## ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i ## Source details **Canonical URL:** [ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i](https://www.imf.org/-/media/files/publications/miscellaneous/english/2026/ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i.pdf) ## Other formats - [Markdown version](/-/media/files/publications/miscellaneous/english/2026/ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i.pdf.md) - [Structured JSON version](/-/media/files/publications/miscellaneous/english/2026/ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i.pdf.json) --- ### Purpose and scope - Practical guidance to central banks and monetary authorities on designing and strengthening foreign reserves management frameworks across varied mandates, governance traditions, and operational capacities. - Covers governance models, decision-making structures, legal and regulatory underpinnings, Investment Policy Statements (IPS), risk tolerances, segregation of front-/middle-/back-office functions, and IT/information systems. - Emphasizes advice must be tailored to country-specific circumstances; recommendations are conditional and fit-for-purpose. - Scope limited to official foreign reserves assets; excludes portfolios governed by distinct mandates (e.g., sovereign wealth funds, internal pension funds). - Chapter authors: Carlos de Barros Serrao (CSerrao@imf.org); Thierry Borel (TBorel@imf.org) - DATE ISSUED: June 2026 ### Definitions and core objectives of foreign reserves - Foreign reserves: monetary gold, SDR holdings, the reserve position in the IMF, and other liquid claims on nonresidents—such as foreign currency, deposits, and highly liquid foreign securities. - Four key objectives of foreign reserves: - (i) underpin the monetary regime by providing essential liquidity and reinforcing credibility of monetary and exchange rate policies; - (ii) facilitate government operations by enabling settlement of current account transactions and supporting international payments; - (iii) meet capital account and debt and other financial account obligations for timely servicing of international liabilities; - (iv) ensure the banking system has adequate foreign exchange (FX) liquidity to promote financial stability. - Excluded from reserves: assets not readily available, not liquid, not claims on nonresidents, or not under effective control of authorities for reserves purposes. ### Costs, benefits, and rationale - Holding reserves entails costs, including forgone investment returns associated with interest rate differentials; characterized as an insurance premium to protect the economy from external shocks and liquidity crises. - Insurance rationale: reserves accumulation reduces sovereign risk, reassures creditors, compresses sovereign spreads and lowers borrowing costs (Levy-Yeyati and Gómez 2020). - Managing reserves may expose the central bank’s balance sheet to losses, requiring formal treatment of potential conflicts between sovereign risk management and central bank risk protection. ### Common weaknesses identified by TA missions - Shortcomings in governance, operational management, or risk management frameworks can result in substantial financial losses and reputational damage. - Recurring TA recommendations emphasize: - ensuring adequate reserves aligned with clearly defined policy objectives (e.g., foreign exchange interventions); - robust and comprehensive risk management covering liquidity, market, credit, legal, settlement, custodial, and operational risks; - pursuit of reasonable risk-adjusted returns constrained by liquidity and other risk requirements. ### Foreign Reserves Management Framework building blocks - Six core components: - Governance and organizational structure - Investment policy statement (IPS), Strategic Asset Allocation (SAA), and Investment Guidelines (IG) - Portfolio management and operations - Risk management framework - Accounting, reporting, and monitoring - Information technology (IT) ### Legal foundations and regulatory elements - Typical legal elements to review: - ownership of reserve assets; - delineation of responsibilities for management; - stated reserves management objectives; - types of reserve assets; - governance structures and delegation principles. - Legal ownership typically rests with the state; ownership affects accountability, profit and loss allocation, sovereign immunity, and political control. - Multiple layers of legal texts can govern reserves: international treaties, constitutions, central bank acts, special acts/stabilization funds, regulations/statutory instruments, and internal policies. - Recommended legal and regulatory features: - Modernize legal definitions of eligible assets and operational boundaries; explicitly incorporate management objectives and legal flexibility (align with BPM7 and IMF Revised Guidelines for Foreign Exchange Reserve Management (2013)). - Publicly disclose and formalize allocation of management responsibilities where ownership and management are separated (statute or MoU). - Central bank laws should uphold independence, accountability, and transparency while enabling operational agility for timely interventions. - Provide sovereign immunity and asset protection provisions to reduce attachment and execution risks for assets held abroad. - Internal regulations should: clearly define objectives and eligibility criteria; authorize a comprehensive range of operations (including derivatives and repos if infrastructure and governance permit); include emergency powers with appropriate oversight; prioritize objectives as: "security first, liquidity second, and then profitability". ### Currency unions and exchange-rate-specific considerations - Currency unions (CUs) present models from fully centralized pooled reserves to decentralized national management under union guidelines. - CU legal frameworks may: - explicitly forbid unilateral use of pooled reserves; - mandate coordination of interventions and crisis responses; - require separation between unionwide pooled reserves and national reserves; - enforce principles of transparency and sovereign immunity. - Exchange rate regime alignment: - Floating/managed floating: greater flexibility and risk management autonomy. - Fixed exchange rate/currency boards: more rigid legal constraints and operational arrangements to maintain peg. - Dollarized economies: legal frameworks emphasize ownership/sovereignty over foreign reserves, strict limits on reserve use, and stringent transparency, risk management, and oversight. ### Investment Policy Statement (IPS): role, content, and process - IPS purpose: formal document establishing objectives, criteria, and rules for managing a central bank’s foreign reserves; ensures alignment with legal mandates and monetary frameworks. - Key IPS components: - clear statement of purpose—typically prioritizing safety, liquidity, and return in that order; - governance structures defining roles of board, governor, and IC; - permitted asset classes and counterparties; - SAA targets; - prescribed risk management practices (currency, liquidity, credit, market, operational, legal, reputational); - procedures for delegated management, exceptions, accountability, performance and compliance reporting. - Typical steps to elaborate an IPS: - establish mandate and objectives; - engage key stakeholders (board, ALCO, RCO, IC); - assess risk appetite and constraints; - define eligible assets and limits; - develop risk management and compliance framework; - draft IPS and circulate for review; - obtain formal approval by the governing board or equivalent; - implement, communicate, and periodically review/update. - IPS checklist highlights for TA missions (selected items): - Has an IPS been adopted and by which body? - Are roles, meeting frequencies, and segregation of duties for committees (IC, RCO, ALCO, EC, AC) clearly stated? - Does the IPS explicitly recall objectives (security, liquidity, return, in this order)? - Is there a comprehensive framework specifying risk appetite and constraints, including tranching and SAA? - Is the investment universe and list of eligible/noneligible assets clearly defined? - Does the IPS authorize external investment management mandates and specify procedures? - Are risks for each asset class and instrument stated with parameters and mitigation measures? - Are management styles, benchmarks, deviation margins, rebalancing procedures, exceptions, escalation, and monitoring procedures specified? - How often is the IPS reviewed? ### Governance and organizational structure: principles and common recommendations - Governance principles: transparency, accountability, operational efficiency, strong legal foundation, institutional independence, adherence to international standards, defined IPS, coordinated institutional collaboration, continuous capacity building. - Three pillars: supportive legal environment; top-down authority delegation; bottom-up mechanisms for transparency and accountability. - Recommended hierarchical structure and roles: - Strategic level: governing board (approve IPS, set objectives). - Tactical level: Investment Committee (IC) to monitor compliance and coordinate policy reviews. - Operational level: Market Operations Department (front office) to implement investment tactics. - Main TA recommendations for the IC (selected): - Establish a clear framework defining IC roles relative to the board. - Ensure IC composition includes relevant expertise. - Require regular reporting from IC to the Governing Board. - Emphasize IC oversight role rather than day-to-day operations. - Formalize IC decision-making powers for tactical decisions within guidelines. - Establish performance benchmarks and documentation of decision processes. - Provide training and regular audits of IC activities. ### Identified governance and organizational weaknesses from TAs - Observed issues: - Overly complex and inflexible delegation of authority delaying transactions. - Restrictions on internal information sharing between reserves management and domestic liquidity/FX intervention functions. - Weakly defined delegations and limits of authority leading to confusion and unauthorized operations. - Governing board or governor lacking formal review processes for investment activities and risk controls. - Ambiguous organizational hierarchies causing delayed decision making and unclear accountability. - ICs operating without a clear mandate, irregular meetings, or inadequate authority. - Insufficient segregation of duties among FO, MO, and BO; overlap of MO functions within FO; MO understaffed relative to FO. ### Front Office (FO), Middle Office (MO), Back Office (BO): roles and recommendations - Front Office (FO): first line of defense; handles FX, securities, and gold transactions; formulates investment proposals; performs market analysis; ensures transaction compliance; documents and reports trades. - Middle Office (MO): typically second line of defense; responsibilities include articulating strategy and risk tolerance, proposing limits, acceptance procedures for instruments/counterparties, establishing benchmarks, monitoring exceedances, calculating performance metrics, performing market conformity checks, reconciling trades, validating valuations, and risk model evaluation and modification. - Back Office (BO): third line of defense at operational level; functions include trade processing and settlement, recordkeeping and reconciliations, reporting for risk monitoring, maintaining control procedures, and ensuring accurate pricing and valuation for accounting. - TA survey findings on organizational arrangements: - One-third (34 percent) of respondents have integrated FO, MO, and BO within the same department. - 29 percent maintain clear separation among the three units across different departments. - 25 percent have the FO and MO in one department, with the BO operating independently. - Despite IMF's 2014 recommendations for separation, a majority (59 percent) of central banks still place the MO alongside the FO. - Recommended practices: - Clear segregation of duties and reporting lines, ideally with MO independent from FO and BO. - Formal escalation procedures for breaches or decisions exceeding delegated authority. - Regular IC meetings (recommended monthly) and documented delegation frameworks. ### Risk management framework: goals, components, and gaps - Goals of a well-designed risk management framework: - Enable identification and management of risks within acceptable parameters. - Measure exposures accurately and implement controls/mitigations. - Respond proactively to changing risk environments. - Support operational resilience and strategic decision-making. - Foundational components to codify: risk tolerance, total risk budget, permissible deviations from benchmark, SAA embedded in IG/IPS. - Key activities: - Risk identification: market, credit, liquidity, legal, custodial, operational risks. - Risk measurement: VaR, ES, stress testing, duration analysis, downgrade probabilities, CDS analysis, bid-ask/trading volume assessments. - Risk mitigation: diversification, hedging, SAA, tranching, currency/asset-class diversification. - Risk monitoring: continuous monitoring and risk reporting, risk-adjusted return measures. - Common gaps identified: - Insufficient clarity on currency composition. - Vague or absent duration limits and interest rate risk guidelines. - Lack of quantified credit risk limits. - Absence of explicit rules on tactical deviations from SAA and rebalancing rules. - Underdeveloped reporting and compliance mechanisms. - Emerging risks to integrate: technological change, cyber risks, digital currencies/assets, climate-related and geopolitical risks; trade-offs with ESG/geopolitical exclusions vs liquidity. ### Risk governance and committee structure - Recommended integrated risk management approach and alignment with organizational risk culture. - Three-committee good-practice model: - RCO (Risk Committee of the Board): high-level governance proposing risk appetite and overseeing significant risks; may be chaired by governor/deputy governor/CRO; reviews exposures and corrective actions. - AC (Audit Committee): oversees risk management, financial reporting, internal