## ppea2022036

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---

### Reform objectives and Board guidance (Executive Summary)
- Objectives:
  - Refocus the MCP policy on official action that segments FX markets.
  - Eliminate the concept of potentiality.
  - Update the methodology for identifying MCPs to be market-based and country-specific.
  - Align the MCP policy with other Fund policies while continuing to address objectionable official actions.
- Board guidance (February 2019):
  - "Expressed strong support" for most preliminary proposals.
  - Requested further analysis on: approval of MCPs maintained primarily for non-BOP reasons; addressing non-compliance; ensuring a smooth transition.

### Key policy changes supported by Directors
- Core principles retained:
  - Official actions should not cause unreasonable deviations in exchange rate spreads compared to normal costs and risks.
- Scope and focus:
  - Policy refocused on official action that segments FX markets.
  - Certain practices excluded (e.g., illegal parallel markets excluded from MCP analysis though authorities expected to make reasonable efforts to eliminate them).
- Elimination of potentiality:
  - An MCP arises only when official action results in an actual exchange rate spread exceeding the permissible margin.
- New identification methodology for spot transactions:
  - Country-specific market-based norm: range between the highest and the lowest exchange rates of the day in the wholesale market.
  - Tolerance margin of 2 percent to avoid capturing minor deviations.
  - Apply market-based norm and 2 percent tolerance uniformly across membership for both spot (including bank notes) and non-spot transactions, with further guidance to follow.

### Approval of MCPs maintained for non-BOP reasons
- Background statistics and observations:
  - Among 120 MCP findings made between 2000 and end-2017, 30 MCPs were approved, of which 12 MCPs were approved for non-BOP reasons.
  - Among 45 cases of MCPs reported in the latest Article IV staff reports issued before end-2017, about half were maintained for non-BOP reasons; more than 10 cases due to low levels of market development and about 5 cases for resource allocation.
- Staff proposal (approval subject to strengthened criteria):
  - Retain possibility for Board to approve MCPs maintained primarily for non-BOP reasons in limited circumstances.
  - Additional conditions for temporary approval:
    - (i) the member commits to a credible strategy for the removal of the measure; and
    - (ii) the measure does not constitute an exchange restriction.
  - Intended to guard against unwarranted use of MCPs for non-BOP reasons (Proposed Decision, Paragraph 3(b)).

### Addressing noncompliance and accountability
- Cooperative approach:
  - Continue current cooperative approach; remedial framework for unapproved MCPs deemed unnecessary at this juncture.
  - Use surveillance, technical assistance, standard conditionality in Fund arrangements (prohibits introduction/modification of MCPs during Fund-supported programs), and tailored conditionality where warranted.
  - Board may revisit need for more comprehensive remedial framework in subsequent reviews.
- Enhancements to increase transparency and accountability:
  - More prominent and extensive coverage of MCPs in staff reports, including:
    - existence of measures;
    - their actual or expected economic impact;
    - advice provided to authorities on removal;
    - authorities’ plans regarding the measures.
  - Staff to seek authorities’ views when new MCP findings are made, especially when there is disagreement.
  - Interdepartmental review process and forthcoming guidance note to set requirements for coverage of MCPs in staff reports.
  - Annual circulation to the Executive Board of a list of all approved and unapproved MCPs drawn from staff reports.
- Tools proposed to promote compliance and Article VIII, Section 3 enforcement:
  - (i) More transparent coverage of MCPs in staff reports.
  - (ii) Urging members with unapproved MCPs to eliminate them.
  - (iii) Technical assistance on elimination of MCPs and broader FX market reforms.
  - (iv) Continued monitoring under Fund-supported programs of the standard continuous performance criterion on non-introduction and non-modification of MCPs, and specific conditionality where warranted.
  - (v) Annual reporting to the Board on current MCPs and their approval status across the membership.

### Concept of official action and scope
- Official action focused on actions that segment FX markets; segmentation exists where official action results in an exchange rate available only for:
  - (i) a specific intermediary and/or end-user or a limited group of intermediaries and/or end-users; and/or
  - (ii) a limited range of purposes.
- Official action also includes actions that directly increase or subsidize the cost of certain FX transactions in a manner that causes permissible spreads to be exceeded (e.g., an exchange tax or subsidy), and includes informal guidance or moral suasion by authorities (Proposed Decision, Paragraph 2(a)).

### Elimination of "potentiality" and actual spread-based MCP determination
- The concept of “potentiality” eliminated.
- An MCP arises only if the official action actually gives rise to an impermissible spread, calculated per the new methodology summarized (see Table 1, Paragraph 30).

