Appendix 2: Survey responses and comments

Below are comments provided by reserve managers to our survey questions.

1. Which in your view are the most significant risks facing reserve managers in 2020? (Please rank the following 1–5 with 1 being the most significant)

After the Covid-19 crisis geopolitics likely will be a hot spot again. On the other hand, strategic asset allocation may be implemented in such a way as to preserve three pillars: safety, liquidity and performance. Therefore, we will keep following, throughout the year, how well the international reserves are hitting these targets.

All of them are somehow relevant, and may become more significant over time.

Chinese economic downturn in light of the coronavirus outbreak, which might drag down the world’s economic growth prospects.

Chinese economic downturn, mainly attributable to the Covid-19 epidemic, presents a significant downside risk to reserve management in 2020.

Chinese slowdown could have an impact on Asia and commodity countries.

Coronavirus development is the most significant risk in the market.

Economic slowdown and change of market sentiment due to the coronavirus outbreak.

Following the (partial) resolution of the trade dispute between China and the US, we believe the low-yield environment will be the major challenge going forward.

Geopolitics has increased uncertainty and reduced growth potential.

Given China’s prominent role as one of the world’s largest exporters of goods and services, any negative developments from that end may definitely have a spillover effect on the rest of the global economy. As for the continuous low-yield environment, this can be said to raise difficulties for reserves managers as they gear to find alternative sources for enhanced return at potentially higher risks.

Government emergency spending and budgetary deficit will be the risk facing reserve managers.

In our view, currently the most significant risk is connected with global slowdown and increased market volatility as a result of the coronavirus pandemic.

It’s difficult to know which of these are that important at this current time while Covid-19 is around … until this is controlled nothing else matters....and just in the short term (at least) liquidity is the only game in town.

Low-yield environment puts pressure on the “business model” of central banks, where liabilities are raised at zero or market rate, while assets typically yield market-related rates of return. The closer to zero the rates, the more pressure central banks have on this core business related to their policy functions.

Market liquidity given the global pandemic is the highest risk now.

New risks at the top of the ranking are: (i) economic slowdown due to Covid-19; and (ii) the oil price war.

Our main risk is the global recession caused by the pandemic, which changes the whole financial market.

Recent coronavirus developments pose the most significant risk to markets. In addition to the economic consequences, related health risks and possible operational breakdowns should also be considered.

Reserve managers are mainly risk-averse fixed income investors, and thus more sensitive to events that may affect that asset class and the continuous low-yield environment.

Right now there are a lot of fear about coronavirus. This is affecting the economic activity and the markets in developed countries. Some central banks could reduce interest rates.

The #1 issue now will be the anticipated adverse impact of Covid-19 on the financial markets.

The ability to preserve capital in a negative yielding environment becomes increasingly challenging.

The actual environment suggests the most relevant risks are geopolitics and the coronavirus impact in the global economy.

The coronavirus spreading outside China puts global growth at risk and leads to a lower-yield environment. Geopolitical risks in the Middle East are not off the table. Uncertainty remains about the future trading relationship between the US and China, but also between the EU and the UK.

The current health crisis has roiled the markets and created uncertainty, leading to sell off of risk assets and aggressive central bank action which will impact reserves portfolio.

The main risk for the markets will probably be related to the coronavirus pandemic (included within geopolitical risks in the ranking) and its impact on global growth.

The most significant risk facing investors in 2020 has proven to be the concerns surrounding the spread of coronavirus and the effects thereof.

The most significant risk for reserve managers in 2020 is the outbreak of coronavirus. All other risks rank below the contagion risks of Covid-19.

The situation has been changed considerably in recent months.

There has been an easing in trade tensions between the US and China, but economic downturn caused by the outbreak of the coronavirus in China is likely to result in decline in global bond yields as central banks attempt to support their economic growth through monetary easing.

There is no risk from the Chinese economy.

They all are somehow interconnected. Therefore, it is hard to pick just one. On the other hand, for an investor who is already invested it may be different than for an investor who is just planning to invest. The price of traditional assets is so high that not everyone is prepared to anticipate a further rise.

Tightening of trade relationships (especially US versus other trade partners) and Chinese economic downturn could have significant impact on the global economic growth rate. In addition, we believe that coronavirus contagion could have a temporary, but significant, impact on the global growth rate as well due to demand and supply disruptions.

We believe that the coronavirus can negatively impact the global economy in Q1 and Q2, leading to a contraction in the economic activities not only in China but all over the world. As we are risk-averse, and investing in high-rated government bonds, we have benefited from the current environment. However, we do think that the low-yield scenario will force us to invest in more risky assets so that we can accomplish with our investment goals (in particular, the positive real return).

2. The euro celebrated its 20th anniversary in 2019 and, according to the most recent data, accounts for 20% of allocated official sector reserves. How would you characterise its performance, versus its potential, as a reserve currency over the past two decades? (Please check one box)

Although the currency performance of the EUR in the past 20 years has been positive (on aggregated terms), its status as a reserve currency has reduced in the past six years due to negative interest rates, facts that shock one of the main reserves management objectives (capital preservation).

As a reserve currency one should anticipate higher stability and lower intervention of the European Central Bank (ECB). The quantitative easing (QE), together with the sovereign debt crisis, should not be a sign of reserve currency. Both the bond market and equity market performed extremely well, but central banks used to live from coupons and interest rates – and they have been very negative. Therefore, I would generally mark the situation as “underperformance”.

Disparate economies, limited ECB monetary policy.

Economic imbalances of the euro area countries contributed to the protracted effects of economic crisis, which resulted in a low/negative level of government bond yields on the European market and undermined the role of the euro as a reserve currency.

EUR has the capacity to be a world-leading reserve currency, but it also obviously has its flaws that might need to be fixed before the EUR can fulfil its full potential.

Euro has fulfilled its function as a reserve currency throughout the last two decades. More specifically over the last decade, yields declined, have guaranteed long-run positive performance and, in our case, currency exposure has been used to hedge our external public debt. Therefore, performance has been the same for USD and for EUR on the basis of strategic objectives. However, the euro had a total return underperformance compared to USD Treasuries.

Euro still struggling due to the economic performance in Europe, whereas the US economy was doing pretty well before the pandemic.

Given the European Union’s (EU) share in the world GDP and negative yield environment in the euro area, we think 20% share in reserve currency is outperformance.

In general terms, euro has maintained its weight (percentage) as a world reserve in that period while the euro area countries GDP weight (percentage) has been decreasing.

