Global Economics

IMF: Special Drawing Rights

CONTENTS
Sr.
No.

Topic

Page
No.

HISTORY

THE INTERNATIONAL MONETARY FUND (IMF)

SPECIAL DRAWING RIGHTS (SDRs)

BASKET OF CURRENCIES

SDR ALLOCATIONS TO IMF MEMBERS

SDRs VALUE

SDRs INTEREST RATE

11

IMF LOANS & QUOTA

15

BUYING AND SELLING SDRS

10

PRIVATE SDRs

17

11

PROS & CONS of SDR-DENOMINATED INSTRUMENTS

18

12

CONCLUSION

19

13

BIBLIOGRAPHY

20

Yash Vora

16

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Global Economics

IMF: Special Drawing Rights

HISTORY
Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign
exchange reserves under the Bretton Woods system of fixed exchange rates. 1 XDR was initially defined
as 1 USD, equal to 0.888671 g of gold. After the collapse of that system in the early 1970s the XDR has
taken on a less important role. Acting as the unit of account for the IMF has been its primary purpose
since 1972.
However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a
floating exchange rate regime. In addition, the growth in international capital markets facilitated
borrowing by creditworthy governments. Both of these developments lessened the need for SDRs. But
more recently, the 2009 SDR allocations totaling SDR 182.6 billion have played a critical role in
providing liquidity to the global economic system and supplementing member countries official reserves
amid the global financial crisis.
China currently holds approximately $ 2.2 trillion in gold and foreign exchange reserves and about $800
billion in U.S. Treasuries, as well as an estimated $500 billion in U.S. Agency debt. The rapid build -up in
reserves, however, is not limited to China. Williamson (2009b) points out that global foreign exchange
reserves from 1975 to 2008 grew roughly 2.2 times as fast as global nominal GDP, and 1.10 times as fast
as world trade. Further, in March 2009, the Peoples Bank of China (PBOC) posted a speech by Governor
Zhou Xiaochuan entitled Reform the International Monetary System. Among other initiatives, Zhou
emphasized:

Reforming the international monetary system and creating an international reserve currency that
is disconnected from individual nations and is able to remain stable in the long run, thus
removing the inherent deficiencies caused by using credit-based national currencies.
Entrusting part of member countries reserves to the centralized management of the International
Monetary Fund (IMF).
Expanding the use of the IMFs SDRs, including as a means of payment, currency of
denomination of securities, commodity denomination and reserve currency.
Expanding the basket of currencies forming the basis for SDR valuation to include currencies of
all major economies, and including GDP as a factor in currency selection for the SDR.

In April 2009, the G-20 countries agreed to a roughly $250 billion allocation of official SDRs, or newly
created reserves. On August 28, 2009, members of the IMF that were participants in the Special Drawing
Rights Department (currently all 186 members) duly received their official SDR allocations. In addition,
the Fourth Amendment to the IMF Articles of Agreement provided a one-time allocation of SDRs equal to
approximately $33 billion. This allocation had been delayed, but was finally acted upon in 2009. After the
special and general allocations the cumulative total of SDR allocations totals roughly SDR 204 billion, or
about $316 billion. SDR assets will thus represent roughly 4 percent of global foreign exchange as of the
2009:Q3. The United States, with an allocation of about 17 percent, is currently the largest official holder
of SDRs followed by Japan at 6 percent (IMF 2009b).

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Global Economics

IMF: Special Drawing Rights

THE INTERNATIONAL MONETARY

FUND (IMF)
The International Monetary Fund (IMF) is an international organization headquartered in Washington,
D.C., in the United States, of 188 countries working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and sustainable economic
growth, and reduce poverty around the world. Formed in 1944 at the Bretton Woods Conference, it came
into formal existence in 1945 with 29 member countries and the goal of reconstructing the international
payment system. Countries contribute funds to a pool through a quota system from which countries with
payment imbalances can borrow. As of 2010, the fund had SDR 476.8 billion, about US$755.7 billion at
then-current exchange rates.
Through this fund, and other activities such as statistics keeping and analysis, surveillance of its members'
economies and the demand for self-correcting policies, the IMF works to improve the economies of its
member countries. The organization's objectives stated in the Articles of Agreement are: to promote
international economic cooperation, international trade, employment, and exchange-rate stability,
including by making financial resources available to member countries to meet balance-of-payments
needs.
With its near-global membership of 188 countries, the IMF is uniquely placed to help member
governments take advantage of the opportunitiesand manage the challengesposed by globalization
and economic development more generally. The IMF tracks global economic trends and performance,
alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue,
and passes on know-how to governments on how to tackle economic difficulties.
The IMF provides policy advice and financing to members in economic difficulties and also works with
developing nations to help them achieve macroeconomic stability and reduce poverty.
Key IMF activities
The IMF supports its membership by providing

