## ppea2023058 ## Source details **Canonical URL:** [ppea2023058](https://www.imf.org/-/media/files/publications/pp/2023/english/ppea2023058.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2023/english/ppea2023058.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2023/english/ppea2023058.pdf.json) --- ### Overview and purpose - New MCP policy effective February 1, 2024. - Policy elaborates Article VIII, Section 3 prohibition on members (and their fiscal agencies) engaging in MCPs unless authorized under the Articles or approved by the Fund. - 2022 comprehensive review to reflect FX market developments and align with other Fund policies. - Guidance Note provides operational guidance to staff on: - Monitoring compliance by identifying impermissible exchange rate spreads arising due to official actions. - Criteria and processes for approval and removal of MCPs. - Modalities of engagement with the authorities. - Coverage of MCPs in surveillance and program documents. - Relationship between the MCP policy and other IMF policies. ### Legal and policy rationale - Executive Board Decision No. 17292-(22/63) (adopted July 1, 2022) defines when an MCP arises and sets measurement conditions and exceptions. - Rationale: MCPs create distortions, impede trade and investment, can give unfair competitive advantage, associate with lower GDP growth, higher inflation, lower trade volumes, and encourage rent-seeking and resource misallocation. - MCP policy serves as a deterrent and has contributed to a substantial decline in MCPs historically. ### Definition and conditions for an MCP - General principle: Official Action should not cause exchange rate spreads to differ unreasonably from normal commercial costs and risks. - An MCP arises if all of the following conditions are met: - An “official action” segments the member’s FX market or increases/subsidizes costs of certain FX transactions (e.g., exchange tax or subsidy). - The action relates to an “exchange transaction” (spot vs. non-spot classification per paragraph 14). - The exchange transaction takes place on the territory of the member (includes all territories); offshore FX markets are excluded. - The official action results in an actual exchange rate spread that differs unreasonably from normal commercial costs and risks, i.e., exceeds permissible margins. A single such deviation is sufficient for an MCP to arise. - Only spreads arising from Official Action of the member or its fiscal agencies can give rise to MCPs; spreads arising without Official Action do not. ### Official actions that can (and cannot) give rise to MCPs - Official action encompasses: - (i) actions that segment FX markets and make an exchange rate available only to specific intermediaries/end-users or for limited purposes; - (ii) actions that increase or subsidize costs of certain FX transactions (e.g., exchange taxes, subsidies). - Examples that may give rise to MCPs: - Direct FX transactions by authorities at particular rates with selected intermediaries or end-users. - Multiple- and single-price FX auctions that segment the market (unless run according to best practices). - Establishing different exchange rates for different transactions, dual/multiple legal FX markets, bilateral payment arrangements using special rates. - Direct imposition of costs/provision of subsidies on FX transactions (exchange taxes, exchange rate guarantees). - Informal guidance or moral suasion influencing exchange rates and causing impermissible spreads. - Selected exclusions (official actions that will not give rise to an MCP): - FX transactions by authorities that are open to all intermediaries in good standing and do not restrict use of purchased foreign currency. - FX transactions between government and central bank conducted at market exchange rates. - Exchange rates used solely for evaluation/accounting and not used for actual exchange transactions. - FX auctions that meet all best-practice criteria: (i) access granted to all intermediaries in good standing; (ii) allotment determined solely by submitted bid exchange rate; (iii) no constraints on range/level of submitted exchange rates. - Spreads between formal market rates and illegal parallel markets (illegal defined by national law prohibition). - Broken cross rates (virtually disappeared). - Official exchange rates based on market exchange rates with one day lagged calculations that meet specified weighted-average and timing criteria. ### Effective exchange rate: components and assessment - Effective exchange rate = nominal exchange rate (or mid-point of the High/Low range when nominal not determined by official action) + aggregate of any additional mandatory costs or subsidies closely related to the exchange transaction (e.g., exchange taxes, commissions, fees, margin requirements). - Whether a mandatory cost/subsidy is “so closely related” requires comprehensive assessment of measure nature, effects, and procedures. - Mandatory costs/subsidies considered part of the effective exchange rate (examples): - (a) Exchange and other mandatory taxes and fees (commissions, fees, stamp duties, transfer/withholding/financial transaction taxes where closely related). - (b) Import deposit and cash margin requirements — lost interest on unremunerated deposits is an additional cost. - (c) Unremunerated reserve requirements (URR) — lost interest considered an additional cost when closely related to FX transactions. - Box 2 notes: when market interest rates rise dramatically, opportunity costs from CMR/URR can convert previously permissible official actions into MCPs without a change in the official action itself. ### Methodology for identifying impermissible spreads (country-specific norm and tolerance) - Country-specific market-based norm: range between the highest (HIGHt) and lowest (LOWt) exchange rates of the given day in the wholesale FX market; tolerance margin = +/- 2 percent of the midpoint M(H/L)t. - Methodology condition: - Min {LOWt ; M(H/L)t – 2%} ≤ Rt ≤ Max {HIGHt ; M(H/L)t + 2%} - M(H/L)t = (HIGHt + LOWt) / 2 - Definitions preserved exactly: HIGHt = highest (most depreciated) wholesale exchange rate; LOWt = lowest (most appreciated) wholesale exchange rate; Rt = exchange rate arising from official action; t = trading day. - Spot vs. non-spot classification: - Spot: settle at or less than t+2 days. - Non-spot: settle at more than t+2 days. - A single deviation outside permissible margin is sufficient for an MCP. - Data sources precedence: - Primary: LSEG Eikon. - Secondary: Bloomberg. - Alternatives when primary/secondary unavailable or manifestly irregular: (i) publicly available independent data sources; (ii) publicly available data from authorities; (iii) data obtained directly from authorities. - If representative wholesale spot data cannot be obtained, spot MCP assessment cannot be conducted; non-spot assessments can proceed using theoretical prices when representative market data absent. ### Spot transaction assessment (key points) - Compare Rt with Ht and Lt and the tolerance margin +/- 2 percent of M(H/L)t for the trading day. - Banknote transactions: benchmark-provider results compared with authority data; base finding on more favorable treatment for the member when authority provides representative banknote rate data. - FX auctions: use weighted average rate (Rw t) for multiple-price auctions, marginal rate (Rm t) for single-price auctions; compare with Ht/Lt and +/- 2 percent tolerance margin where t is auction trading day. - FX interventions: do not give rise to MCPs if they do not segment the market; if they do segment, compare intervention Rt with Ht/Lt and +/- 2 percent tolerance margin. ### Non-spot transactions, forwards, swaps, options, NDFs - Non-spot: spot and non-spot rates cannot be directly compared; use theoretical prices where non-spot wholesale market rates are not widely available. - Forwards: - Compare Rt with wholesale forward market Ht/Lt for same maturity and tolerance +/- 2 percent. - If interdealer forward rates unavailable, calculate theoretical forward rate based on interest differentials. - Swaps: - Assess both legs: spot leg against wholesale spot H/L and tolerance; forward leg against market forward rates/theoretical forward for same maturity. Both legs must be within permissible margins to avoid an MCP. - Options: - Effective exchange rate = strike rate + option premium. - Compare with market option Ht/Lt of comparable terms or theoretical option price +/- 2 percent tolerance margin. - In absence of market prices, use theoretical option calculators (LSEG Eikon or Bloomberg). - Non-Deliverable Forwards (NDFs): - NDFs give rise to MCPs only if: (i) result from official action; (ii) made available only to a subset/earmarked; (iii) closely related to acquiring/selling FX; and (iv) effective exchange rate exceeds permissible margins. - Otherwise excluded. ### Measurement and operational data rules - Predefined order of data sources limits risk: LSEG Eikon primary, Bloomberg secondary. - Representative wholesale FX market criteria: - (i) market trades not concentrated between few participants; - (ii) market trades daily; - (iii) two-way executable quotes available and trades executed. - Timing: ensure FX market closed for the day before extracting highest/lowest exchange rates. - Dominant currency-pair approach: assess dominant pair first; if MCP found for dominant currency, additional pair findings not required for the same official action. - Dual/multiple legal FX markets: primary wholesale market determines market H/L; mid-point of H/L in secondary market is considered exchange rate arising from official action for assessment. - If primary/secondary data manifestly irregular/inaccurate, use alternative representative data only if compliant with IOSCO principles for financial benchmarks. ### Data and monitoring tools - Monitoring tool forthcoming; methodology included in the “Test” worksheet for automated quantitative assessments. - Monitoring should be continuous once an official action is identified; daily monitoring required between end of mission and Board consideration. - Area teams to maintain daily exchange rate and spread records; maintain IMF records for at least five years for MCP policy purposes. - If representative spot market data unavailable, spot assessment cannot be conducted; non-spot can rely on theoretical pricing. ### Approval, removal, and transitional arrangements - Members shall not engage in MCPs unless authorized or approved by the Fund. - Article XIV transitional arrangements permit members to maintain MCPs or exchange restrictions in place when they joined the Fund; adaptations require consultation and approval. - Approval framework: - MCPs can be approved if for BOP reasons or primarily for non-BOP reasons provided approval criteria are met. - MCPs that apply solely to capital transactions do not require Fund approval. - Approval criteria for BOP reasons (paragraph 33): measure must be (i) temporary; (ii) applied while member endeavors to eliminate BOP problems; (iii) not give an unfair competitive advantage; (iv) not discriminate among members. Authorities should normally indicate a firm timetable for removal. - Approval criteria for non-BOP reasons (paragraph 34): MCPs may be approved if they do not materially impede BOP adjustment, do not harm other members, do not discriminate, do not constitute an exchange restriction, and the member commits to a credible strategy for removal. Credible strategy is country-specific and should reasonably be expected to eliminate the MCP. - Approval duration: normally one-year or until next Article IV consultation (whichever earlier). Exceptions for specified cases. - Removal of MCPs: - (i) Authorities remove the official action that gave rise to the MCP. - (ii) Authorities keep action but take credible measures to bring spread within permissible margin (if spread reappears, new MCP finding). - (iii) No action but monitoring over an “observation period” of 12 months shows impermissible spread has not recurred; MCP considered eliminated at end of 12-month observation period. Reemergence resets the 12-month clock. - Example: impermissible spread observed March 17, 2023 → observation period finishes March 16, 2024. Reoccurrence in September 2023 restarts the 12-month period ending in September 2024. ### Treatment in Fund arrangements, PCs, emergency financing, and reporting - Most Fund arrangements (except FCL, SLL, RSF) and non-financial monitoring instruments (PCI) include a standard continuous performance criterion (PC) prohibiting introduction or modification of MCPs during the arrangement/PCI. - Introduction or modification of an MCP during an arrangement triggers breach of the continuous PC and generally requires a waiver of non-observance for review completion. - Transition/grandfathering: official actions that gave rise to MCPs under previous policy and continue under new policy are not considered “introductions” for the purposes of standard PC for arrangements in place on the effective date. - Exceptional exclusions from standard PC may be granted at approval or review time in rare cases. - RCFs and RFIs do not include the standard continuous PC; ex-ante policy undertakings in LOIs include commitment not to introduce or intensify measures such as MCPs that compound BOP difficulties. - Staff report coverage: - Staff Appraisal should state MCP findings, whether approval requested, and whether approval criteria are met. - Informational Annex must include information on new and existing MCPs, dates of first and most recent impermissible spread observations. - New MCP findings/modifications require prominent coverage in main text and Staff Appraisal. - Authorities’ views on MCP findings must be sought and included. - Annual Board reporting: staff to prepare an annual report listing existing MCPs and removals as reported in latest IMF staff reports; not expected to be disseminated externally. AREAER will include MCP information as in staff reports as of December 31 of the AREAER reporting year. ### Interaction with other Fund policies: exchange restrictions, CFMs, IV, Article XIV - MCP policy distinct from policy on exchange restrictions (Article VIII, Section 2(a)): MCPs broader — can arise from transactions related to inflows and outflows; exchange restrictions cover outgoing payments/transfers for current international transactions. - Exchange taxes and mandatory costs that are subject to MCP policy but do not give rise to MCPs would also not give rise to exchange restrictions under the new policy. - MCPs can be both MCPs and DCAs; MCPs may also be CFMs. Treatment: - Measures that are MCPs and CFMs and are subject to Article VIII approval will be assessed under MCP policy only; appropriateness under the IV will not be assessed. - MCPs applicable solely to capital transactions are assessed under the IV, not subject to Article VIII findings or approval. - Staff should ensure coherence: MCPs maintained for non-BOP reasons can only be approved to the extent they do not constitute exchange restrictions. ### Specific instruments and arrangements (BPAs, ERGSs) - Bilateral Payment Arrangements (BPAs): - BPAs may give rise to MCPs or exchange restrictions depending on features (use of special exchange rates, settlement periodicity). - Assessment uses Ht/Lt on settlement dates and +/- 2 percent tolerance margin; BPAs not continuously monitored but assessed on settlement dates. - Exchange Rate Guarantee Schemes (ERGSs): - ERGSs considered MCP-relevant only when arising from official action. - ERGS gives rise to MCP if (a) not self-financed; and (b) an impermissible spread has arisen. - Self-financed defined by premia reasonably assumed sufficient to cover risks; assessment at inception and periodic review required. - MCP from ERGS considered removed when scheme rendered self-financed or no new impermissible spread observed over 12 months after emergence (or authorities take credible measures). - Fund has generally approved MCPs arising from ERGSs where no new commitments were made. ### Responsibilities, engagement, and data provision - Members responsible for compliance and must ensure they do not engage/allow fiscal agencies to engage in MCPs. - Staff monitor compliance; engagement with authorities is critical: authorities should inform country teams about new official actions or changes. - Staff request data in context of Article IV consultations, program reviews, or when staff become aware of possible official actions. - Data provision expectations: - Article VIII, Section 5 requires members to provide information on “buying and selling rates for foreign currencies,” exchange controls, and details of official clearing arrangements. - Members must provide information on unpublished exchange rates used by authorities that segment the market, exchange rates in legal parallel markets, taxes/fees/costs/subsidies related to exchange transactions, and exchange rates in official payment arrangements. - Failure to provide mandatory data/information, or providing inaccurate data, could lead to a breach of obligation unless due to lack of capacity. - Staff should determine representative data compliance with IOSCO principles when using alternative sources. - Staff may provide capacity development (CD) assistance at authorities’ request. ### Selected numerical and procedural specifics (preserved) - Effective date: February 1, 2024. - Tolerance margin: +/- 2 percent of M(H/L)t. - Spot settlement threshold: settle at or less than t+2 days (spot); non-spot settle at more than t+2 days. - Observation period for removal via non-recurrence: 12 months after emergence of impermissible spread. - Example observation dates preserved: impermissible spread observed March 17, 2023 → observation period ends March 16, 2024. - Primary data source: LSEG Eikon; secondary: Bloomberg. - Records retention for MCP policy purposes: at least five years. *Prepared by a team led by Niamh Sheridan (SPR), Nadia Rendak (LEG), and Annamaria Kokenyne (MCM); approved by Tobias Adrian (MCM), Ceyla Pazarbasioglu (SPR), and Rhoda Weeks-Brown (LEG).