### New methodology — formula and operationalization
- Principal determination for spot exchange transactions:
  - Min {LOWt; M(H/L)t – 2%} ≤ Rt ≤ Max {HIGHt; M(H/L)t + 2%}
    - HIGHt is the highest (most depreciated) wholesale exchange rate on day t.
    - LOWt is the lowest (most appreciated) wholesale exchange rate on day t.
    - M(H/L)t = (HIGHt + LOWt) / 2, the mid-point of the High/Low range.
    - Rt is the exchange rate arising from official action on day t.
- Permissible spread determined by country-specific High/Low range and a tolerance margin of +/- 2 percent around the midpoint of the High/Low range, whichever is wider.
- Rationale for +/- 2 percent tolerance margin: avoid capturing relatively minor deviations from the market-based norm.
- Treatment of additional costs/subsidies:
  - If imposed on spot transactions where exchange rate is not determined by official action: costs/subsidies deemed levied on the midpoint of the H/L range and compared with the H/L and the 2 percent tolerance margin (whichever is wider). Exchange taxes/costs/subsidies that alone or in aggregate do not exceed 2 percent would not be considered MCPs.
  - If imposed on exchange transactions where the exchange rate arises from official action: the exchange tax or mandatory cost/subsidy is part of the effective exchange rate and compared to the permissible spread; a mandatory cost less than 2 percent could give rise to an MCP if it causes the effective exchange rate to exceed permissible spreads, and a mandatory cost greater than 2 percent would not necessarily result in an MCP if the effective exchange rate remains within the H/L of the day (Proposed Decision, Paragraphs 2.b. and 1.I.a).
- Market data and monitoring:
  - Market exchange rate data (including daily High/Low range) primarily collected from reputable third-party providers (Thomson Reuters and Bloomberg consulted).
  - Staff intend to confirm continued comprehensiveness and reliability of such data in the subsequent review (expected in five years).

### Spot and non-spot transactions — operational notes
- Spot transactions:
  - Defined consistent with global standard: settle at or less than t+2 days (spot); banknote transactions assessed as spot.
  - An MCP arises if an official action exchange rate exceeds the permissible margin, regardless of whether that rate is actually used.
- Non-spot transactions:
  - Methodology applies to non-spot transactions (settling at more than t+2 days).
  - When market data available, compare official-action exchange rate with market exchange rates of same type and maturity.
  - If market data unavailable, use theoretical model and require:
    - Tt – 2% ≤ Rt ≤ Tt + 2%
      - Rt is the exchange rate arising from official action settling at more than t+2.
      - Tt is the exchange rate calculated using the theoretical model described in Initial Considerations.
  - Typical swaps: forward leg evaluated as forward exchange rate; spot leg assessed as spot. Options assessed only if exercised.
  - Bloomberg and Reuters provide calculators; staff may use alternative domestic funding-rate data if more representative.

### Foreign exchange auctions, lagged official rates, illegal parallel markets, and broken cross-rates
- FX auctions:
  - Multiple and single-price FX auctions give rise to MCPs only if they segment the FX market.
  - An auction is not considered to segment the market if all criteria met: access to all intermediaries in good standing; no constraints on bid ranges; allotment based solely on bid ranking.
  - If criteria not met, an MCP arises if the auction exchange rate exceeds the permissible margin (Proposed Decision, Paragraph 2(a)).
- One-day lagged official exchange rates:
  - An official exchange rate calculated on the basis of the preceding day’s market rates will not give rise to an MCP if:
    - (i) the lagged rate is calculated as a weighted average of transaction exchange rates in the wholesale FX market (or, absent a wholesale market, transactions between intermediaries and clients or a combination); and
    - (ii) the transactions included occurred on the business day immediately preceding the day when the official rate is to be used (Proposed Decision, Paragraph 1.II).
- Illegal parallel markets:
  - Removed from scope of revised MCP policy but remain addressed under policy on exchange restrictions; staff will continue to discuss them in Article IV (or UFR) reports and identify underlying exchange restrictions.
- Broken cross-rates:
  - Not considered MCPs under revised policy given near disappearance; may be reincluded if they re-emerge.

### Non-Deliverable Forwards (NDFs) and agreements between central banks
- NDFs:
  - Considered under MCP policy only if closely related to acquiring or selling foreign exchange and if:
    - (i) result from official action;
    - (ii) made available only to a subset of intermediaries or end-users or earmarked; and
    - (iii) closely related to acquiring or selling foreign exchange.
  - Other NDFs excluded from the policy; NDFs settled in local currency that are linked to the exchange rate but not closely related to an exchange transaction will be excluded from MCP scope but can be discussed in Article IV.
  - If an NDF resulting from official action is closely related to an exchange transaction, additional cost/subsidy from the NDF may be considered part of the effective exchange rate and assessed under the methodology.
- Agreements between central banks:
  - Continue current practice: assess agreements structured as bilateral payments arrangements (BPAs) for consistency with Article VIII, Section 2(a) and 3; do not assess agreements not structured like BPAs (e.g., swaps for liquidity support or reserve management).
  - Instances where central bank swap funds are passed on through official action to domestic intermediaries and end-users causing segmentation are covered by the methodology.
  - Agreements structured as collateralized lending not considered under the policy.

### Finding, reporting, and eliminating MCPs
- A single deviation outside the permissible margin gives rise to an MCP.
- Reporting:
  - MCPs reported in the next Article IV consultation or program review report.
- Elimination options:
  - Eliminate the official action that gave rise to the MCP. Approval of the MCP could be granted while removal is in progress; approval normally not to exceed 12 months but may be extended if conditions met.
  - Keep the official action but take credible measures to bring the spread back within permissible margin; staff will assess credibility and give benefit of reasonable doubt. Re-emergence triggers a new finding.
  - No action but demonstrate over an observation period that impermissible spread has not recurred:
    - Staff propose an observation period of 12 months.
    - MCP remains in place during observation period and noted in Article IV or UFR reports.
    - Re-emergence during observation period resets the observation period.

