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IMF History (1966-1971) Volume 2
Chapter

(B) An Outline of a Reserve Facility Based on Reserve Units and Administered by a Fund Affiliate (June 8, 1967)

Author(s):
International Monetary Fund
Published Date:
February 1996
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This outline contains the principal elements of a reserve facility based on reserve units and administered by a Fund affiliate. It has been prepared as a companion paper to the Outline of a Reserve Facility Based on Drawing Rights in the Fund, and could serve as a basis for a report to be submitted to the Board of Governors for consideration at the Rio Annual Meeting. This outline reflects comments and suggestions made during recent discussions in the Fund, in the Group of Ten, and in the Third Joint Meeting, and therefore parallels the first outline on many points.

The facility is described in the outline as involving the establishment of an affiliate of the Fund, and it would therefore be a separate legal entity with its own Articles of Agreement. However, provisions relating to some of the topics in this outline could be included in By-Laws or Rules and Regulations rather than in the Articles. An agreement between the Fund and the affiliate might be necessary to deal with certain administrative and other matters.

I. Establishment of an International Reserve Organization

Articles of Agreement will be adopted which will establish a new international organization and which will set forth the legal provisions relating to it. The organization will have some appropriate name, such as the International Reserve Union (iru).

II. Members and Other Holders

1. Members. Membership in the iru will be open to any member of the Fund that undertakes the obligations of the Articles of the iru. A member of the iru will have a quota equal at all times to its quota in the Fund.

2. Fund. The Fund will be authorized, by appropriate provisions in the Articles of the iru and by amendment of the Fund’s Articles, to hold and use reserve units.

III. Issuance of Reserve Units

1. Principles for decisions. The iru will issue reserve units in accordance with the provisions of its Articles. The principles to be taken into consideration in connection with the first and subsequent decisions to issue reserve units will be included in an introductory provision of the Articles or in a report explaining the Articles.

2. Basic period and rate of issuance. The following provisions will apply to any decision to issue reserve units:

  • (i) The decision will prescribe a basic period during which reserve units will be issued annually. The period normally will be five years in length, but the iru may decide that any basic period will be of different duration. The first basic period will begin on the effective date of the first decision to issue reserve units.

  • (ii) The decision will also prescribe the rate or rates at which reserve units will be issued annually for a basic period. This rate will be expressed as a percentage, uniform for all members, of their quotas on the date specified in the decision.

3. Procedure for decisions, (a) Any decision on the basic period for, timing of, or rate of issuance of reserve units will be taken by the Board of Governors on the basis of a proposal by the Managing Director concurred in by the Executive Directors. Before submitting a proposal, the Managing Director will conduct such consultations as will enable him to ascertain that there is broad support among members for the issuance of reserve units at the proposed rate and for the proposed basic period.

(b) The Managing Director will make proposals with respect to the issuance of reserve units (i) within sufficient time before the end of a basic period; (ii) in the circumstances of III.4; (iii) within six months after the Board of Governors or the Executive Directors request that he make a proposal. The Managing Director will make a proposal for the first basic period when he is of the opinion that there is broad support among members to start the issuance of reserve units.

4. Change in rate of issuance or basic period. If there are unexpected major developments which make it desirable to change the rate at which further reserve units are to be issued for a basic period, (i) the rate may be increased or decreased, or (ii) the basic period may be terminated and a different rate of issuance adopted for a new basic period. Paragraph III.3 will apply to such changes.

5. Voting majority. Any decisions of the Board of Governors on the basic period for, timing of, or rate of issuance of reserve units will be taken by a [———] majority of the voting power of members under VII.2, except that decisions to decrease the rate of issuance of reserve units for the remainder of a basic period will be taken by a simple majority of the voting power of members.

6. Opting out. (a) Subject to (b) below, members will be required to receive reserve units issued to them.

(b) After reserve units equal to one half a member’s quota on the date the Articles enter into force have been issued to the member, it may elect not to receive reserve units to be issued to it under a decision if it did not vote in favor of that decision and if it gave notice of its election prior to the issuance of any reserve units under the decision.

(c) By giving notice to the iru, a member that has opted out in accordance with (b) above may withdraw its earlier notice so that it ceases to apply to reserve units to be issued after such withdrawal.

IV. Cancellation of Reserve Units

The principles set forth in III relating to the procedure and voting for the issuance of reserve units will be applicable, with appropriate modifications, to the cancellation of such units.

V. Use of Reserve Units

1. Right to transfer reserve units, (a) A member will be entitled, in accordance with the provisions of V, to transfer reserve units to another member in return for an equivalent amount of the other member’s currency or, at the transferor’s option, the transferee’s main reserve currency. If neither currency is convertible in fact, the transferee will provide a currency which is convertible in fact if the transferor so requests.

(b) Except as otherwise indicated in such general rules as the iru may adopt, a member will be expected not to make a greater gross use of reserve units than it needs to make in the light of its balance of payments and reserve position. The use of reserve units will not be subject to prior challenge on the basis of this expectation, but the iru may make representations to any member which, in the iru’s judgment, has failed to observe the expectation.

2. Voluntary acceptance of transfers. Except as otherwise indicated in such general rules as the iru may adopt, a member may agree to accept reserve units in exchange for its own or any other currency from any other member or from the Fund.

3. Obligatory acceptance of transfers, (a) A member to which reserve units are tendered pursuant to such rules or instructions as the iru may adopt under (c) will be obliged to accept the reserve units for currency.

