Chapter

APPENDIX I. SDRs: Allocation, Valuation, Interest Rate, Arrangements for Transactions, and Accounting

Author(s):
International Monetary Fund
Published Date:
June 1995
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A. Allocation of SDRs

Article XVIII, Section 2(a) provides that “Decisions of the Fund to allocate or cancel special drawing rights shall be made for basic periods which shall run consecutively and shall be five years in duration.” It also allows the Fund to provide for the duration of a basic period to be other than five years. On the first occasion to allocate SDRs, it was decided that the basic period would be for three years starting on January 1, 1970.

The Board of Governors, on a proposal by the Managing Director, decided on October 3, 1969 at its Annual Meeting to provide for a total allocation of approximately SDR 9.5 billion over the three years 1970-72. Three annual allocations were made to participants on January 1 of each year 1970 to 1972, calculated as a uniform percentage of each participant's quota in the Fund on the day before each allocation.

The second basic period began on January 1, 1973 and was for five years. The Fund did not decide to allocate SDRs during the second basic period.

The third basic period, which started on January 1, 1978, had a duration of four years, and it was decided to allocate SDRs for three years of this period. Based on a proposal by the Managing Director, the Board of Governors adopted a resolution,38 which became effective on December 11, 1978, to make allocations of SDR 4 billion each year from 1979 through 1981. The Fund allocated SDR 4,032.7 million on January 1, 1979, SDR 4.033.3 million on January 1, 1980, and SDR 4,052.5 million on January 1, 1981 in proportion to the quotas. These allocations and those in the first basic period bring total SDRs in existence to SDR 21,433 million.

In the fourth and fifth basic periods, each of which had a duration of five years (January 1, 1982-December 31, 1986 and January 1, 1987-December 31, 1991, respectively), the Fund did not allocate SDRs.

In the current basic period, which began on January 1, 1992, the question of an allocation of SDRs is still under examination.

B. Valuation of SDRs

On January 1, 1981, the Fund began to use a basket of five currencies for determining the SDR's valuation. As noted below, the same basket is also used to determine the interest rate on the SDR. A basket of 16 currencies had been in use from July 1, 1974 to December 31, 1980.

The currencies that determine the value of the SDR are reviewed every five years so as to ensure that the currencies included in the basket are those of the five member countries of the Fund with the largest exports of goods and services during the five-year period ending 12 months before the effective date of the revision. The weight of each of these currencies in the basket is reviewed at the same time to ensure that they broadly reflect the relative importance of each currency in international trade and reserves, based on the value of exports of goods and services of each country and the balances of these currencies held as reserves by members of the Fund over the same five-year period. The value of the new basket must equal the value of the old one on the last business day preceding the day the new basket becomes effective.

Using the above-mentioned guidelines, the basket that was in effect for the period January 1, 1981-December 31, 1985 was replaced with another basket on January 1, 1986, which remained in effect through December 31, 1990. It was then replaced with a new one on January 1, 1991, which will be in effect through December 31, 1995. Although the currencies composing the baskets have remained unchanged, namely the U.S. dollar, the deutsche mark, the Japanese yen, the French franc, and the pound sterling, the amounts of these currencies have been revised reflecting the above-mentioned factors. The weights of these currencies in the present basket (i.e., the weights on December 31, 1990) and the derived currency amounts (which will remain fixed until December 31, 1995) are as follows:

CurrencyWeight (percent)Currency Amount
U.S. dollar400.5720
Deutsche mark210.4530
Japanese yen1731.8000
French franc110.8000
Pound sterling110.0812

The above currency amounts were derived by converting the percentage weights into units of each of the five currencies using exchange rates in London at noon averaged over the three months ended December 31, 1990. The set of currency units so determined satisfied the condition that the value of the SDR in terms of any currency on December 31, 1990 be the same under the valuation in effect before and after the revision.

The SDR/U.S. dollar exchange rate is determined by converting the amount of each currency making up the basket into U.S. dollar equivalents, using the market rates of exchange each day.39 The U.S. dollar equivalents are added up, and the reciprocal of the total, rounded to six significant figures, establishes the SDR value of the U.S. dollar. Table 1 illustrates the calculation of the SDR value for September 1, 1995. Being a weighted average of the exchange rates of the five major currencies, the value of the SDR tends to be more stable than any single currency in the basket.