controls; composed of independent members with finance/audit expertise. - ALCO (Asset and Liability Committee): senior management committee overseeing balance sheet risks; chaired by governor/deputy governor or senior executive; focuses on liquidity targets, funding, and structural risks. - Typical reporting lines: - RCO and AC report to the board. - ALCO is a management/executive committee chaired by governor/deputy governor. - Defense lines mapping: ALCO = first line of defense; RCO = second; AC = third. - Trend toward ERM: enterprise risk management with 10 interrelated components adapted to the central bank environment. ### Accounting, reporting, monitoring, and audits - Reporting hierarchy and frequency: - MO: daily reports on holdings, risk, and performance. - Department managers: daily oversight of portfolio size, risk, and compliance. - IC: monthly reviews of overall financial health. - Board of directors: quarterly oversight on composition, returns, performance metrics. - Accounting best practices: - Most central banks subscribe to internationally recognized accounting frameworks; IFRS adoption recommended where possible. - Reporting should provide fair value of reserves in a single currency for operational relevance. - External independent audits of reserves management activities and timely publication of audit opinions (example: within three to four months of reporting date) encouraged. - Ensure proper classification of financial instruments to avoid accounting errors. - Data dissemination and transparency: - Use SDDS and SDDS Plus and the Reserves Data Template for comprehensive public disclosure on reserves and short-term flows. - Public disclosures should be on a pre-announced schedule and maintain continuity during market stress. - Performance monitoring against benchmarks and swift escalation of breaches is essential. ### Information technology, data governance, and business continuity - IT and transaction systems should: - Enable secure negotiation and recording of transactions, forward transactions for MO/BO verification, maintain audit trails, prevent unilateral transaction cancellation, and calculate management results accurately. - Support authorized instruments (deposits, repos, securities, derivatives) and monitor instrument-specific risks in real time with limit alerts. - Implement STP and segregated access control; ensure robustness, availability, maintenance, and disaster recovery. - Comply with cybersecurity standards (ISO 27001, NIST) and protect sensitive flows (e.g., SWIFT encryption). - Be scalable and adaptable to evolution of reserves framework. - Data governance: - Ensure numerical accuracy, data completeness, consistency across systems, and single data model for transactions. - Centralize market data sources into a data warehouse for consolidated reporting. - Use automated validation and cleansing tools. - Practical trade-offs: - Fully integrated front-to-back solutions are ideal but may be justified only for institutions with sufficient reserves and resources. - Multiple standalone but interconnected systems can be sensible for smaller institutions if manual interfaces are controlled via detailed MOPs. - Business continuity: - Develop, regularly test, and update continuity plans including remote working secure access and backup disaster facilities. - Address operational risks from partial/manual IT infrastructures and emerging technologies (including AI). ### Staged roadmap (illustrative three-stage progression) - Stage 1: Establish a clearly defined foreign reserves management framework; basic IT supporting transactions and audit trail; plain vanilla instruments only; local accounting standards implemented and independently verified. - Stage 2: Implement a conservative, formalized framework with professional IT solutions, independent risk division, RCO/ALCO/AC established, liquidity instruments and active management allowed, international accounting standards adopted (IAS, US GAAP). - Stage 3: Sophisticated, differentiated management with fully integrated IT systems, advanced risk monitoring (VaR, ES, scenario analysis), broad instrument universe including derivatives, IFRS fully applied, external annual audits, and governance aligned with best practices. ### Key implementation recommendations (summary) - Prioritize establishing or updating an IPS adopted at the highest authority that explicitly states objectives (security, liquidity, return) and embeds SAA, tranching, and clear risk limits. - Modernize legal frameworks to clarify ownership, management responsibilities, permissible assets, and sovereign immunity protections. - Implement three-tier governance with clear delegations: board (strategic), IC/ALCO (tactical), FO/MO/BO (operational), and formalize escalation procedures. - Ensure MO independence and adequate staffing; clearly segregate FO, MO, BO functions or provide compensating controls where segregation is impractical. - Adopt a formal risk management framework with quantified risk budgets and metrics (VaR, ES, duration limits), regular stress testing, and integration into decision-making. - Strengthen accounting, reporting, and transparency practices; adopt IFRS where feasible; subscribe to SDDS/SDDS Plus and publish Reserves Data Template metadata where applicable. - Invest in IT systems appropriate to institutional scale: ensure audit trails, real-time limit monitoring, STP where justified, cybersecurity, disaster recovery, and robust data governance. - Use a pragmatic, staged roadmap tailored to country capacity and constraints; avoid immediate full adherence to all best practices if resources and governance readiness are limited. *Source: IMF | MCM Technical Assistance Handbook — Chapter: Foreign Reserves Management—Part I (June 2026).* ### REFERENCES _______________________________________________________________________________________ 47 ### ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i - REFERENCES ### References and Organizational Elements - REFERENCES _______________________________________________________________________________________ 47 - ACRONYMS/DEFINITIONS ________________________________________________________________________ 48 ### Boxes (numbered list as in source) - 1. Legal and Regulatory Framework: Checklist for TA Missions_______________________________________ 17 - 2. Investment Policy Statement: Checklist for TA Missions ___________________________________________ 19 - 3. Accountability and Transparency: Checklist for TA Missions _______________________________________ 22 - 4. Most Common Recommendations on Organizational Structures __________________________________ 23 - 5. Main TA Recommendations for the Investment Committee _______________________________________ 25 - 6. Recommendation for Front Office _________________________________________________________________ 26 - 7. Internal Governance and Operational Framework: Checklist for TA Missions ______________________ 28 - 8. A Risk Management Framework: Checklist for TA Missions ________________________________________ 35 - 9. Requirements for Strong Risk Management in a Central Bank _____________________________________ 36 - 10. Middle Office: Checklist for TA Missions _________________________________________________________ 38 - 11. Back Office: Checklist for TA Missions ____________________________________________________________ 39 - 12. IT Infrastructure: Checklist for TA Missions _______________________________________________________ 45 ### Figures (numbered list as in source) - 1. Foreign Reserves Management Framework Building Blocks _______________________________________ 10 - 2. Generic Three-tier Governance Structure for Reserves Management ______________________________ 24 - 3. Risk Duality ________________________________________________________________________________________ 31 - 4. Committees Organization _________________________________________________________________________ 33 - 5. Risk Culture _______________________________________________________________________________________ 35 - 6. Workflow of the Processing and Settlement of a Transaction _____________________________________ 43 ### Tables (numbered list as in source) - 1. Examples of Legal Texts Covering Foreign Reserves Management ________________________________ 14 *IMF | MCM Technical Assistance Handbook* ### 2. Examples of Currency Unions' Specific Provisions _________________________________________________ 15 ### ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i - 2. Examples of Currency Unions' Specific Provisions _________________________________________________ 15 ### Chapter metadata and context - Chapter authors: Carlos de Barros Serrao (CSerrao@imf.org); Thierry Borel (TBorel@imf.org) - DATE ISSUED: June 2026 - Appendices referenced in chapter: - I. Assessment of the Investment Policy Statement of the Central Bank — 52 - II. Central Banks' Accountability and Transparency — 58 - III. Proposed Multistage Roadmap (illustrative only) — 60 - IV. Suggested Outline for TA Report on Foreign Reserves Management Framework — 64 ### Purpose and scope of the chapter - Practical guidance to central banks and monetary authorities on designing and strengthening foreign reserves management frameworks across varied mandates, governance traditions, and operational capacities. - Covers governance models, decision-making structures, legal and regulatory underpinnings, investment policy statements (IPS), risk tolerances, segregation of front-/middle-/back-office functions, and IT/information systems. - Emphasizes that advice must be tailored to country-specific circumstances; recommendations are conditional and fit-for-purpose. - Scope limited to official foreign reserves assets; excludes portfolios governed by distinct mandates (e.g., sovereign wealth funds, internal pension funds). ### Definitions and core objectives of foreign reserves - Foreign reserves: monetary gold, SDR holdings, the reserve position in the IMF, and other liquid claims on nonresidents—such as foreign currency, deposits, and highly liquid foreign securities. - Four key objectives of foreign reserves: - (i) underpin the monetary regime by providing essential liquidity and reinforcing credibility of monetary and exchange rate policies; - (ii) facilitate government operations by enabling settlement of current account transactions and supporting international payments; - (iii) meet capital account and debt and other financial account obligations for timely servicing of international liabilities; - (iv) ensure the banking system has adequate foreign exchange (FX) liquidity to promote financial stability. - Reserve assets excluded: assets not readily available, not liquid, not claims on nonresidents, or not under effective control of authorities for reserves purposes (e.g., assets held by sovereign wealth funds or internal pension funds). ### Costs, benefits, and rationale - Holding reserves entails costs, including forgone investment returns associated with interest rate differentials; characterized as an insurance premium to protect the economy from external shocks and liquidity crises. - Insurance rationale: reserves accumulation reduces sovereign risk, reassures creditors, compresses sovereign spreads and lowers borrowing costs (Levy-Yeyati and Gómez 2020). - Managing reserves may expose the central bank’s balance sheet to losses, necessitating formal treatment of potential conflicts between sovereign risk management and central bank risk protection. ### Common weaknesses identified by TA missions - Shortcomings in governance, operational management, or risk management frameworks can result in substantial financial losses and reputational damage. - Recurring TA recommendations emphasize: - ensuring adequate reserves aligned with clearly defined policy objectives (e.g., foreign exchange interventions); - robust and comprehensive risk management covering liquidity, market, credit, legal, settlement, custodial, and operational risks; - pursuit of reasonable risk-adjusted returns constrained by liquidity and other risk requirements. ### Foreign Reserves Management Framework building blocks (Figure 1) - Six core components: - Governance and organizational structure - Investment policy statement (IPS), Strategic Asset Allocation (SAA), and Investment Guidelines (IG) - Portfolio management and operations - Risk management framework - Accounting, reporting, and monitoring - Information technology (IT) ### Governance and organizational structure: principles and pillars - Governance is critical given reserves are public resources; effective governance protects reserves from misuse and supports public confidence. - Framework should promote transparency, accountability, and operational efficiency through: - strong legal foundation and clear mandate; - institutional independence; - adherence to international standards; - a defined IPS; - coordinated institutional collaboration; - continuous capacity building and training. - Three key pillars: a supportive legal environment, top-down authority delegation, and bottom-up mechanisms for transparency and accountability. ### Legal foundations for reserves management - Chapter limits discussion to factual description of common legal elements found across jurisdictions: - ownership of reserve assets; - delineation of responsibilities for management; - stated reserves management objectives; - types of reserve assets; - governance structures and delegation principles. - Two objectives for TA missions regarding legal foundations: - Recognize diversity and complexity of country legal frameworks and focus recommendations on immediately actionable issues (e.g., absence of clear mandate, overly permissive/restrictive asset eligibility, maturity limits). - Identify inconsistencies or gaps across legal texts of varying authority to strengthen operational effectiveness and coherence. - Legal ownership typically rests with the state; ownership affects accountability, profit and loss allocation, sovereign immunity, and political control. - Legal ownership is independent of exchange rate regime. ### Legal and regulatory framework: layers and practical elements - Multiple layers of legal texts can govern reserves: international