### Expected outcomes and comparisons with current policy
- Revised policy expected to yield fewer MCP findings because:
  - FX auctions that conform to best practices will not be considered official actions.
  - Official exchange rates calculated with one day lag will not be considered official actions.
  - Illegal parallel markets not considered official actions under revised policy.
- Changes across categories (as summarized in Table 1, Paragraph 30) include different treatment of: differing exchange rates for different transactions, lagged official rates, BPAs, exchange rate guarantee schemes, FX auctions, dual/multiple FX markets, illegal parallel markets, and measures increasing/decreasing cost of FX transactions.

### Linkages with the Institutional View (IV)
- Clarifications:
  - CFMs should generally not be designed to give rise to exchange restrictions and MCPs on current transactions.
  - IV does not alter Fund jurisdiction or Article VIII, Sections 2(a) and 3 policies.
  - Avoid potential inconsistencies from applying both Article VIII policies and the IV.
- Assessment approach:
  - Measures that give rise to MCPs and exchange restrictions and are CFMs relating to transactions capital in nature but treated as current will be assessed under Article VIII approval criteria and not under the IV.
  - MCPs applying solely to capital transactions (Article XXX(d)) are not subject to Fund approval; if also CFMs, appropriateness assessed under the IV while identified in Article IV reports as MCPs.

### Resource, data, and monitoring implications
- Resource impact:
  - Limited additional resources expected once policy established (Paragraph 33).
  - Revised definition of official action likely reduces number of cases to monitor; preliminary testing suggests MCPs likely to decline.
  - Initial operationalization may require additional resources but over time fewer resources expected for MCP assessment.
- Monitoring arrangements:
  - Daily monitoring by country teams not foreseen to be resource-intensive and needed only after staff identifies an official action (Paragraph 34).
  - Market data generally available from Reuters and Bloomberg; existing Fund subscriptions adequate.
  - Monitoring to be performed on automated templates after data download.
- Data provision and obligations:
  - New policy does not introduce new data provision requirements but clarifies current requirements (Paragraph 35).
  - Reliance on third-party exchange rate data; member-provided information may be needed when third-party data unavailable.
  - Members already obliged under Article VIII, Section 5 to provide information on “buying and selling rates for foreign currencies” and on “exchange controls,” and must provide information on exchange rates arising from official action that segment the market, among other items listed.

### Transitional arrangements and timing
- Effective date:
  - Proposed effective date nine months following Board meeting, with exceptions (Paragraph 36).
  - As of effective date, the 1981 decision on the current MCP policy and other relevant Board decisions will be repealed.
- Rationale:
  - Delayed entry provides time for members to adjust, and for Fund to prepare guidance and monitoring systems (Paragraph 37).
- Immediate exceptions during transition (Paragraph 38):
  - Revised definition of official action effective immediately.
  - During transitional period, no MCPs found where:
    - (i) official action is an official exchange rate calculated with a one day lag, or an FX auction consistent with specified criteria; or
    - (ii) an MCP results from exchange rate spreads arising in an illegal parallel market.
  - Elimination of provision on broken cross rates effective immediately.
- Status of existing and new MCP findings (Paragraphs 40–42):
  - During transition, current policy continues to apply with exceptions in Paragraph 38 because current MCP policy articulates obligations under Article VIII, Section 3 (Paragraph 40).
  - No new MCP will be found during transition where conditions in Paragraph 41 hold (one-day lag, broken cross rates, qualifying auctions, or illegal parallel market spreads).
  - Existing MCPs based on types of official action no longer covered will be considered eliminated as of the approval date and reflected in the first Article IV consultation report after approval.
  - Other existing MCPs continue until considered eliminated as of the effective date.
  - As of the effective date, all existing MCPs considered eliminated; monitoring under new policy becomes operational; if impermissible spreads emerge, new MCP findings and possible approvals follow revised approval policy. The same official action that gave rise to an MCP under the current policy will not be considered an “introduction” of an MCP for purposes of the standard continuous performance criterion under arrangements in place on the effective date.

*Source: ppea2022036 — Review of the MCP Policy – Proposals for Reform, International Monetary Fund*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Reform objectives and Board guidance
- The review aims to modernize the IMF’s policy on multiple currency practices (MCPs) to: (i) refocus the policy on official action that segments foreign exchange (FX) markets; (ii) eliminate the concept of potentiality; (iii) update the methodology for identifying MCPs so it is market-based and country-specific; and (iv) align the MCP policy with other Fund policies while continuing to address objectionable official actions.
- In February 2019, the Executive Board considered staff’s preliminary proposals and "expressed strong support" for the majority of them, while requesting further analysis on three areas: approval of MCPs maintained primarily for non-BOP reasons; addressing non-compliance; and ensuring a smooth transition.

### Key policy changes supported by Directors
- Retain the core principle that official actions should not cause unreasonable deviations in exchange rate spreads compared to normal costs and risks.
- Refocus the policy on official action that segments FX markets; exclude certain practices (for example, illegal parallel markets excluded from MCP analysis but with an expectation of reasonable efforts by authorities to eliminate such markets).
- Eliminate potentiality: an MCP would only arise if an official action results in an actual exchange rate spread exceeding the permissible margin.
- Replace the current fixed two-percent rule for identifying MCPs for spot transactions with:
  - a country-specific market-based norm (the range between the highest and the lowest exchange rates of the day in the wholesale market), and
  - a tolerance margin of 2 percent to avoid capturing minor deviations.
- Apply the market-based norm and tolerance margin uniformly across the membership for both spot (including bank notes) and non-spot transactions, with further refinement and guidance to be provided as experience is gained.

