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IMF History (1966-1971) Volume 2
Chapter

(A) Outline of an Illustrative Reserve Unit Scheme (February 23, 1967)

Author(s):
International Monetary Fund
Published Date:
February 1996
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Comment

(i) There is set forth below the outline of an illustrative scheme based on reserve units.

(ii) The outline of the present scheme is meant to demonstrate how the main features of a reserve unit scheme could be fitted together. On certain aspects, such as opting out, the adjustment of votes for creditors, and compulsory repurchase from the Fund, consensus has not yet developed, and on other aspects there has been little or no discussion so far. Although it is recognized that many variants are possible, a choice has been made on all these topics in order to show how a scheme could look with provisions on these topics.

(iii) Since the outline is based on past studies in the Fund and in the Group of Deputies, it is not accompanied by any elaborate discussion. However, a few explanatory notes have been appended, mainly in order to draw attention to certain issues.

(iv) The outline does not include all of the provisions that would have to be included in the Articles of an International Reserve Organization. Some of the topics included in the outline could be made part of the By-Laws or Rules adopted by the Organization. Moreover, the contents of the outline have not been drafted as legal provisions or elaborated with the refinement of detail which the Articles would have to take into account. In this connection, it should be noted that there are a number of terms that would have to be defined with precision in the Articles, but these definitions have not been attempted in the outline.

(v) Any illustrative scheme inevitably includes certain magnitudes, such as quotas and percentages. The magnitudes included in this paper are to be considered illustrative.

(vi) Finally, the illustrative scheme contained in the outline envisages certain consequential amendments of the Articles of the Fund. The outline does not deal with the amendment of the Fund’s Articles.

Introduction*

The purposes of the scheme, which will include the creation of an International Reserve Organization as an affiliate of the Fund, will be set forth in the preamble of the Articles of the Organization. Any special considerations applicable to the first decision to create reserves could be included in the preamble or elsewhere, for example in a report accompanying the final act adopting the Articles.

I. Membership

1. Membership in the Organization will be confined to members of the Fund and will be available to them as of right if they accept membership by a specified date. Admission of members of the Fund after that date will be on terms and conditions prescribed by the Organization.

2. A member may withdraw from the Organization at any time with immediate effect.

3. Any member which ceases to be a member of the Fund will immediately cease to be a member of the Organization.

II. Quotas

Each member in the Organization will have a quota equal at all times to its quota in the Fund.

III. Distribution of Reserve Units and Opting Out

1. The Organization will decide at intervals on the amount of reserves to be distributed for a basic period ahead. The basic period will normally be five years, but the Organization may decide on different basic periods.

2.* The amount of reserve units to be distributed will be expressed as a percentage of quotas, uniform for all members. Reserve units will be distributed each quarter on the basis of each member’s quota at the time of distribution.

3. If the Organization finds that unexpected developments indicate that a change in the rate of distribution of reserve units during a basic period is desirable, the Organization may decide to increase or decrease the rate of distribution or to discontinue such distribution for the remainder of that basic period.

4. Decisions on the amount and timing of reserve units to be distributed will be taken by the Board of Governors. These decisions will be based on proposals made by the Managing Director after such consultations as will enable him to ascertain that there is broad support among members for the distribution of a particular amount of reserve units. The Managing Director’s proposals shall be considered by the Executive Directors and shall be transmitted to the Board of Governors with a report of the Executive Directors.

5. Decisions by the Board of Governors on the amount and timing of reserve units to be distributed will be taken by a four-fifths majority of the total voting power, except that decisions to decrease the amount of reserve units to be distributed or to discontinue distribution for the remainder of a basic period will be taken by an ordinary majority of the total voting power.

6. In taking their first decision to distribute reserve units after entry into force of the Articles, the Board of Governors will take into account the special considerations referred to in the Introduction in this outline.

7.* The Organization will distribute reserve units by crediting the account of each member quarterly with the number of reserve units determined in accordance with III.2 or under III.10, except in the cases covered by III.8 and 9.

8. A member must participate in distributions until the total amount of reserve units distributed to it are equal to half its initial quota in the Organization. Thereafter, a member which did not vote in favor of a decision to distribute reserve units in a basic period may elect, prior to the first distribution in that basic period, not to participate in the distributions for that period by giving notice to the Organization. Any member that has opted out with respect to a basic period may give notice to the Organization that it wishes to participate in distribution subsequent to its notice during the period.

