Article XII, Section 6
- International Monetary Fund. Legal Dept.
- Published Date:
- December 2014
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
Broadening the Fund’s Investment Mandate—Proposed Rules and Regulations for the Investment Account
1. The Rules and Regulations for the Investment Account adopted under Executive Board Decision No. 13711-(06/40), April 28, 2006 are repealed.
2. Pursuant to Article XII, Section 6(f)(iii), the Fund adopts the Rules and Regulations for the Investment Account that are set forth in the Annex to SM/12/318, Sup. 1 (1/25/13). (SM/12/318, Sup. 1, 01/25/13)
Decision No. 15314-(13/6),
January 23, 2013
Annex from SM/12/318, Sup. 1
Rules and Regulations for the Investment Account
I. General Provisions
Objective of the Investment Account
1. The objective of the Investment Account (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 meet the expenses of conducting the business of the Fund. Achieving this objective would help diversify the sources and increase the level of the Fund’s income, thereby strengthening its finances over time.
Sources of Investment Account Assets
2. The IA may be funded with (a) currencies transferred from the General Resources Account (GRA) in accordance with Article XII, Section 6(f)(ii) of the Articles and (b) the placement of profits from the sale of pre-Second Amendment gold in accordance with Article V, Section 12(g) of the Articles, in amounts up to the total amount of the Fund’s general and special reserves at the time of any decision authorizing such transfers; (c) the transfer of profits from the sale of post-Second Amendment gold in accordance with Article V, Section 12(k) of the Articles; and (d) income from the IA investment that is not transferred to the General Resources Account to meet the expenses of the Fund (Article XII, Section 6(f)(iv)).
Investment Account Subaccounts and Allocation of Assets
3. The IA shall have a Fixed-Income Subaccount, an Endowment Subaccount, and a Temporary Windfall Profits Subaccount, each of which has its own investment objective and shall be managed in accordance with Sections I and II, I and III, and I and IV, respectively, of these Rules and Regulations.
4. The assets of the IA in existence at the time of the effectiveness of these Rules and Regulations shall be allocated to the subaccounts as follows: (a) the Fixed-Income Subaccount shall be funded with the IA assets that are attributed to past transfers of currencies in accordance with Article XII, Section 6(f)(ii) of the Articles, and any retained income attributed to these assets; (b) the Endowment Subaccount shall be funded with (i) the IA assets attributed to profits from the sale of the holdings of the Fund’s post-Second Amendment gold during 2009 and 2010 equivalent to an average sales price of US dollar 850 per fine ounce, (ii) any retained income attributed to these assets, and (iii) the retained income attributed to the SDR 0.7 billion of gold sales profits from the 2009 and 2010 gold sales at an average sales price above US dollar 850 per fine ounce that were transferred from the IA to the GRA on October 23, 2012 to fund a distribution of the Fund’s general reserve; and (c) the Temporary Windfall Profits Subaccount shall be funded with IA assets attributed to profits of SDR 1.75 billion from the sale of the holdings of the Fund’s post-Second Amendment gold during 2009 and 2010 at an average sales price above US dollar 850 per fine ounce, and any retained income attributed to these assets.
5. Transfers of assets between subaccounts may be made with the approval of the Executive Board.
Responsibilities of the Managing Director
6. The Managing Director is responsible for implementing the investment policies for the IA set out in these Rules and Regulations.
7. In carrying out the Managing Director’s responsibilities, the Managing Director shall (a) establish effective decision-making and oversight arrangements; (b) take the necessary measures, including the adoption of policies and procedures, that seek to avoid actual or perceived conflicts of interest; and (c) establish specific risk control measures and put in place mechanisms to monitor their observance by asset managers.
8. The Managing Director shall consult with the Executive Board regarding (a) the key conflict of interest policies and arrangements in the Managing Director’s responsibility referred to in paragraph 7 and (b) the key aspects of the investment strategy for the actively- managed portion of the Endowment Subaccount referred to in paragraph 23 of these Rules and Regulations.
