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IMF POLICY PAPER
REVIEW OF THE METHOD OF VALUATION OF THE SDR
May 16, 2022
IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its May 11, 2022 consideration of the staff report.
The Staff Report, prepared by IMF staff and completed on April 14, 2022 for the Executive Board’s consideration on May 11, 2022.
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Electronic copies of IMF Policy Papers
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Press Release
PRESS RELEASE
PR[22/153]
IMF Executive Board Concludes Quinquennial SDR Valuation Review and Determines New Currency Weights for SDR Valuation Basket
FOR IMMEDIATE RELEASE
The current composition of the SDR currency and interest rate baskets was maintained and updated weights in the basket were approved.
The updated basket implies slightly higher weights for the U.S. dollar and the Chinese renminbi and, accordingly, somewhat lower weights for the British pound, the euro, and the Japanese yen.
The updated basket weights will come into effect on August 1, 2022.
Washington, DC – May 14, 2022: On May 11, 2022, the Executive Board of the International Monetary Fund (IMF) completed the quinquennial review of the method of valuation of the basket of currencies that make up the Special Drawing Right (SDR).1 The review covered the composition and weighting of the SDR currency basket. The Executive Board also reviewed the corresponding interest rate instruments used to determine the SDR interest rate. The updated basket weights will come into effect on August 1, 2022.
The last SDR valuation review was concluded in 2015. Under the existing SDR valuation method adopted by the Executive Board, the SDR currency basket is reviewed every five years unless developments in the interim justify an earlier review. The current review is taking place about one year later than originally scheduled, as the Executive Board decided in March 2021 to extend the current basket until July 31, 2022 to prioritize work on the Fund’s response to the COVID-19 pandemic, including work related to the 2021 General SDR allocation.
Executive Board Assessment
Executive Directors concluded the quinquennial review of the method of valuation of the Special Drawing Rights (SDR). They supported maintaining the current method of valuation of the SDR, including the selection criteria for inclusion in the basket and the methodologies for determining the currency weights and currency amounts in the basket, while formalizing the current practice and accepted statistical method of dealing with data gaps. Directors agreed to maintain the current composition of the SDR currency and interest rate baskets and approved their updated weights in the baskets.
Directors concurred that the export criterion and the freely usable criterion should continue to guide decisions on inclusion of currencies in the basket. They also agreed to maintain the methodology introduced in the 2015 review for determining currency weights and amounts in the SDR basket. Directors encouraged future reviews to include further analysis of the weights used in the formula to ensure that it continues to adequately capture the role of currencies in global trade and financial markets. They agreed that data gaps for indicators used in the SDR valuation review should be addressed by using available data within the relevant five-year period consistent with past practice, while continuing to explore availability of alternative variables to minimize data gaps.
Directors noted that based on developments in trade and financial markets over the period 2017-2021, the updated weights in the SDR basket maintain the same ranking of the initial weights set in the 2015 review, with slightly higher weights for the U.S. dollar and the Chinese renminbi and, accordingly, somewhat lower weights for the British pound, the euro, and the Japanese yen. Directors concurred that neither the COVID-19 pandemic nor advances in Fintech have had any major impact on the relative role of currencies in the SDR basket so far. They called for continuous monitoring of implications for the SDR valuation framework from fintech and other developments, including potential economic and financial fragmentation and high inflation. A few Directors also called for monitoring implications of economic sanctions on the valuation framework.
Directors welcomed the update on operational issues raised in previous reviews through a survey of SDR users and the finding that most users do not experience significant operational challenges using SDRs or operating in the five SDR basket currencies’ markets. They noted however that the survey identified some remaining operational challenges for the currencies in the basket. In this context, Directors broadly acknowledged the progress made on financial market reforms in China, while calling for additional efforts to further open and deepen the onshore renminbi market, with some Directors also stressing the need to further enhance data transparency.
Directors agreed with the Managing Director’s proposal for the next SDR review to take place on a five-year basis, to be concluded before end-July 2027.
