Public Information Notice: IMF Executive Board Completes the 2010 Review of SDR Valuation
IMF News, November 17, 2010
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- Public Information Notice: IMF Executive Board Completes the 2010 Review of SDR Valuation
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- Published: November 17, 2010
Background
- Review completed by the Executive Board on November 15, 2010; PIN issued November 17, 2010 (Public Information Notice (PIN) No. 10/149).
- The SDR currently derives its value from a basket of four currencies: the U.S. dollar, the euro, pound sterling and the Japanese yen.
- Valuation method: the “standard basket” method—fixed amounts of currency units are valued at prevailing market exchange rates and summed to obtain the SDR’s value. This method is intended to best ensure the stability of the SDR in terms of the major currencies under floating exchange rates.
- Inclusion criteria (as adopted in previous reviews):
- Currencies included are those issued by Fund members, or by monetary unions that include Fund members, whose exports of goods and services during the five-year period ending 12 months before the effective date of the revision had the largest value, and which have been determined by the Fund to be freely usable currencies in accordance with Article XXX (f) of the Articles of Agreement.
- A freely usable currency is one the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.
- Relative weights of component currencies are determined by combining the value of exports and official reserves held by monetary authorities outside the country or monetary union that issues the respective currency, each averaged over the relevant five-year period.
- Interest rate basket criteria:
- Financial instruments should be broadly representative of instruments available to investors in a given currency and have interest rates responsive to underlying credit conditions in the corresponding money market.
- Instruments should have risk characteristics similar to the official standing of the SDR and reflect the actual choice of reserve managers.
Executive Board Assessment — Key Findings and Decisions
- Directors concluded the quinquennial review of valuation of the SDR and approved revised weights for the four currencies determining the value of the SDR (see Press Release No. 10/434 referenced in the PIN).
- Currencies to remain in the SDR basket:
- U.S. dollar
- Euro
- Pound sterling
- Japanese yen
- Weighting methodology and adjustments:
- Relative weights to continue reflecting the value of international reserves held in that currency and the value of exports of goods and services by the member issuing that currency.
- Directors agreed to round the initial currency weights to one decimal place, removing the need for significant adjustments under the former method of rounding to the nearest whole percentage point.
- SDR interest rate:
- Directors considered that the financial instruments used in determining the SDR interest rate remain appropriate.
- China and the renminbi:
- Noted that China has become the third-largest exporter of goods and services on a five-year average basis and has taken steps to facilitate international use of its currency.
- Determined the Chinese renminbi does not currently meet the criteria to be a freely usable currency and would therefore not be included in the SDR basket at this time.
- Directors urged that this issue be kept under review in light of developments.
- Data and COFER:
- Directors supported further consideration of expanding the currency coverage of the Composition of Official Foreign Exchange Reserves (COFER) database.
- Emphasized improved data availability and accuracy while balancing reporting burdens; a number of Directors encouraged wider reporting by members of the currency composition of their reserves.
Policy Recommendations, Work Program, and Next Steps
- Work program to be initiated in 2011 to review indicators used to guide future decisions on the SDR valuation basket, taking account of broader discussions on reform of the international monetary system.
- Scope of the 2011 work program to include:
- Review of the indicators used to select new currencies for the SDR basket.
- Review of the number of currencies in the basket.
- Review of the method of determining currency weights, including the relative roles of trade and financial indicators and the scope for considering supplementary financial indicators.
- Work on facilitating replication of the official SDR interest rate in financial markets, including possible options to align the maturity of the underlying instruments with the frequency of adjustments in the SDR interest rate.
- Consultation with reserve managers and SDR users to enhance the attractiveness of the SDR as a reserve asset (encouraged by a few Directors).
- Timing of the next review:
- Directors agreed that the next review of the method of valuation of the SDR should take place by 2015, with some noting that an earlier review should be considered if warranted by developments.
Contact Information (as provided in the PIN)
- IMF EXTERNAL RELATIONS DEPARTMENT — Public Affairs — Media Relations
- E-mail: publicaffairs@imf.org
- E-mail: media@imf.org
- Fax: 202-623-6220
- Phone: 202-623-7100
Public Information Notice: IMF Executive Board Completes the 2010 Review of SDR Valuation (PIN No. 10/149), November 17, 2010.