9. The Managing Director shall provide semi-annual reports to the Executive Board on the investment activities of the IA. Ad hoc reports shall be prepared as warranted by market or other developments.
10. All assets of the IA shall be managed by external managers, except as otherwise set forth in these Rules and Regulations. The Managing Director shall only select external managers of the highest professional standards, in particular excellent compliance records, strong market reputation, and with sound investment processes. In selecting managers for passively-managed assets, the Managing Director shall take into account their ability to replicate selected benchmarks with minimal tracking error and cost, and in selecting managers for actively-managed assets, their proven skills and track record in generating excess returns after fees.
11. The assets of the IA shall be held in safekeeping by one or more custodian banks or the Bank for International Settlements (BIS). The custodian(s) shall hold the assets of the IA in safekeeping, periodically value the assets held, and hold and invest short-term residual cash balances.
Use of Investment Account Income
12. The income from investment shall be invested, retained in the IA or used to meet the expenses of conducting the business of the Fund. The Fund shall decide on the use of the IA’s income for each financial year, including whether any portion of such income will be transferred to the GRA for use in meeting the expenses of conducting the business of the Fund, provided that income generated from the Endowment Subaccount shall not be used in meeting the expenses of conducting the business of the Fund pending the completion of the phasing period for the passively-managed portion of the Endowment Subaccount specified in paragraph 30.
Termination or Reduction of the Investment Account
13. The IA shall be terminated in the event of a liquidation of the Fund and may be terminated, or the amount of the investment may be reduced, prior to the 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) of the Articles will apply in the event of the termination of the IA or a reduction in its assets. The Fund’s decision to reduce investments in the IA shall specify the subaccount from which assets shall be used to fund a reduction in investments.
14. The assets of the IA shall be audited by the Fund’s external auditors and included in the Fund’s annual financial statements. Review of the Rules and Regulations and Conflict of Interest Policies
15. The Executive Board shall review these Rules and Regulations at least every 5 years.
II. Fixed-Income Subaccount
16. The investment objective of the Fixed-Income Subaccount 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. The assets in the Fixed-Income Subaccount shall be managed against the 1-3 year government bond benchmark, weighted to reflect the currency composition of the SDR basket.
17. The assets of the Fixed-Income Subaccount may be invested only in marketable obligations of members or in marketable obligations of international financial institutions. 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 deposits with the BIS and Medium-Term Instruments (MTIs) issued by the BIS. IA investments in the instruments specified above may only be made directly in the cash markets. Hedging is prohibited, as is the use of derivative instruments (including forwards, futures, options and swaps), short selling, or any form of financial leverage. Investments are limited to eligible investments that are denominated in SDRs or in the currencies included in the SDR basket.
18. Government and government agency bonds in which the Fixed-Income Subaccount invests shall be subject to a minimum credit rating by a major credit rating agency equivalent to A (based on Standard & Poor’s rating scale). If the respective rating threshold is breached, assets shall be divested within three months from the rating downgrade.
19. The assets of the Fixed-Income Subaccount shall be managed by external managers, provided that assets may also be invested by the Managing Director in marketable obligations of the BIS. The investment mandates for external mangers shall provide for active management against the 1-3 year government bond benchmark within risk parameters established by the Managing Director. Investments in BIS obligations shall be guided by the 1-3 year government bond benchmark.
III. Endowment Subaccount
20. The investment objective of the Endowment Subaccount is to achieve a long-term real return target of 3 percent in U.S. dollar terms. This is consistent with the objective of generating investment returns to contribute to the Fund’s income, while preserving the long-term real value of these resources. The subaccount’s real return shall be calculated by using the deflator that is used for purposes of the Fund’s administrative budget, the Global External Deflator (GED), provided that the U.S. consumer price index (US CPI) component of the GED shall be adjusted to use the actual US CPI instead of the projected US CPI.
