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IMF History (1966-1971) Volume 2
Chapter

(C) An Outline of a Reserve Facility Based on Drawing Rights in the Fund—Revised (June 8, 1967)

Author(s):
International Monetary Fund
Published Date:
February 1996
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This outline, which contains the principal elements of a reserve facility based on drawing rights in the Fund separate from the present facilities of the Fund, could serve as a basis for a report to be submitted to the Board of Governors for consideration at the Rio Annual Meeting. It reflects comments and suggestions made during recent discussions in the Fund, in the Group of Ten, and in the Third Joint Meeting.

The facility is described in this outline as being established within the framework of the Fund and, therefore, by an amendment of the Fund’s Articles. 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 amendment itself. The technique of an amendment has been adopted for illustrative purposes and is not intended to imply a preference for it as compared with the establishment of an affiliate.

I. Establishment of a Reserve Drawing Account in the Fund

An amendment to the Articles will establish a Reserve Drawing Account through which all the operations relating to reserve drawing rights will be carried out. The operations of and resources available under the Reserve Drawing Account will be separate from the operations and resources of the present Fund which will be referred to as the General Account. Separate provisions will be included in the amendment for withdrawal from or liquidation of the Reserve Drawing Account; Article XVI, Section 2, and Schedules D and E on withdrawal and liquidation will continue to apply as they do at present to the General Account of the Fund.

II. Participants and Other Holders

1. Participants. Participation in the Reserve Drawing Account will be open to any member of the Fund that undertakes the obligations of the amendment. A member’s quota in the Fund will be the same for the purposes of both the General and the Reserve Drawing Accounts of the Fund.

2. Holding by General Account. The General Account will be authorized to hold and use reserve drawing rights.

III. Distribution of Reserve Drawing Rights

1. Principles for decisions. The Reserve Drawing Account will distribute reserve drawing rights in accordance with the provisions of the amendment. The principles to be taken into consideration in connection with the first and subsequent decisions to distribute reserve drawing rights will be included in an introductory provision of the amendment or in a report explaining the amendment.

2. Basic period and rate of distribution. The following provisions will apply to any decision to distribute reserve drawing rights:

  • (i) The decision will prescribe a basic period during which reserve drawing rights will be distributed annually. The period normally will be five years in length, but the Fund 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 distribute reserve drawing rights.

  • (ii) The decision will also prescribe the rate or rates at which reserve drawing rights will be distributed annually for a basic period. This rate will be expressed as a percentage, uniform for all participants, of Fund 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 distribution of reserve drawing rights 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 participants for the distribution of reserve drawing rights at the proposed rate and for the proposed basic period.

(b) The Managing Director will make proposals with respect to the distribution of reserve drawing rights (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 the participants to start the distribution of reserve drawing rights.

4. Change in rate of distribution or basic period. If there are unexpected major developments which make it desirable to change the rate at which further reserve drawing rights are to be distributed 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 distribution 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 distribution of reserve drawing rights will be taken by a [———] majority of the voting power of participants under VII.2, except that decisions to decrease the rate of distribution of reserve drawing rights for the remainder of a basic period will be taken by a simple majority of the voting power of participants.

6. Opting out. (a) Subject to (b) below, participants will be required to receive reserve drawing rights distributed to them.

(b) After reserve drawing rights equal to one half of a participant’s quota on the effective date of the amendment have been distributed to the participant, it may elect not to receive reserve drawing rights to be distributed 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 distribution of any reserve drawing rights under the decision.

(c) By giving notice to the Reserve Drawing Account, a participant that has opted out in accordance with (b) above may withdraw its earlier notice so that it ceases to apply to reserve drawing rights to be distributed after such withdrawal.

IV. Cancellation of Reserve Drawing Rights

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

V. Use of Reserve Drawing Rights

1. Right to use reserve drawing rights, (a) A participant will be entitled, in accordance with the provisions of V, to use reserve drawing rights to acquire from another participant an equivalent amount of the other participant’s currency or, at the user’s option, the other participant’s main reserve currency. If neither currency is convertible in fact, the other participant will provide a currency which is convertible in fact if the user so requests. The currencies referred to may be obtained either directly from the other participant or through the Reserve Drawing Account, at the user’s option. A participant which thus provides currency, either directly or through the Reserve Drawing Account, will receive an equivalent amount of reserve drawing rights.

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

2. Voluntary provision of currency. Except as otherwise indicated in such general rules as the Fund may adopt, a participant may agree with another participant or with the General Account to provide currency and thereby acquire reserve drawing rights.

3. Obligatory provision of currency, (a) A participant which is requested to provide currency pursuant to such rules or instructions as the Fund may adopt under (c) below will be obliged to. provide currency and thereby acquire reserve drawing rights.

