Chapter

Proposed Amendment of the Articles of Agreement

Author(s):
International Monetary Fund
Published Date:
February 1996
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On April 17, 1968, the Executive Directors submitted to the Governors detailed proposals for amendments to the Articles of Agreement of the Fund. These proposals provided for a Facility Based on Special Drawing Rights in the Fund, and for some other changes in the Articles by which, inter alia, gold tranche drawings will become legally automatic, the provisions for repurchases will be substantially altered, and certain revisions will be made in voting requirements.

The proposals were approved by the Governors on May 31, 1968, and entered into force on July 28, 1969, having been accepted by 60 per cent of the members and by members having 80 per cent of the total votes.

Establishment of a Facility Based on Special Drawing Rights in the International Monetary Fund and Modifications in the Rules and Practices of the Fund

(April 1968)

A Report by the Executive Directors to the Board of Governors Proposing Amendment of the Articles of Agreement

TABLE OF CONTENTS

INTRODUCTION

At its Twenty-Second Annual Meeting at Rio de Janeiro in September 1967, the Board of Governors adopted the following Resolution:

  • WHEREAS the functioning of the international monetary system and its improvement, including arrangements to meet the need, as and when it arises, for a supplement to existing reserve assets, have been the subject of extensive study and international discussion resulting in the Outline of a Facility Based on Special Drawing Rights in the International Monetary Fund, which Outline is attached to this Resolution; and

  • WHEREAS studies are currently under way on possible improvements in the present rules and practices of the Fund;

  • NOW, THEREFORE, the Board of Governors hereby RESOLVES:

  • That the Executive Directors are requested to

    • 1. Proceed with their work relating to both

      • (a) the establishment in the Fund of a new facility on the basis of the Outline in order to meet the need, as and when it arises, for a supplement to existing reserve assets, and

      • (b) improvements in the present rules and practices of the Fund based on developments in world economic conditions and the experience of the Fund since the adoption of the Articles of Agreement of the Fund; and

    • 2. Submit to the Board of Governors as soon as possible but not later than March 31, 1968

    • (a) a report proposing amendments to the Articles of Agreement and the By-Laws for the purpose of establishing a new facility on the basis of the Outline, and

    • (b) a report proposing such amendments to the Articles of Agreement and the By-Laws as would be required to give effect to those modifications in the present rules and practices of the Fund that the Executive Directors will recommend.

As the Governors have been informed, it was not possible to complete by March 31, 1968 the work on the two subjects referred to in paragraph 1 of this Resolution. The Executive Directors are now submitting to the Board of Governors the present Report which combines the two reports envisaged in paragraph 2 of the Resolution. Part I constitutes the first and Part II the second of these two reports. The recommendations of the Executive Directors are presented together in Annex A to this Report.

Annex A submits for approval by the Board of Governors a Resolution proposing modifications in the Articles of Agreement of the International Monetary Fund for the purpose of (a) establishing in the Fund a facility for special drawing rights based on the Outline, and (b) giving effect to certain changes in the present rules and practices of the Fund that the Executive Directors have decided to recommend. They are not recommending modifications in the By-Laws at this time. It would not be possible for the Board of Governors to adopt By-Laws relating to the new facility until the participation requirement prescribed in Article XXIII, Section 1, has been met. Recommendations will be submitted in due course.

The modifications in the Articles of Agreement under both (a) and (b) above are set forth in the Proposed Amendment which appears in the attachment to the Resolution. The Executive Directors recommend to the Board of Governors the adoption of this Resolution.

The Outline referred to above is also annexed to this Report (Annex B).

While the modifications set forth in Annex A are for the most part self-explanatory, the Executive Directors believe that brief comments on various aspects of these modifications may be useful to Governors and to member governments. They are to be found in Parts I and II of the Report.

In addition, Part III of the Report describes the procedure to be followed in order to give effect to the proposed modifications.

The Executive Directors wish to take this opportunity to express their great appreciation of the outstanding contribution made by the Staff of the Fund at all levels in the implementation of the Governors’ Resolution. Working under intense pressure, sustained for more than six months, they have at all times given the Executive Directors the benefit of their skill and experience.

PART I The New Facility

1. General Comments

The Resolution adopted by the Board of Governors at its Rio de Janeiro Meeting envisaged the establishment in the Fund of a new facility based on special drawing rights to meet the need, as and when it arises, for a supplement to existing reserve assets. The changes in the Introductory Article and the addition of Articles XXI through XXXII and Schedules F, G, H, and I, which are included in the Proposed Amendment, will achieve this purpose, and under them the Fund will acquire an important new function in the international monetary system. The new provisions also deal with the relationship of the new facility to the present functions of the Fund. However, the provisions of the Articles of Agreement, as amended, will constitute a single legal document.

As requested by the Rio de Janeiro Resolution, the Executive Directors, in drafting the modifications in the Articles of Agreement that would establish the new facility, have worked on the basis of the Outline attached to that Resolution. The Outline sets forth the main features of the new facility and several of its more detailed characteristics. It was, however, intentionally less than a complete plan of the facility, and the Executive Directors have had to elaborate certain aspects of the facility that were treated in the Outline only in a very general way. This applied, for example, to the establishment of the General and the Special Drawing Accounts, the terms on which the General Account may hold and use special drawing rights, the provision relating to “other holders,” the cancellation of special drawing rights, the payment of interest, the levying of charges, withdrawal from the facility, and its liquidation. It was also necessary to provide in detail for the effects on the organizational structure of the Fund that follow from the fact that, while all members are entitled to become participants in the new facility, they are not required to participate. However, it has not been felt necessary to include in the Proposed Amendment a provision corresponding to Paragraph III. 3 (d) of the Outline under which the Executive Directors are to review the operations of the Special Drawing Account and the adequacy of global reserves as part of their Annual Report to the Board of Governors. On the analogy of Article XII, Section 7, and Section 10 of the By-Laws, this requirement will be included in the By-Laws.

2. The Special Drawing Account

Under the Articles of Agreement as amended, there will be maintained in the Fund two separate Accounts, a General Account and a Special Drawing Account. The Fund will carry on its present operations and transactions, including those of an administrative character, through the General Account, and its functions relating to special drawing rights through the Special Drawing Account. There will be a corresponding separation of assets and property as well as liabilities and obligations.

Operations and transactions involving the acceptance or holding of special drawing rights by the Fund in the General Account or the use of special drawing rights thus held will be carried out through and recorded in both Accounts.

The separation of the two Accounts does not create a new legal entity. The Fund will continue to be the same institution with a single international personality.

3. Participation in the Special Drawing Account

Participation in the Special Drawing Account will be open to members of the Fund and only to them. Each member of the Fund will continue to be entitled to take part in General Account operations and transactions, but in order to become a participant in the Special Drawing Account a member will have to deposit with the Fund an instrument setting forth that it undertakes all the obligations of a participant in the Special Drawing Account in accordance with its law and that it has taken all steps necessary to enable it to carry out all these obligations. No member will become a participant, however, before these instruments have been deposited by members that have at least 75 per cent of the total quotas in the Fund.

Participation in the Special Drawing Account will involve the assumption of both financial and nonfinancial obligations. The basic financial obligation that each participant will assume will be the obligation under Article XXV, Section 4, to provide currency convertible in fact, when the participant is designated by the Fund, to another participant using its special drawing rights, up to a total net amount equivalent to twice the net amount of special drawing rights allocated to the designated participant. The participant providing currency will receive an equivalent amount of special drawing rights. The circumstances in which a participant will be designated to provide currency are set forth in Article XXV, Section 5, and Schedule F.

A participant whose Governor did not vote in favor of a decision under which allocations of special drawing rights are being made will not have to receive allocations under that decision if it does not wish to do so. A participant will be required to receive special drawing rights allocated to it if its Governor voted in favor of the decision under which the allocations are made. Accordingly, a participant that wishes to receive special drawing rights to be allocated to it under a decision and that needs parliamentary or other legal authorization in order to be able to meet the financial obligation assumed under Article XXV, Section 4, should obtain, prior to the adoption of the relevant decision to make allocations, the necessary authorization.

The domestic legal steps that each member will need to take in order to enable it to carry out the obligations of a participant, both financial and nonfinancial, will have to be determined by the authorities of the member in accordance with its own constitutional and other legal requirements. One way in which a member will be able to put itself into a position to meet its obligations under Article XXV, Section 4, to provide currency will be to give its central bank the power to acquire and hold special drawing rights without limitation, thus obviating any need for further legal action from time to time. Central banks in many countries already have authority to acquire gold and some or all forms of foreign exchange.

An alternative course would be for a member to seek parliamentary or other legal authority, as may be necessary, for a specified amount, e.g., authority to receive allocations equal to not less than 50 per cent of quota with the consequent obligation to provide currency up to a total net amount at least equal to its quota.

4. Holders of Special Drawing Rights Other than Participants

Allocations of special drawing rights may be made only to participants, but the holding of such rights is not restricted to participants. Article XXIII, Section 2, authorizes the Fund itself to accept and hold special drawing rights in, and use them through, the General Account. Detailed provisions with respect to these operations and transactions are contained in Article XXV, Section 7.

Section 3 of Article XXIII foresees the possibility that the Fund may permit others to accept, hold, and use special drawing rights. Under this provision the Fund, by an 85 per cent majority of the total voting power, will be able to permit nonmembers and members that are not participants to engage in operations and transactions involving special drawing rights. Other holders that the Fund could authorize to engage in these operations and transactions would be institutions that perform one or more functions of a central bank for more than one member. Regional organizations in which members or their central banks pool some of their reserves and the Bank for International Settlements are considered to fall within this description. The expression “operations and transactions” in Article XXIII, Section 3, will cover the operations and transactions of a central banking character engaged in by the organizations referred to in this section.

The Fund has the power to prescribe, by an 85 per cent majority, the terms and conditions for the operations and transactions between participants and these other holders, but these terms and conditions must be consistent with the provisions of the Articles. In exercising this power the Fund will necessarily be guided by the nature of special drawing rights as a supplement to existing reserve assets and by the desirability of ensuring their proper use. Under this power the Fund will be able to prescribe, where it is found appropriate, that operations and transactions between participants and other holders will be subject to the requirement of need which is discussed in section 15 below. It is expected that normally the requirement of need will be prescribed as part of the terms and conditions for transactions in which participants use special drawing rights to obtain currency from other holders.

5. Recording and Information

Article XXII, Section 3, provides that all changes in holdings of special drawing rights, whether the result of allocations and cancellations or of operations and transactions, will become effective only when recorded by the Fund in the Special Drawing Account. This will apply not only to operations and transactions between participants but also to operations and transactions between other holders and participants. The Fund will record changes resulting from operations and transactions that are in conformity with the obligations of participants under the provisions of the Articles or any terms and conditions prescribed by the Fund under these provisions. To enable the Fund to carry out this task, participants are required to inform the Fund of any operation or transaction involving special drawing rights that they enter into and to indicate at the same time the provisions of the Articles under which the operation or transaction is entered into. The obligation falls on both parties to the operation or transaction if they are participants. It is expected that a similar requirement will be included in the terms and conditions for other holders.

6. Principles Governing Allocations and Cancellations

Article XXIV, Section 1 (a), states the basic principle which is to govern all decisions to allocate or cancel special drawing rights. This principle is that the Fund must seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets, in a manner that will promote the attainment of the Fund’s purposes as set forth in Article I, and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.

7. First Decision to Allocate Special Drawing Rights

Article XXIV, Section 1 (b), provides that the first decision to allocate special drawing rights shall be based on the principles that guide all decisions to allocate special drawing rights, and in addition, that it shall take into account certain special considerations. The first of these special considerations is a collective judgment that there is a global need to supplement reserves. The term “collective judgment” reflects the requirement of an 85 per cent majority of the total voting power for the adoption by the Board of Governors of decisions to allocate special drawing rights. The other special considerations are the attainment of a better balance of payments equilibrium and the likelihood of a better working of the adjustment process in the future. While the situation of all members is relevant to a judgment with respect to the attainment of a better balance of payments equilibrium, the judgment to be made at the time will necessarily be influenced predominantly by the situation of members that have a large share in world trade and payments.

8. Allocation and Cancellation

Special drawing rights will be allocated or cancelled over periods, referred to in the Articles as “basic” periods, which normally will be five years in duration and which will run consecutively. Allocations to participants will be made at yearly intervals and on the basis of their quotas on the date of the relevant decision to allocate, unless the Fund decides that allocations are to be made at different intervals or are to be based on quotas at different dates.

The concept of consecutive basic periods has been introduced for technical reasons and does not prejudice the exercise by the Fund of its discretion to allocate special drawing rights, or to cancel special drawing rights, or to do neither. The Fund will exercise its discretion on the basis of the judgment it forms on the need to supplement existing reserve assets. It will be possible to have basic periods in which there are neither allocations nor cancellations. A basic period can be an “empty period,” either because the Governors have approved a proposal by the Managing Director that no allocation or cancellation should be made, or because the Managing Director, having ascertained that there is no broad support for a proposal that would be consistent with the requirements of the Articles, has been unable to make a proposal, or because a proposal by the Managing Director to allocate or to cancel has failed to command the required majority.

A member that becomes a participant after a basic period has started will not receive allocations during that basic period, unless the Fund decides that the member will start to receive allocations beginning with the next allocation after it becomes a participant. It is expected that normally the Fund will so decide.

9. Decisions on Allocations and Cancellations

Under Article XXIV, Section 4 (a), and Article XXVII (a) (i), decisions to allocate or cancel special drawing rights may be made only by the Board of Governors and only by an 85 per cent majority of the total voting power. These decisions may be made by the Governors only on the basis of proposals of the Managing Director concurred in by a decision of the Executive Directors.

