IMF reviews SDR valuation

he Executive Board of the International Monetary Fund (IMF) completed the quinquennial review of Special Drawing Right (SDR) valuation on Monday and approved the revised weights for the four currencies that determine the value of the SDR.

The currencies and their weights in the valuation basket are reviewed every five years unless the Board decides otherwise. The Board discussion was based on the staff paper Review of the Method of Valuation of the SDR, said the IMF board.

The SDR currently derives its value from a basket of four currencies -- the US dollar, the euro, pound sterling and the Japanese yen. The basket contains fixed amounts of the currency units which are valued at prevailing market exchange rates and summed to obtain the SDR’s value. This 'standard basket' method has been accepted as the method that best ensures the stability of the SDR in terms of the major currencies under floating exchange rates.

At previous reviews the executive board adopted the criterion that the currencies included in the SDR are the four currencies issued by Fund members, or by monetary unions that include Fund members, whose exports of goods and services during the five-year period ending 12 months before the effective date of the revision had the largest value, and which have been determined by the Fund to be freely usable currencies that is a member’s currency that the Fund determines, in fact, widely used to make payments for international transactions, and is widely traded in the principal exchange markets.

The relative weights of component currencies are to be determined by combining the value of exports and official reserves held by monetary authorities outside the country or monetary union that issues the respective currency, each averaged over the relevant five-year period.

According to the criteria agreed by the executive board in previous reviews, the financial instruments in the interest rate basket should be broadly representative of the range of financial instruments that are actually available to investors in a particular currency, and the interest rate on the instrument should be responsive to changes in underlying credit conditions in the corresponding money market.

"Instruments should also have risk characteristics that are similar to the official standing of the SDR itself, and should also reflect the actual choice of reserve managers," the board said. "In addition to approving the revised weights for the four currencies that determine the value of the SDR, the executive board also discussed several issues relating to the valuation of the SDR and the SDR interest rate, which are expected to be taken up in further work during 2011, in parallel with discussions on the reform of the international monetary system."