Users' Guide to the SDR : A Manual of Transactions and Operations in Special Drawing Rights

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1995
• eBook ISBN: 9781557755285

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APPENDIX II. Transactions with Designation: Use and Receipts of SDRs, Designation Plan, and Forms of Communication

A. Use and Receipts of SDRs in Transactions with Designation

1. Use of SDRs with Designation

(a) Requirement of need

Use of SDRs in designation is governed by Article XIX, Section 3(a), which reads in part that “a participant will be expected to use its special drawing rights only if it has a need because of its balance of payments or its reserve position or developments in its reserves, and not for the sole purpose of changing the composition of its reserves.” A participant that wished to use SDRs in a transaction with designation must state that the intended use is in accordance with Article XIX, Section 3(a).

A participant's use of SDRs with designation cannot be challenged at the time of use, but the Fund examines recent developments in the participant's balance of payments and reserve position immediately thereafter to ascertain that the requirement of need has been met. If, in the judgment of the Fund, the transaction was not justified by need, that is, it was not in accordance with Article XIX, Section 3(a), the participant may be subject to designation in order to offset the effect of the transaction.

In considering whether a use of SDRs would be in accordance with the requirement of need, participants should be guided by the general principle that they may use SDRs whenever they have a need to use reserves. Adherence to this principle ensures that SDRs are not used for the sole purpose of changing the composition of reserves. It should, however, be noted that the requirement of need is the same as the requirement of need that applies to the use of resources from the Fund's GRA. Accordingly, if a participant receives SDRs in a purchase from the Fund's GRA, it would be able to use them immediately through the designation process to obtain foreign exchange. A participant intending to use SDRs in a transaction with designation must inform the Fund of the amount of SDRs it wishes to use and the freely usable currency it wishes to receive in exchange.

(b) Freely usable currency

Participants using SDRs in transactions with designation may receive any “freely usable currency” or a combination of freely usable currencies. A freely usable currency is a member's currency that the Fund determines (a) is, in fact, widely used to make payments for international transactions, and (b) is widely traded in the principal exchange markets. The Fund has determined that there are five freely usable currencies, namely, the U.S. dollar, the deutsche mark, the Japanese yen, the French franc, and the pound sterling. If a currency requested by the user of SDRs is not directly available from the participant designated by the Fund, the Fund will initiate exchange arrangements in order to have the requested currency delivered to the user of SDRs.

(c) Procedures for use of SDRs in designation

Transactions in SDRs will normally be executed by crediting currency to the account of the appropriate official agency of the participant using SDRs that is maintained with the official agency of the issuer of the currency that the participant desires to receive.⁴⁷ The participant using SDRs must inform the Fund of the currency desired, the name and location of the account to which the desired currency should be provided, and the value date desired.

The form of the cable communication a participant should send to the Fund regarding the use of SDRs in a transaction with designation is set out in Section C of this Appendix. On receipt of such a communication, the Fund designates one or more participants from a current designation plan to provide currency. The Fund's communication to the designated participant indicates a value date on which currency should be provided and instructs the participant to arrange for the freely usable currency to be held at the Fund's disposal. The exchange rate applied to this transaction is determined under Rule O-2. The Fund must receive payment instructions from the participant not later than the date on which the Fund issues instructions for the execution of the transaction. If a participant particularly wishes to have a transaction executed on a certain date, or if the amount of SDRs to be used is large in relation to the current designation plan, advance notification to the Fund would greatly facilitate the procedures. When the Fund acknowledges the receipt of a participant's notification of its intended use of SDRs, the Fund indicates the date on which it has instructed the designated participant and, when applicable, the central bank making the currency exchange to execute the transaction and the amount of currency to be provided. Transfers of SDRs are recorded as of the date the currency is provided, and the Fund notifies the user and the recipient of SDRs when the transaction is completed.