9.* If a member is ineligible to use the Fund’s resources, its share in the distribution will be credited not to that member’s regular account but to a suspense account in its name pending elimination of the ineligibility. A similar procedure will be followed if the Organization declares a member “ineligible” because it has failed to fulfill any of its obligations to the Organization.

10.* The Organization may decide to distribute reserve units in connection with the payment of “gold” subscriptions on the occasion of general quota increases in the Fund. The Organization will decide whether or not to charge such distributions against the quarterly distributions.

IV. Recall of Reserve Units

1. The Organization may decide, at any time, to recall, at such dates as it may specify, part or all of the reserve units outstanding.

2. The amount to be recalled will be expressed as a percentage of net cumulative distributions, uniform for all members.

3. Decisions on the amount and timing of reserve units to be recalled will be taken by the Board of Governors. These decisions will be based on proposals made by the Managing Director after such consultations as will enable him to ascertain that there is broad support among members for the recall of a particular amount of reserve units. The Managing Director’s proposals shall be considered by the Executive Directors and shall be transmitted to the Board of Governors with a report of the Executive Directors.

4. Decisions by the Board of Governors on the amount of reserve units to be recalled will be taken by a four-fifths majority of the total voting power, except that decisions to decrease the amount of reserve units to be recalled will be taken by an ordinary majority of the total voting power.

5.* The Organization will debit the account of each member with the number of reserve units recalled.

V.* Repayment of Fund Drawings in the Credit Tranches

If the Fund’s holdings of a member’s currency exceed its quota at the time of any distribution, the units received by the member in that distribution, or an equivalent amount in other reserve assets acceptable to the Fund, will be used at once in repurchase of the Fund’s holdings of the member’s currency, but such repurchase will not be allowed to reduce the Fund’s holdings below the quota level.

VI. Holding, Use, and Acceptance of Reserve Units

1. Authorized holders. Reserve units will be held by the fiscal agencies of members, and the following provisions of VI deal primarily with holding, use, and acceptance by members. These provisions would have to be modified to reflect such provisions as may be agreed for the Fund. If it is decided to authorize the fiscal agencies of nonmembers and other international institutions to hold reserve units, further modifications would be required.

2. Accounts. Reserve units will be held only in accounts opened by the Organization for each member.

3. (a) Members will be entitled to transfer reserve units to other members subject to the following provisions:

  • (i)* Members will be expected not to make transfers of reserve units if, over a period of reasonable length and taking into account the effect of such transfers, their other reserves would increase. The Organization may make representations to any member that fails to comply with this expectation.

  • (ii)* The Organization may make such rules and recommendations on the direction of transfers as it believes necessary for the effective and equitable operation of the system. Members will be obliged to follow these rules and to give due consideration to any recommendations.

(b)* A member will be obliged to accept reserve units until it holds reserve units equal to three times the net cumulative distribution to it or until its holdings of reserve units are equal to such percentage of its gross reserves as may be specified from time to time by the Organization, whichever is less. A member may accept or enter into an agreement with the Organization to accept reserve units beyond these limits on terms and conditions not inconsistent with the provisions of the scheme.

(c) Subject to VI.3 (a) (i), a member will be entitled to use reserve units to redeem balances of its currency presented to it for redemption without reference to the acceptance limits of the member requesting the redemption.

4. Currencies and rate of exchange

(a) A member transferring reserve units will be entitled to receive, at its option, the currency of the transferee or the transferee’s main reserve currency.

(b) Transfers between members will be at par against U.S. dollars or, if against the currency of any other member, at the corresponding rate between that currency and the U.S. dollar. The Organization will certify this rate upon request. Transfers of reserve units between a member and the Fund will be at the par value of the member’s currency or at the rate at which the Fund holds that currency.

5. The Organization might establish rules under which a member could pledge reserve units to another member or enter into some other form of security arrangement involving the units. Members entering into these arrangements would inform the Organization promptly.

