Selected Decisions and Selected Documents of the IMF, Thirty- Eighth Issue -- The Acting Chair’s Summing Up—Review of the Investment Strategy for the Fixed-Income Subaccount of the Investment Account, Executive Board Meeting 15/82, August 31, 2015

Prepared by the Legal Department of the IMF
As updated as of February 29, 2016

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Reserves, Distribution of Net Income, and Investment

The Acting Chair’s Summing Up—Review of the Investment Strategy for the Fixed-Income Subaccount of the Investment Account

Executive Board Meeting 15/82, August 31, 2015

Executive Directors welcomed the opportunity to review the investment strategy for the Fixed-Income Subaccount, building on the informal discussion in September 2014. They supported the proposed revisions to the Rules and Regulations, which represent an evolution of the current approach aimed at making the portfolio more resilient in a range of market environments.

Directors agreed that the investment strategy for the Fixed-Income Subaccount should remain aimed at protecting the Fund’s balance sheet and generating income, with a number of Directors considering that balance sheet protection should be the primary objective. Directors agreed that the return objective should remain to exceed the SDR interest rate without setting a specific numerical target, noting that this issue could be revisited at a later date. Directors also supported extending the investment horizon to 3–4 years.

Directors supported the approach of splitting the portfolio into two initially broadly equal tranches, aimed at strengthening portfolio resilience. They also agreed that the longer-duration Tranche 2 investments should be phased in over a five-year horizon in order to reduce market timing and interest rate risks.

Directors supported the expansion of the list of eligible assets into other high-quality fixed-income instruments. They stressed the importance of establishing adequate risk controls, to be implemented by the Managing Director along the lines set out in the staff paper, and limiting the new Group 2 assets to a maximum 35 percent of the overall portfolio, noting that this is an upper limit and not a target for these asset classes. A few Directors would have preferred a lower maximum limit, at least initially, and called on the Managing Director to exercise caution in this regard to limit portfolio risks. Also, some Directors would have favored a more limited expansion into new asset classes, while recognizing that the proposed approach is consistent with general practices at other international financial institutions.

Directors agreed to broaden the permissible currency universe and allow investments in non-SDR basket currencies for government and central bank fixed-income obligations. They also agreed that investments in such currencies should be subject to explicit ex ante criteria along the lines set out in the staff paper, and that non-SDR currency exposures should be hedged back into one of the currencies of the SDR basket. A few Directors were skeptical of the merits of permitting investments denominated in non-SDR currencies, noting also the added complexity and hedging costs associated with such investments.

Directors supported the proposed arrangements for addressing operational and implementation issues. They called for moving swiftly on the work required for implementing the new investment strategy.

Directors agreed that current governance arrangements for the Fund’s investment activities are robust and appropriately address potential and actual conflicts of interest. They also underscored that Directors should be informed of developments in the Investment Account at least annually, and more frequently as warranted by market or other developments.


September 2, 2015

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