chapter 19 Termination of Participation in Special Drawing Account

International Monetary Fund
Published Date:
October 1985
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Termination and Withdrawal

The provisions of the Articles on the termination of participation in the Special Drawing Account were based on the provisions that govern withdrawal from the Fund. An important difference between them, however, is that the Fund has no power to compel a participant to terminate its participation in the Special Drawing Account. A leading similarity between them is that a participant has the right to terminate its participation at any time by transmitting a notice to the Fund at its principal office, and termination is effective on the date the notice is received.1 A participant that withdraws from membership in the Fund is deemed to have terminated its participation in the Special Drawing Account at the same time.2 It would be possible for the Fund to permit an ex-participant or an ex-member to be an “other holder” of special drawing rights on such terms and conditions as the Fund prescribed,3 but a country’s willingness to be an “other holder” does not eliminate the need for a settlement on the termination of participation.

Settlement After Termination

The provisions that govern settlement after termination do not distinguish between the ex-participant that continues to be a member of the Fund and the ex-participant that ceases to be a member. All operations and transactions by a “terminating participant” in special drawing rights cease, subject to certain exceptions that are associated with the settlement.4 In the day-to-day operations of the Special Drawing Account, special drawing rights, like gold, are not the obligations of anyone. The main obligation of the Fund in the normal conduct of the Special Drawing Account is to designate a participant as the transferee of special drawing rights when another participant wishes to use its holdings of them. On a termination of participation, however, the Fund is obligated to redeem all special drawing rights held by the ex-participant.5 Only on a termination of participation and in the liquidation of the Special Drawing Account do special drawing rights become obligations of the Fund.6 The ex-participant is obligated to pay to the Fund an amount equal to the net cumulative allocation of special drawing rights that was made to it together with any other amounts that are due and payable as a result of participation, such as charges that accrued to the date of termination. The obligations of the Fund and the ex-participant are set off against each other, and the amount of special drawing rights that enter into the setoff are canceled.7

A settlement must be made with reasonable dispatch by agreement between the ex-participant and the Fund in respect of the obligation of the one or the other that remains outstanding after the setoff. If agreement on a settlement is not reached promptly, the provisions of Schedule H apply and govern all aspects of the settlement.8

Schedule D does not deal explicitly with the rates of charge payable by an ex-member on the Fund’s holdings in the General Account of the ex-member’s currency after withdrawal from the Fund, but the Articles contain an express provision with respect to the rate of charges and interest payable after termination of participation in the Special Drawing Account. The Fund must pay interest on any outstanding balance of special drawing rights held by an ex-participant, and an ex-participant must pay charges on any outstanding obligation to the Fund, at the times and rates prescribed under the Articles for payments to or by participants. Payments must be made in special drawing rights. In order to pay charges, an ex-participant is entitled to obtain special drawing rights with currency convertible in fact in transactions with participants that are specified by the Fund, or in transactions entered into by agreement between the ex-participant and any “other holder” of special drawing rights.9 In order to enhance the quality of special drawing rights as reserve assets, there are only three situations in which a participant may be required to part with them, but of course for value even in these exceptional circumstances. One of these three situations is the transfer that may be required in order to enable an ex-participant to pay charges.10 If an ex-participant receives special drawing rights as interest paid by the Fund, the ex-participant will be able to dispose of them in a transaction with any participant designated by the Fund or by agreement with any “other holder.” 11 The ex-participant will have to dispose of them unless the Fund has decided to comply with a request by the ex-participant to be an “other holder.”