Table 1.SDR Valuation on September 1, 1995
CurrencyCurrency Amount (1)Exchange Rate on September 1, 1995 (2)U.S. Dollar Equivalent (3)
Deutsche mark0.45301.467500.308688
French franc0.80005.058500.158150
Japanese yen31.800097.670000.325586
Pound sterling0.08121.551500.125982
U.S. dollar0.57201.000000.572000
1.490406
SDR value of US$1.00 = 0.670958
Note:Column 1: The currency components of the basket under Rule O-1.Column 2: Exchange rates in terms of currency units per U.S. dollar, except for the pound sterling, which is expressed as U.S. dollars per pound sterling.Column 3: The U.S. dollar equivalents of the currency amounts in Column 1 at the exchange rates in Column 2; that is, Column 1 divided by Column 2 except for the pound sterling, for which the amounts in the two columns are multiplied.

Once the SDR value for the U.S. dollar has been determined, the exchange rate for any other currency in terms of the SDR is calculated by using the SDR value of the U.S. dollar and the representative rate for the currency in terms of the U.S. dollar, as required under Rule O-2 of the Fund's Rules and Regulations and as defined by the Fund after consultation with the currency issuer.

SDR rates for more than forty currencies are made available to the public each day. These rates are carried daily by several wire services, for example, Reuters, AP Dow Jones, AFP, and UPI, and are published monthly in International Financial Statistics. Some daily newspapers and financial periodicals also publish the SDR rates for major currencies, for example, Journal of Commerce, Financial Times of London, London Times, Agence economique et financiere, Neue Zuercher Zeitung, Asian Wall Street Journal, The Economist, and the Wall Street Journal. The daily SDR value of the U.S. dollar is also available by calling the telephone number (202) 623-7171.

C. Rate of Interest on SDRs

Since July 1974, the rate of interest on the SDR has been based on a combined market rate of interest calculated by using interest rates on selected short-term instruments in the domestic money markets of five countries. Since January 1981, these five countries have been the same as those whose currencies are included in the SDR valuation basket.40 The rates and instruments are as follows: the market yield on three-month U.S. treasury bills, the three-month interbank deposit rate in Germany, the three-month rate for treasury bills in France, the three-month rate on certificates of deposit in Japan, and the market yield on three-month U.K. treasury bills.41

The SDR interest rate is a specified percentage of the combined market rate. The method used to calculate the combined market rate is as follows: the reported yield or interest rate on the instrument for each component currency is multiplied by the number of units of that currency in the basket, and the product is then multiplied by the value of the currency unit in terms of the SDR; the resulting products for the five currencies are then added together. The total is rounded to two decimal places. Since May 1981, the SDR interest rate has been 100 percent of the combined market rate thus calculated.

Until August 1, 1983, the SDR interest rate was set quarterly on the basis of average interest rates on the 15 business days preceding the last 2 business days of the month before the calendar quarter for which the SDR interest rate applied. Since then, the SDR interest rate has been calculated weekly each Friday for the week beginning on the ensuing Monday. Table 2 illustrates the calculation of the SDR interest rate for the week of September 4, 1995-September 10, 1995.

Table 2.Calculation of the Combined Market Rate of Interest Under Rule T-1 (c), and SDR Interest Rate for the Week September 4, 1995 to September 10, 1995
CurrencyCurrency Amount (1)Interest Rate on Friday September 1, 1995 (2)Exchange Rate Against the SDR on Friday September 1, 1995 (3)Product (1x2x3)
Deutsche mark0.45304.30900.457212000.8925
French franc0.80005.82000.132522000.6170
Japanese yen31.80000.78000.006874570.1705
Pound sterling0.08126.67171.040990000.5639
U.S. dollar0.57205.45000.670958002.0916
Total4.3355
SDR interest rate 4.34
Note:Column 1: The currency components of the valuation basket.Column 2: The reported yield or interest rate on the instrument for each component currency.Column 3: The SDR value of each unit of component currency.Column 4: The product of the first three columns.