The Managing Director is required to make proposals at certain times and in certain circumstances. Whenever he is required to make proposals but he reaches a conclusion that there is no proposal that would be consistent with the principles and considerations governing allocation and cancellation that would have broad support among participants, he must submit a report to both the Board of Governors and the Executive Directors.

10. Operations and Transactions in Special Drawing Rights

As stated in Article XXV, Section 1, special drawing rights may be used only in the operations and transactions authorized by or under the provisions of the Articles. The term “transactions,” as used in Articles XXI through XXXII, refers to uses of special drawing rights to obtain currency. The main examples are transactions under Article XXV, Section 2. The term “operations” refers to all other uses of special drawing rights authorized by or under the Articles, such as the payment of interest, charges, and assessments under Article XXVI.

11. Receipt of Allocations

Article XXIV, Section 2 (e), requires each member that has become a participant to accept an allocation of special drawing rights unless its Governor voted against or did not vote on the decision under which the allocation is to be made and, prior to the first allocation under that decision, the participant has given the Fund notice that it does not wish to receive the allocation. In other words, a participant whose Governor did not vote affirmatively may “opt out” of allocations under a decision (i.e., may choose not to receive special drawing rights and incur the corresponding obligations) by giving notice to that effect.

A participant that has opted out with respect to a basic period may “opt back in” (i.e., resume receiving allocations) with the permission of the Fund, but the participant will receive only the allocations made after it has been permitted to opt back in. Opting back in is not possible with respect to allocations that were made previously during the basic period. It is expected that the Fund will give sympathetic consideration to a request by a participant to opt back in.

12. Character of Special Drawing Rights

Special drawing rights will be issued by the Fund but they will not confer on participants a claim against the Fund itself to provide currency, except as prescribed by provisions of Articles XXX and XXXI and Schedules G and H relating to the termination of participation and liquidation. Participants will be able to use special drawing rights to obtain currency from other participants in accordance with the provisions of Article XXV. The provisions of Article XXV require the Fund to designate participants to provide currency to other participants using their special drawing rights in accordance with Section 2 (a) of that Article, so that participants can be assured that at all times they will be able to use their special drawing rights in a manner consistent with the provisions of the Articles.

13. Designation of Participants to Provide Currency

The principles that will govern the designation of participants to provide currency to other participants using their special drawing rights in accordance with Article XXV, Section 2 (a), are indicated in the three subsections of Section 5 (a) of the same Article. However, this listing is not exhaustive; the Fund may supplement these principles with other principles.

As legards the order of priority between designations under subsections (a) (i) and (a) (ii) of Section 5 and among the three categories mentioned in subsection (a) (ii), subsection (a) (iii) prescribes that priority shall normally be given to those participants that need to acquire special drawing rights to meet the objectives of designation under subsection (a) (ii). Thus, it may be assumed that, as a general rule, the Fund will designate participants under subsection (a) (ii) if there are participants that need special drawing rights in order to comply with the reconstitution requirements of Schedule G, to reduce a negative balance (i.e., the amount of special drawing rights that the participant owes the Fund because, at the time of a cancellation, it did not hold an amount of rights equivalent to its share of the cancellation), or to offset the effect of a failure to fulfill the expectation referred to in Article XXV, Section 3 (a), on the requirement of need for the use of special drawing rights.

The Outline contained two possible criteria to guide designation among participants with a sufficiently strong balance of payments and reserve position: (i) the ratios of these participants’ holdings of special drawing rights to their gross reserves, and (ii) the ratios of such holdings in excess of net cumulative allocations to gross reserves.

The Executive Directors have examined the relative merits of these two criteria. The excess holdings criterion is expected, on balance, to offer significant advantages in its application and to give the new facility a broad basis for designation consistent with the universal approach of the scheme, thereby contributing to the confidence of participants in the new instrument of special drawing rights. At the same time the Executive Directors considered a certain flexibility to be desirable for the future, and they have therefore provided in Article XXV, Section 5 (c), for a review of the rules for designation before the end of each basic period, in order to enable, the Fund to adopt new rules if it deems this to be desirable. The Executive Directors have also considered that the results of a system of designation will depend not only on the choice of a criterion to determine the target distribution of holdings of special drawing rights among participants but also on the selection of the participants that should be subject to designation and on the particular formula used to aim over time at harmonization of individual ratios.

Accordingly, Schedule F envisages that participants shall be designated for such amounts as will promote over time equality in their ratios of excess holdings of special drawing rights to their holdings of gold and foreign exchange. Because initially these ratios will be zero for all participants, paragraph (b) (i) of the Schedule indicates that participants will be designated in amounts that are proportionate to their official holdings of gold and foreign exchange. With the passage of time situations are likely to arise in which such ratios for one or more participants subject to designation may be significantly below those of the majority of other participants in the group. Paragraph (b) (ii) therefore envisages a designation process which will tend to reduce gradually the difference between low and high ratios among participants subject to designation, in order to avoid sudden and massive designation of participants with relatively low ratios. The intention is that such participants, once their position permitted their being made subject to designation, would be designated, to the extent that the volume of designation permits, in amounts calculated to raise their ratios at a steady pace within approximately one year to the vicinity of the ratios that are relatively high. The formula for doing this will be determined from time to time by the Fund. Any amounts not designated in accordance with this formula would normally be assigned to the other participants subject to designation under subsection (a) (i) of Article XXV, Section 5, in a manner consistent with the objective of a harmonization of ratios.

The Fund will exercise its power of designation in a manner that will ensure that participants will be able to use their special drawing rights in order to obtain currency. Thus, if a designated participant were to fail to provide currency to a participant using its special drawing rights in accordance with Article XXV, Section 2 (a), the Fund would make any necessary additional designations.

14. Transactions not Requiring Designation

Under Article XXV, Section 2 (b) (ii), the Fund is given the power to prescribe transactions in which a participant may engage in agreement with any other participant whether designated or not. The provision contains a list of transactions that the Fund may prescribe. The prescription of these transactions may be made by a decision or by rules and regulations adopted by the Executive Directors. The Fund is given discretion to specify transactions from among those listed. It may specify all or none of the categories listed; or it may specify individual transactions in one or more of the categories. By an 85 per cent majority in the Board of Governors, additional transactions or categories of transactions outside the categories in the list may be prescribed. Under Article XXV, Section 2 (b) (ii), a principle is established for the adoption of decisions under that provision. These decisions of the Fund must be consistent with the provisions of the Agreement and with the proper use of special drawing rights under the Agreement; participants will be expected to observe this principle and avoid engaging in transactions without designation which might prejudice basic features of the scheme such as the requirement of need.

Article XXV, Section 2 (b) (i), expressly exempts certain transactions from designation. The Fund may prescribe any necessary rules and regulations under Article XII, Section 2 (g), in order to implement this provision.

15. Requirement of Need

As a general rule, a participant will be expected to use special drawing rights in transactions with other participants only if it has a need as defined in Article XXV, Section 3 (a). Section 4 of this Report deals with the requirement of need in operations and transactions in which participants obtain currency from other prescribed holders.

The definition of need given in Article XXV, Section 3 (a), covers all balance of payments needs, whether these arise from current or capital transactions. Because these needs can be defined in various ways, reference is also made to “developments in its [a participant’s] official holdings of gold, foreign exchange, and special drawing rights, and its reserve position in the Fund,” to indicate that these developments, even if attributable to conversions of balances of the member’s currency and not to a balance of payments deficit, may give rise to a need to use special drawing rights. Use of special drawing rights merely to reduce holdings of such rights while the total of holdings of gold and foreign exchange and the reserve position in the Fund is increasing or would increase as a result of such use would not be regarded as meeting the requirement of need. However, the use of rights to meet a payments need may have the incidental effect of changing the relative proportions in which a participant holds different reserve assets.

16. Transactions without Requirement of Need

Under Article XXV, Section 3 (c), the Fund is authorized to prescribe transactions in which participants may use special drawing rights without fulfilling the requirement of need. The categories of transactions listed in that provision are the same as those listed in Article XXV, Section 2 (b) (ii), but, in contrast to the exemptions from the requirement of designation, the list is exhaustive and the Fund cannot prescribe transactions that go beyond its scope. As in the case of the prescription of transactions that are not subject to designation, prescriptions under Article XXV, Section 3 (c), may be made by a decision or by rules and regulations adopted by the Executive Directors, and may relate to individual transactions or categories of transactions falling within the listed categories. The transactions exempted by prescription from the requirement of need do not have to coincide at any given time with those that are exempted from the requirement of designation. In prescribing transactions or categories of transactions that are exempted from the requirement of need the Fund will take into account the extent to which a participant has to obtain special drawing rights for the purpose of meeting the objectives of Section 3 (c) of Article XXV.

17. Reconstitution

Under the reconstitution principles set forth in Article XXV, Section 6, and Schedule G, a participant’s net use of its special drawing rights must be such that the average of its daily holdings of special drawing rights over a five-year period will not be less than 30 per cent of the average of its daily net cumulative allocations of special drawing rights over the same period. It is envisaged that the Fund will assist participants to comply with this requirement through designation under Article XXV, Section 5 (a) (ii), and rules to that effect will be adopted by the Fund. If a participant is unable to obtain sufficient special drawing rights through designation, it must obtain them from the General Account or from another participant specified by the Fund for this purpose to the extent that the General Account is unable to supply them.

The reconstitution rules set forth in Schedule G will be reviewed by the Fund before the end of each basic period. The Board of Governors by an 85 per cent majority of the total voting power may adopt, modify, or abrogate rules for reconstitution.

18. Operations and Transactions through the General Account

The principal provisions governing the acceptance and use of special drawing rights by the Fund in operations and transactions conducted through the General Account are set forth in Article XXV, Section 7. These provisions impose an obligation on the Fund to accept special drawing rights in two specified cases in which the provisions of the Articles require payments to be made to the Fund in special drawing rights. However, the Fund will have authority to accept, to the extent that it may decide, special drawing rights in the General Account in the cases indicated in subsection (c) of Section 7.

Subsections (d), (e), and (f) describe the circumstances in which the Fund will be authorized to use special drawing rights held in the General Account to obtain currencies from participants. Under subsection (d) the Fund may require a participant to provide its currency to the Fund for special drawing rights, if the Fund deems it appropriate to replenish its holdings of the participant’s currency in the General Account and has consulted the participant on alternative ways of replenishment under Article VII, Section 2. Under subsection (f) the Fund may use special drawing rights only by agreement with the participant involved in the operation or transaction.

In order to assist a participant to meet its need for special drawing rights to carry out the objective of reconstitution, to eliminate any negative balance, or to reverse the effects of a transaction engaged in inconsistently with the rule of need, subsection (e) authorizes the Fund to provide this participant with special drawing rights from the General Account for gold or currency acceptable to the Fund.

19. Exchange Rates

Under Article XXV, Section 8, the exchange rates for operations and transactions are to be such as will ensure that a participant using its special drawing rights will receive the same value, on the basis of the exchange rates prevailing at the time the transaction takes place, whatever the currencies that might be provided and whichever the participant that provides the currency. The Fund will have to adopt regulations to give effect to this principle, and will consult a participant on the procedure for determining rates of exchange for its currency.

The rates prescribed under Article XXV, Section 8, will not apply to operations and transactions in special drawing rights with the General Account. Those operations and transactions will be executed at the rate at which the Fund holds the currency involved, which normally is the par value of the currency.

20. Interest and Charges

Under the provisions of Article XXVI, the rate of interest and the rate of charges will be the same. The net effect of these provisions will be the payment of interest by the Fund to a participant on the excess of its holdings of special drawing rights over its net cumulative allocation, and the payment of charges by a participant on the amount by which its holdings of special drawing rights are less than its net cumulative allocation. As a matter of accounting practice, the amount of interest to be paid to a participant and the amount of charges to be paid by that participant will be offset and only the balance will be paid or collected, as the case may be, by the Fund. Interest and charges will be payable in special drawing rights.

Section 3 of Article XXVI sets the rate at 1½ per cent per annum, but the Fund is given authority to apply a different rate within maximum and minimum levels. Under this authority, the Fund could set the rate at the same level as the remuneration to be paid to members under Article V, Section 9, but it will not be required to do so.

If a participant does not have sufficient special drawing rights to meet the payment of charges, it will be able to obtain special drawing rights from the General Account or from another participant specified by the Fund for this purpose to the extent that the General Account is unable to supply them.

21. Expenses of the Special Drawing Account

The expenses of conducting the business of the Special Drawing Account are to be met by the Fund from the resources held in the General Account. However, under Article XXII, Section 2, the Fund will be reimbursed periodically on the basis of a reasonable estimate of these expenses. For the purpose of such reimbursement, the Fund will levy assessments under Article XXVI, Section 4, on all participants in proportion to their net cumulative allocations. The amounts assessed will be paid directly into the General Account and, like interest and charges, will be payable in special drawing rights.

22. Administration of the Special Drawing Account

Because participation may not be coextensive with membership in the Fund, Article XXVII contains special rules for calling meetings, determining quorums, and voting majorities for the Board of Governors and the Executive Directors of the Fund when these organs consider matters pertaining to the Special Drawing Account. There is no change in the composition of these two organs of the Fund. All Governors and Directors remain entitled to attend and participate in all meetings and in the discussion of any item on the agenda. However, if a decision is to be taken on an item that pertains exclusively to the Special Drawing Account, for example, on a proposal by the Managing Director to allocate or cancel special drawing rights, only Governors for members that are participants may vote and each Director will be able to cast only the votes of the Fund members appointing or electing him that are participants. It is, therefore, possible that a Director will not have any votes to cast. Similarly, whether a Governor or Director may cast votes on an item pertaining exclusively to the Special Drawing Account will determine whether he may put an item on the agenda, whether he may request that a meeting be called, and whether there is a quorum for any meeting.