* ### EXECUTIVE SUMMARY ### ppea2023058 - EXECUTIVE SUMMARY ### Overview and purpose - The new policy on multiple currency practices (MCPs) is effective February 1, 2024. - The MCP policy elaborates on Article VIII, Section 3 of the IMF’s Articles of Agreement, which prohibits member countries from engaging or permitting their fiscal agencies to engage in MCPs unless authorized under the Articles or approved by the Fund. - The MCP policy was comprehensively reviewed in 2022 to reflect developments in foreign exchange (FX) markets since the 1980s and to align better with other Fund policies. - This Guidance Note provides operational guidance to staff, particularly country teams, on: - Monitoring members’ compliance with the new MCP policy by identifying impermissible exchange rate spreads arising due to official actions. - Criteria and processes for approval and removal of MCPs. - Modalities of engagement with the authorities. - Coverage of MCPs in country surveillance and program documents. - Relationship between the MCP policy and other relevant IMF policies. ### Main changes in the new MCP policy - The main changes focus on three areas: - (i) An MCP will arise due to an official action that segments foreign exchange (FX) markets or increases or subsidizes the cost of certain FX transactions (e.g., exchange taxes). - (ii) MCPs will be identified on the basis of a new country-specific market-based rule. - (iii) The new policy ensures better alignment of the MCP policy with other relevant IMF policies. ### Scope and structure of the Guidance Note - The Guidance Note elaborates on: - The definition of an MCP, including official actions that can give rise to an MCP. - Methodology for measuring and identifying impermissible spreads (see Annexes II and V and a forthcoming monitoring tool). - How MCPs are identified and their consequences, and engagement with authorities. - Members’ rights and obligations with regard to MCPs, and guidance on approval and removal processes. - Operational guidance for Fund staff on assessment, communication, monitoring, and reporting. - Treatment of MCPs in Fund-supported programs and emergency financing. - Relationship between the MCP policy and other Fund policies, including the policy on exchange restrictions and the Institutional View on the Liberalization and Management of Capital Flows (IV). - Coverage of MCPs in staff reports and annual reporting to the Board. ### Legal and policy rationale - Article VIII, Section 3 requires members to refrain from engaging in MCPs, but does not define the term; the Executive Board provides the definition via decisions. - Executive Board Decision No. 17292-(22/63), adopted on July 1, 2022, defines when an MCP arises and sets out measurement conditions and exceptions. - Box 1 summarizes why the Fund needs an MCP policy: - MCPs create distortions, impede trade and investment, and can give a member an unfair competitive advantage. - Historically used to mitigate balance of payments (BOP) pressures or achieve non-BOP objectives (e.g., revenue mobilization) without direct taxation/subsidies. - MCPs generally associate with lower GDP growth, higher inflation, and lower trade volumes and can encourage rent-seeking and resource misallocation. - The MCP policy serves as a deterrent and has contributed to a substantial decline in MCPs over the last few decades, especially among large countries. ### Definition of an MCP (Executive Board Decision No. 17292-(22/63)) - General principle: Official Action should not cause exchange rate spreads to differ unreasonably from those that arise from the normal commercial costs and risks of exchange transactions. - A multiple currency practice would arise in the circumstances set forth in paragraph 1: - a. Official Action causes an Effective Exchange Rate for a Spot Exchange Transaction to exceed the Spot Permissible Spread. - b. Official Action causes an Effective Exchange Rate for a Non-spot Exchange Transaction to exceed the Non-spot Permissible Spread. - Notwithstanding the above, a multiple currency practice would not arise if the Effective Exchange Rate for an Exchange Transaction caused by Official Action is calculated as follows: - (i) the Effective Exchange Rate is derived solely from the weighted average of transaction exchange rates in a member’s wholesale foreign exchange market or, in the absence of a wholesale foreign exchange market, as the weighted average of the transaction exchange rates between intermediaries and their clients, or a combination of the two if the wholesale foreign exchange market is not representative of the member’s foreign exchange market, and - (ii) the only transactions included in the calculation of the Effective Exchange Rate occurred on the business day immediately preceding the day on which such Effective Exchange Rate is to be used. - Only exchange spreads arising from Official Action of the member or its fiscal agencies can give rise to MCPs; spreads arising without Official Action do not give rise to MCPs. ### Operational and methodological guidance highlights - Section II covers: - Official Actions That Can Give Rise to MCPs. - Effective Exchange Rate and considerations (including the impact of higher interest rates and inflation). - Identifying Impermissible Spreads and Methodology for Measuring Spreads. - Methodology for Monitoring Spreads (operational details in Annexes II and V and a forthcoming monitoring tool). - Section III–V cover: - Determining existence of an MCP and its consequences. - Members’ obligations: maintaining MCPs under transitional arrangements of Article XIV; approval of MCPs; removal of MCPs. - Operational guidance for staff: assessment of Official Actions; communication with authorities; monitoring exchange rates; coverage of MCPs in policy notes. - Section VI clarifies treatment of MCPs in the context of the use of Fund resources, including Fund arrangements and nonfinancial instruments. - Section VII discusses relationship between the MCP policy and other Fund policies (e.g., Article XIV, policy on exchange restrictions, IV). - Final section provides guidance on coverage of MCPs in staff reports, including MCP findings, requests and recommendations for approval, removal of MCPs, authorities’ views, countries on a 24-Month Article IV consultation cycle, and annual reporting to the Board. *Prepared by a team led by Niamh Sheridan (SPR), Nadia Rendak (LEG), and Annamaria Kokenyne (MCM); approved by Tobias Adrian (MCM), Ceyla Pazarbasioglu (SPR), and Rhoda Weeks-Brown (LEG).* ### 5. In light of the above definition, an MCP would arise if all the following conditions are ### 5. In light of the above definition, an MCP would arise if all the following conditions are ### Conditions for an MCP - An “official action” that segments the member’s FX market or increases or subsidizes the costs of certain FX transactions (e.g., an exchange tax or subsidy) has been taken by the authorities. - The official action relates to an “exchange transaction”, i.e., transaction whereby the currency of one member is exchanged for another member’s currency. - Based on the global financial market standards for settlement dates, the policy distinguishes between spot and non-spot transactions (as discussed in paragraph 14). - The exchange transaction takes place on the territory of the member engaging in the official action. This includes not only the member’s metropolitan territory, but also any other territories of the member. - Exchange transactions that take place in offshore FX markets are not considered exchange transactions for the purposes of the MCP policy. - The official action results in an actual exchange rate spread that differs unreasonably from the normal commercial costs and risks of exchange transactions (exchange rate spreads which are not considered “commercially reasonable”), i.e., exceed the permissible margins, specified in the MCP policy. - A single such deviation is sufficient for an MCP to arise. ### A. Official Actions That Can Give Rise to MCPs - The concept of official action, i.e., action taken by the authorities, is a core element of the MCP policy. Official action encompasses: - (i) any action by the authorities that segments FX markets and results in an exchange rate being available only for (a) a specific intermediary and/or end-user or a limited group of intermediaries and/or end-users and/or (b) for a limited range of purposes, and - (ii) any action by the authorities that increases or subsidizes the cost of certain FX transactions (e.g., an exchange tax or subsidy). - For purposes of the MCP policy the term “authorities” refers specifically to the member itself or any of its fiscal agencies referred to in Article V, Section 1 of the Articles (i.e., the Treasury, central bank, stabilization fund, or other similar fiscal agency). - Exchange rates used in such exchange transactions will be assessed according to the methodology (as outlined later in this section), and an MCP would arise if the transaction exchange rate is outside of the permissible margins. - Examples of official actions that may result in MCPs include but are not limited to: - Direct engagement in foreign exchange transactions by the authorities, for instance, central bank’s FX transactions with the government, or FX transactions conducted by the authorities at a particular exchange rate with selected wholesale FX intermediaries or end-users, or for specific purposes (i.e., earmarked transactions) results in a segmentation of the FX market and are considered official action. - The authorities often sell and purchase foreign exchange through FX auctions; the treatment of FX auctions is explained immediately below and in paragraph 8. - Multiple—and single—price foreign exchange auctions that segment the FX market. While a FX auction would generally be considered as official action when it is established or operated by the authorities (e.g., the central bank), FX auctions organized according to best practices (described in paragraph 8) are not considered to segment the FX market. - Official actions bringing about a multiplicity of exchange rates at which market participants can make exchange transactions, for instance, establishing different exchange rates for different transactions conducted by market participants, dual and multiple legal FX markets in a single jurisdiction, or bilateral payment arrangements that provide for the use of a special exchange rate for covered transactions. - Dual and multiple exchange markets that are segmented due to official action, such as, for example, capital controls applying to one FX market but not another on the member’s territory, may result in an exchange spread on exchange transactions with a member’s currency in different segments of the member’s exchange market. - Direct imposition of costs/provision of subsidies on FX transactions, for instance, exchange taxes, exchange rate guarantees schemes provided by the authorities, or other mandatory costs and subsidies. - The new MCP policy broadly provides continuity for the treatment of exchange taxes, and other costs and subsidies imposed by official action. However, their treatment under the new policy differs depending on whether they are imposed on exchange transactions using market exchange rates or exchange transactions where the exchange rate is determined by official action. (See paragraph 16 and Annex I). - Other examples of official actions can include informal guidance or moral suasion that influences the exchange rate and causes impermissible spreads. ### Official actions that will not give rise to an MCP (selected exclusions) - FX transactions between the authorities and FX intermediaries, which do not segment the FX market: - FX transactions by the authorities (other than FX auctions) that are (a) open to all FX 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 to specific purposes or end-users, will not be considered as segmenting the FX market and, thus, will not give rise to an MCP. - Such FX transactions (“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. - FX transactions between the government and the central bank which do not segment the FX market: - Such transactions do not segment the market if they are conducted at market exchange rates. - Exchange rates used solely for evaluation or accounting purposes, and not used for actual exchange transactions. - FX auctions (single- or multi-priced) that are not for earmarked purposes and organized in line with best practices will not be considered to segment the market if all the following criteria are met: - (i) access to bid at the auction is granted to all intermediaries in good standing, in the country’s wholesale FX market, either directly or indirectly through market makers, so that they can all sell or make purchases of FX for themselves and on behalf of their clients; - (ii) the exchange rate of the bid submitted by participants is the only criterion used to determine allotment; and - (iii) no constraints are imposed on the range or level of the exchange rates that can be submitted. - If any of these criteria are not met, an MCP would arise if impermissible spreads can be observed from the FX auction, as determined under the methodology described below. - Spreads arising between exchange rates used in FX transactions in a member’s formal FX market(s) and illegal parallel market(s). - Parallel markets will be considered “illegal” if transactions conducted in such markets are prohibited under national law. - Broken cross rates are not considered as giving rise to MCPs because they have virtually disappeared. - Official exchange rates based on market exchange rates with one day lagged calculations will not give rise to an MCP, provided that: - (a) the lagged official exchange rate is calculated as a weighted average of all transaction exchange rates in the wholesale FX market during the day/operating hours of the wholesale FX market and, in the absence of a wholesale FX market, as the weighted average of the exchange rates used in transactions between intermediaries and their clients (see paragraph 12 of Annex V) or a combination of the two if the wholesale FX market is not representative of the FX market; and - (b) all the transactions included in the calculation occurred on the business day immediately preceding the day when the official exchange rate is to be used. - If the lagged official exchange rate does not meet the above-mentioned criteria, staff will assess whether it gives rise to an MCP under the methodology described below. ### B. Effective Exchange Rate - The Fund examines the effective rate of exchange when identifying MCPs. The effective exchange rate includes: - the nominal exchange rate (or when the nominal exchange rate is not determined by official action as described in paragraph 16, the mid-point of the High/Low range) plus - the aggregate of any additional mandatory costs or subsidies (e.g., exchange taxes, commissions, fees, margin requirements) that are related to the exchange transaction closely enough to be considered as part of the effective exchange rate. - Whether an additional mandatory cost or subsidy is “so closely related to the exchange transaction as to be considered part of the effective exchange rate” requires a comprehensive assessment based on all the relevant circumstances. Staff should consider, among others, the nature of the measure under which the costs or subsidies are imposed, its effects, and the procedures followed for applying it. - To be considered part of the effective exchange rate, the mandatory cost or subsidy should be sufficiently closely related to an exchange transaction and not to the underlying transaction (e.g., trade, invisible or capital transaction). ### Examples of costs/subsidies considered part of the effective exchange rate - (a) Exchange and other mandatory taxes and fees. - Taxes, other charges, or fees imposed by the authorities and levied on an exchange transaction are directly connected with the exchange transaction and this cost is considered to be part of the effective exchange rate. - Examples include commissions and fees levied on the currency conversion conducted by the authorities (e.g., central bank sales of FX on which a commission or fee is charged) and commissions, fees and taxes on exchange transactions mandated by the authorities (e.g., taxes applied to the currency conversion for outward remittances and stamp duties levied on all currency conversions above a certain amount). - Some taxes or charges/fees not levied directly on the currency conversion may nevertheless be so closely related to the currency conversion that they need to be considered part of the effective exchange rate (e.g., transfer taxes, withholding taxes levied on payments abroad or receipts from abroad, and financial transaction taxes), depending on whether an exchange transaction is an indispensable part of the payment or receipt and how the tax/charge/fee is levied. - (b) Import deposit and cash margin requirements. - Systems that require an import deposit or cash margin deposit before a letter of credit is opened or FX is purchased can create a loss of interest if, as a result of the authorities’ decision, interest on the deposits is not paid or is lower than the prevailing market interest rate. - The lost interest is considered an additional cost of the FX transaction and should be considered as part of the effective exchange rate for the exchange transaction related to, e.g., the import. - (c) Unremunerated reserve requirements (URR). - If the authorities require an URR (for example, at the central bank), and the URR is closely related to the exchange transactions on which it is imposed (for instance, the URR is on the purchase and/or sale of FX on non-spot basis), such requirement may give rise to an MCP. - The unremunerated nature of the RR results in a loss of interest that could be earned if the amount of the URR is deposited at a financial institution that pays market interest on such deposit. The lost interest is considered as an additional cost of the FX transaction and should be considered as part of the effective exchange rate of FX transactions that are subject to the URR. *Guidance Note on Multiple Currency Practices — excerpt provided in the content unit.