D. Arrangements for SDR Transactions

1. Introduction

Participants and prescribed holders of SDRs wishing to buy or sell SDRs generally seek the Fund's assistance in arranging SDR transactions. The Fund arranges such transactions in a manner that, to the greatest extent possible, meets the requirements or preferences of the transactors involved. The Fund has been aided, in this respect, by standing arrangements that some holders of SDRs, in a spirit of cooperation with the Fund and with the aim of contributing to the SDR's liquidity, have established with the Fund. These arrangements authorize the Fund to arrange transactions on behalf of the parties establishing them subject to the terms and conditions specified by these holders. When these standing arrangements authorize the Fund to arrange both sales and purchases of SDRs on behalf of the parties to the arrangements, they are called two-way (or buying and selling) arrangements for SDR transactions. Other standing arrangements may authorize the Fund to arrange either sales or purchases of SDRs on behalf of the parties to the arrangements, and they are called one-way arrangements (or selling or buying arrangements, as appropriate) for SDR transactions.42 Standing arrangements can have a revolving or nonrevolving character (see Section 2.a below).

These buying and/or selling arrangements have facilitated transactions by agreement requested by participants or prescribed holders by eliminating the time-consuming need to consult prospective buyers or sellers about each transaction. Such arrangements have also provided the Fund with a large degree of flexibility in matching the desired sales and/or purchases of SDRs by participants and prescribed holders. This applies, for example, to participants who wish to use SDRs without recourse to the designation mechanism and also to prescribed holders who cannot use SDRs in transactions with designation and must, therefore, rely on transactions by agreement to obtain currency. Since September 1987, it has been possible to meet all requests by members for sales of their SDRs (from their holdings or from purchases made from the Fund) through transactions by agreement, and, thus, no recourse to designation has been necessary. The relegation of the designation mechanism to a precautionary and contingency device has been made possible by the existence of SDR buying arrangements. Increasing the ability of prescribed holders to use SDRs, when needed, makes it more attractive for them to hold SDRs.

2. Operational Features of SDR Buying and/or Selling Arrangements

Arrangements for SDR transactions normally determine the range within which the member's SDR holdings are to be maintained, the minimum and maximum amounts of SDRs available for purchase and/or sale in any individual transaction, the currency or currencies acceptable in exchange for SDRs, the exchange rate to be used, and the effective period of the arrangement.

(a) Range of arrangements

In revolving one-way arrangements, members having the arrangements agree to sell or buy SDRs (depending on whether they have a selling or buying arrangement) provided that their SDR holdings remain above certain levels (in selling arrangements) or do not exceed certain levels (in buying arrangements). In revolving two-way arrangements, members having the arrangements specify both the maximum and minimum levels of their SDR holdings and hence the ranges within which the members are willing to buy and sell SDRs. In nonrevolving arrangements, members having the arrangements specify certain amounts of SDRs that they are willing to sell or buy.

(b) Currency

In both one-way and two-way arrangements, members specify the currency or currencies against which they are willing to buy and/or sell SDRs.43

(c) Exchange rate and settlement provisions

In accordance with Rule P-6 of the Fund's Rules and Regulations, the exchange rate in SDR transactions by agreement shall be the Fund's official SDR exchange rate (unless otherwise authorized by the Fund), and the settlement44 shall take place on the date of the agreement or any business day within three business days from that date, as agreed by participants. Thus, members having the arrangements can specify whether they are willing to buy and/or sell SDRs by using the exchange rate on the same day as the value date or the exchange rate of one day, two days, or three days prior to the value date.

(d) Size of individual transactions

Members having the arrangements can specify the minimum and/or maximum size for a single transaction.

(e) Period of arrangement

Members who are parties to the arrangements can determine the periods within which the arrangements remain in effect (although thus far they have generally opted for open-ended arrangements).

3. Effects of Arrangement

Arrangements for SDR transactions have facilitated the Fund's financial operations in a number of ways. For example, buying and/or selling arrangements have facilitated sales of SDRs by members received in purchases and the acquisition of SDRs required by members for settlement of obligations to the Fund. Moreover, Fund repayments of its borrowing can be made in SDRs, and often creditors would like to use all or part of the SDRs thus received. The existence of the arrangements for SDR transactions has facilitated these sales by creditors and has therefore enhanced the ability of the Fund to assign the SDR as a medium for repayments of its borrowings, providing another element of flexibility to the Fund's financial operations. Another effect of the arrangements for SDR transactions has been the increased sense of security they have provided to prescribed holders. As a result, these holders have become more active in SDR sales, purchases, and other operations.