treaties, constitutions, central bank acts, special acts/stabilization funds, regulations/statutory instruments, and internal policies. - Table 1 (illustrative) examples of legal texts and their coverage: - International treaties — Monetary union or currency board arrangement (e.g., Treaty on the functioning of the EU (Eurozone)). - Constitution — May define sovereign ownership (e.g., Bolivia’s constitution recognizes state ownership of monetary reserves (Art. 339-2)). - Central Bank Act — Main law establishing mandate (e.g., Reserve Bank of India Act, Federal Reserve Act, Bank of England Act). - Special acts/exchange stabilization funds — Specific instruments for FX operations (e.g., US Exchange Stabilization Fund (31 USC § 5302), UK Exchange Equalization Account). - Regulations/statutory instruments — Practical rules for day-to-day implementation (e.g., foreign reserves guidelines, risk limits, internal reserves management policy). ### Currency Unions (CUs): models and specific provisions - CUs present unique features and challenges: approaches range from fully centralized pooled reserves to decentralized national management under union guidelines. - CU legal frameworks may: - explicitly forbid unilateral use of pooled reserves; - mandate coordination of interventions and crisis responses; - require separation between unionwide pooled reserves and national reserves; - enforce principles of transparency and sovereign immunity. - Table 2 (illustrative) examples of CU provisions (model clauses and jurisdictions): - Purpose and scope: TFEU Art. 127, ESCB Statute Art. 3; ECCB Agreement Art. 4; WAEMU Treaty Art. 2 - Pooled reserves: TFEU, Protocol 4 Art. 30; ECCB pooled reserves; BCEAO pooled reserves - Prohibited unilateral use: ESCB Statute Art. 31; ECCB Agreement Art. 4; WAEMU statutes - Prohibition of fiscal financing: TFEU Art. 123; ECCB Agreement Art. 39; WAEMU/UMOA treaty ### Exchange rate regimes and specialized frameworks - Frameworks should align with exchange rate regimes: - Floating/managed floating: greater flexibility and risk management autonomy. - Fixed exchange rate/currency boards: more rigid legal constraints and operational arrangements to maintain peg. - Dollarized economies: legal frameworks emphasize ownership/sovereignty over foreign reserves, strict limits on reserve use for external liquidity and emergencies, and stringent transparency, risk management, and oversight. ### Recommended legal, regulatory, and internal policy features - Modernize legal definitions of eligible assets and operational boundaries; explicitly incorporate management objectives and ensure legal flexibility (align with BPM7 and IMF Revised Guidelines for Foreign Exchange Reserve Management (2013)). - Ensure allocation of management responsibilities is publicly disclosed and formalized where ownership and management are separated (e.g., via statute or MoU). - Central bank laws should uphold independence, accountability, and transparency while enabling operational agility for timely interventions (clarify scope of authority, decision-making autonomy, and procedural agility). - Provide sovereign immunity and asset protection provisions to reduce attachment and execution risks for assets held abroad. - Internal regulations should: - clearly define broad objectives and publicly disclose them; - state eligibility criteria for reserve assets; - authorize a comprehensive range of operations (including derivatives and repos if infrastructure and governance permit); - include emergency powers with appropriate oversight; - prioritize objectives as: "security first, liquidity second, and then profitability". ### Legal risks and considerations - Be aware of sovereign immunity and attachment risks for assets held abroad; protections vary by jurisdiction (examples: US Foreign Sovereign Immunity Act (FSIA), UK State Immunity Act 1978 (SIA), Swiss law for assets held at the BIS). - Internal regulations and policies must be consistent with higher-order legal instruments; they cannot supersede constitutions or central bank organic laws where those have higher legal value. - TA missions should identify outdated provisions, rigid legal requirements, or missing explicit reserves management objectives in legal texts. *Source: IMF | MCM Technical Assistance Handbook — Chapter: Foreign Reserves Management—Part I (June 2026).* ### Box 1. Legal and Regulatory Framework: Checklist for TA Missions ### Box 1. Legal and Regulatory Framework: Checklist for TA Missions ### Legal and regulatory checklist for TA missions - What are the legal texts framing the foreign reserves management area in the central bank? Is there a dedicated legal framework or set of regulations governing foreign reserves management? - What is the exchange rate regime? - Does the central bank have an explicit legal mandate to manage foreign reserves? - Is the scope of the central bank’s foreign reserves management power clearly defined in law or regulation? Are there formal coordination mechanisms (e.g., a MoU) between the central bank and the Ministry of Finance regarding foreign exchange liability management? - Are the objectives of foreign reserves management stipulated legally? - Is ownership of reserves clearly defined in a legal text? - Does the legal mandate specify permissible types of foreign reserve assets (currencies, instruments, counterparties, etc.)? - Is the use of complex instruments (derivatives, repos, etc.) supported by standard international legal agreements (e.g., ISDA/CSA, GMRA) with valid netting and collateral enforceability? - Are laws or regulations in place to ensure compliance with international standards and best practices? - Governance structure: are the roles and responsibilities of the governor, board of directors, other bodies clearly defined in the statutes of the central bank? - Does the central bank have the legal authority to make investment decisions related to foreign reserves? - Are there legal safeguards to prevent conflicts of interest or misuse of reserve assets? - Foreign risk immunity: is there a clear legal assessment of the immunity of the foreign reserves? - Internal provisions and procedures should establish clear guidelines and reporting requirements governing investment and allocation of foreign reserves, ensuring compliance with international standards. ### Role and design of the Investment Policy Statement (IPS) - The IPS is a formal document that establishes the objectives, criteria, and rules for managing a central bank’s foreign reserves, ensuring alignment with legal mandates and monetary frameworks. - Key components of the IPS include: - A clear statement of purpose—typically prioritizing safety, liquidity, and return in that order. - Governance structures that define the roles and responsibilities of the board of directors, governor, and IC. - Outlines of permitted asset classes and counterparties. - SAA targets. - Prescribed risk management practices for currency, liquidity, credit, market, operational, legal, and reputational risks. - Procedures for delegated management, exceptions, and accountability, including regular performance and compliance reporting. - The IPS is the fundamental brick on which the foreign reserves management framework is built and is usually adopted at the highest level of authority responsible for public policy formulation (the board of directors or, in rare cases, the governor or governing board). - The IPS is used by portfolio managers, the IC, and stakeholders to ensure consistency and discipline in the investment process. - The elaboration of an IPS can be a long process requiring numerous inputs (data on financial instruments to elaborate a risk framework and propose risk metrics, etc.), potential external stakeholders, expertise from legal, financial, operational areas, and consideration of financial costs and investments (human resources (HR) recruitment, new IT infrastructure, constructions of new physical infrastructures (vaults, recovery center, etc.)). ### Typical steps to elaborate an IPS in a central bank - Establish the mandate and objectives: define the primary objectives for foreign reserves management (e.g., safety, liquidity, return); consider the legal mandate and macroeconomic policy goals. - Engage key stakeholders: involve relevant governance bodies such as the board of directors, the Asset and Liability Committee (ALCO), the Risk and Control Committee (RCO), and senior management; consult external advisors or experts as needed. - Assess risk appetite and constraints: determine acceptable risk levels for market, credit, liquidity, and operational risks and identify regulatory, legal, and operational constraints. - Define eligible assets: specify permissible asset classes, instruments, and geographic or currency exposures; set limits on concentrations, maturities, and counterparties. - Develop a risk management and compliance framework: define processes for monitoring, reporting, and managing risks aligned with the IPS; establish compliance protocols. - Draft the IPS: prepare a clear, comprehensive document covering objectives, scope, roles, constraints, and procedures and including performance benchmarks and review cycles. - Review and approval: circulate the draft IPS for review by and feedback from governance bodies (IC); obtain formal approval by the central bank’s governing board or equivalent authority. - Implementation and communication: disseminate the IPS to all relevant operational units and stakeholders; train staff on the IPS requirements. - Ongoing review and update: periodically review the IPS to adapt to changing market conditions, regulatory requirements, or strategic priorities; conduct formal updates and re-approvals as necessary. - Box 2 provides an IPS checklist for TA missions. ### Box 2 (Investment Policy Statement): checklist highlights for TA missions - Has an IPS been formerly adopted by the central bank? - Which body adopted the IPS? It is usually adopted at the highest level of authority responsible for public policy formulation (the board of directors or, in rare cases, the governor or governing board). It is good practice that the body adopting the IPS does not chair the IC. - Are the missions, organization, and meeting frequencies of the various committees (IC, RCO, ALCO, Ethics Committee (EC), Audit Committee (AC)) involved in foreign reserves management clearly stated, without loopholes or overlap? - Does the IPS clearly mention the segregation of duties? - Does the IPS mention the other internal documents that formalize the foreign reserves framework (SAA, IG, manual of procedures (MOP), code of ethics, others)? - Does the IPS explicitly recall objectives of the foreign reserves management (security, liquidity, return, in this order)? - Does the IPS set out a comprehensive framework specifying risk appetite and constraints of the central bank? Ideally, it should include the institution’s major risks and constraints that should be mitigated by adequate asset allocation. Typically, risks should be covered through a tranching exercise and a strategic asset allocation exercise. - Is the definition of each tranche relevant and adapted to the specific constraints faced by the central bank? - Is the investment universe clearly defined and adapted to the risk and objectives adopted by the central bank? - Is there a comprehensive list of eligible assets, transactions, and instruments defined? Is there a list of noneligible assets, forbidden transactions, and instruments defined? - Does the IPS authorize external investment management mandates (are there specific procedures, and does it align with the investment framework adopted)? - Are the various risks (currency, liquidity, credit, market, legal, etc.) faced by each asset class, instrument, and transaction clearly and comprehensively stated, each followed by risk parameters and mitigation measures adopted to alleviate the risk? - Does the IPS specify the management style adopted (if applicable, for each tranche defined): is it active or passive; what are the benchmarks (internal or external); what are the deviation margins; what are the rebalancing procedures? - Are the exceptions, escalation, and monitoring procedures specified? - How often is the IPS reviewed? - The IPS is often complemented by IG and MOP describing in detail the foreign reserves management framework and the relevant operational procedures to ensure that all parameters decided by relevant bodies and committees are strictly adhered to and exceptions are duly reported and sanctioned as needed. ### Accountability and transparency highlights - Accountability promotes openness, builds public trust, and underpins the effective stewardship of national assets. - Independent audits and regular reporting to government bodies enhance public confidence and reinforce prudent management practices. - The IMF Safeguards Assessment enhances accountability and governance by evaluating control environment, risk management practices, and financial reporting frameworks; recommendations strengthen governance, internal controls, and transparency. - The IMF Central Bank Transparency Code assesses disclosure of policy objectives, operational frameworks, oversight responsibilities, rationale behind policy decisions, and associated risk exposures. - Information on official foreign reserves should be publicly disclosed according to a pre-announced schedule to promote informed decision making and allow for more gradual market adjustment. - The Special Data Dissemination Standard (SDDS), the Special Data Dissemination Standard Plus (SDDS Plus), and their associated Data Template on International Reserves and Foreign Currency Liquidity (the Reserves Data Template) provide a comprehensive benchmark standard for the content and timing of public disclosures on foreign reserves, predetermined and contingent short-term outflows/inflows of foreign currency resources, and other activities of potential relevance. - Countries that subscribe to the SDDS or SDDS Plus also publicly disseminate the metadata file to describe compilation and dissemination of the Reserves Data Template. - Periodic standardized public information should be defined such that the publication can be continued during difficult