III. The Guidelines

International Monetary Fund
Published Date:
August 2004
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1. Reserve Management Objectives, Scope, and Coordination

1.1 Objectives

Reserve management should seek to ensure that (1) adequate foreign exchange reserves are available for meeting a defined range of objectives; (2) liquidity, market, and credit risks are controlled in a prudent manner; and (3) subject to liquidity and other risk constraints, reasonable earnings are generated over the medium to long term on the funds invested.

1.2 Scope

Reserves consist of official public sector foreign assets that are readily available to and controlled by the monetary authorities.

Reserve management activities may also encompass the management of liabilities, other short foreign exchange positions, and the use of derivative financial instruments.

1.3 Reserve Management Strategy and Coordination

Reserve management strategies should be consistent with and supportive of a country’s or union’s specific policy environment, in particular its monetary and exchange arrangements.

Evaluation of alternative reserve management strategies and their respective implications for reserve adequacy are likely to be facilitated by a cost-benefit analysis of holding reserves.

Reserve management strategies may also need to take into account strategies for the management of external debt for purposes of reducing external vulnerability.

2. Transparency and Accountability

2.1 Clarity of Roles, Responsibilities, and Objectives of Financial Agencies Responsible for Reserve Management

The allocation of reserve management responsibilities, including agency arrangements, between the government, the reserve management entity, and other agencies should be publicly disclosed and explained.

The broad objectives of reserve management should be clearly defined and publicly disclosed, and the key elements of the adopted policy explained.

2.2 Open Process for Reserve Management Market Operations

The general principles governing the reserve management entity’s relationships with counterparties should be publicly disclosed.

2.3 Public Availability of Information on Foreign Exchange Reserves

Information on official foreign exchange reserves should be publicly disclosed on a pre-announced schedule.

2.4 Accountability and Assurances of Integrity by Agencies Responsible for Reserve Management

The conduct of reserve management activities should be included in the annual audit of the reserve management entity’s financial statements. Independent external auditors should conduct the audit and their opinions on the financial statements should be publicly disclosed.

General principles for internal governance used to ensure the integrity of the reserve management entity’s operations should be publicly disclosed.

3. Institutional Framework

3.1 Legal Foundation

Sound institutional and governance arrangements should be established through a legislative framework that clearly establishes the reserve management entity’s responsibilities and authority.

3.2 Internal Governance

The internal governance structure of the reserve management entity should be guided by and reflect the principles of clear allocation and separation of responsibilities. Sound management of internal operations and risks requires appropriately qualified and well-trained staff, following sound business practices.

Effective monitoring of internal operations and related risks should be supported by reliable information and reporting systems, and an independent audit function.

Staff involved in reserve management should be subject to a code of conduct and conflict of interest guidelines regarding the management of their personal affairs.

Effective recovery procedures should be in place to mitigate the risk that reserve management activities might be severely disrupted by the failure of operating systems, or other catastrophic events.

4. Risk Management Framework

There should be a framework that identifies and assesses the risks of reserve management operations and that allows the management of risks within acceptable parameters and levels.

The risk management framework should apply the same principles and measures to externally managed funds as it does to those managed internally.

Risk exposures should be monitored continuously to determine whether exposures have been extended beyond acceptable limits.

Reserve managers should be aware of and be able to account for potential financial losses and other consequences of the risk exposures they are prepared to accept.

The risk management framework should also address risks associated with derivative financial instruments and other foreign currency operations.

To assess the risk and vulnerability of the reserve portfolio, the reserve management entity should regularly conduct stress tests to ascertain the potential effects of macroeconomic and financial variables or shocks.

5. Role of Efficient Markets

Reserve management, and any related policy operations, should be conducted in markets that have sufficient depth and liquidity, and can process transactions in a sound and efficient manner.

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