## _031811

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### I. Current guidelines for allocation of currencies
- Adopted in November 1998; objective to balance members’ positions in the Fund over time relative to quotas.
- Under the guidelines:
  - Transfers are allocated across FTP members solely in proportion to quotas.
  - Receipts are allocated to FTP members with above average “positions in the Fund,” defined as RTP plus any outstanding loans to the Fund by the member under borrowing arrangements such as the GAB/NAB.
- The 1998 guidelines narrowed large differences in members’ Fund positions relative to quota that had developed under the earlier reserve-based system; last reviewed in November 2000 and found appropriate then.
- The allocation mechanism is slow at reducing significant imbalances (e.g., those resulting from folding pre-NAB claims into the NAB) because rebalancing is achieved mainly through allocation of receipts; receipts are relatively small until 2012 under the current repayment schedule.

### II. Proposed temporary modification (purpose, scope, mechanics)
- Purpose:
  - Promote fair burden sharing between NAB participants that have bilateral borrowing agreements or note purchase agreements (“bilateral agreements”) and NAB participants that do not have such agreements.
- Scope and duration:
  - Applies only to FTP members that are NAB participants.
  - Current guidelines reinstated automatically for all FTP members when:
    - all pre-NAB bilateral agreements have been terminated, and
    - any imbalances in NAB positions resulting from folding in claims under bilateral agreements have been eliminated,
    - or at an earlier date as decided by the Executive Board.
- Modified allocation mechanics:
  - Transfers allocated to the entire group of FTP members that are NAB participants in proportion to quotas, but allocation within the NAB-participant group takes into account imbalances in NAB positions (drawn balances in relation to NAB credit arrangements).
  - All other FTP members continue to have transfers allocated in proportion to quotas (group and individual).
  - No change to allocation of receipts; receipts continue to be allocated to FTP members with above average positions in the Fund.
  - Within the two NAB-participant groups (with bilateral agreements; without bilateral agreements), transfers are allocated among members in proportion to their NAB credit arrangements.

### III. Definitions and intended effect (NAB shortfall, excess RTP)
- NAB shortfall:
  - The additional amount in SDRs needed to bring the borrowing ratio (ratio of NAB claims outstanding to NAB credit arrangements) of NAB participants without bilateral agreements to the same level as that of NAB participants with bilateral agreements, assuming all outstanding bilateral claims of the latter group are folded into the NAB.
- Excess RTP of NAB participants without bilateral agreements:
  - The difference between the RTP of this group and the RTP of NAB participants with bilateral agreements (after allocation of transfers but before allocation of receipts), adjusted for the relative quota sizes of the two groups.
- Intended effect:
  - Create “excess reserve tranche positions” for NAB participants without bilateral agreements in an amount equivalent to the NAB shortfall of this group; participants with higher NAB positions because of folded-in bilateral claims would face lesser use of their currencies for transfers.

### IV. Dynamic operation and sequencing
- Initial phase:
  - Allocate transfers to compensate NAB shortfall by creating excess RTP for NAB participants without bilateral agreements.
- Subsequent phase:
  - Once excess RTP compensates NAB shortfall, allocate transfers to reduce excess RTP as differences in NAB positions narrow.
- Persistence:
  - As NAB positions converge, imbalances could reemerge if drawings under outstanding FCLs were made; the modified rule may need to remain until pre-NAB bilateral agreements are terminated and folding-in imbalances eliminated. Executive Board retains discretion to terminate earlier.
- Operational sequencing:
  - Calculate NAB shortfall independently given amounts of purchases under pre- and post-NAB commitments and borrowing-to-quota ratios using NAB drawing rules.
  - Substitute RTP expressions to obtain a linear equation in t* (transfers to other NAB participants).
  - Maintain balance between NAB shortfall and excess RTP; may require unwinding excess RTP by allocating more transfers to bilateral creditors (leading to t* < 0 in some scenarios).