There is no special provision in Article XXVII regarding the voting power of members that are participants for the purpose of decisions on matters relating to the Special Drawing Account. There is no need for such a provision because the voting power of these members will be determined for all purposes by the present provisions of Article XII, Section 5. Accordingly, for the purposes of the Special Drawing Account as well, each participating member will have 250 votes plus one vote for each part of its quota equivalent to one hundred thousand U.S. dollars.

Decisions on certain important issues that require an 85 per cent majority of the total voting power as well as a decision to liquidate the Special Drawing Account can be taken only by the Board of Governors. These issues are those relating to the prescription of other holders, the allocation and cancellation of special drawing rights, the prescription of additional transactions not requiring designation, and the amendment or abrogation of reconstitution rules.

23. Suspension of Participants’ Use of Special Drawing Rights

Article XXIX, Section 2 (f), makes it clear that the suspension of a participant’s use of special drawing rights pursuant to the provisions of that Article will not affect, in any way, its right as a member to make use of the resources of the Fund in the General Account, and conversely, any limitation of this right of a member that is a participant will not affect, in any way, the participant’s right to use its special drawing rights.

24. Definition of Currency Convertible in Fact for Transactions in Special Drawing Rights

The provisions of Article XXXII (b) are designed to ensure that any participant using special drawing rights to obtain “currency convertible in fact” from a designated participant can obtain, directly or indirectly, any one of a number of convertible currencies that he may choose, in amounts determined by the exchange rates prescribed under Article XXV, Section 8, in accordance with the principle of equal value.

This objective is to be achieved by establishing a group of currencies which will be interconvertible at appropriate rates of exchange for balances arising in connection with the use of special drawing rights. Only currencies with respect to which there are procedures designed to ensure this interconvertibility to the satisfaction of the Fund and which in addition are convertible in the sense that they are the currencies of participants that freely buy and sell gold under Article IV, Section 4 (b), or have accepted the obligations of Article VIII, Sections 2, 3, and 4, will qualify for inclusion in this group.

In addition to the currencies mentioned in the preceding paragraph, currency convertible in fact will also include balances of any other currency for which suitable arrangements exist for conversion, at rates of exchange prescribed by the Fund, into any of the currencies in the group that are interconvertible. Through one or more conversions, such balances can in fact be converted into any of the currencies in the group.

25. Definition of Reserve Position in the Fund

Article XXXII (c) defines a participant’s “reserve position in the Fund” as the sum of the gold tranche purchases that the participant could make and the amount of any Fund indebtedness to the participant which is “readily repayable” under a loan agreement. Examples of the latter are the indebtedness of the Fund to participants in the General Arrangements to Borrow and the indebtedness to Italy under the 1966 Loan Agreement, both of which have been entered into under Article VII, Section 2. Members that have made loans to the Fund under these agreements may obtain early repayment by representing to the Fund that there is a balance of payments need for repayment and requesting such repayment.

26. Termination of Participation

The principles governing termination of participation in the Special Drawing Account, which are set forth in Article XXX and Schedule H, are generally the same as those governing the settlement of accounts on withdrawal of a member from membership in the Fund. A participant may terminate its participation in the Special Drawing Account at any time without withdrawing from membership in the Fund. Withdrawal from the Fund automatically terminates participation in the Special Drawing Account.

27. Liquidation

The principal issue in devising any procedure for liquidation is the distribution of the burden of any default. Article XXXI and Schedule I distribute the burden of default among all participants on the basis of their net cumulative allocations. This is accomplished by a system of liquidation under which the Fund redeems special drawing rights first from the participant that holds the largest amount in proportion to its net cumulative allocation until this portion is reduced to that of the participant with the second highest proportion. The Fund then redeems special drawing rights held by these two participants until the proportion held by each is reduced to that of the participant with the third highest proportion and so on until all amounts paid in the Fund by participants have been distributed. Thus a participant’s share of any possible default does not increase as its holdings of special drawing rights increase above its net cumulative allocation.

PART II Modifications in Rules and Practices of the Fund

28. General Comments

Board of Governors Resolution No. 22–8, which called on the Executive Directors to propose amendments to the Articles and the By-Laws of the Fund for the purpose of establishing the new facility based on special drawing rights, also requested the Executive Directors to consider at the same time and report on possible improvements in the present rules and practices of the Fund based on developments in world economic conditions and the experience of the Fund since the adoption of its Articles of Agreement. The Executive Directors have considered various suggestions for improvements and have decided to recommend the introduction of certain changes in the present rules and practices of the Fund, all of which would be made by amending the Articles. These changes relate to: certain quota increases and associated matters; uniform proportionate changes in par values and the maintenance of the gold value of the Fund’s assets in the event that such changes in par values are made; the use of the Fund’s resources in the gold tranche, including use for capital transfers; a limitation on the Fund’s power to introduce new facilities in the General Account for the unconditional use of the Fund’s resources; the rules on repurchase under Article V, Section 7; the payment of a remuneration to members whose currencies are held by the Fund in amounts less than 75 per cent of quota; the distribution of net income; and the interpretation of the Articles of Agreement. The modifications in Articles I, III, IV, V, VI, XII, XVIII, and XIX, and in Schedule B, which are included in the Proposed Amendment, are intended to give effect to these changes.

Three general points should be made in connection with these modifications. First, some of them represent no more than a clarification or codification of practices developed over the years and followed currently by the Fund on the basis of the Articles of Agreement in their present form. Secondly, some modifications are intended to adapt the Articles to the fact that there will be a facility which will make it possible to allocate special drawing rights of an unconditional character. Finally, while one of the effects of these modifications will be to prevent the establishment of new facilities for the unconditional use of the Fund’s resources, they are not intended to make the rules and practices relating to the use of the Fund’s resources more restrictive than they are at the present time.

29. Quota Changes and Related Matters

Under Article III, Section 2, in its present form, all changes in quotas require a four-fifths majority of the total voting power. Under the Proposed Amendment decisions on changes in quotas, including special increases and increases by installments, proposed as the result of a general review will require a new special majority, i.e., 85 per cent of the total voting power. The general reviews referred to in the amended provision are those that have as their purpose an examination of the appropriateness of the quotas of all members, and they will include not only the reviews of the quotas of all members which the Fund is required to conduct at intervals of five years but also any reviews of this kind conducted at other times. All other changes in quotas will continue to require a four-fifths majority of the total voting power.

The majority of 85 per cent will also apply to decisions specifying conditions precedent to the effectiveness of quota increases proposed as a result of a general review. The adoption of these conditions is subject at present to the four-fifths majority which is applicable to quota increases. Examples of such conditions drawn from past practice are the requirement of a minimum total participation in a general increase and the payment of the additional subscriptions before the increases become effective. As at present, the power to adopt these conditions will be exercised by the Board of Governors as a reserved power.

Under a new provision, Article III, Section 4 (c), an 85 per cent majority will be required for decisions on other matters that are related to quota increases proposed as the result of a general quota review even though they do not involve conditions precedent to the effectiveness of the increases. These decisions include any decision pursuant to Article III, Section 4 (a), under which a member may be permitted to pay less than 25 per cent of its additional subscription in gold. The new provision will also apply to any decision intended to mitigate the effects of the payment of additional subscriptions. At present, the Articles provide that all of these decisions are to be made by the Executive Directors by a majority of the votes cast. After the Proposed Amendment enters into force the power to make such decisions will be reserved to the Board of Governors.

The special majority of 85 per cent of the total voting which will be required as the result of various changes in the rules and practices of the Fund is analogous to the majority required for a number of important decisions under the new facility based on special drawing rights.

30. Uniform Proportionate Changes in Par Values and Maintenance of Gold Value

Under the modifications in Article IV, Section 7, a decision to make a uniform proportionate change in par values also will require an 85 per cent majority of the total voting power. This changes the present provision in two respects. It replaces the simple majority with a special majority and eliminates the requirement that the uniform proportionate change be approved by those members that have 10 per cent or more of the total of Fund quotas. The power to make a uniform proportionate change in par values will continue to be reserved to the Board of Governors.

Under the modifications in Article IV, Section 8 (d), and Article XII, Section 2 (b) (iii), a decision to waive the maintenance of the gold value of the Fund’s assets in the event of a uniform proportionate change in par values will require an 85 per cent majority of the total voting power, and the power to make the decision will be reserved to the Board of Governors. At present the power to make a decision of this kind is not reserved to the Board of Governors and a special majority is not required.

31. Temporary Character of Use of the Fund’s Resources

The modifications in Article I and the inclusion in Article V of a new Section 3 (c) state expressly what is regarded as implicit in the present Articles, i.e., that use of the Fund’s resources must be of a temporary character and that the Fund must adopt policies intended to encourage members to take measures that will help them to avoid a use which is not of such a character. In this way the Fund safeguards the revolving character of its resources. Therefore, no changes in the established policies and practices of the Fund, as set forth in the Fund’s decision of February 13, 1952, and in other decisions would be called for by the entry into force of the Proposed Amendment. The resources of the Fund referred to in Article I (v) and in other provisions of the Articles are those that will be held by the Fund in the General Account.

32. Legal Automaticity of Gold Tranche Purchases

Requests for gold tranche purchases now enjoy de facto automaticity. One of the effects of the modifications in Article V, Section 3, will be to make the use of the Fund’s resources in the gold tranche legally automatic.

After the amendment, the use of the Fund’s resources in the gold tranche will continue to be subject to the provisions of Article V, Section 3 (a). Accordingly, members making requests for purchases in the gold tranche will still be required to make the representation of need prescribed by Article V, Section 3 (a) (i). However, the Fund will not have the legal power to challenge this representation.

Article V, Section 3 (a) (iii), will be amended to eliminate the necessity for a waiver that might have been required for a gold tranche purchase in certain circumstances. Furthermore, Article VI, Sections 1 (a) and 2, as amended, will remove the present limitation on making gold tranche purchases for meeting capital transfers. A member will be able to make gold tranche purchases even though they are to meet what might be regarded as a large or sustained outflow of capital. The established legal position will be maintained in respect of requests for purchases other than gold tranche purchases. Accordingly, a member will be able, as at present, to use the Fund’s resources to meet capital outflows subject to Article VI, Section 1.

The legal automaticity of gold tranche purchases will not prejudice the application of the Fund’s policies on the currencies to be used in purchases. These policies are set forth in the Fund’s Decision of July 20, 1962 and are applicable to all purchases including gold tranche purchases.

The legal automaticity of gold tranche purchases raises the question of possible misuse by a member of its right to make such purchases without challenge by failing to observe the principle of need set forth in Article V, Section 3 (a) (i). The Executive Directors believe that if the question should arise it could be met by an adjustment, in due time, of the Fund’s policies with respect to the currencies to be used in purchases in order to bring about a correction of the effects of any misuse by a member of the kind referred to above.

The Fund will continue to have authority under the Articles of Agreement to declare a member ineligible to use the Fund’s resources even in the gold tranche if the member makes gold tranche purchases without observing the principle of need.

33. Definition of Gold Tranche Purchases

The changes in the Articles commented upon in sections 32, 34, and 36 of this Report should be understood in the light of the definition of gold tranche purchases in a new provision, Article XIX (j). This definition is somewhat different from the definition of gold tranche purchases which prevailed in Fund practice until less than two years ago and according to which a gold tranche purchase was understood as a purchase which did not cause the Fund’s holdings of a member’s currency to exceed 100 per cent of its quota. By permitting the exclusion of purchases under the compensatory financing facility and the holdings of currency acquired by the Fund as a result of those purchases, the definition in Article XIX (j) will make it possible for the Fund to continue the present practice of treating the compensatory financing facility as separate for the purpose of applying the Fund’s policies on the use of its resources. This practice was introduced by the amendments to the Decision on Compensatory Financing of Export Fluctuations adopted on September 20, 1966, under which the Fund applies “its tranche policies to drawing requests by a member as if the Fund’s holdings of the member’s currency were less than its actual holdings of that currency by the amount of any drawing outstanding under paragraph (5)” of that decision.

Under the definition in Article XIX (j), a purchase under paragraph (5) of the compensatory financing decision will not be regarded as a gold tranche purchase even if it does not raise the Fund’s holdings of a member’s currency above the level of the member’s quota. Conversely, a purchase not under the compensatory financing facility which raises the Fund’s holdings above that level will be regarded as a gold tranche purchase, provided that the amount by which the quota level is exceeded will not be larger than the amount of any purchases outstanding under the compensatory financing decision.

In view of the possibility that, under the definition of gold tranche purchases in Article XIX (j), a gold tranche purchase may increase the Fund’s holdings above the quota level and in order to preserve the legal automaticity of requests to make gold tranche purchases under Article V, Section 3 (d), the text of Article V, Section 3 (a) (iii), is amended so that a waiver under Article V, Section 4, will not be necessary. Under the amended text of Section 3 (a) (iii), however, a purchase under the compensatory financing decision which, together with any other net increases in the Fund’s holdings of the member’s currency, causes these holdings to increase by more than 25 per cent of quota during the period of 12 months ending on the date of the purchase, will require a waiver under Article V, Section 4, even though it does not raise the Fund’s holdings above the quota level. At present, any purchase below the quota level, including a purchase under the compensatory financing decision, does not require a waiver.

34. Termination of Power to Establish New Unconditional Facilities in the General Account

As a result of the adoption of Article V, Section 3 (d), the Fund will not have the power to create any new facility in the General Account for the unconditional use of its resources. This provision reflects the view that, with the establishment of the new facility based on special drawing rights, any need for additions to existing reserve assets will be met, as and when it arises, through allocations of special drawing rights. The provision makes it explicit that a member’s representation under Article V, Section 3 (a), must be examined in order to determine that the requested purchase would be consistent with the provisions of the Articles and the policies on the use of the Fund’s resources adopted under Article V, Section 3 (c). This means that the Fund will not grant de facto automaticity (i.e., “the overwhelming benefit of any doubt” or treatment having the same effect) to requests for purchases other than gold tranche purchases. The Fund will continue to be able to adapt its policies governing purchases other than gold tranche purchases in all other respects.