E. Accounting for SDR Allocations and Holdings

Transactions and operations in SDRs are recorded and administered in the SDR Department. Although there are no currency counterparts to allocations and holdings in the SDR Department, members are encouraged to account in a transparent manner for the assets and liabilities arising out of their participation in the SDR Department in the balance sheet of the depository (usually the member's central bank).

Although the Fund does not recommend any particular accounting treatment for SDR allocations and holdings by participants and prescribed holders, it does recommend that holders be guided mainly by generally accepted accounting standards, and their own legislation, policies, and practices with respect to the accounts of SDRs and other external reserve assets. However, new participants and prescribed holders may find it useful to consider the examples reproduced below in determining their own methods of accounting for SDRs. Included in these examples are accruals and their treatment in the financial statements to reflect the participants' true positions vis-a-vis the Fund at any time.

SDRs allocated by the Fund to a participant (prescribed holders do not receive allocations) are owned by the participant, and the Fund expects the participant to undertake the ensuing legal and financial obligations. If the participant's central bank is authorized to act as fiscal agency under Article V, Section 1 on behalf of the government, it would normally act in this capacity with respect to SDRs. Such a central bank may be required, by whatever domestic legal steps are necessary, to meet the government's obligations under the Fund's Articles of Agreement, including those arising because of participation in the SDR Department, and may exercise the rights of the member as a participant. If appropriate domestic arrangements are made along these lines, the central bank can consider these rights and obligations as its immediate assets and liabilities. Sample entries set out below are based on the assumption that such arrangements have been made and that the allocations and movements of SDRs are recorded in the accounts of the central bank, thereby avoiding any duplicate accounting through the government's records. However, if a participant, in accordance with its domestic laws and practices, decides that its accounts of SDRs should be in the accounts of the appropriate government ministry or of some combination of the ministry and the central bank, these sample entries will need to be modified and adapted to meet the participant's particular legal and accounting requirements.

The following accounting entries and the sample balance sheets are shown in a simplified form and do not include the possible accounts and entries in a central bank's accounting of transactions with respect to the GRA. Also, the entries are not exhaustive and would be subject to various modifications by participants who may wish to record other information, such as a description of the type of transaction or operation, the foreign exchange received or used, and prevailing exchange rates. The item “Allocations of SDRs” that appears on the liabilities side of the central bank's balance sheet as shorthand for “net cumulative allocations” will vary only when allocations or cancellations are made. The item “Holdings of SDRs” will change with every operation or transaction, and the central bank's asset, liability, and income or expense accounts will be affected by the various movements of SDRs in respect of such operations or transactions. The impact of some common transactions and operations in SDRs on a central bank's balance sheet is illustrated below:

1. Allocations of SDRs

  • The accounting entry for an allocation of SDRs to a participant can be recorded as follows (assuming an allocation of SDR 50):

Holdings of SDRsDebitCredit
Allocations of SDRs5050
  • The accounts in which these are recorded are indicated by asterisks (*) in the following sample balance sheets.

CENTRAL BANK BALANCE SHEET
ASSETSLIABILITIES
External assetsCurrency issue185
Gold50Gov’t deposits20
*Holdings of SDRs50Other deposits150355
Foreign exchange250
Other securities50400*Allocations of SDRs50
Other assets250Other liabilities100
CAPITAL AND
PROFIT (OR LOSS)
Capital45
Profit (or loss)100145
TOTAL LIABILITIES
TOTAL ASSETS650AND CAPITAL650
  • The above entries are suggested as they would correspond to the account titles that the Fund uses in the accounts of the SDR Department. Thus, when the central bank sets up its asset account “Holdings of SDRs” to record the receipt of SDRs under allocations, the entry will correspond to the entry in the SDR Department “Holdings of SDRs by Participants.” The entry in the central bank's records in its liability account “Allocations of SDRs” will correspond to the entry in the SDR Department “Net Cumulative Allocations of SDRs to Participants.” This procedure may facilitate a participant's reconciliation of the balances of its SDR holdings with the monthly statements it will receive from the Fund.