### V. Illustration and key assumptions (hypothetical late-March–July 2011)
- Assumptions:
  - Total transfers financed under the FTP in late March–July 2011 amount to SDR 5.5 billion.
  - That SDR 5.5 billion arises from:
    - SDR 10 billion under pre-NAB commitments financed by borrowed and quota resources in a ratio of 1:1, plus
    - SDR 3 billion under post-NAB commitments financed using a ratio of 3:1 of borrowed and quota resources,
    - implying total SDR 5.5 billion in transfers to be allocated to FTP members.
  - The total to be financed with non-borrowed resources (SDR 5.75 billion) is reduced by SDR 250 million covered by the use of SDRs.
  - Assumed no repurchases during the period in question (no change proposed in allocation of receipts).
- Key illustrative outcomes (summary of Table 1 and Table 2 discussion):
  - Under the modified rule, no transfers would be allocated to NAB participants with bilateral agreements; allocation to NAB participants without bilateral agreements would be in proportion to their NAB credit arrangements.
  - In the illustrative scenario:
    - Application of the modified rule would compensate about half of the NAB shortfall through excess RTP by the end of the period.
    - NAB shortfall for NAB participants without bilateral agreements (“other NAB participants”) would be about SDR 10 billion.
    - The SDR 10 billion is additional borrowing these members would need (on top of their projected end-period claims of about SDR 2.2 billion) to bring their ratio of outstanding NAB claims to NAB credit arrangements to 10 percent (the corresponding ratio for NAB participants with bilateral agreements).
    - Starting point excess RTP: about SDR 182 million for NAB participants with bilateral agreements (resulting from uneven RTP positions as of late-March 2011).
    - Allocating purchases of about SDR 5.2 billion under the modified rule to other NAB participants creates an excess RTP for this group of about SDR 5 billion, compensating about half of the NAB shortfall.
    - The remaining SDR 275 million of the SDR 5.5 billion budget is allocated to other FTP members under the modified rule.
  - Financing and borrowing notes:
    - End-period claims of about SDR 2.2 billion for other NAB participants correspond to the use of SDR 2.2 billion of borrowed resources for post-NAB commitments totaling SDR 3 billion.
    - Borrowing figures for bilateral creditors take into account new borrowing of about SDR 5 billion related to financing of pre-NAB commitments totaling SDR 10 billion.

### VI. Key statistics (End of period; in million of SDRs) — Hypothetical Budget of SDR 5.5 Billion for Late-March-July 2011
- Aggregate figures from illustrative Table 1:
  - Total quotas: 194,700
  - Total NAB credit arrangements: 363,247
  - Total RTP (projected at end-March 2011): 53,449
  - Total NAB Borrowing (projected at end-March 2011): 19,278
  - Total Fund Position (projected at end-March 2011): 72,727
  - Total Transfers May–July 2011: 7,196
  - Transfers under Current Rule: 5,500
  - Transfers under Modified Rule: 5,500
  - End of Period RTP under Current Rule: 58,949
  - End of Period RTP under Modified Rule: 58,949
- Subtotals (end-period; in million of SDRs):
  - Bilateral Creditors:
    - Quotas: 107,012
    - NAB credit arrangements: 241,019
    - RTP: 29,563
    - NAB Borrowing: 19,278
    - Fund Position: 48,841
    - Transfers May–July 2011: 4,953
    - Transfers under Current Rule: 3,023
    - End of Period RTP under Current Rule: 32,586
    - End of Period RTP under Modified Rule: 29,563
  - Other NAB participants:
    - Quotas: 77,961
    - NAB credit arrangements: 122,228
    - RTP: 21,355
    - NAB Borrowing: -
    - Fund Position: 21,355
    - Transfers May–July 2011: 2,244
    - Transfers under Current Rule: 2,202
    - Transfers under Modified Rule: 5,225
    - End of Period RTP under Current Rule: 23,557
    - End of Period RTP under Modified Rule: 26,580
  - Other FTP members:
    - Quotas: 9,727
    - RTP: 2,531
    - Fund Position: 2,531
    - Transfers under Modified Rule: 275
    - End of Period RTP under Current Rule: 2,806
    - End of Period RTP under Modified Rule: 2,806
- Memorandum items:
  - NAB shortfall of other NAB participants 1/: 10,045
  - Excess RTP of other NAB participants 1/:
    - Current Rule: (182)
    - Modified Rule: 5,043
  - 1/ As defined in paragraph 6.

