Staff Note for the G20 - The Role of the SDR - Initial Considerations
Policy Papers, July 15, 2016
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Bibliographic details
- Published: July 15, 2016
- Series: Policy Papers
Purpose and scope
- Following the recent diagnostic of the international monetary system (IMS), the IMF will explore whether a broader role for the SDR could contribute to its smooth functioning.
- The economic rationale for or against broader use of the SDR will be examined, focusing on identifying any gaps and market failures the SDR could help address in light of the increasingly multi-polar nature of the global economy and growing financial interconnectedness.
- This note sets out some initial considerations and sketches key issues bearing on the role of the SDR in each of three concepts: (i) the official SDR, or “O-SDR”; (ii) SDR-denominated financial market instruments, or “M-SDRs”; and (iii) the SDR as a unit of account.
O-SDR (the official SDR)
- The official SDR under its current framework is not playing a significant role in the IMS.
- A re-examination of the O-SDR’s role is expected to inform whether any specific reform options should be pursued.
- The evolution of the IMS has given rise to an active debate on:
- how much concern is posed by high rates of reserve accumulation,
- global imbalances, and
- rising claims on reserve issuers,
- and on whether the O-SDR could contribute to addressing these issues.
M-SDRs (SDR-denominated financial market instruments)
- Potential benefit:
- M-SDRs reduce foreign exchange and interest rate risk relative to single-currency instruments.
- The basket nature of M-SDRs would allow the volatility of returns to be lower than for a similar single-currency instrument.
- Drawbacks and challenges:
- The SDR only represents one of many possible sets of portfolio weights; issuers or investors could use existing instruments to replicate their preferred weights at a relatively low cost.
- Market development challenges include settling and clearing of M-SDR transactions, dealing with potential basket redefinition, and fostering secondary market trading to generate liquidity and market depth.
SDR as a unit of account
- Potential benefits:
- Publishing economic statistics and financial statements in SDR terms could help users identify valuation changes.
- Considerations and requirements:
- Statistical authorities would need to invest in communicating the rationale for any change in practices.
- Benefits must be weighed against other considerations (not specified in this note).
Initial conclusions and next steps
- The note provides initial considerations rather than definitive policy prescriptions.
- Examination of the economic rationale, potential gaps, and market failures will inform whether broader use of the SDR—across O-SDR, M-SDRs, or as a unit of account—warrants specific reforms.
Source: Staff Note for the G20 - The Role of the SDR - Initial Considerations, July 15, 2016. https://www.imf.org/en/publications/policy-papers/issues/2016/12/31/staff-note-for-the-g20-the-role-of-the-sdr-initial-considerations-pp5050
Content in this bundle
- _072416 - Executive Summary