International Monetary Fund
Published Date:
August 2004
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Asset liability management.

The management of business and financial risks by matching the financial characteristics (on and off balance sheet) of an entity’s assets to those of its liabilities.

Back office.

The area of reserve management operations responsible for confirmation, settlement, and, in many cases, reconciliation of reserve management transactions.


The mix of currencies, investment instruments, and duration that reflect the reserve manager’s tolerance for exposure to liquidity, credit, and market risks.

Credit risk.

The risk of nonperformance or default by borrowers on loans or other financial assets, or by a counterparty on financial contracts.

Currency risk.

The risk of adverse movements in foreign currency cross-exchange rates that reduce the domestic currency value of international reserves. Currency risk also arises with an appreciation of the domestic currency.

Custodial risk.

The failure of a foreign agent or custodian to deliver securities held on behalf of the reserve manager.

Dealing risk.

Dealers exceed their authority in dealing with counterparties or instruments, or incorrectly process a transaction.


A measure of the sensitivity of a portfolio to movements in market yields by determining the time-weighted average of the present values of all future cash flows of a security or a portfolio, discounted at current interest rates.

Financial error or misstatement risk.

The failure of the accounting system and related controls to properly record all transactions and accounting adjustments.

Front office.

The area responsible for initiating investment transactions in accordance with approved delegations, limits, and benchmarks and the prompt and accurate entry of transactions into the investment management system.

Information technology risk.

The failure of critical electronic data processing and communication and information systems, thereby causing severe disruption to reserve management functions.

Interest rate risk.

Sometimes also referred to as an element of market risk, interest rate risk involves the adverse effects of increases in market yields that reduce the present value of fixed interest investments in the reserve portfolio. Interest rate risk increases, ceteris paribus, with the duration of a portfolio.

Internal audit.

An independent source of assurance about the management of risks and the operation of the control system that assists management of an organization in the effective discharge of its responsibilities.

Legal risk.

The possibility of losses from contracts that are not legally enforceable or not properly documented.

Liquidity risk.

Liquidity risk refers to the possible difficulties in selling (liquidating) large amounts of assets quickly, possibly in a situation where market conditions are also unfavorable, resulting in adverse price movements.

Market risk.

Risks associated with changes in market prices, such as interest rates and exchange rates. Changes in interest rates affect market prices of fixed-interest securities. Hence, shorter duration securities are less at risk than long-term, fixed-rate securities.

Middle office.

Located between the front and back offices, the middle office’s role is to monitor that all transactions have been performed properly, that risks are being monitored and limits observed, and that relevant information is available for management.

Official foreign exchange reserves.

Those external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitudes of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes.34 To meet this definition, reserve assets need to be liquid or marketable foreign currency assets that are under the effective control of, or “usable” by, the reserve manager and held in the form of convertible foreign currency claims of the authorities on nonresidents. To be recognized as part of official foreign exchange reserves, gold must be held by the monetary authorities as monetary gold.

Operational risk.

A range of different types of risks, arising from inadequacies, failures, or nonobservance of internal controls and procedures that threaten the integrity and operation of business systems.

Public debt management.

The process of establishing a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and meet any other sovereign debt management goals the government may have set.

Reputation risk.

A reserve manager’s reputation and credibility may be called into question as a result of inappropriate reserve management actions or unauthorized release of information.

Reserve assets.

See official foreign exchange reserves.

Reserve management.

The process by which public sector assets are managed in a manner that provides for the ready availability of funds, the prudent management of risks, and the generation of a reasonable return on the funds invested.


The possibility of financial or other losses arising from an entity’s financial exposures and/or the failure of its internal control systems.

Safeguards Assessment.

A two-stage evaluation of a member country’s central bank control, accounting, reporting, and auditing systems to ensure that resources, including those provided by the Fund, are adequately monitored and controlled. The first stage will determine whether there are clear vulnerabilities in these systems, based on information provided by central banks. If weaknesses in internal procedures are suspected, a second stage will comprise on-site evaluations and recommendations for improvements. Safeguards Assessments for all new users of Fund resources began in mid-2000.

Settlement risk.

The potential loss as a result of failure to settle, for whatever reason other than default, by the counterparty.

Sovereign risk.

The risk that a foreign sovereign government will restrict the ability of holders to gain access to their assets or the proceeds from the sale of such assets. Sovereign risk is an inevitable feature of reserve management since assets are necessarily held in foreign countries, often in sovereign government securities of major investment currencies, and for which there are no better investment alternatives available.

The word union is used to represent monetary or exchange management unions that also undertake reserve management.

Among countries, and among monetary or exchange management unions, the entity responsible for reserve management may be a central bank or monetary authority acting either as a principal or as an agent for another repository of reserves such as an exchange fund. These entities may also have a range of policy responsibilities and functions that extend beyond their reserve management responsibilities. For discussion purposes, the term reserve management entity is used throughout this paper to refer to the entity that is responsible for reserve management, and the term reserve manager is used to refer to the specific area within the entity that performs the actual reserve management function.

A number of countries also maintain separate stabilization or savings funds often related to nonrenewable resources. Such funds do not generally fall within the definition of reserve assets and are not specifically covered by these guidelines. They do, however, represent public sector assets that must be managed with due care and diligence. Accordingly, the principles contained in the guidelines may also have potential relevance for the sound management and stewardship of such foreign assets.

Such experiences are not discussed in detail in this paper, but have been drawn upon in identifying risks to which countries have been exposed. Some further detail, however, is provided in Chapter 4.