### VII. Scenarios for t* (allocation outcomes)
- (i) 0 < T < t*:
  - t* required for other NAB participants exceeds total transfers available; allocate all transfers to other NAB participants in partial compensation for NAB shortfall. Likely in initial periods when NAB shortfall is large.
- (ii) 0 ≤ t* ≤ T:
  - Allocate transfers of amount t* to other NAB participants and transfers of amount (T-t*) to bilateral creditors. NAB shortfall is fully compensated through excess RTP.
- (iii) t* < 0:
  - Purchases cannot be negative; all transfers allocated to bilateral creditors. Occurs after balance reached and excess RTP is being reduced while receipts may be large. Excess RTP will exceed NAB shortfall because transfers are not large enough to reduce excess RTP built up earlier.

### VIII. Implementation and decision text summary
- The modified rule introduced with the next FTP adopted by the Executive Board after the effectiveness of the proposed decision; current rule restored when bilateral agreements are terminated and folding-in imbalances eliminated.
- Text amendments summarized: preservation of proportional allocation by quotas subject to special allocation while pre-NAB bilateral agreements exist or folding-in imbalances persist; receipts allocation principle preserved; definitions of “position in the Fund,” floor on Fund’s holdings, 10 percent working balances requirement, and reporting to the Executive Board in quarterly FTP context retained.
- Annex II provides formulas and operational mechanics for computing NAB shortfall, excess RTP, and solving for t*; allocations within NAB participant groups made in proportion to NAB credit arrangements.

*Source: _031811 - 11.      The temporary modification of the current rule for allocating transfers in the*

### 1.      This paper proposes a temporary modification of the current guidelines for

### _031811 - 1.      This paper proposes a temporary modification of the current guidelines for

### I. CURRENT GUIDELINES FOR ALLOCATION OF CURRENCIES
- The current guidelines were adopted in November 1998.
- Objective: balance members’ positions in the Fund over time relative to quotas.
- Under the guidelines:
  - Transfers are allocated across FTP members solely in proportion to quotas.
  - Receipts are allocated to FTP members with above average “positions in the Fund,” defined as RTP plus any outstanding loans to the Fund by the member under borrowing arrangements such as the GAB/NAB.
- The 1998 guidelines narrowed large differences in members’ Fund positions relative to quota that had developed under the earlier reserve-based system; they were last reviewed in November 2000 and found to be appropriate at that time.
- The allocation mechanism maintains balance but is slow at reducing significant imbalances (e.g., those resulting from folding pre-NAB claims into the NAB) because rebalancing is achieved mainly through allocation of receipts; receipts are relatively small until 2012 under the current repayment schedule.