market conditions without jeopardizing other policy goals. - Many central banks publish periodic releases, statistical releases on international liquidity and summary balance sheets, and annual reports of reserves management entities, timed to avoid interfering with market operations or pre-announcing changes to reserves management strategies. ### Box 3. Accountability and Transparency: Checklist for TA Missions - Is there a clearly defined accountability framework for managing foreign reserves? - Are the roles and responsibilities of individuals and committees involved in reserves management explicitly assigned? - Does the central bank have formal mechanisms to ensure accountability for foreign reserves management decisions? - Are regular reports on reserves management submitted to relevant oversight bodies (e.g., board, parliament)? - Is there a requirement for senior management or governing bodies to explain deviations from investment guidelines or limits? - Are exceptions, losses, or operational incidents during reserves management disclosed and explained to oversight bodies? - Are internal and external audits conducted regularly on foreign reserves management activities? - Do external auditors have unrestricted authority to access all systems and records, including direct verification with external custodians and correspondent banks? - Is the external audit opinion published in a timely manner (e.g., within three to four months of the reporting date), and if not, are the reasons for delay publicly explained? - Are audit findings formally addressed and corrected in a timely manner? - Is there accountability for implementing audit recommendations related to reserves management? - Do the assets held as reserves meet the criteria set by international standards (e.g., ready availability in the most unconditional form)? The IMF’s Statistics Department can provide guidance according to the international standards (e.g., the BPM7). - Are there clear sanctions or disciplinary procedures for breaches of policies or misconduct in reserves management? - Are accountability reports or statements made publicly available or communicated to stakeholders? - Are there formal transparency policies related to foreign reserves management? - Are transparency practices aligned with international standards or codes of good governance? - Does the central bank publish regular reports on the size, composition, and management of foreign reserves? Are risk exposures and risk management practices related to foreign reserves? Are explanations provided for major changes in reserves levels or investment strategy? - Are the “set and breath” of information adapted to key stakeholders such as the government, parliament, or the public? - Is there a policy allowing stakeholders reasonable access to information on reserves management? - Are any restrictions or confidentiality rules on disclosure clearly communicated? - Does the central bank engage in proactive communication or briefings regarding foreign reserves management? - Are audit reports and assessments related to foreign reserves made publicly available or shared with oversight bodies? - Is the central bank’s website periodically updated? ### Internal governance and operational framework - The internal governance framework must be predicated on clear allocation and segregation of responsibilities and accountabilities. - A well-defined organizational structure from governing levels to operational units establishes separation of duties and authority, mitigating risk and ensuring effective oversight. - Clearly articulated and formally documented delegations and authority limits are essential so personnel understand responsibilities and undertake only authorized transactions. - TA missions reported that many reserves management entities lack formally documented delegations and limits of authority, leading to confusion about responsibilities, inadequately managed risks, and unauthorized or nontransparent operations. - Limited formal reporting lines and escalation procedures impede transparency and timely management intervention, allowing operational and risks issues to remain unresolved. - Box 4 presents a summary of TA mission recommendations on organizational structures. *IMF | MCM Technical Assistance Handbook — Box 1, Box 2, Box 3 content as provided in the source PDF.* ### Box 4. Most Common Recommendations on Organizational Structures ### Box 4. Most Common Recommendations on Organizational Structures ### Recommended hierarchical structure and roles - Adopt a three-tier hierarchical structure: - Strategic level: a high-level body to set overall objectives and approve the IPS. - Tactical level: IC to monitor compliance and coordinate policy reviews. - Operational level: Market Operations Department (front office) to implement investment tactics. - Define roles and responsibilities: clearly outline the responsibilities of each management level, ensuring that the high-level body understands the implications of the IPS. - Separation of duties: ensure clear separation of duties among the front office (FO), middle office (MO), and back office (BO) to promote operational integrity and reduce conflicts of interest. - Enhance compliance monitoring: implement a framework for monitoring compliance with the IPS, ensuring that significant violations are recorded and addressed promptly. - Regular meetings for IC: the IC should hold monthly meetings to review investment strategies, compliance, and operational efficiency. Scheduling future meetings in advance is recommended. - Strengthen risk management: establish a dedicated Risk Management Section (MO) within or outside the Market Operations Department to monitor risk exposure, ensure compliance, and report to the general director regularly. - Capacity building and staff training: focus on recruiting and training qualified staff in reserves management. Engage in partnerships with other central banks for knowledge transfer and provide access to international training programs. ### Generic three-tier governance structure (summary of Figure 2 text) - At the highest level: strategic decisions typically taken by the governing board, a comparable body (Oversight Committee/RCO), or the governor. Responsibilities include setting overarching policies and parameters, establishing the risk control framework, and approving the strategic asset allocation. The board’s oversight role is exercised through periodic reporting by executive management and does not extend to day-to-day monitoring of investment performance. - Implementation delegation: the implementation of strategies approved by the board is typically delegated to an IC. This committee—generally established by the executive management and composed solely of executive level members—is not a separate decision-making body but operates under delegated authority. Responsibilities include defining the operational framework for reserves management, formulation of investment strategies and portfolio benchmarks (to be adopted by the board), conducting regular reviews of reserves management activities, and proposing new investment operations and instruments with supporting policies and procedures. - Footnote: In practice, central banks may rely either on a dedicated IC for foreign reserve management or on a broader ALCO that oversees the institution’s entire balance sheet. References in this Handbook to the “Investment Committee” should therefore be interpreted as referring either to a standalone IC or to an ALCO fulfilling equivalent responsibilities. ### Box 5: Main TA Recommendations for the Investment Committee - 1. Establish a clear framework: define the roles, responsibilities, and authority of the IC in relation to the governing board. - 2. Streamline composition: ensure that the IC includes members with relevant expertise in foreign reserves management and investment strategies. - 3. Regular reporting: require the IC to provide regular reports to the Governing Board on its activities, performance, and adherence to IG. - 4. Focus on oversight: emphasize the role of the IC in providing monitoring rather than engaging in day-to-day operational decisions. - 5. Decision-making powers: formalize the decision-making powers of the IC, allowing it to make tactical investment decisions while adhering to established guidelines. - 6. Performance measurement: establish performance benchmarks for evaluating the effectiveness of investment strategies and decision-making processes. - 7. Direct communication: encourage direct communication between the IC, the governing board, and the MO to enhance transparency and coordination. - 8. Training and capacity building: provide ongoing training for IC members to enhance their understanding of market dynamics and investment strategies. - 9. Regular audits: conduct regular audits of the IC’s activities and performance to ensure compliance with established policies and procedures. - 10. Stakeholder engagement: engage with relevant stakeholders to gather insights and feedback on investment strategies and market conditions. - 11. Documentation and transparency: maintain comprehensive documentation of decision-making processes to ensure transparency and accountability in investment activities. - 12. Review and adaptation: periodically review the IC’s performance and adapt its strategies in response to changing market conditions and regulatory environments. ### Governance deficiencies and escalation procedures - The governance structure should incorporate clear escalation procedures for decisions that exceed delegated authorities, as well as for any compliance incidents or breaches of risk limits. - Design considerations: - Delineate the level of authority required to reconcile inconsistencies or interferences between reserves management activities and other central bank functions. - Avoid unwanted signaling effects from reserves management operations. - Observed issues from TA missions: - Overly complex and inflexible delegation of authority, where the FO is required to seek approval from senior officials before concluding any transaction, irrespective of its size or objective—resulting in delays and impeded negotiation of optimal prices with counterparties. - Restrictions on internal information sharing within the reserves management department; lack of formal or informal interactions between the reserves management department and the department responsible for domestic liquidity management and foreign exchange intervention, leading to missed opportunities for information sharing and collaboration. ### Identified organizational gaps from previous TAs - Weaknesses in defining delegation of authority across hierarchical levels, resulting in blurred responsibilities and reduced decision-making efficiency. - Governing board or governor sometimes lacks a formalized process for periodically reviewing investment activities and risk controls, weakening strategic oversight. - Ambiguous or fragmented organizational structures where hierarchies from top to operational levels are unclear, causing delayed decision making, unclear accountability, and insufficient oversight. - ICs operating without a clear mandate, conducting irregular meetings, or having inadequate authority—undermining their role in setting operational frameworks, effective risk-limiting decision making, and ensuring regular review of portfolio performance. - Need to minimize overlap between functions: segregation of duties among FO (transaction initiation), MO (risk control and reporting), BO (settlements), and accounting functions is often insufficient or overlapping—particularly due to overlapping roles between the FO and MO, with some MO functions embedded within or understaffed relative to the FO. ### Box 6: Recommendations for Front Office - Transaction management: the FO should handle all foreign exchange, securities, and gold transactions to ensure efficient execution and management of these assets. - Investment proposal formulation: the FO is responsible for formulating investment proposals based on market analysis and strategic objectives, ensuring alignment with overall reserves management goals. - Market analysis: regularly conduct market analysis to identify opportunities and risks, providing insights that inform investment decisions and strategies. - Communication with other departments: establish direct communication channels with the MO and BO to facilitate information sharing and operational coordination. - Segregation of duties: ensure clear segregation of duties within the reserves management section to prevent conflicts of interest and enhance operational integrity. - Risk assessment: actively participate in risk assessment processes to evaluate the potential impact of investment proposals and market movements on the portfolio. - Committee participation: actively participate in and provide expertise and inputs for the elaboration of the investment policy framework, including IPS, investment guidelines, strategic asset allocation, risk management, calibration of risks, internal benchmarks, etc. FO experts should also participate in committee reviews to update the investment framework as needed. - Training and development: provide ongoing training and professional development opportunities for FO staff to enhance their skills in market analysis, trading, and compliance. - Compliance with guidelines: before the trade is executed, ensure it complies with established guidelines, policies, and regulatory requirements to maintain transparency and accountability. - Documentation and reporting: maintain comprehensive documentation of all transactions and decisions made by the FO, facilitating audits and performance reviews. - Technology use: leverage technology and trading platforms to enhance the efficiency and accuracy of transaction execution and market analysis. - Feedback mechanisms: establish feedback mechanisms to gather insights from the MO and BO regarding the effectiveness of transactions and operational workflows. ### Risk control, staff conduct, and business continuity - The investment management and risk control activities should be separate to facilitate independent and comprehensive identification, monitoring, and management of risks. - For externally managed portfolios, the risk management framework should apply the same principles and measures as for internal portfolios management. - Staff qualifications and training: - Implement a comprehensive training and development program covering theoretical knowledge and practical skills. - Encourage pursuit of relevant certifications widely accepted as standards in the asset management industry. - Provide practical training in market mechanics and best practices, regular workshops, seminars, and attachments with external managers. - Code of conduct and conflicts of interest: - Staff should adhere to a code of conduct (COC) and conflict of interest guidelines. - Require staff to adopt and comply with professional COC applicable in the markets where operations are conducted. - Extend similar requirements to external managers through contractual agreements. - Business continuity and disaster recovery: - Develop, regularly test, and update comprehensive continuity plans encompassing technology, personnel, and processes. - TA findings indicate some institutions have formal plans integrated within broader risk frameworks, while others have fragmented or partially manual IT infrastructures increasing operational vulnerabilities—particularly with increased operational risks posed by the crescent adoption of AI and new digital technologies. - Emphasize need for comprehensive continuity plans to ensure resilient and uninterrupted reserves management operations. *IMF | MCM Technical Assistance Handbook.