IMF expands SDR utility to hybrid capital instruments

May 16, 2024 (MLN): The International Monetary Fund’s executive board has approved the use of Special Drawing Rights (SDRs) for the acquisition of hybrid capital instruments issued by prescribed holders, the Fund said in a statement on Wednesday.

A hybrid capital instrument is a financial instrument with perpetual maturity that has both equity and debt properties.

This new use of SDRs, which adds to seven already authorized prescribed SDR operations, is subject to a cumulative limit of SDR 15 billion to minimize liquidity risks.

The Executive Board also established a strong expectation that contributors channeling SDRs to prescribed holders under such capital contributions have Voluntary Trading Arrangements (VTAs) in place to ensure sufficient liquidity and equitable distribution of potential SDR exchanges into currencies.

A review of the proposed use is expected to be conducted when cumulative hybrid capital contributions surpass SDR 10bn or two years after the authorization, whichever comes first.

The authorization would help broaden the use of SDRs and increase the attractiveness of the SDR as a reserve asset.

By facilitating SDR channeling to prescribed holders in the circumstances specified in the proposal, it would also support the ambition of the international community to further enhance the impact of the 2021 allocation to benefit countries most in need, doing so in a manner consistent with the Fund’s mandate.

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