* ### Box 2. Further Considerations on the Calculation of the Effective Exchange Rate: The ### ppea2023058 - Box 2. Further Considerations on the Calculation of the Effective Exchange Rate: The Impact of Higher Interest Rates and Inflation ### Opportunity cost of unremunerated requirements (CMR, URR) and reimbursable exchange taxes - Unremunerated import deposit and cash margin requirements (CMR) and unremunerated reserve requirements (URR), closely related to an exchange transaction, create an opportunity cost equal to the lost interest that would have been earned if the amounts were deposited at a financial institution paying market interest. - The lost interest (opportunity cost) for the period of the mandatory cash margin or URR is an additional cost of the FX transaction and is added to the nominal exchange rate (or the mid-point of the High/Low range when the nominal exchange rate is not determined by official action) to determine the effective exchange rate of FX transactions subject to CMR or URR. - When market interest rates rise dramatically (for instance when inflation suddenly increases), an official action that previously produced an effective exchange rate within permissible margins may suddenly lead to an MCP even if the official action itself remains unchanged. - Note: The considerations apply also if authorities mandate payment of interest rates at less than market interest rates. ### Exchange rate subsidies (assessment guidance) - To determine whether a subsidy should be considered part of the effective exchange rate, examine: - Whether the subsidy is applied exclusively to the underlying transaction (e.g., trade) or to the exchange rate used in the FX transaction. - Whether the subsidy is calculated on the amount of the FX received/purchased or based on the amount of the export/import in quantitative terms. - Whether the provision of the subsidy is linked to changes in the exchange rate (e.g., subsidy provided when the exchange rate appreciates beyond a certain level). - Whether the subsidy is paid on all exports of the goods or only if FX is surrendered. - If URR applies to the underlying transaction (e.g., external borrowing) and not on the exchange transaction (or is not sufficiently closely related to be part of the effective exchange rate), the URR would not be considered under the MCP policy. - In some cases trade and payment aspects may be so interlocked that a measure directly affects both. ### Exchange rate guarantees - Official exchange rate guarantees can be considered as a subsidy of the rate that applies to exchange transactions covered by the scheme because they reduce FX risk and costs. - Schemes akin to options or forwards: analyze as such; the effective exchange rate = aggregate of the market or theoretical option price and the strike price, or the market/theoretical forward exchange rate respectively. - Exchange rate guarantee schemes that are self-financed but merely administered by the member are not considered an official action under the MCP policy (FX risks are effectively pooled among participants or subsidized by third parties). ### Cost or subsidy arising from non-deliverable forwards (NDFs) - NDFs do not involve an actual exchange of a member’s currency for another member’s currency and give rise to an MCP only if: - (i) the NDFs 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 specific intermediary/end-user or a limited group of intermediaries/end-users or earmarked for specific transactions (therefore segmenting the market), - (iii) are closely related to acquiring or selling FX, and - (iv) the effective exchange rate of such exchange transaction exceeds the permissible margins. - Determination of whether an NDF is closely related to buying or selling FX will be based on assessment of all relevant circumstances. - Example: When a central bank sells NDFs at a preferential rate to banks which need to buy FX to repay external FX loans for specific purposes, the subsidy arising from the NDF at preferential rate would be considered as part of the exchange rate at which banks buy FX. - All other NDFs are excluded from the policy. ### Identifying impermissible spreads (commercial reasonableness standard) - 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). - An MCP will arise where official action gives rise to an exchange rate for an exchange transaction that exceeds the permissible spread, i.e., a country specific market-based norm and a tolerance margin. - The exchange rate of the transaction that is assessed is the effective rate of exchange. ### Methodology for measuring spreads (country-specific norm and tolerance) - The country specific market-based norm is defined as the range between the highest and lowest exchange rates of the given day in the wholesale FX market of the country implementing the official action, with a tolerance margin of +/- 2 percent of the midpoint of the High/Low (“H/L”) to avoid capturing minor deviations. - Methodology condition (as given): - Min {LOWt ; M(H/L)t – 2%} ≤ Rt ≤ Max {HIGHt ; M(H/L)t + 2%} - Definitions: - HIGHt is the highest (i.e., the most depreciated) wholesale exchange rate, - LOWt is the lowest (i.e., the most appreciated) wholesale exchange rate, - Rt is the exchange rate arising from official action, and t is a given trading day. - The mid-point of the High/Low range is defined as: M(H/L)t = (HIGHt + LOWt) / 2 - The methodology applies to both spot and non-spot FX transactions, with supplementary requirements for specific non-spot transactions. - Classification by settlement date: - Spot: settle at or less than t+2 days. - Non-spot: settle at more than t+2 days. - Data sources for wholesale market H and L: - LSEG Eikon (formerly Refinitiv Eikon) is the primary data source. - Bloomberg is the secondary source. - For non-spot transactions the methodology may rely on theoretical prices (see Annexes II and V). ### Box 3 — Identifying MCPs in Spot and Non-Spot Transactions (key points) - Spot transactions: - Any FX transaction that settles at or less than t+2 days is spot. - Compare Rt with wholesale spot FX market Ht and Lt and the tolerance margin of +/-2 percent of M(H/L)t. An MCP arises if Rt is not within either Ht/Lt or the tolerance margin. - Banknote transactions: compare banknote Rt with Ht and Lt and the +/- 2 percent tolerance margin; where authorities provide representative banknote rate data staff will compare benchmark-provider results with authority data and base the finding on the more favorable treatment for the member. - FX auctions: use weighted average exchange rate (Rw t) for multiple-price auctions or marginal rate (Rm t) for single-price auctions; compare with Ht/Lt and +/- 2 percent of M(H/L)t where t is the trading day of the auction. - FX interventions do not give rise to an MCP as long as they do not segment the FX market; if they make FX available at a particular rate only to selected intermediaries or for specific purposes, compare the intervention rate Rt with Ht/Lt and the +/- 2 percent tolerance margin of M(H/L)t for the trading day. - Non-spot transactions: - Non-spot settle at more than t+2 days. - Spot and non-spot rates cannot be directly compared; additional computations may be required. - Where non-spot wholesale market rates are not widely available, assessments may rely on comparing the non-spot exchange rate from official action with the +/-2% tolerance margin of the theoretical price of the non-spot transaction (calculation of theoretical price: see Annexes II and V). - Drawbacks exist in using theoretical prices; methodology will be refined as experience is gained. - Forwards: - An MCP arises if the forward exchange rate from official action (Rt) is not within either Ht/Lt of the wholesale forward market rates for the same maturity or the tolerance margin of +/- 2 percent of M(H/L)t. - When interdealer forward rates are not available, calculate the theoretical forward rate for the same maturity. - Swaps: - Assess spot leg against wholesale market spot exchange rates and forward leg against market forward rates for the same maturity (or theoretical forward when market rates unavailable). - Both legs must remain within their respective permissible margins to avoid an MCP; if either leg is outside, an MCP arises. - Options: - If market exists for comparable options, effective exchange rate Rt should remain within Ht/Lt of comparable option prices (strike rate plus option premium) or the +/-2 percent tolerance margin around M(H/L)t. - If market prices are not available, calculate a theoretical option price using LSEG Eikon (or Bloomberg) option price calculator; an MCP arises if option prices from official action exceed +/- 2 percent tolerance margin of the theoretical option price. ### Exchange taxes and other mandatory costs or subsidies (treatment) - When exchange taxes and other mandatory costs or subsidies are imposed on exchange transactions, the effective exchange rate depends on whether the transaction’s exchange rate is market-determined: - (a) If the exchange rate is market-determined (i.e., the market exchange rate), the tax/mandatory cost/subsidy is deemed applied on the midpoint of the H/L for the day and compared with the H/L of the same day and the +/- 2 percent tolerance margin (whichever is wider). - This implies exchange taxes (and other mandatory costs or subsidies) that alone or in the aggregate do not exceed 2 percent would not give rise to MCPs. - For members with an H/L permanently wider than 2 percent, exchange taxes (or other mandatory costs or subsidies) may not give rise to an MCP even though they exceed 2 percent alone or in the aggregate. - As FX markets develop and H/L may narrow below the +/-2 percent tolerance margin, taxes that previously did not give rise to an MCP may result in an MCP. - Where no wholesale FX market exists and the tax applies on bank-client exchange rates, the tax is deemed levied on the mid of the H/L of the bank-client rates. - (b) Where an exchange tax, other mandatory cost or subsidy is imposed on an exchange transaction with an exchange rate arising from an official action, it will be considered part of the effective exchange rate to be compared to the permissible spread. - In such cases, the tax/cost/subsidy, even if less than 2 percent alone or in the aggregate, could give rise to an MCP. - Conversely, an exchange tax (and/or other mandatory costs or subsidy) of more than 2 percent, included in the aggregate, would not necessarily result in an MCP as long as the effective exchange rate remains within the H/L of the day. *Source: GUIDANCE NOTE ON MULTIPLE CURRENCY PRACTICES, International Monetary Fund — Box 2.* ### 17. The methodology relies on a predefined order of data sources to limit the risk arising ### 17. The methodology relies on a predefined order of data sources to limit the risk arising ### Data sources, precedence, and fallback procedures - Primary and secondary wholesale market exchange rate providers: - LSEG Eikon is the primary source. - Bloomberg is the secondary source. - Guidance for sourcing market exchange rates from these data providers: see Annexes II and V (as referenced). - Alternative data sources when LSEG Eikon and Bloomberg are unavailable or data are manifestly irregular or inaccurate (paragraph 18): - (i) publicly available independent data sources; - (ii) publicly available data from the authorities; or - (iii) data obtained directly from the authorities. - Staff expectation when using alternative data (paragraph 18): - Staff should determine whether the alternative data are representative of the FX market by assessing whether they have been computed in compliance with the IOSCO principles for the computation of financial benchmarks (see Annex II Box 1). - If representative data for spot exchange rates cannot be obtained, the MCP assessment cannot be conducted. - For non-spot transactions the assessment can be concluded even in the absence of representative market data if the theoretical price of the non-spot transaction can be calculated. - Default assumption (paragraph 19): wholesale FX market data available from the primary and secondary data sources are considered representative unless staff has reasonable evidence to the contrary. - When data from primary and secondary sources are manifestly irregular or inaccurate, staff will use alternative representative data sources (see paragraph 18). Such cases are expected to be rare. ### Definition and criteria for a representative wholesale FX market - Representative wholesale FX market: where the price formation of the currency takes place, without constraints by the authorities (paragraph 20). - To consider the wholesale market as representative (paragraph 20), staff should ascertain that: - (i) the market trades are not concentrated between a few participants; - (ii) the market trades on a daily basis; and - (iii) two-way executable quotes are available and trades are executed. - If one or more of these conditions are missing and/or there are official constraints (regulatory or through moral suasion) on intermediaries’ quotes in the wholesale market stifling wholesale market operations, the wholesale market cannot be considered representative and staff should use data from alternative market segments that are representative. ### Retrieval of market exchange rates and operational steps (paragraph 21) - Timing: staff must ensure that the FX market in the corresponding country has closed for the day before extracting the highest and lowest exchange rates to prevent retrieval while FX transactions that could alter highest and lowest rates are still taking place. - Special official actions (examples given): legal dual FX markets, use of lagged official exchange rate, official dollarization — these require special considerations when retrieving market exchange rates. - For detailed step-by-step instructions and examples, staff are referred to Annex V and the forthcoming monitoring tool (as referenced). - Specific retrieval considerations and rules: - Currency pairs: - If an official action results in market segmentation for multiple currency pairs, the MCP assessment is performed on the dominant currency pair first. - If an MCP is found for the dominant currency, staff do not need to identify MCPs in other currency pairs to avoid multiple MCP findings arising from the same official action. - If there is no MCP finding for the dominant currency pair, staff must assess if there is an MCP in the other currency pairs resulting from the official action for which information is available on LSEG Eikon or Bloomberg. - Dual or multiple legal FX markets in a single jurisdiction: - When authorities establish separate legal markets for exchange of currencies in which participants conduct exchange transactions without arbitrage, exchange rates on such distinct markets may exceed the permissible margin and must be quantitatively compared. - For the MCP assessment: - The primary wholesale market (i.e., largest by volume and/or participants, used as benchmark, used by the authorities to intervene, etc.) determines the market H/L range. - The mid-point of the H/L in the secondary market is considered as the exchange rate arising from the official action. - If the H/L is unavailable for the secondary market, staff should use the most representative exchange rate available from the secondary market for the assessment. - Only FX markets in the same jurisdiction are considered. FX markets established outside of the country are not considered legal markets for the purposes of the MCP assessment. - Footnote references preserved: see footnote 34 and footnote 35 as cited in the source. ### Determining existence of an MCP, communication, monitoring, and staff-authority engagement - Responsibility and monitoring (paragraphs 22–23): - Compliance with Article VIII, Section 3 regarding MCPs is solely the responsibility of Fund members. - Members shall ensure they do not engage, or allow their fiscal agencies to engage, in MCPs as defined by the MCP policy. - Members’ compliance with the MCP policy is monitored by IMF staff. - Continuous monitoring is envisaged where official action (covered under the MCP policy) is identified; this