SDR Valuation Review: Questions and Answers

Q1. What is the importance of the SDR valuation review that was concluded by the IMF’s Executive Board on May 11, 2022? Can you clarify the process?

• This is the IMF Executive Board’s regular quinquennial review of the method of valuation of the basket of currencies that make up the Special Drawing Rights (SDR). The review was delayed by about a year, in an effort to prioritize work during the COVID-19 crisis and allow for a more suitable effectiveness date for the new basket. The review covers the composition and weighting of the SDR currency basket. It also reviews the financial instruments used to determine the SDR interest rate. The SDR valuation review ensures that the currencies in the SDR basket, and their corresponding weights, reflect the importance of these currencies in the world’s trading and financial system.
• The currencies in the basket maintain the same ranking of the 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 SDR valuation review does not affect members’ quotas in the Fund.

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Q2. What are the main findings and outcomes of the review?

• 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.
• The review maintained the current composition of the SDR currency and interest rate baskets and updated the weights for the currencies in the SDR basket, in line with the IMF Executive Board-approved methodology. The currencies in the basket maintain the same ranking of the 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 (for details see the accompanying Board paper).
• The new basket will take effect on August 1, 2022, with the current basket remaining in effect until July 31, 2022.

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Q3. What is the status of operational issues identified in the 2015 review of the valuation of the SDR?

• While operational considerations are not formal requirements for the SDR currency selection criteria, currencies in the SDR basket are nevertheless expected to satisfy a number of characteristics in order to facilitate a smooth functioning of Fund operations.
• The 2015 SDR valuation review raised a number of operational issues related to the hedging of SDR positions and operations in the Chinese renminbi. The current review followed up on these issues through a survey conducted among all participants in the SDR department and prescribed holders.
• The survey found that most SDR users do not experience significant obstacles when operating in the five SDR basket currencies’ markets. However, SDR users identified some remaining operational challenges for the currencies in the basket, most of them pertaining to the Chinese renminbi but also some for other markets. For the Chinese renminbi, these include a higher burden in terms of transaction costs and operational procedures in the onshore market, inconvenient or less flexible trading hours, and lower liquidity compared to more mature markets. In other markets, challenges identified referred to low or negative interest for the case of the euro and the Japanese yen, while transaction costs are a challenge mentioned for the British pound. (for details see accompanying Board paper).
• Following the completion of the SDR valuation review, the Chinese authorities issued a press statement noting their intentions to further facilitate operations in the onshore renminbi market.

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Q4. How does this reflect on members’ quotas at the Fund?

• The SDR valuation review does not affect members’ quotas in the Fund.