Article XV, Section 2
- International Monetary Fund. Legal Dept.
- Published Date:
- August 2017
Valuation of the Special Drawing Right
The Chairman’s Summing Up—Review of the Method of Valuation of the SDR Executive Board Meeting 15/109, November 30, 2015
Executive Directors concluded the quinquennial review of the method of valuation of the Special Drawing Right (SDR). They re-affirmed the existing criteria for currency selection for the SDR basket—the export criterion and the freely usable criterion—and applied these two criteria in the review.
Directors noted that the ranking of the largest exporters remains broadly unchanged since the last review. They observed that China, as the third-largest exporter, continues to meet the export criterion for SDR basket inclusion, and noted the narrow margin separating Japan and the United Kingdom, the fourth- and fifth-largest exporters, respectively. Recognizing that the demand for a currency as a reserve asset reflects principally the economic position of the area where a currency is issued, Directors agreed that the currency-based approach already applied to monetary unions should be used for all currencies when assessing the export criterion.
Directors noted the substantial increase in the international use and trading of the renminbi (RMB) since the last review, across all the indicators used to inform the assessment. They agreed that the RMB can now be considered “in fact, widely used to make payments for international transactions” and “widely traded in the principal exchange markets.”
Directors commended the Chinese authorities for implementing substantial reforms that have supported the internationalization of the RMB and would facilitate its use in Fund operations. They recognized some remaining operational challenges but expected their impact to be mitigated by a number of factors, including the unencumbered access of Fund members and SDR users to both onshore and offshore markets. Directors stressed the importance of continuing and deepening the recent reforms and addressing any operational issues that may arise.
In light of the above considerations, Directors agreed that, effective October 1, 2016, the RMB is determined by the Fund to be freely usable. Directors further agreed that upon the effectiveness of this determination, the RMB will meet both criteria for SDR inclusion and will be added as a fifth currency in the SDR basket, in addition to the U.S. dollar, euro, Japanese yen, and pound sterling. Directors considered that expanding the basket to five currencies is appropriate, given that the relative rankings of the export shares of Japan and the United Kingdom have switched over time. They also viewed the administrative burden of expanding the basket by one currency as manageable. Authorities of all currencies represented in the SDR basket, which would now include the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the Fund, its membership and other SDR users in their currencies.
Directors agreed that in order for the SDR basket to reflect the characteristics of currencies rather than members, the currency-based approach applied since 2000 to monetary unions should be applied to all currencies when determining currency weights. They welcomed the weighting formula proposals as they address issues recognized in previous reviews, in particular by increasing the share of financial variables relative to exports, broadening the scope of the financial variables to cover private sector transactions, and setting fixed weights for exports and financial variables.
Specifically, Directors supported a formula consisting of equal weights on exports and a financial variable, with the latter comprising in equal shares official holdings of foreign exchange, foreign exchange turnover, and the sum of international bank liabilities and international debt securities. They viewed this formula as simple and transparent, while preserving broad stability in the composition of the basket and continuity in the method of valuation. Directors agreed that where data for any variable in the weighting formula are not available from uniform sources or for each year of the relevant valuation period, appropriate alternative data sources shall be used and the average values of available data shall be calculated as inputs. They underscored the importance of making efforts to address remaining data gaps, including in the currency coverage of the COFER database, ahead of the next SDR review.
Directors considered that the financial instruments representing the current four currencies used in determining the SDR interest rate remain appropriate. For the RMB, they regarded the three-month benchmark yield for China Treasury bonds as broadly reflecting conditions in the onshore money market while having a credit risk profile of the highest quality. Accordingly, Directors agreed that it is the most appropriate RMB-denominated instrument and meets the established characteristics for instruments in the SDR interest rate basket, and thus decided to add it to the basket.
Directors noted that when the new SDR currency basket comes into effect, the SDR interest rate is likely to be affected, as on past occasions. They looked forward to a comprehensive discussion of the implications of any such changes in the SDR interest rate in the context of the next review of the Fund’s income position in April 2016. This would allow any relevant policy decisions to be taken well in advance of the effectiveness of the new SDR basket.