requires timely identification of official actions, continuous monitoring of effective exchange rates arising from that official action, and timely communication of any observed impermissible spreads. - Engagement and information exchange (paragraphs 24–26): - Engagement between staff and authorities is the critical first step and involves the sharing, requesting, and receiving information related to official actions covered under the MCP policy. - Authorities should inform staff (country teams) about new official actions that can give rise to MCPs and changes in existing measures. - Staff typically request such information in the context of Article IV consultations or program reviews, or at other times if staff become aware of possible official actions. - If an official action is identified, staff will request relevant information to determine the effective exchange rates arising from that official action and to monitor whether they are within permissible margins. - Authorities may decide to remove the action to avoid an impermissible spread from arising. - Discussions during Article IV consultations and missions should include design, purpose, economic impact, and ways to remove the official action or the MCP arising from it. - Once an MCP has been identified, authorities should share intentions to request approval of the retention of the MCP or remove it, through modalities discussed in Section IV.B. - Staff should prepare for the possibility that an impermissible spread can arise any time, including the day before the Board meeting. - Data provision scope and periodicity (paragraph 25): - Clear understandings about the scope and periodicity of provision of data and information necessary for MCP assessments are important. - For countries with Fund-supported programs, such understandings would normally be reflected in a Technical Memorandum of Understanding (TMU). - For other cases, such understandings should preferably be in writing. - If a member’s provision of data and information for MCP assessments is limited by capacity constraints, or if data or information is not provided for any other reasons, staff should discuss these issues with the authorities; such discussions may be included in the assessment of data adequacy for surveillance and/or mentioned in staff reports when warranted. - Immediate communication and follow-up when an MCP arises (paragraphs 27–29): - When an impermissible spread is observed and thus an MCP has arisen, this should be immediately communicated. - As soon as staff observes an impermissible spread arising from an official action, it should inform the authorities immediately about the MCP. - Authorities will need to decide whether to request approval of the retention of the MCP or take necessary actions to eliminate it. - Staff will discuss potential ways of eliminating the MCP or advise on criteria and procedures for approval of MCPs (see Section IV.B). - Staff will recommend approval to the Board if requested by the member and if staff is of the view that the relevant conditions for approval are met. - Where an MCP arises and approval is not requested, staff will advise on ways to remove the MCP. - If the authorities decide to request approval of the retention of the MCP, this can be done on a stand-alone basis or in the context of an Article IV consultation or program review. Procedures for approval of MCPs are described in Section IV.B. - Any modifications to existing MCPs (including those previously approved by the Board) are subject to Board approval under the same procedures applied to the introduction of the new MCP. - If the Board does not approve the MCP, the determination of the existence of the unapproved MCP will be made through the Summing Up of the relevant Article IV consultation Board meeting, or Board decision adopted upon completion of an Article IV consultation on a lapse-of-time basis, where the Board endorses staff’s appraisal. - Capacity development support (paragraph 29): - Staff could assist authorities on MCP-related issues via capacity development at authorities’ request and subject to Fund policies on capacity development (CD). Staff can provide technical advice on aspects necessary to remove an MCP or remove/adjust an official action so it does not give rise to an impermissible spread in the future (see paragraph 41 reference). ### Members’ obligations and approval frameworks for MCPs (paragraphs 30–33) - General obligation (paragraph 30): - Fund members shall not engage in MCPs, unless such practices are authorized under the Articles of Agreement or are approved by the Fund. - If a member engages in MCPs outside the transitional arrangements of Article XIV, to maintain such practices in a manner consistent with Article VIII, Section 3, the member should request approval of the Fund (the Executive Board). - Procedures for obtaining approval for introduction, modification, and retention of MCPs and modalities to remove MCPs are discussed in Sections IV.B and IV.C (as referenced). - Article XIV transitional arrangements (paragraph 31): - Transitional arrangements under Article XIV allow members to maintain MCPs or exchange restrictions in place at the time at which they join the Fund. - A member availing itself of Article XIV may maintain those MCPs or exchange restrictions that were in effect on the date on which it became a member, and consult with the Fund annually with respect to their retention. - An adaptation of any MCP maintained under Article XIV also requires consultation with and approval of the Fund. - Article XIV consultations are required only if the member maintains measures under the transitional arrangements of Article XIV. Measures put in place after joining the Fund are not protected by Article XIV, Section 2 and will give rise to a breach of Article VIII, Section 3 unless approved by the Fund. - Practice: the Fund has historically adopted a collaborative approach encouraging members to remove measures maintained under Article XIV, including through conditionality under Fund-supported programs and technical assistance. - Approval of MCPs (paragraphs 32–33): - Maintaining an MCP that is approved by the Fund is in compliance with the member’s obligations. - The Fund can approve MCPs maintained both for BOP and primarily for non-BOP reasons provided that the relevant approval criteria established by the Executive Board are met (Box 4 referenced). - The assessment whether an MCP is introduced/maintained for BOP or primarily for non-BOP reasons is made at the time of the approval request and is based on circumstances at that time. - Changes to existing MCPs require approval of the Fund and are subject to the same approval criteria applicable to the introduction of a new MCP. - Staff should determine, after consultation with the authorities, whether the MCP is imposed or maintained for BOP or primarily for non-BOP reasons. - For an MCP to be considered introduced/maintained for BOP reasons, the measure should be considered as needed to address the BOP difficulties of the member; it is not sufficient for a member to have BOP difficulties for a measure to be assessed as for BOP reasons. - MCPs that apply solely to capital transactions do not require Fund approval. - Specific approval criteria for MCPs maintained for BOP reasons (paragraph 33): - (i) the measure is temporary; - (ii) it is being applied while the member is endeavoring to eliminate its BOP problems; - (iii) it does not give the member an unfair competitive advantage over other members; and - (iv) it does not discriminate among members. - To be considered temporary, authorities should normally indicate a firm timetable for removal. - If a country has a Fund-supported program, the MCP may be considered temporary, i.e., implemented for the duration of the program, if the program includes reforms that will allow the member to eliminate MCPs by the end of the program. - In some cases a firm timetable may not be feasible; approval could be requested if the member is taking necessary steps to eliminate it, e.g., by committing to a credible strategy for removal (see paragraph 34 reference). *Source: ppea2023058 - 17. The methodology relies on a predefined order of data sources to limit the risk arising* ### 34. The Fund may also approve MCPs imposed or maintained primarily for non-BOP ### ppea2023058 - 34. The Fund may also approve MCPs imposed or maintained primarily for non-BOP ### Approval criteria for MCPs maintained primarily for non-BOP purposes - MCPs maintained primarily for non-BOP purposes can be approved if the MCPs: - do not materially impede the member’s BOP adjustment; - do not harm the interest of other members; - do not discriminate among members; - do not constitute an exchange restriction; and - the member commits to a credible strategy for the removal of the MCP. - A credible strategy: - would describe the policies and actions the authorities intend to take, and which can be reasonably expected to eliminate the MCP; - would be country-specific and consider the country’s characteristics and capacity to manage risks that may arise if the MCP is removed; - while not necessarily time-bound, should aim to support the removal of MCPs within a reasonable period. - Assessing whether an MCP is introduced/maintained for BOP or primarily for non-BOP reasons may require judgment; staff should give the benefit of any reasonable doubt to the authorities’ representation, but the Fund will make an objective assessment based on all relevant circumstances. - All listed criteria must be met for an approval of an MCP (Box 4 summary). ### Approval of MCPs that constitute exchange restrictions - MCPs that also constitute exchange restrictions can be approved if the relevant approval criteria are met. - The Fund can grant temporary approval for exchange restrictions if the measures: - are imposed or maintained for BOP reasons; - are temporary; and - do not discriminate among Fund members. - Relevant precedent: Executive Board Decision No. 1034-(60/27), adopted on June 1, 1960, provides that the Fund will grant approval of exchange restrictions imposed for balance of payments reasons “only where it is satisfied that the measures are necessary and that their use will be temporary while the member is seeking to eliminate the need for them”. ### Requesting approval and staff handling - A request for approval, with a statement of reasons, should be made by the authorities in writing to the country team or in program documentation (LOI or MEFP). - Where authorities inform staff they are considering introducing a measure that could give rise to an MCP, or an MCP has been identified, the country team should inquire whether the authorities intend to seek temporary approval. - If authorities intend to seek approval, staff will: - assess whether the approval criteria in paragraphs 33-34 are met; - advise the member whether approval can be recommended; - include staff’s recommendation concerning approval in the Staff Appraisal section of the relevant staff report if approval is recommended; - analyze the reasons underlying the MCP and its effects in the staff report to assist the Board in its decision. - If approval is requested on a stand-alone basis, a short Board paper containing the member’s request and staff’s recommendation for approval would be issued. - If approval is not sought by the authorities, the staff report should normally urge elimination of unapproved MCPs. ### Duration of approvals and exceptions - Approval is normally granted for a one-year period or until the next Article IV consultation (whichever is earlier), granted from the date of adoption of the Board decision, to provide regular review by the Executive Board. - Exceptions permitting longer approval periods may be granted on a case-by-case basis, for instance: - where MCP is maintained for existing arrangements and for a specified period because legal commitments must be carried out despite discontinuation; or - expired forward cover schemes where approval has been requested until the maturity of the remaining contract; or - exchange rate guarantee schemes which may exceed one year. - The notion of “temporary” for purposes of approval differs from “temporary” as grounds for a waiver of non-observance of a performance criterion in a Fund arrangement. ### Removal of MCPs — ways MCPs may be considered eliminated - An MCP may be removed in one of the following ways: - (i) Authorities remove the official action that gave rise to the MCP (e.g., abolition of requirement to use an official exchange rate that causes an impermissible spread, or repeal of a law/regulation implementing multiple exchange rates). - (ii) Authorities keep the relevant official action in place but take credible measures to bring the spread back within permissible margin and ensure it will not give rise to future impermissible spreads. If an impermissible spread arises again, a new MCP would be found. - (iii) Even if authorities take no action, the MCP is considered eliminated if monitoring of exchange rates by staff over an “observation period” of 12 months after the emergence of the impermissible spread shows the impermissible spread has not recurred. The MCP remains in place during the observation period and is noted in Article IV or URF staff reports; reemergence during the period resets the clock and restarts the 12-month observation period. - Example (from the guidance): if an impermissible spread was observed on March 17, 2023, the observation period will finish on March 16, 2024. If an impermissible spread is again observed in September 2023, the 12-month observation period would recommence immediately and, if there were no further impermissible spreads, end in September 2024 and the MCP would be considered removed in September 2024. An impermissible spread observed after September 2024 would constitute a new MCP. - The removal of an MCP will be mentioned in the relevant AIV or UFR staff report and should include details on modalities for removal and the date on which the MCP was considered removed. When removal is via option (ii), the measures taken should be described in the staff report. ### Encouragement and capacity development for removal - The Fund encourages members to remove unapproved MCPs through surveillance, programs, and capacity development (CD). - CD on removing MCPs is often part of broader FX market reform assistance, providing comprehensive guidance on monetary policy, FX market regulations and operations necessary to support unification of the exchange rate. - This approach aligns with the Fund’s objective of unifying exchange rates in multiple rate systems (Executive Board Decision No. 649-(57/33), adopted on June 26, 1957). ### Operational guidance for staff — assessment, communication, monitoring, and documentation - Assessment of official actions: - Staff assess whether measures imposed by authorities constitute “official actions” under the MCP policy, determining jurisdictional implications and whether measures apply to current payments and transfers or financial account transactions, and whether they may also constitute an exchange restriction or capital flow management measure (CFM). - If assessed as official action, the country team should immediately initiate exchange rate spread monitoring. - Initial data analysis should normally assess all observations from the date of the official action to confirm whether an MCP has already arisen or for the past 12 months, whichever is shorter. For actions introduced or changed during a Fund-supported program, initial data analysis should cover the entire period from the date of the official action. - Communication with authorities: - Staff must notify authorities about identification of a measure as an official action, normally via a short note outlining the measure and the basis for staff’s assessment. - Staff will provide authorities with specific details of any required FX monitoring (including ticker codes) and may request regular exchange rate data for monitoring purposes. - Monitoring exchange rates: - Area department staff are responsible for ongoing monitoring of relevant exchange rates, undertaken continuously and daily during the period after missions and before Board meetings. - Frequent monitoring ensures prompt authority notification when MCPs arise and that the Board can be fully informed; a Supplement to the staff report should be issued when impermissible spreads arise after a staff report is issued and before the Board meeting. - Area teams are expected to maintain records of daily exchange rates and spreads according to IMF records management framework; for MCP policy purposes departments should maintain records for at least five years. - When an impermissible spread is observed, the area department team should promptly alert relevant functional departments to confirm that an MCP has arisen; once confirmed, authorities should be notified and the MCP discussed in the next staff report or in the document requesting Board approval. - Coverage in policy notes: - During policy consultation, area teams should confirm no impermissible spreads have arisen since last Board consideration. - Policy notes should discuss official actions that could give rise to impermissible spreads and note whether impermissible spreads have been observed. - Where there is a new or existing MCP finding, policy notes should include staff’s assessment of the economic impact and any policy advice, consistent with staff report expectations. - If staff anticipate an