* ### Box 7. Internal Governance and Operational Framework: Checklist for TA Missions ### Box 7. Internal Governance and Operational Framework: Checklist for TA Missions ### Checklist for TA Missions - Is there a clearly defined organizational structure for managing foreign reserves? - Are the roles and responsibilities of units and individuals involved in reserves management formally documented? - Does the central bank have formal committees (e.g., ALCO, RCO) overseeing reserves management? - Are the mandates and authority of these committees clearly defined in governance documents? - Are documented policies and procedures in place for executing foreign reserves operations? - Is there a formal process for investment decision making, including approvals and escalation procedures? - Are operational controls designed to prevent errors, fraud, and unauthorized transactions? - Are there formalized IPS, IG, code of ethics, MOP? - Is there segregation of duties among FO, MO (risk/control), and BO functions? - Are there regular internal reports monitoring reserves portfolio performance and risks? - Does the bank provide ongoing training in governance, operational procedures, and risk management to the staff? ### III. Risk Management — Overview - Risk management underpins the central bank’s ability to fulfill statutory mandates and preserve reputation; financial losses or mismanagement can erode public and market trust. - Effective risk control is essential to safeguard the balance sheet and maintain credibility as a stable institution. - Risk management contributes both to protecting value (limit losses) and adding value (informing operational and strategic decisions). ### A. Goals of a Well-Designed Risk Management Framework - Enable identification and management of risks within acceptable parameters reflecting the institution’s risk tolerance. - Measure exposures accurately and implement controls and mitigation strategies to keep risks within defined limits. - Equip the institution to respond proactively to changing risk environments (market volatility, interest rate shifts, currency fluctuations, geopolitical uncertainties). - Support both operational resilience and strategic decision-making through comprehensive risk information that minimizes decision biases. - Foundational components: - Formal articulation of the institution’s risk tolerance. - Precise quantification of the total risk budget. - Explicit delineation of permissible deviations from the benchmark portfolio. - Codification of these parameters within IG and, in some cases, an overarching IPS. - Embedding the SAA within IG/IPS as the reference portfolio guiding investment decisions. - Typical documentation elements: legal mandate, objectives for reserves holdings, applicable risk factors, eligible asset classes, benchmarks, quantitative limits on exposures, allowable tolerances for deviations from benchmark allocations, rebalancing protocols, reporting and governance requirements. ### Key activities in risk management (as described) - Risk identification: market risk, credit risk, liquidity risk, legal risk, custodial risks, operational risk. - Risk measurement: quantitative techniques including value at risk (VaR), expected shortfall (ES), stress testing, duration analysis, downgrade probabilities and credit default swap analysis, bid-ask spread and trading volume assessments. - Risk mitigation: diversification, hedging, SAA, tranching, currency and asset-class diversification. - Risk monitoring: continuous monitoring and risk reporting to track performance and compliance with limits; include risk-adjusted return measures for portfolio and benchmarks at the same risk level. ### Common gaps identified by TA missions - Insufficient clarity and detail on the currency composition of reserves. - Vague or absent duration limits and guidelines on interest rate risk. - Lack of clearly defined and quantified limits on credit risk exposures. - Absence of explicit rules on allowable tactical deviations from the SAA. - Lack of defined rebalancing rules. - Underdeveloped reporting requirements and compliance mechanisms. ### Risk environment considerations and emerging risks - Risk management should incorporate risks from additional assets taken on for financial stability objectives; material shifts should trigger reassessment of reserves’ asset allocation. - Need to maintain adequate capital buffers and focus on long-term capital preservation and growth. - Frameworks must remain flexible to emerging risks: technological change, cyber risks, digital currencies/assets, climate-related and geopolitical risks. - Trade-offs: incorporating ESG or geopolitical exclusions versus maintaining high liquidity of reserve assets. ### B. Risk Management and Governance - Adopt an integrated risk management approach to understand individual and interacting risks across the organization; embed risk considerations in corporate strategy and decision making. - Risk duality: risk management both enables taking risks (strategic level) and controls risks (operational level); the role of the risk function shifts across hierarchy levels. - Development of risk management is gradual and requires alignment with organizational risk culture and stakeholder buy-in. - Three-committee good-practice model (not universally adopted but recommended): - RCO (Risk Committee of the Board) - High-level governance body proposing risk appetite and overseeing identification, assessment, monitoring, and management of significant risks (not limited to foreign reserves). - Chaired by the governor or deputy governor (chief risk officer (CRO)); composed of senior representatives from risk management, treasury/foreign reserves management, legal/compliance, finance/accounting, internal audit, operations, etc. - In reserves management: identifies risks of eligible assets and management styles, defines limits aligned with risk appetite and regulatory expectations, approves and reviews risk management policies, frameworks, and methodologies, reviews exposures and approves corrective actions. - Note: If a RCO has not been established, the IC is usually in charge of proposing the SAA and submitting it to the board for approval.10 - AC (Audit Committee) - Oversees risk management, financial reporting, internal controls, and compliance; composed of independent members with expertise in finance, auditing, and risk management. - Reports to the board; evaluates policies, procedures, and controls; monitors internal controls to safeguard assets and ensure compliance with IG and risk limits. - ALCO (Assets and Liabilities Committee) - Senior management committee overseeing risks associated with the bank’s balance sheet structure; holistic assets-and-liabilities view. - Chaired by governor/deputy governor or senior executive (chief financial officer); includes treasury/foreign reserves management, risk management, finance/accounting, legal/compliance, operations/back office. - Ensures alignment of asset duration and liquidity with liability structure, sets liquidity targets and policies, oversees funding plans, cost of funds, and capital adequacy. - ALCO and IC functions are sometimes confused; when no ALCO exists the IC may pursue similar goals, but ALCO focuses on balance sheet and structural risks while IC focuses on investment portfolios.11 - Typical reporting and accountability lines: - RCO and AC normally report to the board. - ALCO is typically a management/executive committee chaired by the governor/deputy governor. - Defense lines: ALCO = first line of defense; RCO = second; AC = third. - Trend toward enterprise risk management (ERM): - ERM offers a structured, integrated approach to identify, assess, and mitigate financial, operational, market, and liquidity risks across central bank functions. - Benefits: improved decision making, optimized resource allocation, standardized risk practices and reporting, stronger risk awareness and accountability. - ERM comprises 10 interrelated components (as described in the source) and should be adapted to the central bank’s specific operational environment. ### Pillars of an effective cross-functional risk management system - Governance: robust organizational structure with clearly defined risk owners and information flows. - Technology: relevant data, reliable models, and adaptable IT tools. - People: expertise to combine quantitative outputs and qualitative judgment. - Risk integration: integrated processes to ensure risk insights inform asset allocation and investment decisions. *IMF | MCM Technical Assistance Handbook — Box 7. Internal Governance and Operational Framework: Checklist for TA Missions* ### Box 8. A Risk Management Framework: Checklist for TA Missions ### ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i - Box 8. A Risk Management Framework: Checklist for TA Missions ### Checklist for TA Missions: Risk Management Framework - Is the hierarchy of objectives well defined in the IPS? - Is there a formalized and clear governance framework for effective oversight and accountability in risk management practices? - Are all the risks identified and continuously monitored (currency, liquidity, credit, interest rate, volatility, and other market risks; legal, custodial, settlement, and other operational risks) for compliance? - Is there a policy to continuously monitor and manage risks associated with foreign reserves management? - Is there a policy to develop strategies for managing identified risks to mitigate their impact effectively? - What are the reporting mechanisms for providing adequate information for informed decision making regarding foreign reserves? - Is there a risk management unit within the organization to monitor risk exposure and ensure compliance? - Is there a three-tier management structure for effective oversight? - Are there different roles within the organization for managing different types of financial risks? - What are the risk metrics and indicators to manage each type of risk, and how often are they reviewed and evaluated? - Is the risk budget explicitly quantified using specific metrics (e.g., VaR, ES, duration deviation limits) rather than just qualitative statements? - Are there risk assessment reviews conducted on a regular basis to evaluate all the risks identified? - Are limits and minimum and maximum thresholds defined for each category of risk, asset, instrument, and currency? - Are specific credit risk mitigation tools, such as collateralization and margining processes, employed? - Are there guidelines for defining the currency allocation and reviewing this allocation? - Are stress tests and scenario analysis conducted regularly and constantly improved? - Is a risk/return analysis conducted regularly to assess the appropriateness of including asset classes in each tranche? - Are there regular reviews conducted on risk management functions, decision-making processes, and structure and governance? - Is there a process for escalating significant risk issues promptly? - Is there a formal contingency or crisis management plan related to foreign reserves risks? - Is ongoing staff training provided on risk management policies, tools, and compliance requirements? ### Independent Audit, MOP, and Governance Observations - An independent internal audit should regularly assess procedures and controls regarding consistency and compliance with the institution’s policies and formulate proposals to the AC or top management for improving the governance and organizational structure. - TA missions identified critical governance issues in some reserves management departments: - Instances where the department has never undergone an internal audit and no formal visit is planned for the following months. - Absence of external auditors and lack of oversight by appointed observers leaving the department operating in relative isolation from the rest of the central bank. - Undocumented procedures increasing operational risk. - Recommended remedy: drafting and using a MOP to improve the structure and management of operations and create a collective memory. - Purpose of a MOP: - Serves as the fundamental operational framework to ensure consistency, transparency, and efficiency in managing reserves assets. - Details step-by-step processes and responsibilities for execution of investment decisions, risk management, and compliance monitoring. - Operationalizes IPS and IG directives into actionable tasks and controls at the transaction level. ### Requirements for Strong Risk Management (Box 9) - Board and senior management awareness: - Board and senior management must recognize the significance of risk management, support and compensate risk managers, understand their role as