Special Drawing Rights are currency units of the International Monetary Fund. These units were originally worth .888671 grams of gold and $1 when they were initially created under the gold standard in 1969. In 1973 the pegged currency system set up at the Bretton Woods conference collapsed.
The IMF then re-defined these SDRs as a basket of the major world reserve currencies. Until October 1, 2016, SDR baskets are comprised of U.S. dollars, euros, British pounds, and Japanese yen. On October 1 this definition will be broadened to add in the Chinese renminibi. The IMF created these unique currency units in order to supplement the existing currency reserves of countries who are members.
Every day the IMF figures up the SDR value and puts it up on their website. The value is a composition of its various parts. They figure the value as measured in U.S. dollars by adding up the value of each currency in the basket in dollars. To do this, they utilize the noon time exchange rates from the London market fixing.
Every five years, the IMF has an Executive Board meeting to review the components of the Special Drawing Rights. They have the ability to hold this meeting earlier should financial circumstances call for it. The idea is to make certain that the basket continuously mirrors how important various currencies included are in the financial and trading systems of the world. The review that ended in November of 2015 decided that the Chinese renminbi currency had become freely usable enough to include as the basket’s fifth currency alongside the dollar, euro, British pound, and Japanese yen.
They also adopted a new method for determining how much of each reserve currency will make up an SDR. Equal weighting is now being given to the exports of the currency issuing nation and a composite financial indicator. With the financial indicator, each of the components is being given an equal weighting. It is based on the reserves in the currency held by other countries, the amount of foreign exchange turnover for that currency, and the total of international debt securities and bank liabilities which are held in that currency.
Until October of 2016, the Special Drawing Rights components are U.S. dollars at 41.9%, euros at 37.4%, British pounds at 11.3%, and Japanese yen at 9.4%. As of October 1, 2016 the new SDRs are instead comprised of U.S. dollars at 41.73%, euros at 30.93%, Chinese renminbi at 10.92%, Japanese yen at 8.33%, and British pounds at 8.09%. This represents the new SDR value in a change more significant than any made in decades. The next scheduled review for the SDR is set to occur on September 30 of 2021.
Special Drawing Rights can be given out to member states of the IMF as a proportion of their IMF quotas. This gives every member an international reserve asset that will not cost them anything. Charges are made on allocations and then utilized to cover any interest owed on SDR holdings. Member countries that do not utilize their holdings which are allocated do not pay since any charges equate to the interest they receive. Members whose holdings become greater than what they are allocated receive interest on the extra ones.
SDRs today are only used in limited capacity as reserve assets. Their main purpose is to function as the account unit of the IMF and a few international organizations. The SDR is not actually a claim against the IMF or a true currency. Instead it represents a possible claim against the IMF members and their currencies.