A NEWSLETTER FROM THE BALANCE OF PAYMENTS AND EXTERNAL DEBT DIVISIONS • STATISTICS DEPARTMENT • IMF
IMF Releases the Operational Guidelines for the Data Template on International Reserves and Foreign Currency Liquidity
"The International Monetary Fund (IMF) recently issued its Operational Guidelines for the Data Template on International Reserves and Foreign Currency Liquidity (Washington, D.C., October 1999). The IMF prepared the operational guidelines to assist countries to compile data for the template on international reserves and foreign currency liquidity. The IMF and a working group of the Committee on the Global Financial System (CGFS) of the Group of Ten central banks jointly developed the template. (See also “Reserves Template to Help Strengthen the International Financial Architecture” in the midyear 1999 issue of this Newsletter.)
The data template is designed to provide a comprehensive account of countries’ international reserves and other foreign currency assets and of drains on such resources arising from various foreign currency liabilities and commitments of the authorities. The public disclosure of such information by countries on a timely and accurate basis will promote informed decision-making in the public and private sectors, thereby helping to improve the functioning of global financial markets.
The template is a prescribed category of the IMF’s Special Data Dissemination Standard (SDDS). The transition period for SDDS subscribing countries to provide the template data ends on March 31, 2000. Following the end of the transition period, SDDS subscribing countries will need to disseminate their template data on a monthly basis with a lag of no longer than one month.
The operational guidelines clarify data concepts, definitions, and classifications and discuss ways to report the requisite data in the template. The guidelines are presented in five chapters and a number of appendices. Chapter One of the document provides an overview of the genesis of the template and outlines its structure and key features. The chapter is primarily intended for those readers, including members of the press, interested in a general understanding of the template. The later chapters and the appendices, which are more technical, are designed to facilitate compilation of the template by data providers. In developing the guidelines, the IMF staff consulted with IMF member countries, the CGFS, and the European Central Bank. (See also the article on “What Are International Reserves? How Are They To Be Compiled?” on pp. 3-10 of this issue of the Newsletter.)..."
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***Only certain financial assets qualify as international reserves. ***
Reserve assets include only certain financial instruments. The BPM5 lists among reserve assets these instruments: foreign exchange (consisting of holdings of securities, currency and deposits, and financial derivatives), monetary gold, special drawing rights (SDRs), reserve position in the Fund, and other claims. These classifications correspond to “foreign currency reserves,” “gold,” “SDRs,” “IMF reserve position,” and “other reserve assets,” respectively, in the data template on international reserves and foreign currency liquidity, for which the Guidelines are developed.
Monetary gold, SDRs, and reserve positions in the Fund are considered reserve assets because they are owned assets readily available to the monetary authorities in unconditional form. Foreign exchange and other claims in many instances are equally available and therefore qualify as reserve assets. The following recommendations are advanced in the Guidelines to assist compilers to determine what financial instruments should be included in reserve assets:
- For securities, they should be highly liquid, marketable equity and debt securities;5 liquid, marketable, long-term securities (such as 30-year U.S. Treasury bonds) can be included. Nonissued securities (that is, securities not listed for public trading) are excluded; such securities are deemed not to be marketable and liquid enough to qualify as reserve assets.
- Only foreign currency securities issued by nonresident entities should be included; these cover securities issued by institutions headquartered in the reporting country but located abroad, as well as those issued by institutions headquartered and located abroad.
- Currency consists of monetary authorities’ holdings of foreign currency notes and coins in circulation and commonly used to make payments. Commemorative coins and uncirculated banknotes are excluded.
- Deposits to be included are those available on demand; these generally are referred to as demand deposits. Term deposits that are redeemable upon demand can also be included. Deposits in reserve assets are those held in foreign central banks, the Bank for International Settlements (BIS), and other banks. The term “banks” generally refers to financial depository institutions6 and encompasses such institutions as “commercial banks, savings banks, savings and loan associations, credit unions or cooperatives, building societies, and post office savings banks or other government-controlled savings banks (if such banks are institutional units separate from government).”7
- Under the residency concept set forth in the BPM5, monetary authorities’ deposits held in resident banks (including banks headquartered and located in the reporting country and banks headquartered abroad but located in the reporting country) do not constitute external claims on nonresidents and are not considered reserve assets. Nonetheless, the BPM5 permits the authorities’ foreign currency deposits held in resident banks (banks located in the reporting country, whether they are domestically or foreign controlled) to be included in reserves under certain restrictive circumstances. In particular, this may be permitted when the banks located in the reporting country have counterpart foreign currency claims upon nonresident entities and the counterpart claims are under the effective control of the monetary authorities and readily available to them to meet balance of payments financing and other needs.