  • The asset item “Holdings of SDRs” should be included as an external asset because of the reserve characteristics of the SDR. With regard to the corresponding liability entry, this represents the obligations of the participant that would arise, for example, if its participation in the SDR Department were to be terminated in accordance with Article XXIV, or upon the liquidation of that Department under Article XXV.

2. Transfers Among Participants and Prescribed Holders

In addition to receiving allocations from the Fund, a participant may use or obtain SDRs in transactions or operations with other participants or prescribed holders.

If a participant receives SDRs from another participant in a transaction with designation or by agreement, it must provide currency in exchange and its foreign exchange holdings will be reduced accordingly. Conversely, the participant that has sold the SDRs will add to its foreign exchange holdings.

  • If a participant or prescribed holder receives SDRs from another holder in exchange for currency (or in discharge of a financial obligation), its SDR holdings would increase while its foreign exchange holdings (or the appropriate “item due from…”) would decrease. In converting values to the unit of account used by the participant receiving SDR 10, for example, care must be exercised in choosing the appropriate exchange rate. In accordance with Rule P-6(a), as amended, the exchange rate for a transaction by agreement is the rate determined under Rule O-2 for any business day within three business days before the value date of the transaction. The exchange rate in SDR operations prescribed by the Fund is generally determined by the parties involved. The entry would be as follows:

Holdings of SDRsDebitCredit
Foreign exchange1010
  • It would have the following effect on the balance sheet of the participant acquiring SDRs:

CENTRAL BANK BALANCE SHEET
ASSETSLIABILITIES
External assetsCurrency issue185
Gold50Gov’t deposits20
*Holdings of SDRs60Other deposits150355
*Foreign exchange240
Other securities50400Allocations of SDRs50
Other assets250Other liabilities100
CAPITAL AND
PROFIT (OR LOSS)
Capital45
Profit (or loss)100145
TOTAL LIABILITIES
TOTAL ASSETS650AND CAPITAL650
  • If a participant sells its SDRs to acquire foreign exchange, or to discharge a financial obligation, its holdings of SDRs would be reduced and foreign exchange reserves would increase. In other words, the reverse of the previous example should be reflected.

3. Interest and Charges

All holders of SDRs earn interest on their actual daily holdings, and all participants that have received allocations of SDRs incur charges on those allocations. Because the rate of interest on holdings is the same as the rate of charge on allocations, a participant whose holdings matched its net cumulative allocation over the financial quarter would earn and owe offsetting, equal amounts of interest and charges; that is, no net income or expense would be generated. However, in most cases, such interest and charges do not offset each other, and the profit and loss account must reflect the actual situation. For the participant depicted above whose holdings exceed allocations, the entries would be as shown below. (Prescribed holders, by definition, will receive interest only on their SDR holdings; they are not subject to charges because they do not receive SDR allocations.)

(a) Accruals

Examples of accrual accounting entries to be made when generally accepted accounting principles are used are shown below.

Entries related to accrued interest on SDR holdings and accrued charges on net cumulative allocations are as follows:

DebitCredit
Interest to be received on SDR holdings
Accrued interest receivable3
Interest income3
Charges to be paid on net cumulative allocations
Interest expense2
Accrued interest payable2
CENTRAL BANK BALANCE SHEET
ASSETSLIABILITIES
External assetsCurrency issue185
Gold50Gov’t deposits20
Holdings of SDRs60Other deposits150355
*Accrued interest on
SDR holdings3*Accrued interest
Foreign exchange240payable2
Other securities50403Allocations of SDRs50
Other assets250Other liabilities100
CAPITAL AND
PROFIT (OR LOSS)
Capital45
*Profit (or loss)101146
TOTAL LIABILITIES
TOTAL ASSETS653AND CAPITAL653

(b) Actual transfers

Entries relating to the receipt of interest on SDR holdings and the payment of charges on net cumulative allocations are as follows:

DebitCredit
Receipt of interest on SDR holdings
Holdings of SDRs3
Accrued interest receivable3
Payment of charges on net cumulative allocation
Accrued interest payable2
Holdings of SDRs2

The entries would have the following effect on the balance sheet:

