Reserve management should seek to ensure that: (i) adequate foreign exchange reserves are available for meeting a defined range of objectives; (ii) liquidity, market, and credit risks are controlled in a prudent manner; and (iii) subject to liquidity and other risk constraints, reasonable earnings are generated over the medium to long term on the funds invested.

APPENDIX 1. Reserve Management Guidelines

1. Reserve Management Objectives, Scope, and Coordination

1.1 Objectives

Reserve management should seek to ensure that: (i) adequate foreign exchange reserves are available for meeting a defined range of objectives; (ii) liquidity, market, and credit risks are controlled in a prudent manner; and (iii) subject to liquidity and other risk constraints, reasonable earnings are generated over the medium to long term on the funds invested.

1.2 Scope

Reserves consist of official public sector foreign assets that are readily available to and controlled by the monetary authorities.

Reserve management activities may also encompass the management of liabilities, other short foreign exchange positions, and the use of derivative financial instruments.

1.3 Reserve management strategy and coordination

Reserve management strategies should be consistent with and supportive of a country’s or union’s specific policy environment, in particular its monetary and exchange arrangements.

Evaluation of alternative reserve management strategies and their respective implications for reserve adequacy are likely to be facilitated by a cost/benefit analysis of holding reserves.

Reserve management strategies may also need to take into account strategies for the management of external debt for purposes of reducing external vulnerability.

2. Transparency and Accountability

2.1 Clarity of roles, responsibilities, and objectives of financial agencies responsible for reserve management

The allocation of reserve management responsibilities, including agency arrangements, between the government, the reserve management entity, and other agencies should be publicly disclosed and explained.

The broad objectives of reserve management should be clearly defined, publicly disclosed, and the key elements of the adopted policy explained.

2.2 Open process for reserve management market operations

The general principles governing the reserve management entity’s relationships with counterparties should be publicly disclosed.

2.3 Public availability of information on foreign exchange reserves

Information on official foreign exchange reserves should be publicly disclosed on a preannounced schedule.

2.4 Accountability and assurances of integrity by agencies responsible for reserve management

The conduct of reserve management activities should be included in the annual audit of the reserve management entity’s financial statements. Independent external auditors should conduct the audit and their opinion on the financial statements be publicly disclosed.

General principles for internal governance used to ensure the integrity of the reserve management entity’s operations should be publicly disclosed.

3. Institutional Framework

3.1 Legal foundation

Sound institutional and governance arrangements should be established through a legislative framework that clearly establishes the reserve management entity’s responsibilities and authority.

3.2 Internal governance

The internal governance structure of the reserve management entity should be guided by and reflect the principles of clear allocation and separation of responsibilities.

Sound management of internal operations and risks requires appropriately qualified and well-trained staff, following sound business practices.

Effective monitoring of internal operations and related risks should be supported by reliable information and reporting systems, and an independent audit function.

Staff involved in reserve management should be subject to a code of conduct and conflicts of interest guidelines regarding the management of their personal affairs.

Effective recovery procedures should be in place to mitigate the risk that reserve management activities might be severely disrupted by the failure of operating systems, or other catastrophic events.

4. Risk Management Framework

There should be a framework that identifies and assesses the risks of reserve management operations and that allows the management of risks within acceptable parameters and levels.

The risk management framework should apply the same principles and measures to externally managed funds as it does to those managed internally.

Risk exposures should be monitored continuously to determine whether exposures have been extended beyond acceptable limits.

Reserve managers should be aware of and be able to account for potential financial losses and other consequences of the risk exposures they are prepared to accept.

The risk management framework should also address risks associated with derivative financial instruments and other foreign currency operations.

To assess the risk and vulnerability of the reserve portfolio, the reserve management entity should regularly conduct stress tests to ascertain the potential effects of macroeconomic and financial variables or shocks.

5. The Role of Efficient Markets

Reserve management, and any related policy operations, should be conducted in markets that have sufficient depth and liquidity, and can process transactions in a sound and efficient manner.

APPENDIX 2. Supplementary Data

Institutional Framework

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Portfolio Management

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Portfolio Management Statistics: Strategic Benchmarks

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APPENDIX 3. Macroeconomic Indicators

Macroeconomic Indicators

(At end-2001)

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Source: Annual Report on Exchange Arrangements and Exchange Restrictions.