- Because short-term loans provided by the monetary authorities to other central banks, the BIS, the IMF (such as the ESAF Trust Loan Account), and depository institutions are much like deposits, it is difficult in practice to distinguish the two. For this reason, the reporting of deposits in reserve assets should include short-term foreign currency loans that are redeemable upon demand made by the monetary authorities to these nonresident banking entities.
- Short-term foreign currency loans that are available upon demand made by the monetary authorities to nonresident nonbank entities, however, are not deposits but can be disclosed in “other reserve assets.”
- Long-term loans provided by the monetary authorities to nonresidents, which would not be readily available for use in times of need, are not reserve assets.
- Reserve position in the IMF is the sum of (1) SDR and foreign currency amounts that a member country may draw from the IMF at short notice and without conditions from its “reserve tranche,”8 and (2) indebtedness of the IMF (under a loan agreement) readily available to the member country including the reporting country’s lending to the IMF under the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB).
- SDRs are international reserve assets the IMF created to supplement the reserves of IMF member countries. SDRs are allocated in proportion to countries’ respective quotas in the IMF.
- Gold is treated as a financial instrument because of its historical role in the international monetary system. As noted earlier in footnote 4, gold held by monetary authorities as a reserve asset is referred to as monetary gold. All other gold of the authorities (e.g., gold held for trading purposes) is not monetary gold and should not be included among reserve assets. In addition, holdings of silver bullion, diamonds, and other precious metals and stones10 are not reserve assets.
- Gold deposits are to be included in gold and not in total deposits. In reserves management, it is common for monetary authorities to have their bullion deposited with a bullion bank, which may use the gold for trading purposes in world gold markets. The ownership of the gold effectively remains with the monetary authorities, which earn interest on the deposits, and the gold is returned to the monetary authorities on maturity of the deposits. The term maturity of the gold deposit is often short, up to six months. To qualify as reserve assets, gold deposits must be available upon demand to the monetary authorities. To minimize risks of default, monetary authorities can require adequate collateral (such as securities) from the bullion bank. It is important that compilers not include such securities collateral in reserve assets, thereby preventing double counting.
- In reserves management, monetary authorities also may undertake gold swaps. In gold swaps, gold is exchanged for cash and a firm commitment is made by the monetary authorities to repurchase the quantity of gold exchanged at a future date. Accounting practices for gold swaps vary among countries. Some countries record gold swaps as transactions in gold, in which both the gold and the cash exchanged are reflected as offsetting asset entries among reserve assets. Others treat gold swaps as collateralized loans, leaving the gold on reserve assets, as well as recording the cash received among foreign exchange in reserve assets, counterbalanced by a liability entry on the balance sheet of the monetary authorities. To enhance data transparency, it is recommended that countries disclose the accounting methods used in supplementary information.
- “Other reserve assets” include assets that are liquid and readily available to the monetary authorities but not included in the other categories of reserve assets. These assets can include (1) net, marked-to-market value of financial derivatives positions (including, for instance, forwards, futures, swaps, and options) of the monetary authorities with nonresidents, if the derivative products pertain to the management of reserve assets, are integral to the valuation of such assets, and are under the effective control of the monetary authorities; such assets must be highly liquid and denominated and settled in foreign currency; and “net” refers to asset positions offset by liability positions (i.e., netting by novation); (2) short-term foreign currency loans redeemable upon demand provided by the monetary authorities to nonbank nonresidents; and (3) repo assets that are liquid and available upon demand to the monetary authorities.
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*** Reserve assets are to reflect their market values. ***
How should reserve assets be valued?
In principle, “reserve assets” are to be valued at market prices. In practice, however, accounting systems may not generate actual market values on all reporting dates for all classes of instruments. The Guidelines recommend that, in these cases, approximate market values may be substituted. Other recommendations proffered in the Guidelines for the valuation of reserve assets include the following:
- The market valuation should be applied to reserve assets (that is, the stock of the assets) on the reference date (that is, at the end of the appropriate reporting period). If necessary, the stock of assets on the reference date can be approximated by adding the net cumulating flows during the reference period to the stock at the beginning of the reference period.
