May 14, 2024
PRESS OFFICER: Camila Perez
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: The Executive Board of the International Monetary Fund (IMF) authorized on May 10 the use of Special Drawing Rights (SDRs) by IMF members for the acquisition of hybrid capital instruments issued by prescribed holders (official entities approved by the IMF to hold SDRs). A hybrid capital instrument is a financial instrument with perpetual maturity that has both equity and debt properties.
The use of SDRs to acquire hybrid capital instruments adds to seven SDR prescribed operations already authorized (see background below). The new SDR use will be subject to:
A review of the new SDR use is expected to be conducted when cumulative hybrid capital contributions surpass SDR 10 billion or two years after the authorization, whichever comes first.
The authorization provides members with the possibility to consider the use of SDRs in the acquisition of hybrid capital instruments issued by prescribed holders. The decision whether to use SDRs to acquire hybrid capital instruments rests solely with each member country. Some member countries are impeded to engage in this type of operations due to domestic constraints.
Executive Board Assessment[1]
Executive Directors approved the decision to expand permitted use of SDRs by authorizing the use of SDRs in the acquisition of hybrid capital issued by prescribed holders, adding to the seven currently authorized financial operations which are (i) the settlement of obligations, (ii) loans, (iii) pledges, (iv) transfers as a security for performance of financial obligations, (v) swaps, (vi) forward operations, and (vii) donations.
Most Directors agreed that the authorization could help broaden the use of SDRs and increase the attractiveness of the SDR as a reserve asset. However, a number of Directors did not share this assessment and some would have preferred a broader principles based review to have taken place before taking any decisions. Most Directors agreed that the proposed use of SDRs is consistent with the Articles of Agreement, as well as with the policy motivations of previous authorizations of SDR uses. Many Directors however raised varying reservations about the use of SDRs as hybrid capital, with a number of Directors having remaining questions about consistency of the proposal with the intended purpose of SDRs and the role of the IMF.
Directors also emphasized that while the decision creates an option for members to use their SDRs to acquire hybrid capital instruments of prescribed holders, it is the sole decision of individual members whether to use their SDRs in this way. They also noted that many members will not in practice be able to channel SDRs in this manner due to domestic constraints.
Directors agreed that the expansion of permitted use, in the form of a general decision, should be subject to ex ante risk mitigation measures. In this context, they supported the proposal that authorization be subject to a cumulative limit of SDR 15 billion on the use of SDRs for hybrid capital acquisition, with the limit designed to minimize any possible liquidity risks while providing room for participants in the SDR Department to channel SDRs to multilateral development banks (MDBs) by acquiring hybrid capital instruments issued by these banks. A number of Directors expressed evenhandedness concerns from the “first come, first served” basis implicit in the limit for any prescribed holder wishing to channel SDRs into hybrid capital instruments.
Directors supported the proposal to conduct a review of the proposed use when cumulative hybrid capital contributions surpass SDR 10 billion or two years after the authorization, whichever comes first. This review would assess experience with the proposed SDR use and encompass the other already authorized uses, thereby providing the Executive Board with an opportunity to discuss the scope of SDR operations by prescribed holders in a holistic manner.
To address concerns over SDR market liquidity risks and equitable burden sharing of potential SDR exchanges into currencies in the VTA market, Directors expressed the strong expectation that participants availing themselves of the new use participate in the Voluntary Trading Arrangements (VTAs). However, a few Directors would have preferred a requirement for an explicit commitment to participate in the VTA market.
Directors called on staff to closely monitor the operations related to the use of SDRs for the acquisition of hybrid capital instruments and to bring any issues that could affect the functioning of the SDR Department to the attention of the Executive Board. They also called for a careful communication strategy concerning the new authorized SDR use that appropriately manages external expectations.
Background
The SDR is an international reserve asset created by the IMF to meet the long-term global need to supplement the existing reserve assets of IMF members. SDRs are allocated only to IMF members participating in the SDR Department. SDRs can be used by holders in spot transactions for exchanges into currencies and in financial operations authorized by the IMF. With the objective of making the SDR the principal reserve asset of the international monetary system, between 1978-1980 the Executive Board adopted decisions allowing SDR Department participants (currently all IMF members) and prescribed holders to use SDRs for seven operations: (i) the settlement of obligations; (ii) loans; (iii) pledges; (iv) transfers as a security for performance of financial obligations; (v) swaps; (vi) forward operations; and (vii) donations. The IMF has authorized 20 official entities as prescribed holders of SDRs.
Related links
FAQ: Hybrid Capital Instruments
[1] At the conclusion of the discussion, the Deputy Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