Annex. Summary of Key Decisions
SDR Basket Composition and Size
The value of the SDR will continue to be based on a weighted average of the values of a basket of currencies comprising the U.S. dollar, euro, Chinese renminbi, Japanese yen, and pound sterling.
Currency Weights in the SDR (and SDR Interest Rate) Basket
With effect from August 1, 2022, the IMF has determined that the five currencies that meet the selection criteria for inclusion in the SDR valuation basket will be assigned the following weights based on their roles in international trade and finance:
U.S. dollar 43.38 percent
Euro 29.31 percent
Chinese renminbi 12.28 percent
Japanese yen 7.59 percent
Pound sterling 7.44 percent
The amounts of each of the five currencies will be calculated on July 29, 2022 (the transition date) in accordance with the new weights and will go into effect on August 1, 2022.2 The calculation will be made on the basis of the average exchange rates for these currencies over the three months ending on the transition date in such a manner as to ensure that the value of the SDR will be the same on that date under both the revised valuation and present valuation baskets.
As a service to the users of SDRs and in order to provide adequate notice, the Fund will project the currency amounts in the revised basket once in May and June and every week in July 2022, and post them on the IMF's website (www.imf.org). As the currency amounts will be based on a three-month average of exchange rates, these projections will tend to iterate toward the final effective amounts, thereby keeping users informed of the likely final currency amounts in the new basket that takes effect on August 1, 2022.
SDR Interest Rate
The SDR interest rate will continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies comprising the SDR basket.
Title Page
REVIEW OF THE METHOD OF VALUATION OF THE SDR
April 14, 2022
EXECUTIVE SUMMARY
This paper provides the basis for the quinquennial review by the Executive Board of the method of valuation of the Special Drawing Right (SDR), hereafter SDR valuation review. The review covers the composition and weighting of the SDR currency basket, and the financial instruments used to determine the SDR interest rate.
In the five-year period for this review (2017-21), developments in key variables relevant for the SDR valuation suggest that there have been no major changes in the roles of currencies in the world economy. The countries and the currency union (euro area) whose currencies are currently included in the SDR basket remain the five largest exporters and their currencies continue to account for the majority of international financial transactions. Moreover, staff analysis finds that the COVID-19 pandemic and recent fintech developments have no systematic or material impact on the SDR valuation.
The paper proposes to maintain the current composition of the SDR currency and interest rate baskets, as well as the method for determining the currency weights and currency amounts in the basket. In line with the Board-approved methodology, the paper proposes updated weights for the currencies in the SDR basket. These maintain the same ranking of the initial weights set in the 2015 review, with slightly higher weights for the U.S. dollar and the Chinese renminbi and, accordingly, somewhat lower weights for the British pound, the euro, and the Japanese yen.
The paper also proposes to make explicit the treatment of data gaps in the SDR valuation framework. It proposes to formalize, through a modification of the valuation decision, the current practice of closing data gaps using available data for the relevant five-year period.
Findings from a survey of SDR department participants and prescribed holders are used to follow up on operational issues raised in earlier valuation reviews. Responses provide limited evidence that mismatches between the SDR interest rate reset frequency and instrument maturity or differences in the sources and timing of data collection for SDR exchange rates hamper the hedging of SDR positions. The majority of survey respondents report operating across the five SDR basket currencies’ markets without major difficulties. However, the survey identifies some remaining operational challenges, most of them pertaining to the Chinese renminbi.
It is proposed that the new SDR valuation and interest rate baskets will come into effect on August 1, 2022 for a period of five years, consistent with past practice. In line with previous practice, the decision by the Executive Board regarding this review would be adopted well before August 1, 2022 in order to give notice to interested parties, and to complete any consultations that might be required. It is proposed that the next SDR valuation review take place in 2027.