GDP, Reserves, Imports, Broad Money, ST Debt: WEO.

WEO Classification.



Asset-backed securities.

Bonds or notes backed by loan paper or accounts receivable originated by banks, credit card companies, or other providers of credit and often enhanced by a bank letter of credit or by insurance coverage provided by an institution other than the issuer.

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.

Confidence intervals.

An estimate of the probability (confidence) that an observation will fall within or outside a specified range. If the underlying data are normally distributed, a 68% confidence interval is estimated as the mean plus and minus one standard deviation and a 95% confidence interval is estimated as the mean plus and minus two standard deviations.

Credit risk.

The risk of nonperformance or default by borrowers on loans or other financial assets, or by a counterparty on financial contracts. Credit risk includes replacement cost risk, principal risk, and cash deposit risk.

Currency risk.

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

Custodial risk.

The risk of loss of securities held in custody occasioned by the insolvency, negligence, or fraudulent action of the custodian or of a sub-custodian.


An entity, often a bank, that safekeeps and administers securities for its customers and that may provide various other services, including clearing and settlement, cash management, foreign exchange, and securities lending.


The safekeeping and administration of securities and other financial instruments on behalf of others.

Dealing risk.

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

Delivery versus payment.

A link between a securities transfer and a funds transfer system that ensures that delivery occurs if, and only if, payment occurs.


Delta measures the relationship between an option price and the underlying futures contract or stock price.

Derivative product.

A contract or convertible security that changes in value in concert with and/or obtains much of its value from price movements in a related or underlying security, future, or other instrument or index.


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 ratio.

Information ratio measures excess return over the benchmark per unit of observed risk.

Information technology risk.

The failure of critical electronic data processing, communication, and information systems 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.

Mean variance analysis.

The process of identifying and evaluating portfolios that offer the highest expected return for given levels of variance.

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.

Mortgage-backed securities.

Debt instruments collateralized by residential, commercial, or industrial real estate mortgages.

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 magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes. 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.

Performance attribution system.

An analytical framework that isolates the effects and measures the return contributions of market allocation, currency management, and security selection decisions. Performance attribution is used to evaluate the quality of the separate asset allocation and selection decisions that create a portfolio.


Pfandbriefe are covered bonds issued to fund loans that are secured, as a rule, by first ranking mortgages or land charges (Mortgage Pfandbriefe) or lending to the public sector (Public Pfandbriefe). They are issued by German private mortgage banks, private ship mortgage banks, and public sector credit institutions.

Portfolio optimization.

Use of a linear or quadratic model to structure a portfolio to maximize or minimize yield, long-term rate sensitivity, etc., or to increase or reduce exposure to certain industries, market sectors, or macroeconomic factors, subject to prespecified constraints.

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 to meet any other sovereign debt management goals the government may have set.

Repurchase agreement (repo).

A contract to sell and subsequently repurchase securities at a specified date and price.

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.

Securities lending.

A carefully collateralized process of loaning portfolio positions to custodians, dealers, and short-sellers who must make physical delivery of fungible positions.

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 a holder to gain access to its 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.

Tracking error.

Tracking error is the differential in performance between a portfolio and its benchmark, indicating the standard deviation of relative returns.


The Guidelines can be found on the IMF’s website, http://www.imf.org/external/np/mae/ferm/eng/index.htm. A summary is contained in Appendix 1 to this document.


The focus in this document is on management of reserves by a monetary authority or a central bank acting as a principal or as an agent for another repository of reserves such as an exchange fund. A number of countries also maintain separate stabilization or national savings funds often related to nonrenewable resources. The management of such funds has not been included in the sample case studies.


Appendix 3 presents the countries that have participated in the preparation of this document and the diverse nature of their economic and financial conditions.


For insights on reserve adequacy, which is outside the scope of the Guidelines, see the following papers available on the IMF website: Issues in Reserve Adequacy and Management: http://www.imf.org/external/np/pdr/resad/2001/reserve.htm; Debt- and Reserve-Related Indicators of External Vulnerability: http://www.imf.org/external/np/sec/pn/2000/pn0037.htm; http://www.imf.org/external/np/pdr/debtres/index.htm.