ultimate risk managers, and actively engage in relevant investment processes. - Qualified risk managers: - Risk management team must possess quantitative and qualitative skills in risk analysis, create and interpret risk metrics, and contribute to long-term strategies including strategic asset allocation and investment guidelines. - Portfolio managers as risk managers: - Portfolio managers should embrace their role as risk managers and understand risks to make informed decisions and position portfolios sensibly. - Effective coordination among stakeholders: - Both formal and informal communication channels across organizational levels are necessary; regular meetings (board sessions, investment committee meetings) should review risk metrics and discuss adjustments to investment policy. ### Organization at the Operational Level - At the board level, risk information and supporting data must be timely, accurate, and complete to support senior decision makers. - Effective risk governance must guarantee identification, measurement, and treatment of all risks for smooth implementation. - Risk definition and control often fall to a dedicated risk directorate, but structures vary: - Risk management functions may be integrated within the reserves management department or distributed across units (MO or broader ERM team). - Core mandate: identify, assess, and manage financial market, credit, operational, and legal risks using methodologies such as external ratings, duration metrics, VaR, ES, and risk matrices. - Determine acceptable margins of deviation and benchmarks for active management oversight to inform rebalancing, identify operational risks, and implement mitigations. - The MO plays a key role in continuously monitoring compliance by portfolio managers with the IPS. - Organizational arrangements differ across central banks; survey findings: - One-third (34 percent) of respondents have integrated FO, MO, and BO within the same department. - 29 percent maintain clear separation among the three units across different departments. - 25 percent have the FO and MO in one department, with the BO operating independently. - Despite IMF's 2014 recommendations for separation, a majority (59 percent) of central banks still place the MO alongside the FO. ### Segregation of Duties and Reporting Lines - Separation of FO, MO, and BO functions has progressed, aided by integrated IT systems and straight through processing (STP) with protected user access. - Emergence of corporate ERM departments has led some institutions to fold MO into bank-wide ERM, changing reporting lines. - Segregation of reporting is essential to preserve independence and integrity of operational and risk management activities. - Convergence of reporting lines should occur only at the highest executive levels to ensure operational decisions and risk oversight remain insulated from conflicts of interest. ### Front Office, Middle Office, Back Office Roles - Front Office (FO): - First line of defense; manages assets in compliance with market, credit, and liquidity risk limits adopted and formalized in the IPS, IG, and MOP. - Middle Office (MO): - Typically constitutes the second line of defense. - Responsibilities include: - Articulating desired strategy and risk tolerance as defined by the executive board or governor. - Proposing and updating a system of limits reflecting evolving risks. - Developing procedures for acceptance of new instruments, currencies, and counterparties and proposing risk control measures. - Establishing or recommending benchmarks for active portfolio management. - Monitoring benchmark changes and determining rebalancing methods. - Overseeing exceedances and generating reports for the IC and the RCO. - Calculating performance metrics and producing corresponding reports for committees. - Potentially conducting market monitoring studies to inform decision making. - A separate Risk Management Unit or MO should monitor all portfolios daily and establish working groups to control market, credit, liquidity, operational, and legal risks, collaborating with Operational Risk Unit and Legal Department as needed. - Back Office (BO): - Considered the third line of defense at the operational level. - Typical functions: - Transaction processing and settlement, reconciling trades with counterparties and third parties to ensure trade finality. - Recordkeeping and reporting, maintaining detailed transaction records and reconciliations with external records. - Reporting for internal risk monitoring and compliance. - Maintaining and updating control procedures to mitigate operational risks and ensure robust trade verification, confirmation, and exception handling. - Ensuring accuracy of prices and asset valuation in conjunction with accounting, crucial for risk measurement. ### Middle Office: Checklist for TA Missions (Box 10) - Is the role of the MO clearly defined within the organizational structure? - Is the MO segregated from the other operational units? Is there a direct communication channel with the governing board to facilitate information flow and enhance decision making? - Does the MO have responsibility for risk monitoring, valuation verification, and performance measurement? - Is it adequately staffed and trained to enhance operational effectiveness in monitoring, analysis, and compliance? - What are the reports elaborated by the MO to inform the executive board and the IC about risks, compliance, and performance metrics? - Does the MO independently monitor post trade compliance with risk limits and IG? - Are discrepancies or breaches identified by the MO promptly reported and escalated? - Does the MO conduct independent “market conformity” checks to ensure trades were executed at prevailing market rates, identifying significant off-market deviations? - Is there a documented process for trade capture, confirmation, and verification involving the MO? - Does the MO perform trade reconciliation between FO and BO records? - Is performance measurement granular enough to attribute returns to specific factors (e.g., asset allocation, security selection, currency effect) relative to benchmarks? - Is there a defined process for benchmark maintenance, including rules for rebalancing and handling cash flow reinvestments? - Are exceptions and discrepancies in trade data timely investigated and resolved? - Are appropriate IT systems and tools in place to support MO functions? - Are system controls and data integrity regularly reviewed to ensure reliability? - How does the MO accomplish its tasks in monitoring trading activities and ensuring compliance with established guidelines and regulations? Are there performance indicators to evaluate MO effectiveness? - What is the frequency of internal audits for assessing the performance of the MO? - What are the relations between the FO, MO, and BO to ensure alignment in trading strategies and risk assessment? ### Risk Model Evaluation and Modification - Risk model evaluation and modification typically fall within the remit of the MO or a risk directorate. - Functions include: - Systematic testing and validation of risk models. - Estimating and adjusting the uncertainty structure of exogenous variables. - Formulating models that address key risk concerns, deriving and calibrating density functions for relevant factors. - Executing stress tests to assess portfolio resilience under adverse scenarios. - Objective: ensure risk models remain robust, adaptive to evolving market conditions, and supportive of effective risk governance. *IMF | MCM Technical Assistance Handbook* ### Box 11. Back Office: Checklist for TA Missions ### Box 11. Back Office: Checklist for TA Missions ### Back Office checklist - Is the role of the BO clearly defined within the organizational structure? - Is the BO segregated from the other operational units? - Trade confirmation and settlement: what are the procedures in place to confirm that trade details match terms outlined by the front office (e.g., amounts, currencies, settlement dates)? - Does the BO keep key documentation: trade confirmations, contracts, and counterparty agreements? - Does the BO confirm bank account details, currency codes, and payment instructions prior to the settlement process? - Does it perform daily reconciliations of cash flow records with external accounts? - Accounting and reporting: does the BO verify that each transaction is posted correctly in the accounting system? Does it prepare detailed schedules for audits, including transaction history, reconciliations, and valuation data. - Risk management and control : does the BO maintain a risk register documenting identified risks and mitigation plans? - Regulatory compliance: does the BO verify transactions against national and international regulatory frameworks like FATF standards? Does it ensure proper paperwork is on file? Does it conduct periodic audits to assess adherence to compliance protocols? ### Interactions among the FO, MO, and BO - Interactions among the three functions—the FO, MO, and BO—are generally limited, and ideally, each of them should report to a distinct reporting line. - The risk identification and control function, typically conducted by the MO, should operate independently from operations management to ensure objectivity and effectiveness. - Interactions between the MO and both the FO and BO should be restricted to specific activities to maintain clarity in responsibilities. - Physical separation of functions is ideal but may not always be feasible based on premises layout. - When interactions occur, they may be confined to analytical tasks, such as assessing a counterparty for inclusion in the FO's eligible list. - FO staff’s product and market expertise may be essential for executing certain MO tasks, such as analyzing market depth for rebalancing feasibility, in particular in small central banks. - Confidentiality of sensitive information may necessitate that FO and BO staff be situated in secure-access locations, a requirement that may not extend to the MO’s operational activities. - Though not always possible, the BO and FO should report to different operational directorates and reside in different secure premises. ### Accounting, reporting, and monitoring - Reporting and control are essential mechanisms in the investment process; reporting allows decision makers to know if the investment strategy is working as expected. - Reporting and control should contribute to constantly challenging the status quo and generating continuous improvement in investment activity. - The general principles for internal governance used to ensure integrity of the reserves management entity’s operations should be publicly disclosed. - Disclosures may be made as part of the entity’s annual financial statements, on an official register, in other publications, or on the entity’s website. - Disclosures could extend to roles of the governing board, IC, RCO, and ALCO in setting reserves management policies and parameters, internal audit, the role of an AC, and external audit arrangements. - Reporting framework hierarchy and frequency: - MO: responsible for daily reports detailing holdings, risk, and performance. - Department managers: conduct daily oversight related to portfolio size, risk, and compliance. - IC: engages in monthly reviews to assess overall financial health. - Board of directors: provides quarterly oversight focusing on portfolio composition, returns, and performance metrics. - Reserves management strategy should be consistent with fundamental objectives set by the monetary authorities and supported by appropriate reporting framework and accounting conventions. - Most central banks subscribe to an internationally recognized accounting framework that provides detailed guidelines for fair value measurement and disclosure of financial instruments. - For reserves management, it is important to report in a single currency the fair value of the reserves; if the financial accounting framework does not provide such information, internal reporting procedures should aim to provide it. - TA missions should include a detailed assessment of the accounting standards in use; International Financial Reporting Standards (IFRS) should be adopted and implemented where possible. - TA missions should evaluate the proper application of sound accounting principles to ensure there are no evident accounting errors (for example, classification of financial instruments as either securities held for trading or investment securities). - Effective reporting should be clear, concise, and directly supportive of informed decision making; concise reports facilitate review, escalation, transparency, and accountability. - Reporting data to the IMF’s Statistics Department and public data dissemination according to SDDS and SDDS Plus contributes to enhancing transparency of reserves-related data internationally. - Performance monitoring involves assessing performance against established benchmarks, limiting breaches, and swiftly escalating issues. - Investment decisions should be consistent with the chosen strategy and not dictated by the reporting and accounting framework. - The investment horizon should be appropriate to adequacy of reserves, objectives for holding reserves, and central bank risks; inappropriate short horizons can reduce long-term average return and increase volatility and reinvestment risk. - Conduct of reserves management activities should be included in the annual audit of the reserves management entity’s financial statements by independent external auditors; the audit opinion should be publicly disclosed. - Some countries mandate audits by a state auditor; INTOSAI has aligned its public sector financial audit guidelines with International Standards on Auditing (ISA). - Reserves holdings should be properly represented in financial statements using valuation methods reflecting the nature of holdings and reserves management objectives; adherence to IFRS supports true and fair opinion. - Reserves management activities are generally represented under the fair value principle; deviations in domestic-currency translation may occur, but the foreign currency value of reserves matters for intervention and repayment purposes. - Some entities may