In our case, we reduced transactions in euro-denominated securities since 2015 because of the negative yield environment.

It is mostly used by many central banks to meet the euro liabilities. The currency would have definitely performed better if interest rates were above zero as this would support capital preservation as well as enhance portfolio returns.

It underperformed because of its weakness in comparison with the USD in a low rate environment, which has extended for a long time.

Negative yields makes euro unattractive in central banks reserves.

One of the world’s superpowers is not pulling its weight in economic terms.

Participation is still low, especially if you take European countries out of the sample. Negative yields and doubt about future of integration weigh on the currency.

Presently, it is accepted by 19 of the European countries and is the world’s second-most common currency reserve. However, it has been trailing the USD for quite some time and still only accounts for 20% of the allocated official sector reserves. In light of the fact that they also have three members of the G7 countries, it would be expected that the currency would have been doing much better when compared to the US.

Prolonged low interest rate environment.

Specifically in the last decade, the lack of fiscal integration and thus of policy coordination, has limited the potential of the EUR as a reserve currency. Similarly, the low levels of interest rates and poor economic prospects make the currency not very attractive.

The euro area is more crisis-prone than the US, and lack of uniformity in policy puts it at a disadvantage against the USD.

The euro continues to be overshadowed by the USD as a reserve currency.

The euro delivered a stable currency, both in terms of exchange rate and price stability target. Data shows that the effective exchange rate against major currencies has been more stable, but at a lower level since the introduction of the euro. It has partially succeeded in achieving the goal of international currency status. The performance of the euro was somewhat stained by the severe eurozone crisis, several sovereign debt runs and a stagnating growth in income. It revealed the difficulties of a monetary union guided by separate national governments.

The euro did not meet the initial expectations of challenging the dominance of the US dollar as a reserve currency having a lower allocation than the relative economic power of the eurozone.

The euro has been a stable currency both in terms of exchange rate and price stability. Over the years, the currency has performed well relative to the world’s major currencies and continues to show potential in this regard. Further, euro assets have generated generous returns for our reserve portfolios in the past. However, as of recent years, the EUR as a reserve currency poses challenges to our reserve portfolios due to the negative yields within the euro area. As result, our euro exposures were liquidated and allocated to positive yielding currency assets leaving the EUR currency at around 2.5% of total our reserves. This level of allocation is likely to continue in the next few years, while periodically assessed based on our country’s foreign obligations and euro area interest rate expectations.

The negative rates associated with the euro have been a major challenge in reserve management.

The potential of the euro to perform better as a reserves currency can be said to be higher than at present. The reason for this is some banks are keeping the bare minimum of the currency for operational needs to not incur increased charges from holding high amounts of the currency.

The sovereign crisis affected the euro performance.

The subdued economic performance from the European region, resulting in lower yields on the euro currency and an unstable political landscape across the European region, have prompted a lower allocation of global reserves to the euro.

There is a negative rate offered by the eurozone.

We do not have a special view regarding EUR past performance.

We have built our reserves asset allocation on liquidity and safety. As such, the euro has met our expectations without over or underperforming.

We have limited exposure to EUR.

When accounting for the size of the euro system compared to its peers, we would say that the 20% allocation to the euro is meagre.

3. What in your view would make the biggest difference to the attractiveness of the euro as a reserve currency? (Please rank 1–5 with 1 having the most impact)

A centralised euro benchmark issuance with a high rating might increase the attractiveness of the euro in the medium to long term. We would wait to have enough data to monitor the attractiveness.

A closer political and/or banking union might provide more stability and improve the attractiveness of the EUR.

As long as the European assets have low levels of returns, it is difficult to allocate a substantially higher exposure to the currency.

Closer political union would reinforce security and confidence in the euro as a reserve currency. More liquid markets and higher (non-negative) yields always help in the attractiveness of the currency for reserve management purposes.

Credit risk is still different across countries despite the single currency.

Euro is still in some kind of doubts about its future. The eurozone, as the country of the euro, is still struggling with delivering economic prosperity. And we are not seeing any progress in finding the way to somehow harmonise the “issuing country” as a whole. The negative rates do not help either because, even if I were somehow to accept the risk, the negative yields and rates push me out of the euro into other currencies with positive nominal yields.

Even though the presented measures may affect the attractiveness of the euro as a reserve currency, the timing of their effect may vary. Higher yields, for example, may be attractive even in the short term, while others, such as a closer political union, would take more time to accomplish this goal.

Foreign official holdings of euro area government debt are concentrated in the few euro area sovereigns issuing highly rated debt securities. The creation of a common euro area safe asset would contribute to the credit quality of the outstanding debt and to the euro’s global appeal. The interest rate differentials have favoured the US dollar and other “higher yielding currencies”, especially after the ECB embarked in 2014 on a monetary policy accommodation programme in 2014 and lowered the deposit facility rate below the zero threshold. Eurozone needs to move towards a closer political union, requiring nations to cede more sovereignty, a so-called fiscal union and more joint budget policy. This should boost market sentiment and stimulate economic growth.

Have a positive nominal return, it´s a basic premise (among others) for us to consider a reserve currency to be included in our portfolio. We do agree that, if EUR could have positive interest rates, at least we would have some exposure in the money market.

Higher yields and deeper liquid in markets turn out to be important factors for reserve management.

Negative rates limit the attractiveness of the currency.

Negative yields seem to be one of the major factors undermining the role of the euro as a reserve currency as, despite fragmentation, the eurozone financial markets are mature and liquid. Paradoxically, European benchmark issuances could blur their transparency and make it more difficult to assess credit risk.

Positive interest rate, as well as having an active market that is available and free flowing, would increase the demand for the euro. Both banking and political unions are important for preserving the euro, but the banking union will employ better mechanisms for supporting European banks in the event that euros are depleting. Centralised benchmark issuances may increase the attractiveness, but may have the opposite effect as well.

Some issuers have mentioning the fact that they would like to see more EU countries joining the economic and monetary union (EMU).

The biggest concern has always been around negative yields given that central banks match their assets to their liabilities and are therefore required to hold euro-denominated assets.

The negative rates associated with the euro have been a major challenge in reserve management.

The negative yield environment, combined with the fragmented market structure and significantly decreased liquidity in several asset classes, make the euro less attractive as a reserve currency compared to its peers.

The negative yield environment makes EUR investment very unattractive, unless you can swap assets back to USD.

4. Has the low-yield environment, notably in major reserve currencies, changed reserve management policy and practices at your central bank?