VII. Interest

1. A member will pay interest on the amount by which, on the average, the net cumulative distribution of reserve units to it has exceeded its holdings of reserve units. The Organization will pay interest to each holder of reserve units on the amount by which, on the average, its holdings have exceeded its net cumulative distribution of reserve units.

2. The rate of interest paid and received by members will be the same and will be uniform for all members. The initial rate of interest will be stated in the Articles. The Organization may increase or decrease the rate from time to time.

3. The Organization may decide to pay a higher rate of interest to a member holding reserve units in excess of the prescribed limits under an agreement entered into under VI.3 (b). The cost of such additional interest paid to any member will be assessed against all other members in proportion to the net cumulative distributions of reserve units to them.

4. Interest will be credited and debited by the Organization in reserve units.

VIII. General Provisions

1. Members will undertake to collaborate with the Organization to promote the purposes of the Organization and in particular to facilitate the proper functioning of the international monetary system and the effective use of reserve units within that system.

2. Reserve units will constitute obligations of the Organization to the holders and each member will be obligated to the Organization in the amount of the net cumulative distribution of reserve units to it.

3.* The value of reserve units will be equal to 0.888 671 gram of fine gold per unit. The quotas of members, the obligations of members to the Organization, and the obligations of the Organization will be expressed in terms of reserve units.

IX. Structure and Voting

1. The Organization will be a separate legal entity. The structure of the Organization will be similar to that of the Fund but with its own Board of Governors, Executive Directors, Managing Director, and staff.

2. All powers of the Organization will be vested in the Board of Governors, which will be able to delegate to the Executive Directors all except reserved powers. These reserved powers will include, in particular, decisions on the amounts and timing of the distribution or recall of reserve units.

3. The Managing Director of the Fund will be ex officio Managing Director of the Organization. The staff of the Fund, as needed, will serve as staff of the Organization.

4.* The Organization may assess members in order to meet part or all of the administrative expenses of the Organization, or such expenses may be covered by the Fund. The Organization and the Fund will enter into an agreement for this and other necessary purposes.

5.* Each member will have

  • (i) 250 votes plus

  • (ii) either

    • (a) one additional vote for each part of its quota equivalent to 100,000 reserve units,

    • or

    • (b) one additional vote for each 50,000 reserve units of its net cumulative distribution,

    • whichever is greater;

    • plus

  • (iii) one additional vote for each 400,000 reserve units by which on the average over the preceding five years its holdings of reserve units exceeded its net cumulative distribution.

6. Each Governor will cast the votes of the member appointing him.

7. Each Executive Director will cast the votes of the member or members appointing or electing him as a bloc.

8. Except as will be otherwise provided in the Articles, all decisions of the Organization will be taken by a majority of the votes cast.

X. Settlement with a Withdrawing Member

1. When a member withdraws, the member’s claim against the Organization will be offset against the member’s obligation to the Organization. The Organization and the withdrawing member may agree on the settlement of any remaining balance. In the absence of such an agreement, X.2, 3 and 4 shall apply.

2. If the remaining balance is in favor of the withdrawing member, it will be able to elect either to hold and use the remaining balance as an authorized nonmember on terms and conditions established by the Organization in accordance with VI.1, or it may request the Organization to redeem the balance in equal quarterly installments over a five-year period, the first redemption to be made six months after the date of withdrawal. Redemption will take place in gold or currencies convertible in fact, as determined by the Organization. The necessary amounts will be made available to the Organization by all other members in proportion to the net cumulative distributions to them at the time of each quarterly redemption in exchange for equivalent amounts of the withdrawing member’s reserve units.

3. If the remaining balance is in favor of the Organization, the withdrawing member will redeem the balance in equal quarterly installments over a five-year period, the first redemption to be made six months after the date of withdrawal, in gold or currencies convertible in fact and acceptable to the Organization. The Organization will apply the amounts received to redeem reserve units held by members in proportion to the amount by which their holdings exceed the net cumulative distributions to them at the time of each redemption.

4. Until the settlement under X.2 or 3 is completed, interest will be paid at the rates of the Organization in effect at the time of each redemption payment.

5. In the event of liquidation of the Organization within six months after the date of a member’s withdrawal, the provisions of XI will apply to the settlement of the account with that member.

