Special Drawing Rights

http://fx.sauder.ubc.ca/SDR.html

The SDR Fact Sheet

What is a Special Drawing Right (SDR), and what is it used for?

The SDR (Special Drawing Right) is an artificial "basket" currency

used by the IMF (International Monetary Fund) for internal accounting
purposes. The SDR is also used by some countries as a peg for their own
currency, and is used as an international reserve asset.

What is the value of an SDR?

Initially, the value of the SDR was defined in terms of one US-$, which
in turn was defined in terms of an ounce of gold: $35/oz until 18-Dec-
1971; $38/oz between 18-Dec-1971 and 11-Feb-1973; $42.22/oz between
12-Feb-1973 and 30-Jun-1974. Since July 1974 the SDR has been
defined in terms of a basekt of currencies. This basket consisted initially
of 16 currencies and was reduced to 5 in 1981. Every five years the IMF
determines which five currencies will enter the basket, and which
weight will be applied to each currency. The exchange rates used by the
IMF to calculate the official SDR are the noon rates in the London
foreign exchange market. When the London market is closed, noon
rates in the New York market are used, and Frankfurt fixing rates are
employed when the New York market is also closed. The tables on the
right show the composition of the SDR.

Note that the currency values are exact as defined by Rule 0-1 of the
IMF. However, the weights are approximate and will change along with
the fluctuations of the constituent currencies. To get exact current
weights, refer to the IMF's current valuation page (see below). Weights
can be calculated by dividing the US-$ equivalent amount of each
currency by the sum of US-$ equivalent amounts.

How can one calculate the value of an SDR?

To calculate the value of the SDR in national currency (say, ABC),
multiply the four exchange rates of the home country vis-à-vis the
basket-currency countries (i.e., ABC/USD, ABC/EUR, ABC/JPY, and
ABC/GBP) with the basket values indicated in the above table. Add
these four numbers together to obtain the ABC/SDR exchange rate.

What is today's value of the SDR?

The International Monetary Fund prepares a daily web page with

today's SDR valuation.

Where can I get more information?

The IMF has a SDR home page with links to current rates and more
information. Authoritative SDR rates for the most recent months and
for a larger number of currencies are also available directly from the
International Monetary Fund. The current value of an SDR vis-à-vis the
US-$ and C-$ are available from the PACIFC Exchange Rate Service.
SDR rates against numerous currencies for the last five days can also be
retrieved from the IMF SDRs per Currency unit and Currency units per
SDR last five days web page.

Special Drawing Rights (SDRs)

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the
existing official reserves of member countries. SDRs are allocated to member countries in
proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF
and some other international organizations. Its value is based on a basket of key
international currencies.

Why was the SDR created and what is it used for today?
The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton
Woods fixed exchange rate system. A country participating in this system needed official
reserves—government or central bank holdings of gold and widely accepted foreign
currencies—that could be used to purchase the domestic currency in world foreign
exchange markets, as required to maintain its exchange rate. But the international supply
of two key reserve assets— gold and the U.S. dollar—proved inadequate for supporting
the expansion of world trade and financial development that was taking place. Therefore,
the international community decided to create a new international reserve asset under the
auspices of the IMF.

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.

Today, the SDR has only limited use as a reserve asset, and its main function is to serve
as theunit of account of the IMF and some other international organizations. 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.

SDR valuation
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold
—which, 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 consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The
U.S. dollar-value of the SDR is posted daily on the IMF's website. It is calculated as the
sum of specific amounts of the four 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 to ensure that it reflects the relative
importance of currencies in the world's trading and financial systems. In the most recent
review that took place in November 2005, 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 which were held by other
members of the IMF. These changes became effective on January 1, 2006. The next
review by the Executive Board will take place in late 2010.

The SDR 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 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.

SDR allocations
Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to
their IMF quotas. Such an allocation provides each member with a costless asset on
which interest is neither earned nor paid. However, if a member's 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. The Articles of Agreement also allow for
cancellations of SDRs, but this provision has never been used. The IMF cannot allocate
SDRs to itself.

There are two kinds of allocations:

General allocations of SDRs have to be based on a long-term global need to supplement

existing reserve assets. General allocations are considered every five years, although
decisions to allocate SDRs have been made only twice. The first allocation was for a total
amount of SDR 9.3 billion, distributed in 1970-72. The second allocation was distributed
in 1979-81 and brought the cumulative total of SDR allocations to SDR 21.4 billion.

A proposal for a special one-time allocation of SDRs was approved by the IMF's Board
of Governors in September 1997 through the proposed Fourth Amendment of the Articles
of Agreement. This allocation would double cumulative SDR allocations to SDR 42.8
billion. Its intent is 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 subsequent
to 1981—more than one fifth of the current IMF membership—have never received an
SDR allocation. The Fourth Amendment will become effective when three fifths of the
IMF membership (111 members) with 85 percent of the total voting power accept it. As
of end-August, 2006, 131 members with 77.3 percent of total voting power had accepted
the proposed amendment. Approval by the United States, with 17.1 percent of total votes,
would put the amendment into effect.