Active management increased.

After the sovereign debt crisis in the eurozone in 2011, we broadened the universe of eligible assets, diversified into more higher-yielding currencies and invested in top-rated sovereigns. At the same time, we lowered the minimum credit rating to accommodate issuers, which we perceived as safe and which provided significant yield pick-up at the same time.

Although asset classes and currencies have remained largely unchanged in recent years, there has been a notable increase in geographies.

Asset classes, currencies and credit ratings neither increased nor decreased.

Central banks have had to find ways to increase reserve by going into more riskier asset classes such as corporate bonds or allowing for exposures below investment grade in order to gain higher yields to boost reserves.

Credit rating lowered to get access to higher yield.

Due to the low-yield environment, it was necessary to exit the eurozone bond market.

Euro-denominated assets were discontinued the moment interest rates in the euro turned negative. The bank also invested in other currencies to enhance portfolio diversification as well as enhance returns.

In a low-yield environment, we have searched to have a diversified portfolio that minimises CVaR for a given level of expected return. As a result, in the past couple of years we have: (i) increased asset classes (we have incorporated new fixed income yield curves and corporate bonds, among others); (ii) new markets and geographies: we included government bonds from Australia and New Zealand in our benchmark portfolio; (iii) expanded our asset management programme: we increased our absolute return mandate, the mortgage-backed securities (MBS) mandate and the corporate mandate; (iv) credit rating: we have implemented a credit rating tranched limit model that provides flexibility in order to allocate investments through different ratings regardless of the asset class. This allows us to have small investment allocations in lower tiers that were previously not accepted.

In the case of our central bank, there were no major changes in the above-mentioned details.

In the previous strategic asset allocation (SAA) we have added high-yield bonds to our allocation, thereby increasing the minimum credit rating accepted.

Low/negative yields stimulated adjustments in currency composition of foreign exchange (FX) reserves as well as extension of asset classes’ spectrum.

Main change has been in SAA looking for higher yielding yet high-quality assets.

No change in minimum credit rating accepted, active/passive approach, use of external managers and use of collateral management.

No change.

No major shift in approach. However, adjustments and rebalancing is regular feature of reserve management.

Some assets that were denominated in currencies in which the central bank had low levels of liabilities had to be reduced significantly given that interest rates were not as attractive compared to the USD. The credit rating limit was relaxed for a limited exposure in the euro.

The changes are related both to the low-yield environment as well as to the increased level of the reserves, which allows us to take additional short-term risk.

The changes that have been made, if any, were not triggered by the low-yield environment.

The current scenario has taken us to invest in emerging markets, with emphasis on the China Interbank Bond Market (CIBM), so that we can diversify our reserves and ensure positive returns.

The focus is on strategic asset allocation against the board-approved risk tolerance.

The main change was the inclusion of new kinds of asset classes.

The negative interest rate environment turned the possibility of loss on reserves into certainty, making capital preservation an unachievable goal. It led to a major reallocation of reserves into new currencies and asset classes. Yield earned on reserves got a more pronounced attention in strategic asset allocation models.

Throughout the last decade, diversification has internally played a key role when dealing with the current low-yield environment by means of adding exposure to new asset classes, such as equities and MBS, and increasing allocation in other economies, such as China.

We added equity investments as a new asset class.

We optimised cash holdings more actively.

5. Have you added (removed) any asset class or currency to (from) your portfolio in the past 12–18 months?

Added covered bonds as an eligible asset class.

Added exposure to investment-grade corporate bonds. No changes in currencies in the portfolio.

Adding spread products.

Although the AUD and NZD currencies are still eligible in our guideline, we have decided to short the current position as their interest rates are not attractive at the moment.

Asset classes remain the same.

Broader strategic asset allocation.

CAD deposits were converted into USD and some external fund managers on boarded CNH-denominated bonds.

Deposits, swaps and futures in other currencies apart from USD.

EUR, CAD, GBP and AUD currencies have been removed.

EUR fixed income portfolio was removed.

Euro interest rate instruments have been removed as a consequence of negative yields.

Exposure to MBS has recently been added to our portfolio in such a way to build capacity for accessing liquidity on a broader range of markets.

Geographic and asset class reallocation were achieved in previous years.

Included NOK and DKK to the portfolio for contingency reasons.

Low credit currency and high-yield asset class added.

Neither added nor removed.

New asset classes were included and currencies were removed.

No, asset class and currency composition were increased seven years ago.

Not added or removed any asset or currency for reserve management. Nevertheless, rebalancing as a result of change in reserve holding has been undertaken.

RMB added to currency composition.

The bank has not added or removed any asset class or currencies over the past two years. However, over this period the bank has had discussions to trade futures internally.

The central bank has not added or removed any asset class or currency to or from its portfolio.

The information cannot be disclosed as the 2019 annual report is not published yet.

There have not been changes in this period.

We added Korean government bonds.

We did not change any asset class nor currency in the past 12–18 months.

We had not added any asset class or currency to the composition of foreign currency reserves.

We have added equity investments in the form of equity exchange-traded funds (ETFs).

We have added some currency exposure to currencies that we did not invest in the past and added two MBS external mandates.

We have added US agency MBS as an asset class.

We have incorporated new fixed income yield curves into our benchmark: France, Germany and Japan.

We have not added any new asset class or currency, but we have amended our investment framework by broadening the list of eligible issuers of covered bonds and issuers of financials (senior, unsecured corporate bonds).

We recently invested in the BIS green bond fund.

Yes, USD removed and CNY added.

6. In light of the continuing low-yield environment, are you considering investing in less-liquid investments in order to generate extra yield?

Although still within our risk parameters, the actively managed portfolios have increased their allocations to the less-liquid negotiable certificate of deposit (NCD), euro certificate of deposit (ECD) and floating rate note (FRN) (private placements) instruments.

As a central bank, we aim to manage the reserves in line with the objectives of safety, liquidity and return. Hence, the objective of liquidity comes before return.

At least once a year the universe of eligible assets is reconsidered, taking into account market conditions.

At the moment, we have heightened liquidity requirements.

Because of the current situation Covid-19.

Depends on the attractiveness of these assets and our assessment of liquidity needs (reserve adequacy).

For example, we already invest in corporate bonds and equities, and feel that our universe is adequate.

Given our investment approach, we are currently prioritising the capital preservation and the liquidity objectives.

In order to achieve better returns in low-yield environment, we are prepared to accept investments in riskier assets, but not at the expense of liquidity since it is an important objective that guides our reserves management framework. We would not accept investments in instruments for which there is no active secondary market.

