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IMF History (1966-1971) Volume 2
Chapter

(B) Outline of an Illustrative Scheme for a Special Reserve Facility Based on Drawing Rights in the Fund (February 28, 1967)

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

1. There is set forth below the outline of an illustrative scheme for a special reserve facility in the Fund in the form of drawing rights.

2. The general comments made to preface the outline of the illustrative reserve unit scheme are equally applicable to this outline.

3. The Managing Director’s Plan I of March 1966 attempted to formulate a drawing rights scheme without amendment of the Articles. The present outline sets forth a drawing rights scheme which would be comparable in most respects to the illustrative reserve unit scheme, and this would entail amendments of the Articles.

4. Plan I referred to above involved an extension into the credit tranches of the quasi-automatic drawing rights which members now enjoy in the gold tranche. A member would have been able to exercise those rights after it had used its gold tranche and at whatever point it chose while it was in the credit tranches. In the present outline special drawing rights would be exercisable by a member at whatever point it chose in the gold and credit tranches. In connection with the use of the Fund’s resources, the special facility could thus be thought of as having a completely floating character or as constituting something in the nature of a separate account within the Fund. An approach of this kind would require the modification of a number of provisions of the Articles.

5. With the present approach, there is a choice between giving the new facility the characteristics of the super gold tranche (Fund holdings not in excess of 75 per cent of quota) or the basic gold tranche (Fund holdings above 75 per cent but below 100 per cent of quota). In this outline some of the characteristics of each as they stand at present have been adopted. This is not intended to preclude any changes in these characteristics that might be adopted as the result of further study of the gold tranche.

6. In the preparation of this outline, a major preoccupation has been to equalize as far as possible the characteristics of the different reserve assets in the Fund: the basic gold tranche and super gold tranche, the special reserve drawing facility described herein, loan claims on the Fund of the existing type, and the loan claims that will arise as the lines of credit under this scheme are drawn upon. One of the ways in which it is possible to equalize the reserve quality of all these assets is by pooling all the resources of the Fund.

7. The form of amendment could be the addition of a new Article to the Fund Agreement or the amendment of various provisions throughout the Articles.

Introduction *

The purposes of the scheme will be set forth in an introductory section of an amendment. The guiding principles for the activation of this type of reserve creation could be included in that introductory section or in a report of the Board of Governors explaining the amendment.

I. Provision of Drawing Rights

1. Participation. The Fund will provide special drawing rights in accordance with this outline to those members that have undertaken to lend to the Fund pursuant to V.

2. Basic periods and amounts. Decisions to provide special drawing rights will prescribe the amount to be made available over a basic period ahead. The basic period will normally be five years but the Fund may decide on different basic periods. The amount to be provided will be expressed as a percentage of quota at the time the special drawing rights are made available, uniform for all members. Special drawing rights will be made available each quarter during the basic period.

3. Change in amounts. If the Fund finds that unexpected developments indicate that a change is desirable in the rate at which further special drawing rights are to be made available over a basic period, the Fund may decide to increase or decrease the rate or to discontinue the provision of further special drawing rights for the remainder of that basic period.

4.*Procedure for decisions. Decisions on the amount and timing of special drawing rights to be provided 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 provision of a particular amount of special drawing rights. 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. Voting majority. By amendment, decisions of the Board of Governors on the amount and timing of special drawing rights to be provided will be taken by a four-fifths majority of the total voting power, except that decisions to decrease the amount of special drawing rights to be provided or to discontinue the provision of such rights for the remainder of a basic period will be taken by an ordinary majority of the total voting power.

6. First decision. In taking their first decision to provide special drawing rights after the amendment enters into force, the Board of Governors will take into account the special considerations referred to in the Introduction in this outline.

7.*Opting out. A member which did not vote in favor of the decision to provide special drawing rights for any basic period may elect not to receive such rights by giving notice to the Fund before they are first made available in that basic period. Any member that has opted out with respect to a basic period may give notice to the Fund that it wishes to receive the special drawing rights to be made available subsequent to that notice during the period.

8.*Ineligibility. It will be necessary to decide whether a member which is ineligible to use the Fund’s resources should also be ineligible to use special drawing rights, and also whether during such ineligibility it should be able to obtain repayment of any loan made pursuant to V.

II. Cancellation of Special Drawing Rights

1.*Cancellation. The Fund may decide, at any time, to cancel, at such dates as it may specify, part or all of the special drawing rights that have been provided.