Strategic Asset Allocation and Investment Strategy
21. No less than 90 percent of the Endowment Subaccount assets shall be managed passively (the “passively-managed portion”) under mandates that require the external managers to closely track benchmark indices selected by the Managing Director, with up to 10 percent of the Endowment Subaccount assets managed actively in accordance with paragraph 23 below (the “actively-managed portion”). Upon effectiveness of these Rules and Regulations, an amount equivalent to 95 percent of the Endowment Account assets shall be allocated to the passively-managed portion and an amount equivalent to 5 percent to the actively-managed portion.
22. The passively-managed portion shall be invested pursuant to the following strategic asset allocation (SAA) benchmark: 20 percent in developed market sovereign bonds; 20 percent in developed market inflation-linked bonds; 15 percent in developed market corporate bonds; 10 percent in emerging market bonds; 25 percent in developed market equities; 5 percent in emerging market equities; and 5 percent in real estate investment trusts (REITs).
23. The actively-managed portion may be invested only in the same asset classes as the SAA benchmark for the passively-managed portion, with a 65 percent share of fixed-income instruments and a 35 percent share for equities (including REITs) but no specific allocation requirements for each asset class within these two categories. The Managing Director, in consultation with the Executive Board, shall determine the investment strategy and investment arrangements for the actively-managed portion of the Endowment Subaccount, including the selection criteria and risk parameters for external managers, benchmark indices, the scope and instruments for currency hedging, the phasing of the actively-managed portion of the Endowment Subaccount, policy bands and rebalancing procedures, and additional key measures to avoid actual or perceived conflicts of interest.
24. The asset allocation benchmarks for both the passively- and actively-managed portions above shall not apply to temporary holdings of cash, bank deposits or short-term investments in cash instruments.
Rebalancing of the Passively-Managed Portion
25. The passively-managed portion of the Endowment Subaccount shall be rebalanced to the SAA benchmark (a) annually, either in the context of implementing the Fund’s annual income disposition decisions or, absent such disposition decisions affecting the Endowment Subaccount, at end-July of each year, and (b) when the actual weight of any of the asset classes of developed market sovereign bonds, developed market corporate bonds, developed market inflation-linked bonds or developed market equities deviates by more than
8 percentage points from the SAA benchmark, or by more than 4 percentage points for any of the asset classes of emerging market bonds, emerging market equities, and REITs. A scheduled annual rebalancing under (a) shall not take place if a rebalancing under (b) is completed within three months prior to that scheduled annual rebalancing.
Prohibited Investment Activities
26. Short selling and any form of financial leverage as well as direct investments in gold are not permitted for the Endowment Subaccount. Derivative instruments, including options, forwards, futures and swaps, are only allowed for hedging operations authorized under these Rules and Regulations or to minimize transaction costs in the context of subaccount rebalancing and benchmark replication.
27. The exchange rate risk for fixed-income instruments denominated in developed market currencies vis-à-vis the U.S. dollar shall be hedged for the passively-managed portion of the Endowment Subaccount. Permitted hedging instruments include, but are not limited to, currency forwards, futures, swaps, and options. Currency hedging is not permitted for other assets of the passively-managed portion of the Endowment Subaccount. Hedging by external managers of the actively-managed portion of the subaccount is permitted, but not required, as determined by the Managing Director in accordance with paragraph 23 above.
Minimum Credit Ratings for Bonds and Divestment
28. The Endowment Subaccount shall only invest in bonds that have the following minimum credit ratings by a major credit rating agency: for sovereign bonds, a rating equivalent to BBB+ (based on Standard & Poor’s rating scale); and, for corporate bonds, a rating equivalent to BBB- (based on Standard & Poor’s rating scale). If the respective rating threshold is breached, assets shall be divested within three months from the rating downgrade.
Investment Management Arrangements
29. The assets of the Endowment Subaccount shall be managed by external managers within mandates established by the Managing Director in accordance with these Rules and Regulations. The Managing Director is authorized to manage Endowment Subaccount assets (a) during the phasing of the Endowment Subaccount in accordance with paragraph 30 of these Rules and Regulations, and (b) on an interim basis where this is necessary following the termination of a manager and pending the transfer of the assets to a new manager.