### II. PROPOSED TEMPORARY MODIFICATION
- Purpose: promote fair burden sharing between NAB participants that have bilateral borrowing agreements or note purchase agreements (“bilateral agreements”) and NAB participants that do not have such agreements.
- Scope and duration:
  - Temporary modification applies only to FTP members that are NAB participants.
  - Current guidelines to be reinstated automatically for all FTP members when:
    - all pre-NAB bilateral agreements have been terminated, and
    - any imbalances in NAB positions resulting from folding in claims under bilateral agreements have been eliminated,
    - or at an earlier date as decided by the Executive Board.
- Mechanics of the modified rule:
  - Transfers would be allocated to the entire group of FTP members that are NAB participants in proportion to quotas, but the allocation within that NAB-participant group would take into account imbalances in NAB positions (i.e., drawn balances in relation to NAB credit arrangements).
  - All other FTP members would continue to have transfers allocated in proportion to quotas (group and individual).
  - No change proposed to allocation of receipts; receipts continue to be allocated to FTP members with above average positions in the Fund.
  - Within the two NAB-participant groups (with bilateral agreements; without bilateral agreements), transfers would be allocated among members in proportion to their NAB credit arrangements.
- Definitions and intended effect:
  - NAB shortfall: the additional amount in SDRs needed to bring the borrowing ratio (ratio of NAB claims outstanding to NAB credit arrangements) of NAB participants without bilateral agreements to the same level as that of NAB participants with bilateral agreements, assuming all outstanding bilateral claims of the latter group are folded into the NAB.
  - Excess RTP of NAB participants without bilateral agreements: the difference between the RTP of this group and the RTP of NAB participants with bilateral agreements (after allocation of transfers but before allocation of receipts), adjusted for the relative quota sizes of the two groups.
  - The modified allocation aims to create “excess reserve tranche positions” for NAB participants without bilateral agreements in an amount equivalent to the NAB shortfall of this group; participants with higher NAB positions because of folded-in bilateral claims would face lesser use of their currencies for transfers.
- Dynamic operation:
  - Initially allocate transfers to compensate NAB shortfall by creating excess RTP for NAB participants without bilateral agreements.
  - Once excess RTP compensates NAB shortfall, transfers would be allocated to reduce excess RTP as differences in NAB positions narrow.
  - As NAB positions converge, imbalances could reemerge if drawings under outstanding FCLs were made; the modified rule may need to remain until pre-NAB bilateral agreements are terminated and folding-in imbalances eliminated. The Executive Board retains discretion to terminate modification earlier.
- Illustration and assumptions:
  - Assumes total transfers financed under the FTP in late March–July 2011 amount to SDR 5.5 billion.
  - That SDR 5.5 billion arises from:
    - SDR 10 billion under pre-NAB commitments financed by borrowed and quota resources in a ratio of 1:1, plus
    - SDR 3 billion under post-NAB commitments financed using a ratio of 3:1 of borrowed and quota resources,
    - implying total SDR 5.5 billion in transfers to be allocated to FTP members.
  - The total to be financed with non-borrowed resources (SDR 5.75 billion) is reduced by SDR 250 million covered by the use of SDRs.
  - For the illustrative period it is assumed there are no repurchases during the period in question (no change proposed in allocation of receipts).
- Key illustrative outcomes (from Table 1 and Table 2 discussion):
  - Under the modified rule, no transfers would be allocated to NAB participants with bilateral agreements; allocation to NAB participants without bilateral agreements would be in proportion to their NAB credit arrangements.
  - In the illustrative scenario:
    - Application of the modified rule would compensate about half of the NAB shortfall through excess RTP by the end of the period.
    - NAB shortfall for NAB participants without bilateral agreements (“other NAB participants”) would be about SDR 10 billion. This is the additional borrowing these members would need (on top of their projected end-period claims of about SDR 2.2 billion) to bring their ratio of outstanding NAB claims to NAB credit arrangements to 10 percent (the corresponding ratio for NAB participants with bilateral agreements).
    - Starting point excess RTP: about SDR 182 million for NAB participants with bilateral agreements (resulting from uneven RTP positions as of late-March 2011).
    - Allocating purchases of about SDR 5.2 billion under the modified rule to other NAB participants creates an excess RTP for this group of about SDR 5 billion, compensating about half of the NAB shortfall.
    - The remaining SDR 275 million of the SDR 5.5 billion budget is allocated to other FTP members under the modified rule.
  - Financing and borrowing notes:
    - End-period claims of about SDR 2.2 billion for other NAB participants correspond to the use of SDR 2.2 billion of borrowed resources for post-NAB commitments totaling SDR 3 billion.
    - Borrowing figures for bilateral creditors take into account new borrowing of about SDR 5 billion related to financing of pre-NAB commitments totaling SDR 10 billion.
- Aggregate figures from the illustrative Table 1:
  - Total quotas: 194,700
  - Total NAB credit arrangements: 363,247
  - Total RTP (projected at end-March 2011): 53,449
  - Total NAB Borrowing (projected at end-March 2011): 19,278
  - Total Fund Position (projected at end-March 2011): 72,727
  - Total Transfers May–July 2011: 7,196
  - Transfers under Current Rule: 5,500
  - Transfers under Modified Rule: 5,500
  - End of Period RTP under Current Rule: 58,949
  - End of Period RTP under Modified Rule: 58,949
  - Subtotals:
    - Bilateral Creditors: Quotas 107,012; NAB credit arrangements 241,019; RTP 29,563; NAB Borrowing 19,278; Fund Position 48,841; Transfers May–July 2011 4,953; Transfers under Current Rule 3,023; End of Period RTP under Current Rule 32,586; End of Period RTP under Modified Rule 29,563.
    - Other NAB participants: Quotas 77,961; NAB credit arrangements 122,228; RTP 21,355; NAB Borrowing -; Fund Position 21,355; Transfers May–July 2011 2,244; Transfers under Current Rule 2,202; Transfers under Modified Rule 5,225; End of Period RTP under Current Rule 23,557; End of Period RTP under Modified Rule 26,580.
    - Other FTP members: Quotas 9,727; RTP 2,531; Fund Position 2,531; Transfers under Modified Rule 275; End of Period RTP under Current Rule 2,806; End of Period RTP under Modified Rule 2,806.