In Oman, foreign currency revenues of the government in excess of budgeted prices of oil are held in a fund known as the State General Reserve Fund. This portion of the external reserves of the country is owned and managed directly by the government and may be utilized in case of a budget shortfall. There is an institutional arrangement for consultation between the central bank and the fund on various investment-related issues, such as composition of benchmark and portfolio performance.


Details can be found at the following website: http://www.imf.org/external/np/mae/mft/index.htm.


In addition, the Norges Bank also manages the government’s Petroleum Fund as a separate portfolio to Norway’s official international reserves.


The government has also entrusted the management of the foreign exchange equalization fund to the central bank.


Specific details for SDDS subscribing countries can be found on the IMF website: http://dsbb.imf.org/Applications/web/sddscontrylist. For countries that have their template data redisseminated by the IMF, the data, in a common format and in a common currency, are accessible on the IMF’s website at http://www.imf.org/external/np/sta/ir/index.htm. The website also provides links to subscribing countries’ websites.


The International Accounting Standards Board (IASB) publishes its standards in a series of pronouncements called International Financial Reporting Standards (IFRS). It has also adopted the body of standards previously issued by the International Accounting Standards Committee. Those pronouncements continue to be designated “International Accounting Standards” (IAS).


See paragraphs 47 to 52 on allocation of roles and responsibilities for reserve management for additional information on the laws governing institutional arrangements in the participating countries.


For reserves, the guidelines prepared by Governor’s staff are set by the Executive Board or the Governor. For the Petroleum Fund, the guidelines are given by the Ministry of Finance, except supplementary guidelines for credit risk, which are set by the Governor.


The working capital bucket covers immediate requirements, the intermediate liquidity bucket covers one year’s requirements, and the stable liquidity bucket is composed of reserves that have the least probability of being drawn.


For more discussion on efficient liquidation of assets, refer to paragraphs 150–151.


An account of the RBA’s approach to risk management is detailed in the Bank’s 2000/01 Annual Report.


Prior to the performance review in 2000, management had discretion to vary the portfolio as much as 20 percentage points either side of the benchmark.


First, the TBT is virtually all cash. Then LIT invests only in short-term bonds and money market instruments. Finally, the Pula Fund is fully diversified.


The External Asset Management Program was implemented in October of 2000 with two main objectives: to keep Depin’s team updated with the best investment practices available in the market and to be used as a reference for the performance evaluation of the internal active portfolio.


Liquid reserves consist of marketable securities and deposits denominated in U.S. dollars, euros, and yen.


In addition, the Department of Finance publishes an annual Debt Management Report and Debt Management Strategy Report, which provide an overview of foreign reserve management operations.


Canada was one of the first countries to fully meet the requirements of the IMF’s and G–10’s new format for presentation of international reserves data.


See De Leon, J., 2000–2001, “The Bank of Canada’s Management of Foreign Currency Reserves,” Bank of Canada Review; and Rochette, M., 2001–2002, “Risk Management in the Exchange Fund Account,” Bank of Canada Review.


Bank for International Settlements, 2001, A survey of stress tests and current practice at major financial institutions (April).


Johnson-Calari, Jennifer, “Risk Management Practices at the World Bank: Global Liquidity Portfolios,” Risk Management for Central Bankers (London: Central Banking Publications), defines the liquidity requirements as stable, discretional, and operational.


In 1991, the central bank defined target zones within which the market determined the exchange rate, at first through the issuance of exchange certificates until 1994.


Bussiere, Matthieu, and Christian Mulder, 1999, “External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion,” IMF Working Paper 99/88.


The Economic Research Department, using the Hodrick-Prescott methodology, estimated long-term component of the current account and volatility.


The main difference between FASB rules and the Colombian Superintendency of Banks has to do with the procedure involved with the valuation of derivative products, resulting in marginal differences.


After five years the employee receives a salary increase that gradually reaches a level equivalent to 20 percent of the average salary paid by the industry.


The central bank is at present working on a dynamic stress test model for the balance of payments in order to determine more precisely its liquidity requirements over a one-year period. Under the current procedure liquidity requirements over a one-year period may be overestimated given that the historical volatility of the reserves reflects the prolonged period in which the country was under a crawling peg and a managed float exchange regime.