The changes in Article V, Section 3, will be without prejudice also to the Fund’s compensatory financing facility and the adjustment of that policy if this should be considered desirable. In addition, as already indicated, these changes are not intended to make the rules and practices relating to the use of the Fund’s resources more restrictive than they are at present.

35. Rules on Repurchase

The modifications in Article V, Section 7, Article XII, Section 2 (b), Article XIX (a) and (e), and Schedule B, will introduce the following changes in the present rules on repurchase:

(a) At present, the amounts of a member’s currency that are held by the governmental agencies and other official institutions of other members, as well as by banks within the territories of the latter, are deducted from the member’s official holdings of gold and convertible currencies under Article XIX (e). The deduction of these currency liabilities will be abolished, thereby introducing a gross concept of monetary reserves as the basis of the calculation of members’ repurchase obligations and for certain other purposes. This change is effected through the modifications in Article XIX (a) and (e). The new paragraph 6 of Schedule B sets forth a transitional rule designed to prevent the accrual of repurchase obligations solely because of the elimination of the deduction of currency liabilities during a financial year of the Fund. It will apply only in the year in which the Proposed Amendment enters into force and, thereafter, no deductions will be made for currency liabilities.

(b) The abatement of repurchase obligations calculated in a member’s currency, which the Fund may not accept because the acceptance would increase the Fund’s holdings of that currency above 75 per cent of the member’s quota, will be eliminated. Under paragraph 1 (d) of Schedule B the amounts that would be abated for this reason will have to be discharged in other convertible currencies as determined by the Fund.

(c) The present paragraph 2 of Schedule B, which will be retained as paragraph 2 (a), prohibits the Fund from acquiring the currency of any nonmember by way of repurchase but does not indicate how repurchase obligations that accrue in specified non-member currencies are to be treated. The proposed paragraph 2 (b) of Schedule B provides that repurchase obligations that accrue in specified nonmember currencies will be paid in the convertible currencies of members as determined by the Fund. The Fund has never specified a nonmember currency for the purposes of repurchases but would be likely to do so if it found that members held appreciable amounts of a nonmember currency.

(d) The present Article V, Section 7 (c) (i), provides that a repurchase shall not be carried out to the extent that it would reduce the repurchasing member’s monetary reserves, as presently defined on a net basis, below an amount equal to its quota. Under the amended Article V, Section 7 (c) (i), a level of monetary reserves, defined on a gross basis, equivalent to 150 percent of quota will be substituted for the quota level. If a repurchase obligation accrues which would exceed this limit, the excess will be abated.

(e) Under the proposed Article V, Section 7 (c) (iv), there will be an annual limit on repurchases under Article V, Section 7 (b), equal to 25 per cent of a member’s quota. Under the new paragraph 1 (e) of Schedule B, if an obligation accrues which exceeds this amount, the excess will be postponed to the end of the subsequent financial year or years, but not more than 25 per cent of the member’s quota will have to be repurchased in any one year under postponed and other repurchase obligations accruing under Article V, Section 7 (b). This new rule will not affect repurchases made outside Article V, Section 7 (b).

(f) A change will be introduced in the formula on the basis of which repurchase obligations are calculated. The present formula takes account of increases in the Fund’s holdings of a member’s currency and increases or decreases in its monetary reserves during a year. Under the modified formula in Article V, Section 7 (b) (i), account will also be taken of decreases in the Fund’s holdings of the member’s currency during the year. This change will reduce a member’s repurchase obligation under Article V, Section 7 (b), at the end of a financial year by the full amount of other repurchases made during that year, whereas at present they reduce the obligation only by one half of the full amount. It should be noted that, in respect of repurchases outside Article V, Section 7 (a) or (b), the Fund has legal authority to specify the acceptable convertible currencies that the repurchasing member may use.

(g) In accordance with paragraph 5 of Schedule B, the Fund, in its discretion, will be able to accede to a member’s request that in the calculation of its monetary reserves a deduction be made for its outstanding obligations resulting from swap transactions with other members.

(h) The Fund will have the power to revise the percentage of quota below which repurchases may not reduce a repurchasing member’s monetary reserves and the annual limit on repurchases under Article V, Section 7 (b). In addition, the Fund will be able to revise and supplement, in a manner consistent with the other repurchase provisions of the Articles, the newly introduced rules in paragraph 1 (c), (d), and (e) and paragraph 2 (b) of Schedule B. The Fund is granted this power under Article V, Section 7 (d). Under this provision and Article XII, Section 2 (b) (ix), the power is reserved to the Board of Governors which can exercise it by an 85 per cent majority of the total voting power.

(i) Under Article XXV, Section 7 (a) and (b), special drawing rights are to be included in the monetary reserves of members for the purposes of the Articles. As a result of these provisions and of the modifications in the introductory parts of Article V, Section 7 (b), and in paragraph 1 of Schedule B, repurchase obligations may accrue in special drawing rights, and the Fund will accept special drawing rights in repurchase under Article V, Section 7 (b). However, the Fund may decide that no account be taken of any increase or decrease in monetary reserves during a financial year which is due to allocations or cancellations of special drawing rights during the same year.

36. Service Charge

Article V, Section 8(a), as amended, will maintain the existing maximum rate of the service charge that the Fund can levy on exchange transactions. The present minimum rate for exchange transactions will be unaffected, except that the Fund will be authorized to levy a lower charge or no charge on gold tranche purchases. The Executive Directors believe that initially no service charge should be levied on gold tranche purchases, subject to any change in this policy that would be appropriate in the light of subsequent developments.

37. Remuneration

A new provision, Article V, Section 9, will require the Fund to pay a return to members on the excess of 75 per cent of a member’s quota over the average of the Fund’s holdings of the member’s currency, or, in other words, on the Fund’s net use of a member’s normal currency subscription. The rate of remuneration will be 1½ per cent per annum. However, the Executive Directors would be able to specify other rates within the limits of 1 to 2 per cent per annum by a majority of the votes cast. The Executive Directors would be able to make changes beyond these limits by a three-fourths majority of the total voting power, but it is not expected that this would be done unless it were necessary in the light of developments in international money markets.

The remuneration will be payable in gold or in the member’s own currency or partly in gold and partly in that currency. The Executive Directors believe that the Fund’s policy should be to pay remuneration in gold to the extent that receipts of gold from members in payment of charges under Article V, Section 8, would permit, subject again to any change in this policy that would be appropriate in the light of subsequent developments.

38. Distribution of Net Income

Article XII, Section 6, in its present form, requires that, before any distribution of the net income of any year is made by the Fund to all members on the basis of quotas, a 2 per cent noncumulative payment be made to each member on the amount by which 75 per cent of its quota exceeded the Fund’s average holdings of the member’s currency during the year. Under the amended provision, instead of the 2 per cent preferential payment, the Fund will have to distribute first to members eligible to receive remuneration under Article V, Section 9, an amount of net income which will raise to 2 per cent the return paid to them as remuneration for the year for which net income is distributed.

Under Article XII, Section 6 (c), the Fund will be able to transfer to general reserve all or part of its special reserve to which the yield of its investment is placed. The yield of the investment is not net income in the sense of, and cannot be distributed under, Article XII, Section 6. Moreover, it can be used only for the limited purpose of meeting administrative deficits. Amounts transferred from special to general reserve, however, will be available to meet a deficit of any character, whether operational or administrative, including a deficit resulting from the payment of remuneration under Article V, Section 9, but they will continue to be unavailable for distribution as net income under Article XII, Section 6.

The power to make transfers to general reserve from the existing or any other special reserve will be without prejudice to any future decisions on the maintenance or termination of the Fund’s investment. The power to make transfers will be exercised by the Board of Governors, and a provision reserving it to the Board of Governors is inserted as Article XII, Section 2 (b) (x).

39. Interpretation

Article XVIII, as amended, will require the establishment of a standing Committee on Interpretation of the Board of Governors. A question of interpretation of the Articles, on which the Executive Directors have given a decision under Article XVIII and which, at the request of a member made within three months from the date of that decision, is referred to the Board of Governors, will have to be considered first by this Committee. The decision of this Committee will be regarded as the decision of the Board of Governors, and therefore final, unless the Board of Governors decides otherwise by an 85 per cent majority of the total voting power. Article XVIII (b) prescribes that each member of the Committee on Interpretation shall have one vote. Other matters, such as the membership, procedures, and voting majorities of the Committee, are left for later determination by the Board of Governors by means of a By-Law. In addition, under Article XXVII (c), the Board of Governors will have the power to determine whether all members of the Committee will be entitled to vote on a question of interpretation pertaining exclusively to the Special Drawing Account.

PART III Procedure

40. Applicable Legal Provisions

The procedure for the adoption of modifications in the Articles of Agreement is set forth in Article XVII which reads:

  • (a) Any proposal to introduce modifications in this Agreement, whether emanating from a member, a governor or the Executive Directors, shall be communicated to the chairman of the Board of Governors who shall bring the proposal before the Board. If the proposed amendment is approved by the Board the Fund shall, by circular letter or telegram, ask all members whether they accept the proposed amendment. When three-fifths of the members, having four-fifths of the total voting power, have accepted the proposed amendment, the Fund shall certify the fact by a formal communication addressed to all members.

  • (b) Notwithstanding (a) above, acceptance by all members is required in the case of any amendment modifying

    • (i) the right to withdraw from the Fund (Article XV, Section 1);

    • (ii) the provision that no change in a member’s quota shall be made without its consent (Article III, Section 2);

    • (iii) the provision that no change may be made in the par value of a member’s currency except on the proposal of that member (Article IV, Section 5 (b)).

  • (c) Amendments shall enter into force for all members three months after the date of the formal communication unless a shorter period is specified in the circular letter or telegram.

41. Resolution of Board of Governors

Annex A contains the text of a Resolution, and there is attached to it a Proposed Amendment to the Articles of Agreement. The Chairman of the Board of Governors has requested that on his behalf the Secretary of the Fund bring the Resolution and Proposed Amendment before the Board of Governors for its approval. Pursuant to this request the Secretary is transmitting them to the Board with this Report.

In the judgment of the Executive Directors the action requested of the Board of Governors should not be postponed until the next regular meeting of the Board and does not warrant the calling of a special meeting of the Board. For this reason, the Executive Directors, pursuant to Section 13 of the By-Laws, request Governors to vote without meeting. In accordance with established practice, the Executive Directors have also decided to waive the requirement that no Governor shall vote until seven days after the dispatch of the motion. To be valid votes must be received at the seat of the Fund on or before May 31, 1968.

For the adoption of the Resolution it will be necessary that replies be received from a majority of the Governors exercising two-thirds of the total voting power and that a majority of the votes cast be in favor of the Resolution. The Resolution must be voted on as a whole.

42. Acceptance of Proposed Amendment by Members

By adopting the annexed Resolution the Board of Governors will grant its approval to the Proposed Amendment of the Articles of Agreement. Members will then be asked, by circular letter or telegram, to notify the Fund whether they accept the Proposed Amendment. The Proposed Amendment can be accepted only in its entirety. That is to say, members will not be able to accept part only of the Proposed Amendment.

In accordance with Article XVII (a) the Proposed Amendment must be accepted by three-fifths of the members, having four-fifths of the total voting power, before it can enter into force.

43. Entry into Force of Proposed Amendment

When the Proposed Amendment has been accepted by the necessary majority, the Fund will certify the fact by a formal communication to be sent by the Secretary of the Fund to all members. Pursuant to Article XVII (c), the Executive Directors recommend that the Proposed Amendment enter into force on the date of the formal communication instead of three months after that date. In accordance with that provision and paragraph 3 of the Resolution, the circular letter or telegram by which members will be asked whether they accept the Proposed Amendment will specify the date of the formal communication referred to above as the date of the entry into force of the Proposed Amendment.

The Proposed Amendment will enter into force for all members on the date of the formal communication, whether they accepted the Amendment or not. Presumably, members accepting the Proposed Amendment will have taken any legislative and other action that may be necessary to enable them to carry out their obligations under the Articles of Agreement as amended. Other members that have not accepted the Proposed Amendment will need to consider whether any action is necessary in order to enable them to carry out their obligations under the Articles of Agreement as amended.

44. Notification to Depositary of Articles of Agreement

Upon certification of the entry into force of the Proposed Amendment it is intended to notify that fact to the Government of the United States, which is the depositary of the Articles of Agreement of the Fund, so that it may record the Amendment. It is also intended to ask the Government of the United States to register the Amendment with the Secretary-General of the United Nations, pursuant to Article 102 of the United Nations Charter.

Annex A RESOLUTION

WHEREAS the Executive Directors have completed their work relating to the establishment in the International Monetary Fund of a new facility based on special drawing rights in order to meet the need, as and when it arises, for a supplement to existing reserve assets, and on improvements in the present rules and practices of the Fund, pursuant to Resolution No. 22–8 of the Board of Governors of the International Monetary Fund at its Twenty-Second Annual Meeting in Rio de Janeiro; and

WHEREAS the Executive Directors have prepared a Report setting forth proposals for modifications in the Articles of Agreement of the International Monetary Fund for the purpose of establishing the new facility and giving effect to certain modifications in the present rules and practices of the Fund; and

WHEREAS the Chairman of the Board of Governors has requested the Secretary of the Fund to bring the proposals of the Executive Directors before the Board of Governors; and

WHEREAS the Report of the Executive Directors setting forth their proposals has been submitted to the Board of Governors by the Secretary of the Fund; and

WHEREAS the Executive Directors have requested the Board of Governors to vote on the following Resolution without meeting, pursuant to Section 13 of the By-Laws of the Fund;

NOW, THEREFORE, the Board of Governors, noting the said Report of the Executive Directors, hereby RESOLVES that:

  • The Proposed Amendment to the Articles of Agreement of the International Monetary Fund set forth in the attachment to this Resolution is approved.