It is part of the analysis realised, and is in scope.

Liquidity and capital preservation are still the most important strategic goals, although searching for yield has led to investing in less-liquid instruments on a strategic level too. More importantly, searching for yield carried out by the portfolio managers’ level shifted portfolios to less-liquid instruments, which indicates the importance of active investment strategies.

Liquidity is one of our key mandates.

Liquidity of investments and capital preservation are the main concerns in our reserves management operation.

One of major portfolios liquidity doesn’t matter as much.

One of the main objectives for holding reserves is liquidity, so that cannot be compromised for extra yield.

Only for a minor part of the portfolio.

Putting more weight on liquidity compared to return generation prevents us from investing in less-liquid instruments.

The Chinese bond market is attractive as it still offers relatively high yield.

The investment horizon of our central bank’s reserve assets is long, which provides some room to invest in less-liquid investments.

The markets are volatile and the future yield on investments is unpredictable, so investing in less-liquid investments is beneficial in this instance.

We are considering, for example, investment in equities, MBS. However, we perceived them to be not less-liquid but definitely less traditional reserve asset classes.

We do not intend to sacrifice liquidity in order to hunt for yield.

We have increased our exposure to sovereign, supranational and agency debt and covered bonds.

We think about adding corporate bonds, MBS, emerging market bonds in local currencies.

Are you able to purchase private placements?

If yes, please say if you are restricted to a certain percentage of the issue.

$1.5 billion.

30%, only if they meet minimum credit quality.

Cannot do more than one-third of a private placement (PP).

Limits depends on average rating.

Maximum 10% of the outstanding issuance is allowed to invest.

No restrictions but it will be in the range of 1%, and only with a currency that it is important to be in the portfolio and the interest rate is negative: EUR.

No, we are not restricted. The restrictions apply to the maximum amount we can hold of different issuers.

Not allowed.

Not explicitly.

Not restricted, although we greatly value not being sole investor in issue. Maximum allocation decided on a case-by-case basis.

Subject to certain percentage of the issue.

The central bank act does not allow for private placements.

We can hold up to 10% of the total issue.

We try to keep them at less than 20% of total reserves.

Yes; however, in practice it is hard to monitor such limitations as details on issuance are not available – just the general assumptions/rules behind the financing programme are published.

Yes, percentage limits for both issuer and sector per issuer with overall cap for supra and agency, per portfolio.

7. Do you apply any form of tranching in the management of your central bank’s reserves? If yes, please give details.

03 tranches.

For most of our reserve currencies, we segregate our holdings into two different portfolios: a trading portfolio and a held-to-maturity portfolio.

FX and equity portfolios are in effect tranches.

In line with our banks’ strategic asset allocation approach, reserves are bifurcated into three tranches based on liquidity. Size of tranches is not normally shared.

Investment and operations (liquidity) tranches.

Our tranching system is based on liquidity.

Reserves are tranched into classical tranches reflecting the difference in liquidity needs and investment horizon.

The central bank typically operates with three tranches: working capital, liquidity and investment.

The central bank’s reserves are divided into three tranches.

The composition and relative size of each tranche is based on an assessment of liquidity needs over different time horizons, taking into account the adequate level of foreign reserves. To optimise FX reserves management while taking into account the varying liquidity requirements over different time horizons, each tranche is characterised by a distinct objective, eligible asset classes, risk tolerance and investment horizon. Tranches designed to meet short-term liquidity needs would be invested in highly liquid and short duration assets. For tranches with a longer investment horizon, relatively higher risk/return investment strategies are employed in line with the principles of diversification of portfolio investments.

The FX reserve is structured into a highly liquid tier 1 tranche and a less-liquid tier 2 tranche. The tier 1 tranche only holds instruments that can be liquidated at very short notice.

Through our yearly strategic asset allocation exercise, the ideal strategic currency composition per tranche for the year is established.

Two main tranches: short term for higher probability of use in one year; medium term for lower probability of use in a one-year horizon.

We have a precautionary tranche for immediate liquidity needs, an investment tranche to look for higher yield and diversification in assets and currencies different than USD.

We have three portfolios with different duration and investment horizon targets.

We have two portfolios: hedged and unhedged. It is not exactly tranching per se. Tranching often refers to a liquidity tranche and an investment tranche.

We use three tranches, each with their own objective and risk tolerance.

With a higher reserves accumulated recently, we have decided to tranche them. The reason is that it helps to anchor the risk profile because the tranches we have are designed for very different investment horizon.

Has this changed in the past year?

Because of more liquidity needs of the domestic financial system.

Dynamic allocation between tranches using an asset liability management (ALM) approach.

Heightened liquidity requirements resulted in reduction of portfolio allocation to investment tranche.

In order to meet the distribution target between the trading and the maturity portfolios, each year the real weights are driven closer to the targets for each currency.

In our case, integrated FX reserves management is more efficient.

More long-term investments.

Our international reserves increased last year. As a consequence, we have a larger liquidity tranche right now. However, we are going to change the weights in the short term. We are going to reduce the liquidity tranche to 50%. In addition, we will review our strategic asset allocation next month.

Shutdown of oil production, which amounts to around 95% of the total GDP.

The bank had three tranches, what changed is the size of each tranche; this year, the working capital is larger than it was last year.

The bank transitioned to a new strategic asset allocation at the end of 2019.

The change in percentage has been minimal year-on-year.

The information cannot be disclosed as the 2019 annual report is not published yet.

The tranches have fluctuated over the last year due to volatility in interest rates, which resulted in a shift in tenor of the investments. As a result, there was movement from one tranche to the next.

Throughout the last few years, we have been increasing the long-term tranche by decreasing the short-term one.

Tranching has remained largely unchanged.

We are putting in place a new investment policy, but would like not to offer the details until finalised.

We have changed the share of each tranche.

We have increased the proportion of the operations tranche.

8. Does your central bank use a quantitative model for strategic asset allocation (SAA) in its reserve management?

A quantitative model is employed during the SAA process.

A single period expected return/shortfall optimisation model was used.

Allocations are based on index weights.

Although our SAA process does not rely merely on quantitative models, they play an important role in the whole allocation process. They are mainly used to provide important insights, such as allocation trends, which will be used as inputs to the more qualitative models.

Due to the level of our reserves, it is not cost-effective to apply a quantitative model for the SAA at this time.

Inhouse algorithms and quantitative models are used to decide strategic asset allocation.

