IMF amends SDR calculation method

Exchange rates used to calculate SDR to be obtained from a commercial provider by the Bank of England, in effort to make methodology more “robust”
imf
Bruno Sanchez-Andrade Nuño

The executive board of the International Monetary Fund has approved a "technical modification" to the way exchange rates are collected to calculate the value of its special drawing rights (SDR) basket, the fund announced on October 26.

Currently, the value of the SDR is calculated by converting the currencies which comprise the basket into US dollars using exchange rates provided by the Bank of England's foreign exchange desk. If rates cannot be obtained from the BoE, they are provided by the Federal Reserve Bank of New York or the European Central Bank.

The methodology was last adjusted in 2000. "Since the current procedures were last modified, more robust technologies and methodologies have been developed to capture exchange rates," the IMF notes.

"There is presently at least one commercial provider (WM/Reuters) that uses a transactions-based and Iosco-aligned methodology to publish exchange rates at regular intervals throughout the global trading day," the fund continues.

By using these rates, the IMF believes the BoE will be able to "capture" representative spot exchange rates from "highly liquid platforms". The BoE has since "reviewed" the methodology, agreeing such a practice would "strengthen" the exchange rates provided for SDR calculation.

Under the new calculation method, the BoE will obtain exchange rate data from a commercial provider, but when rates cannot be obtained, it will revert to the market exchange rates provided by its foreign exchange desk, the IMF says.

"The amended decision would allow a more robust and more transactions-based methodology to be applied for collecting the exchange rates for the daily valuation of the SDR and also help harmonise the approaches currently used," the IMF says.

The new calculation method will come into force on November 1. The SDR basket is currently made up of five currencies: the dollar (41.73%), euro (30.93%), renminbi (10.92%), yen (8.33%) and sterling (8.09%).

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