SWF may invest in SDR-denominated bonds

  • By: Raquel Pichardo-Allison
  • 20 Aug 2009
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GLOBAL – Sovereign wealth funds (SWF) may decide to purchase special drawing rights (SDR)-denominated bonds, creating a wider market for the instrument some have touted as the alternative to the US dollar as the reserve currency.

SWFs could purchase SDR-denominated instruments to diversify their currency risk and create more efficient portfolios, said State Street global investment strategist George Hoguet at a press briefing in London this week.

SDRs are the International Monetary Fund's unit of account and consists of a 44% weighting to the US dollar, 34% to the euro and 11% each to the pound sterling and Japanese yen.

"It is possible that the private use of the SDR could promote the public use of the SDR," said Hoguet.

"This could in turn facilitate...the development of an IMF-sponsored ‘substitution account' in which official holders of dollars could exchange their surplus reserves for SDRs at the IMF. The IMF would manage the reserves," wrote Hoguet in a vision paper outlining the state of sovereign wealth funds.

This view was supported by China's central banker Zhou Xiaochuan in March when he called for the creation of an international reserve currency and expanding the use of SDRs.

The prominence of SDR on the global financial stage is set to soar. In April the G-20 agreed to issue US$250bn in SDRs in order to boost global liquidity, bringing the share of SDRs in world reserves to 4% up from 0.3%.

But SWFs face a number of obstacles before they can increase their holdings in SDR-denominated investments, Hoguet said.

"Such handicaps include: safeguard clauses that specify what happens if the IMF changes the composition of the SDR; currencies used to repay interest and principles; the absence of clear market-making and liquidity provisions; and other constraints," he wrote.

The vision paper gave an overview of the sovereign wealth fund market. State Street listed 37 SWFs with combined assets of $3.7trn.

Like other investors, SWF suffered from a drop in assets because of the global financial crisis. They had put their diversification activities on hold, but have now started to look at ways to shore up liquidity, and in some cases, invest more in their local markets. (Global Pensions; August 19, 2009)


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