Directors acknowledged the lead time necessary for the Fund, its members, and other SDR users to adjust to today’s decisions. They thus agreed that all of the above changes would take effect as of October 1, 2016.
Directors agreed that the SDR basket be established for five years, consistent with past practice. Accordingly, following their earlier decision to extend the current SDR basket through September 2016, Directors agreed that the next review of the method of valuation of the SDR should take place by September 30, 2021, unless developments in the interim justify an earlier review.
November 30, 2015
Review of the Method of Valuation of the SDR—Freely Usable Currency—Renminbi
Pursuant to Article XXX(f), and after consultation with the People’s Republic of China, the Fund determines that, effective October 1, 2016, and until further notice, the Chinese renminbi is a freely usable currency. (SM/15/278, Sup. 2, 11/25/15)
Decision No. 15890-(15/109),
November 30, 2015
Review of the Method of Valuation of the SDR—Method of SDR Valuation and Amendment of Rule T-1(C)
A. Method of SDR Valuation
1. The value of the special drawing right shall be determined on the basis of the five currencies issued by Fund members, or by monetary unions that include Fund members (“monetary unions”), whose exports of goods, services, and income credits (“Exports”) had the largest value during the five-year period ending December 31, 2014, or for any subsequent revision, during the most recent five calendar-year period for which the required Exports data are readily available, and which have been determined by the Fund to be freely usable currencies in accordance with Article XXX(f) of the Articles of Agreement. In the case of a monetary union, the determination of the value of Exports shall exclude trade among members that are part of the union. In the case of a member with more than one currency, the determination of the value of Exports shall be based, for each currency, on trade by the member’s economic region for which the currency is legal tender.
2. The percentage weight of each currency selected in accordance with paragraph 1 above for the SDR basket composition shall be equal to the sum of:
(a) One half of the share of the member or monetary union issuing that currency in the total exports of the members or monetary unions issuing the currencies as calculated in accordance with paragraph 1 above; and
(b) One sixth of the share of that currency in the total value of balances of the currencies selected in accordance with paragraph 1 above, held by monetary authorities that are not issuers of the relevant currency, and in the case of the currency of a monetary union, by the monetary authorities of members other than those forming part of the monetary union, at the end of each year of the five-year period ending December 31, 2014, and thereafter at the end of each year of the relevant five-year period referred to in paragraph 1 above;
(c) One sixth of the share of that currency in the total value of foreign exchange market turnover of the currencies selected in accordance with paragraph 1 above, during the five-year period ending December 31, 2014, and thereafter during each relevant five-year period referred to in paragraph 1 above; and
(d) One sixth of the share of that currency in the total value of international banking liabilities and international debt securities denominated in the currencies selected in accordance with paragraph 1 above, at the end of each year of the five-year period ending December 31, 2014, and thereafter at the end of each year of the relevant five-year period referred to in paragraph 1 above. In the case of a monetary union, international banking liabilities and international debt securities shall be determined on the basis of the monetary union as one economic region. In the case of a member with more than one currency, these indicators shall be determined on the basis of the economic region of the member for which the currency in question is legal tender.
3. In accordance with the principles set forth in paragraphs 1 and 2 above, effective October 1, 2016, the value of one special drawing right shall be the sum of the values of specified amounts of the five currencies listed below. These amounts shall be determined on September 30, 2016 in a manner that will ensure that, at the average exchange rates for the three-month period ending on that date, the shares of each of the five currencies in the value of the special drawing right correspond to the weights specified below.
|Currency||Weight (in percent)|
4. The list of the currencies that determine the value of the special drawing right, and the amounts of these currencies, shall be revised with effect on October 1, 2021 and thereafter on the first day of each subsequent period of five years in accordance with the following principles, unless the Fund decides otherwise in connection with a revision:
(a) The currencies determining the value of the special drawing right shall be determined in accordance with paragraph 1 above, provided that a currency shall not replace another currency included in the list at the time of the determination unless the value of Exports of the member or monetary union, whose currency is not included in the list, during the relevant period exceeds by at least one percent that of a member or a monetary union issuing a currency included in the list.