2. Amount of cancellation. The amount of special drawing rights to be canceled will be expressed as a percentage, uniform for all members, of the net amount of special drawing rights that have been provided to each member.

3. Procedure for decision. Decisions on the amount and timing of the cancellation of special drawing rights 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 special drawing rights. 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. Voting majority. By amendment of the Articles, decisions by the Board of Governors on the amount by which special drawing rights will be canceled will be taken by a four-fifths majority of the total voting power, except that decisions to decrease the amount of special drawing rights to be canceled will be taken by an ordinary majority of the total voting power.

III. Character and Use of Special Facility

1. Floating character of facility. A member will be free to decide whether to use special drawing rights before or after using any part of its other facilities. The Fund’s holdings of currency resulting from the use of special drawing rights will be excluded from the Fund’s holdings of that currency for the purposes of the Fund’s tranche policies and for the purposes of such Articles as Article V, Section 3 (a) (iii) (limits on drawing rights), Article V, Section 8 (c) (charges on Fund holdings), and Article XII, Section 6 (b) (distribution of net income).

2.*Repayment of Fund drawings in credit tranches. Whenever special drawing rights are provided, members which at that time are already making a conditional use of the Fund’s resources will be deemed to have used the newly provided special drawing rights immediately and to the extent necessary for the reconstitution of their conditional facilities.

3.*Principle of use. Members will be expected not to use their special drawing rights if, over a period of reasonable length and taking into account the effect of such use, their other reserves would increase. The Fund may make representations to any member that fails to observe this expectation.

4. Currencies to be drawn. The choice of currencies for drawings under the special facility will be in accordance with whatever may be the Fund’s policy on currencies to be drawn at the time.

5.*Reconstitution. The provisions of the Articles and policies with respect to repurchase in the basic gold tranche will apply to repurchase of drawings under the special facility. Reductions in the Fund’s holdings of a member’s currency (as a result of repurchases, sales, etc.) will be allocated according to rules to be formulated which will follow the general principle that credit tranche drawing rights and basic gold tranche drawing rights are restored before restoration of the special facility.

IV. Charges and Interest

1.*Payable by members. A member will pay charges on the Fund’s holdings of its currency resulting from the use of special drawing rights at such rate as the Fund may determine from time to time.

2.*Payable to members. The Fund will pay interest to members on amounts lent to the Fund pursuant to V at such rate as the Fund may determine from time to time.

V. Obligation to Lend

1.*Obligation. A member will have the obligation to lend to the Fund on demand a net cumulative amount of currency equal to twice the amount of special drawing rights provided to it, but no member will be called on to lend more than a percentage of its gross reserves to be specified from time to time by the Fund. A member will be obliged to lend, at the option of the Fund, the member’s own currency or its main reserve currency, provided that the consent of the currency issuer will be necessary if the Fund wishes to borrow the latter. The terms and conditions for loans will be consistent with this outline and will be laid down in advance.

2. Calls. The Fund may call on members to lend under this scheme for any of its operations.

3. Repayment on the initiative of the Fund

(i) The Fund, at its discretion, may repay amounts lent to it, taking into account its present and prospective need for currencies.

(ii) If, when the Fund reduces the amount of special drawing rights already provided, its borrowings from a member exceed twice the special drawing rights retained by the member after the reduction, the Fund will make arrangements to repay the excess to the member.

(iii) Repayments under this V.3 may be made in the currency of the lender, in gold, or in currencies convertible in fact, as determined by the Fund.

4.*Repayment on the request of a member. A member which has lent to the Fund under this scheme may request the repayment of part or all of its loan claim if, over a period of reasonable length and taking into account the effect of such repayment, its other reserves would not increase. Repayments under this V.4 may be made in gold or in currencies convertible in fact, as determined by the Fund.

5.*Gold guarantee. Loans to the Fund could be given an absolute gold value guarantee or they could be given a guarantee under Article IV, Section 8.

VI.* Adjustment of Voting Power

The Articles already provide for adjustments in votes as the result of net purchases and net sales of currency, whether that currency is subscribed to or borrowed by the Fund. However, there are certain limits on these adjustments, and adjusted voting applies only to two types of decision. A number of modifications in the relevant Article could be made in connection with the scheme.

VII. Withdrawal from the Fund

Upon withdrawal from the Fund, any indebtedness of the Fund arising from loans obtained under V will be treated as amounts due from the Fund for the purposes of Article XV, Section 3, and Schedule D of the Fund Agreement.