(b) A member’s obligation to accept reserve units in accordance with (a) above will not extend beyond the point at which its holdings of reserve units equal three times the net cumulative amount of reserve units issued to it. However, a member may accept, or agree with the iru to accept, reserve units in excess of this limit.

(c) The iru’s rules and instructions relating to the members to which transfers of reserve units should be directed will be based on the following main general principles, supplemented by such principles as the iru may find desirable from time to time:

  • (i) Normally, reserve units will be transferred to members that have a sufficiently strong balance of payments and reserve position, but this will not preclude the possibility of transfers to members with strong reserve positions even though they have moderate balance of payments deficits.

  • (ii) The iru’s primary criterion will be to seek to approach over time equality, among the members indicated from time to time by the criteria in (i) above, in the ratios of their holdings of reserve units to total reserves.

  • (iii) If notwithstanding VIII.1 a member is making a large and sustained use of the reserve units issued to it, the iru, after making an appropriate representation to the member, may decide that the member will have to accept transfers of reserve units even though it is not in a reasonably strong balance of payments and reserve position.

4. Exchange rate. The use of reserve units between members will be at par if against U.S. dollars or, if against any other currency, at the corresponding market rate between that currency and the U.S. dollar. The iru will certify this rate upon request.

VI. Interest

A moderate rate of interest will be paid in reserve units on holdings of reserve units. The cost of this interest will be assessed against all members in proportion to the net cumulative amounts of reserve units issued to them.

VII. Structure and Voting

1. Structure. (a) The structure of the iru will be similar to that of the Fund, with Board of Governors, Executive Directors, Managing Director, and staff.

(b) Certain powers, and in particular those relating to the adoption of decisions concerning the issuance, cancellation, and certain aspects of the use of reserve units, will be reserved to the Board of Governors. All other powers, except those specifically granted to other organs, will be vested in the Board of Governors which will be able to delegate them to the Executive Directors.

(c) Governors of the Fund appointed by members of the iru, Executive Directors of the Fund appointed or elected by members of the iru, and the Managing Director of the Fund will serve ex officio as Governors, Executive Directors, and Managing Director of the iru. The staff of the Fund, as needed, will serve as the staff of the iru.

2. Voting, (a) Each member will have

  • (1) 250 votes

  • plus

  • (2) the greater of either

    • (i) one vote for each part of its quota as of the date of entry into force of the Articles equivalent to $100,000, or

    • (ii) one vote for each 50,000 of the net cumulative amount of reserve units issued to it;

  • plus

  • (3) one vote for each [———] of reserve units by which on the average over the preceding [———] years its holdings of reserve units have exceeded the net cumulative amount issued to it.

(b) Each Governor will cast the votes of the member appointing him.

(c) Each Executive Director will cast, as a bloc, the votes of the member or members appointing or electing him.

(d) Except as otherwise provided, all decisions will be taken by a majority of votes cast.

VIII. General Provisions

1. Collaboration. Members will undertake to collaborate with the iru to promote its purposes and in particular to facilitate the proper functioning and effective use of reserve units within the international monetary system. In accordance therewith, members will seek to avoid a large and sustained use of reserve units.

2. Maintenance of gold value. The value of reserve units will be equal to 0.888 671 gram of fine gold. The rights and obligations of members and of the iru can be subject to an absolute maintenance of gold value or to provisions similar to Article IV, Section 8 of the Fund’s Articles.

3. Nonfulfillment of obligations. (a) If the iru finds that a member has failed to fulfill its obligations to accept reserve units, the iru may suspend the right of the member to use its reserve units.

(b) If the iru finds that a member has failed to fulfill any other obligation under the Articles or continues to make a large and sustained use of its reserve units, the iru may suspend the member’s right to use any reserve units issued to, or acquired by, it after the suspension.

(c) Suspension under (a) or (b) above will not affect a member’s obligation to accept reserve units in accordance with the Articles.

(d) The iru may at any time terminate a suspension under (a) or (b) above.

4. Ineligibility to use Fund resources. Ineligibility to use the Fund’s resources, or any limitation in connection therewith, will not prevent the use of reserve units.

5. Accounts. All changes in holdings of reserve units will take effect when recorded in the accounts of the iru.

6. Reports. The Executive Directors will submit to the Board of Governors an annual report which will review the operations of the iru.

IX. Settlement with a Withdrawing Member

1. Withdrawal from the Fund. A member of the iru that withdraws from membership in the Fund will be deemed to have withdrawn automatically from membership in the iru. However, a member that withdraws from the iru will not be deemed thereby to have withdrawn from the Fund.

2. Obligations upon withdrawal. Settlement between a withdrawing member and the iru will be made in a manner similar to that provided for in the Fund’s Articles. If no agreement is reached on a settlement, any obligation resulting from the net use or net acquisition of reserve units by the withdrawing member will be satisfied by it or by the iru, as the case may be, over a specified period of years.

X. Settlement on Liquidation

Liquidation will be in accordance with procedures comparable to those in Schedule E of the Fund’s Articles and with rules that would distribute the cost of default among members according to the net cumulative amount of reserve units issued to each member.

XI. Entry into Force

The Articles establishing the iru will enter into force on the adherence by members of the Fund having 80 per cent of the total quotas of the Fund, or in accordance with some other appropriate formula.

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