Special Drawing Rights

SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries

Private SDR

The IMF created SDRs in 1969 as an international reserve asset meant to support the Bretton Woods fixed exchange rate system by supplementing the existing reserves of member countries. Since 1972 the Fund has also used the SDR as its basic unit of account. Over time, the SDR has found a number of applications outside the IMF official framework. Current accounting uses of the SDR include:

 

 Transit fees in the Suez Canal are denominated in SDRs.
 Some airlines now designate charges for overweight baggage in SDRs.
 A number of international organizations maintain their accounts in SDRs or accounting units linked to the SDR. The Arab Monetary Fund, for instance, maintains ts accounts in Arab Accounting Dinars (AAD), which are linked to the SDR.
 In the past, some countries, such as Latvia, have pegged their currency to the SDR.

 

Coats (1990) suggests that the SDR’s attractiveness as a unit of account for private sector use derives from the stability of its value relative to values of alternative units. By virtue of their currency composition, SDR-denominated securities can serve as a diversification vehicle and as a partial hedge against currency risk. For example, at the time the first SDR was created in 1969, 1 SDR was equivalent to 0.888 grams of fine gold and/or $1.00. However, as of Sept 30, 2009, 1 SDR is equivalent to roughly $1.58. Figure 2 outlines the dollar/SDR parity since 1970.

SDR

 

Although its uses outside the official circle have been modest so far, information about the SDR is available on some commercial platforms. For example, the SDR has been assigned the ISO 4217 currency code XDR, and it is quoted on Bloomberg regularly (SDR Currency <GO>). The IMF determines the SDR’s interest rate on a weekly basis. The IMF also updates the SDR every 20 minutes, although it does not quote an SDR rate on Saturday or Sunday, EST.

 

Sobol (1981) notes that private markets in SDR-denominated instruments first emerged in 1975 and included commercial bank deposits, syndicated credits, certificates of deposit (CDs), floating rate CDs, Eurobonds and floating rate notes. Interest grew in the SDR as a unit of account as the dollar weakened in 1977-1978. Sweden issued an SDR-denominated credit in 1981, and several other borrowers followed its lead. Sobol notes that JP Morgan offered demand deposits in SDRs and the ability to debit and credit accounts directly in SDRs without having first to convert the SDR into its component parts. The SDR thus served as limited means of payment. Banks also developed a secondary market in SDR-denominated CDs, and Euroclear and Cedel developed systems to accept assets in SDRs. Madura (1982) notes that banks in the United States, the United Kingdom and Japan issued SDR-denominated CDs.