Lots of calculation in Excel has been made; maybe this could be described as a quantitative model.

Model based on an ALM approach.

Risk parity.

The bank makes use of the workbench tool for optimisation, and looks at historical payments and expected foreign obligations when tranching under the SAA.

The information cannot be disclosed as the 2019 annual report is not published yet.

The model takes into account derived by computing the 12-month projected debt outflow plus or minus the average of the bank’s historical five-year monthly cash outflows.

The SAA optimisation uses a multi-factor model developed in MATLAB to generate the optimal portfolios and the corresponding risk/return metric, while another model is used to simulate the efficient frontier and validated by yet another model for SAA simulation and stress testing.

We find the portfolio that maximises the expected return subject to a level of risk, which we determine as the CVaR (95%) of the portfolio. Along this process, we use the market data to construct the probability distribution function of any given portfolio consisting of assets in our eligible universe.

We use both the BIS asset allocation module and our own internal software.

We use different quantitative methods in our decision process, but not one single model that gives us a final allocation. Methods used include: mean/ variance optimisations; optimisation with downside risk measures; simulation methods such as bootstrapping or Monte Carlo analysis; a combination of the methods stated above, eg, minimisation of the shortfall probability using bootstrapping simulations.

We use quantitative models, running complex optimisation and simulation analyses, but they are to support not determine the decision on strategic asset allocation. Quantitative analysis is just one element of the process.

We use the Asset Allocation Workbench provided by the World Bank.

We use the Black–Litterman model with some modifications.

We use the Black–Litterman optimisation model.

We use an economic scenario generator and optimisation engine.

We used this model for anchoring the equity part of the reserve. However, there are many other asset classes that are anchored using other approaches.

If yes, does the model contain dynamic elements?

Basic tailored model built in-house.

Depends on what you mean with “dynamic”. Inputs to the models are “dynamic”, so for example, when interest rates change this will have an effect on return expectations. Also, different time periods can be used to examine correlations and covariance matrices.

Dynamic based on relative level of reserves and expected liquidity needs.

It includes relative views to modify the posterior distribution and try to enhance our strategic asset allocation.

Market prices and dynamic rebalancing approach.

Most inputs are dynamic: expected returns, volatilities correlations.

The capital market assumptions and data are dynamic. The data can be updated on a monthly basis.

The information cannot be disclosed as the 2019 annual report is not published yet.

The market data (yields, FX, economic data) that feed into the model is from Bloomberg and is dynamic – ie, the current data can updated at any time since the model is automated to include live data.

The model contains path dependency.

The model has many parameters that change over time, and it also has the option to adjust the model with expectations.

The model implements simulation based on an econometrics model, which uses history of yields to model the dynamics of the yield curve going forward. The model supports a range of financial assets such as fixed income securities, equities, indices and other financial instruments.

The SSA is based on forward-looking scenarios. Monte Carlo simulation is used, and the optimisation tries to find the optimal portfolio according to the risk appetite.

We do not speculate, and in our opinion all dynamic approaches must to a certain extent work with anticipation of future market development (you either speculate on the price or the liquidity or correlation development).

We do not use dynamic elements as we have prioritised the mean variance approach based on historical data.

We have a risk budget that is relative to the risk of the policy portfolio. As this risk budget is linked to the policy portfolio, it becomes dynamic (or adaptive) in the sense that the acceptable risk level shifts through time with the risk of the policy portfolio.

We use a model provided by World Bank. This model is similar to another one provided by BIS.

With application, we can perform scenarios analysis, among others.

World Bank model.

9. How often does your central bank review its SAA and SAA model/ process?

Committees have to meet at least every 90 days.

Each year, the asset allocation process incorporates the most relevant and up-to-date techniques used in investment management.

Model/process reviewed on an ad hoc basis.

Model review period changes between two to three years.

Or more frequent if necessary.

Review is done every three years.

SAA is reviewed every three years, while our investment policy is reviewed annually.

SAA model/process reviewed as needed.

SAA process is reviewed every three years.

The formal review is annual, but we can conduct reviews more frequently if we consider that we need to review the model or propose a change to an allocation given a specific situation.

The investment policy is reviewed once every three years.

The model and process is maintained by a third party.

The strategic asset allocation is conducted once every three years.

The strategic asset allocation is done every four years.

The whole revision is made once a year in the structure and results.

There is no regular review.

Upon major events in the markets we meet to adjust our strategic asset allocation.

Via external asset managers.

We are currently reviewing the process to increase the frequency.

We do the strategic allocation exercise on an annual basis and review it quarterly.

We rethink the process each time we do strategic asset allocation.

We review our SAA model every three years.

We review our strategic asset allocation at least once annually. However, bearing in mind the dynamics of market developments in recent years, we were challenged to review our SSA more frequently. The chosen model currently meets our requirements and we do not plan to alter the SSA model.

We review SAA after three years.

We review SAA process on an ad hoc basis.

Have these changed in the past two years?

Being put in place.

Changed to include emerging markets and high yield.

Continuous improvements on modelling framework.

Each year, the asset allocation process incorporates the most relevant techniques used in investment management.

Equity investment as a new asset class.

In the past two years some important developments have been included in the models to determine the optimal portfolio. In the first place, it is important to highlight that since 2018 we have projected returns using market prices and an adjustment of the corresponding risk premiums, which are combined with a correlation structure through a copula model to determine the portfolio probability distribution function. Additionally, in the last year some important changes to the model inputs were applied: (i) instead of using historical volatility to construct the marginal distributions of fixed income securities, we compute the implied volatility using a Garch (1,1) model, which tend to better reflect the recent volatility environment; (ii) we incorporated credit risk into the time deposits returns distribution through a mix of distributions, one representing returns under default and the other representing returns under normal market conditions; and (iii) in the last year, for the computation of the optimisation function (return/CVaR (95%)), we changed from using excess returns to absolute returns. The last change was particularly important given risk premium compression and risk-free rate levels around the zero lower bound. These developments, in particular the last, have led to a reduction in the portfolio absolute risk level.

Last year we reviewed our SAA for 2020–22. In the past two years we remained committed to our previous SAA.

Our reserve management is based on strategic decisions, not influenced by temporary market/policy developments.

Results indicated that exposure to China would be beneficial.

Slight adjustments to the SAA regarding currency and/or asset allocation. No significant changes.

Strategic asset allocation changed according to a dynamic ALM model.

The annual review of the strategic asset allocation was conducted as per investment policy.

