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Home > Statistics > UK International Reserves - background and methodology
 

UK International Reserves - background and methodology

 

 

 Introduction

The terms international reserves, reserve assets or official reserves are commonly used to represent the foreign currency assets of monetary authorities, where monetary authorities are defined as the central government and/or the central bank. International reserves are comprised of:

  • Foreign exchange - a range of financial instruments including various types of deposits and securities;
  • The reserves tranche position at the International Monetary Fund (IMF);
  • IMF SDRs (special drawing rights);
  • Gold; and
  • Other reserve assets - including repurchase agreements and derivatives.

Countries hold international reserves for a variety of reasons:

  • As a tool of exchange rate or monetary policy - most obviously if countries have fixed exchange rates;
  • To pay for government purchases of foreign goods - countries may set foreign currency aside to meet future needs;
  • To service and ultimately repay foreign currency debt - adequate levels of reserves give confidence to creditors;
  • Insurance against emergencies - more relevant for smaller countries with variable export receipts; and
  • As a source of income - although few countries will rank this as a high priority, reserve assets may be actively managed to earn income or preserve value once the decision to hold them has been made.

The level of a country's international reserves will therefore depend on variables such as the exchange rate regime, the extent to which the economy is open to trade, and the level of foreign currency debt. 

Management of the UK's international reserves

Official reserves
 

The exchange equalisation account (EEA) holds the UK’s reserves of gold, foreign currencies and IMF SDRs. These holdings, together with the reserve tranche position at the IMF, make up the UK's official reserves. The reserves are owned by Her Majesty's Treasury but the Bank of England acting as their agent carries out day-to-day management of the account, dealing in foreign currencies and the investment of the reserves.

The EEA was established in 1932 to provide a fund which could be used for "checking undue fluctuations in the exchange value of sterling" (Section 24 of the Finance Act 1932). Any UK Government intervention in the foreign exchange market would therefore be conducted through the EEA. Subsequent legislation extended the possible use of the fund; and, under the consolidating Exchange Equalisation Account Act 1979, it is now also used:
 
  • To secure the conservation or disposition in the national interest of the means of making payments abroad; and
  • For certain purposes arising from the UK’s membership of the IMF, including the holding, purchase and sale of SDRs.

The Bank of England manages the reserves in accordance with the criteria set annually by HM Treasury in a document known as the Remit. The Remit specifies:

  • Limits on reserve transactions during the year;
  • Benchmarks for investing the reserves with limits to the Bank's discretion to take currency or interest rate positions relative to these benchmarks;
  • The framework for controlling credit and market risk; and
  • The framework for the national loans fund (NLF) foreign currency borrowing program which is used to finance part of the reserves.

 

Bank of England's holdings

In addition to the United Kingdom's Official Reserves the Bank of England manages its own holdings of foreign currency assets and gold. In accordance with the Chancellor of the Exchequer's letter of 6 May 1997 to the Governor of the Bank of England, the Bank may intervene in the foreign exchange market in support of its monetary policy objective.

 

Publication of UK reserve assets data

Historical context

Historically, UK reserves data were disseminated via the HMT UK Official Holdings of Foreign Currency and Gold press release. Data were published in official or "parity" dollars, whereby foreign currency data were converted into official dollars using parity exchange rates. Parity exchange rates were set by taking the average of the daily exchange rates prevailing in the three months to the end of March each year, or the daily exchange rate prevailing on the last working day of March, whichever was lower. The advantage of this approach was that it allowed the presentation of reserves data without the effect of exchange rate movements. The disadvantage was that this fell short of best accounting practice and masked changes in the market value of the reserves.

In September 1997 the Chancellor of the Exchequer announced the launch of a new quarterly report containing data on the UK's forward book (trades that have been done but that are settled in the future), spot book and a breakdown of assets and liabilities into broad currency blocks, SDRs and gold. The first report covering the period July to September 1997 was published in December 1997. In October 1998 the Chancellor announced that information on the forward book would be published on a monthly rather than a quarterly basis, which was first published in November 1998 covering the October 1998 reserves.

Since July 1999, monthly data have also been published in the IMF template format (see below), on the Bank of England's website. 

The IMF's reserves data template
 
The reserves data template was jointly developed in 1999 by the IMF and a working group of the G10 Committee on the Global Financial System (see report on the BIS website.
 
