Context: International Monetary Fund lifted the yuan’s weighting in the Special Drawing Rights currency basket, prompting the Chinese central bank to pledge to push for a further opening of its financial markets.

Special Drawing Rights (SDR)

• Special drawing rights (SDRs) are an artificial currency instrument created by the International Monetary Fund, which uses them for internal accounting purposes.
• It is an interest-bearing international reserve asset created in 1969 to supplement other reserve assets of member countries.
• The value of the SDR is calculated from a weighted basket of major currencies, including the U.S. dollar, the euro, Japanese yen, Chinese yuan, and the British pound.
• SDRs are allocated based on the quota amounts of each member country.
• The higher the quota amount, the larger the SDR allocation a country will receive. In general, stronger economies have higher quotas.
• It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
• SDRs can be used to exchange for other currencies, the repayment of loans, the payments of obligations, pledges, the payment of interest on loans, or paying for increases in quota amounts.
• The value of the SDR is not directly determined by supply and demand in the market.
• It is set daily by IMF on the basis of market exchange rates between the currencies included in the SDR basket

Who can hold SDRs?

• SDRs are allocated by the IMF to its member countries and are backed by the member countries’ governments.
• The makeup of the SDR is re-evaluated every five years.
• SDRs can be held and used by member countries, IMF, and certain designated official entities called prescribed holders.It cannot be held by private entities or individuals.
• Its status as a reserve asset derives from the commitments of members to hold, accept, and honour obligations denominated in SDR.

Are SDR’s traded?

• SDR is predominantly traded through Voluntary Trading Agreements (VTA). A country that wants to sell SDR, will notify the SDR department.The department will help in settling the trade between seller and buyer.
• Exchanging currency and SDR is not prohibited.