require supporting rules to avoid premature distribution of unrealized market-based valuation gains included in net profits. ### Information systems - Information and transaction processing systems should: - Enable secure and confidential negotiation of transactions. - Ensure transactions are properly recorded, including confirmation between parties. - Forward transactions to the MO for verification and the BO for validation of the opening balance sheet. - Facilitate continuous monitoring of operational boundaries and record any exceedances while triggering alerts. - Maintain an audit trail for all transactions regardless of validation status. - Prevent operators from canceling transactions unilaterally. - Allow accurate calculation of management results. - IT system guidance: - Be consistent with the mandate to manage the foreign reserves and capable of handling all authorized instruments (deposits, repos, securities, derivatives, currencies, etc.) and associated operations and flows. - Include features to monitor risks associated with each instrument or transaction type (liquidity, credit, interest rate risk, etc.) and allow the entity responsible (generally the MO) to adapt and update limits deviations per IC decisions. - Be reliable and available, with maintenance services, robustness, data availability at all times, and operations processed under any conditions. - Comply with cybersecurity standards (ISO 27001, NIST) and protect sensitive data flows (such as messages and instructions sent through SWIFT) via encryption. - Implement robust disaster recovery and business continuity (BC) frameworks; remote working solutions with secure access and backup disaster facilities may be implemented. - Be adapted to the risk management policy and organization, ensuring segregation of functions with differentiated accreditations so users access only required functionalities (example: transaction ticket validated only by an accredited FO dealer; BO may reopen under procedures but not edit; only FO dealer authorized to amend). - Ensure a reliable audit trail tracing a transaction from negotiation to final accounting recording. - Provide a comprehensive view of foreign reserves exposures, risks, and associated limits as defined by senior management/board or committee(s). - Be scalable to adapt to evolution of the foreign reserves framework without rebuilding from scratch. - Trade-offs and practical considerations: - Adoption and development of IT infrastructure presents tradeoffs between priorities and constraints; central bank should balance needs and costs and HR capacities. - A fully integrated solution—from negotiation to final accounting recognition with automated compliance verification, performance calculation, and reporting—is desirable but may be justified only for institutions with sufficient financial strength, reserves, and political commitment. - For smaller or less technically ambitious institutions, a highly sophisticated fully integrated IT infrastructure may not be justified. - Maintaining multiple standalone but interconnected systems can be sensible when activity is low and systems are well-functioning; however, manual operations between systems are potential sources of operational risks and require a detailed MOP to mitigate risks. - Data governance and quality: - Audit trail reliability and strict compliance with standards, committees, international standards, and local regulations are essential. - Numerical accuracy, data completeness, and consistency across systems facilitate correct portfolio valuation, risk measurement, and regulatory reporting. - Implement a robust data governance framework with clear ownership and accountability for data integrity. - Use automated validation and cleansing tools to detect inconsistencies; define a single data model for all transactions (instruments, currencies, rates, maturities). - Allow market data sources to feed into a central data warehouse for consolidated reporting. - See Figure 6. Workflow of the Processing and Settlement of a Transaction. *IMF | MCM Technical Assistance Handbook.* ### Box 12. IT Infrastructure: Checklist for TA Missions ### Box 12. IT Infrastructure: Checklist for TA Missions ### Checklist for IT infrastructure supporting foreign reserves management - Is there an IT governance framework that supports foreign reserves management activities? - Is there a documented IT disaster recovery plan covering critical systems for foreign reserves management? - Are regular tests and updates conducted on the disaster recovery plan? - Is there a business continuity plan to ensure uninterrupted reserves management operations? - Is there specific IT infrastructure, other than market data information, operated for the foreign reserves management area? Is it composed of multiple systems provided by different vendors? - Is the IT infrastructure developed internally or acquired from external vendors? - Is the IT infrastructure shared by different units (the FO, MO, BO)? Is there a strict segregation of the functions between the FO, MO, and BO with specific access-control profiles? - Is STP implemented to automate transactions and reduce errors? - Does the system cover all types of instruments and operations authorized by the IC? - Is it capable of monitoring the limits set by the relevant committee in real time and automatically triggering an alarm in case of a limit breach? Are there limit threshold alerts implemented? - How does the system ensure that the audit trail is reliable, ensuring that each transaction is documented from the initiation to the settlement (time stamps, validation, users, etc.)? - Can the system monitor the compliance of each transaction with the eligibility criteria defined by the IC? - Can the system monitor the global situation of the foreign reserves of the institution (risk parameters, allowed margin of deviations, liquidity, etc.)? - Is it automatically interfaced with the internal accounting system infrastructure? - Can the infrastructure be used for simulation or stress testing exercises? - Can the infrastructure automatically compute the financial positions, active performance, and absolute performance of each portfolio and its attribution? - What are the ad hoc and periodic reports (positions, liquidity, VaR, exposures) computed by the IT infrastructure? Does it allow the elaboration of dashboards and exports (Excel, pdf, etc.)? - Does the IT infrastructure use standardized information and data to facilitate interface between the different software programs while guaranteeing their integrity, accuracy, and confidentiality? - Finally, are there MOPs available, used and regularly updated? Is the maintenance operated internally or outsourced to a third party? Is the training and recruitment policy adapted to the IT infrastructure? ### Key conclusions and guidance from the TA handbook - The TA handbook presents best practices and the state of the art that all central banks should pursue in managing their foreign reserves. - Establishing or modernizing the foreign reserves management function must be approached holistically, considering all necessary aspects to conduct this activity within an efficient and secure framework. - Risks of prioritizing rapid development without adequate consideration of risk tolerance, identification and management of risks, or sufficient human, financial, or technological resources are emphasized. - Creating or developing a foreign reserves management function can rapidly become: - technically complex (IT architecture, creation of dedicated and secure facilities, possibly including a backup site), - organizationally demanding (governance, committee formation, new functions—particularly risk management), - financially burdensome (recruitment of experts, IT developments) if aligned with international best practices. - Many central banks, especially in developing and more vulnerable economies, face structural challenges: limited internal expertise, weak governance, incomplete legal and regulatory frameworks, and budget constraints that limit recruitment, expertise development, and updates to technical and IT solutions. - Recommending immediate full adherence to international best practices may be counterproductive in some contexts; a tailored, staged approach is often more appropriate. - The handbook proposes a pragmatic three-stage roadmap of increasing sophistication to help institutions progressively evolve their foreign reserves management framework until best practices are achieved. - The number and scope of steps in the proposed roadmap are illustrative only and should be tailored to the specific circumstances of each central bank. - The primary objective is to offer a logical framework of progression to recommend a tailored roadmap based on the institution's status and targeted objectives (e.g., active versus passive management, broadening the investment universe, etc.). *ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i - Box 12. IT Infrastructure: Checklist for TA Missions* ### Appendix I. Assessment of the Investment Policy Statement of the ### Appendix I. Assessment of the Investment Policy Statement of the Central Bank ### A- Introduction - 1) The purpose of the IPS is clearly defined - 2) The area and assets covered by the IPS are mentioned (e.g. foreign currency reserves) - 3) The IPS refers to the Statutes of the Central Bank (cite the relevant articles) - 4) The IPS refers to other relevant legal texts mandating the CB for managing the assets referred to in 2) - 5) Does the IPS specify a frequency to review the IPS periodically (3 years as a standard)? - 6) Does the review process include an external expert assessment? - 7) Does the IPS specify the objectives of the management (capital preservation, liquidity and return IN THIS ORDER)? - 8) Does the IPS specify additional/secondary objectives (e.g., currency convertibility, ESG standards, etc.)? ### B- Governance and Institutional Framework - 9) Does the IPS specify the roles of all the following bodies and committees (or equivalent) involved in the foreign reserve management process: Board of Directors, the Governor, the Investment Committee (IC), the Risk Committee (RCO), the Asset and Liability Committee (ALCO), the Audit Committee (AC) and others? - 10) Does the IPS specify the roles of all the following departments (or equivalent): Operations Department, Risk Department, Foreign reserve management department, others? - 11) Does the IPS specify the following roles of the IC: - Implementation of the IPS, - Tactical decisions, - Compliance and monitoring of the implementation, - Performance and evaluation, - Delegated mandates management, - periodic reporting to the Governor/Board of Directors - 12) Does the IPS specify the option to delegate management mandates? What are the criteria for selecting external managers? - 13) Does the IPS specify the segregation of functions between operational and risk control management? ### C- Investment Strategy and Asset Allocation: Principles - 14) Does the IPS set the main principles, criteria and authorization for the management process? - 15) Does the IPS refer to the Investment guidelines and other documents (e.g., manual of procedures) for the operational details of the investment strategy? - 16) Does the IPS formulate a strategic asset allocation? - 17) Does the strategic asset allocation include a neutral reference including the following parameters: - currencies, - asset classes, - duration, - liquidity, - Credit risk exposure, - risk limits and mitigation measures, - other? - 18) Does the IPS specify and defines different tranches by maturity and liquidity buckets? - 19) Do the tranches match identified liabilities? - 20) What are the currency guidelines? (e.g., USD anchor, risk neutrality) - 21) How are the benchmarks defined for each tranche? - 22) How are the management styles defined for each tranche (active/ passive)? ### D- Permitted Asset Classes and Instruments - 23) Are the permitted asset classes and instruments clearly defined (e.g., term deposits, fixed rate bonds, repo)? - 24) Are the credit quality of the counterparties and issuers defined (e.g., only AAA securities and counterparties)? - 25) Are the maximum asset maturity and portfolio modified duration constraints specified (e.g., 20 years maximum maturity for AAA sovereign bonds, modified duration of the liquidity portfolio set to 0,75)? - 26) Are derivatives permitted and for which goals (e.g., hedging purpose)? - 27) Does the IPS provide a list of prohibited instruments/asset classes/strategies (e.g., floating rate bonds, interest rate swaps, short selling, leverage, etc.)? ### E- Risk Management Framework - 28) Does the IPS define and specify market risks (interest rate exposure through a duration limit, volatility, currency risk, etc.)? - 29) Does the IPS define and specify credit risks (credit quality threshold, concentration risk, counterparty limits, etc.)? - 30) Does the IPS define and specify liquidity risks (minimum and maximum of liquid assets, maximum exposure on a specific issuance)? - 31) Does the IPS define and specify operational risks (manual of procedures, 4 eyes principle for trading, periodic audits)? - 32) Does the IPS define and specify legal and reputational risks (jurisdictional restrictions, legal reportings, code of ethics, etc.)