Chapter

Article XII, Section 6

Author(s):
International Monetary Fund
Published Date:
July 2012
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Reserves, Distribution of Net Income, and Investment

The Investment Account—Establishment

1. The Fund hereby establishes within the General Department an Investment Account as provided for in Article XII, Section 6(f)(i).

2. The assets of the Investment Account shall be kept separately from the other accounts of the General Department. (EBS/06/57, 4/17/06)

Decision No. 13710-(06/40) IA,

April 28, 2006

Investment Account—Adoption of Rules and Regulations

1. Pursuant to Article XII, Section 6(f)(vi),1 the Fund adopts the Rules and Regulations for administration of the Investment Account that are set forth in Annex I of EBS/06/57 (4/17/06).

Decision No. 13711-(06/40),

April 28, 2006

EBS/06/57, Annex I: Rules and Regulations for Administration of the Investment Account (IA)

Objective of the Investment Account

1. The objective of the IA is to provide a vehicle for the investment of a part of the Fund’s assets so as to generate income that may be used to help meet the expenses of conducting the business of the Fund.

Sources of Investment Account Assets

2. The IA will be funded initially through the transfer of currencies from the GRA in an amount equivalent to the total amount of the Fund’s general and special reserves at the time of the decision authorizing the transfer. In addition, and subject to paragraph 3 below, the IA may retain or invest the income from its investments, and may also reinvest the proceeds of assets that mature or that it sells.

Uses of Investment Account Income

3. The IA’s income from investment may be invested, retained in the IA, or used to meet the expenses of conducting the business of the Fund. The Fund will decide on the use of the IA’s income for each financial year, including whether any portion of such income should be transferred to the GRA for use in meeting the expenses of conducting the business of the Fund.

Termination or Reduction of the Investment Account

4. The IA shall be terminated in the event of liquidation of the Fund and may be terminated, or the amount of the currency transferred to the IA may be reduced, prior to liquidation of the Fund by a 70 percent majority of the total voting power. The procedures specified in Article XII, Sections 6(f) (vii), (viii) and (ix) will apply in the event of the termination of the IA or a reduction in its assets.

Guidelines for Investing Investment Account Assets

Investment Objective

5. The investment objective of the IA is to achieve investment returns that exceed the SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over a 12-month investment horizon. Achieving this objective would help diversify the sources and increase the level of the Fund’s income, thereby strengthening its finances over time.

Eligible Investments

6. The assets of the IA may be invested only as specified in Article XII, Section 6(f)(iii) of the Fund’s Articles of Agreement. Accordingly:

• A member’s currency held in the IA may be invested only in marketable obligations of that member or in marketable obligations of international financial organizations, provided that the IA may invest only in obligations denominated in special drawing rights (SDRs) or in the currency used for investment. Marketable obligations of a member shall include the obligations of its central bank and official agencies. Marketable obligations of international financial organizations shall include without limitation SDR-denominated deposits with the Bank for International Settlements.

• The IA’s investment in the instruments specified above may only be made directly in the cash markets. Derivative securities—including forwards, futures, options and swaps—may not be used to establish or hedge positions in eligible investments.

• Only long positions may be established in eligible investments. Short selling or any form of leverage is not permitted.

7. The IA’s portfolio will be limited to eligible investments, as described above, that are denominated in SDRs or in the currencies included in the SDR basket. No investment shall be made without the concurrence of the member whose currency is used to make the investment.

Supervision of the Investment Account’s Investment Activities

8. The Managing Director will provide for the supervision of the IA’s investment activities. Such supervision will include negotiating agreements with external investment managers and with custodial agents; ensuring that the IA’s investment and other activities conform with the relevant provisions of the Fund’s Articles of Agreement and with these rules and regulations; establishing investment benchmarks and guidelines for investment managers; placing investments in eligible BIS deposits and in the BIS’ Medium-Term Instruments (MTIs); monitoring the structure and evaluating the performance of the IA’s assets; supervising the management of the IA’s assets, including the hiring and firing of external investment managers and assessing their performance; supervising the custodial arrangements for IA assets; adjusting the allocation of the portfolio in response to market conditions and the Fund’s financing needs; and preparing regular reports to the Executive Board on the investment activities of the IA.

Custody Arrangements

9. The assets of the IA may be held in safekeeping by one or more custodian banks. The custodian(s) will hold the assets of the IA in safekeeping, periodically value the assets held, and hold and invest short-term residual cash balances.

Risk Controls

10. In keeping with the IA’s investment objective, the Managing Director will establish specific risk control procedures and put in place a mechanism to monitor their observance by asset managers. The investment guidelines and benchmarks established for asset managers will set explicit limits for the exposure to interest rate, foreign exchange, liquidity, credit and operational risks.