policy advice to governments and central banks based on analysis of economic trends and crosscountry experiences;

research, statistics, forecasts, and analysis based on tracking of global, regional, and individual
economies and markets;

loans to help countries overcome economic difficulties;

concessional loans to help fight poverty in developing countries; and

technical assistance and training to help countries improve the management of their economies.

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Global Economics

IMF: Special Drawing Rights

SPECIAL DRAWING RIGHTS (SDRs)

The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to
supplement the existing official reserves of member countries.
The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable
currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in
two ways: first, through the arrangement of voluntary exchanges between members; and second, by the
IMF designating members with strong external positions to purchase SDRs from members with weak
external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of
account of the IMF and some other international organizations.
In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF
and some other international organizations.
However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a
floating exchange rate regime. In addition, the growth in international capital markets facilitated
borrowing by creditworthy governments. Both of these developments lessened the need for SDRs. But
more recently, the 2009 SDR allocations totaling SDR 182.6 billion have played a critical role in
providing liquidity to the global economic system and supplementing member countries official reserves
amid the global financial crisis.
The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable
currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in
two ways: first, through the arrangement of voluntary exchanges between members; and second, by the
IMF designating members with strong external positions to purchase SDRs from members with weak
external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of
account of the IMF and some other international organizations.

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Global Economics

IMF: Special Drawing Rights

BASKET OF CURRENCIES
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine goldwhich, at the
time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973,
however, the SDR was redefined as a basket of currencies. Today the SDR basket consists of the euro,
Japanese yen, pound sterling, and U.S. dollar. The value of the SDR in terms of the U.S. dollar is
determined daily and posted on the IMFs website. It is calculated as the sum of specific amounts of the
four basket currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in
the London market.
The basket composition is reviewed every five years by the Executive Board, or earlier if the IMF finds
changed circumstances warrant an earlier review, to ensure that it reflects the relative importance of
currencies in the worlds trading and financial systems. In the most recent review (in November 2010),
the weights of the currencies in the SDR basket were revised based on the value of the exports of goods
and services and the amount of reserves denominated in the respective currencies that were held by other
members of the IMF. These changes became effective on January 1, 2011. In October 2011, the IMF
Executive Board discussed possible options for broadening the SDR currency basket. Most directors held
the view that the current criteria for SDR basket selection remained appropriate. The next review will take
place by 2015.

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Global Economics

IMF: Special Drawing Rights

SDR ALLOCATIONS TO IMF

MEMBERS
Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF
quotas, providing each member with a costless asset. However, if a members SDR holdings rise above its
allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays
interest on the shortfall.
There are two kinds of allocations:

General allocations of SDRs. General allocations have to be based on a long-term global need to
supplement existing reserve assets. Decisions to allocate SDRs have been made three times:

in 1970-72, for SDR 9.3 billion;

in 197981, for SDR 12.1 billion;
and in August 2009, for an amount of SDR 161.2 billion.

Special allocations of SDRs. A special one-time allocation of SDRs through the Fourth
Amendment of the Articles of Agreement was implemented in September 2009. The purpose of
this special allocation was to enable all members of the IMF to participate in the SDR system on
an equitable basis and correct for the fact that countries that joined the Fund after 1981more
than one-fifth of the current IMF membershiphad never received an SDR allocation.

With the general SDR allocation of August 2009 and the special allocation of September 2009, the
amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about
$317 billion.

