Use of SDRs in the acquisition hybrid capital instruments of the prescribed holders
Source details
- Canonical URL
- Use of SDRs in the acquisition hybrid capital instruments of the prescribed holders
Other formats
Definition and scope
- A hybrid capital instrument is a financial instrument with perpetual maturity that has both debt and equity properties, designed to be subordinated to other types of debt issued by prescribed holders and may be written off to absorb losses.
- The specific form of such instruments could vary across channeling schemes depending on applicable accounting standards (e.g., IFRS, US GAAP), prescribed holders’ internal risk capital models, and the methodology of credit rating agencies for recording the instrument as equity on the balance sheet of a prescribed holder of SDRs.
- The reserve asset status of any SDRs transferred to prescribed holders in a sale of hybrid capital instruments remains unchanged and always be maintained.
Authorization and permitted operations
- The IMF authorized participants in the SDR Department (currently all IMF members) to use SDRs to acquire hybrid capital instruments issued by prescribed holders (official entities authorized by the IMF to hold SDRs).
- This new authorized use is additional to earlier authorized uses of SDRs to buy or sell currencies and to conduct seven financial operations:
- (i) the settlement of obligations
- (ii) loans
- (iii) pledges
- (iv) transfers as a security for performance of financial obligations
- (v) swaps
- (vi) forward operations
- (vii) donations
- Prescribed holders can issue hybrid capital instruments and receive SDRs from members as proceeds; they can hold the received SDRs on their balance sheet or exchange them for currencies, including through Voluntary Trading Arrangements (VTAs).
Cumulative cap and liquidity rationale
- The newly authorized use of SDRs to acquire hybrid capital instruments issued by prescribed holders is subject to a cumulative cap of SDR 15 billion until further notice.
- The cumulative limit of SDR 15 billion aims to mitigate potential liquidity risks in the SDR market and to enable an orderly introduction of novel SDR operations by limiting liquidity risks and allowing room for monitoring implications on the functioning of the SDR Department.
- The proposed SDR 15 billion cap represents a moderate volume relative to the current VTA buying capacity (about 7 percent) and cumulative SDR allocations (below 3 percent), and thus limits risks to the SDR operations while still providing potential room for various prescribed holders to use this modality at a significant scale.
- Usage of the proposed cap will be published in the Annual Report on SDR Trading Operations.
Reserve asset quality and statistical guidance
- The reserve asset quality of any claims arising from the acquisition of hybrid capital instruments is separate from the reserve asset quality of the transferred SDRs.
- Whether any such underlying claim has characteristics that allow classification as reserve assets depends on the design of the specific instrument adopted by the issuer.
- Under the applicable statistical guidance (Sixth edition of the Balance of Payments and International Investment Position Manual (BPM6)), reserve assets must be readily available in the most unconditional form (e.g., highly liquid and can be liquidated with minimum cost and time) and be generally of high quality (e.g., high investment grade).
- There is no requirement under the Articles of Agreement of the IMF or the authorization of this new use of SDRs that the claims under hybrid capital instruments issued by prescribed holders in exchange for SDRs have reserve asset characteristics.
- Hybrid capital claims that possess the characteristics of a reserve asset are likely to be much more attractive for potential contributors because any acquisition would be neutral for their international reserve holdings.
Roles, responsibilities, and practical considerations
- Whether to acquire hybrid capital instruments is a sovereign decision of SDR Department members and requires a bilateral agreement between a member and the issuing prescribed holder; some members are impeded from engaging in this type of operation due to domestic constraints.
- The IMF does not use its own SDRs (held in the General Resources Account (GRA)) for the acquisition of hybrid capital instruments and is not involved in solicitation of potential contributors or in the contractual relationship between contributors and prescribed holders; the IMF’s role is limited to recording relevant transfers between members and prescribed holders.
- The IMF expects any member who decides to use SDRs to acquire hybrid capital instruments issued by prescribed holders to have VTAs in place to help ensure sufficient liquidity and an equitable distribution of potential SDR exchanges into currencies in the VTA market.
- Interested prescribed holders can approach the Fund for consultation when they firm up plans for a possible issuance of hybrid capital instruments, which provides a channel for sharing updated information on the remaining headroom under the cap to promote equal access to information ex-ante and minimize evenhandedness concerns.
- IMF staff has shared experience from the design of the Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustainability Trust (RST) and provided technical advice to a number of multilateral development banks (MDBs) that are prescribed holders and are developing hybrid capital offerings in exchange for SDRs.
Prescribed holders authorized to hold SDRs (current list)
- African Development Bank (AFDB)
- African Development Fund (AFDF)
- Arab Monetary Fund (AMF)
- Asian Development Bank (ADB)
- Bank for International Settlements (BIS)
- Bank of Central African States (BEAC)
- Caribbean Development Bank (CDB)
- Central Bank of West African States (BCEAO)
- Development Bank of Latin America (Corporacion Andina de Fomento or CAF)
- Eastern Caribbean Central Bank (ECCB)
- European Central Bank (ECB)
- European Bank for Reconstruction and Development (EBRD)
- European Investment Bank (EIB)
- Inter-American Development Bank (IADB)
- International Bank for Reconstruction and Development (IBRD)
- International Development Association (IDA)
- International Fund for Agricultural Development
- Islamic Development Bank
- Latin American Reserve Fund (FLAR) - Former Andean Reserve Fund
- Nordic Investment Bank
References