  • The Secretary of the Fund is directed to ask, by letter or telegram, all members of the Fund whether they accept, in accordance with the provisions of Article XVII, the Proposed Amendment to the Articles of Agreement as set forth in the attachment to this Resolution.

  • The circular letter or telegram to be sent to all members in accordance with 2 above shall specify that the Proposed Amendment to the Articles of Agreement set forth in the attachment to this Resolution shall enter into force for all members as of the date on which the Fund certifies, by formal communication addressed to all members, that three-fifths of the members, having four-fifths of the total voting power, have accepted the modifications.

Proposed Amendment to the Articles of Agreement of the International Monetary Fund Prepared Pursuant to Board of Governors Resolution No. 22–8

A INTRODUCTORY ARTICLE

The Introductory Article shall read:

  • “(i) The International Monetary Fund is established and shall operate in accordance with the provisions of this Agreement as originally adopted, and as subsequently amended in order to institute a facility based on special drawing rights and to effect certain other changes.

  • (ii) To enable the Fund to conduct its operations and transactions, the Fund shall maintain a General Account and a Special Drawing Account. Membership in the Fund shall give the right to participation in the Special Drawing Account.

  • (iii) Operations and transactions authorized by this Agreement shall be conducted through the General Account except that operations and transactions involving special drawing rights shall be conducted through the Special Drawing Account”

B ARTICLE I Purposes

1. Article I (v) shall read:

  • “(v) To give confidence to members by making the Fund’s resources temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.”

2. The last sentence of Article I shall read:

  • “The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.”

C ARTICLE III Quotas and Subscriptions

1. Section 2 shall read:

  • “Section 2. Adjustment of quotas

  • The Fund shall at intervals of not more than five years conduct a general review, and if it deems it appropriate propose an adjustment, of the quotas of the members. It may also, if it thinks fit, consider at any other time the adjustment of any particular quota at the request of the member concerned. An eighty-five percent majority of the total voting power shall be required for any change in quotas proposed as the result of a general review and a four-fifths majority of the total voting power shall be required for any other change in quotas. No quota shall be changed without the consent of the member concerned.”

2. The following subsection (c) shall be added to Section 4. Payments when quotas are changed:

  • “(c) A majority of eighty-five percent of the total voting power shall be required for any decisions dealing with the payment, or made with the sole purpose of mitigating the effects of the payment, of increases in quotas proposed as the result of a general review of quotas.”

D ARTICLE IV Par Values of Currencies

1. Section 7 shall read:

  • “Section 7. Uniform changes in par values

  • Notwithstanding the provisions of Section 5 (b) of this Article, the Fund by an eighty-five percent majority of the total voting power may make uniform proportionate changes in the par values of the currencies of all members. The par value of a member’s currency shall, however, not be changed under this provision if, within seventy-two hours of the Fund’s action, the member informs the Fund that it does not wish the par value of its currency to be changed by such action.”

2. In Section 8. Maintenance of gold value of the Fund’s assets, subsection (d) shall read:

  • “(d) The provisions of this Section shall apply to a uniform proportionate change in the par values of the currencies of all members, unless at the time when such a change is made the Fund decides otherwise by an eighty-five percent majority of the total voting power.”

E ARTICLE V Transactions with the Fund

1. In Section 3. Conditions governing use of the Fund’s resources, subsection (a) (iii) shall read:

  • “(iii) The proposed purchase would be a gold tranche purchase, or would not cause the Fund’s holdings of the purchasing member’s currency to increase by more than twenty-five percent of its quota during the period of twelve months ending on the date of the purchase or to exceed two hundred percent of its quota;”

2. The following subsections (c) and (d) shall be added to Section 3:

  • “(c) A member’s use of the resources of the Fund shall be in accordance with the purposes of the Fund. The Fund shall adopt policies on the use of its resources that will assist members to solve their balance of payments problems in a manner consistent with the purposes of the Fund and that will establish adequate safeguards for the temporary use of its resources.”

  • “(d) A representation by a member under (a) above shall be examined by the Fund to determine whether the proposed purchase would be consistent with the provisions of this Agreement and with the policies adopted under them, with the exception that proposed gold tranche purchases shall not be subject to challenge.”

3. In Section 7. Repurchase by a member of its currency held by the Fund, the first sentence of subsection (b) shall read:

  • “(b) At the end of each financial year of the Fund, a member shall repurchase from the Fund with each type of monetary reserve, as determined in accordance with Schedule B, part of the Fund’s holdings of its currency under the following conditions:

    • (i) Each member shall use in repurchases of its own currency from the Fund an amount of its monetary reserves equal in value to the following changes that have occurred during the year: one-half of any increase in the Fund’s holdings of the member’s currency, plus one-half of any increase, or minus one-half of any decrease, in the member’s monetary reserves, or, if the Fund’s holdings of the member’s currency have decreased, one-half of any increase in the member’s monetary reserves minus one-half of the decrease in the Fund’s holdings of the member’s currency.”

4. In Section 7, subsection (c) shall read:

  • “(c) None of the adjustments described in (b) above shall be carried to a point at which

    • (i) the member’s monetary reserves are below one hundred fifty percent of its quota, or

    • (ii) the Fund’s holdings of its currency are below seventy-five percent of its quota, or

    • (iii) the Fund’s holdings of any currency required to be used are above seventy-five percent of the quota of the member concerned, or

    • (iv) the amount repurchased exceeds twenty-five percent of the quota of the member concerned.”

5. The following subsection (d) shall be added to Section 7:

  • “(d) The Fund by an eighty-five percent majority of the total voting power may revise the percentages in (c) (i) and (iv) above and revise and supplement the rules in paragraph 1 (c), (d), and (e) and paragraph 2 (b) of Schedule B.”

6. In Section 8. Charges, subsection (a) shall read:

  • “(a) Any member buying the currency of another member from the Fund in exchange for its own currency shall pay, in addition to the parity price, a service charge uniform for all members of not less than one-half percent and not more than one percent, as determined by the Fund, provided that the Fund in its discretion may levy a service charge of less than one-half percent on gold tranche purchases.”

7. The following Section shall be added to Article V:

  • “Section 9. Remuneration

    • (a) The Fund shall pay remuneration, at a rate uniform for all members, on the amount by which seventy-five percent of a member’s quota exceeded the average of the Fund’s holdings of the member’s currency, provided that no account shall be taken of holdings in excess of seventy-five percent of quota. The rate shall be one and one-half percent per annum, but the Fund in its discretion may increase or reduce this rate, provided that a three-fourths majority of the total voting power shall be required for any increase above two percent per annum or reduction below one percent per annum.

    • (b) Remuneration shall be paid in gold or a member’s own currency as determined by the Fund.”

F ARTICLE VI Capital Transfers

1. In Section 1. Use of Fund’s resources for capital transfers, subsection (a) shall read:

  • “(a) A member may not use the Fund’s resources to meet a large or sustained outflow of capital except as provided in Section 2 of this Article, and the Fund may request a member to exercise controls to prevent such use of the resources of the Fund. If, after receiving such a request, a member fails to exercise appropriate controls, the Fund may declare the member ineligible to use the resources of the Fund.”

2. Section 2 shall read:

  • “Section 2. Special provisions for capital transfers

  • A member shall be entitled to make gold tranche purchases to meet capital transfers.”

G ARTICLE XII Organization and Management

1. In Section 2. Board of Governors, subsection (b) (ii) and (iii) shall read:

  • “(ii) Approve a revision of quotas, or to decide on the payment, or on the mitigation of the effects of payment, or increases in quotas proposed as the result of a general review of quotas.”

  • “(iii) Approve a uniform change in the par values of the currencies of all members, or to decide when such a change is made that the provisions relating to the maintenance of gold value of the Fund’s assets shall not apply.”

2. The following shall be added to Section 2 (b):

  • “(ix) Revise the provisions on repurchase or to revise and supplement the rules for the distribution of repurchases among types of reserves.”

  • “(x) Make transfers to general reserve from any special reserve.”

3. The title of Section 6 shall read:

  • “Reserves and distribution of net income”

4. In Section 6, subsection (b) shall read:

  • “(b) If any distribution is made of the net income of any year, there shall first be distributed to members eligible to receive remuneration under Article V, Section 9, for that year an amount by which two percent per annum exceeded any remuneration that has been paid for that year. Any distribution of the net income of that year beyond that amount shall be made to all members in proportion to their quotas. Payments to each member shall be made in its own currency.”

5. The following subsection (c) shall be added to Section 6:

  • “(c) The Fund may make transfers to general reserve from any special reserve.”

H ARTICLE XVIII Interpretation

Article XVIII (b) shall read:

“(b) In any case where the Executive Directors have given a decision under (a) above, any member may require, within three months from the date of the decision, that the question be referred to the Board of Governors, whose decision shall be final. Any question referred to the Board of Governors shall be considered by a Committee on Interpretation of the Board of Governors. Each Committee member shall have one vote. The Board of Governors shall establish the membership, procedures, and voting majorities of the Committee. A decision of the Committee shall be the decision of the Board of Governors unless the Board by an eighty-five percent majority of the total voting power decides otherwise. Pending the result of the reference to the Board the Fund may, so far as it deems necessary, act on the basis of the decision of the Executive Directors.”

I ARTICLE XIX Explanation of Terms

1. Article XIX (a) shall read:

“(a) A member’s monetary reserves means its official holdings of gold, of convertible currencies of other members, and of the currencies of such non-members as the Fund may specify.”

2. Article XIX (e) shall read:

“(e) The sums deemed to be official holdings of other official institutions and other banks under (c) above shall be included in the member’s monetary reserves.”

3. The following shall be added to Article XIX:

“(j) Gold tranche purchase means a purchase by a member of the currency of another member in exchange for its own currency which does not cause the Fund’s holdings of the member’s currency to exceed one hundred percent of its quota, provided that for the purposes of this definition the Fund may exclude purchases and holdings under policies on the use of its resources for compensatory financing of export fluctuations.”

J ARTICLE XX Final Provisions

The title of Article XX shall read:

“Inaugural Provisions

K

The following Articles XXI through XXXII shall be added after Article XX:

“ARTICLE XXI Special Drawing Rights

Section 1. Authority to allocate special drawing rights

To meet the need, as and when it arises, for a supplement to existing reserve assets, the Fund is authorized to allocate special drawing rights to members that are participants in the Special Drawing Account.

Section 2. Unit of value

The unit of value of special drawing rights shall be equivalent to 0.888 671 gram of fine gold.

ARTICLE XXII General Account and Special Drawing Account

Section 1. Separation of operations and transactions

All operations and transactions involving special drawing rights shall be conducted through the Special Drawing Account. All other operations and transactions of the Fund authorized by or under this Agreement shall be conducted through the General Account. Operations and transactions pursuant to Article XXIII, Section 2, shall be conducted through the General Account as well as the Special Drawing Account.

Section 2. Separation of assets and property

All assets and property of the Fund shall be held in the General Account, except that assets and property acquired under Article XXVI, Section 2, and Articles XXX and XXXI and Schedules H and I shall be held in the Special Drawing Account. Any assets or property held in one Account shall not be available to discharge or meet the liabilities, obligations, or losses of the Fund incurred in the conduct of the operations and transactions of the other Account, except that the expenses of conducting the business of the Special Drawing Account shall be paid by the Fund from the General Account which shall be reimbursed from time to time by assessments under Article XXVI, Section 4, made on the basis of a reasonable estimate of such expenses.

Section 3. Recording and information

All changes in holdings of special drawing rights shall take effect only when recorded by the Fund in the Special Drawing Account. Participants shall notify the Fund of the provisions of this Agreement under which special drawing rights are used. The Fund may require participants to furnish it with such other information as it deems necessary for its functions.

ARTICLE XXIII Participants and Other Holders of Special Drawing Rights

Section 1. Participants

Each member of the Fund that deposits with the Fund an instrument setting forth that it undertakes all the obligations of a participant in the Special Drawing Account in accordance with its law and that it has taken all steps necessary to enable it to carry out all of these obligations shall become a participant in the Special Drawing Account as of the date the instrument is deposited, except that no member shall become a participant before Articles XXI through XXXII and Schedules F through I have entered into force and instruments have been deposited under this Section by members that have at least seventy-five percent of the total of quotas.

Section 2. General Account as a holder

The Fund may accept and hold special drawing rights in the General Account and use them, in accordance with the provisions of this Agreement.

Section 3. Other holders

The Fund by an eighty-five percent majority of the total voting power may prescribe:

  • (i) as holders, non-members, members that are non-participants, and institutions that perform functions of a central bank for more than one member;

  • (ii) the terms and conditions on which these holders may be permitted to accept, hold, and use special drawing rights, in operations and transactions with participants; and

  • (iii) the terms and conditions on which participants may enter into operations and transactions with these holders.

The terms and conditions prescribed by the Fund for the use of special drawing rights by prescribed holders and by participants in operations and transactions with them shall be consistent with the provisions of this Agreement.

ARTICLE XXIV Allocation and Cancellation of Special Drawing Rights

Section 1. Principles and considerations governing allocation and cancellation

(a) In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.

(b) The first decision to allocate special drawing rights shall take into account, as special considerations, a collective judgment that there is a global need to supplement reserves, and the attainment of a better balance of payments equilibrium, as well as the likelihood of a better working of the adjustment process in the future.

Section 2. Allocation and cancellation

(a) Decisions of the Fund to allocate or cancel special drawing rights shall be made for basic periods which shall run consecutively and shall be five years in duration. The first basic period shall begin on the date of the first decision to allocate special drawing rights or such later date as may be specified in that decision. Any allocations or cancellations shall take place at yearly intervals.

(b) The rates at which allocations are to be made shall be expressed as percentages of quotas on the date of each decision to allocate. The rates at which special drawing rights are to be cancelled shall be expressed as percentages of net cumulative allocations of special drawing rights on the date of each decision to cancel. The percentages shall be the same for all participants.