(b) A participant’s obligation to provide currency in accordance with (a) above will not extend beyond a point at which its holdings of reserve drawing rights equal three times the net cumulative amount of such rights distributed to it. However, a participant may provide currency or agree with the Fund to provide currency in excess of this limit.

(c) The Fund’s rules and instructions relating to the participants from which currencies should be acquired by users of reserve drawing rights will be based on the following main general principles, supplemented by such principles as the Fund may find desirable from time to time:

  • (i) Normally, currencies will be acquired from participants that have a sufficiently strong balance of payments and reserve position, but this will not preclude the possibility that currency will be acquired from participants with strong reserve positions even though they have moderate balance of payments deficits.

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

  • (iii) If notwithstanding VIII.1 a participant is making a large and sustained use of the reserve drawing rights distributed to it, the Fund, after making an appropriate representation to the participant, may decide that the participant will have to provide currency even though it is not in a reasonably strong balance of payments and reserve position.

4. Exchange rate. The use of reserve drawing rights between participants either directly or through the Reserve Drawing Account will be at par if against U.S. dollars, or if against any other currency the corresponding market rate between that currency and the U.S. dollar. The Reserve Drawing Account will certify this rate upon request.

VI. Interest

A moderate rate of interest will be paid in reserve drawing rights on holdings of reserve drawing rights. The cost of this interest will be assessed against all participants in proportion to net cumulative distributions of reserve drawing rights to them.

VII. Functions of Fund Organs and Voting

1. Exercise of powers. The decisions taken with respect to the Reserve Drawing Account, and the supervision of its operations, will be carried out by the Board of Governors, the Executive Directors, the Managing Director, and the staff of the Fund. Certain powers, and in particular those relating to the adoption of decisions concerning the distribution, cancellation, and certain aspects of the use of reserve drawing rights, 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.

2. Voting, (a) Decisions on matters pertaining to the Reserve Drawing Account will be taken only by participants. In a vote on a matter pertaining to the Reserve Drawing Account only Governors of participants will be entitled to vote, and Executive Directors will cast only the votes of participants appointing or electing them. Each Executive Director will cast all of these votes as a bloc.

(b) Each participant will have

  • (1) 250 votes

  • plus

  • (2) the greater of either

    • (i) one vote for each part of its quota as of the effective date of the amendment equivalent to $100,000, or

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

  • plus

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

(c) Except as otherwise provided in the amendment all decisions pertaining to the Reserve Drawing Account will be taken by a majority of votes cast.

VIII. General Provisions

1. Collaboration. Participants will undertake to collaborate with the Fund in order to facilitate the proper functioning and effective use of reserve drawing rights within the international monetary system. In accordance therewith, participants will seek to avoid a large and sustained use of reserve drawing rights.

2. Maintenance of gold value. The unit of value for expressing reserve drawing rights will be equal to 0.888 671 gram of fine gold. The rights and obligations of participants and of the Reserve Drawing Account 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 Fund finds that a participant has failed to fulfill its obligations to provide currency in accordance with the amendment, the Fund may suspend the right of the participant to use its reserve drawing rights.

(b) If the Fund finds that a participant has failed to fulfill any other obligation under the amendment or continues to make a large and sustained use of its reserve drawing rights, the Fund may suspend the participant’s right to use any reserve drawing rights distributed to, or acquired by, it after the suspension.

(c) Suspension under (a) or (b) above will not affect a participant’s obligation to provide currency in accordance with the amendment.

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

4. Ineligibility to use other Fund resources. Ineligibility to use the resources of the General Account, or any limitation in connection therewith, will not prevent the use of reserve drawing rights.

5. Accounts. All changes in holdings of reserve drawing rights will take effect when recorded in the accounts of the Reserve Drawing Account.

6. Reports. The Executive Directors will review the operations of the Reserve Drawing Account as part of their annual report to the Board of Governors.

IX. Settlement with a Withdrawing Member

1. Withdrawal from the Fund or the Reserve Drawing Account. A participant that withdraws from membership in the Fund will be deemed to have withdrawn automatically from both the General Account and the Reserve Drawing Account. However, a participant will be permitted to withdraw from the Reserve Drawing Account without also withdrawing from the Fund.

2. Obligations upon withdrawal. Settlement between a withdrawing participant and the Reserve Drawing Account will be accomplished in a manner similar to that provided for in the Fund’s Articles. If no agreement on a settlement is reached, any net use or net receipt of reserve drawing rights by such a participant will be paid off by it or redeemed by the Fund, 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 participants according to the net cumulative distribution of reserve drawing rights to each participant.

XI. Entry into Force

The amendment would enter into force in accordance with the terms of Article XVII of the Fund’s Articles.

The question of terminology will need to be examined further.

See above, pp. 30–34.

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