‘The template is innovative in that it integrates data on balance-sheet and off-balance-sheet international financial activities of country authorities and supplementary information. It aims to provide a comprehensive account of countries’ official foreign currency assets and drains on such resources arising from various foreign currency liabilities and commitments of the authorities. The public disclosure of such information by countries on a timely and accurate basis promotes informed decision making in the public and private sectors, thereby helping to improve the transparency and functioning of global financial markets.’
Dissemination of the template is a category in the IMF’s Special Data Dissemination Standard (SDDS), and as a result templates can be found on the websites of subscribing countries’ central banks and finance ministries, and on the IMF’s website.

 

 
UK methodology and definitions
 
The UK's International Reserves are published in accordance with methodology set out in the IMF’s Internal reserves and foreign currency liquidity – guidelines for a data template (exceptions are detailed below*), and the following sections describe some of the main conventions now employed:
 
Data are now published on a done date basis whereas they were previously published on a settled basis. This removes the distinction between the spot and forward books (the former comprises all settled transactions, the latter all unsettled transactions). The template integrates on-balance sheet and off-balance sheet international financial assets and liabilities. With effect from Aug 2001 data, foreign currency holdings of Central Government, which are not classed as reserve assets, have been included in section IB and IV of the template. Associated foreign currency drains are scored against the UK Govt in Section II.
 
*The presentation of data in the IMF template differs from the guidelines in the following areas:
i. Because the UK-based financial markets are global in nature, official reserve holdings include claims on residents, although these are separately identified in the template.
ii. Items in course of settlement are netted against the underlying reserve asset or liability to which they relate, rather than being included as Accounts Payable/Receivable in section II.3 of the template.

 

Section I : Reserve assets and other foreign currency assets

Valuation

Mark to market (MTM) using end-period market prices for financial instruments, and exchange rates for foreign currencies.

Coverage
 
Assets
1a Securities: Bonds, notes and money market instruments
1b Foreign Currency and Deposits: Foreign currency deposits, nostro and call accounts
2 IMF: Reserve tranche position at the IMF (asset of the UK Government only)
3 SDRs: Holdings of SDR (asset of the UK Government only)
4 Gold: Monetary gold held and transactions in gold (deposits, swaps etc.) valued at the prevailing market price based on the London 3pm fix at the end of the period
5 Other:
Includes capital items, etc. (investments and participation in international financial institutions, together with the net claim on other central banks arising from participation in the TARGET system (assets of Bank of England only)), foreign currency forwards and swap positions (net MTM value of foreign currency forwards, interest rate and cross currency swaps) and reverse repo (claims on counterparties for foreign currency lent in reverse repos)
 
  

 

Section II(i) : Predetermined short-term net drains on foreign currency assets

Valuation

Nominal future cash flows

Coverage

Future known cash flows in foreign currency over the next 12 months (for the purposes of this section 1 month refers to a period of 30 days)

1 Foreign currency loans and securities: Principal and interest payments due on foreign currency notes, bonds and bills issued by HM Treasury and the Bank of England; and principal and interest repayments due on foreign currency loans received; including the Bank of England's liability to commercial banks in relation to participation in the TARGET system
2 Short and long positions in forwards and swaps: Known and projected foreign currency cash flows of foreign currency forwards, interest rate and currency swaps
 
 

 

 

Section IV : Memo items

Valuation

Mark to market using end- period market prices and exchange rates
 
Coverage
 
a - b Not applicable to UK data
​c ​Pledged assets ​Reserve assets provided as collateral to market counterparties under ISDA or FCRA agreements
d Repo collateral Collateral taken in reverse repo transactions and reserve assets provided as collateral under repo transactions
e Off-balance sheet items: Net present value of known and projected foreign currency cashflows of foreign currency forwards, interest rate and currency swaps
 
Foreign currency assets and liabilities summary
 
Valuation
 
Mark to market using end- period market prices and exchange rates
 
Transactions against sterling: Represents the amount by which the total value of the reserves has fallen or risen as a result of transactions against sterling during the month.
Based on sales and purchases of currency against sterling, currency leg of swaps against sterling and interest paid or received in currency from swap deals done against sterling (taking the currency side and omitting the sterling leg).
Valuation effects: The change in the level of the reserves attributable to the effect of price and exchange rate fluctuations on the mark to market valuation of foreign assets and liabilities, and the net income accruing on them.
 
 
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