(c) In its decision for any basic period the Fund may provide, notwithstanding (a) and (b) above, that:

  • (i) the duration of the basic period shall be other than five years; or

  • (ii) the allocations or cancellations shall take place at other than yearly intervals; or

  • (iii) the basis for allocations or cancellations shall be the quotas or net cumulative allocations on dates other than the dates of decisions to allocate or cancel.

(d) A member that becomes a participant after a basic period starts shall receive allocations beginning with the next basic period in which allocations are made after it becomes a participant unless the Fund decides that the new participant shall start to receive allocations beginning with the next allocation after it becomes a participant. If the Fund decides that a member that becomes a participant during a basic period shall receive allocations during the remainder of that basic period and the participant was not a member on the dates established under (b) or (c) above, the Fund shall determine the basis on which these allocations to the participant shall be made.

(e) A participant shall receive allocations of special drawing rights made pursuant to any decision to allocate unless:

  • (i) the governor for the participant did not vote in favor of the decision; and

  • (ii) the participant has notified the Fund in writing prior to the first allocation of special drawing rights under that decision that it does not wish special drawing rights to be allocated to it under the decision. On the request of a participant, the Fund may decide to terminate the effect of the notice with respect to allocations of special drawing rights subsequent to the termination.

(f) If on the effective date of any cancellation the amount of special drawing rights held by a participant is less than its share of the special drawing rights that are to be cancelled, the participant shall eliminate its negative balance as promptly as its gross reserve position permits and shall remain in consultation with the Fund for this purpose. Special drawing rights acquired by the participant after the effective date of the cancellation shall be applied against its negative balance and cancelled.

Section 3. Unexpected major developments

The Fund may change the rates or intervals of allocation or cancellation during the rest of a basic period or change the length of a basic period or start a new basic period, if at any time the Fund finds it desirable to do so because of unexpected major developments.

Section 4. Decisions on allocations and cancellations

(a) Decisions under Section 2 (a), (b), and (c) or Section 3 of this Article shall be made by the Board of Governors on the basis of proposals of the Managing Director concurred in by the Executive Directors.

(b) Before making any proposal, the Managing Director, after having satisfied himself that it will be consistent with the provisions of Section 1 (a) of this Article, shall conduct such consultations as will enable him to ascertain that there is broad support among participants for the proposal. In addition, before making a proposal for the first allocation, the Managing Director shall satisfy himself that the provisions of Section 1 (b) of this Article have been met and that there is broad support among participants to begin allocations; he shall make a proposal for the first allocation as soon after the establishment of the Special Drawing Account as he is so satisfied.

(c) The Managing Director shall make proposals:

  • (i) not later than six months before the end of each basic period;

  • (ii) if no decision has been taken with respect to allocation or cancellation for a basic period, whenever he is satisfied that the provisions of (b) above have been met;

  • (iii) when, in accordance with Section 3 of this Article, he considers that it would be desirable to change the rate or intervals of allocation or cancellation or change the length of a basic period or start a new basic period; or

  • (iv) within six months of a request by the Board of Governors or the Executive Directors; provided that, if under (i), (iii), or (iv) above the Managing Director ascertains that there is no proposal which he considers to be consistent with the provisions of Section 1 of this Article that has broad support among participants in accordance with (b) above, he shall report to the Board of Governors and to the Executive Directors.

(d) A majority of eighty-five percent of the total voting power shall be required for decisions under Section 2 (a), (b), and (c) or Section 3 of this Article except for decisions under Section 3 with respect to a decrease in the rates of allocation.

ARTICLE XXV Operations and Transactions in Special Drawing Rights

Section 1. Use of special drawing rights

Special drawing rights may be used in the operations and transactions authorized by or under this Agreement.

Section 2. Transactions between participants

(a) A participant shall be entitled to use its special drawing rights to obtain an equivalent amount of currency from a participant designated under Section 5 of this Article.

(b) A participant, in agreement with another participant, may use its special drawing rights:

  • (i) to obtain an equivalent amount of its own currency held by the other participant; or

  • (ii) to obtain an equivalent amount of currency from the other participant in any transactions, prescribed by the Fund, that would promote reconstitution by the other participant under Section 6 (a) of this Article; prevent or reduce a negative balance of the other participant; offset the effect of a failure by the other participant to fulfill the expectation in Section 3 (a) of this Article; or bring the holdings of special drawing rights by both participants closer to their net cumulative allocations. The Fund by an eighty-five percent majority of the total voting power may prescribe additional transactions or categories of transactions under this provision. Any transactions or categories of transactions prescribed by the Fund under this subsection (b) (ii) shall be consistent with the other provisions of this Agreement and with the proper use of special drawing rights in accordance with this Agreement.

(c) A participant that provides currency to a participant using special drawing rights shall receive an equivalent amount of special drawing rights.

Section 3. Requirement of need

(a) In transactions under Section 2 of this Article, except as otherwise provided in (c) below, a participant will be expected to use its special drawing rights only to meet balance of payments needs or in the light of developments in its official holdings of gold, foreign exchange, and special drawing rights, and its reserve position in the Fund, and not for the sole purpose of changing the composition of the foregoing as between special drawing rights and the total of gold, foreign exchange, and reserve position in the Fund.

(b) The use of special drawing rights shall not be subject to challenge on the basis of the expectation in (a) above, but the Fund may make representations to a participant that fails to fulfill this expectation. A participant that persists in failing to fulfill this expectation shall be subject to Article XXIX, Section 2 (b).

(c) Participants may use special drawing rights without fulfilling the expectation in (a) above to obtain an equivalent amount of currency from another participant in any transactions, prescribed by the Fund, that would promote reconstitution by the other participant under Section 6 (a) of this Article; prevent or reduce a negative balance of the other participant; offset the effect of a failure by the other participant to fulfill the expectation in (a) above; or bring the holdings of special drawing rights by both participants closer to their net cumulative allocations.

Section 4. Obligation to provide currency

A participant designated by the Fund under Section 5 of this Article shall provide on demand currency convertible in fact to a participant using special drawing rights under Section 2 (a) of this Article. 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. A participant may provide currency in excess of the obligatory limit or any agreed higher limit.

Section 5. Designation of participants to provide currency

(a) The Fund shall ensure that a participant will be able to use its special drawing rights by designating participants to provide currency for specified amounts of special drawing rights for the purposes of Sections 2 (a) and 4 of this Article. Designations shall be made in accordance with the following general principles supplemented by such other principles as the Fund may adopt from time to time:

  • (i) A participant shall be subject to designation if its balance of payments and gross reserve position is sufficiently strong, but this will not preclude the possibility that a participant with a strong reserve position will be designated even though it has a moderate balance of payments deficit. Participants shall be designated in such manner as will promote over time a balanced distribution of holdings of special drawing rights among them.

  • (ii) Participants shall be subject to designation in order to promote reconstitution under Section 6 (a) of this Article; to reduce negative balances in holdings of special drawing rights; or to offset the effect of failures to fulfill the expectation in Section 3 (a) of this Article.

  • (iii) In designating participants the Fund normally shall give priority to those that need to acquire special drawing rights to meet the objectives of designation under (ii) above.

(b) In order to promote over time a balanced distribution of holdings of special drawing rights under (a) (i) above, the Fund shall apply the rules for designation in Schedule F or such rules as may be adopted under (c) below.

(c) The rules for designation shall be reviewed before the end of the first and each subsequent basic period and the Fund may adopt new rules as the result of a review. Unless new rules are adopted, the rules in force at the time of the review shall continue to apply.

Section 6. Reconstitution

(a) Participants that use their special drawing rights shall reconstitute their holdings of them in accordance with the rules for reconstitution in Schedule G or such rules as may be adopted under (b) below.

(b) The rules for reconstitution shall be reviewed before the end of the first and each subsequent basic period and new rules shall be adopted if necessary. Unless new rules are adopted or a decision is made to abrogate rules for reconstitution, the rules in force at the time of the review shall continue to apply. An eighty-five percent majority of the total voting power shall be required for decisions to adopt, modify, or abrogate the rules for reconstitution.

Section 7. Operations and transactions through the General Account

(a) Special drawing rights shall be included in a member’s monetary reserves under Article XIX for the purposes of Article III, Section 4 (a), Article V, Section 7 (b) and (c), Article V, Section 8 (f), and Schedule B, paragraph 1. The Fund may decide that in calculating monetary reserves and the increase in monetary reserves during any year for the purpose of Article V, Section 7 (b) and (c), no account shall be taken of any increase or decrease in those monetary reserves which is due to allocations or cancellations of special drawing rights during the year.

(b) The Fund shall accept special drawing rights:

(c) The Fund may accept special drawing rights to the extent it may decide:

  • (i) in payment of charges; and

  • (ii) in repurchases other than those under Article V, Section 7 (b), in proportions which, as far as feasible, shall be the same for all members.

(d) The Fund, if it deems such action appropriate to replenish its holdings of a participant’s currency and after consultation with that participant on alternative ways of replenishment under Article VII, Section 2, may require that participant to provide its currency for special drawing rights held in the General Account subject to Section 4 of this Article. In replenishing with special drawing rights, the Fund shall pay due regard to the principles of designation under Section 5 of this Article.

(e) To the extent that a participant may receive special drawing rights in a transaction prescribed by the Fund to promote reconstitution by it under Section 6 (a) of this Article, prevent or reduce a negative balance, or offset the effect of a failure by it to fulfill the expectation in Section 3 (a) of this Article, the Fund may provide the participant with special drawing rights held in the General Account for gold or currency acceptable to the Fund.

(f) In any of the other operations and transactions of the Fund with a participant conducted through the General Account the Fund may use special drawing rights by agreement with the participant.

(g) The Fund may levy reasonable charges uniform for all participants in connection with operations and transactions under this Section.

Section 8. Exchange rates

(a) The exchange rates for operations or transactions between participants shall be such that a participant using special drawing rights shall receive the same value whatever currencies might be provided and whichever participants provide those currencies, and the Fund shall adopt regulations to give effect to this principle.

(b) The Fund shall consult a participant on the procedure for determining rates of exchange for its currency.

(c) For the purpose of this provision the term participant includes a terminating participant.

ARTICLE XXVI Special Drawing Account Interest and Charges

Section 1. Interest

Interest at the same rate for all holders shall be paid by the Fund to each holder on the amount of its holdings of special drawing rights. The Fund shall pay the amount due to each holder whether or not sufficient charges are received to meet the payment of interest.

Section 2. Charges

Charges at the same rate for all participants shall be paid to the Fund by each participant on the amount of its net cumulative allocation of special drawing rights plus any negative balance of the participant or unpaid charges.

Section 3. Rate of interest and charges

The rate of interest shall be equal to the rate of charges and shall be one and one-half percent per annum. The Fund in its discretion may increase or reduce this rate, but the rate shall not be greater than two percent or the rate of remuneration decided under Article V, Section 9, whichever is higher, or smaller than one percent or the rate of remuneration decided under Article V, Section 9, whichever is lower.

Section 4. Assessments

When it is decided under Article XXII, Section 2, that reimbursement shall be made, the Fund shall levy assessments for this purpose at the same rate for all participants on their net cumulative allocations.

Section 5. Payment of interest, charges, and assessments

Interest, charges, and assessments shall be paid in special drawing rights. A participant that needs special drawing rights to pay any charge or assessment shall be obligated and entitled to obtain them, at its option for gold or currency acceptable to the Fund, in a transaction with the Fund conducted through the General Account. If sufficient special drawing rights cannot be obtained in this way, the participant shall be obligated and entitled to obtain them with currency convertible in fact from a participant which the Fund shall specify. Special drawing rights acquired by a participant after the date for payment shall be applied against its unpaid charges and cancelled.

ARTICLE XXVII Administration of the General Account and the Special Drawing Account

(a) The General Account and the Special Drawing Account shall be administered in accordance with the provisions of Article XII, subject to the following:

  • (i) The Board of Governors may delegate to the Executive Directors authority to exercise any powers of the Board with respect to special drawing rights except those under Article XXIII, Section 3, Article XXIV, Section 2 (a), (b), and (c), and Section 3, the penultimate sentence of Article XXV, Section 2 (b), Article XXV, Section 6 (b), and Article XXXI (a).

  • (ii) For meetings of or decisions by the Board of Governors on matters pertaining exclusively to the Special Drawing Account only requests by or the presence and the votes of governors appointed by members that are participants shall be counted for the purpose of calling meetings and determining whether a quorum exists or whether a decision is made by the required majority.

  • (iii) For decisions by the Executive Directors on matters pertaining exclusively to the Special Drawing Account only directors appointed or elected by at least one member that is a participant shall be entitled to vote. Each of these directors shall be entitled to cast the number of votes allotted to the member which is a participant that appointed him or to the members that are participants whose votes counted towards his election. Only the presence of directors appointed or elected by members that are participants and the votes allotted to members that are participants shall be counted for the purpose of determining whether a quorum exists or whether a decision is made by the required majority.

  • (iv) Questions of the general administration of the Fund, including reimbursement under Article XXII, Section 2, and any question whether a matter pertains to both Accounts or exclusively to the Special Drawing Account shall be decided as if they pertained exclusively to the General Account. Decisions with respect to the acceptance and holding of special drawing rights in the General Account and the use of them, and other decisions affecting the operations and transactions conducted through both the General Account and the Special Drawing Account shall be made by the majorities required for decisions on matters pertaining exclusively to each Account. A decision on a matter pertaining to the Special Drawing Account shall so indicate.

(b) In addition to the privileges and immunities that are accorded under Article IX of this Agreement, no tax of any kind shall be levied on special drawing rights or on operations or transactions in special drawing rights.