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Global Economics

IMF: Special Drawing Rights

SDRs VALUE
The value of the SDR is based on a basket of key international currenciesthe euro, Japanese yen, pound
sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on the IMFs website. The
basket composition is reviewed every five years by the Executive Board to ensure that it reflects the
relative importance of currencies in the worlds trading and financial systems.
The SDR interest rate provides the basis for calculating the interest charged to members on regular (non
concessional) IMF loans, the interest paid and charged to members on their SDR holdings, and the
interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined
weekly and is based on a weighted average of representative interest rates on short-term debt in the
money markets of the SDR basket currencies.

Wednesday, March 11, 2015

Currency

Yash Vora

Currency
amount under
Rule O-1

Exchange rate

U.S. dollar
equivalent

Percent change
in exchange rate
against U.S.
dollar from
previous
calculation
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Global Economics

IMF: Special Drawing Rights

Euro

0.4230

1.06020

0.448465

Japanese yen

12.1000

121.45000

0.099629

Pound sterling

0.1110

1.50530

0.167088

U.S. dollar

-1.221

0.066
0.6600

1.375182
U.S.$1.00 = SDR
SDR1 = US$

1.375180

0.727176

0.395

SDR Valuations
For the past ten year
Report
date

Currenc
y

Currency amount
under Rule O-1

U.S.
Dollar
equival
ent

Exchange
rate

2005
3-Jan-05

0.426

1.3475

3-Jan-05

21

102.85

3-Jan-05

0.0984

1.9055

3-Jan-05

0.577

SDR1 = US$

0.57403
5
0.20418
1
0.18750
1
0.577
1.54271
7
1.54272

1.195
0.389
1.341
0

0.48486
6
0.15591
9
0.15556

0.084
0.373
0.046

2006
2-Jan-06

0.41

1.1826

2-Jan-06

18.4

118.01

2-Jan-06

0.0903

1.7227

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Global Economics
2-Jan-06

IMF: Special Drawing Rights

0.632

SDR1 = US$

0.632
1.42834
5
1.42834

2007
2-Jan-07

0.41

1.3271

2-Jan-07

18.4

118.89

2-Jan-07
2-Jan-07

0.0903
0.632

1.9701
1

SDR1 = US$

0.54411
1
0.15476
5
0.1779
0.632
1.50877
6
1.50878

0.698
0.025
0.362
0

2008
2-Jan-08

0.41

1.4687

2-Jan-08

18.4

111.44

2-Jan-08

0.0903

1.9844

2-Jan-08

0.632

SDR1 = US$

0.60216
7
0.16511
1
0.17919
1
0.632
1.57846
9
1.57847

0.183

0.293
0.855
0.556
0

0.637
0.948
0

2009
2-Jan-09

0.41

1.3939

0.57149
9

2-Jan-09

18.4

91.22

0.20171

2-Jan-09

0.0903

1.4497

2-Jan-09

0.632

SDR1 = US$

0.13090
8
0.632
1.53611
7
1.53612

2010
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Global Economics

IMF: Special Drawing Rights

4-Jan-10

0.41

1.4395

4-Jan-10

18.4

92.8

4-Jan-10

0.0903

1.6223

4-Jan-10

0.632

SDR1 = US$

0.59019
5
0.19827
6
0.14649
4
0.632
1.56696
5
1.56697

0.028
0.409
0.173
0

2011
3-Jan-11

0.423

1.337

3-Jan-11

12.1

81.57

3-Jan-11

0.111

1.5489

3-Jan-11

0.66

SDR1 = US$

0.56555
1
0.14833
9
0.17192
8
0.66
1.54581
8
1.54582

0.906
0.074
0.35
0

2012
3-Jan-12

0.423

1.3046

3-Jan-12

12.1

76.68

3-Jan-12

0.111

1.5611

3-Jan-12

0.66

SDR1 = US$

0.55184
6
0.15779
9
0.17328
2
0.66
1.54292
7
1.54293

0.835
0.913
0.97
0

2013
2-Jan-13

0.423

1.3249

2-Jan-13

12.1

87.12

2-Jan-13

0.111

1.6296

2-Jan-13

0.66

Yash Vora

0.56043
3
0.13888
9
0.18088
6
0.66
1.54020
8

0.524
1.159
1.117
0

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IMF: Special Drawing Rights

SDR1 = US$

1.54021

2014
2-Jan-14

0.423

1.369

2-Jan-14

12.1

105.4

2-Jan-14
2-Jan-14

0.111
0.66

1.6527
1

SDR1 = US$

0.57908
7
0.11480
1
0.18345
0.66
1.53733
8
1.53734

-0.53
0.199
0.358
0

2015
5-Jan-15

0.423

1.1905

5-Jan-15

12.1

120.27

5-Jan-15

0.111

1.5254

5-Jan-15

0.66

SDR1 = US$

Yash Vora

0.50358
2
0.10060
7
0.16931
9
0.66
1.43350
8
1.43351

2.057
0.782
2.268
0

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IMF: Special Drawing Rights

THE SDRs INTEREST RATE

The SDR interest rate provides the basis for calculating the interest charged to
members on regular (non-concessional) IMF loans, the interest paid to members on
their SDR holdings and charged on their SDR allocation, and the interest paid to
members on a portion of their quota subscriptions. The SDR interest rate is
determined weekly and is based on a weighted average of representative interest
rates on short-term debt instruments in the money markets of the SDR basket
currencies.

For the week of March 09, 2015 to March 15, 2015

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IMF: Special Drawing Rights

Currency

Currency
amount
under Rule O-1
(A)

Exchange rate
against the
SDR 1
(B)

Euro

0.4230

0.787596

-0.148489

-0.0495

Japanese Yen

12.1000

0.00598428

0.000000

0.0000

U.K. Pound
Sterling

0.1110

1.09026

0.410000

0.0496

U.S. Dollar

0.6600

0.718413

0.010000

0.0047

Interest rate
(C)

Product
(A) x (B) x (C)

Total

0.0048

Floor for SDR Interest Rate

0.050

SDR Interest Rate

0.050

SDR Interest Rate Calculation

Past 10 years; first week of the year.
Effective Effectiv
Curre
Currency
from
e to
ncy
amt under
Rule O-1
(A)

Exchang
e rate
against
the
SDR(B)

Interest
rate

Product
(A) x (B)
x (C)

0.877073
0.006184
33
1.24365

2.1849
0.003

0.8164
0.0004

4.72

0.5776

(C)