XI.* Settlement on Liquidation

1. On liquidation the obligations under VIII.2 will be discharged in accordance with the system that follows. The Organization will continue in existence for the purpose of administering this settlement.

2. Each member will discharge its obligation to the Organization, which will be equal to the net cumulative distribution of reserve units to it, in twenty quarterly payments. The Organization will specify the means of payment.

3. The Organization will redeem reserve units held by members in the following manner:

  • (i) Members will be ranked according to the proportion of reserve units held by each to its net cumulative distribution.

  • (ii) The Organization will first redeem reserve units from the member with the highest proportion until this proportion is reduced to the proportion of the next highest member; it will then redeem reserve units held by these two members until their proportions are reduced to the proportion of the next highest member, and so on until the amount available for redemption has been exhausted.

  • (iii) Redemption payments will be made from the payments made by members in discharge of their obligations to the Organization.

XII. Entry into Force

1. The Agreement establishing the Organization will enter into force when it has been adhered to by members of the Fund having 85 per cent of the total of the quotas of the Fund.

2.* If the attainment of the 85 per cent participation is delayed beyond a specified date, the Agreement will enter into force as soon as members of the Fund that have adhered to the Agreement and have at least two thirds of the total of Fund quotas inform the Managing Director of the Fund that they are prepared to have the Agreement enter into force among themselves.

Explanatory Notes

In deciding how to express the amounts of reserves to be created there is a choice between a round amount in terms of millions of reserve units, to be distributed among members of the Organization in proportion to their quotas, and a percentage of quotas. Such a percentage would be selected in the light of the amount of reserve creation which it would produce. For example, with total quotas at approximately $20 billion, every ¼ of 1 per cent per quarter would represent an annual amount of reserve creation of approximately $200 million. The choice made in the outline is in favor of a percentage of quotas, which would give members an amount of reserve units each quarter that would not be fractionally influenced by changes in the quotas of other members or entry into the Fund of new members. However, on this basis, a substantial increase in the membership of the Fund would lead to an increase in the total amount of reserve creation, but this might be considered appropriate on the occasion of an enlargement of the area of operation of the Fund. In addition, a large increase in the amount of reserve creation could occur as the result of a general increase in Fund quotas which did not coincide with the beginning of a basic period of the Organization. It would be necessary for the Organization to decide whether the consequential increase in the amount of distributions would be desirable or whether this should be avoided by a reduction in the percentage of distribution.

It will be noted that it is proposed that members’ accounts with the Organization be credited in reserve units without corresponding transfers of members’ currencies. It has often been assumed that reserve creation would be accompanied by transfer to the Organization by each member of an amount of its currency equivalent to the value of reserve units credited to its account. Since such currency holdings of the Organization would be dormant, they clearly serve no purpose except in connection with withdrawal or liquidation; at other times they would have no more than an accounting significance. Provided that appropriate arrangements are made in connection with withdrawal and liquidation, it would be possible to dispense altogether with the requirement that currencies should be transferred to the Organization. This procedure could have the advantage of simplifying the legislation in member countries with respect to the acceptance of the obligations of the Agreement. In any event, it would be a simple matter to adjust the scheme as outlined if it were decided, after all, to require the transfer of currency to or by the Organization on the occasion of the distribution or recall of reserve units.

The question will also have to be considered whether reserve units should be placed in a suspense account and not distributed to a member when its access to the Fund’s resources has been limited under Article V, Section 5 of the Fund Agreement or Rule K-2 of the Rules and Regulations.

The distribution mentioned in III.10 goes beyond the other provisions of III under which the Organization can make only regular distributions of reserve units to members in proportion to quotas. It is possible to envisage other uses for reserve units even beyond those covered by III.10 and the other provisions of III. It has been suggested, for example, that reserve units might be made available to reserve centers on terms and conditions to offset certain declines in the amounts of reserve currencies outstanding. To give effect to such a proposal, it would be necessary to incorporate special provisions in the Articles of the Organization.

Rules would have to be adopted to deal with the case in which a member did not hold enough reserve units to meet a recall.

Whether or not a provision such as V were adopted, it would be desirable to amend the Fund’s Articles so that reserve units would be part of a member’s monetary reserves for the purpose of Article V, Section 7 (b), and Schedule B of the Fund’s Articles, with resulting repurchase obligations.