(c) A question of interpretation of the provisions of this Agreement on matters pertaining exclusively to the Special Drawing Account shall be submitted to the Executive Directors pursuant to Article XVIII (a) only on the request of a participant. In any case where the Executive Directors have given a decision on a question of interpretation pertaining exclusively to the Special Drawing Account only a participant may require that the question be referred to the Board of Governors under Article XVIII (b). The Board of Governors shall decide whether a governor appointed by a member that is not a participant shall be entitled to vote in the Committee on Interpretation on questions pertaining exclusively to the Special Drawing Account.

(d) Whenever a disagreement arises between the Fund and a participant that has terminated its participation in the Special Drawing Account or between the Fund and any participant during the liquidation of the Special Drawing Account with respect to any matter arising exclusively from participation in the Special Drawing Account, the disagreement shall be submitted to arbitration in accordance with the procedures in Article XVIII (c).

ARTICLE XXVIII General Obligations of Participants

In addition to the obligations assumed with respect to special drawing rights under other Articles of this Agreement, each participant undertakes to collaborate with the Fund and with other participants in order to facilitate the effective functioning of the Special Drawing Account and the proper use of special drawing rights in accordance with this Agreement.

ARTICLE XXIX Suspension of Transactions in Special Drawing Rights

Section 1. Emergency provisions

In the event of an emergency or the development of unforeseen circumstances threatening the operations of the Fund with respect to the Special Drawing Account, the Executive Directors by unanimous vote may suspend for a period of not more than one hundred twenty days the operation of any of the provisions relating to special drawing rights, and the provisions of Article XVI, Section 1 (b), (c), and (d), shall then apply.

Section 2. Failure to fulfill obligations

(a) If the Fund finds that a participant has failed to fulfill its obligations under Article XXV, Section 4, the right of the participant to use its special drawing rights shall be suspended unless the Fund otherwise determines.

(b) If the Fund finds that a participant has failed to fulfill any other obligation with respect to special drawing rights, the Fund may suspend the right of the participant to use special drawing rights it acquires after the suspension.

(c) Regulations shall be adopted to ensure that before action is taken against any participant under (a) or (b) above, the participant shall be informed immediately of the complaint against it and given an adequate opportunity for stating its case, both orally and in writing. Whenever the participant is thus informed of a complaint relating to (a) above, it shall not use special drawing rights pending the disposition of the complaint.

(d) Suspension under (a) or (b) above or limitation under (c) above shall not affect a participant’s obligation to provide currency in accordance with Article XXV, Section 4.

(e) The Fund may at any time terminate a suspension under (a) or (b) above, provided that a suspension imposed on a participant under (b) above for failure to fulfill the obligation under Article XXV, Section 6 (a), shall not be terminated until one hundred eighty days after the end of the first calendar quarter during which the participant complies with the rules for reconstitution.

(f) The right of a participant to use its special drawing rights shall not be suspended because it has become ineligible to use the Fund’s resources under Article IV, Section 6, Article V, Section 5, Article VI, Section 1, or Article XV, Section 2 (a). Article XV, Section 2, shall not apply because a participant has failed to fulfill any obligations with respect to special drawing rights.

ARTICLE XXX Termination of Participation

Section 1. Right to terminate participation

(a) Any participant may terminate its participation in the Special Drawing Account at any time by transmitting a notice in writing to the Fund at its principal office. Termination shall become effective on the date the notice is received.

(b) A participant that withdraws from membership in the Fund shall be deemed to have simultaneously terminated its participation in the Special Drawing Account.

Section 2. Settlement on termination

(a) When a participant terminates its participation in the Special Drawing Account, all operations and transactions by the terminating participant in special drawing rights shall cease except as otherwise permitted under an agreement made pursuant to (c) below in order to facilitate a settlement or as provided in Sections 3, 5, and 6 of this Article or in Schedule H. Interest and charges that accrued to the date of termination and assessments levied before that date but not paid shall be paid in special drawing rights.

(b) The Fund shall be obligated to redeem all special drawing rights held by the terminating participant, and the terminating participant shall be obligated to pay to the Fund an amount equal to its net cumulative allocation and any other amounts that may be due and payable because of its participation in the Special Drawing Account. These obligations shall be set off against each other and the amount of special drawing rights held by the terminating participant that is used in the setoff to extinguish its obligation to the Fund shall be cancelled.

(c) A settlement shall be made with reasonable dispatch by agreement between the terminating participant and the Fund with respect to any obligation of the terminating participant or the Fund after the setoff in (b) above. If agreement on a settlement is not reached promptly the provisions of Schedule H shall apply.

Section 3. Interest and charges

After the date of termination the Fund shall pay interest on any outstanding balance of special drawing rights held by a terminating participant and the terminating participant shall pay charges on any outstanding obligation owed to the Fund at the times and rates prescribed under Article XXVI. Payment shall be made in special drawing rights. A terminating participant shall be entitled to obtain special drawing rights with currency convertible in fact to pay charges or assessments in a transaction with a participant specified by the Fund or by agreement from any other holder, or to dispose of special drawing rights received as interest in a transaction with any participant designated under Article XXV, Section 5, or by agreement with any other holder.

Section 4. Settlement of obligation to the Fund

Gold or currency received by the Fund from a terminating participant shall be used by the Fund to redeem special drawing rights held by participants in proportion to the amount by which each participant’s holdings of special drawing rights exceed its net cumulative allocation at the time the gold or currency is received by the Fund. Special drawing rights so redeemed and special drawing rights obtained by a terminating participant under the provisions of this Agreement to meet any installment due under an agreement on settlement or under Schedule H and set off against that installment shall be cancelled.

Section 5. Settlement of obligation to a terminating participant

Whenever the Fund is required to redeem special drawing rights held by a terminating participant, redemption shall be made with currency or gold provided by participants specified by the Fund. These participants shall be specified in accordance with the principles in Article XXV, Section 5. Each specified participant shall provide at its option the currency of the terminating participant or currency convertible in fact or gold to the Fund and shall receive an equivalent amount of special drawing rights. However, a terminating participant may use its special drawing rights to obtain its own currency, currency convertible in fact, or gold from any holder, if the Fund so permits.

Section 6. General Account transactions

In order to facilitate settlement with a terminating participant the Fund may decide that a terminating participant shall:

  • (i) use any special drawing rights held by it after the setoff in Section 2 (b) of this Article, when they are to be redeemed, in a transaction with the Fund conducted through the General Account to obtain its own currency or currency convertible in fact at the option of the Fund; or

  • (ii) obtain special drawing rights in a transaction with the Fund conducted through the General Account for a currency acceptable to the Fund or gold to meet any charges or installment due under an agreement or the provisions of Schedule H.

ARTICLE XXXI Liquidation of the Special Drawing Account

(a) The Special Drawing Account may not be liquidated except by decision of the Board of Governors. In an emergency, if the Executive Directors decide that liquidation of the Special Drawing Account may be necessary, they may temporarily suspend allocations or cancellations and all transactions in special drawing rights pending decision by the Board. A decision by the Board of Governors to liquidate the Fund shall be a decision to liquidate both the General Account and the Special Drawing Account.

(b) If the Board of Governors decides to liquidate the Special Drawing Account, all allocations or cancellations and all operations and transactions in special drawing rights and the activities of the Fund with respect to the Special Drawing Account shall cease except those incidental to the orderly discharge of the obligations of participants and of the Fund with respect to special drawing rights, and all obligations of the Fund and of participants under this Agreement with respect to special drawing rights shall cease except those set out in this Article, Article XVIII (c), Article XXVI, Article XXVII (d), Article XXX and Schedule H, or any agreement reached under Article XXX subject to paragraph 4 of Schedule H, Article XXXII, and Schedule I.

(c) Upon liquidation of the Special Drawing Account, interest and charges that accrued to the date of liquidation and assessments levied before that date but not paid shall be paid in special drawing rights. The Fund shall be obligated to redeem all special drawing rights held by holders and each participant shall be obligated to pay the Fund an amount equal to its net cumulative allocation of special drawing rights and such other amounts as may be due and payable because of its participation in the Special Drawing Account.

(d) Liquidation of the Special Drawing Account shall be administered in accordance with the provisions of Schedule I.

ARTICLE XXXII Explanation of Terms with Respect to Special Drawing Rights

In interpreting the provisions of this Agreement with respect to special drawing rights the Fund and its members shall be guided by the following:

(a) Net cumulative allocation of special drawing rights means the total amount of special drawing rights allocated to a participant less its share of special drawing rights that have been cancelled under Article XXIV, Section 2 (a).

(b) Currency convertible in fact means:

  • (1) a participant’s currency for which a procedure exists for the conversion of balances of the currency obtained in transactions involving special drawing rights into each other currency for which such procedure exists, at rates of exchange prescribed under Article XXV, Section 8, and which is the currency of a participant that

    • (i) has accepted the obligations of Article VIII, Sections 2, 3, and 4, or

    • (ii) for the settlement of international transactions in fact freely buys and sells gold within the limits prescribed by the Fund under Section 2 of Article IV; or

  • (2) currency convertible into a currency described in paragraph (1) above at rates of exchange prescribed under Article XXV, Section 8.

(c) A participant’s reserve position in the Fund means the sum of the gold tranche purchases it could make and the amount of any indebtedness of the Fund which is readily repayable to the participant under a loan agreement.”

L SCHEDULE B Provisions with Respect to Repurchase by a Member of its Currency Held by the Fund

1. Paragraph 1 shall read:

“1. In determining the extent to which repurchase of a member’s currency from the Fund under Article V, Section 7 (b), shall be made with each convertible currency and each of the other types of monetary reserve, the following rule, subject to 2 below, shall apply:

  • (a) If the member’s monetary reserves have not increased during the year, the amount payable to the Fund shall be distributed among all types of reserves in proportion to the member’s holdings thereof at the end of the year.

  • (b) If the member’s monetary reserves have increased during the year, a part of the amount payable to the Fund equal to one-half of the increase, minus one-half of any decrease in the Fund’s holdings of the member’s currency that has occurred during the year, shall be distributed among those types of reserves which have increased in proportion to the amount by which each of them has increased. The remainder of the sum payable to the Fund shall be distributed among all types of reserves in proportion to the member’s remaining holdings thereof.

  • (c) If after the repurchases required under Article V, Section 7 (b), had been made, the result would exceed either of the limits specified in Article V, Section 7 (c) (i) or (ii), the Fund shall require such repurchases to be made by the member proportionately in such manner that these limits will not be exceeded.

  • (d) If after all the repurchases required under Article V, Section 7 (b), had been made, the result would exceed the limit specified in Article V, Section 7 (c) (iii), the amount by which the limit would be exceeded shall be discharged in convertible currencies as determined by the Fund without exceeding that limit.

  • (e) If a repurchase required under Article V, Section 7 (b), would exceed the limit specified in Article V, Section 7 (c) (iv), the amount by which the limit would be exceeded shall be repurchased at the end of the subsequent financial year or years in such a way that total repurchases under Article V, Section 7 (b), in any year would not exceed the limit specified in Article V, Section 7 (c) (iv).”

2. Paragraph 2 shall read:

  • “2. (a) The Fund shall not require the currency of any non-member under Article V, Section 7 (b) and (c).

  • (b) Any amount payable in the currency of a non-member under 1 (a) or 1 (b) above shall be paid in the convertible currencies of members as determined by the Fund.”

3. The following paragraphs 5 and 6 shall be added to Schedule B:

“5. In calculating monetary reserves and the increase in monetary reserves during any year for the purpose of Article V, Section 7 (b) and (c), the Fund may decide in its discretion, on the request of a member, that deductions shall be made for obligations outstanding as the result of transactions between members under a reciprocal facility by which a member agrees to exchange on demand its currency for the currency of the other member up to a maximum amount and on terms requiring that each such transaction be reversed within a specified period not in excess of nine months.”

“6. In calculating monetary reserves and the increase in monetary reserves for the purpose of Article V, Section 7 (b) and (c), Article XIX (e) shall apply except that the following provision shall apply at the end of a financial year if it was in effect at the beginning of that year:

‘A member’s monetary reserves shall be calculated by deducting from its central holdings the currency liabilities to the Treasuries, central banks, stabilization funds, or similar fiscal agencies of other members or non-members specified under (d) above, together with similar liabilities to other official institutions and other banks in the territories of members, or non-members specified under (d) above. To these net holdings shall be added the sums deemed to be official holdings of other official institutions and other banks under (c) above.’ “

M

The following Schedules shall be added after Schedule E:

“SCHEDULE F Designation

During the first basic period the rules for designation shall be as follows:

  • (a) Participants subject to designation under Article XXV, Section 5 (a) (i), shall be designated for such amounts as will promote over time equality in the ratios of the participants’ holdings of special drawing rights in excess of their net cumulative allocations to their official holdings of gold and foreign exchange.

  • (b) The formula to give effect to (a) above shall be such that participants subject to designation shall be designated:

    • (i) in proportion to their official holdings of gold and foreign exchange when the ratios described in (a) above are equal; and

    • (ii) in such manner as gradually to reduce the difference between the ratios described in (a) above that are low and the ratios that are high.

SCHEDULE G Reconstitution

1. During the first basic period the rules for reconstitution shall be as follows:

  • (a)

    • (i) A participant shall so use and reconstitute its holdings of special drawing rights that, five years after the first allocation and at the end of each calendar quarter thereafter, the average of its total daily holdings of special drawing rights over the most recent five-year period will be not less than thirty percent of the average of its daily net cumulative allocation of special drawing rights over the same period.

    • (ii) Two years after the first allocation and at the end of each calendar month thereafter the Fund shall make calculations for each participant so as to ascertain whether and to what extent the participant would need to acquire special drawing rights between the date of the calculation and the end of any five-year period in order to comply with the requirement in (a) (i) above. The Fund shall adopt regulations with respect to the bases on which these calculations shall be made and with respect to the timing of the designation of participants under Article XXV, Section 5 (a) (ii), in order to assist them to comply with the requirement in (a) (i) above.