### Approval of MCPs maintained for non-BOP reasons
- Background:
  - Under the current policy, MCPs can be temporarily approved for both BOP and non-BOP reasons.
  - Historically, countries have maintained non-BOP based MCPs mainly to raise revenue (taxing exchange transactions) and to achieve special resource allocation objectives; such measures often have short-term benefits but tend to hurt long-term growth, distort trade and resource allocation, and impose burdens on businesses and consumers.
  - Among 120 MCP findings made between 2000 and end-2017, 30 MCPs were approved, of which 12 MCPs were approved for non-BOP reasons.
  - Among 45 cases of MCPs reported in the latest Article IV staff reports issued before end-2017, about half of the cases were maintained for non-BOP reasons, with more than 10 cases due to low levels of market development and about 5 cases for resource allocation.
- Staff proposal:
  - Retain the possibility for the Board to approve MCPs maintained primarily for non-BOP reasons in limited circumstances, but strengthen approval criteria.
  - Additional conditions for temporary approval of non-BOP MCPs:
    - (i) the member commits to a credible strategy for the removal of the measure; and
    - (ii) the measure does not constitute an exchange restriction.
  - These two additional requirements aim to guard against unwarranted use of MCPs for non-BOP reasons.
  - Proposed Decision, Paragraph 3(b) (as referenced in the document).

### Addressing noncompliance and accountability
- Maintain the general cooperative approach to addressing unapproved MCPs, while enhancing transparency and accountability.
- Proposed operational measures to address noncompliance include:
  - More prominent and extensive coverage of MCPs in staff reports, with details to be outlined in a forthcoming guidance note.
  - Annual reporting to the Executive Board on all approved and unapproved MCPs.
- These measures are intended to strengthen incentives for compliance while preserving the cooperative framework preferred by most Directors.

### Transitional arrangements and timing
- To ensure a smooth transition and avoid disruptions, staff proposes:
  - Delay of the effective date of the new MCP policy for nine months following approval, with some exceptions.
  - Transitional arrangements covering application of the new policy and the status of existing and new MCP findings (details set out in Section III of the paper).
- Following Board approval of a revised MCP policy:
  - Staff will prepare a detailed guidance note to assist implementation; the guidance note will be shared with the Executive Board for information and published.
  - Staff will conduct outreach to member countries.

### Implementation, review, and cross-policy linkages
- The reformed policy clarifies data necessary for implementation but does not introduce new or modify existing obligations regarding data provision to the Fund.
- Links with the Institutional View on the Liberalization and Management of Capital Flows (the “IV”) are clarified: where MCPs also constitute capital flow management measures, they should be assessed under the IV and, if approved, would be considered appropriate under the IV for the approval period.
- Staff proposes a review of the new MCP policy within a period of five years, once sufficient experience with its application has been accumulated, with subsequent reviews to be conducted every five years or more, as needed.

*Prepared by a staff team from the Legal Department (LEG), Monetary and Capital Markets Department (MCM), and Strategy, Review and Policy Department (SPR), in collaboration with the Research Department (RES).*

### 10. In line with Directors’ views expressed during the February 2019 meeting, staff

### ppea2022036 - 10. In line with Directors’ views expressed during the February 2019 meeting, staff

### Cooperative approach to unapproved MCPs — staff proposal and rationale
- Staff proposes to continue the Fund’s current cooperative approach to addressing noncompliance, with some enhancements.
- Staff concurs with most Directors that a remedial framework for unapproved MCPs is not necessary at this juncture, particularly given the substantial reform of the policy.
- Staff would continue to urge members to eliminate unapproved MCPs and to encourage policy reforms in members’ exchange systems through:
  - surveillance and technical assistance;
  - standard conditionality in Fund arrangements and instruments (which prohibits the introduction or modification of MCPs during a Fund-supported program);
  - specifically-tailored conditionality related to the elimination of MCPs, where warranted.
- Staff view: cooperative approach appropriate because eliminating unapproved MCPs often requires further development of the FX market and institutions that may take time.
- The Board may revisit the need for a more comprehensive remedial framework during subsequent reviews of the new MCP policy if the proposed approach proves insufficient.

### Enhancements to increase transparency and accountability
- Staff proposes more prominent and extensive reporting of identified MCPs in staff reports (both approved and unapproved), including:
  - existence of measures;
  - their actual or expected economic impact;
  - advice provided to authorities on removal; and
  - authorities’ plans regarding the measures.
- When temporary approval of an MCP is requested, staff appraisal will continue to include staff’s recommendation on approval or non-approval.
- When a new MCP finding is made by staff, the views of the authorities on such finding should always be sought for inclusion in the Article IV consultation staff report, especially when there is disagreement.
- Consistent implementation to be ensured through the interdepartmental review process and a forthcoming guidance note on the new policy to set forth requirements for coverage of MCPs in staff reports.
- A list of all approved and unapproved MCPs drawn from staff reports would be circulated to the Executive Board for information on an annual basis.

