CHAPTER I. General Description of the SDR
- International Monetary Fund
- Published Date:
- June 1995
1. SDR as Official Reserve Asset
The SDR is an international reserve asset that serves as a means of payment among Fund members that are participants in the SDR Department, the Fund itself through its General Resources Account (GRA), and prescribed “other holders.” SDRs are created by decisions of the Fund to supplement existing reserve assets. Operations and transactions in SDRs are conducted through the SDR Department. SDRs are distributed to participants in the form of allocations in proportion to their quotas in the Fund and are the liabilities of the participants receiving them in allocations should the SDR Department be liquidated.1 The cumulative amount of SDRs allocated and canceled for each participant to date is called its “net cumulative allocation,” although to date there have been no cancellations. Participation in the SDR Department is voluntary for Fund members; however, at present all members are participants.
The Fund guarantees that participants can use their SDR holdings in transactions “with designation” to obtain an equivalent amount in foreign exchange, provided that the user has a balance of payments need to use SDRs. In these transactions, the Fund designates other participants whose balance of payments and gross reserve position is considered sufficiently strong to provide the foreign exchange and to receive SDRs in return. Participants and prescribed holders of SDRs can also use them to obtain foreign exchange from other countries willing to accept the SDRs voluntarily in transactions “by agreement.” The Fund is willing to assist in arranging these transactions if requested. In addition, SDRs can be used by participants and other holders quite freely by mutual agreement for a variety of other financial operations.
The Fund's GRA accepts SDRs in settlement of obligations to the Fund, including repurchases of drawings and the payment of charges on the use of the Fund's resources, and for quota payments. The Fund may use SDRs in various ways, including sales to members using the Fund's resources, payment of remuneration (i.e., interest payments on members' creditor positions in the Fund), payment of interest and principal on borrowings, and replenishment of needed currencies.
Participants pay charges on their net cumulative allocations of SDRs and, together with prescribed holders and the Fund, earn interest on holdings. The interest rate on SDR holdings is equal to the rate of charge on SDR allocations. Interest and charges in the SDR Department are due and payable immediately after the end of each financial quarter of the Fund (May 1, August 1, November 1, and February 1).
2. SDR as a Unit of Account
The Fund uses the SDR as its unit of account, and the value of the Fund's currency holdings is maintained in terms of the SDR. Since the generalized floating of exchange rates, the SDR has also become increasingly more important for this purpose outside the Fund. For example, the SDR has been used as a unit of account (or as the basis for a unit of account) in private contracts and international treaties and by other international organizations, such as the African Development Bank, the African Development Fund, the Arab Monetary Fund, the Asian Clearing Union, the Asian Development Bank, the Great Lakes States Development Bank, the East African Development Bank, the Economic Community of West African States, the European Conference of Postal and Telecommunications Administrations, the International Center for Settlement of Investment Disputes, the International Development Association, the International Fund for Agricultural Development, the International Telecommunications Union, the Islamic Development Bank, and the Universal Postal Union. SDR-denominated currency deposits, which may be called “nonofficial” SDRs, are now accepted by the Bank for International Settlements and some commercial banks, and a number of SDR loans have been made by these banks. Some bonds denominated in SDRs have been issued in the international capital market. Moreover, a number of participants have elected to peg their currency to the SDR.
3. Improvements in the SDR after the Second Amendment
One of the major objectives of the Second Amendment of the Fund's Articles of Agreement, which became effective on April 1, 1978, is to make the SDR the principal reserve asset of the international monetary system. To this end, the Fund's Executive Board has taken a number of decisions to improve the yield on the SDR and its liquidity and usability. At the same time, certain obligations arising from participation have been eliminated.
(a) Valuation and Interest Rate
On September 17, 1980, the Board adopted a decision2 to unify and simplify, as of January 1, 1981, the separate currency baskets that had determined the value of (i.e., the exchange rate) and the interest rate on the SDR. The unified basket is revised every five years and is composed of the currencies 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.3 The weights of each of these currencies in the basket are reviewed at the same time to ensure that they broadly reflect the relative importance of each currency in international trade and reserves, as measured by the value of exports of goods and services of each country, and the amounts of these currencies held as reserves by members of the Fund over the preceding 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.4
With effect from May 1, 1981, the Board decided to increase the interest rate on the SDR to 100 percent of the combined market interest rate, which would be a weighted average of short-term interest rates in the United States, Germany, France, Japan, and the United Kingdom. Since August 1, 1983, the combined market interest rate has been based on the rates prevailing each Friday for the week beginning on the ensuing Monday.5
(b) Uses of SDRs
The requirement of a balance of payments need applies to the use of SDRs in transactions with designation but not to transactions by agreement. This is because the designation mechanism is predicated on the Fund's assessment of the strength of members' external position, whereas the latter are transfers agreed upon bilaterally between participants or other holders in which SDRs can be exchanged for any currency for which the Fund has established a “representative” rate.
