IMF sets new SDR calculation method for prepare for yuan's entry

WASHINGTON (Reuters) - The International Monetary Fund on Monday said it adopted a new methodology for calculating the currency amounts in the Special Drawing Rights (SDR) the fund uses for transactions, partly to ensure that China’s yuan meets the IMF Board’s intended weighting.

Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon/File Photo

The changes will apply to a historic rebalancing of the SDR basket on Oct. 1 to include the yuan for the first time, a step that gives China prized reserve currency status and moves the yuan a step closer to being freely usable internationally.

The relative amounts of dollars, euros, yen, pounds and yuan to achieve these weightings in the SDR basket will be set on Sept. 30 and will be fixed for five years.

But the IMF said its previous method of calculating currency amounts in past rebalancings had caused deviations from the intended weights due to complex rounding calculations and other issues. In the 2010 rebalacing, the old method resulted in a dollar weighting that was nearly half a percentage point above the board’s intended target.

The new method will involve simpler rounding calculations out to five significant digits, with the potential to round to six digits to more accurately match intended weightings.

The IMF said the method will be easier to replicate on a simple spreadsheet, providing more transparency to market participants.

“The amended methodology allows final currency amounts to produce currency weights that are very close to the weights adopted by the IMF,” the fund said in a statement.

In November 2015, the board agreed to introduce the yuan into the SDR basket with a weighting of 10.92 percent. It left the dollar relatively unchanged at 41.73 percent, and reduced weightings for the euro, yen and pound to 30.93 percent, 8.33 percent and 8.09 percent, respectively.

The dollar has risen in value significantly against these currencies since the decision.

In the run-up to the yuan’s introduction into the SDR, the IMF said it will publish weekly the prospective calculations of the currency amounts in the SDR basket using the new method.

Reporting by David Lawder; Editing by Jonathan Oatis, Bernard Orr