What are 'Special Drawing Rights - SDR'

Special drawing rights (SDR) refer to an international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing money reserves of member countries. Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs augment international liquidity by supplementing the standard reserve currencies.

An SDR is essentially an artificial currency instrument used by the IMF, and is built from a basket of important national currencies. The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments. The makeup of the SDR is re-evaluated every five years. The current makeup on the SDR is represented by the following table:

Currency Weights determined in the 2015 Review Fixed Number of Units of Currency for a 5-year period Starting Oct 1, 2016
  U.S. Dollar 41.73 0.58252
  Euro 30.93 0.38671
  Chinese Yuan 8.33 1.0174
  Japanese Yen 8.09 11.900
  Pound Sterling  10.92 0.085946

BREAKING DOWN 'Special Drawing Rights - SDR'

The SDR was formed with a vision of becoming a major element of international reserves, with gold and reserve currencies forming a minor incremental component of such reserves. To participate in this system, a country was required to have official reserves. This consisted of central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency in foreign exchange markets to maintain a stable exchange rate.

However, the international supply of the U.S. dollar and gold — the two main reserve assets — wasn’t sufficient to support growth in global trade and the related financial transactions that were taking place. This prompted member countries to form an international reserve asset under the guidance of the IMF.

A few years after the SDR was created, the Bretton Woods system imploded, moving major currencies to the floating exchange rate system. With time, international capital markets expanded considerably, enabling creditworthy governments to borrow funds. This saw many governments register exponential growth in their international reserves. These developments diminished the stature of the SDR as a global reserve currency.

How the Concept of SDR Is Used to Settle Claims

The SDR isn’t regarded as a currency or a claim against the IMF assets. Instead, it is a prospective claim against the freely usable currencies that belong to the IMF member states. The Articles of Agreement of the IMF define a freely usable currency as one that is widely used in international transactions and is frequently traded in foreign exchange markets.

The IMF member states that hold SDRs can exchange them for freely usable currencies by either agreeing among themselves for voluntary swaps, or by the IMF instructing countries with stronger economies or larger foreign currency reserves to buy SDRs from the less-endowed members. IMF member countries can borrow SDRs from its reserves at favorable interest rates, mostly to adjust their balance of payments to favorable positions.

Besides acting as an auxiliary reserve asset, the SDR is the unit of account of the IMF. Its value, which is summed up in U.S. dollars, is calculated from a weighted basket of major currencies: the Japanese yen, the U.S. dollar, the pound sterling and the euro.

The SDR Interest Rate

The interest rate on SDRs, or the SDRi, provides the basis for calculating the interest rate charged to member countries when they borrow from the IMF, and paid to members for their remunerated creditor positions in the IMF. It is also the interest paid to member countries on their own SDR holdings and charged on their SDR allocation.

The SDRi is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of 5 basis points. It is posted on the IMF website.

RELATED TERMS
  1. International Reserves

    International reserves are any kind of reserve funds, which central ...
  2. Exchange Stabilization Fund (ESF)

    The Exchange Stabilization Fund (ESF) is U.S. Treasury funds ...
  3. Group of Ten - G10

    The G-10 is a group of eleven industrialized nations that meet ...
  4. Reserve Tranche

    The reserve tranche is a segment of an International Monetary ...
  5. Monetary Reserve

    A monetary reserve is a central bank's holdings of a country’s ...
  6. Currency

    Currency is a generally accepted form of money, including coins ...
Related Articles
  1. Trading

    What Are IMF Special Drawing Rights?

    Technically, the SDR is neither a currency, nor a claim on the IMF itself.
  2. Insights

    An Introduction To The International Monetary Fund (IMF)

    Chances are you've heard of the IMF. But what does it do, and why is it so controversial?
  3. Trading

    China's Foreign Exchange Reserves Fall By Almost $100 Billion

    Almost $100 billion evaporates from China's forex reserves as Beijing continues its support toward yuan.
  4. Insights

    IMF Cuts Global Growth Forecast as Brexit Hits UK

    The IMF cut global growth today. The UK and Nigeria were the two countries that suffered the biggest downgrades
  5. Insights

    IMF Calls For 6-Step Solution to the Euro Crisis

    Discover six points the International Monetary Fund believes the European Union must address in order to continue economic recovery.
  6. Trading

    Canada And Australia Dollars To Be Reserve Currencies

    The IMF upgrading the Canadian and Australian dollars to "official" reserve currency status is a recognition of reality.
  7. Insights

    IMF, WTO and World Bank: How Do They Differ?

    Understand what IMF, WTO and the World Bank are, how they differ, and why some people question their motives.
  8. Insights

    IMF: Greek Debt 13 Years Away from Exploding

    The IMF’s annual review of Greece's economic policies warns that the country’s debt is unsustainable and 13 years away from exploding.
  9. Tech

    IMF Urges Banks to Invest In Cryptocurrencies

    The International Monetary Fund is pushing for the new wave of digital currencies to occupy a more prominent position.
  10. Insights

    Is the IMF’s Loan to Ukraine Wasted Money?

    The IMF just approved the next instalment of its loan to Ukraine, but is the aid agency just wasting its money?
RELATED FAQS
  1. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  2. How are international exchange rates set?

    Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments ... Read Answer >>
  3. What countries have the largest gold reserves?

    Find out which countries have the largest gold reserve stockpiles, and why governments still feel that it's necessary to ... Read Answer >>
Trading Center