CENTRAL BANK BALANCE SHEET
ASSETSLIABILITIES
External assetsCurrency issue185
Gold50Gov’t deposits20
*Holdings of SDRs61Other deposits150355
Foreign exchange240
Other securities50401Allocations of SDRs50
Other assets250Other liabilities100
CAPITAL AND
PROFIT (OR LOSS)
Capital45
Profit (or loss)101146
TOTAL LIABILITIES
TOTAL ASSETS651AND CAPITAL651

If the participant had used SDRs to the point where its holdings during the financial quarter were less than its allocation, it would have incurred charges in excess of interest received. Holdings of SDRs and reported profits would have been reduced rather than increased as shown in the example above.

4. Transfers Between Participants and General Resources Account

Participants transfer SDRs to the GRA to discharge certain obligations, such as the payment of charges and assessments, or to make repurchases and quota payments. Examples of entries and their effect on the balance sheet are as follows:

DebitCredit
Payment of charges on the use of Fund resources45
Accrued charges payable10
Holdings of SDRs10
Balance Sheet
AssetsLiabilities/Capital
Holdings of SDRs(10)
Profit (or loss)(10)
DebitCredit
Assessment due to the Fund
Assessment expense3
Holdings of SDRs3
Balance Sheet
AssetsLilabilities/Capital
Holdings of SDRs(3)
Profit (or loss)(3)
DebitCredit
Repurchase (In SDRs)
Demand deposit10
Holdings of SDRs10
Balance Sheet
AssetsLiabilities/Capita1
Holdings of SDRs(10)
Demand deposit(10)
DebitCredit
Quota increase (if 25 percent of increase is paid in SDRs)
IMF subscription100
Holdings of SDRs25
Demand deposit75
Balance Sheet
AssetsLiabilities/Capital
Holdings of SDRs(25)
IMF subscription100
Demand deposit75

Participants may receive SDRs from the GRA for remuneration earned, in purchases, interest and repayments of Fund borrowing, acquisition of SDRs, and refunds and replenishment of members' currencies. Entries and the effect on balance sheet items are as follow:

DebitCredit
Receipt of remuneration and interest46
Holdings of SDRs10
Accrued interest income10
Balance Sheet
AssetsLiabilities/Capital
Holdings of SDRs10
Profit (or loss)10
DebitCredit
Purchase In SDRs
Holdings of SDRs10
Demand deposit10
Balance Sheet
AssetsLiabilities/Capital
Holdings of SDRs10
Demand deposit10
DebitCredit
Repayment of borrowing in SDRs by the IMF
Holdings of SDRs20
Loans receivable
Balance Sheet
AssetsLiabilities/Capital
Loans receivable(20)
Holdings of SDRs20
DebitCredit
Acquisition of SDRs
Holdings of SDRs10
Foreign exchange(10)
Refunds (e.g., burden sharing, stand-by charges)
Holdings of SDRs5
Refunds5
Balance Sheet
AssetsLiabilities/Capital
Holdings of SDRs5
Profit (or loss)5
DebitCredit
Replenishment of member's currency by the GRA
Holdings of SDRs10
Other deposits10
Balance Sheet
AssetsLiabilities/Capital
Holdings of SDRs10
Other deposits10

Resolution No. 34-3, International Monetary Fund,Selected Decisions and Selected Documents of the International Monetary Fund, Nineteenth Issue (Washington, 1994), pp. 503-13.

The market rates used in this calculation are the midpoints between buying and selling rates at noon in the London foreign exchange market. When the London market is closed, the rates used are from New York at noon. If both the London and New York markets are closed, fixing rates from the Frankfurt market are used.

Prior to 1981, the SDR valuation basket included 16 countries' currencies.

See Rule T-1(c), p. 73.

See footnote 17, p. 8.

Of the 13 standing arrangements in effect as of September 1, 1995, all accept U.S. dollars against which SDRs are to be bought or sold, 6 also accept deutsche mark, 2 also accept yen, 2 also accept French francs, and 1 also accepts pounds sterling.

The settlement date is also called the value date.

To reflect accrued charges, the entries would be similar to the examples in Section 3(a).

To reflect the accrued remuneration and accrued interest, the entries would be similar to the examples in Section 3(a).

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