### Tools proposed to promote compliance with MCP policy and Article VIII, Section 3
- (i) More transparent coverage of MCPs in staff reports consistent with best practices to be identified in the guidance note.
- (ii) Urging members with unapproved MCPs to eliminate them.
- (iii) Technical assistance on elimination of MCPs and broader FX market reforms to requesting countries.
- (iv) Continued monitoring under Fund-supported programs of the standard continuous performance criterion on the non-introduction and non-modification of MCPs, as well as specific conditionality directed towards elimination of MCPs where warranted, and raising awareness of countries about the standard continuous performance criterion.
- (v) Annual reporting to the Board on current MCPs and their approval status across the membership.

### Summary of key elements of the proposed new MCP policy — Concept of official action
- Scope of official action clarified to focus primarily on action that segments FX markets.
- Segmentation defined to exist where official action results in an exchange rate being available only for:
  - (i) a specific intermediary and/or end-user or a limited group of intermediaries and/or end-users; and/or
  - (ii) for a limited range of purposes.
- Official action also covers actions that directly increase or subsidize the cost of certain FX transactions in a manner that causes permissible spreads to be exceeded (e.g., an exchange tax or subsidy), and includes informal guidance or moral suasion by authorities. (Proposed Decision, Paragraph 2(a).)

### Elimination of "potentiality" and actual spread-based MCP determination
- The concept of “potentiality” will be eliminated.
- Under the new policy, an MCP arises only if the official action actually gives rise to an impermissible spread, calculated per the new methodology summarized in Table 1 in Paragraph 30 (see source text for methodology).  
- The overlap between existing and proposed policy is summarized in Table 1 in Paragraph 30.

### Foreign exchange auctions — when auctions give rise to MCPs
- Multiple and single-price FX auctions give rise to MCPs only if they segment the FX market.
- An auction that is not for earmarked purposes/specific end-users is considered not to segment the market if all of the following criteria are met:
  - Access to bid at the auction is granted to all intermediaries in good standing, either directly or indirectly through market makers, in the country’s wholesale FX market so they can buy/sell FX for themselves and on behalf of clients.
  - No constraints are imposed on the range or level of exchange rates that bidders can submit.
  - Allotment at the auction is determined solely on the basis of the bid prices submitted by participants ranked from best to worst exchange rates, and FX awarded according to that ranking up to the intended allotment.
- If an FX auction fails to meet the above criteria, an MCP would arise if the auction exchange rate exceeds the permissible margin per the methodology (see Section B). (Proposed Decision, Paragraph 2(a).)

### Use of official exchange rates with one-day lagged calculation
- An official exchange rate calculated on the basis of the preceding day’s market rates will not give rise to an MCP if:
  - (i) the lagged official exchange rate is calculated as a weighted average of transaction exchange rates in the wholesale FX market and, in the absence of a wholesale FX market, as the weighted average of the transaction exchange rates between intermediaries and their clients or a combination of the two; and
  - (ii) the transactions included occurred on the business day immediately preceding the day when the official exchange rate is to be used. (Proposed Decision, Paragraph 1.II.)

### Illegal parallel markets and broken cross-rates
- Illegal parallel markets would be removed from the scope of the revised MCP policy but would continue to be captured under the Fund’s policy on exchange restrictions, where relevant.
  - Staff will continue to discuss illegal parallel markets in Article IV (or UFR) staff reports, identify exchange restrictions that give rise to them, their implications, and how underlying policies fueling these markets can be removed.
- Broken cross-rates would not be considered MCPs under the revised policy given their near disappearance; they could be reincluded if they re-emerge.

### Exchange taxes, other mandatory costs and subsidies — treatment under the new policy
- Treatment differs depending on whether they are imposed on market exchange rates or on exchange transactions where the exchange rate is determined by official action.
- Where imposed on exchange transactions where the exchange rate is not determined by official action:
  - Such taxes/costs/subsidies are deemed levied on the midpoint of the range between the most appreciated and most depreciated wholesale exchange rates on a given day (H/L) and compared with the H/L of the same day and the 2 percent tolerance margin (whichever is wider).
  - Exchange taxes (and other costs or subsidies) that alone or in aggregate do not exceed 2 percent would not be considered MCPs.
  - For members with a H/L permanently wider than 2 percent, exchange taxes (or other costs/subsidies) may not give rise to an MCP even if they exceed 2 percent alone or in the aggregate.
- Where imposed on exchange transactions with an exchange rate arising from official action (e.g., a rate determined by the authorities):
  - The exchange tax or other mandatory cost/subsidy will be considered part of the effective exchange rate and compared to the permissible spread under the new methodology.
  - A mandatory cost less than 2 percent in itself or in aggregate could give rise to an MCP if it causes the effective exchange rate to exceed permissible spreads; conversely, a mandatory cost greater than 2 percent would not necessarily result in an MCP if the effective exchange rate remains within the H/L of the day. (Proposed Decision, Paragraphs 2.b. and 1.I.a.)
- Rationale and considerations:
  - The approach allows application of the country-specific market-based methodology to exchange taxes and similar costs/subsidies.
  - By not treating exchange taxes under 2 percent as MCPs where the exchange rate is market-determined, it provides a degree of fiscal certainty and accommodates countries that have integrated the 2 percent concept into exchange tax regimes.
  - Staff will closely monitor implementation and be prepared to propose adjustments if necessary.
- Exchange taxes and other mandatory costs that do not give rise to MCPs would also not give rise to exchange restrictions; due to current absence of a generally applicable de minimis rule for exchange restrictions, it is proposed that such costs not giving rise to an MCP under the new methodology would not give rise to an exchange restriction. (Proposed Decision, Paragraph 4.)