2005
1/3/2005
1/3/2005

1/9/2005
1/9/2005

0.426
21

1/3/2005

1/9/2005

0.0984

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Global Economics
1/3/2005

IMF: Special Drawing Rights

1/9/2005

0.577

0.643912

2.22
Total
SDR Int.
Rate

0.8248
2.2192
2.22

1/2/2006
1/2/2006

1/8/2006
1/8/2006

0.426
21

2.5226
0.002

0.887
0.0002

1/2/2006
1/2/2006

1/8/2006
1/8/2006

0.0984
0.577

0.825389
0.005930
83
1.20474
0.69966

4.42
4.08
Total
SDR Int.
Rate

0.524
1.6471
3.0583
3.06

1/1/2007
1/1/2007

1/7/2007
1/7/2007

0.41
18.4

3.7007
0.445

1.3283
0.0458

1/1/2007
1/1/2007

1/7/2007
1/7/2007

0.0903
0.632

0.875431
0.005588
2
1.30484
0.664716

5.14
5.02
Total
SDR Int.
Rate

0.6056
2.1089
4.0886
4.09

1/13/200
8
1/13/200
8
1/13/200
8
1/13/200
8

0.41

0.93087

4.086

1.5594

18.4

0.555

0.0591

0.0903

0.005790
97
1.24976

5.28

0.5959

0.632

0.632084

3.2

1.2783

Total
SDR Int.
Rate

3.4927
3.49

1.825

0.6754

2006

2007

2008
1/7/2008
1/7/2008
1/7/2008
1/7/2008

2009
1/5/2009
Yash Vora

1/11/200

0.41

0.902666

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Global Economics

1/5/2009
1/5/2009
1/5/2009

9
1/11/200
9
1/11/200
9
1/11/200
9

IMF: Special Drawing Rights

18.4

0.195

0.0257

0.0903

0.007173
47
0.943743

1.18

0.1006

0.632

0.650992

0.08

0.0329

Total
SDR Int.
Rate

0.8346
0.83

2010
1/4/2010
1/4/2010
1/4/2010
1/4/2010

1/10/201
0
1/10/201
0
1/10/201
0
1/10/201
0

0.41

0.918931

0.4005

0.1509

18.4

0.125

0.0159

0.0903

0.006928
97
1.03305

0.48

0.0448

0.632

0.637881

0.06

0.0242

Total
SDR Int.
Rate

0.2358
0.24

0.862318
0.007972
2
1.00225
0.649336

0.5597
0.125

0.1979
0.0183

0.5
0.12
Total
SDR Int.
Rate

0.0453
0.0492
0.3107
0.31

0.842786
0.008380
76
1.00706
0.651353

0.145
0.1

0.0517
0.0101

0.26
0.02
Total
SDR Int.
Rate

0.0291
0.0086
0.0995
0.1

2011
1/3/2011
1/3/2011

1/9/2011
1/9/2011

0.41
18.4

1/3/2011
1/3/2011

1/9/2011
1/9/2011

0.0903
0.632

1/2/2012
1/2/2012

1/8/2012
1/8/2012

0.423
12.1

1/2/2012
1/2/2012

1/8/2012
1/8/2012

0.111
0.66

2012

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IMF: Special Drawing Rights

2013
1/7/2013
1/7/2013
1/7/2013
1/7/2013

1/13/201
3
1/13/201
3
1/13/201
3
1/13/201
3

0.423

0.853305

-0.0162

-0.0058

12.1

0.1

0.0091

0.111

0.007481
84
1.05037

0.24

0.028

0.66

0.655783

0.07

0.0303

Total
SDR Int.
Rate

0.0616
0.06

2014
1/6/2014
1/6/2014
1/6/2014
1/6/2014

1/12/201
4
1/12/201
4
1/12/201
4
1/12/201
4

0.423

0.887868

0.148

0.0556

12.1

0.06

0.0045

0.111

0.006184
39
1.0721

0.29

0.0345

0.66

0.651216

0.07

0.0301

Total
SDR Int.
Rate

0.1247
0.12

2015
1/5/2015
1/5/2015
1/5/2015
1/5/2015

Yash Vora

1/11/201
5
1/11/201
5
1/11/201
5
1/11/201
5

0.423

0.838001

-0.02273

-0.0081

12.1

0.111

0.005721
35
1.0773

0.45

0.0538

0.66

0.690224