(d) Procedures for using SDRs in designation and with voluntary acquisitions

Another way of obtaining foreign exchange against the sale of SDRs that participants may wish to consider involves combining use through designation with that of agreed transfers (see “Transactions by Agreement,” p. 7). This approach combines a participant's request for currency under the designation procedure with its authorization to the Fund to substitute, to the extent possible, transactions by agreement against the same currency for value either on or before the same date to be applied to the transaction with designation. The participant would still have the assurance, made possible by the designation guarantee, that the amount of currency required will be obtained by the date specified, but this approach is more flexible for the system as a whole because it allows some or all of the SDRs to be sold to go to those wanting them.

If the Fund is authorized to attempt to substitute transactions by agreement for delivery on the same date, the same amount of currency would be delivered as with designation alone, as the same exchange rate would be used for both transactions. If the authorization is to provide currency on or before a specified date, transactions by agreement could be arranged for delivery of currency at earlier dates, and currency amounts would be determined by the exchange rates appropriate to those dates. The extent to which the Fund is able to exercise this option may depend on the Fund's receiving instructions far enough in advance of the final value date to permit it to make the necessary arrangements with potential purchasers of SDRs.

While the use of this option may not affect the participant selling its SDRs, its use would help broaden the range of SDR transfers and thus enhance the liquidity and acceptability of the SDR.

2. Receipts of SDRs with Designation

(a) Designation plan

To ensure that potential users of SDRs can obtain freely usable currency when the need arises, the Fund establishes in advance a list of participants whose balance of payments and reserve positions are sufficiently strong for them to be called upon to provide currency in these exchanges. This list as well as the amounts for which participants are included is known as the “designation plan” and is established each quarter by the Executive Board on the basis of recommendations by the Fund staff. A participant, through its Executive Director, may present its views at the time of the quarterly review, and these will be taken into account by the Executive Board. If a participant is judged to be sufficiently strong to be included in the designation plan, the amount for which it will be included is determined by a mathematical formula in order to achieve a balanced distribution of SDRs among participants. When a participant subject to designation is actually called upon to provide currency, it is obligated to do so; the obligation to provide currency on the specified value date is of the highest order. If the Fund makes a finding that a participant has failed to meet this obligation, the participant's right to use its SDRs shall be suspended unless the Fund decides otherwise (Article XXIII, Section 2(a)).

(b) Inclusion in the designation plan

The procedure the Fund uses to determine which participants should be subject to designation and the amounts of SDRs the participants could be called upon to accept in exchange for freely usable currency is governed by Article XIX, Section 5(a)(i).⁴⁸ The principle for inclusion in the designation plan is that a participant shall be subject to designation if its balance of payments and gross reserve position is considered “sufficiently strong.” This does not preclude the possibility that a participant with a strong reserve position will be designated even though it has a moderate balance of payments deficit. The general rationale of this criterion is that members whose balance of payments and reserve positions are relatively strong should be prepared to make currency available in exchange for SDRs to members whose positions are relatively weak. Moreover, to the extent that the Fund directs the distribution of Fund-related assets, these should move to relatively strong holders.

The Executive Board's assessment of a member's strength is guided by the following considerations.

• Because the acquisition of SDRs and other Fund-related assets by designation changes only the composition of a member's reserves and not their amount and because Fund-related assets can be used in the event of need, there is a less compelling need to set a stringent criterion of “sufficient strength” in determining which members should receive reserve tranche positions and SDRs.
• The criterion of “sufficient strength” is applied to all members, and, for the purpose of determining which members should increase their holdings of SDRs, the component element of a member's overall balance of payments and reserves is not usually very important.
• Having a broad list of members included in the designation plans stresses the cooperative nature of the Fund and improves the effective functioning of the SDR Department.
• Members are not automatically judged to be insufficiently strong solely because they obtain a stand-by arrangement from the Fund, have recently made a purchase from...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• Introduction
• I. General Description of the SDR
• II. Transactions and Operations in SDRs Between Participants and Other Holders
• III. Transactions and Operations Through General Resources Account
• IV. Charges, Interest, and Assessments in the SDR Department
• V. Forms of Communication for Transactions and Operations in the SDR Department
• Appendix I. SDRs: Allocation, Valuation, Interest Rate, Arrangements for Transactions, and Accounting
• Appendix II. Transactions with Designation: Use and Receipts of SDRs, Designation Plan, and Forms of Communication
• Footnotes