Phasing of Initial Investments
30. The investment of the passively-managed portion of the Endowment Subaccount shall be phased over a three-year period, with equal amounts to be made available to external managers for investment at quarterly intervals. In case of exceptional market conditions, the Managing Director may decide to suspend the phasing or extend this period by up to one year, and to adjust the quarterly installments accordingly. With respect to the actively-managed portion, the phasing of investments shall be decided in the context of the investment strategy in accordance with paragraph 23 of these Rules and Regulations. Pending investment in accordance with the rules for the passively- and actively-managed portions of the Endowment Subaccount, the assets of the Endowment Subaccount shall be invested in accordance with paragraphs 17 to 19 of these Rules and Regulations, provided that the investment objective for these amounts shall be nominal capital preservation while generating income.
IV. Temporary Windfall Profits Subaccount
31. The assets of the Temporary Windfall Profits Subaccount shall be invested, pending their use in accordance with Executive Board Decision No. 15228-(12/95), adopted September 28, 2012, in accordance with paragraphs 17 to 19 of these Rules and Regulations, provided that the investment objective of this subaccount shall be nominal capital preservation while generating income.
32. The Temporary Windfall Profits Subaccount shall be terminated after the transfer in accordance with Executive Board Decision No. 15228-(12/95) has been completed. Any remaining assets, including any retained income, shall be transferred to the Endowment Subaccount for investment.
Review of the Fund’s Income Position for FY 2012 and FY 2013-14—Transfer of Investment Income for FY 2012 to General Resources Account
The income of the Investment Account for FY 2012 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 2012. (EBS/12/51, 04/12/12)
Decision No. 15145-(12/39),
April 26, 2012
Review of the Fund’s Income Position for FY 2013 and FY 2014—Transfer of Investment Income for FY 2013 To General Resources Account
The income of the Fixed Income Subaccount of the Investment Account for FY 2013 shall be transferred to the General Resources Account for use in meeting the expenses of conducting the business of the Fund during FY 2013. (EBS/13/38, 04/15/13)
Decision No. 15378-(13/37),
April 26, 2013
Review of the Fund’s Income Position for FY 2013 and FY 2014—Placement of FY 2013 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 2013 shall be placed to the Fund’s Special Reserve and General Reserve as follows: Net income not attributable to surcharge income shall be placed to the Fund’s Special Reserve, and net income attributable to surcharge income shall be placed to the General Reserve. (EBS/13/38, 04/15/13)
Decision No. 15379-(13/37),
April 26, 2013
Review of the Fund’s Income Position for FY 2013 and FY 2014—Transfer of Currencies to the Investment Account for FY 2013
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, 2013 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 July- September 2013. The currencies transferred to the Investment Account pursuant to this decision shall be used for immediate investment in the Fixed Income Subaccount in accordance with the Rules and Regulations for the Investment Account. (EBS/13/38, 04/15/13)
Decision No. I5380-(I3/37),
April 26, 2013
The Acting Chair’s Summing Up—Broadening the Fund’s Investment Mandate—Additional Considerations Executive Board Meeting 12/60, June 20, 2012
Executive Directors welcomed the opportunity to continue the discussion on implementing the Fund’s expanded investment authority through an endowment funded from the profits of limited gold sales. They broadly supported the proposed investment strategy and governance framework, and generally considered them adequate to reduce the main risks of actual or perceived conflicts of interest. Directors emphasized the need to move expeditiously to complete the remaining implementation issues this year.
Directors underscored that, given the Fund’s central role in promoting global financial stability, strong protection against actual or perceived conflicts of interest involving the Fund’s investment activities is critical. They agreed that the mitigating factors taken into account in the lead-up to approval of the new income model in 2008, including those identified in the context of an independent external review, remain valid to address conflicts of interest. In particular, Directors supported the proposed clear separation of responsibilities between the Executive Board, management, and external managers, as well as the exclusion of certain investment activities that by their very nature would be more susceptible to the appearance of conflict. They noted that the steps laid out in SM/12/111, including the outsourcing of specific investment decisions to external managers and the largely passive investment strategy, would further help prevent conflicts of interest.