MCP approval request, the policy note should discuss whether the measure is for BOP or non-BOP purposes and whether approval criteria are likely to be met or would continue to be met if the MCP was previously approved. - Where there are unapproved MCPs, staff are expected to urge their elimination. ### Treatment of MCPs in Fund-supported programs and emergency financing - The Fund promotes compliance through continued monitoring under Fund-supported programs of the standard continuous performance criterion (PC) on the non-introduction and non-modification of MCPs. - All Fund arrangements (except for FCL, SLL and RSF arrangements) and non-financial monitoring instruments (PCI) include a standard continuous PC (or continuous quantitative target for PCIs) that prohibits the introduction or modification of MCPs at any time during the period of the arrangement. The standard PCs on MCPs and exchange restrictions are not required for SMPs. - References to MCPs in Fund decisions relating to UFR do not include MCPs applying solely to capital transactions, except if otherwise provided. - In addition to standard PCs, Fund arrangements and PCIs can include specific conditionality directed to elimination of MCPs (e.g., structural benchmarks and/or prior actions) where necessary for program objectives or for implementation of specific provisions of the Articles or policies adopted under them. - If a member with a Fund arrangement or PCI introduces or modifies an MCP during the arrangement/PCI: - the member will be in breach of the standard continuous PC/target; completion of the review under the arrangement requires the Executive Board to grant a waiver of non-observance of that PC; - where an MCP also gives rise to an exchange restriction, waivers of nonobservance of both PCs/ACs would be required; - under a PCI, non-observance of the continuous target does not require a formal waiver, but completion of a review is subject to the Board’s judgment that there are compensating factors. - If the MCP was introduced or modified after the arrangement was approved but prior to completion of the ongoing review, a waiver of nonobservance of the PC will be required for the review to be completed. If an MCP was introduced or modified in the period leading to completion of an earlier review at which a purchase or disbursement was approved and it was not reported at the time of that review, a waiver would be required and misreporting may also arise under applicable frameworks. - If the MCP was introduced or modified prior to the approval or after the expiration of a Fund arrangement/PCI, it has no impact on observance of the standard PC. *GUIDANCE NOTE ON MULTIPLE CURRENCY PRACTICES — INTERNATIONAL MONETARY FUND* ### 51. The member with a Fund arrangement/PCI is responsible for providing information to ### ppea2023058 - 51. The member with a Fund arrangement/PCI is responsible for providing information to ### Responsibilities and information-sharing - The member with a Fund arrangement/PCI is responsible for providing information to the Fund to assess compliance with the conditions established by the Executive Board. - Authorities should consult with staff in advance of taking action to ensure it would not give rise to a new MCP, or a modification of an existing MCP, to avoid delays in completing program reviews. - During negotiations for a new arrangement/PCI and during the period of the arrangement, staff should proactively seek information from, and understandings with, the authorities on policies that may give rise to MCPs. ### Assessment of the standard PC on non-introduction and non-modification of MCPs - An MCP would be considered "introduced" if, following the date of approval of the arrangement//PCI, an impermissible spread arises from: - (i) a new official action that did not exist prior to the approval of the arrangement/PCI; or - (ii) a change during the arrangement/PCI to official action that was adopted prior to the approval of the arrangement/PCI. - If an impermissible spread arises during the arrangement/PCI solely from an official action taken prior to, and not changed during the arrangement/PCI, an MCP would arise (and therefore the member should request Board approval) but the MCP would not be considered as introduced for the purposes of the continuous PC. - An MCP would be considered "modified" if the authorities make any change in the official action(s) underlying a previous (existing) MCP finding (unless changes constitute removal of the MCP). ### Transition and grandfathering under the new policy - If the same official action that gave rise to an MCP under the previous MCP policy gives rise to an MCP under the new policy either as of the date of effectiveness of the new policy or later when an impermissible spread emerges, it will not be considered the “introduction” of an MCP for purposes of the standard PC 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. ### Exceptional exclusions from the standard PC - In exceptional cases, the standard PC can be modified to exclude from its scope certain MCPs already in place or expected to be introduced during the program. - Such exclusions can be made at the time of the approval of an arrangement/PCI or at the time of a program review by modifying the standard PC through changes to the TMU (including definitions of PCs and other program-related conditions). - These exclusions are expected to be rare. - An exclusion of specific MCPs from the PC could be considered when staff is of the view that the official action which would segment the market and create a multiplicity of exchange rates is necessary but the MCP, if it were to emerge, cannot be approved. - Exclusions may be for the entire duration of the program or for a shorter period as appropriate. ### Program reviews, waivers of non-observance, and corrective actions - Where a member introduces or modifies an MCP during an arrangement, a program review can be completed only if the Board grants the waiver of non-observance. - Generally, a waiver of nonobservance will be granted only if the Fund is satisfied that, notwithstanding the non-observance of the PC, the program will be successfully implemented—i.e., that it will achieve its goals—either because of the minor or temporary nature of the nonobservance or because of corrective actions taken by the authorities. - For the non-observance of the standard PC on non-introduction and non-modification of the MCP, the following considerations apply in assessing grounds for the waiver: - Minor non-observance: - The introduction of an MCP is a breach of an obligation under Article VIII Section 3 and thus cannot be considered "minor". This ground for a waiver will not be available in case of introduction of a new MCP. - A modification of an MCP is also not considered minor, as the modification is treated as an introduction of a new MCP. - Temporary non-observance: - For staff to recommend a waiver based on this ground, the MCP (or its modification) which gave rise to the non-observance of the standard PC must be removed by the time of the completion of the review. - Corrective action: - While the Fund may lend to a member with unapproved MCPs, the member that introduces or modifies an MCP that results in non-observance of the standard PC is generally advised to seek temporary approval of such MCP under Article VIII. - Once such approval is granted, the Board would also normally grant a waiver of nonobservance of the PC. The member’s request for approval under Article VIII is normally considered the “corrective action” for purposes of the waiver of nonobservance. - Where the MCP (or its modification) cannot be approved by the Board under Article VIII, a waiver of non-observance of the PC for the introduction or modification of an MCP could only be granted if the MCP has been removed. ### Bilateral payment agreements (BPAs) and continuous PCs/QTs - In addition to the standard PCs on MCPs and exchange restrictions, all Fund arrangements (except for FCL, SLL, and RSF arrangements) and non-financial monitoring instruments (PCI) also include a standard continuous performance criterion (PC) (for arrangements), continuous assessment criterion, or continuous quantitative target (QT) (for PCIs) that prohibits members from concluding BPAs that are inconsistent with Article VIII. - BPAs may give rise to exchange restrictions and/or MCPs. If a member, during the period of a Fund arrangement/PCI enters into a BPA that includes such provisions, a waiver of nonobservance would be required for the upcoming review to be completed. - Staff should remind the authorities of countries with Fund-supported programs that BPAs can include provisions inconsistent with Article VIII and encourage them to discuss with staff any plans to enter into a BPA during the Fund-supported program. ### MCPs and Emergency Financing (RCF/RFI) - RCFs and RFIs constitute outright disbursements/purchases without ex-post conditionality and therefore do not include the standard continuous PC on the non-introduction and non-modification of MCPs. - The ex-ante policy undertakings for RFIs and RCFs encompass the typical commitment not “to introduce or intensify exchange and trade restrictions and other measures or policies, such as MCPs, that could compound the members’ BOP difficulties”. - Such commitments are included in the authorities’ LOI requesting financing under the RFI or RCF; staff should ensure consistent inclusion of the relevant language in LOIs. - Any Article VIII measures introduced contrary to these commitments will be discussed in the next Article IV and/or UFR staff report. - Prior actions with respect to MCPs can be established where appropriate under the relevant policy. - The Fund can, as a condition for the RFI/RCF disbursement/purchase, require a member to implement a prior action on the elimination or calibration of the measure which gives rise to an MCP or exchange restriction subject to the Board approval under Article VIII. ### Relationship between the MCP policy and other Fund policies - Article VIII, Section 3 is linked to Article VIII, Section 2(a) on exchange restrictions, Article IV on exchange rate policies and surveillance, Article XIV on transitional provisions for members who join the Fund with MCPs or exchange restrictions in place, and Article VI on capital transfers. A. MCPs and Article XIV - The transitional arrangements under Article XIV allow members to maintain MCPs or exchange restrictions in place at the time at which they join the Fund. B. MCP Policy and the Fund’s Policy on Exchange Restrictions - MCPs and exchange restrictions are distinct legal concepts covered under Article VIII, Section 3 and Article VIII, Section 2(a), respectively. - Article VIII, Section 2(a) prohibits members from imposing restrictions on the making of payments or transfers for current international transactions, unless approved by the Fund or authorized under the transitional arrangements under Article XIV. - The MCP policy is broader than the policy on exchange restrictions: an MCP can arise from any purchase or sale of FX that relates to either the making (outflow) or receipt (inflow) of payments, while the policy on exchange restrictions covers only outgoing payments and transfers for current international transactions. - MCPs that apply to transactions other than those defined as current under Article XXX(d), including incoming payments and transfer (e.g., differentiated rates for surrender of FX from exports), do not give rise to exchange restrictions. - Sometimes exchange measures may give rise to both MCPs and exchange restrictions (e.g., exchange taxes, mandatory import deposit requirements). - When an additional cost is imposed by official action (i.e., an exchange tax), such measure may be both an MCP and an exchange restriction. Treatment of exchange taxes and mandatory costs - Historically, the MCP policy allowed members to impose minor taxes (i.e., less than 2 percent under the old MCP policy) on exchange transactions without giving rise to an MCP. - Due to the absence of a de minimis rule for exchange restrictions, taxes and other mandatory costs below 2 percent were considered as giving rise to exchange restrictions. - The new MCP policy provides that exchange taxes and other mandatory costs or subsidies that are subject to the MCP policy and do not give rise to MCPs would also not give rise to exchange restrictions. - There may be cases where the member-specific H/L is wider than the plus/minus 2 percent tolerance band; in such cases, exchange taxes and other mandatory costs and subsidies greater than 2 percent (alone or in aggregate) may not give rise to an MCP, and therefore, would not be considered to give rise to an exchange restriction. - The assessment as to whether other types of official action that may give rise to MCPs also constitute exchange restrictions will continue to be made on a case-by-case basis. Approval criteria and coherence across policies - Both MCPs and exchange restrictions can be temporarily approved by the Fund but the approval criteria under the two policies differ: - MCPs can be approved if maintained for both BOP and non-BOP reasons. - Exchange restrictions can only be approved if they are maintained for BOP reasons. - To avoid inconsistency, MCPs maintained for non-BOP reasons can only be approved to the extent that the same measure does not also constitute an exchange restriction. Discriminatory currency arrangements (DCAs) - MCPs may also constitute DCAs, which are also prohibited under Article VIII, Section 3. MCPs and DCAs are distinct legal concepts but the same measure may be an MCP and a DCA. - The Fund does not routinely identify measures as DCAs in practice. C. MCP Policy and the IMF Institutional View on Liberalization and Management of Capital Flows - Official action that gives rise to an MCP may at the same time be a capital flow management measure (CFM) if it is “designed to limit capital flows”. - The definition of a “current transaction” under Article XXX(d) captures some transactions that, from an economic perspective, are capital in nature and are registered in the capital and financial accounts of the balance of payments, namely: (i) payments of moderate amounts for amortization of loans or for depreciation of direct investments; (ii) normal short-term banking and credit facilities; and (iii) moderate remittances for family living expenses. - Measures that impact these types of transactions may be classified simultaneously as MCPs and CFMs (and exchange restrictions). - Some measures that affect solely capital transactions may be an MCP as well as a CFM. - A measure broad enough to affect both capital transactions and transactions defined as “current” may be classified as an MCP and a CFM with respect to capital transactions and an MCP (and an exchange restriction) with respect to payments and transfers for current transactions. - In advising members on CFMs, staff should be mindful that CFMs should generally be designed in such a way as not to give rise to exchange restrictions or MCPs for current transactions. - Measures that are both MCPs and CFMs will always be mentioned and discussed as MCPs in relevant staff reports and will be identified in the report as being a CFM if the criteria for coverage of CFMs in surveillance are met. *Guidance Note on Multiple Currency Practices — Extract* ### 66. MCPs including those that are also CFMs are subject to Board approval, except for ### ppea2023058 - 66. MCPs including those that are also CFMs are subject to Board approval, except for ### Treatment of measures that are both MCPs and CFMs - Measures that are MCPs and also CFMs due to the Articles’ definition of current transactions and are subject to Fund approval under Article VIII will be assessed only under the MCP policy (paragraph 67). - Such measures will not be assessed under the IV for appropriateness (paragraph 67). - A measure may affect both capital transactions and transactions defined as “current” under the Articles and can be: - Classified as a CFM (and an MCP) with respect to capital transactions. - Classified as an MCP (and an exchange restriction as the case may be) with respect to payments and transfers for current transactions (paragraph 68). - A measure that is an MCP and affects both current and capital transactions (and thus is also a CFM) will be assessed only under the MCP approval policy; its appropriateness will not be assessed under the IV (paragraph 68). Example: an exchange tax that gives rise to an MCP and applies to both current and capital transactions. ### MCPs applicable solely to capital transactions - MCPs that are also CFMs and are applicable solely to capital transactions (as per Article XXX(d)) will be assessed only under the IV (paragraph 69). - Staff should identify MCPs applicable to capital transactions in Article IV (or UFR) reports, but: - No finding of a breach of obligation under Article VIII, Section 3, will be made. - Such MCPs are not subject to Fund approval (paragraph 69). - Illustrative examples of official actions that may give rise to MCPs applicable solely to capital transactions (Box 5): - A tax on FX purchase for acquiring securities abroad by residents. - The requirement to use a specific exchange rate for FX purchases by residents to acquire real estate abroad. - Cash margin requirement or URR on inflows resulting from external borrowings by residents. - The requirement to use a subsidized forward exchange rate in FX swaps concluded between banks and the