0.02

0.0091

Total
Floor for
SDR
Interest
Rate
SDR Int.
Rate

0.0548
0.05

0.055

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IMF: Special Drawing Rights

IMF LOANS & QUOTA

LOANS
Non-concessional loans are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit
Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility (which is useful
primarily for medium- and longer-term needs). The IMF also can provide emergency assistance via the
Rapid Financing Instrument (RFI) to all its members facing urgent balance of payments needs. All nonconcessional facilities are subject to the IMFs market-related interest rate, known as the rate of charge,
and large loans (above certain limits) carry a surcharge. The rate of charge is based on the SDR interest
rate, which is revised weekly to take account of changes in short-term interest rates in major international
money markets. The maximum amount that a country can borrow from the IMF, known as its access
limit, varies depending on the type of loan, but is typically a multiple of the countrys IMF quota. This
limit may be exceeded in exceptional circumstances. The Stand-By Arrangement, the Flexible Credit Line
and the Extended Fund Facility have no pre-set cap on access.

QUOTA
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IMF: Special Drawing Rights

Quota subscriptions are a central component of the IMFs financial resources. Each member country of
the IMF is assigned a quota, based broadly on its relative position in the world economy. A member
countrys quota determines its maximum financial commitment to the IMF, its voting power, and has a
bearing on its access to IMF financing.
Subscriptions (quota share): A member's quota subscription determines the maximum amount of
financial resources the member is obliged to provide to the IMF. A member must pay its subscription in
full upon joining the Fund: up to 25 percent must be paid in SDRs or widely accepted currencies (such as
the U.S. dollar, the euro, the yen, or the pound sterling), while the rest is paid in the member's own
currency.
Voting power (voting share): The quota largely determines a member's voting power in IMF decisions.
Each IMF members votes are comprised of basic votes plus one additional vote for each SDR 100,000 of
quota. The 2008 reform fixed the number of basic votes at 5.502 percent of total votes. The current
number of basic votes represents close to a tripling of the number prior to the implementation of the 2008
reforms.
Building on the 2008 reforms, the 14th General Review of Quotas will:

double quotas from approximately SDR 238.5 billion to approximately SDR 477 billion (close to
US$737 billion at current exchange rates),

shift more than 6 percent of quota shares from over-represented to under-represented member
countries,

