Recently, the IMF released this Report of the Managing Director (Christine Lagarde) to the IMF Board of Governors. The report is done by the Managing Director to make a recommendation "relating to a general allocation or cancellation of Special Drawing Rights (SDRs).

Regular readers here understand what SDRs are, but if you are new to this blog you may want to look over this page of articles on the subject of the SDR. In this report, I want to focus on just one item (#27) on page 15 of the report. Below I have pasted in this item (#27) and further below I have added some comments.

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27. A forthcoming Board paper will look into the evolution of the SDR and its potential future role in addressing some of the IMS’s vulnerabilities. In particular, the paper will analyze if greater use of the SDR—including SDR-denominated assets, which could be both issued and held by any parties—could help reduce global imbalances and mitigate the impact of financial market volatility. The outcome of this discussion could result in proposals to modify the existing framework set forth in the Fund’s Articles of Agreement for general SDR allocations or cancellations. The paper will also review whether there is scope for the SDR to strengthen the capacity of the GFSN (Global Financial Safety Net), complementing other work streams, including on the Fund’s lending facilities. 

(I added the underlines for emphasis)

Click here to read the full report

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My added comments: Item #27 above caught my attention for a couple of reasons. First, we watch for any signs here that any kind of expanded role for the SDR is in progress. Secondly, we are interested in anything that may suggest that it is possible for the SDR to become a global reserve currency that regular citizens can own and not just banking entities and governments.

The paragraph above clearly indicates that the IMF is ready to begin doing research on how the role for the SDR might be expanded "including SDR-denominated assets, which could be both issued and held by any parties." We have already covered the fact that China has interest in expanding the role of the SDR including possibly issuing SDR denominated bonds. Now we have confirmation directly from the IMF that they are interested in looking at an expanded role for the SDR as well. 

A question that arises for me is: Who are the "any parties" they mention that might be able to hold SDR denominated assets? 

Are they only talking about banking and governmental entities that Jim Rickards talks about in this twitter conversation we had recently? 

Or could this mean that the IMF would consider allowing "any parties" (like you and I) to some day hold SDRs? 

I asked Dr. Warren Coats (former Chief of the SDR Operations Division at IMF) for this thoughts on this question and he clarified it for us perfectly. Here are his direct comments on it provided to me by email (underlines were added by me):

"The Managing Director’s reference to “SDR-denominated assets, which could be both issued and held by any parties” clearly refer to private SDRs, that is SDR denominated assets and liabilities created in the private sector.  These would be attractive to cross border transactors wanting to invest in or borrow instruments with more stable exchange value and to those trading commodities such as oil internationally, especially if those commodities are priced in SDRs. The IMF would not be directly involved and would have no control over private SDRs, but their development and proliferation would promote and facilitate the demand for and use of the IMF’s own SDR reserve asset. Thus the IMF is hopefully interested in encouraging the development of private SDRs."

Adding some intrigue to all this are some recent comments by Willem Middelkoop on his twitter feed here and here and here where he says he has been made aware of a plan to expand the role of the SDR "on China's request." These comments were made on his twitter feed shortly after he gave me this quote by email to use here for an earlier blog article:

"On a side note; Russia and Chinese leaders met twice during last week and called (again) for an end to the current (dollar-)system. From my contacts with Chinese insiders I know they really understand our problems well and are clearly preparing for The Next Phase (a monetary and geopolitical reset) "

Jim Rickards told me by email he will be watching the G20 meeting this fall in China to see what they may propose for ways to expand the role of the SDR.  We covered that in a recent blog article here.

We do also know that the BIS (Bank for International Settlements) uses the SDR for its unit of account already (since 2003) as we noted in this blog article. 

Clearly, something is going on related to some kind of expanded role for the SDR. It's hard to tell from all this if anything is likely to surface any time soon though or not. The IMF report implies that the IMF is just now starting a research paper on the idea which we assume would take some time to complete. We now know from Dr. Coats explanation above that IMF may be pursuing the idea of encouraging "private SDRs" (which are different from the reserve SDRs used within the IMF). 

We have a number of very high credibility sources who are telling us that a bigger future role for the SDR may be coming. However, one of my most reliable sources recently told me to expect change to "move at a snail's pace" due to a lack of political will for major changes. Until we get more information, all we can do is report what we find (as we have here) and continue to follow events to see what actually does happen.

Added note: Because of the excellent information provided above by Dr. Coats for this article I will add this article to our page of articles on SDR's. A thank you to Dr. Coats for taking time to provide his comments on this for us. SDRs are a new concept for most people and the idea of "private SDRs" is even less well known and understood. Please note Dr. Coats explanation of the difference between private SDRs and IMF reserve SDRs above (see pages 168-170 for more on this)

Additional added note: I received the following request from Robert Pringle related to efforts to reform the current monetary system:

"The first and  biggest challenge facing us reformers is to show that the financial /trade crisis of 2008 and the subsequent great recession were caused  by - or can be traced back to - faults in the international monetary system. So it would be tremendously valuable if in the course of your reading and review of papers appearing on the internet you could continue to flag any that related to that issue."

Mr. Pringle went on to tell me that he feels it is important to establish a link between faults in the monetary system and the 2008 financial crisis before trying to propose any specific reforms to the system (SDRs,gold,etc). Policy makers have to believe reforms are needed for any changes to move forward. Right now, all the available evidence I have suggests that Western policy makers do not see any urgent need to reform the present system.