central bank to assure banks’ future acquisition of FX in connection with their repayment of the principal amount of long-term non-residents’ deposits. ### When to discuss an action as an MCP vs. CFM in staff reports - An official action that may give rise to an MCP and is also a CFM should be discussed as an MCP in the relevant staff report only if an impermissible spread arises (paragraph 70). - In the absence of an impermissible spread, the CFM should be discussed in the staff report to the extent the measure meets the criteria for coverage in the surveillance for CFMs (paragraph 70). - For coverage of the official action in the staff report see paragraph 79 (paragraph 70). ### Member obligations to provide data to the Fund (data-driven assessments) - MCP assessments require information about official action and, once identified, exchange rate and other data (e.g., tax, interest rate) to assess whether an impermissible spread arises (paragraph 71). - Where market exchange rates exist, policy relies primarily on exchange rate data compiled by primary and secondary exchange rate data providers; members may need to provide data when third-party sources do not cover required items (paragraph 71). - The MCP policy relies on existing Fund data provision frameworks; it does not introduce new data provision requirements (paragraph 72). - Article VIII, Section 5 requires each member to provide information on: - (i) “buying and selling rates for foreign currencies,” - (ii) information on “exchange controls, i.e., a comprehensive statement of exchange controls in effect at the time of assuming membership in the Fund and details of subsequent changes as they occur”, - (iii) for existing official clearing arrangements, “details of amounts awaiting clearance in respect of commercial and financial transactions, and of the length of time during which such arrears have been outstanding.” (paragraph 72) - As part of this obligation, members must provide information on exchange rates arising in their territory from official action, such as: - (i) unpublished exchange rates used in transactions by the authorities that segment the market; - (ii) exchange rates in legal parallel markets; - (iii) taxes, fees, other costs and subsidies related to exchange transactions; - (iv) exchange rates set forth in official payment arrangements (paragraph 72). - Country teams should have understandings with authorities on provision of exchange rate data, including market exchange rates if not available from third party providers, and other data relevant for MCP assessments (paragraph 72). - Members must inform the Fund, on a continuous basis, about details of any changes to ‘exchange controls’, including introduction of new measures or changes to existing ones including related to existing MCPs (paragraph 72). - Failure to provide mandatory data/information, or provision of inaccurate data/information, could lead to a breach of obligation, unless non-provision or inaccurate provision is due to the member’s lack of capacity (paragraph 72). - If a member has an arrangement or a non-financial monitoring instrument with the Fund, the Fund may require additional information beyond Article VIII, Section 5 (paragraph 72). - Any deficiencies concerning data required for an MCP assessment may be noted as part of data adequacy assessments in Article IV reports or mentioned in other reports, e.g., on program reviews (paragraph 72). - Beyond mandatory data, members have generally provided other information necessary for MCP assessments (e.g., BPAs); staff should continue to request copies of such agreements between central banks to assess features that may give rise to MCPs and/or exchange restrictions (paragraph 73). - The Fund’s confidentiality framework applies to data provided for MCP assessments; members may designate particular non-public data as “confidential,” but cannot request staff to refrain from sharing with the Executive Board data required under the Articles (paragraph 74). ### Coverage of MCPs in staff reports and reporting guidance - Staff reports should provide a comprehensive discussion of MCPs; this discussion supersedes guidance in the “Guidance Note for Surveillance under Article IV Consultations” (paragraph 75). - MCPs are exchange rate policies and may lead to a breach of obligations under the Articles; they are always discussed in Article IV consultation reports (paragraph 75). - Staff reports are expected to discuss: - Official actions that gave rise to an MCP. - Reasons underlying the practice. - The MCPs’ actual or expected economic impact. - Advice provided to the authorities. - The authorities’ plans regarding the measure (paragraph 75). - The Informational Annex to the Article IV staff report should always include information on new and existing MCP(s), including MCPs applying solely to capital transactions (paragraph 75). - MCPs which are also CFMs should be identified and discussed in staff reports considering specifics in Section VII.C (paragraph 75). ### MCP findings: reporting content and prominence - New MCP findings and modifications to existing MCPs should receive prominent coverage in the staff report (paragraph 76). - The main text of the staff report should discuss: - (i) staff’s assessment that an MCP has arisen or that a modification to an existing MCP has been made; - (ii) describe the underlying official action and observed impermissible spread or changes to them in case of MCP modifications, including noting the most recent date when impermissible spread was observed; - (iii) reasons underlying the introduction or modification of the MCP; - (iv) the actual or expected economic effect (paragraph 76). - The views of the authorities should be noted (paragraph 76). - Staff’s initial finding of a new, or a modification to an existing MCP should be included in the Staff Appraisal section of the report; the Staff Appraisal should also state whether approval has been requested and, if so, whether the approval criteria are met (paragraph 76). - The staff report should discuss the authorities’ plans regarding the measure and staff’s policy advice on removal. Where staff does not recommend, or the authorities do not request, approval of the MCP, staff should urge its removal in the Staff Appraisal section (paragraph 76). - The Informational Annex should elaborate on all existing MCP findings and modifications, describing the official action that gives rise to the MCP (or modified it), the date when an impermissible spread first arose, and the most recent date when the impermissible spread was observed (paragraph 76). - In program countries, a waiver of nonobservance of a continuous performance criterion on non-introduction and non-modification of an MCP would need to be requested by the authorities where relevant; staff report on the program review will discuss staff’s recommendation for a waiver and whether criteria for granting a waiver are met (paragraph 76). ### Continuing coverage and updates - In subsequent years after an MCP finding, where the MCP has not been removed since the previous staff report, the staff report should continue to discuss the MCP, note that the country continues to maintain the MCP, include discussion of the official action, the impermissible spread with the most recent date, and continue to provide policy advice (paragraph 77). - If authorities seek an extension of temporary Board approval of an MCP, the staff report should assess whether criteria for approval continue to be met and the Staff Appraisal should include staff’s recommendation regarding approval (paragraph 77). - The Informational Annex should elaborate on the MCP, describing the official action, the date when an impermissible spread first arose and the most recent observed date (paragraph 77). ### Coverage where no MCP finding exists - Coverage of official actions that could give rise to an MCP but where there is no MCP finding can vary depending on economic impact (paragraph 78). - Staff reports can discuss the official action and its economic impact, and may advise removal or change of the official action (paragraph 78). - The Policy Note should state that staff are monitoring relevant exchange rates for impermissible spreads related to specific official actions (paragraph 78). - The staff report should not refer to the official action as “likely to give rise to an MCP” or similar language, nor explicitly state that staff are monitoring specific transactions (paragraph 78). ### Reporting of MCPs that apply only to capital transactions - Newly identified MCPs that apply only to capital transactions should be reported as MCPs in the main text of the staff report, Staff Appraisal and in the Informational Annex (paragraph 79). - In subsequent years, such MCPs and any modifications (including those that are also CFMs) should be discussed in the Informational Annex (and, where relevant, in the staff report, see Section VII.C) (paragraph 79). *Source: GUIDANCE NOTE ON MULTIPLE CURRENCY PRACTICES, selected paragraphs 66–79, 86–87, Box 5, and accompanying notes.* ### 80. If the member requested temporary approval of an MCP, the staff report will confirm ### ppea2023058 - 80. If the member requested temporary approval of an MCP, the staff report will confirm ### Temporary approval of an MCP - Staff report will confirm if the member requested temporary approval of an MCP and include staff’s assessment on whether criteria for temporary approval are met. - The Staff Appraisal should: - Note that the authorities have requested temporary approval of the MCP. - Discuss whether staff supports the request. - State whether the MCP is for BOP or non-BOP reasons. - Assess whether the MCP meets the relevant criteria for approval. - If approval is requested for non-BOP reasons, the staff report main text should include a description of the credible strategy for eliminating the MCP and indicate when or under what conditions the MCP will be eliminated. ### Removal of MCPs - When an MCP previously identified in a staff report has been removed: - Removal should be discussed in the next staff report (or the next Article IV staff report, at the latest). - Information on removal should be included in the Informational Annex. - The main text of the staff report should: - Note that the member has removed the MCP. - Discuss when and how it was removed (e.g., the date of removal of the official action, the date when credible measures were taken, or if it has been 12 months since the last observation of an impermissible spread). - Describe credible measures taken by the authorities to remove the MCP. - The Informational Annex should include information on the MCP removal and its date. ### Authorities’ views - 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 staff report, even when the authorities accept the staff’s finding, and especially when there is disagreement. - Inclusion of the authorities’ views on MCP findings in UFR staff reports is also encouraged. ### Countries on a 24-month Article IV consultation cycle - Coverage of MCPs in staff reports for countries on a 24-month consultation usually follows the rules described above. - If an official action gives rise to an impermissible spread but the 12-month observation period ends, the official action is removed, or credible measures are taken before the next Article IV staff report is considered by the Board: - The staff report may, where appropriate, include a discussion of the official action, impermissible spread, their economic impact, the authorities’ actions and dates of MCP emergence and elimination. ### Annual reporting to the Board - Staff will prepare an annual report to the Board on existing MCPs and their approval status across the membership once the new MCP policy becomes effective. - The annual report will provide a list of all existing MCPs and MCPs removed over the previous calendar year as reported in the latest IMF staff reports. - The list will contain: - A brief description of the MCPs. - Their approval status. - For approved measures, whether they are for BOP or non-BOP reasons. - Where applicable, the date of the MCP removal. - MCPs that apply solely to capital transactions and are noted as such in staff reports will also be included. - Annual reports will be circulated to the Board for information and are not expected to be disseminated externally. - For external audiences, the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) includes information on MCPs as discussed in the latest IMF staff reports issued as of December 31 of the AREAER reporting year. ### Annex I — Taxes, other mandatory costs, and subsidies (key points) - Taxes, other mandatory costs, or subsidies imposed on, or closely related to, an exchange transaction are considered official action and may give rise to MCPs. - Examples of mandatory costs: fees, surcharges. - A mandatory subsidy decreases the cost of exchange transactions and may segment the market. - If a tax or cost is imposed on, or closely related to, an exchange transaction, it is considered part of the effective exchange rate for that transaction and, if the resulting effective exchange rate exceeds the permissible spreads under the methodology, it would give rise to an MCP. - Assessment steps: - Determine whether taxes, costs, or subsidies are “so closely related to an exchange transaction” as to constitute part of the effective exchange rate (e.g., exchange taxes like a stamp tax on purchase or sale of FX are considered so closely related). - For taxes imposed on international transfers rather than on sale/purchase of FX, assessment requires comprehensive, country-specific analysis (e.g., whether it applies only to transfers abroad or to all transfers). - Taxes levied on the exchange of currencies are considered exchange taxes even if collected separately or at a different time than the exchange transaction. - Taxes, other costs, and subsidies imposed by official action but not closely related to an exchange transaction do not fall within the MCP policy. - Calculation of effective exchange rate when taxes apply: - The entire amount of tax(es) levied on the transaction must be included. - If the tax is reimbursed fully or partially later, calculate the effective exchange rate considering the time value of the tax (similarly to cash margin requirements and the unreimbursed part). - If reimbursement amount and timing vary by other tax liabilities and transaction date, use the average amount (share) of tax and period until compensation; absent such information, use the nominal tax rate and the longest period until reimbursement (e.g., one year). - How the methodology applies to taxes, costs, subsidies (three cases): - On market-determined exchange rates: - Such levies are considered to be applied 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 that alone or in aggregate with other mandatory costs and subsidies do not exceed 2 percent would not be considered MCPs. - For members with an H/L permanently wider than 2 percent, exchange taxes (or other mandatory costs or subsidies) may not give rise to an MCP even though they exceed 2 percent alone or in aggregate. - If H/L narrows below the 2 percent tolerance margin, taxes higher than 2 percent could give rise to MCPs. - On exchange transactions with rates arising from other official action (e.g., rates determined by the authorities): - Such taxes, costs, or subsidies imposed on the exchange transaction by official action are part of the effective exchange rate that will be compared to the permissible spread under the new methodology. - Even a very small mandatory cost, including an exchange tax or subsidy, could give rise to an MCP in these cases. - Conversely, an exchange tax or subsidy would not necessarily result in an MCP if the effective exchange rate remains within the H/L of the day. - Taxes imposed on transfers: - If considered so closely related to the exchange transaction as to constitute part of its effective exchange rate, they will be assessed as in the previous two bullets depending on whether the exchange rate for the underlying exchange transaction is determined by official action. - Alignment with exchange restrictions policy: - Exchange measures that give rise to MCPs may also give rise to exchange restrictions under Article VIII, Section 2(a). - Under the new policy, exchange taxes and other mandatory costs that are subject to the MCP policy but do not give rise to MCPs would also not give rise to exchange restrictions. - Historically, minor taxes up to 2 percent were considered non-objectionable under the MCP policy; absence of a de minimis rule previously meant similar taxes could still be exchange restrictions. - Taxes and costs not considered part of the effective exchange rate: - These would continue to be considered to give rise to exchange restrictions regardless of their size. ### Annex II — Technical aspects of monitoring spreads (methodology summary) - The new methodology is a three-step assessment process for both spot and non-spot FX transactions: - Step 1: Ascertain whether an exchange rate has arisen from official action as defined in the MCP policy. If not, no MCP assessment proceeds. - Step 2: Compare the effective exchange rate arising from the official action (R) with the market-based norm — whether R is within the range of the highest (H) and lowest (L) wholesale exchange rates of the trading day. If R is within H/L, there is no MCP. If R is beyond H/L, proceed to Step 3. - Step 3: Examine if R exceeds the tolerance margin