The Chairman’s Summing Up— Review of the Method of Valuation of the SDR, Executive Board Meeting 15/109, November 30, 2015

Executive Directors concluded the quinquennial review of the method of valuation of the Special Drawing Right (SDR). They reaffirmed the existing criteria for currency selection for the SDR basket—the export criterion and the freely usable criterion—and applied these two criteria in the review.

Directors noted that the ranking of the largest exporters remains broadly unchanged since the last review. They observed that China, as the third-largest exporter, continues to meet the export criterion for SDR basket inclusion, and noted the narrow margin separating Japan and the United Kingdom, the fourth- and fifth-largest exporters, respectively. Recognizing that the demand for a currency as a reserve asset reflects principally the economic position of the area where a currency is issued, Directors agreed that the currency-based approach already applied to monetary unions should be used for all currencies when assessing the export criterion.

Directors noted the substantial increase in the international use and trading of the renminbi (RMB) since the last review, across all the indicators used to inform the assessment. They agreed that the RMB can now be considered “in fact, widely used to make payments for international transactions” and “widely traded in the principal exchange markets.”

Directors commended the Chinese authorities for implementing substantial reforms that have supported the internationalization of the RMB and would facilitate its use in Fund operations. They recognized some remaining operational challenges but expected their impact to be mitigated by a number of factors, including the unencumbered access of Fund members and SDR users to both onshore and offshore markets. Directors stressed the importance of continuing and deepening the recent reforms and addressing any operational issues that may arise.

In light of the above considerations, Directors agreed that, effective October 1, 2016, the RMB is determined by the Fund to be freely usable. Directors further agreed that upon the effectiveness of this determination, the RMB will meet both criteria for SDR inclusion and will be added as a fifth currency in the SDR basket, in addition to the U.S. dollar, euro, Japanese yen, and pound sterling. Directors considered that expanding the basket to five currencies is appropriate, given that the relative rankings of the export shares of Japan and the United Kingdom have switched over time. They also viewed the administrative burden of expanding the basket by one currency as manageable. Authorities of all currencies represented in the SDR basket, which would now include the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the Fund, its membership and other SDR users in their currencies.

Directors agreed that in order for the SDR basket to reflect the characteristics of currencies rather than members, the currency-based approach applied since 2000 to monetary unions should be applied to all currencies when determining currency weights. They welcomed the weighting formula proposals as they address issues recognized in previous reviews, in particular by increasing the share of financial variables relative to exports, broadening the scope of the financial variables to cover private sector transactions, and setting fixed weights for exports and financial variables.

Specifically, Directors supported a formula consisting of equal weights on exports and a financial variable, with the latter comprising in equal shares official holdings of foreign exchange, foreign exchange turnover, and the sum of international bank liabilities and international debt securities. They viewed this formula as simple and transparent, while preserving broad stability in the composition of the basket and continuity in the method of valuation. Directors agreed that where data for any variable in the weighting formula are not available from uniform sources or for each year of the relevant valuation period, appropriate alternative data sources shall be used and the average values of available data shall be calculated as inputs. They underscored the importance of making efforts to address remaining data gaps, including in the currency coverage of the COFER database, ahead of the next SDR review.

Directors considered that the financial instruments representing the current four currencies used in determining the SDR interest rate remain appropriate. For the RMB, they regarded the three-month benchmark yield for China Treasury bonds as broadly reflecting conditions in the onshore money market while having a credit risk profile of the highest quality. Accordingly, Directors agreed that it is the most appropriate RMB-denominated instrument and meets the established characteristics for instruments in the SDR interest rate basket, and thus decided to add it to the basket.

Directors noted that when the new SDR currency basket comes into effect, the SDR interest rate is likely to be affected, as on past occasions. They looked forward to a comprehensive discussion of the implications of any such changes in the SDR interest rate in the context of the next review of the Fund’s income position in April 2016. This would allow any relevant policy decisions to be taken well in advance of the effectiveness of the new SDR basket.

Directors acknowledged the lead time necessary for the Fund, its members, and other SDR users to adjust to today’s decisions. They thus agreed that all of the above changes would take effect as of October 1, 2016.

Directors agreed that the SDR basket be established for five years, consistent with past practice. Accordingly, following their earlier decision to extend the current SDR basket through September 2016, Directors agreed that the next review of the method of valuation of the SDR should take place by September 30, 2021, unless developments in the interim justify an earlier review.

BUFF/15/105

November 30, 2015