If after the setoff the ex-participant is indebted to the Fund, and an agreement is not reached within six months of the date of termination, the ex-participant is required by Schedule H to discharge its 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 period of three years was chosen notwithstanding the period of five years that is permitted by Schedule D for settlement after withdrawal from the Fund. The Fund may determine that the ex-participant shall discharge its obligation either by paying currency convertible in fact or gold at the choice of the ex-participant, or by paying special drawing rights obtained from the General Account, a participant specified by the Fund, or any “other holder.” 12

Gold or currency received by the Fund from an ex-participant in a settlement under Schedule H or under an agreement must be used by the Fund to redeem special drawing rights from participants that hold more than their net cumulative allocations at the time the gold or currency is received. The amounts redeemed are proportionate to their holdings of special drawing rights in excess of net cumulative allocations. If the Fund receives special drawing rights from an ex-participant in discharge of any installment that is due, the special drawing rights are canceled.13

Under Schedule H, if after the setoff the Fund is indebted to the ex-participant, and agreement is not reached within six months after the date of termination, the Fund must redeem the ex-participant’s holdings of special drawing rights in equal half-yearly installments within a maximum period of five years after the date of termination.14 The period of five years available to the Fund for the discharge of its obligation is longer than the period of three years on which it can insist for the discharge of the ex-participant’s obligation if the ex-participant is the obligor after the setoff. One reason for the choice of the longer period was the possibility that the Fund’s obligation to an ex-participant might be large, and it was thought desirable, therefore, to protect continuing participants against the burdens of a prompt settlement. A reason for the choice of the shorter period of three years for settlement by an ex-participant was the consideration that if the Fund was the obligor there would be in existence an amount of special drawing rights in excess of the total of net cumulative allocations of them to continuing participants. It was thought to be desirable to remove this excess from the system as soon as possible so as not to place too great a strain on those participants that could be designated to accept special drawing rights.

If a settlement is made under Schedule H and the Fund is the obligor, redemption of the ex-participant’s holdings of special drawing rights must be made with currency or gold provided by participants specified by the Fund in accordance with the criterion of a sufficiently strong balance of payments and reserve position. Each specified participant has the option to provide the currency of the ex-participant, currency convertible in fact, or gold, and it receives an equivalent amount of special drawing rights in return. Alternatively, the Fund may permit the ex-participant to use its special drawing rights to obtain its own currency or currency convertible in fact from the General Account, a participant specified by the Fund, or any “other holder.” Somewhat similar rules apply to a settlement made by agreement.15

In a settlement under Schedule H, no installment is payable by the Fund or by the ex-participant within six months after the date of the termination of participation. If it is decided to liquidate the Special Drawing Account within that period, the provisions for liquidation apply to the relations of the Fund and the ex-participant.16

The Articles say nothing about the remedies of the Fund if an ex-participant fails to observe the obligations that bind it under a settlement. Under Schedule D, if an ex-member defaults in the payment of an installment, the Fund is empowered to sell an equivalent amount of the ex-member’s currency in an orderly manner in any market, although this may not prove to be an effective remedy. There is no comparable remedy that can be applied against an ex-participant. If it remains a member of the Fund, the question might be asked whether the Fund could declare it ineligible to use the resources of the Fund held in the General Account or require it to withdraw from membership. Article XXIX, Section 2 (f), provides that Article XV, Section 2, which deals with ineligibility and compulsory withdrawal, shall not apply because a participant fails to fulfill any obligations with respect to special drawing rights. Article XXIX, Section 2 (f), refers to participants, and the question, therefore, is whether a different rule would apply to an ex-participant. The devotion of the drafters to the principle of the separation of the two Accounts would be an argument against a different rule for ex-participants.

No country has terminated its participation in the Special Drawing Account.

1Article XXX, Section 1 (a)
2Article XXX, Section 1 (b); Article XV, Section 1.
4Article XXX, Section 2 (a).
5Article XXX, Section 2 (b).
6See Gold, Special Drawing Rights, pp. 30–31, 54–56.
7Ibid., p. 55. Article XXX, Section 2 (b).
8Article XXX, Section 2 (c); Schedule H.
10See Gold, Special Drawing Rights, p. 49.
12Schedule H, paragraph 2; see also Article XXV, Section 8 (c).
14Schedule H, paragraph 1.
15Article XXX, Section 5; see also Article XXV, Section 8 (c).
16Schedule H, paragraphs 3 and 4.

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