A discussion of reserve adequacy can be found in International Monetary Fund, 2000, Debt-and Reserve-Related Indicators of External Vulnerability, which is available on the IMF’s website:

In general, control is assured when reserve assets are owned by the reserve management entity. However, external assets held by another authority may also be considered as reserve assets when such assets are under the direct and effective control of the reserve management entity. Comprehensive guidance on definitional and other aspects of reserves and liquidity can be found in International Monetary Fund, Statistics Department, 1999, “Data Template on International Reserves and Foreign Currency Liquidity—Operational Guidelines,” October.

Official foreign exchange reserves may also include holdings of gold. Such holdings would need to be held by the authorities as monetary gold so as to ensure ready availability for sale and delivery on world bullion markets.

Examples of instruments used include swap, futures, and options contracts involving foreign currencies or interest rates. Risk aspects associated with these operations are discussed in Section 4.

A currency board arrangement may also have a direct implication for the currency composition of reserves, if there is a requirement for base money to be backed wholly, or predominantly, by the currency to which the local currency is pegged.

Arrangements in this regard would include conventional fixed pegs, crawling pegs, horizontal bands, and crawling bands. Further details on these arrangements can be found in the IMF’s Annual Report 2001 (Appendix II, pp. 141–43), which is available on the Fund’s website:

This may involve, for example, a policy coordination body such as a separate treasury council that oversees external debt management and coordinates borrowing programs having regard to advice from the reserve management entity on the desired level of reserves.

See MFP Transparency Code, 1.1.4 and 1.3.1.

See MFP Transparency Code, 1.3.1.

See MFP Transparency Code, 1.1 and 5.1.

See MFP Transparency Code, 2.1.2.

See MFP Transparency Code, 3.1 and 3.2.4.

It should be noted that this approach differs from more traditional entity-specific reporting regimes, in that it integrates the activities of all public authorities, including the reserve management entity, which may be responsible for, or involved in, responding to currency crises.

Further information on the SDDS and the data template, including data periodicity and timeliness, can be obtained from the Dissemination Standards Bulletin Board at

See MFP Transparency Code, 4.2.1 and 8.2.1.

IAS are promulgated by the International Accounting Standards Board, London. The publication of annual financial statements that are prepared in accordance with such standards, or equivalent national standards, and are independently audited, is also a key element of the Fund’s Safeguards Assessment framework. This framework has been adopted to ensure that central banks responsible for managing resources obtained from the Fund have adequate control, accounting, reporting, and auditing systems in place to manage funds and to ensure the integrity of operations. The Supporting Document of the MFP Transparency Code also suggests an approach to good accountability practices based on the adoption of internationally recognized accounting and auditing standards.

While IAS do not contain any prescriptions relating specifically to international reserves, disclosures by a reserve management entity, on its reserve-related assets and liabilities, would likely form a large part of the more general annual financial statement disclosures required by IAS. Two relevant standards in this regard are IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement. These standards require, inter alia, financial statement disclosures relating to exposures to interest rate and credit risks, and the fair or market-based valuation of financial assets.

The “mark to market” process of valuing all marketable investments at their current market price is a specific feature of the fair value measures defined in IAS 32 and IAS 39.

See MFP Transparency Code, 4.2.2 and 8.2.2.

Responsibilities in this regard are usually allocated among the ministry of finance, central bank, or a central repository such as an exchange fund.

Following, for example, Guideline 2.1.

VaR methodologies can be a useful tool and component of risk management systems for the measurement of exposure to risks emanating from movements in market prices. Nonetheless, VaR has limitations and requires careful attention to the development, application, and analysis of results.

Particular operational risks that might need to be addressed in the context of reserve management activities include control system failures associated with (1) dealing risks; (2) settlement risk; (3) custodial risk; (4) legal risk; (5) information technology risk; and (6) financial error or misstatement risk. Further details on each of these risks are contained in the glossary to these guidelines.

Typically a separate area, such as the internal audit unit, within the reserve management entity performs this function. In some cases, particularly those involving smaller entities with a limited resource base, consideration might also be given to contracting out internal audit work associated with specialized operations such as reserve management.

See MFP Transparency Code, 4.4 and 8.4.

The definition of a benchmark portfolio may be based on, or similar to, recognized investment “industry” benchmarks such as those used and published by major investment houses. Many reserve managers, while drawing on such industry measures, choose to define and construct their benchmarks with more specific regard for the objectives, operations, and risks of the reserve management entity.

All benchmark portfolios, for example, reflect tolerance for risk that can, and will, vary among reserve management entities.

Reserve management strategies can reflect varying choices between approaches that are generally described as either active or passive management. These terms, however, can be understood in different ways. Sometimes, a buy-and-hold-only strategy is viewed as passive management. The more generally accepted view of passive management is one where the risk characteristics of the portfolio replicate those of the benchmark. In this case, portfolio managers take no view on the direction of the market (i.e., the rate of return provided by the benchmark is accepted). However, over time, transactions would be necessary to maintain the alignment of the portfolio with the predetermined benchmark. This is the kind of passive management discussed here. Active management implies that the actual portfolio deviates from the benchmark as managers take views on the direction of the market or some of its components.

Examples of other foreign currency activities include the issue of foreign-currency-denominated securities to fund lending to domestic entities, facilities to support exporter access to pre- and post-shipment finance, placement of deposits with foreign subsidiaries of the reserve management entity, guarantees, and letter of credit facilities. In some cases, commitments have also been given to foreign supervisory authorities to support the capital and liquidity of the reserve management entity’s foreign subsidiaries.

Source: International Monetary Fund, 1998, Balance of Payments Manual, 5th ed. (Washington: IMF), paragraph 424.

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