*Source: _031811 - 1.      This paper proposes a temporary modification of the current guidelines for*

### 11.      The temporary modification of the current rule for allocating transfers in the

### 11.      The temporary modification of the current rule for allocating transfers in the FTP

### Proposed modification and implementation
- Introduce a modified rule for allocating transfers in the Financial Transactions Plan (FTP) as described in Section II and Annex II.
- The modified rule would be introduced with the next FTP adopted by the Executive Board after the effectiveness of the proposed decision.
- The current rule for the allocation of transfers would be restored when bilateral agreements are terminated and any imbalances in NAB positions resulting from the folding-in of claims under pre-NAB bilateral agreements have been eliminated.
- Staff made technical changes primarily to replace references to the “operational budget” with references to the “Financial Transactions Plan” or “FTP”. A redline is provided in Annex III.

### Key statistics (End of period; in million of SDRs) — Hypothetical Budget of SDR 5.5 Billion for Late-March-July 2011
- NAB participants with bilateral agreements:
  - Quotas: 107,012
  - NAB Credit Arrangement: 241,019
  - Borrowing: 24,231
  - RTP — Current Rule: 32,586
  - RTP — Modified Rule: 29,563
- NAB participants without bilateral agreements:
  - Quotas: 77,961
  - NAB Credit Arrangement: 122,228
  - Borrowing: 2,244
  - RTP — Current Rule: 23,557
  - RTP — Modified Rule: 26,580
- Memorandum Items:
  - NAB shortfall of other NAB participants 1/: 10,045
  - Excess RTP of other NAB participants 1/:
    - Current Rule: (182)
    - Modified Rule: 5,043
- 1/ As defined in paragraph 6.