Since this is a reserve adequacy objective, a reserve account was created in the balance sheet of the institution composed of the foreign exchange profits resulting from the non-U.S. dollar exposure of the portfolio in terms of the U.S. dollar. In the case of losses this reserve account is used.


These risk-adjusted measures are implemented following the RiskMetrics methodology.


The Brinson-Fachler model measures attribution in terms of asset allocation, security selection, and an interaction effect.


Risk Contribution of nthasset=h(n)*VectorofMarginalVolatilityσ, where h(n) is the nth element of the position vector of Marginal Volatility = Σh/σ. (Σ: Covariance matrix) (h: Portfolio position vector).


With special attention to the ECB and the connected European NCBs.


For a subsequent substantive discussion on the issue, refer to the Mid-Term Review of Monetary and Credit Policy for 2002–2003 (paragraphs 30–34), RBI Bulletin, November 2002, available on the RBI website, www.rbi.org.in.


However, under the Bank’s current policy of nonintervention, “conduct” of intervention policy is limited to information-gathering activities, so long as the exchange rate is within the band.


Other than the use of short-term repurchase agreements for tactical liquidity management.


In brief, the Bank is permitted—within the framework of the reserves—to own gold, foreign currency, and securities that are issued or fully guaranteed by a foreign government, to invest in bank deposits and CDs, and to utilize derivatives such as futures and options, provided the underlying asset is of a type that the Bank is permitted to own.


This system was based on the 1979 study by A. Ben-Bassat, The Management of Foreign Exchange Reserves, Israel’s Experience, Research Department, Bank of Israel (Hebrew), an abridged English version of which was published in the May 1981 Bank of Israel Economic Review.


This section should be read in conjunction with paragraphs 639–642, above.


Chapter VII, Article 51, subindex III of Banco de Mexico’s Law (BDML) states: “In April of each year, a report on the implementation of monetary policy during the second semester of the previous year and, in general, on the activities of the Bank throughout said year, within the context of the domestic and international economic situation.”


The liquidity portfolio considers investments with maximum maturities of three months (although investments in instruments such as U.S. treasuries and U.S. agencies can be made liquid on a same-day basis).


This funding arrangement requires the Bank to spread its borrowing requirements to minimize its exposure to refinancing risk—i.e., minimize the risk that the Bank has to finance a substantial portion of reserves at a time when an extreme event in international markets has a significant adverse effect on borrowing (refinancing) costs.


The Bank’s Board is about to undergo a restructuring—a non-executive director will replace the Governor as Chair of the Board, and Deputy Governors will no longer hold Board positions. This follows an independent review of the operation of monetary policy in New Zealand.


Note, the effect of translating reserves management performance back into NZD is not material (but is separately disclosed) because foreign reserves are funded by foreign currency liabilities.


Guidelines and performance reports for the foreign exchange reserves and various funds managed by the Bank and invested in the international capital markets are presented on Norges Bank’s website (www.norges-bank.no).


Until 2000 the Executive Board delegated to the Governor to define the benchmark portfolios and the limits for relative risk (tracking error), as well as credit risk (minimum rating level). These fundamental limits are now placed with the Board itself.


For the reserves, the guidelines prepared by the Governor’s staff are set by the Executive Board or the Governor. For the Petroleum Fund the guidelines are given by the Ministry of Finance, except supplementary guidelines for credit risk, which are set by the Governor.


Most of the web pages are available in English.


In simplified terms, a tracking error of 1 percentage point means that the actual difference between the returns on the benchmark and the actual portfolio will be between −1 and +1 percentage points in 2 out of 3 years on average.


The detailed methodology for calculating the returns on the various portfolios Norges Bank manages are described in the appendix of the Government Petroleum Fund quarterly report. The report is accessible on our website.


We define “information ratio” as the average monthly excess return over time divided by the standard deviation. This figure is annualized.


In addition to the United Kingdom’s Official Reserves, the Bank of England manages its own holdings of foreign currency assets and gold. As set out in the Chancellor of the Exchequer’s letter of 6 May 1997 to the Governor of the Bank of England, the Bank can intervene in support of its monetary policy objective using the Bank’s own resources rather than those of the EEA. The Bank of England Act 1998 sets out rules governing the disclosure of any such intervention.


Refers to entities that integrate government liabilities and reserve assets.

Accompanying Document and Case Studies