Q&As on the New SDR Basket that Comes into Effect October 1, 2016

July 25, 2016

On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-yearly review of the basket of currencies that make up the Special Drawing Right (SDR). The Board decided that, effective October 1, 2016 the Chinese renminbi (RMB) is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the pound sterling. A short-term RMB instrument will also be added to the SDR interest rate basket. The Board decided to launch the new SDR basket on October 1, 2016 to provide lead time for the Fund, its members and other SDR users to adjust to these changes. The Q&As below provide information about the composition of the new SDR basket, the determination of so-called currency amounts, and on the operational implications for SDR users.

SDR Currency Amounts and Exchange Rate Sources

Q1. What are "currency amounts" and what is their role in the SDR basket?

Currency amounts refer to the number of units of each currency in the SDR basket. Currency amounts play a central role in the daily valuation of the SDR. They are determined on the last business day before a new SDR basket becomes effective (transition date — i.e., September 30, 2016 for the upcoming SDR basket) and remain fixed over the SDR valuation period. On each business day during the valuation period, the value of the SDR (in U.S. dollars) is calculated as the sum of the currency amounts, valued at daily exchange rates of the currencies against the U.S. dollar. Since currency amounts are fixed, the relative weight of currencies in the SDR basket can change during a valuation period, with weights rising (falling) for the currencies that appreciate (depreciate) relative to other currencies over time.

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Q2. How and when are the currency amounts for the new SDR basket determined?

New currency amounts are calculated on the last business day before the date on which a new SDR basket enters into effect. Accordingly, new currency amounts that will be in effect for the five-year period starting on October 1, 2016, when the new basket becomes effective, will be determined on September 30, 2016. They will be calculated such that the value of the SDR in U.S. dollar terms is the same under the new basket as the value of the SDR prevailing on September 30, 2016, and that, at the average exchange rates for the three-month period ending on September 30, 2016 (July 1 through September 30, 2016), the share of each currency in the value of the SDR corresponds to the weight approved by the IMF Executive Board on November 30, 2015, which were as follows:

  • U.S. dollar 41.73 percent
  • Euro 30.93 percent
  • Chinese renminbi 10.92 percent
  • Japanese yen 8.33 percent
  • Pound sterling 8.09 percent

As in the past, the IMF is publishing illustrative currency amounts in the lead up to the effectiveness of the new basket. Illustrative currency amounts based on the exchange rates from April 26 through July 25, 2016 can be found on the IMF website here. Updates of illustrative currency amounts will be published on a weekly basis every Monday starting July 25 through September 26. As indicated above, final currency amounts will be determined on September 30, the transition date.

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Q3. What are the steps for calculating currency amounts for the new SDR basket?

The first step is calculating unrounded currency amounts in a way such that each currency’s share in the new basket is equal to its Board-determined weight, and the value of the SDR in U.S. dollar terms is the same under the old basket as the value of the SDR the new basket on the transition day; i.e., the last working day preceding the effective date of the relevant SDR Basket weight revision (i.e., September 30, 2016 for the upcoming SDR basket transition). This step is captured in the following formula:

The second step is rounding each currency amount. According to the new rounding methodology adopted by the IMF on July 20, 2016, currency amounts calculated using the formula above are rounded to five significant digits based on the sixth significant digit. If necessary to ensure that the value of the SDR in U.S. dollar terms on the transition date is the same before and after the revision (“same value”), an adjustment will be made to the currency amount of the U.S. dollar, the currency against which the values of the other SDR basket currencies are determined in accordance with IMF rules. In the unlikely event that calculations do not yield the same value for the SDR in five significant digits, the same steps will be followed but with rounding to six significant digits based on the seventh significant digit.

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Q4.Why has the IMF changed the rounding methodology for currency amounts?

The method of rounding currency amounts has been changed to make it simpler and to also more closely align the currency weights implied by the final currency amounts with the weights approved by the Executive Board. SDR users had indicated that the previous methodology was rather complex and it was difficult to replicate the currency amounts published by the IMF. Moreover, the previous rounding methodology had sometimes resulted in currency weights that deviate significantly from the Board-determined weights, albeit within the 0.5 percentage points allowed in the prior Board decision governing the determination of currency amounts.

