency outflows net of inflows) scheduled to come due during the 12 months ahead recorded at cash-flow value when the flows take place, as defined in Section II, IRFCL Template. - FCD include short-term on- and off-balance sheet (e.g., financial derivatives; guarantees are not included) foreign currency obligations to residents and nonresidents because RA will be used regardless of whether the drain arises from residents or nonresidents. - FCD also include short-term on- and off-balance sheet foreign currency obligations of the central government, as payment of these obligations would usually involve the use of RA. - Avoiding double counting between RA and FCD: - When short-term foreign currency outflows/inflows vis-à-vis the domestic currency from forwards and futures are scheduled in FCD (IRFCL Template, Section II, 2), corresponding market values of the derivative contracts recorded in RA (Section I.A (5) of the IRFCL Template) should be excluded in the calculation of NIR to avoid double counting. - Only market values of foreign exchange forwards/swaps, for which notional values are recorded in Section II.2, should be excluded; market values of other types of derivatives (e.g., options) should remain in RA in the calculation of NIR. - Where notional values of non-deliverable forwards (NDFs) are included in FCD, they should be excluded in the calculation of NIR as the payment at maturity would only involve the market value of the contract (the market value is included in RA if the contract is settled in foreign currency). - Relationship to existing frameworks: - These concepts and data are covered in this Manual and the Guidelines for the IRFCL Template; the definition of RA on a gross basis is based on this Manual. - Section II of the IRFCL Template covers data that go beyond the residence concept of this Manual (note on FCD scope). - Compilation of the IRFCL Template is a requirement to subscribe to the IMF’s Special Data Dissemination Standard (SDDS) and to adhere to the SDDS Plus; even if a country does not compile the IRFCL Template, the same information could be collected from the authorities based on the Guidelines for the IRFCL Template to calculate NIR. - Practical note on decomposition: - Section II in the IRFCL Template allows total predetermined short-term drains to be decomposed between those of the monetary authorities and the central government, although in practice this decomposition is often not provided. - In the very rare case where the central government has sufficient short-term FX assets held overseas, the short-term liabilities of the central government would not be included in the predetermined short-term drains in the calculation of NIR (the liabilities still need to be recorded in the IRFCL Template). --- _Source: https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/chapter-6-functional-categories-in-external-accounts-v7.pdf_