Approved By
Bernard Lauwers (FIN)
Prepared by the Finance (FIN), Legal (LEG), and Strategy Policy and Review (SPR) Departments. The team was led by Greetje Everaert and Mwanza Nkusu (both FIN), Sebastian Sosa and Camilo Tovar (both SPR), and Anjum Rosha (LEG); comprising Veerayudh Bunsoong, Qianying Chen, Simon Cooney, Bilal Khan, Tetsuya Konuki, Jane Mburu, Flavien Moreau, Constance de Soyres, and Zhibo Tan (all FIN), Mengxue Wang (formerly FIN); Hoang Pham (LEG); Eric Pondi, Neil Shenai, Misa Takebe, and Yiqun Wu (all SPR). Olaf Unteroberdoerster (FIN) and Delia Velculescu (SPR) provided overall guidance, under the supervision of Andreas Bauer (FIN), Kristina Kostial (SPR), and Bernhard Steinki (LEG). Shan He, Marco Cobanera, and Sandra Saveikyte (all FIN) and N. Hallmark and S. Xiong (both SPR) provided research assistance. Rafael Flores and Atiya Mahdi (both FIN) and Shanika Jayakody (formerly FIN) helped prepare the report.
Contents
INTRODUCTION
FRAMEWORK FOR THE SDR VALUATION
DEVELOPMENTS IN SDR VALUATION-RELATED VARIABLES
A. Exchange Rate Developments
B. Developments in Exports and Financial Variables
C. Other Developments
COMPOSITION AND WEIGHTING OF CURRENCIES IN THE UPDATED SDR BASKET
A. SDR Currency Basket Composition
B. Currency Weights
C. Currency Amounts in the SDR Basket
REVIEW OF INSTRUMENTS IN THE SDR INTEREST RATE BASKET
OPERATIONAL ISSUES
A. Hedging and SDRi Reset Frequency
B. Operational Issues in SDR Basket Currencies’ Markets
ENTERPRISE RISKS
TRANSITION TO THE NEXT BASKET, TIMING OF THE NEXT REVIEW, AND ISSUES FOR DISCUSSION
BOXES
1. Broad Principles Guiding SDR Valuation Decisions
2. Determination of Currency Amounts and Actual Daily Weights
3. China—Impact of the Covid-19 Pandemic on SDR Valuation-Related Variables
4. Fintech Developments and Implications for the SDR Valuation Framework
5. Interest Rate Calculation
6. China—Progress in Financial Market Reforms and Data Dissemination, 2015-21
FIGURES
1. U.S. Dollar Exchange Rate Movements, 2016-21
2. Actual Currency Weights in the SDR Basket, 2016-21
3. Exchange Rate Volatility, 2016-21
4. Exports of Goods and Services
5. Bid-Offer Spreads for SDR Basket Currency Pairs
6. Shares of SDR Basket Currencies in the Four Components of the Weighting Formula
7. RMB Internationalization Index
8. SDR Interest Rate and Components
9. Hedging Operations of SDR Position
10. Extent of Operational Challenges in SDR-Related Currency Markets
11. Most Frequently Mentioned Operational Challenges in SDR-related Currency Markets
12. Depending on the Current Level of Activity in the RMB Market, How Have Activities Evolved Since 2015?
13. Renminbi Spot Onshore (CYN) vs. Offshore (CNH) Exchange Rates and Spreads
TABLES
1. Exports of Goods and Services
2. Official Reserves
3. International Debt Securities Outstanding
4 International Banking Liabilities
5. Currency Composition of Global Foreign Exchange Market Turnover
6. Proposed SDR Currency Basket Weights Under the Board Adopted Formula
7. Illustrative Currency Amounts
ANNEXES
I. Data Issues
II. Analysis of Liquidity of SDR Basket Currencies
III Key Decisions on SDR Valuation and the SDR Interest Rate
IV. Survey Questionnaire Sent to Participants in the SDR Market
The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries.
A press release providing the final currency amounts in the new SDR valuation basket to take effect on August 1, 2022 will be issued by the IMF on July 29, 2022. The first SDR exchange rate using the new basket will be posted on August 1, 2022. The first SDR interest rate based on the new basket will be determined on August 5, 2022 and will be effective during the week of August 8-12, 2022. Further information on the SDR can be found on the IMF's website (https://www.imf.org/en/data/imf-finances).