(b) The amount of the five currencies referred to in (a) above shall be determined on the last working day preceding the effective date of the relevant revision in a manner that will ensure that, at the average exchange rates for the three-month period ending on that date, the shares of these currencies in the value of the special drawing right correspond to percentage weights for these currencies, which shall be established for each currency in accordance with (c) below.
(c) The percentage weights shall be established in accordance with paragraph 2 above. The percentage weights shall be rounded to the nearest 1 percent or as may be convenient. Adjustments to currency weights resulting from the above formula shall be made, if necessary to ensure that the rounded currency weights sum to one hundred percent, in a manner that has the least impact on relative weights.
5. The amounts of the currencies under paragraphs 3 and 4 above shall be determined in a manner that will ensure that the value of the special drawing right in terms of currencies on the last working day preceding the five-year period for which the determination is made will be the same under the valuation in effect before and after revision (“same value”), and shall be calculated in accordance with the following guidelines:
(a) The currency amounts calculated for the new basket will be rounded to five significant digits based on the sixth significant digit. If necessary to achieve the same value, an adjustment will be made to the amount of the currency against which the values of the other SDR basket currencies are determined in accordance with Rule O-2.
(b) If the calculations under (a) do not yield the same value in five significant digits, the calculations shall be made by applying the same guidelines but rounding currency amounts to six significant digits based on the seventh significant digit.
B. Amendment of Rule T-1(c)
Effective October 1, 2016, Rule T-1(c) of the Fund’s Rules and Regulations shall be amended by inserting “Chinese renminbi: Three-month benchmark yield for China Treasury bonds as published daily by the China Central Depository and Clearing Co., Ltd.” after “Euro: Three month spot rate for euro area central government bonds with a rating of AA and above published by the ECB”. (SM/15/278, Sup. 2, 11/25/15)
Decision No. 15891-(15/109),
November 30, 2015,
as amended by Decision No. 16033-(16 /17),
July 20, 2016
Review of the Method of Valuation of the SDR—Amendment to Rule O-1
Effective October 1, 2016, Rule O-1, which specifies the amounts of the currencies in the SDR valuation basket, shall be amended to read as follows:
“Rule O-1. The value of the SDR shall be the sum of the values of the following amounts of the following currencies:
(SM/15/278, Sup. 5, 09/30/16)
Decision No. 16061-(16/91),
September 30, 2016
Method of Collecting Exchange Rates for the Calculation of the Value of the SDR for the Purposes of Rule O-2(a)
1. For the purpose of determining the value of the United States dollar in terms of the special drawing right pursuant to Rule O-2(a), the equivalents in United States dollars of the amounts of currencies specified in Rule O-1 shall be based on spot exchange rates against the United States dollar. For each currency the exchange rate shall be the mid-market rate, as provided to the Fund by the Bank of England, based on spot exchange rates observed at around noon London time.
2. If the exchange rate for any currency cannot be obtained as described in paragraph 1 above, the rate shall be the mid-market rate, as provided to the Fund by the Federal Reserve Bank of New York, based on spot exchange rates observed at around noon London time or, if not available, the mid-market rate based on spot exchange rates observed at around noon New York time.
3. If the exchange rate for any currency cannot be obtained as described in paragraph 1 or 2 above, the rate shall be the mid-market rate, as provided to the Fund by the European Central Bank based on spot exchange rates observed at around noon London time or, if not available, the market exchange rates observed at 2:15 p.m. Central European Time.
4. If the rate for any currency against the United States dollar cannot be obtained directly in any of these markets, the rate shall be calculated indirectly by use of a cross rate against another currency specified in Rule O-1.
5. If on any day the exchange rate for a currency cannot be obtained in accordance with paragraph 1, 2, 3, or 4 above, the rate for that day shall be the latest rate determined in accordance with paragraph 1, 2, 3, or 4 above, provided that after the second business day the Fund shall determine the rate. (EBS/16/100, 10/19/16)
Decision No. 6709-(80/189) S,
December 19, 1980,
as amended by Decision Nos. 12157-(00/24) S, March 9, 2000, and
October 26, 2016