If the principle of compulsory repurchase is adopted in accordance with V, the reference to the quota level of Fund holdings could be taken to exclude holdings resulting from drawings under the compensatory financing facility.

(a) (i) This paragraph reflects the basic principle which is often expressed in the form that members should not use reserve units solely in order “to change the composition of their reserves.” This expression lacks precision because any use of reserve units changes the composition of reserves at that moment and also because the word “composition” could easily be misunderstood to mean “percentage composition.” Therefore, VI.3 (a) (i) relates to the development of reserves as a whole over a reasonable period. It would be necessary to consider whether and to what extent this provision should apply to transfers to the Fund in discharge of obligations.

(a) (ii) The rules and recommendations would leave as much freedom to members in their choice of transferees as would be compatible with the purposes of the scheme and of guidance.

(b) The second sentence of this provision can be compared with Article VII, Section 2 (i) of the Articles of the Fund in that it makes possible further financial support for the system.

This provides for an absolute gold guarantee with no exception such as is theoretically possible under Article IV, Section 8 (d) of the Fund Agreement. If there were a waiver under that provision, the obligations on liquidation of the Organization would be more onerous. Again, in these circumstances the quotas in the Fund and the Organization would diverge.

The administrative expenses of the Organization can be expected to be very small compared to those of the Fund and they might therefore be absorbed by the Fund.

The Fund as the holder of reserve units will receive interest from the Organization on those units. It does not follow, however, that the Fund will receive a net financial benefit to the extent of this interest. In order to determine whether and to what extent it would benefit in this way, it would be necessary to take into account a number of factors connected with the transaction in which it receives the units.

There is, of course, a very wide range of possibilities for voting. This section follows closely the Fund voting system, although with certain important modifications. The basic votes and the additional votes related to a member’s quota are the same as in the Fund. On the basis of certain assumptions, including a Fund with total quotas equal to $20 billion, there will be a transition, for the purpose of computing votes under IX.5 as proposed, from quotas to net cumulative distributions after an aggregate distribution of 10 billion units. The suggestion of a transition from one basis for votes to the other is motivated by the opting out provisions, but relative voting power under the two systems could diverge for reasons other than opting out, such as special quota increases which would raise members’ participation in future but not in past distributions, and the entry into the scheme of new members.

If there is opting out, an alternative to the transition from one system to another might be a gradual transition by a system of IX.5 (ii) (a) plus (instead of or) IX.5 (ii) (b). This latter version could also be described as giving countries voting power in the Organization equal to their voting power in the Fund plus additional votes for their net cumulative distribution and their creditor position in the Organization. The additional votes suggested in IX.5 (iii) are of the same magnitude as the additional votes in the Fund, i.e., in a one to four ratio to the number of votes derived from quota. However, in contrast to the Fund, there is no provision for a reduction of votes for countries in a debtor position, nor is there a maximum for the addition to votes. It has been suggested that creditor positions in the Fund might also be taken into account in connection with voting power in the initial distribution of the Organization (when no creditor positions under the scheme had yet arisen).

The problem that requires the greatest consideration in devising a system of liquidation is what distribution to make of any default during the liquidation. The system described in the outline distributes defaults among all members in proportion to the net cumulative distribution of reserve units to each member. To the extent that any of the redemptions of reserve units could not be made because of continuing defaults, each member will hold a number of unredeemed reserve units. The proportion of these to the net cumulative distribution to each member will be uniform.

Other systems could be devised under which defaults would be distributed among members in proportion to their creditor positions or their holdings of reserve units at the time of liquidation.

The system in the outline, it should be noted, is not the same as the system of liquidation under Schedule E of the Fund Agreement. After certain initial payments, the distribution of the remaining Fund holdings of currency among members and the setoff of bilateral claims, each member in a creditor position in the Fund will have a claim on those members in a lesser creditor position and against all those in a debtor position. Only those members in a greater creditor position will have a claim on it. A member in a debtor position will have claims only on those in a greater debtor position and will have claims on it by all those in a creditor position or a lesser debtor position.

It will be recalled that the participation clause in the Fourth Quinquennial Review of Quotas called for consents by members having two thirds of the total of quotas.

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