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Q5. What is the source of exchange rates used in calculating the daily value of the SDR in terms of the U.S. dollar? When and where are these rates published?

The determination of the SDR value in U.S. dollar terms will continue to be based on London noon exchange rates that the Fund receives from the Bank of England (when the exchange rates are not available from the Bank of England, the Fund uses the exchange rates it receives from the Federal Reserve Bank of New York and when these are unavailable, the European Central Bank). The exchange rates used in the daily valuation of the SDR will continue to be available on the IMF’s website at about the time the Fund opens for business, i.e., around 9 AM EST. See here.

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SDR Interest Rate Basket

Q6. What is the 3-month reference rate that will be used for the RMB in the SDR interest rate basket? What is the official source of this rate?

The SDR interest rate is based on a weighted average of representative interest rates on short-term debt instruments in the money markets of the SDR basket currencies. The RMB interest rate to be used in the SDR interest rate basket for the calculation of the SDR interest rate will be the three-month benchmark yield for China Treasury bonds as published daily by the China Central Depository and Clearing Co., Ltd (CCDC). This yield is available on the CCDC’s website http://yield.chinabond.com.cn/cbweb-mn/yield_main# and it is also published on the daily basis by the Peoples’ Bank of China on its website, see http://www.pbc.gov.cn/english/130727/index.html.

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Q7. When and how will the new SDR interest rate be applied to members’ positions with the Fund?

The Fund’s rules stipulate that the weekly SDR interest rate shall be determined each Friday and be applied for the week commencing on the following Monday. Following the RMB’s inclusion in the SDR basket effective (Saturday) October 1, 2016, the SDRi determined the following Friday (October 7) will include for the first time a representative interest rate for the RMB and this SDRi will be first applied for the week commencing Monday, October 10, 2016. Therefore, the SDRi based on the current basket will be applied to members’ positions through October 9, 2016 (Sunday), while the SDRi based on the new basket will be applied commencing on October 10, 2016 (Monday). The SDR interest rate provides the basis for calculating the interest charged to borrowing members, and the interest paid to members and lenders for the use of their resources in the Fund’s lending operations. It is also the interest paid to members on their SDR holdings and charged on their SDR allocation.

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Operational Implications

Q8. In Fund lending transactions, can borrowers select the currency to be received in purchases or used in repurchases? Can members exchange the RMB they receive in purchases or get RMB for their repurchases?

The Fund selects which creditor members’ currencies are used in a member’s purchase (borrowing) or repurchase (repayment) transactions with the Fund. After October 1, 2016, when the Chinese RMB becomes one of the freely usable currencies, it will start to be used in Fund lending transactions; i.e., borrowing members may receive it when making a purchase from the Fund, and may need to repay in RMB when making repurchases to the Fund. In preparation for the RMB becoming a freely usable currency, China has amended its procedural arrangements for the exchange of RMB in connection with Fund operations and transactions. According to the amended arrangement, when a member receives RMB in a purchase, the People’s Bank of China (PBoC) will, if requested by the borrower, stand ready to make the necessary arrangements for exchanging into US dollars the RMB received in the purchase at the most favorable exchange rate available in the market at that time. Likewise, if a member that needs RMB for repurchase operations requests, the PBoC will stand ready to make the necessary arrangements to provide RMB in exchange for the member’s other freely usable currencies at the most favorable exchange rate available in the market at that time.

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Q9. Are Fund members and other SDR users required to open RMB denominated accounts, either with the PBC, or with commercial banks in or outside China?

There is no requirement for Fund members or other SDR users to have RMB denominated accounts in order to conduct financial operations in RMB with the Fund (e.g., in purchase or repurchase transactions). For instance, a borrowing member receiving RMB in a purchase would only need to have a correspondent bank that would exchange the RMB for a currency of its choice (e.g., US dollars). It is up to each member to determine the extent and modalities of their operations in freely usable currencies. SDR users wishing to enter China’s onshore foreign exchange and bond markets can refer to material published by the PBoC [http://www.pbc.gov.cn/english/130721/3048181/2016041414393716593.pdf; http://www.pbc.gov.cn/english/130721/3048181/2016041414393786728.pdf].

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