of +/- 2 percent of the mid H/L of the day. If R is within the tolerance margin, there is no MCP. If R is outside the tolerance margin, an MCP would arise. - Market-based norm and data sources: - The permissible spread is determined by a country-specific market-based norm and the tolerance margin, building upon the exchange rate determined on the country’s wholesale FX market. - Daily H and L on a wholesale FX market will be primarily collected from benchmark data providers (LSEG Eikon, Bloomberg) and generally considered representative. - In rare cases when such data is not available or appears manifestly irregular or inaccurate, alternative exchange rate data may be used, including: - (i) publicly available independent data sources, - (ii) publicly available data from the authorities, - (iii) other data from the authorities. - In all cases staff will determine whether the data are representative of the market. Only exchange rate data representative of the FX market will be used for assessments under the MCP policy. - For non-spot transactions, assessment can be concluded even in the absence of representative market data if the theoretical price of the non-spot transaction can be calculated. - Use of alternative data: - Staff must determine whether alternative data are representative of the FX market. - When using alternate data sources other than the primary and secondary data-providers, staff must assess whether the exchange rate data have been computed in compliance with the IOSCO principles for the computation of financial benchmarks (see Box 1). - Staff may consider underlying data contributors, dataset and methodology used to derive the exchange rates. - If alternative data is used and there is more than one wholesale FX market, the exchange rates determined on the largest market are considered representative of the market exchange rates. - The largest market is usually determined by FX turnover but other factors such as number of active participants could inform judgment. - Data to identify the principal market can be obtained from benchmark providers, reliable independent sources, or the authorities. - Private or semi-private entities that own/operate FX trading platforms can be alternative sources of information on volume of transactions on the platforms. *Source: https://www.imf.org/-/media/files/publications/pp/2023/english/ppea2023058.pdf* ### 5. If representative wholesale FX market data does not exist, exchange rate data from ### ppea2023058 - 5. If representative wholesale FX market data does not exist, exchange rate data from ### Use of alternative exchange-rate segments when wholesale FX data are unavailable - If representative wholesale FX market data does not exist, exchange rate data from other segments that are representative of the FX market can be used to determine the permissible margin. - Possible representative segments include: - the wholesale FX market, - the bank-client FX market, - the exchange bureaus–client market, - or a combination of these, depending on country-specific conditions. ### IOSCO Key Principles for Financial Benchmarks (Box 1) - Replicability: ability of market participants to adopt a trading strategy to obtain a tradable price/exchange rate close to the reference rate. - Transparency: reference rates produced based on clear rules, including transparent fallback procedures; governing rules well-known; computational methodology publicly documented and supported by continuous monitoring. - Reliability: governance and administration should adequately safeguard against manipulation and error; process to change computation method should be explained and allow consultation with market participants. - Availability: reference rate should be available at sufficient frequency to all market participants through convenient publication means. - Accountability: reference rates should be readily available to facilitate verification; oversight of the computation agent should be in place to audit the benchmark regularly; the benchmark administrator should keep a record of all inputs in the computation for at least 12 months. ### Situations with no local FX market or with an adopted foreign legal tender - In the rare case of no local FX market, use the closest exchange rate equivalent to a “market” rate to determine the tolerance margin. - Example: in a pegged exchange rate regime where all FX inflows are surrendered to authorities and the CB sells FX to intermediaries, the wholesale reference rate is the mid-rate between the authorities’ buying rate (surrender capture) and selling rate (redistribution). - No MCP arises if official action rates remain within the +/- 2 percent tolerance margin from the mid of the official buying and selling rates. - When a country adopts another country’s legal tender, exchange rate data from the FX market of the country whose legal tender has been adopted should be used to determine permissible margins. - Staff should account for time zone differences and use exchange rate data overlapping with local FX market opening hours. - Overlap with major trading centers (London, NY, Frankfurt, Tokyo, Singapore) can be used when a major currency is adopted. ### Monitoring, reporting, and thresholds for MCPs - One single deviation from the permissible margin is sufficient for an MCP to arise. - Monitoring of exchange rates arising from official action must be continuous once an official action is identified. - Monitoring should be daily in the period between the end of the mission and the Board consideration/meeting. - Country teams and country authorities are responsible for monitoring: - the effective exchange rate arising from official action, - H and L market exchange rates, - to ascertain whether a breach of the permissible spread has occurred. - Data sources for exchange rates arising from official action can include public sources (e.g., HAVER), members (e.g., central bank website), or direct requests to authorities. - Staff should establish understandings with authorities on reporting of exchange rate data relevant for MCP assessments. ### Monitoring tools and procedures - Monitoring starts with downloading market H and L data from benchmark data providers and the exchange rate arising from official action into a pre-designed forthcoming monitoring tool for automated testing against the market norm and the tolerance margin. - The monitoring tool includes the MCP methodology in the “Test” worksheet to perform quantitative assessments automatically. - The test should be run on a continued basis to detect an MCP in a timely manner, except where monitoring is required only on predetermined dates (e.g., settlements under BPAs). - The monitoring tool will flag breaches that give rise to an MCP; once confirmed, the country team should promptly inform relevant functional departments staff and the authorities. ### Selected hypothetical examples and implications for monitoring - Lagged official exchange rates (Country A example): - Central bank announces official exchange rate (R/USD) at 16:00 daily; rate determined as weighted average interbank market exchange rates from 15:00 on previous trading day (T) to 15:00 on current day (T+1); government trades with CB on T+2 using rate calculated on T+1. - This two-day lag does not meet the one-day lagged criterion; it includes transactions from two different days and transactions from 2 days before. - Monitoring is required because the official rate is used for government transactions. - In the example assessment period May 2–23, 2022 no impermissible spreads were identified; however, the official exchange rates were outside daily H/L on several days and outside the +/-2 percent tolerance margin in 9 cases in the period November 26, 2021–February 8, 2022, resulting in an MCP. - FX auctions (Country A example): - Central Bank buys FX from intermediaries via daily multiple-price auctions; accepted bids must not deviate by more than 1 percent (i) from each other and (ii) from interbank mid rates at auction time. - Auction fails best-practice allotment criterion and reference price inclusion; considered market-segmenting and requires monitoring. - If auction exchange rate exceeds permissible margins (reference: spot wholesale interbank market H/L and mid), MCP arises. The weighted average rate (WAR) of successful bids constitutes the rate arising from official action (R). - Exchange taxes: - If tax is closely related to exchange transactions and levied on market exchange rates, tax is deemed levied on the mid of the daily H/L and effective exchange rate is R = Mid H/L*(1+Tax). - Scenarios: - If the tax does not exceed 2 percent (and no other mandatory costs), it would not result in an MCP because effective exchange rate remains within +/- 2 percent tolerance buffer measured on the mid H/L of the wholesale market. - If the tax is more than 2 percent, staff must monitor continuously; whether an MCP arises depends on whether the effective exchange rate is within the daily H/L of the market exchange rate. Example: a 3 percent tax may or may not give rise to an MCP depending on daily H/L width. - Exchange taxes on exchange rates arising from official action: - Example: official exchange rate x S for 1 USD plus 1.5 percent stamp duty on FX imports. Effective exchange rate R = x * (1+0.015). Even a tax of 1.5 percent (less than 2 percent) can give rise to an MCP if the effective exchange rate occasionally lies outside the tolerance margin. - Cash margin deposit requirement: - Example: unremunerated 100 percent cash margin deposit (official action) for LCs for certain imports; LCs term typically 3–6 months. - Central bank statistical data: annual interest rate on customers’ fixed deposits for 3 months is 15 percent and for 6 months is 25 percent. - Additional cost from unremunerated cash margin is part of the effective exchange rate. - Calculation examples: - Cash margin applied to exchange rates arising from official action: - For G=1, T=0.5, i_g = 0, i_k = 0.25, and DC = 200 S for 1 USD: - Additional cost = 200*(0.25-0)*1*0.5 = 25 S - Effective exchange rate = (200+25) = 225 S - Effective exchange rate compared with daily H/L and tolerance margin (+/-2 percent of mid H/L) to determine MCP. - Cash margin applied to market exchange rates: - Cash margin deemed levied on mid of daily H/L; effective exchange rate calculation identical to above if mid is 200 S for 1 USD and parameters G, T, i_g, i_k are the same. - Subsidies: - Exchange subsidies arising from official action are part of the effective exchange rate and can give rise to MCPs. - Effective exchange rate calculation: - For purchase of FX for import payments: subtract subsidy from nominal exchange rate. - For sale of export proceeds: add subsidy to nominal exchange rate used for sale. - If subsidy is levied on market exchange rates, it is deemed levied on the mid of the daily H/L and compared with H/L of the same day and the +/-2 percent tolerance margin. - Examples: - Incentive schemes (remittances): authorities pay subsidy X units of local currency per USD in addition to official rates for purchases of FX from inward remittances. Effective Rt = official rate + X; compare Rt with Ht/Lt and +/- 2 percent tolerance margin. If Rt is outside permissible margins an MCP arises. - Subsidy for imports of essential goods: authorities compensate importers with X units of local currency per USD purchased at the market exchange rate. Effective Rt = mid Ht/Lt - X; compare Rt with Ht/Lt and +/- 2 percent tolerance margin. If Rt is outside permissible margins an MCP arises. *GUIDANCE NOTE ON MULTIPLE CURRENCY PRACTICES — INTERNATIONAL MONETARY FUND* ### 21. FX forwards. Here we use the example of a 1-year FX forward to illustrate how the non-spot ### 21. FX forwards. Here we use the example of a 1-year FX forward to illustrate how the non-spot ### Overview - Representative tenor used: 1-year FX forward. - Observation period example: Feb 9, 2021, to Feb 8, 2022. - Representative market comparison: the representative tenor forward rate of the currency pair of the wholesale forward market should be used to compare with the forward rate affected by the official action. - Illustration in source: Figure 8 indicates 44 MCP findings during all the transaction days (example shown on Jan 18, 2022). Figure 9 shows forward exchange rates outside the margin, not within the H/L of the prevailing market forward rates for the same maturity or the additional tolerance margin, thus giving rise to an MCP. ### Forwards (Box 2: Forwards) - Market norm for forward exchange rates arising from official action: daily H/L of the forward wholesale market. - Assessment rule: - Apply market norm and tolerance margin as in spot transactions. - An MCP arises if the forward rate arising from official action (R1) exceeds the Ht/Lt of the wholesale forward market rates for the same maturity and the tolerance margin, i.e., +/- 2 percent of the mid of the Ht/Lt. - When interdealer rates are not available, the theoretical forward rate for the same maturity must be calculated based on the interest rate differential in the relevant local and foreign markets. - An MCP would arise if the exchange rate resulting from official action (Rt) were to exceed +/- 2 percent tolerance margin of the theoretical price. ### Swaps (Box 2: Swaps) - Assessment rules for FX swaps arising from official action: - Spot leg: assessed as any other spot rate; spot exchange rates of the swap arising from official action (Rt) should remain within the permissible margin of spot wholesale transactions (wholesale market Ht/Lt and the tolerance margin of +/-2 percent of the mid of the Ht/Lt). - Forward leg: compare the forward rate arising from official action (R1) with market forward rates for forwards with the same maturity. - If wholesale market interdealer rates for forwards of the same maturity are not available, calculate the theoretical price of the forward as described above. - The forward rate of the FX swap arising from official action (R1) should remain either: (i) within the daily Ht/Lt of similar wholesale market forward rates and the tolerance margin (i.e., +/- 2 percent of the mid of the Ht/Lt), or (ii) within the tolerance margin +/- 2 percent of the calculated theoretical price, to avoid an MCP. ### Options (Box 2: Options) - Options arising from official action are assessed under the MCP policy only if exercised. - Effective exchange rate for options = strike rate + option premium. - Assessment: - Compare effective exchange rate with daily Ht/Lt of wholesale market option exchange rates with similar terms and the +/- 2 percent tolerance margin around the mid Ht/Lt. - If representative market data unavailable, compute theoretical option price. - Effective exchange rate must remain within the +/-2% tolerance margin of the theoretical price to avoid an MCP. - Practical considerations: - Option markets often lack depth/standardization; assessments will mainly rely on theoretical prices. - LSEG Eikon and Bloomberg provide theoretical option price calculators; default settings based on benchmark administrator data/assumptions regarding expected volatility. - Staff may assess and adjust default parameters (implied volatility, local currency interest rate) using alternative local-market data to obtain representative option prices. - In absence of alternative information, assessment based on the theoretical option price derived from the default calculator settings. ### Data sources and availability (Box 2 conclusion) - Primary source for non-spot exchange rate information: LSEG Eikon. - Primary data provides H/L forward rates quoted by interbank market participants for 76 currencies, where forward markets exist. - Secondary source: Three can be sourced from Bloomberg as secondary source. - Monitoring: Those forward exchange rates can be monitored continuously. - If wholesale forward market exchange rates from benchmark providers are not available, or data appear manifestly irregular or inaccurate: - Data from alternative sources can be used. - If representative data from alternative sources not available, theoretical prices must be used. - Theoretical forward rate computed as described (based on interest differentials and Ht/Lt inputs). - Footnote: The forthcoming monitoring tool will enable users to calculate theoretical forward prices by inputting the Ht and Lt wholesale spot market rate and the respective domestic and foreign interest rate. Staff may use alternative domestic funding-rate data if considered more representative. ### Non-Deliverable Forwards (NDFs) (paragraph 22) - MCP assessment applies to official NDFs only if: - They are sufficiently closely related to a foreign exchange transaction, and - They are part of a scheme administered by central banks or other official entities under which: (a) NDFs are made available to a subset of intermediaries or end-users or are earmarked for specific transactions, thereby segmenting the market, and (b) NDFs are closely related to acquiring or selling foreign exchange. - All other NDFs are excluded from the policy. - Effective exchange rate of the related exchange transaction includes the benefit/cost from the NDF (difference between the market NDF rate and the official NDF rate). - Assessment steps: - Compare the official NDF rate with the H/L of the market NDF rates of the date for the same maturity. - If market NDF rates not available, compute theoretical NDF rates. - The spread by which the official NDF exceeds the H/L of the market NDF rates, or the difference