BUYING AND SELLING SDRs

IMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish to sell SDRs
in order to adjust the composition of their reserves. The IMF may act as an intermediary between
members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. For
more than two decades, the SDR market has functioned through voluntary trading arrangements. Under
these arrangements a number of members and one prescribed holder have volunteered to buy or sell SDRs
within limits defined by their respective arrangements. Following the 2009 SDR allocations, the number
and size of the voluntary arrangements has been expanded to ensure continued liquidity of the voluntary
SDR market. The number of voluntary SDR trading arrangements now stands at 32, including 19 new
arrangements since the 2009 SDR allocations.
In the event that there is insufficient capacity under the voluntary trading arrangements, the IMF can
activate the designation mechanism. Under this mechanism, members with sufficiently strong external
positions are designated by the IMF to buy SDRs with freely usable currencies up to certain amounts
from members with weak external positions. This arrangement serves as a backstop to guarantee the
liquidity and the reserve asset character of the SDR.

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PRIVATE SDRs
The IMF created SDRs in 1969 as an international reserve asset meant to support the Bretton Woods fixed
exchange rate system by supplementing the existing reserves of member countries. Since 1972 the Fund
has also used the SDR as its basic unit of account. Over time, the SDR has found a number of
applications outside the IMF official framework. Current accounting uses of the SDR include:

Transit fees in the Suez Canal are denominated in SDRs.

Some airlines now designate charges for overweight baggage in SDRs.

A number of international organizations maintain their accounts in SDRs or accounting units linked to
the SDR. The Arab Monetary Fund, for instance, maintains its accounts in Arab Accounting Dinars
(AAD), which are linked to the SDR.
In the past, some countries, such as Latvia, have pegged their currency to the SDR.
Coats (1990) suggests that the SDRs attractiveness as a unit of account for private sector use derives
from the stability of its value relative to values of alternative units. By virtue of their currency
composition, SDR-denominated securities can serve as a diversification vehicle and as a partial hedge
against currency risk. For example, at the time the first SDR was created in 1969, 1 SDR was equivalent
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to 0.888 grams of fine gold and/or $1.00. However, as of Sept 30, 2009, 1 SDR is equivalent to roughly
$1.58. Figure 2 outlines the dollar/SDR parity since 1970.
Although its uses outside the official circle have been modest so far, information about the SDR is
available on some commercial platforms. For example, the SDR has been assigned the ISO 4217 currency
code XDR, and it is quoted on Bloomberg regularly (SDR Currency <GO>). The IMF determines the
SDRs interest rate on a weekly basis. The IMF also updates the SDR every 20 minutes, although it does
not quote an SDR rate on Saturday or Sunday, EST.
Sobol (1981) notes that private markets in SDR-denominated instruments first emerged in 1975 and
included commercial bank deposits, syndicated credits, certificates of deposit (CDs), floating rate CDs,
Eurobonds and floating rate notes. Interest grew in the SDR as a unit of account as the dollar weakened in
1977-1978.
Over time, the SDR has evolved in the composition of its basket of currencies, and the methodologies for
setting its exchange value and interest rates have been refined. Likewise, the last couple of decades have
witnessed substantial structural changes in the global economy due to regional economic integration, the
creation of the euro, the globalization of trade and finance, and the emergence of China as an economic
power. In light of the tremendous changes the world has undergone, it would be instructive to reevaluate
if the desirable qualities of the SDR are as relevant today as they were in the past, a consideration that we
take up in the following section. Despite the changing times, the SDRs potential to enhance the stability
of portfolios investment returns appears to be an enduring attribute.