- In valuing reserve assets, interest earnings, as accrued, on such foreign currency assets should be included.
- Periodic revaluations of the different types of assets should be undertaken to establish benchmarks on which future approximations can be based. It is recommended that such benchmark revaluations be undertaken at least on a quarterly basis. For each reporting period, at a minimum, the value of foreign currency instruments should be adjusted using the market exchange rates applicable on the reference date to arrive at an approximate market value of the assets.
- The stock of equity securities of companies listed on stock exchanges can be revalued based on transaction prices15 on the revaluation date. If such transaction prices are not available, the midpoint of the quoted buy and sell prices of the shares on their main stock exchange on the reference date should provide a useful approximation.
- The market value of currency and deposits generally is reflected in their nominal (face) value. For debt securities, the market price is the traded price on the reference date and includes accrued interest. If that value is not available, other methods of approximation include yield to maturity, discounted present value, face value less (plus) written value of discount (premium), and issue price plus amortization of discount (premium).
- With respect to financial derivatives, for futures contracts, this involves marking to market, which usually precedes the daily settlement of gains and losses. The market value of swap and forward contracts is derived from the difference between the initially agreed contract price and the prevailing (or expected prevailing) market price of the underlying item. The market values of options depend on a number of factors including the contract (strike) price, the price and price volatility of the underlying instrument, the time remaining before expiration of the contract, and interest rates.
- Monetary gold is valued at the current market price of commodity gold.
- SDRs are valued at an administrative rate determined by the IMF. The IMF determines the value of SDRs daily in U.S. dollars by summing the values, which are based on market exchange rates, of a weighted basket of currencies. The basket and weights are subject to revision from time to time.
- The reserve position in the IMF is valued at a rate reflecting current exchange rates (of the SDR against the currency used to report the template data for the reserve tranche position, and of the currency in which loans are denominated in the case of outstanding loans to the IMF by the reporting country).
Reserve assets include only certain financial instruments. The BPM5 lists among reserve assets these instruments: foreign exchange (consisting of holdings of securities, currency and deposits, and financial derivatives), monetary gold, special drawing rights (SDRs), reserve position in the Fund, and other claims. These classifications correspond to “foreign currency reserves,” “gold,” “SDRs,” “IMF reserve position,” and “other reserve assets,” respectively, in the data template on international reserves and foreign currency liquidity, for which the Guidelines are developed.
Monetary gold, SDRs, and reserve positions in the Fund are considered reserve assets because they are owned assets readily available to the monetary authorities in unconditional form. Foreign exchange and other claims in many instances are equally available and therefore qualify as reserve assets.
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Footnotes:4 Gold included in reserve assets is referred to as “monetary gold” in the BPM5.
12 Such gold swaps generally are undertaken between monetary authorities and with financial institutions.
13 This treatment is consistent with BPM5 (para. 434) to the extent that the swap is between monetary authorities. The rationale is that in a gold swap, the monetary authorities swap gold for other assets (such as foreign exchange) and that this involves a change in ownership. The ownership of gold is retransferred to the original owner when the swap is unwound at a specific date and at a specific price.
14 This treatment applies only when an exchange of cash against gold occurs, the commitment to buy back the gold is legally binding, and the repurchase price is fixed at the time of the spot transaction. The logic is that in a gold swap the “economic ownership” of the gold remains with the monetary authorities, even though the authorities temporarily have handed over the “legal ownership.” The commitment to repurchase the quantity of gold exchanged is firm (the repurchase price is fixed in advance), and any movement in gold prices after the swap affects the wealth of the monetary authorities. Under this treatment, the gold swapped remains as a reserve asset and the cash received is a repo deposit. Gold swaps commonly permit central banks’ gold reserves to earn interest. Usually, the central banks receive cash for the gold. The counterparty generally sells the gold on the market but typically makes no delivery of the gold. The counterparty often is a bank that wants to take short positions in gold and bets that the price of gold will fall or is one that takes advantage of arbitrage possibilities offered by combining a gold swap with a gold sale and a purchase of a gold future. Gold producers sell gold futures and forwards to hedge their future gold production. Treating gold swaps as collateralized loans instead of sales also obviates the need to show frequent changes in the volume of gold in monetary authorities’ reserve assets, which, in turn, would affect world holdings of monetary gold as well as the net lending of central banks.
Source: http://www.imf.org/external/pubs/ft/bop/news/pdf/1299.pdf
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