between the theoretical NDF rate and the official NDF rate, is the benefit to be added to the nominal exchange rate of the related exchange transaction. - Reference: Annex V for further information on NDFs data retrieval. ### Exchange Rate Guarantee Schemes (paragraph 23) - Authorities may provide exchange rate guarantee schemes to cover exchange rate risks for specific market participants (e.g., exporters). - If scheme is not self-financed, compensation for exchange losses is considered part of the effective exchange rate. - Example mechanics: - If authorities provide 1.00 unit of domestic currency as exchange rate support per U.S. dollar, and an exporter sells FX at a market rate below threshold X, effective exchange rate R = (X + 1.00) per U.S. dollar. - Alternatively, exporters may be allowed to sell FX to the central bank or operator at a fixed exchange rate R; exporters’ benefit = difference between lower market rate and fixed exchange rate minus any premium paid by exporter for scheme participation. ### Bilateral Payment Arrangements (Annex III summary) - Fund’s policy background: promotion of a multilateral system of trade and payments; concerns that bilateralism can cause distortions and discriminatory features; link to Article I(iv), Article VIII. - Definition and features of BPAs: - Formal or informal arrangements between two (or more) countries establishing at least one account with a central or commercial bank through which payments for current international transactions may or must be passed. - Typical features include: system of bilateral accounts, mutual extension of credit allowing accumulation of net debit balances up to a designated amount, periodic clearing/settlement (examples reference settlement periods and clearing mechanics). - Typical arrangements define exchange rates applicable between parties and types of current transactions to be settled through arrangement accounts. - Restriction on transferability/conversion of balances to other countries is common. - Exchange restrictions and MCP risks from BPAs: - Restrictions may arise at resident level (undue delay in payments) and at central/commercial bank level (settlement of balances only after unduly long periods). - Historical practice: periods up to three months considered not undue. - An exchange restriction arises if balances in bilateral accounts can be used only for settlements between parties and cannot be converted into another currency or used to make payments to a third country. - Use of “special” exchange rates in BPAs that differ from prevailing FX market rates may give rise to MCPs at level of residents using arrangement or at settlement of credit balances by central banks. - Assessment of BPA exchange rates: - Verify whether the exchange rate established by the agreement (R) is within the permissible margin of the wholesale spot FX market in all participating countries. - Measure Rt against the Ht/Lt of the wholesale spot FX market on settlement dates and the +/- 2 percent tolerance margin around the mid Ht/Lt in each country, with t equal to the BPA settlement date. - BPA exchange rates are not continuously monitored; actual settlement dates are used for assessment when MCP may arise at settlement balances between central banks. More frequent monitoring may be required in other cases. *International Monetary Fund — Guidance Note on Multiple Currency Practices (excerpts provided).* ### 4. Most Fund arrangements (and , PCIs) include a standard performance criterion under ### 4. Most Fund arrangements (and , PCIs) include a standard performance criterion under ### Bilateral Payment Arrangements (BPAs) — definitions, jurisdiction, and treatment - BPAs that are inoperative (i.e., no new transactions are channeled through them and no balances outstanding in such arrangements) do not give rise to exchange restrictions or MCPs. - Where balances are still outstanding (as between monetary authorities), Fund jurisdiction has continued to be invoked even if such balances are in the process of liquidation, on the grounds that such balances remain currently acquired and settlement is subject to undue delay. - Where outstanding balances have been repaid in full or converted to loans from one government to another in the process of liquidation, such balances are considered to be no longer outstanding under the inoperative bilateral payments agreements from which they arose. - Central banks may enter into agreements to settle current transactions (e.g., imports and exports) between two or more countries on pre-defined dates at specific exchange rates; the Fund assesses agreements structured as BPAs to determine consistency with members’ obligations under Article VIII, Section 2(a) and 3 of the Articles of Agreement. - An official payment or clearing arrangement would generally give rise to an MCP if for exchange transactions it provides for the use of exchange rates that effectively are not the same as the rates that are used in the market. - An official arrangement would also give rise to an exchange restriction if it provides for the settlement of balances between central banks (arising from current international transactions) less frequently than every three months. - Staff does not assess agreements between central banks that are not structured like BPAs (for example, swaps for liquidity support or for reserve management purposes). Instances where funds from a CB swap are passed on through official action to domestic foreign exchange market intermediaries and end-users in a manner that causes market segmentation and exchange rate deviations in excess of the permissible spread will be assessed under the methodology. - Arrangements (and PCIs) may also include a performance criterion aimed at the elimination of, or reduction in, the scope of, BPAs. ### Assessing changes in BPAs - Whether a change in the main features of a BPA represents an intensification of the related exchange restriction or a modification of a related MCP must be assessed on the basis of sufficiently detailed information. ### Exchange Rate Guarantee Schemes (ERGSs) — definition and scope - ERGSs are mechanisms designed to cover, in whole or in part, exchange rate risks of certain market participants (e.g., some exporters or some banks), by compensating part or all of the losses incurred by these market participants on exchange transactions due to the fluctuations of exchange rates in the future. - Exchange rate guarantees provided by official action can be considered as a subsidy of the rate that applies to exchange transactions covered by the scheme. - Only ERGSs arising from an official action are covered by the MCP policy. - Contingency facilities that do not cover losses in exchange transactions (e.g., suretyships, inconvertibility insurance) are not treated as ERGSs under the MCP policy. - ERGSs have been used to cover exchange rate risks arising from trade, auctions, external debt operations, and deposits associated with foreign assistance for development projects. ### Conditions under which ERGSs give rise to MCPs - An ERGS gives rise to an MCP if the scheme (a) is not considered to be “self-financed” and (b) an impermissible spread has arisen. (a) The self-financed character - ERGSs are considered self-financed if the premia paid by beneficiaries can be reasonably assumed to be sufficient to cover the exchange rate risks over time; in such cases, the member or its fiscal agency does not have to provide additional funds (i.e., subsidies). - A scheme will not be considered self-financed if beneficiaries and/or third parties do not provide a financial contribution to the scheme, or if such contribution is not sufficient to cover the exchange risks, and as a result the authorities have to provide a subsidy or earmark funds to the scheme. - The determination of the self-financed character is made ex ante, i.e., when the scheme is established, not when compensations are paid; the assessment at inception is based on a reasonable assumption about the exchange rate path over time. - The scheme must be reviewed periodically to ensure that it continues to be self-financed. - Depending on its features, the self-financed nature of an ERGS could be assessed under the methodology for non-spot transactions either as a forward or option; ERGSs akin to forwards or options are treated similarly (compared to available relevant market rates/prices or theoretical rates/prices). (b) Assessing the exchange spread - If the scheme is not self-financed, staff will apply the methodology for spot or non-spot transactions depending on the scheme’s features to determine whether it results in an impermissible spread. - When an ERGS is not self-financed the compensation for exchange losses is considered part of the effective exchange. To avoid an MCP, the effective exchange rate of the exchange transaction covered by the ERGS should be within the permissible margins calculated depending on whether the ERGS is akin to forwards, options or spot transactions. - The assessment requires comparing: - the forward exchange rate with the market exchange rate for forwards of the same maturity; or - the effective exchange rate of the option with market option exchange rates with similar terms. - When wholesale market interdealer rates for forwards of the same maturity and options for the same terms are not available, the theoretical price of the forward/option should be calculated. - If an ERGS is akin to a spot transaction, it should be assessed under the methodology for spot transactions. - If the effective exchange rates are outside the respective permissible margins, an MCP would arise. ### Removing an MCP arising from an ERGS - MCPs arising from ERGSs may be difficult to remove quickly because old obligations would need to be honored until relevant contracts expire. - An MCP arising out of an ERGS will be considered removed if the authorities render the scheme self-financed or, if the scheme remains under-financed, the authorities take actions to ensure that no impermissible spread emerges in the future. - An MCP arising from an ERGS will be considered removed when, without any action being taken by the member, no new impermissible spread has arisen over a period of 12 months after the emergence of the impermissible spread that gave rise to the MCP. - A member may request approval of MCPs arising from ERGSs; in practice, the Fund has generally approved MCPs arising from ERGSs, provided that no new commitments were made under the scheme. ### Retrieval of Market Exchange Rates for MCP assessment — timing and data selection - To apply the methodology for MCP assessment, staff must ensure the wholesale foreign exchange market in the respective country is closed before extracting the highest and lowest exchange rates; set the time zone on LSEG Eikon and Bloomberg to match the trading day of the country for which market exchange rates are collected. - Setting the time zone of the local onshore market prevents next-day data influencing the daily high and low. Example: the daily highest and lowest market exchange rates of a given country could be different in Eastern Standard Time (GMT -4) from the daily highest and lowest exchange rate of the country in its local time (e.g., GMT+8). Because of the 12-hour difference between the two time-zones in this example, any exchange rates retrieved post-12pm EST could alter the daily highest and lowest rates, since this is the close time of the market in local time. Any transactions occurring after 12PM EST should therefore be considered for the daily exchange rates of the following day. - The assessment can be conducted only for days when the relevant FX market is open; if the market is closed on a given day, the comparison is impossible and no MCP can be found. ### Currency pairs, dominant-pair approach, and multiple markets - If official action results in market segmentation for multiple currency pairs, the MCP assessment is performed on the dominant currency pair first; if an MCP is found for the dominant currency, staff do not need to identify MCPs in other currency pairs stemming from the same official action. - The dominant currency pair is determined by staff based on trading volumes; it is the pair with the highest wholesale market volume and usually the one in which the authorities intervene. - In cases of dual or multiple FX markets in a jurisdiction, the trading day is defined by the overlapping trading hours of the primary and secondary markets; the overlapping trading hours set the time for collection of market data (from the primary market) and the effective exchange rate arising from official action (from the secondary market), which is the mid of the H/L of the secondary market +/- any mandatory costs and/or subsidies that should be considered part of the effective exchange rate. - If one or both markets are closed on a given day, the comparison is not possible and the assessment is not done on those days. - When collecting market data for the overlapping period, the time zone must be properly calibrated on the benchmark data providers’ interface; the highest and lowest exchange rates for the overlapping period are available from both data providers. ### Availability and representativeness of FX wholesale market exchange rates - If wholesale FX market data are unavailable from LSEG Eikon and Bloomberg or existing data appears manifestly irregular or inaccurate, staff should use other data sources. - Alternative data sources include: (i) publicly available independent data sources (e.g., other third-party data providers, the BIS); (ii) publicly available data from the authorities (e.g., exchange rate or interest rate data published on the CB’s website); or (iii) data obtained directly from the authorities. - In Emerging Market and Developing Economies with FX controls, transaction reporting requirements can produce data that can be leveraged to establish a daily H/L where no active interbank market exists. - Staff are expected to determine whether alternative data are representative of the FX market by assessing compliance with the IOSCO principles for the computation of financial benchmarks. - Rates sourced from LSEG Eikon or Bloomberg are considered representative unless staff or the authorities have reasonable evidence to the contrary; to conclude that these cannot be used there should be reasonable evidence that the rates are manifestly irregular or inaccurate (not representative) — e.g., data reflect only a small volume or number of transactions or trades are concentrated between few banks. - When primary/secondary providers cannot be used, representative exchange rates can be used from third parties that follow a robust process consistent with IOSCO principles. - Representative wholesale FX market rates computed by the authorities can be used if representative third-party rates are unavailable; underlying data (price and quantity) should be provided to staff to ascertain IOSCO-compliant collection, selection and computation. - In the absence of representative wholesale market rates, exchange rate data on other segments (e.g., intermediary-client market) may be used; such rates and transaction amounts should be representative of the broader FX market (e.g., negotiated (large) ADs-client transactions or weighted average rates of bank-client transactions). Data on transactions below a minimum transaction amount may be disregarded to exclude the smallest transactions. If more than one representative exchange rate data is available, the more representative should be used. ### Non-spot transactions and theoretical pricing - Two scenarios for non-spot assessments: (i) non-spot interdealer market exchange rates exist — apply same methodology as for spot transactions using H and L of market exchange rates for transactions with similar terms; (ii) non-spot market does not exist — calculate theoretical non-spot price. - Theoretical non-spot price should be calculated using spot wholesale market exchange rate and interest rate data provided by LSEG Eikon and Bloomberg; theoretical forward and NDF prices can be calculated in the forthcoming monitoring tool. - Theoretical price calculators provided by LSEG Eikon (FX Options Calculator as FXOC) and Bloomberg (OVML) may be used to compute theoretical exchange rates for options; calculators include pricing models and allow amendment of parameters (e.g., a more relevant interest rate). - Staff should verify representativeness of data used in calculations and may use alternative local market data for parameters (e.g., actual funding rate in that market for a given maturity for forwards; volatility and local currency interest rate for options). - In absence of implied volatility, historical volatility based on domestic market prices that reflect exchange rate volatility and local interest rates based on actual cost of funding for relevant maturities should be used; when such data is not publicly available staff may source it from the authorities depending on the option type. - If representative data for spot exchange rates cannot be obtained, the MCP assessment for spot transactions cannot be conducted and thus no MCP finding can be established. - For non-spot transactions the assessment can be concluded even in the absence of representative market data if the theoretical price of the non-spot transaction can be calculated. *Guidance Note on Multiple Currency Practices — Annex IV and Annex V (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/pp/2023/english/ppea2023058.pdf_