Directors acknowledged that the 3 percent real return target, which had been endorsed by most Directors in the previous discussion, would be difficult to achieve in the near to medium term, given historically low yields on highly-rated government bonds. Nevertheless, and noting the long horizon of the endowment, most Directors considered it appropriate to retain long-term capital market assumptions to guide portfolio design, although a few were of the view that adopting a lower target for real return would be more prudent. Directors continued to support a strategic asset allocation along the lines of the “conservative diversified portfolio.” They noted that the return target and the strategic asset allocation could be revisited in the future, with a few calling for more frequent reviews than the envisaged 3-5 years. Differing views were expressed with respect to allocation across asset classes and geographical diversification based on risk-return considerations. On balance, however, most Directors considered that the proposed portfolio provides a reasonable basis for initiating the endowment, and could be adapted over time in light of experience and evolving market developments.
Directors agreed that the endowment’s investment program should be phased in over a sufficiently long period of time to mitigate the risk of short-term losses. With a view to building a cushion and preserving the real value of the endowment, Directors also saw merit in a conservative approach to payouts in the early stages of implementing the endowment, and looked forward to further staff work in this area. A number of Directors pointed to the possibility of delaying the initiation of payouts if warranted.
As regards implementation arrangements for the investment strategy, Directors agreed that the endowment should build on the current approach used for the Investment Account. They supported using external managers with a mandate to track widely available benchmarks or, where warranted, appropriately customized benchmarks. Most Directors also supported active management for a very limited portion of the portfolio in cases of clear opportunities to add value, noting that this could also facilitate the evolution of the Fund’s investment approach over time. While a few cautioned against taking such an approach at this stage, a few others saw scope for more active investment strategies. In order to ensure that the portfolio remains within the broad risk parameters to be adopted by the Board, Directors broadly supported a mechanistic, rules-based rebalancing of the portfolio to the strategic asset allocation. Most Directors supported the proposed policy bands that would trigger a portfolio rebalancing, although a few Directors preferred narrower bands and asked that staff revisit the width of the proposed bands.
Directors broadly supported the governance framework proposed in the staff paper, which builds on the current institutional arrangements. They agreed that the Board would continue to focus on strategic aspects of the Investment Account portfolios, determining their overall purpose, the strategic parameters for their operations, and reviewing regular financial reports for the Investment Account. With respect to the endowment portfolio, the Board would also determine its key strategic direction, including by setting its base currency and return target, strategic asset allocation and eligible and ineligible asset classes, and its spending policy. A few Directors called for greater Board engagement in the initial stages. A few Directors also saw merit in creating a Board-level committee to help the Board in the discharge of these duties.
Directors agreed that management would continue to have responsibility for implementing the strategy established by the Executive Board. Most also saw merit in management’s establishment of an Investment Oversight Committee, with day-to-day responsibility left to the Investment Unit in the Finance Department. Some Directors encouraged the Fund to draw from the experiences of the Investment Office, which manages the Staff Retirement Plan.
Directors looked forward to staff proposals on the remaining strategic implementation issues, including the base currency of the endowment, the scope for currency hedging, the phasing of initial investments, the payout policy, and a possible minimum credit rating threshold. These and other relevant considerations should be embedded expeditiously into a proposal for new Rules and Regulations for the expanded investment authority of the Investment Account.
June 27, 2012
Use of Gold Sales Profits in the Investment Account
The Executive Board approves the exclusion of gold sales profits from the 1-3 year benchmark applied to the Investment Account, as set out in paragraph 16 of EBS/12/105 (8/7/2012). (EBS/12/105, 08/07/12)
Decision No. 15223-(12/82),
August 14, 2012