### Text of proposed decision (summary of amendments)
- The Guidelines for the Allocation of Currencies adopted under Decision No. 11837-(98/121) shall be amended to read as follows (selected operative provisions preserved):
  - 1. (a) Currencies to be used for transfers under the Financial Transactions Plan (FTP) will be allocated in proportion to members’ quotas, subject to subparagraph (b) below.
  - (b) For as long as the Fund has pre-NAB bilateral agreements with members that are participants in the New Arrangements to Borrow (NAB) or with the institutions of such members, or following the termination of such agreements for as long as any imbalances in NAB positions resulting from the folding in of claims under such agreements remain, currencies to be used for transfers under the FTP shall be allocated in accordance with the principles set out in paragraphs 5 - 7 and Annex II of EBS/11/41 (3/18/2011).
  - 2. Currencies to be used for receipts under the FTP will be allocated in such a way as to promote over time-balanced positions in the Fund in relation to quotas. Receipts in currencies will be allocated to members with positions in the Fund above the average of all members included in the FTP. The amount allocated in each currency shall be in proportion to the difference between the member’s position in the Fund and the projected average of all members included in the FTP, expressed as a percent of quota, at the end of the FTP period.
  - 3. A member’s “position in the Fund” shall be defined as its reserve tranche position plus any outstanding loans to the Fund by the member or an institution of the member under credit arrangements that are judged by the Fund to provide it, on a continuing basis, with the ability to finance uses of its resources by members on terms comparable to those applicable to the Fund’s use of its currency holdings for this purpose.
  - 4. The Fund’s holdings of a member’s currency in terms of quota resulting from allocations of currencies for transfers shall not be reduced below a floor of one-half of the projected average level, in percent of quota, of the Fund’s holdings of usable currencies at the end of the FTP period.
  - 5. The Fund will seek to maintain adequate working balances of each member’s currency included in the FTP for transfers of not less than 10 percent of the quotas of these members.
  - 6. These guidelines will enter into effect with the next FTP adopted by the Executive Board after the effectiveness of this decision. Their operation will be reported to the Executive Board in the context of the quarterly FTP.

### Annex II — Modified rule for allocation of currencies for transfers (mechanics and rationale)
- Objective: Allocate purchases to NAB participant FTP members without bilateral agreements (“other NAB participants”) based on their NAB shortfall in relation to their excess RTP.
- Context: After NAB activation, bilateral creditors are expected to fold in claims and acquire equivalent NAB positions, creating imbalances within the NAB; the imbalance at a group level is measured by the amount of additional claims other NAB participants would need to extend to reach the bilateral creditors’ ratio of outstanding NAB claims to NAB credit arrangements.
- NAB shortfall of other NAB participants (SDR terms) is represented by a formula comparing NAB credit outstanding (NABO) relative to NAB credit arrangement size (NAB) for bilateral creditors (“BC”) and other NAB participants (“ONP”).
- Excess RTP of other NAB participants (SDR terms) is defined by a formula using quota (Q) to express reserve tranche position differentials.
- Fair burden sharing at the group level occurs when the SDR amount of excess RTP equals the SDR amount of the NAB shortfall (equality between the NAB shortfall and the excess RTP).
- Feasibility depends on the amount of transfers financed by quota resources in a given period. Let T denote total transfers in period; let t denote transfers allocated to other NAB participants in that period. A unique solution t* is obtained when the NAB shortfall equals the excess RTP (equations (1)-(2) = 0).
- Allocation rule within groups: Once group-level amounts for bilateral creditors and other NAB participants are determined, allocations to individual NAB participants within those two groups are made in proportion to members’ NAB credit arrangements.

### Scenarios for t* (outcomes)
- (i) 0 < T < t*. The required amount t* for other NAB participants is higher than the total amount of transfers available. Rule implies allocating all transfers to other NAB participants in partial compensation for their NAB shortfall. Likely in initial periods when NAB shortfall is large.
- (ii) 0 ≤ t* ≤ T. If t* is non-negative and not greater than T, transfers of amount t* are allocated to other NAB participants and transfers of amount (T-t*) are allocated to bilateral creditors. NAB shortfall is fully compensated through excess RTP.
- (iii) t* < 0. Since purchases cannot be negative, all transfers are allocated to bilateral creditors. Occurs after balance has been reached and excess RTP is being reduced while receipts may be large. Excess RTP will exceed NAB shortfall because transfers are not large enough to reduce excess RTP built up earlier.

### Operational notes and sequencing
- First, NAB shortfall is calculated independently given amounts of purchases under pre- and post-NAB commitments and borrowing-to-quota ratios using NAB drawing rules.
- Next, RTP expressions are substituted to obtain a linear equation in t*.
- Maintaining balance between NAB shortfall and excess RTP may require unwinding excess RTP of other NAB participants by allocating more transfers to bilateral creditors; this could lead to t* < 0 if receipts are large.

*Source: _031811 - 11.      The temporary modification of the current rule for allocating transfers in the*

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