The central bank is conservative in its approach to investments, and has limited options for investments due to the restrictions of the central bank act. As a result, there were no changes in the SAA.

The results of the strategic asset allocation changed because of the domestic and low rate environment.

The SAA and the model/process changes are dependent on prevailing conditions that may have an impact on the bank’s operations.

The SSA reduced our FX exposure in line with the increased risk aversion towards FX risks. At the same time, we increased our interest rate exposure in anticipation of further monetary accommodation by the central banks.

We have used a new risk system since the beginning of 2018.

10. Which factors are most important to your central bank in counterparty selection?

Above are all elements in considering counterparties.

Credit rating and breadth are our most important factors.

Credit rating is a key consideration when selecting counterparties.

From a broad list of eligible counterparties, determined by credit ratings and market data, portfolio managers seek to find those trading partners who offer an outstanding set of services in which, in addition to pricing, established relationship, research quality and knowledge sharing (training and seminars) also play an important role.

If credit rating of the counterparty meets our credit rating threshold, then only pricing is important. Other factors are much less important.

New counterparties can only be selected if they fulfil the minimal rating requirements. The front offices then assess performance, pricing, specialisation according to their needs.

On top of those criteria, we include a back-office performance evaluation (which would be ranked as the third-most important criteria), which evaluates the counterparty in terms of its timeliness and accuracy.

Our counterparty selection process is built on criteria of credit rating, assessment of banks’ financial and credit profiles as well as on existing relationships and performance.

Process of counterparty approval is based on objective criteria (most important is the creditworthiness assessment); pricing and operational issues (soft factors) are less important, as the aim is to make the whole process transparent and unbiased.

Safety, existing relationships and performance are crucial elements in determining counterparties for investment purposes.

The bank does not have a policy regarding environmental, social and governance (ESG) credentials.

The bank has not taken a position regarding ESGs yet.

The credit rating is stipulated in the policy document to ensure capital preservation while the rest of the factors are more flexible.

The credit risk profile is our main demand on selecting a counterparty partner.

The criteria are based mainly on bid provider competitiveness.

11. Do you apply any new technologies, such as advanced learning algorithms or artificial intelligence, to portfolio construction or risk management?

Bloomberg’s portfolio analytics and via external asset managers.

Construction of artificial intelligence and perception models is in progress.

Financial technology (fintech) projects are still at early stage.

N/A.

The central bank has started applying machine-learning techniques in interest rate modelling and risk analysis in the portfolio management area (front office), while a trial robotic process automation (RPA) is in the process of being implemented in the settlements area (back office).

This is still under consideration, and we expect to apply these methodologies in the near future.

We do not have any plans to apply new AI technologies in our FX reserves management framework.

We don’t use these kind of techniques.

We have not used these new technologies directly. However, our counterparties execute our FX orders by using algorithms.

We use AI techniques in the construction of our in-house quantitative duration model for active management. Additionally, we use data mining to assess the market impact of monetary policy changes, among other uses in market intelligence.

We use the Bloomberg platform, along with BlackRock’s Aladdin system for risk management.

12. How many custodians do you use? Of these, how many are private sector/commercial organisations? Has this changed in the past 2–3 years?

Although commercial custodians may charge more than central banks, their broader range of services may compensate for the price difference.

By adding CNY bonds into the reserve portfolio.

New currencies.

No changes in custodians.

Over the past two to three years we have not been undertaking actions towards appointing new or resigning from any custodian whose services we use.

Same custodian for 24 years.

The central bank currently has no custodians.

The central bank switched from two custodians to a single custodian model in 2015. However, at the same time the central bank also introduced another private sector “shadow custodian” for contingency purposes. The custody services segment is very competitive and, as a result, the “catalogue pricing” is applied to lesser extent, which allows banks providing custody services to offer very attractive pricing. The other factor is that central banks are investing in more currencies and therefore the direct connectivity to local markets becomes more important, and finally we see some kind of reincarnation of securities lending among central banks and because the securities lending is usually connected to custody, the securities lending might be the driver for a move to another custodian.

We are using, when possible, central banks as custodians.

We do have a very long relationship with our global custodian. In the near term, we plan to review the current agreement with them so that it would comply with the new trends and regulations in this field.

We have kept the same custodians for the past two to three years.

We increased our custodians because we decided to diversify our basket of reserve currencies.

We maintain safekeeping accounts with central banks and custodians. The custody services with the central banks are an integral part of the reserve management services they provide. No changes have been made in terms of the selected custodians, although we have reallocated assets on our safekeeping accounts based on the fee structure and the performance of the securities lending programmes.

Yes, because of an internal decision.

Which factors are most important to your central bank in custodian selection? (Please rank 1–7 with 1 being most important)

Depends on the market.

For the central bank that manages its country’s official foreign reserves, the safety of assets is a crucial factor that must be fulfilled by each custody service provider. Subsequently, the custodian selection process takes into consideration the competitiveness of the proposed pricing, offers technological solutions and supporting products, market access possibilities, and offers a level of customer service and possible experience with other central banks’ operations.

Not applicable.

Safety and quality of services (reporting, technology) are the most important factors.

Safety of assets is a major consideration.

The key factor in selecting the custodian is the safety of assets, ie, asset segregation requirements in safekeeping duties by the appointed depositary. Our assets must be registered on segregated accounts in the depositary’s books. Pricing is also an important factor, and we try to negotiate favourable fees based on the economies of scale. We do participate in automatic securities lending programmes, which provide additional return on the assets we hold, but it also reduces the fees we pay as custodians do not charge any fees on securities lent out. All the other factors have secondary importance, but they are important in evaluating the services the custodians provide.

The most important aspect is the security of the investments.

13. Does your central bank engage in securities lending?

Finished in October 2019.

It has been an additional factor to increase the returns of the international reserves.

N/A.

On a small scale, with one commercial custodian. Performance and reliability are key considerations for this business. Repo/reverse repo transactions are conducted in-house.

Securities lending is used in such a way as to narrow the cost gap between what is charged by commercial custodians and central banks.

This may be considered in the future.

We engage in securities lending with counterparties with which we have signed bilateral Global Master Repurchase Agreements (GMRAs). We also participate in automatic securities lending programmes managed by the custodians.

We have in place a securities lending programme through an agent for the monetary policy portfolio holdings asset purchase programme (APP), and we are currently implementing a new programme through an agent to include FX reserve holdings.

We used to but we stopped these kinds of transactions.