? ### F- Counterparty and Service Provider Standards: Selection Criteria - 33) Does the IPS specify criteria for selecting counterparties and service providers (reputation, credit rating, legal oversight, operational capability, other)? - 34) Does the IPS specify supervisory and risk management expectations when selecting custodians and correspondent banks? - 35) Does the IPS specify a minimum of counterparties to transact with or concentration limits? ### G- Liquidity Management: Liquidity Buffers - 36) Does the IPS specify a minimum weight of short-term assets and their specificities (e.g., 5% of the portfolios with a maturity up to 15 days, or 50% of the liabilities maturing in 30 days covered by sight deposits)? - 37) Does the IPS specify a minimum of custodian and counterparties or a maximum exposure on them to diversify the risk? - 38) Does the IPS specify circumstances allowing concentration for specific counterparties (e.g., BIS)? ### H- Delegated Management and External Relationships - 39) Does the IPS provide a list of approved external managers or institutions (e.g., WB RAMP, BIS, G7 central banks)? - 40) Does the IPS describe the delegation process: governance, reporting, performance monitoring requirements? - 41) What are the contractual agreements: required documentation and legal safeguards? ### I- Exceptions Handling and Escalation Procedures - 42) Does the IPS specify an exceptions policy: steps for requesting, approving, documenting, and reporting deviations? - 43) Does the IPS specify a procedure to report unresolved or serious breaches to the Board or other governance body? ### J- Reporting, Accountability and Transparency - 44) What are the frequency and content of reports to the IC, the Board and the management? - 45) What are the public disclosure policies (e.g., annual reports, parliamentary hearings, web publication, other)? - 46) What are the internal and external audit schedules and the compliance monitoring frameworks? ### K- Review and Continuous Improvement - 47) What is the schedule for reviewing the IPS and which body is responsible for it? - 48) What is the schedule for evaluating the performance and assessing the investment results? - 49) Does the IPS specify a commitment to align with evolving international standards and adhere to prudential guidelines? ### Appendix II. Central Banks’ Accountability and Transparency (examples) - Accountability Provisions (examples) - U.S. Federal Reserve (Fed): The Fed is subject to regular audits by the U.S. Government Accountability Office. These audits assess the management of foreign reserves and asset performance, thus ensuring accountability for decisions made. In addition, the Fed publishes reports on its activities and decisions, which are available to the public and reviewed by Congress. - European Central Bank (ECB): The ECB is required to report its activities to the European Parliament. The President of the ECB regularly presents reports on monetary policy, including reserves management, and answers questions from members of Parliament. This ensures direct accountability to elected representatives. - Bank of England (BoE): The BoE is subject to external audit by the National Audit Office, which assesses the management of its finances and foreign reserves. In addition, the Governor of the BoE is accountable to Parliament, explaining policy decisions and management strategies. - Bank of Canada (BoC): The BoC publishes annual reports and audited financial statements, which are reviewed by the Office of the Auditor General of Canada. These reports include information on reserves management and performance, ensuring that those responsible are held to account. - Reserve Bank of New Zealand (RBNZ): The RBNZ is subject to regular external audits. Its annual report includes a section on the management of foreign reserves, and the Governor is required to present this report to Parliament, where he or she answers questions from parliamentarians about the decisions made. - Transparency Provisions (examples) - U.S. Federal Reserve (Fed): The Fed publishes quarterly and annual reports on its activities, including the management of foreign reserves. The Federal Reserve Board's reports detail the performance of assets held, interest rate policies, and economic decisions made. The Fed also holds press conferences to explain its decisions, making its actions accessible and understandable. - European Central Bank (ECB): The ECB publishes an annual report on its activities, including detailed information on foreign reserves management and financial results. In addition, the ECB publishes quarterly updates and holds press conferences after monetary policy meetings to explain its decisions, thus enhancing transparency. - Bank of England (BoE): The BoE publishes a quarterly report on its monetary policy and economic forecasts, which includes information on the management of foreign reserves. It also publishes detailed accounts of the decisions made by its Monetary Policy Committee, allowing clear monitoring of actions and the underlying logic. - Bank of Canada (BoC): The BoC regularly publishes reports on the management of its foreign reserves and financial results. Its website provides up-to-date data on reserves, as well as analysis of investment performance. In addition, the BoC holds seminars and public discussions to explain its policies and strategies. - Reserve Bank of New Zealand (RBNZ): The RBNZ publishes monetary policy statements, which include information on the management of foreign reserves. It also publishes information on the framework designed with the Ministry of Finance and information on asset and currency allocations. It is committed to consulting the public and gathering views on its policies, thereby promoting inclusive governance. ### Appendix III. Proposed Multistage Roadmap (illustrative only) - Key Area: Description - Stage 1: The institution establishes a clearly defined foreign reserves management framework. - Stage 2: The institution pursues a conservative management approach within a clearly defined secured framework. - Stage 3: The institution implements sophisticated and differentiated management styles and adheres to the highest standards. - Governance - Stage 1: Statutes mandate foreign reserves management. Internal documents (IPS, regulations) set up a framework. The IC is established and makes tactical decisions. The highest decision-making bodies (board, governor) are regularly informed and make strategic decisions. Statutes explicitly mention reserves objectives emphasizing safety, liquidity, and profitability (in this order). - Stage 2: A comprehensive formalized governance framework is operational (IPS, IG, MOP, SAA, code of ethics). The IC convenes monthly to review performance and adopt tactical positions. - Stage 3: Statutes are unambiguous, allowing flexible, accountable, and evolving reserves management. Governance is aligned with international best practices. Internal documentation is exhaustive, up to date, and conflict free. Governance operates continuously with external audits benchmarking against best practices. - Risk framework - Stage 1: A MO independent from the FO and BO is established. Operational and financial risks are identified, and mitigation measures are implemented. - Stage 2: A risk division independent from an operations division is in place, and the MO reports to it. RCO, ALCO, and AC are established and fully functional. - Stage 3: All the risks faced by the reserves management activity are identified, monitored, and mitigated. Risk management incorporates advanced monitoring techniques (scenario analysis, VaR, ES, etc.). - Accounting - Stage 1: Local accounting standards are implemented and independently verified. - Stage 2: International accounting standards (IAS, US GAAP) are implemented. - Stage 3: IFRS are fully applied with external annual audits. All contracts and transactions comply with internationally recognized standards (e.g., ISDA for swaps and derivatives). - Transparency and accountability - Stage 1: Legal documentation (statutes, IPS, relevant regulation) is published and accessible. - Stage 2: Asset distribution, management style, and performance are disclosed. - Stage 3: Communication is aligned with best international practices and is adapted to various audiences. Performance presentations are aligned with internationally recognized standards. Enhanced communication on implemented strategies is encouraged. - IT infrastructure - Stage 1: IT adapted to basic transactions, recording, and processing and for a simple management portfolio. Audit trail is ensured. - Stage 2: Professional IT solutions support all reserves management activities (transactions, validation, and monitoring). Supplementary in-house solutions allow simulations and scenario analysis. - Stage 3: Fully integrated IT systems (provided by vendors or developed in house) are operational. Automated transactions processing with minimal manual interventions. IT systems can manage all transactions permitted by the IPS and the IG. IT systems are scalable and customizable for future investment framework evolutions. Disaster recovery and back-up solutions are fully operational. - Tranching and asset allocation - Stage 1: Currency liabilities are identified. Structural tranches are identified according to defined parameters and matched with adequate assets. - Stage 2: Tranches are identified, with asset allocation and management style adopted for each tranche. Tranches are reviewed periodically. SAA exercises are conducted periodically. - Stage 3: Tranches are reviewed periodically. SAA exercises are conducted periodically. - Eligible instruments and transactions - Stage 1: Only plain vanilla cash instruments are allowed (fixed rate bonds without embedded options, term and demand deposits). Only highest-quality sovereign and quasi-sovereign and highest-credit-quality counterparties are permitted. Simple strategies and transactions are pursued. Passive management is considered. - Stage 2: The investment universe may include liquidity management instruments (repo, reverse repo). Active management is pursued with the adoption of internal or external benchmarks. Additional risks (leverage, higher duration, new asset classes, etc.) are permitted if the contingent risks are fully understood, accepted, and mitigated. - Stage 3: A broad range of instruments and transactions, including derivatives, are permitted. Credit tolerance is widened to allow exposures to lower-rated issuers or counterparties. Active management is conducted with custom internal benchmarks. - Human resources - Stage 1: Number of staff members and their expertise is adapted to the management sophistication pursued. - Stage 2: Recruitments align with the expertise needed for advanced management techniques and frameworks. Onsite training and professional education (certification) are pursued. External mandates may be delegated for specific asset classes and management styles. - Stage 3: Staff qualifications, certifications, and expertise meet the highest standards in the asset management industry. Training programs ensure knowledge is updated (FO, MO, BO, and IT staff). External mandates may still be required for specific asset classes or innovative management styles. ### Appendix IV. Suggested Outline for Technical Assistance Report on Foreign Reserves Management Framework - Executive Summary - Overview of key findings and recommendations from TA assessment - Summary of major challenges and priority actions - Strategic importance of strengthening reserves management - 1. Governance - 1.1 Legal and Regulatory Framework: Ownership and legal mandates of foreign reserves; Central bank independence and sovereign immunity; Authority delegation, accountability, and coordination with government entities - 1.2 Organizational Structure and Roles: Governance structure (Board, Investment Committee, Front/Middle/Back Office); Segregation of duties and reporting lines; Terms of reference for committees and investment decision-making - 1.3 Investment Policy and Guidelines: Development, approval, and review of Investment Policy Statement (IPS); Definition of objectives: safety, liquidity, and return; Eligible asset classes, risk appetite, and mandate scope - 1.4 Transparency and Accountability: Internal and external audit mechanisms; Reporting to major stakeholders and public disclosure practices; Adherence to IMF safeguards - 1.5 Capacity Building and Staff Development: Staffing adequacy and skill enhancement; Professional certifications and training programs; Succession planning and knowledge transfer - 2. Risk Management - 2.1 Risk Governance: Risk appetite formulation and oversight committees (e.g., Risk and Control Committee); Integration of risk management within organizational culture - 2.2 Market Risk Management: Identification and measurement techniques; Use of diverse risk metrics - 2.3 Credit Risk Management: Issuer and counterparty risk limits; Internal assessments and external ratings usage; Monitoring credit exposures continuously - 2.4 Liquidity Risk Management: Liquidity buffers sizing and calibration methods - 2.5 Operational Risk Management: Segregation of duties and control environment; Incident reporting and business continuity planning - 2.6 Tools and Analytics: Quantitative models and risk dashboards; Scenario analysis and reverse stress testing - 3. Monitoring and Accounting - 3.1 Reporting Framework: Internal reporting frequency and content (daily, monthly, quarterly); Stakeholder-specific reports (investment committee, board, external auditors) - 3.2 Accounting Policies and Valuation: Adoption of IFRS and fair value accounting principles; Treatment of unrealized gains and losses; Recording and reconciliation standards - 3.3 Performance Measurement and Attribution: Benchmark selection and deviation limits; Performance indices and attribution analysis - 3.4 External Audit and Transparency: Independent audits scope and findings; Transparency in reserve holdings and risk exposures; Compliance with IMF data dissemination standards (SDDS, SDDS Plus) - 4. Information Technology - 4.1 IT Infrastructure and Systems: Trading, settlement, risk management, and reporting platform capabilities; Integration levels and front-to-back office automation - 4.2 IT Governance and Security: IT policy framework, cybersecurity standards (e.g., ISO 27001, NIST); Data governance, access controls, and audit trails - 4.3 Business Continuity and Disaster Recovery: IT disaster recovery plans and test procedures; Backup systems and contingency mechanisms - 4.4 Process Automation and Straight Through Processing (STP): Automated trade capture and trade lifecycle management; Real-time limit monitoring and risk analytics - 4.5 Capacity and Staff Training in IT: IT team skill development and ongoing training; User support and system maintenance protocols - Annexes *Source: Appendix I–IV, "TA Handbook: Foreign Reserves Management (Part I)"* --- _Source: https://www.imf.org/-/media/files/publications/miscellaneous/english/2026/ta-handbook-chapter-2026-jun-foreign-reserves-management-part-i.pdf_