    • (iii) The Fund shall give special notice to a participant when the calculations under (a) (ii) above indicate that it is unlikely that the participant will be able to comply with the requirement in (a) (i) above unless it ceases to use special drawing rights for the rest of the period for which the calculation was made under (a) (ii) above.

    • (iv) A participant that needs to acquire special drawing rights to fulfill this obligation shall be obligated and entitled to obtain them, at its option for gold or currency acceptable to the Fund, in a transaction with the Fund conducted through the General Account. If sufficient special drawing rights to fulfill this obligation cannot be obtained in this way, the participant shall be obligated and entitled to obtain them with currency convertible in fact from a participant which the Fund shall specify.

  • (b) Participants shall also pay due regard to the desirability of pursuing over time a balanced relationship between their holdings of special drawing rights and their holdings of gold and foreign exchange and their reserve positions in the Fund.

2. If a participant fails to comply with the rules for reconstitution, the Fund shall determine whether or not the circumstances justify suspension under Article XXIX, Section 2 (b).

SCHEDULE H Termination of Participation

1. If the obligation remaining after the setoff under Article XXX, Section 2 (b), is to the terminating participant and agreement on settlement between the Fund and the terminating participant is not reached within six months of the date of termination, the Fund shall redeem this balance of special drawing rights in equal half-yearly installments within a maximum of five years of the date of termination. The Fund shall redeem this balance as it may determine, either (a) by the payment to the terminating participant of the amounts provided by the remaining participants to the Fund in accordance with Article XXX, Section 5, or (b) by permitting the terminating participant to use its special drawing rights to obtain its own currency or currency convertible in fact from a participant specified by the Fund, the General Account, or any other holder.

2. If the obligation remaining after the setoff under Article XXX, Section 2 (b), is to the Fund and agreement on settlement is not reached within six months of the date of termination, the terminating participant shall discharge this obligation in equal half-yearly installments within three years of the date of termination or within such longer period as may be fixed by the Fund. The terminating participant shall discharge this obligation, as the Fund may determine, either (a) by the payment to the Fund of currency convertible in fact or gold at the option of the terminating participant, or (b) by obtaining special drawing rights, in accordance with Article XXX, Section 6, from the General Account or in agreement with a participant specified by the Fund or from any other holder, and the setoff of these special drawing rights against the installment due.

3. Installments under either 1 or 2 above shall fall due six months after the date of termination and at intervals of six months thereafter.

4. In the event of the Special Drawing Account going into liquidation under Article XXXI within six months of the date a participant terminates its participation, the settlement between the Fund and that government shall be made in accordance with Article XXXI and Schedule I.

SCHEDULE I Administration of Liquidation of the Special Drawing Account

1. In the event of liquidation of the Special Drawing Account, participants shall discharge their obligations to the Fund in ten half-yearly installments, or in such longer periods as the Fund may decide is needed, in currency convertible in fact and the currencies of participants holding special drawing rights to be redeemed in any installment to the extent of such redemption, as determined by the Fund. The first half-yearly payment shall be made six months after the decision to liquidate the Special Drawing Account.

2. If it is decided to liquidate the Fund within six months of the date of the decision to liquidate the Special Drawing Account, the liquidation of the Special Drawing Account shall not proceed until special drawing rights held in the General Account have been distributed in accordance with the following rule:

After the distribution made under 2 (a) of Schedule E, the Fund shall apportion its special drawing rights held in the General Account among all members that are participants in proportion to the amounts due to each participant after the distribution under 2 (a). To determine the amount due to each member for the purpose of apportioning the remainder of its holdings of each currency under 2 (c) of Schedule E, the Fund shall deduct the distribution of special drawing rights made under this rule.

3. With the amounts received under 1 above, the Fund shall redeem special drawing rights held by holders in the following manner and order:

  • (a) Special drawing rights held by governments that have terminated their participation more than six months before the date the Board of Governors decides to liquidate the Special Drawing Account shall be redeemed in accordance with the terms of any agreement under Article XXX or Schedule H.

  • (b) Special drawing rights held by holders that are not participants shall be redeemed before those held by participants, and shall be redeemed in proportion to the amount held by each holder.

  • (c) The Fund shall determine the proportion of special drawing rights held by each participant in relation to its net cumulative allocation. The Fund shall first redeem special drawing rights from the participants with the highest proportion until this proportion is reduced to that of the second highest proportion; the Fund shall then redeem the special drawing rights held by these participants in accordance with their net cumulative allocations until the proportions are reduced to that of the third highest proportion; and this process shall be continued until the amount available for redemption is exhausted.

4. Any amount that a participant will be entitled to receive in redemption under 3 above shall be set off against any amount to be paid under 1 above.

5. During liquidation the Fund shall pay interest on the amount of special drawing rights held by holders, and each participant shall pay charges on the net cumulative allocation of special drawing rights to it less the amount of any payments made in accordance with 1 above. The rates of interest and charges and the time of payment shall be determined by the Fund. Payments of interest and charges shall be made in special drawing rights to the extent possible. A participant that does not hold sufficient special drawing rights to meet any charges shall make the payment with gold or a currency specified by the Fund. Special drawing rights received as charges in amounts needed for administrative expenses shall not be used for the payment of interest, but shall be transferred to the Fund and shall be redeemed first and with the currencies used by the Fund to meet its expenses.

6. While a participant is in default with respect to any payment required by 1 or 5 above, no amounts shall be paid to it in accordance with 2 or 5 above.

7. If after the final payments have been made to participants each participant not in default does not hold special drawing rights in the same proportion to its net cumulative allocation, those participants holding a lower proportion shall purchase from those holding a higher proportion such amounts in accordance with arrangements made by the Fund as will make the proportion of their holdings of special drawing rights the same. Each participant in default shall pay to the Fund its own currency in an amount equal to its default. The Fund shall apportion this currency and any residual claims among participants in proportion to the amount of special drawing rights held by each and these special drawing rights shall be cancelled. The Fund shall then close the books of the Special Drawing Account and all of the Fund’s liabilities arising from the allocations of special drawing rights and the administration of the Special Drawing Account shall cease.

8. Each participant whose currency is distributed to other participants under this Schedule guarantees the unrestricted use of such currency at all times for the purchase of goods or for payments of sums due to it or to persons in its territories. Each participant so obligated agrees to compensate other participants for any loss resulting from the difference between the value at which the Fund distributed its currency under this Schedule and the value realized by such participants on disposal of its currency.”

Annex B OUTLINE OF A FACILITY BASED ON SPECIAL DRAWING RIGHTS IN THE FUND

Introduction

The facility described in this Outline is intended to meet the need, as and when it arises, for a supplement to existing reserve assets. It is to be established within the framework of the Fund and, therefore, by an Amendment of the Fund’s Articles. Provisions relating to some of the topics in this Outline could be included in By-Laws adopted by the Board of Governors or Rules and Regulations adopted by the Executive Directors rather than in the Amendment.

I. Establishment of a Special Drawing Account in the Fund

(a) An Amendment to the Articles will establish a Special Drawing Account through which all the operations relating to special drawing rights will be carried out. The purposes of the facility will be set forth in the introductory section of the Amendment.

(b) The operations of and resources available under the Special Drawing Account will be separate from the operations of the present Fund which will be referred to as the General Account.

(c) Separate provisions will be included in the Amendment for withdrawal from or liquidation of the Special 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 Special 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 Special Drawing Accounts of the Fund.

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

III. Allocation of Special Drawing Rights

1. Principles for decisions. The Special Drawing Account will allocate special drawing rights in accordance with the provisions of the Amendment. Special considerations applicable to the first decision to allocate special drawing rights, as well as the principles on which all decisions to allocate special drawing rights will be based, will be included in the introductory section of the Amendment and, to the extent necessary, in a Report explaining the Amendment.

2. Basic period and rate of allocation. The following provisions will apply to any decision to allocate special drawing rights:

(i) The decision will prescribe a basic period during which special drawing rights will be allocated at specified intervals. The period will normally 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 allocate special drawing rights.

(ii) The decision will also prescribe the rate or rates at which special drawing rights will be allocated during the basic period. Rates will be expressed as a percentage, uniform for all participants, of 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 allocation of special 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.

(b) Before formulating any proposal, the Managing Director after having satisfied himself that the considerations referred to in III.1 have been met, will conduct such consultations as will enable him to ascertain that there is broad support among participants for the allocation of special drawing rights at the proposed rate and for the proposed basic period.

(c) The Managing Director will make proposals with respect to the allocation of special 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 allocation of special drawing rights.

(d) The Executive Directors will review both the operations of the Special Drawing Account and the adequacy of global reserves as part of their annual report to the Board of Governors.

4. Change in rate of allocation or basic period. If there are unexpected major developments which make it desirable to change the rate at which further special drawing rights are to be allocated 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 allocation adopted for a new basic period. Paragraph III.3 will apply to such changes.

5. Voting majority.

(a) For decisions on the basic period for, timing of, amount and rate of allocation of special drawing rights, an 85 per cent majority of the voting power of participants shall be required.

(b) Notwithstanding (a) above, the decisions to decrease the rate of allocation of special drawing rights for the remainder of the basic period will be taken by a simple majority of the voting power of participants.

6. Opting out. The Amendment will include provisions that will prescribe to what extent a participant will be required initially to receive special drawing rights, but will stipulate that beyond any such amount a participant that does not vote in favor of a decision to allocate special drawing rights may elect not to receive them under that decision.

IV. Cancellation of Special Drawing Rights

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

V. Use of Special Drawing Rights

1. Right to use special drawing rights.

(a) A participant will be entitled, in accordance with the provisions of V, to use special drawing rights to acquire an equivalent amount of a currency convertible in fact. A participant which thus provides currency will receive an equivalent amount of special drawing rights.

(b) Within the framework of such rules and regulations as the Fund may adopt, a participant may obtain the currencies referred to in (a) either directly from another participant or through the Special Drawing Account.

(c) Except as indicated in V.3 (c), a participant will be expected to use its special drawing rights only for balance of payments needs or in the light of developments in its total reserves and not for the sole purpose of changing the composition of its reserves.

(d) The use of special 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, and may direct drawings to such participant to the extent of such failure.

2. Provision of currency. A participant’s obligation to provide currency will not extend beyond a point at which its holdings of special drawing rights in excess of the net cumulative amount of such rights allocated to it are equal to twice that amount. However, a participant may provide currency, or agree with the Fund to provide currency, in excess of this limit.

3. Selection of participants to be drawn upon. The Fund’s rules and instructions relating to the participants from which currencies should be acquired by users of special 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:

(a) 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.

(b) 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 (a) above, in the ratios of their holdings of special drawing rights, or such holdings in excess of net cumulative allocations thereof, to total reserves.

(c) In addition, the Fund will, in its rules and instructions, provide for such use of special drawing rights, either directly between participants or through the intermediary of the Special Drawing Account, as will promote voluntary reconstitution and reconstitution under V.4.

(d) Subject to the provisions of V.1 (c), a participant may use its special drawing rights to purchase balances of its currency held by another participant, with the agreement of the latter.

4. Reconstitution.

(a) Members that use their special drawing rights will incur an obligation to reconstitute their position in accordance with principles which will take account of the amount and the duration of the use. These principles will be laid down in rules and regulations of the Fund.

(b) The rules for reconstitution of drawings made during the first basic period will be based on the following principles:

  • (i) The average net use, taking into account both use below and holdings above its net cumulative allocation, made by a participant of its special drawing rights calculated on the basis of the preceding five years, shall not exceed 70 per cent of its average net cumulative allocation during this period. Reconstitution under this subparagraph (i) will be brought about through the mechanism of transfers, by the Fund directing drawings correspondingly.

  • (ii) Participants will pay due regard to the desirability of pursuing over time a balanced relationship between their holdings of special drawing rights and other reserves.

(c) Reconstitution rules will be reviewed before the end of the first and of each subsequent period and new rules will be adopted, if necessary. If new rules are not adopted for a basic period, the rules for the preceding period shall apply unles it is decided to abrogate reconstitution rules. The same majority as is required for decisions on the basic period, timing of, or rate of allocation of special drawing rights will be required for decisions to adopt, amend, or abrogate reconstitution rules. Any amendment in the rules will govern the reconstitution of drawings made after the effective date of the amendment, unless otherwise decided.

VI. Interest and Maintenance of Gold Value

(a) Interest. A moderate rate of interest will be paid in special drawing rights on holdings of special drawing rights. The cost of this interest will be assessed against all participants in proportion to net cumulative allocations of special drawing rights to them.

(b) Maintenance of gold value. The unit of value for expressing special drawing rights will be equal to 0.888 671 grams of fine gold. The rights and obligations of participants and of the Special Drawing Account will be subject to an absolute maintenance of gold value or to provisions similar to Article IV, Section 8 of the Fund’s Articles.

VII. Functions of Fund Organs and Voting

1. Exercise of powers. The decisions taken with respect to the Special 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 allocation, cancellation, and certain aspects of the use of special 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. Except as otherwise provided in the Amendment, all decisions pertaining to the Special Drawing Account will be taken by a majority of votes cast. The precise formula for the voting power of participants, which will include basic and weighted votes, and possibly the adjustment of voting power in relation to the use of special drawing rights, will be the subject of later consideration.

VIII. General Provisions

1. Collaboration. Participants will undertake to collaborate with the Fund in order to facilitate the proper functioning and effective use of special drawing rights within the international monetary system.

2. 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 special drawing rights.

(b) If the Fund finds that a participant has failed to fulfill any other obligation under the Amendment, the Fund may suspend the participant’s right to use any special drawing rights allocated 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.

3. Accounts. All changes in holdings of special drawing rights will take effect when recorded in the accounts of the Special Drawing Account.

IX. Entry into Force

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

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