We used to engage in securities lending in the past, however, and due to a downgrade of our sovereign credit rating the custodian has suspended the programme as a result of lack of counterparties to deal with.

If yes, is this managed?

By custodian.

Currently, we do not engage in securities lending.

Lending with custodians.

Managed by custodian.

Managed by the custodian.

Our security lending activity is primarily based on three pillars: third-party lending, custodian’s automatic lending and in-house lending, which is limited due to shortage of internal resources.

Provided by the custodian, but restricted to a few portfolios.

Securities lending are managed in-house, and we have developed internal systems to monitor and manage counterparty exposure resulting from these transactions.

Securities lending is run by dealers to enhance the return from investment portfolio. We have been involved in these transactions for many years now, usually lending specials for general collateral.

The central bank is involved in securities lending programmes carried out by our custodians, which have had positive results. This helps us to compare the results between them.

We do bilateral and have a securities lending programme.

We use the custodian as the agent.

Do you allow collateral?

Currently we do not engage in securities lending.

Equity collateral for equity lending only.

Government bonds and investment grade bonds are limited only to reverse repo transactions.

In accordance to our internal guidelines, we may only accept collateral, which meets our investment criteria eligibility. Since equities are not eligible instrument, they are not acceptable as collateral, but all other listed instruments are eligible.

In house activity with government bond collateral, third party business with government bond and other IG bond collateral.

N/A.

Not applicable.

Sovereign bonds of highly rated governments, US agencies securities and MBS are accepted as collateral.

Spectrum of eligible collateral is basically concurrent with the investment spectrum, however in practise cash collateral is not used.

The asset classes that are accepted as collateral on securities lending must comply with the same investment guidelines that apply to the reserves management. In other words, we cannot receive any collateral on which we can’t invest on.

The information cannot be disclosed as the 2019 annual report is not published yet.

The investments realised are not realised with collateral in any case.

The selection criteria for eligible institutions and the investment guidelines for collateral payments are similar as the ones determined for the investment of international reserves.

Via repo.

We use custodian or central bank arrangements if it meets our liquidity policy and mandate.

14. Do you make use of derivatives in your reserve management?

Currently, we do not use derivatives.

Derivatives are part of our mandated instruments if they are liquid.

Derivatives instruments are an essential part of our reserves management activities, a necessary supplement to cash bond investments. Derivatives are used on a strategic, tactical and portfolio level too. Our philosophy is that “if you have cash bond investments versus a benchmark, you should have derivatives as well to be able to hedge your positions.” We consider derivatives as not only hedging tools but instruments to express our active views and expectations on markets.

For rebalancing.

FX swaps, bond futures and interest rate swaps.

Hedging.

Investments in derivatives are not allowed under the central bank act.

Market risks taken in the portfolios can also be traded by means of derivatives.

Mostly for currency hedging and duration management.

Not internally, but our external managers do make use of derivatives.

Provision is made for it in the investment policy, even though no derivatives have been added yet.

The external fund managers are allowed to use derivatives for hedging the portfolio against interest rate and FX risks.

The use of derivatives may not be used for the purpose of leveraging.

We invest in derivatives via external managers.

We use market-listed futures and foreign exchange forwards and swaps. We have signed bilateral International Swaps and Derivatives Association (ISDA) and futures commission merchant (FCM) agreements.

We used to, and we are allowed to but we diminished their use in the last quarters.

If yes, which derivatives do you use?

Currently, we do not use derivatives.

Dual currency deposit.

FX forwards.

FX forwards are allowed for hedging against currency risk.

Gold options and forwards.

Including credit default swaps.

N/A.

N/A.

None.

Not applicable.

Not applicable.

Others: FX forwards and bond futures.

We use interest rates futures and forward contracts in externally managed portfolios.

We used to have futures, but it changed given a new internal environment focused on more liquidity.

Has your use of derivatives changed in the past year?

Because of the extension of derivatives for other reserve portfolios apart from USD-denominated ones.

Because of the internal decision.

Because the foreign reserves decreased as well.

Currently, we do not use derivatives.

Derivative usage has not changed in the past year.

Did not change.

Different currencies.

Due to fewer tactical positions.

In the past year, the use of derivatives has not changed substantially.

Stayed more or less constant.

Use of derivatives is linked to the amount of portfolio, which has slightly increased in the past year.

We did not made any substantial changes.

We have reduced the use of derivatives in the past year in line with the subdued market volatility. Namely, in 2019 yields continued to grind lower and we maintained our interest rate exposure accordingly. At the same time, FX volatility was at a multi-year low level and there were no real requirements to hedge any currency risks. However, in 2020 we see interest rate and currency volatility spiking, which creates an interest to increase transactions in derivatives for managing market risks.

With the Markets in Financial Instruments Directive (MiFID) II directive, we requested the external fund managers ensure that the use of derivatives is more efficient to avoid unnecessary costs.

15. Does your central bank incorporate an element of socially responsible investing (SRI) into reserve management?

Currently negative screening takes into account sectoral classification developed by external provider. As the ESG factors are gaining attention, we are considering development of our approach. This may require specialist external data. Research on this topic is ongoing.

Currently, we do not incorporate SRI.

Not applicable.

There still few unresolved issues. One is the mandate of a central bank – is a central bank really responsible for this? In some cases, a central bank is ahead of its government. Second, is there greenwashing, and do central banks anticipate the risk of being involved in greenwashing? Do they have enough capacities to avoid or manage this type of risk? And third, the references! Why should such a complex policy be followed if even the leaders behave in a strange way. The leader is digging the oil from underground, and at the same time supports the policy of not using fossil fuelled power stations. Another leader says I will deploy pension funds into ESG, but for my main business I will not deploy a cent. This creates confusion in a sense. Do these guys really mean it or is it just to be nice? If they mean it, why are not they prepared to bear any costs?

Unable to comment at this stage.

We are involved in the process of choosing the right external data providers.

We do invest in “green” issues but haven’t changed our risk profile to do so. But, we are in the process of defining all of the above, and should have a policy in 2020 unless the current global environment worsens (or doesn’t improve) – it may be that we have to wait a little longer, but will get there.

We primarily use the Bloomberg data field “use of proceeds” as a criterion for our dedicated green bond portfolio. We consider examining cooperation with external data providers to enhance our monitoring efforts.

We use an external data supplier to have access to analyses of ESG developments and ESG scores.

We use Bloomberg data and other publicly available information. No specialist external data supplier.

We use the BIS to invest into green bonds.