*International Monetary Fund — ppea2022036 (excerpt).*

### 22. Foreign exchange purchases and sales by the authorities (aside from auctions that are

### 22. Foreign exchange purchases and sales by the authorities (aside from auctions that are addressed above)

### Scope and exclusions
- FX purchases and sales by the authorities that do not create market segmentation are excluded from the scope of the policy.
- Such FX transactions (loosely referred to as “intervention”) typically involve the sale or purchase of foreign currency by the authorities to/from intermediaries at a particular rate or by accepting offers from them.
- These transactions will not give rise to an MCP as long as they:
  - (a) are open to all intermediaries in good standing, either directly or indirectly through market makers; and
  - (b) do not restrict the use of the foreign currency purchased by intermediaries for specific purposes/end-users.

### Earmarked transactions and segmentation
- FX transactions that make foreign currency available at a particular exchange rate only to or from selected wholesale intermediaries or for specific purposes/end-users (i.e., earmarked transactions) will be assessed under the policy.
- Such earmarked transactions result in segmentation of the FX market and would be considered official action under the revised policy.
- Exchange rates used in such transactions will be assessed according to the new methodology, and an MCP would arise if the transaction exchange rate is outside of the permissible margin.

### Box 2 — Non-Deliverable Forwards (NDFs) and Agreements between Central Banks
- Non-deliverable forwards (NDFs):
  - NDFs entered into by the authorities are considered under the MCP policy only if closely related to acquiring or selling foreign exchange.
  - Rationale: MCPs require an official action and an exchange transaction (actual exchange of a member’s currency for another).
  - NDFs can be covered by the policy only if they:
    - (i) result from official action (e.g., entered into by central banks or other official entities, or by another party at their direction);
    - (ii) are made available only to a subset of intermediaries or end-users or are earmarked for specific transactions (therefore segmenting the market); and
    - (iii) are closely related to acquiring or selling foreign exchange.
  - All other NDFs would be excluded from the policy.
  - If an NDF resulting from official action is sufficiently closely related to acquiring or selling foreign exchange, the additional cost or subsidy resulting from the NDF could be considered as part of the effective exchange rate (of the FX transactions to which the NDF is closely related) and assessed under the proposed methodology.
  - Staff acknowledge that the proposed approach will exclude from the MCP policy NDFs entered into by the authorities that are explicitly linked to the exchange rate but settled in local currency (unless sufficiently closely related to an exchange transaction), though such official intervention through NDFs can still be addressed in Article IV discussions.
- Agreements between Central Banks:
  - Staff proposes to continue current practice:
    - Assess agreements structured as bilateral payments arrangements (BPAs) for consistency with Article VIII, Section 2(a) and 3.
    - Do not assess agreements that are not structured like BPAs (e.g., swaps for liquidity support or for reserve management purposes).
  - Staff will monitor developments to determine if further adjustments are warranted in subsequent reviews.
  - Instances where funds from a CB swap are passed on through official action to domestic FX market intermediaries and end-users in a manner that causes market segmentation and exchange rate deviations in excess of the permissible spread are covered by the proposed new methodology.
  - Agreements between central banks structured as collateralized lending would not be considered under the policy (reflecting that lending is not a purchase/sale of FX).

### New methodology — general principles
- MCPs will be assessed using a methodology that is more market-based and country-specific than the current framework.
- An MCP arises when official action gives rise to exchange rate spreads that differ unreasonably from the normal commercial costs and risks of exchange transactions (the “commercial reasonableness” standard).
- The new methodology specifies that an MCP will arise where official action gives rise to an exchange rate for a spot exchange transaction that exceeds the permissible margin, defined by Proposed Decision Paragraph 1.I(a):
  - Min {LOWt; M(H/L)t – 2%} ≤ Rt ≤ Max {HIGHt; M(H/L)t + 2%}
    - HIGHt is the highest (most depreciated) wholesale exchange rate on day t.
    - LOWt is the lowest (most appreciated) wholesale exchange rate on day t.
    - M(H/L)t = (HIGHt + LOWt) / 2, the mid-point of the High/Low range.
    - Rt is the exchange rate arising from official action on day t.
- The permissible spread is determined by a country-specific market-based norm (the High/Low range) and a tolerance margin of +/- 2 percent around the midpoint of the High/Low range, whichever is wider.
- Purpose of the +/- 2 percent tolerance margin: avoid capturing relatively minor deviations from the market-based norm.
- For official action that imposes additional costs or subsidies on spot exchange transactions (e.g., margin requirements, commissions, fees, taxes or subsidies) that are sufficiently closely related to an exchange transaction, the effective exchange rate resulting from official action should be computed and used in the assessment.
  - If such additional costs/subsidies are imposed on an exchange transaction where the exchange rate is not determined by official action, the effective exchange rate is determined by applying such cost or subsidy to the midpoint of the H/L range for the day.
  - If such costs/subsidies are imposed on an exchange rate arising from other official action, the effective exchange rate is calculated by applying such cost or subsidy to that official exchange rate.
- Market exchange rate data (including daily High/Low range) will be primarily collected from reputable third-party providers; staff consulted Thomson Reuters and Bloomberg and view these data as comprehensive and reliable.
- In the subsequent review of the MCP policy (expected in five years), staff intend to confirm continued comprehensiveness and reliability of such data.