In addition, the Fund prescribed, in a series of decisions during 1979 and 1980, that participants and other holders were free to use SDRs among themselves in certain operations that were not otherwise expressly authorized by the Articles. These include the use of SDRs in forward purchases or sales, in swaps, to settle financial obligations, to make loans, to make donations (grants), and as security for the performance of financial obligations.
After the establishment of new lending facilities in the mid-1980s, that is, the Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF), the Fund, in a number of decisions, permitted the use of SDRs in operations under these facilities and in other Fund-related operations, for example, to pay subsidies under the Supplementary Financing Facility (SFF) and to discharge obligations under the Trust Fund.6
Another decision in 1988 facilitating the use of the SDR permits the settlement of transactions by agreement on the date of the agreement or on any of the three business days from that date as agreed between participants. Previously, these transactions could only be settled two or three business days from the date the transaction was initiated.
In arranging transactions by agreement between participants, the Fund has been aided significantly since 1986 by standing arrangements that a number of SDR holders have established with the Fund. These arrangements authorize the Fund to arrange sales or purchases of SDRs, or both, on behalf of the parties to the arrangements subject to the terms and conditions specified by these parties. The transition from a period when the use of SDRs by members depended largely on the obligatory acceptance of SDRs by other members (transactions with designation) to the period since September 1987 during which all uses of SDRs have been accommodated through voluntary acceptance has been made possible by the establishment of these standing arrangements to buy and/or sell SDRs.7
(c) Obligations in SDR Department
Some of the original obligations of participation in the SDR Department have been eliminated through the adoption of the Second Amendment and subsequent Board decisions. These include the necessity to meet the requirement of need in transactions by agreement and the rules for reconstitution. Thus, a participant may use all its SDR holdings at any time and is not obliged to reacquire SDRs to maintain a minimum average balance. If, however, a participant's balance of payments and reserve position is considered sufficiently strong by the Fund, it can be designated to provide currency and receive SDRs. Under Article XIX, Section 4(a), a participant's obligation to provide currency “shall not extend beyond the point at which its holdings of special drawing rights in excess of its net cumulative allocation are equal to twice its net cumulative allocation or such higher limit as may be agreed between a participant and the Fund.” Should a participant fail to fulfill the obligations to provide currency when designated, its right to use SDRs could be suspended under Article XXIII, Section 2(a).8
In addition, all holders of SDRs are subject to the general obligations of Article VIII, Section 7, and Article XXII. These concern the objective of making the SDR the principal reserve asset in the international monetary system and collaboration with the Fund and other participants in order to facilitate the effective functioning of the SDR Department.
4. Other Holders
The Fund has the authority to extend the range of official holders of SDRs beyond its member countries and the Fund's GRA. Official entities prescribed as “other holders” of SDRs can acquire and use SDRs voluntarily in transactions and operations by agreement with any other holder and with any participant. Prescribed holders have the same freedom as participants to buy and sell SDRs both spot and forward; to borrow, lend, or pledge SDRs; to use SDRs in swaps; or to use or receive SDRs in donations.
However, prescribed holders, not being participants, do not receive allocations of SDRs, nor do they have either the rights or the obligations that arise for participants from their receipt of allocations. For example, they are not required to pay assessments or charges because these obligations apply only to participants that have received allocations of SDRs. Prescribed holders are also not subject to designation to provide currency and to receive SDRs in exchange. By the same token, they do not have recourse to the designation mechanism if they wish to use SDRs to obtain currency at any time.
For a historical account of the allocations of SDRs, see Appendix I.A, “Allocation of SDRs,” p. 35.
Executive Board Decision No. 6631-(80/145) G/S, reproduced in Appendix III.C, p. 88.
During the period July 1, 1974 to December 31, 1980, a basket of 16 currencies was used to value the SDR, while a basket of 5 currencies was used to determine the interest rate on the SDR.
For more details on how the value of the SDR is determined, see Appendix I.B “Valuation of SDRs,”p. 35.
For more details on the determination of the rate of interest on the SDR, see Appendix I.C “Rate of Interest on SDRs,” p. 37.
The Fund's Executive Board decided to extend and enlarge the ESAF Trust on December 15, 1993, and operations under the enlarged ESAF Trust began on February 23, 1994.
For more details on standing arrangements for SDR transactions, see Appendix I.D “Arrangements for SDR Transactions,” p. 38.
For more details on transactions with designation, see Appendix II, p. 47.