In some international treaties and agreements, SDRs are used to value penalties, charges or prices. For example, the Montreal Convention and the Convention on Limitation of Liability for Maritime Claims caps personal liability for damages to 128,821 and 330,000 SDR respectively. So what is SDR and how does one know its value?
Special Drawing Right
The SDR is an international reserve asset. The SDR is not a currency, but its value is based on a basket of five currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
The IMF created the SDR as a supplementary international reserve asset in 1969, when currencies were tied to the price of gold and the US dollar was the leading international reserve asset. The IMF defined the SDR as equivalent to a fractional amount of gold that was equivalent to one US dollar.When fixed exchange rates ended in 1973, the IMF redefined the SDR as equivalent to the value of a basket of world currencies. The SDR itself is not a currency but an asset that holders can exchange for currency when needed. The SDR serves as the unit of account of the IMF and other international organizations.
- Individuals and private entities cannot hold SDRs.
- IMF members – and the IMF itself – hold SDRs and the IMF has the authority to approve other holders, such as central banks and multilateral development banks,.
- As of February 2023, there were 20 organizations approved as prescribed holders. Participating members and prescribed holders can buy and sell SDRs. However, prescribed holders do not receive allocations of SDRs, and they may not request an exchange of SDRs in transactions with designation as members do.
SDR Value
The SDR value in terms of the US dollar is determined daily based on the spot exchange rates observed at around noon London time. It is posted on the IMF website. For example, on January 31, 2021, the value was US$1.44080, and on June 22, 2021, the value was US$1.426480.
The IMF reviews the SDR basket every five years, or earlier if warranted, to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. In its reviews, the IMF considers the criteria it uses in selecting SDR basket currencies and the initial currency weights used in determining the amounts (number of units) of each currency in the SDR basket. The currency amounts remain fixed over the five-year SDR valuation period but the weights of currencies in the basket fluctuate with exchange rates among the basket currencies. The value of the SDR is determined daily based on market exchange rates.