### Spot transactions — operational notes
- Spot transactions defined consistent with global market standard: settle at or less than t+2 days (spot); banknote transactions are assessed as spot.
- If an exchange rate arising from official action exceeds the permissible margin, an MCP arises regardless of whether such rate is actually used in exchange transactions (e.g., if available infrequently or for specific groups).
- For detailed methodology for spot transactions, see Initial Considerations—Methodology to Assess Multiple Currency Practices, Supplement 3, pages 12-15.

### Non-spot transactions
- Methodology also applies to official action involving non-spot exchange transactions (settling at more than t+2 days).
- Where the exchange rate for a non-spot transaction exceeds the permissible margin, an MCP would arise.
- Assessment of non-spot transactions may require supplementary information and computations depending on product type (forwards, swaps, options) and market data availability.
- When market data are available for non-spot FX products, compare the exchange rate arising from official action with market exchange rates of the same type and same maturity.
- If market data are unavailable, compute the non-spot market exchange rate using a theoretical model and require:
  - Tt – 2% ≤ Rt ≤ Tt + 2%
    - Rt is the exchange rate arising from official action settling at more than t+2.
    - Tt is the exchange rate calculated using the theoretical model described in Initial Considerations.
- For typical swaps: forward leg evaluated as a forward exchange rate and spot leg assessed like a spot exchange rate. Options assessed only if exercised.
- Bloomberg and Reuters provide calculators for computing theoretical forward exchange rates and option prices; staff may use alternative domestic funding-rate data if more representative for a given maturity.

### Finding and eliminating MCPs
- An MCP will arise from a single deviation outside of the permissible margin.
- Once found, the MCP will be reported in the next Article IV consultation or program review report.
- Identified MCP could be eliminated by:
  - Eliminating the official action that gave rise to the MCP.
    - Approval of the MCP could be granted while removal is in progress; approval normally granted for a period not exceeding 12 months but could be extended if conditions for continued approval are met.
  - Keeping the official action in place but taking other credible measures to bring the spread back within the permissible margin and ensure future compliance; staff will assess credibility and give the member the benefit of any reasonable doubt. If the MCP re-emerges, a new finding would be made.
  - No action by authorities but demonstrating over a specified “observation period” after the emergence of the spread that an impermissible spread had not recurred.
    - Staff propose an observation period of 12 months.
    - The MCP would remain in place during the observation period and be noted in Article IV or UFR staff reports.
    - Re-emergence of an impermissible spread during this period resets the observation period.

### Expected outcomes and comparisons with current policy
- The revised policy is expected to result in fewer MCP findings because:
  - The revised policy will not consider FX auctions that conform to best practices as official actions.
  - The revised policy will not consider official exchange rates calculated with one day lag as official actions.
  - Illegal parallel markets are not considered official actions under the revised policy.
- Table 1 (comparison of official actions under current and proposed policies) indicates changes across categories such as:
  - Different exchange rates for different transactions, lagged official rates, BPAs, exchange rate guarantee schemes, FX auctions, dual/multiple FX markets, illegal parallel markets.
  - Measures that increase/decrease the cost of FX transactions and are considered part of the “effective exchange rate” (e.g., import deposit requirements, non-interest-bearing blocked accounts, taxes and costs relative to the 2% threshold).

*Source: ppea2022036 — Review of the MCP Policy – Proposals for Reform, International Monetary Fund*

### 31. In line with Board guidance during the February 2019 meeting, Fund approval will

### ppea2022036 - 31. In line with Board guidance during the February 2019 meeting, Fund approval will

### Linkages between the MCP policy and the IV (Paragraphs 31–32)
- Staff clarify linkages between the MCP policy and the IV to reflect recent IV review (Paragraph 32).
- Key clarified positions:
  - Capital flow management measures (CFMs) should generally not be designed in a way that gives rise to exchange restrictions and MCPs on current transactions.
  - The IV does not alter the Fund’s jurisdiction or policies under Article VIII, Sections 2(a) and 3.
  - Potential inconsistencies from applying both Article VIII policies and the IV should be avoided.
- Assessment approach proposed:
  - Measures that give rise to MCPs and exchange restrictions and which are also considered CFMs because they relate to transactions that are capital in nature but considered as current under the Fund’s Articles of Agreement will be assessed only under the criteria for approval under the respective Article VIII policy and will not be assessed for appropriateness under the IV.
  - MCPs that apply solely to capital transactions (as per Article XXX(d)) are not subject to Fund approval; if also considered CFMs, their appropriateness will be assessed only under the IV while they will continue to be identified in Article IV reports as MCPs.