PROS & CONS of SDRDENOMINATED INSTRUMENTS

Issuers
Exchange rate hedging: because the SDR is less volatile than its constituent currencies, it allows
borrowers to hedge against mismatches of inflows and outflows. For example, a U.S.-based
multinational corporation that sells in countries whose currencies help comprise the SDR basket
could hedge its foreign receipts through the issuance of multicurrency liabilities.

Lower underwriting costs: the costs of underwriting an SDR-denominated bond may be lower
than issuing four different currency -denominated bonds. In addition, privately placed SDRdenominated bonds could avoid the administrative and other costs associated with a public issue.

Potentially lower credit spreads: to the extent that a corporations credit spreads differ by the
currency market, the spread over an SDR-denominated instrument could possibly be lower than
the weighted average of single-currency credit spreads.

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Investors

Prepackaged diversification: SDR-denominated securities provide official reserve holders and

other investors exposed to particular currencies a convenient way to diversify the exchange risk
exposure. Such securities may also incentivize a private investor with currency exposures in the
SDR component currencies to reduce risk conveniently and at least cost.

Lower volatility: an investments return and its realized Sharpe ratio can only be known after the
fact. For private investors who may be subject to criticism by boards of directors and other parties
for poor currency selection, SDR-denominated securities can reduce currency regret.

Greater portfolio stability: as an overall portfolio diversifier, Chopra and Ziemba (1993) found
that at the risk tolerance of a typical institutional investor, a mean-variance optimizer is most
sensitive to estimates of means, then to variances and then to co-variances. In the estimation of
optimizer inputs, errors in variance estimates are roughly twice as important as errors in co
-variances. The lower variance of SDR securities can contribute to portfolio stability and facilitate
the estimation of optimizer inputs.

CONCLUSION
The ECU was the most successful postwar basket currency, and preceded the euro by 20 years. The ECU
served as a unit of account for target European food prices under the Common Agricultural Policy and
served in 1979 as a unit of account for the currency area designated as the European Monetary System. As
is the case currently with the SDR, there were at one point both private and public ECUs.
Allen (1986) observed that the ECU had many advantages over the SDR as a basket currency, among
these being that:
The economy in the European Community (EC) was becoming increasingly integrated.most EC
currencies have been more stable against the ECU than against the SDR.the SDR, with the dollar
comprising about 40 percent of its value, is a relatively poor instrument for hedging or speculating against
the dollar.
Eichengreen and Frankel (1996) refer to the SDR as the Esperanto of international currencies,
contending that it lacks a natural constituency. Furthermore, Coats (2009) points out that most central
bank transactions are not with other central banks but with the market. He argues that greater official use
of the SDR will require greater linkages between the private and official SDR. Eichengreen (2009b)

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further points out that the SDRs limitations as an intervention and vehicle currency for foreign exchange
transactions depends on the IMFs ability to issue SDRs rapidly in the case of a global liquidity shortage.
The IMFs recent increased issuance of SDR- denominated notes represents a new development in the
SDRs evolution, and modestly blurs the distinction between private and official SDRs. Despite the recent
global financial crisis and draw-down in some countriesreserves, many nations continue to accumulate
reserves at a healthy pace. However, the IMF (Blanchard, Faruqee and Klyuev 2009) suggests that the
current crisis may raise the precautionary demand for reserves. Thus currency selection will continue to
be important for large official pools of capital. SDR-denominated securities can offer potential advantages
to investors, but several structural impediments exist in developing a market. However, the desires
expressed by some sponsors of large SWFs to diversify their currency exposures suggest that SWFs
acting collectively could promote such a market.

BIBLIOGRAPHY

http://www.imf.org/external/np/exr/facts/sdr.htm

http://www.imf.org/external/about/sdr.htm

http://www.imf.org/external/np/fin/data/rms_sdrv.aspx

http://www.imf.org/external/np/fin/data/sdr_ir.aspx

http://philosophyofmetrics.com/2014/01/21/sdrs-and-the-new-bretton-woodspart-one/

http://en.wikipedia.org/wiki/Special_drawing_rights

http://www.wealthdaily.com/articles/government-us-dollar-sdr/2139

http://www.bis.org/publ/bppdf/bispap58h

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