Reporting Requirements

11. The Managing Director will provide semi-annual reports to the Executive Board on the operations and investment activities of the IA. These reports will analyze the operations of the IA in the context of the Fund’s overall financial position and income, including in particular an assessment of the appropriate size of the IA and the disposition of its assets and earnings. These reports will include an analysis of changes in the valuation of IA assets, the investment guidelines and benchmark being followed by asset managers, a discussion of the applicable controls and evaluation of the adequacy of established risk control procedures, and an assessment of market conditions that may affect the valuation of the IA’s assets. Ad hoc reports will be prepared as warranted by market or other developments. The assets of the IA will be audited by the Fund’s external auditors and included in the Fund’s financial statements.

Review of the Fund’s Income Position for FY 2010 and FY 2011—Transfer of Currencies to the Investment Account

Pursuant to Article XII, Section 6(f)(ii), the Fund shall transfer from the General Resources Account to the Investment Account currencies in an amount equivalent to the increase of the Fund’s general and special reserves as of April 30, 2010 over their level at the end of financial year 2006, excluding any amounts in the special reserve that are attributable to profits from the sale of gold during FY 2010. This transfer of currencies to the Investment Account shall be effected in the context of the Financial Transactions Plan for the quarterly period May through July 2010. The currencies transferred to the Investment Account pursuant to this decision shall be used for immediate investment in accordance with the provisions of Article XII, Section 6(f), and in accordance with the rules and regulations for administration of the Investment Account adopted pursuant to Decision No. 13711-(06/40). (EBS/10/63, Sup. 1, 4/26/10)

Decision No. 14603-(10/41),

April 28, 2010

Review of the Fund’s Income Position for FY 2011 and FY 2012—Transfer of Currencies to the Investment Account

Pursuant to Article XII, Section 6(f)(ii) of the Articles of Agreement, the Fund shall transfer from the General Resources Account to the Investment Account currencies in an amount equivalent to the difference between the Fund’s general and special reserves as of April 30, 2011 and the cumulative amount of previous transfers of currencies from the General Resources Account to the Investment Account. This transfer of currencies to the Investment Account shall be effected in the context of the Financial Transactions Plan covering the period March through July 2011. The currencies transferred to the Investment Account pursuant to this decision shall be used for immediate investment in accordance with the provisions of Article XII, Section 6(f)(iii) of the Articles of Agreement and the Rules and Regulations adopted thereunder. (EBS/11/53, 04/07/11)

Decision No. 14899-(11/37),

April 20, 2011

Review of the Fund’s Income Position for FY 2011 and FY 2012—Transfer of Investment Income for FY 2011 to General Resources Account

The income of the Investment Account for FY 2011 that is not attributable to earnings from gold profits transferred to the Investment Account shall be transferred to the General Resources Account for use in meeting the expenses of conducting the business of the Fund during FY 2011. (EBS/11/53, 04/07/11)

Decision No. 14897-(11/37),

April 20, 2011

Review of the Fund’s Income Position for FY 2011 and FY 2012—Placement of FY 2011 Net Income of the General Resources Account to the Special Reserve and the General Reserve

The net income of the General Resources Account for FY 2011 other than net income from surcharges shall be placed to the Fund’s Special Reserve and General Reserve as follows: Net income not attributable to gold profits shall be placed to the Fund’s Special Reserve. Of the net income attributable to gold profits an amount of SDR 650 million shall be placed to the Fund’s Special Reserve, and an amount of SDR 2,450 million shall be placed to the General Reserve. (EBS/11/53, 04/07/11)

Decision No. 14898-(11/37),

April 20, 2011

Partial Distribution of the General Reserve Attributed to Windfall Gold Sale Profits

1. Pursuant to Article V, Section 2(b), the Fund adopts the Instrument to Establish the Interim Administered Account for Windfall Gold Sales Profits (the “Administered Account”) that is attached to this decision.

2. In accordance with Article XVII, Section 3, the Fund prescribes that:

(a) an SDR Department participant or prescribed holder, by agreement with an SDR Department participant or prescribed holder and at the instruction of the Fund, may transfer SDRs to that participant or prescribed holder in effecting a transfer to or from the Administered Account or in effecting a payment due to or by the Fund in connection with financial operations under the Administered Account.

(b) Operations pursuant to these prescriptions shall be recorded in accordance with Rule P-9.

3. Pursuant to Article XII, Section 6(d), an amount equivalent to SDR 0.7 billion of the general reserve shall be distributed to all members in proportion to their quotas. The payment of the distribution shall be made in SDRs or, if the Fund or a member so decides, in the member’s own currency, provided that payment to a member with overdue repurchase obligations in the General Resources Account shall be made in the member’s own currency.

4. In accordance with Article XII, Section 6(f)(vi) and Article XII, Section 6(f)(ix), the Fund decides to reduce the amount of investment in the Investment Account by an amount equivalent to SDR 0.7 billion and to transfer the proceeds from this reduction to the General Resources Account for immediate use in the Fund’s operations and transactions.