### Resource and data implications (Paragraphs 33–35)
- Expected resource impact:
  - Proposed policy changes would require limited additional resources once the policy is well-established (Paragraph 33).
  - Revised definition of official action is likely to reduce the number of cases to monitor.
  - New policy envisages more consistent monitoring of actual exchange rate spreads in cases where official action is present; Fund would no longer make MCP findings based on potentiality.
  - Preliminary testing by staff suggests the number of MCPs is likely to decline under the new policy.
  - Staff anticipate that, over time, fewer resources will be required for the assessment of MCPs and do not expect that the new policy would increase the workload of staff or the authorities compared with the current policy, with the understanding that in the initial phases of operationalization, additional resources may be required.
- Monitoring arrangements:
  - Continuation of daily monitoring of exchange rate data by the country team is not foreseen to be resource-intensive and will be needed only after staff has identified an official action by the authorities on the FX market (Paragraph 34).
  - Market data are generally available from Reuters and Bloomberg; existing Fund subscriptions are adequate.
  - Monitoring will be performed on automated templates after data are downloaded and, where necessary, included from the authorities.
- Data provision and obligations:
  - The new policy does not introduce new data provision requirements but clarifies current requirements further (Paragraph 35).
  - Reliance primarily on exchange rate data compiled by reputable third-party data providers; member-provided information may be needed when third-party data are unavailable.
  - Members are already obliged under Article VIII, Section 5 to provide information on “buying and selling rates for foreign currencies” and on “exchange controls,” and must provide information on exchange rates arising from official action, including:
    - (i) unpublished exchange rates used in transactions by the authorities that segment the market, including auction exchange rates for auctions not conforming to best practices;
    - (ii) market exchange rates if not available from public sources or third party providers;
    - (iii) exchange rates in legal parallel markets;
    - (iv) taxes, fees, other costs and subsidies related to exchange transactions;
    - (v) exchange rates set forth in official payment arrangements.
  - Members have generally provided other necessary information (e.g., laws, regulations, agreements) and would be expected to continue to do so; consideration could be given to expanding Article VIII, Section 5 in the future if members refuse to provide required documents/information.

### Transitional arrangements — Application of the new MCP policy (Paragraphs 36–39)
- Effective timing:
  - Staff propose that the new policy becomes effective nine months following the Board meeting, subject to exceptions discussed in Paragraph 38 (Paragraph 36).
  - As of the effective date, the 1981 decision on the current MCP policy and other relevant Board decisions will be repealed.
- Rationale for delayed entry:
  - Delayed entry provides time for members to adjust policies and for the Fund to prepare additional guidance and monitoring systems (Paragraph 37).
- Immediate exceptions during transition (Paragraph 38):
  - Revised definition of official action becomes effective immediately upon approval. During the transitional period, no MCPs will be found where:
    - (i) official action takes the form of an official exchange rate calculated with a one day lag (Paragraph 16), or a foreign exchange auction consistent with specified criteria (see paragraph 15), or
    - (ii) an MCP results from exchange rate spreads arising in an illegal parallel market (Paragraph 17).
  - Elimination of the provision on broken cross rates becomes effective immediately; accordingly, no MCP findings based on broken cross rates will be made during the transition period.
- Outreach:
  - Following publication of the Board paper and decision, staff will reach out to country authorities to ensure the new policy is well understood and to facilitate adjustments and data provision during operationalization (Paragraph 39).

### Transitional arrangements — Status of existing and new MCP findings (Paragraphs 40–42)
- Application of current policy during transition:
  - During the transition period, the current policy would continue to apply with the exceptions in Paragraph 38 because the existing MCP policy articulates obligations under Article VIII, Section 3 (Paragraph 40).
  - Staff will discuss likely treatment of existing and newly identified measures under the new policy with authorities and will liaise with country teams undertaking Article IV consultation and UFR missions for guidance.
- Specific transitional provisions (Paragraph 41):
  - No new MCP will be found during the transition where:
    - (i) official action takes the form of an official exchange rate calculated with one-day lag, broken cross rates, or a foreign exchange auction consistent with specified criteria; or
    - (ii) an MCP results from exchange rate spreads arising in an illegal parallel market.
  - Existing MCPs based on types of official action that will no longer be covered will be considered eliminated as of the approval date of the new policy; elimination will be reflected in the first Article IV consultation report issued after approval.
  - Subject to the above, in Article IV consultations concluded during the transitional period, staff will assess under the current policy whether any new MCP has arisen or the previously identified MCP continues to exist and will recommend approval where warranted.
  - Other existing MCPs will continue in place until considered eliminated as of the effective date of the new policy.
- As of the effective date (Paragraph 42):
  - All existing MCPs will be considered eliminated as of the effective date of the new policy.
  - The monitoring modalities under the new policy will become operational and staff will monitor whether official action (as defined under the new policy) gives rise to impermissible spreads; if impermissible spreads emerge, an MCP will be found and approval can be granted pursuant to the revised approval policy in the context of the subsequent Article IV consultation or program review.
  - If the same official action that gave rise to an MCP under the current policy gives rise to an MCP under the new policy as of the effective date or later when an impermissible spread emerges, it will not be considered the “introduction” of an MCP for purposes of the standard continuous performance criterion on non-introduction and non-modification of MCPs under an IMF arrangement or monitoring instrument in place on the effective date of the new policy.

*Source: ppea2022036 - Extracted content on MCP policy reforms and transitional arrangements.*

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_Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022036.pdf_