SDRs and Claims Denominated in SDRs

International Monetary Fund
Published Date:
January 1976
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A distinction must be made between the legal character of the SDR and of SDR-denominated claims. SDRs are allocated by the Fund only to participants in the Special Drawing Account, and they may be held only by participants, the Fund, or “other holders” of SDRs.142 A participant is entitled to have the Fund designate another participant to receive SDRs, and the designated transferee is bound to accept them. It is expected that a participant will not transfer SDRs unless it has a need to use reserves, but the Fund does not monitor transactions before they are carried out to determine that there is a need to use reserves.143 SDRs can be used directly to settle a few obligations to the General Account.144 SDRs cannot be used in the direct settlement of obligations between participants. Settlement can be made between them only by transferring SDRs for currency and then using the currency to discharge the obligation. There are a few transactions that participants are authorized, or may be permitted, to enter into by agreement between them, and therefore without the necessity for designation of the transferee by the Fund.145 The operations and transactions in which other holders may engage are governed by the terms and conditions adopted by the Fund when prescribing that a particular entity may be an other holder. The provisions relating to the characteristics and use of SDRs146 will be liberalized by the second amendment of the Articles in order to help move the SDR to the position of the principal reserve asset of the international monetary system.147

The transferor of SDRs is not entitled to receive the currencies in the basket. A participant that transfers SDRs to a designated transferee is entitled, under the present Articles, to receive one or more of a small number of currencies that are deemed to be “currency convertible in fact.”148 In a transaction that participants are able to enter into by agreement, the transferee may provide any currency that is acceptable to the transferor.149 The amount of currency that the transferor receives is determined by the valuation of the SDR, and the value received will be the same whatever the currency that is provided.150

SDRs are reserve assets because a participant has an assured right to use them to obtain currencies from other participants with which to support its own currency. The Fund has an obligation to ensure that SDRs can be used in this way. The SDR can also be regarded as a unit of account because it measures the amount of currency that holders can get for it. If any entity, public or private, including a participant or an other holder, enters into a contract under which it has rights denominated in SDRs, the resulting claims are not SDRs issued by the Fund or governed by the Articles. There may be a tendency to call the resulting claims SDRs, but they would not be treated by the Fund as SDRs. The claims are subjected to the Fund’s method of valuation of the SDR in accordance with agreement between the parties. Similarly, the parties determine the other legal incidents of the claim, including the currency or currencies of payment. Contracting parties are not restrained by the Articles in determining the currencies of account or of payment, although their freedom may be limited by domestic law.

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