VIII. Liquidation of the Fund

If the facility is liquidated as part of the liquidation of the Fund, any indebtedness of the Fund arising from loans obtained under V will be treated as liabilities of the Fund, and for the purposes of Schedule E of the Articles it will be stipulated that the loans are repayable in the currency of the member to which the Fund is indebted.

IX. Entry into Force

The entry into force provision for the scheme will be the procedure by which the amendment establishing the reserve facility will become effective under Article XVII of the Articles. The procedure for amending the Articles is to communicate such a proposal to the Chairman of the Board of Governors who must bring it before the Board. After approval of the proposal by the Board of Governors, which requires majority of the votes cast, the Fund asks all members whether they accept the proposed amendment. The proposed amendment enters into force for all members three months or such shorter period as may be decided after the date the Fund formally communicates to all members that three fifths of the members having four fifths of the total voting power have accepted the amendment.

Explanatory Notes

This power would be added to the list of reserved powers in Article XII, Section 2 (b).

In contrast to the reserve unit scheme, where opting out would not be permitted with respect to a certain initial amount of reserve unit distribution, the drawing rights scheme permits opting out from the beginning. This would appear to be unavoidable in a scheme which is built into the financial structure of the Fund on the basis of pooled resources. Access to the facility is predicated on the extension of a line of credit, and without opting out, this would face members with a choice between compulsory lending and withdrawal from the Fund. Compulsory loans would be possible if membership in the scheme were optional. However, optional membership would be difficult to reconcile with pooled resources and the desirability of permitting all members to vote on all decisions relating to the use of the Fund’s resources.

The question will have to be considered whether special drawing rights could be used by a member when its access to the Fund’s resources has been limited under Article V, Section 5 of the Articles or under Rule K-2 of the Rules and Regulations.

On reduction, the question would arise of repurchase or reclassification of any outstanding use of the special drawing right in excess of the amount remaining after such reduction or the setoff of this amount against special drawing rights to be provided in the future.

The question would arise whether any drawings under the compensatory financing facility would be deemed to be repurchased under this rule.

This formulation is the same as in VI.3 (a) (i) of the reserve unit scheme. A member’s representation that it had a need to use its special facility, understood in this way, would receive the overwhelming benefit of any doubt or such other treatment as might be accorded to representations connected with the use of other reserve facilities in the Fund.

With this formulation, members would be expected to make short-term use of the special facility. This would continue to be true even if representations as to repurchase under the Decision of February 13, 1952 were eliminated for the special facility and for the basic gold tranche. However, if super gold tranche treatment were given to holdings resulting from the use of the special drawing rights, these holdings would be reduced only by the drawings of other members.

It will be necessary to decide whether, in addition, members should pay a service charge on using their special drawing rights.

It will be necessary to decide whether members should receive transfer charges for such loans. On the analogy of the gab, such charges would be paid, but not on the analogy of the illustrative reserve unit scheme.

It will be noted that the amount of the loan commitment is twice the amount of special drawing rights, in contrast to the principle of equality in the Managing Director’s Plan I. V.1 is in conformity with the limits on acceptance obligations of the illustrative reserve unit scheme.

A member’s loan of its main reserve currency is equivalent to the loan of its own currency and the conversion of it. The currency issuer’s position in the Fund will not be affected by loans of its currency by other members if the currency is used by the Fund at once. It is possible, therefore, that the currency issuer might give some form of general consent.

Requests for repayment would be accorded the same treatment as representations connected with the use of the special drawing rights (see note to III.3).

If the Fund decided to exercise the waiver provision in Article IV, Section 8 (d) and this waiver did not also extend to amounts borrowed by the Fund under the special facility, the Fund could find that its financial position would be jeopardized.

The modifications could provide, for example, for further additions to the votes of lenders by removing the present 25 per cent limit or by changing the formula for additional votes. A further question arises with respect to the categories of decisions to which such amended voting adjustments would apply.

Paragraphs marked with an asterisk are referred to in the attached Explanatory Notes.

See p. 15 above.

See pp. 3–7 above.

Paragraphs marked with an asterisk are referred to in the attached Explanatory Notes.

E.B. Decision No. 102-(52/11), Selected Decisions of the International Monetary Fund and Selected Documents, Seventh Issue, pp. 37–40, or International Monetary Fund, 1945–1965, Vol. III, pp. 228–30.

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