5. Paragraphs 1 through 4 above shall become effective when the Managing Director has notified the Executive Board that, in her assessment, satisfactory financing assurances exist regarding the availability of at least SDR 630 million for new subsidy contributions to the Poverty Reduction and Growth Trust based upon: (a) the amount that members have requested in writing be transferred as subsidy contributions to the PRGT from their share in the partial distribution of the general reserve provided for in paragraph 3 of this decision; (b) the amount of other new contributions that members have provided as subsidy contributions to the PRGT in light of this decision; and (c) the amount of other subsidy contributions that members have given written assurances that they will provide to the PRGT in light of this decision.

6. Paragraph 1(b) of the decision on Attribution of Reductions in Fund’s Holdings of Currencies, Decision No. 6831-(81/65), adopted April 22, 1981 and effective May 1, 1981, as amended, shall be amended to read as follows: “(b) For a member with overdue repurchase obligations, the reduction shall be attributed to any obligation to repurchase.” (SM/12/23, 02/03/12)

Decision No. 15092-(12/19),

February 24, 2012

The Acting Chair’s Summing Up—Broadening the Fund’s Investment Mandate—Further Considerations Executive Board Meeting 11/86, August 26, 2011

Executive Directors welcomed the opportunity to continue the discussion on broadening the Fund’s investment mandate. With the Fund’s expanded investment authority now in place, they called for moving expeditiously to finalize the remaining issues concerning the design of the investment policy and governance framework for the gold-sale financed endowment so that it can be implemented as soon as possible.

Directors agreed that the endowment should reflect the broad goals of providing a meaningful contribution to the Fund’s income and preserving the long-term real value of its resources. In this context, most Directors supported the adoption of a 3 percent real return target for the endowment. They recognized that achieving such a target could be challenging in the near term, given that yields on highly rated sovereign bonds are at or near historic lows, and called for keeping the target and associated risk-return tradeoffs under review. A few Directors preferred a more cautious approach to setting a return target, with greater attention to risk-return tradeoffs especially in the current environment. Many Directors considered it prudent to adopt a lower pay-out ratio in the initial years as a means of protecting the endowment, and a few asked staff to explore the scope for rules to link pay-outs to the Fund’s lending income. A few suggested supplementing the endowment with income windfalls from other Fund operations.

Directors agreed that a diversified portfolio both geographically and across asset classes would be needed to generate a meaningful return while carefully managing risks. At the same time, Directors stressed that the investment policies for the endowment need to take into account the Fund’s mandate and acceptable levels of risk, particularly in light of the public nature of the funds to be invested.

Most Directors expressed willingness to support an approach along the lines of the proposed “conservative diversified portfolio” consisting of high-grade bonds of mature and emerging markets, including inflation-linked instruments; a limited exposure to mature and emerging market equities; and possibly a small allocation to publicly traded real estate trusts. Recognizing that such an approach would imply foregoing the potential benefits afforded by broader diversification, many of these Directors were open to creating a structure that would allow the endowment to flexibly operate over time. A few Directors continued to prefer a portfolio confined to, or with a larger share of, fixed-income instruments.

Directors took note of the extensive work on governance arrangements already done in the lead-up to the 2008 decisions on the new income model and of staff’s more recent work, including outreach efforts. They generally agreed that the broad conclusions of the earlier work remain valid, including the need to establish explicit investment performance objectives to promote accountability, a clear separation between operational and oversight responsibilities, and effective risk controls. Directors reaffirmed the view that the Executive Board should play a central role in the oversight of the endowment, including in determining broad investment policies. A number of Directors preferred to consider a governance structure contemporaneously with other decisions, including portfolio strategy, with a few seeking agreement on governance arrangements even before other decisions. A number of Directors considered that proposals on governance arrangements should await greater clarity on the investment strategy. Directors emphasized the importance of putting in place adequate safeguards against actual or perceived conflicts of interest. A number of Directors saw merit in drawing on the governance structure of the Fund’s Investment Office, including an investment committee similar to that for the Staff Retirement Plan (SRP). A number also saw scope for benefitting from the SRP’s experience and/or professional expertise.

Overall, today’s discussion has been helpful in further clarifying views on the return target, broad investment strategy, and governance arrangements for the endowment. While some differences of views clearly remain, I propose that, as a next step, staff come back with more specific proposals on governance arrangements and an investment strategy, which preserves ultimate flexibility for the endowment, but which initially considers a strategy along the lines of the “conservative diversified portfolio” for further Board discussion.

BUFF/11/128,

September 14, 2011

Ed. Note: After the Fifth Amendment of the IMF Articles of Agreement, Article XII, Section 6(f)(vi) became Article XII, Section 6(f)(iii).

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