16. Which of the following best describes your view on signing the “Principles for Responsible Investment”?

Currently, we do not incorporate SRI.

ESG integration is not a primary factor in investment decisions for the central bank at this moment, so this investment strategy is not being considered.

In March 2019, the central bank signed the PRI. The central bank hopes to set a good example and to encourage more financial institutions to adopt sustainable investment practices.

It is relevant to enter into responsible investment, and it is necessary to sign principles in this sense.

Member of Network for Greening the Financial System (NGFS).

Not aware of the principles.

Our central bank is now a member of the Network for Greening the Financial System and our authorities are very interested in greening our international investments.

Principles for Responsible Investment have not been considered yet as a part of the portfolio management.

Responsible investment is one of the topics covered by the current review of our reserves management strategy.

The bank is engaging with fund managers and the International Forum of Sovereign Wealth Funds (IFSWF).

This has not been discussed internally at the policy level in the bank.

Unable to comment at this stage.

Unknown, but it was part of the stipulations around the mandate given to external equity mandate manager.

We have not considered this yet, but we are committed to green finance and therefore it could be considered in the future.

We have not evaluated the possibility of signing PRI at this stage.

We have not looked into the investment principles for incorporating ESG issues into investment practice.

17. Which best describes your attitude to the following asset classes?

Below BBB are in the high-yield portfolio with a total allocation limit of 5% of the reserves.

Covered bonds are an eligible asset class in our guidelines, it has been invested in our external management programme and is currently being considered in our internal fixed income portfolio.

Depends on SAA outcome.

Equity is enabled asset class for our reserve management activity, but it does not have available line currently.

Gold is not part of our SAA – however, we do have an exposure.

Gold reserves are not actively managed.

Government bonds and agencies (above BBB), covered bonds as spread instruments (SSA) will continue to provide good value in 2020, and we are adjusting the allocation of our FX reserves accordingly. Also, in risk-adjusted terms, equities and hedge funds are expected to underperform because of overvaluation and late economic cycle phase (we currently have no exposure to these assets). We find some interest in short-term BBB governments, financials and money market instruments. Additionally, inflation-linked bonds (ILBs) might be attractive in the medium-term horizon if inflation rises and central banks are slow to react to the increasing price pressures. By the same token, some of the emerging markets (euro) bonds provide attractive yield pickup compared to developed countries’ issues. We expect gold to find support in increased risk aversion, low real rates, heightened geopolitical risks and contagion perils.

High-quality government bonds remain the main asset class.

Investment in equities will require an amendment to the charter.

New asset classes may be considered under the current review of our reserves management strategy.

The information cannot be disclosed as the 2019 annual report is not published yet.

The most relevant part of investment is to maintain its safety so high-quality rating is required.

Those asset classes that are not allowed to invest, we marked as “no interest in investing”.

We are investing in government bonds, corporate bonds, emerging market bonds, inflation-linked bonds, supranational, US agency bonds, deposits, asset-backed securities (ABS)/MBS, covered bonds, gold, equities.

18. If your central bank is investing in equities, please say how you access this asset class: (Please check as many as relevant)

Both active and passive portfolios.

Currently, we do not invest in equities as an investment asset class.

External fund management is not in place yet, but policy has been developed.

For relative marginal short-term exposure, we do it internally through futures on equity indexes.

No investing in equities.

Not invested until now.

Not investing.

Not investing in equities.

Our equity investment strategy is passive.

Passive.

Passive.

Passive ETFs.

Passive index.

Passive index tracking.

Passive index tracking for internal portfolios – active index tracking for asset management mandate.

Passive management against an index.

The Central Bank Act does not allow investment in equities.

The main strategies are passive index with a mandate to active management.

The strategy includes both.

The strategy is passive index tracking, and we use external managers for the bulk of the investment.

We adopt both strategies.

We do not invest in equities.

We do not invest in equity – too risk taking for our risk profile.

We have both active and passive. Active management focuses on ESG integration.

19. Which view best describes your attitude to the following currencies? (Please check one box per currency). If investing in the renminbi, please give the amount of your portfolio invested.

BIS have offered us a product that is repo eligible as well.

Our investments are denominated in US dollars as we are pegged to this currency.

Percentage of the monetary reserves.

Renminbi has small share in the foreign exchange reserves due to that we are still in the learning phase about Chinese investments. Low level of liquidity and the time zone difference (bonds not traded non-Chinese hours) make trading very challenging.

The amount has been increasing steadily in recent years.

The information on currency allocation is confidential.

The RMB looked like a star currency some years ago. Now, I see a bit of stagnation. And one of the reasons may be the fact the China is just learning what it means for the country to open its financial market. The US/China trade talks are just nothing else than an attempt to put RMB and USD into fair competition.

The RMB provides great diversification benefits and, in the current environment, provides yield enhancement.

This portion is invested under the special drawing rights (SDR) portfolio.

Tiny positions due to FX service for the republic.

Up to a maximum of 3% is provisioned for.

We are at the initial phases of analysing approaches on how to invest in CNY.

We are considering investing in some emerging market currencies. Investing in Danish krone is due to cross-currency basis opportunities.

We do invest in CNY (fixed income) and CNH (money market). We used to invest in AUD and NZD, but due to low interest rates compared with our basic currency (USD) we eliminated the exposure.

We don’t hedge the currency risk at the moment.

We have RMB exposure through onshore government bonds, dim sum bonds, BIS investment pools and fixed rate investments in CNY and CNH, and non-deliverable forwards (NDFs) on CNY.

We hedge currency risk.

We invest in these currencies but we hedge the positions into USD.

Within fixed income, 1–2% is invested in Chinese government bonds. Within equities, we are also invested in emerging markets and therefore in China (market cap weight).

20. The IMF added the renminbi to the SDR in October 2016 with a weight of just below 11%. What percentage of global reserves do you think will be invested in the renminbi by:

Because of the weight of the Chinese economy and its importance to the global financial system.

China is one of the largest reserve managers in the world, so the SDR weight would need other central banks to overweight China to get to 11%. Not likely.

Despite the development of the Chinese financial markets infrastructure, the reduced Chinese GDP growth to 6% and the fallen global demand for its exports is expected to worsen. In addition to this, the inaccessibility of the Chinese market and the credibility of information remain a major obstacle for central banks.

Economic slowdown in China, as well as disruptions of supply chains, may diminish the attractiveness/importance of RMB as the reserve currency.

Given the current Covid-19 conditions in the global economy, specifically on the continent of Asia, the value of renminbi may decline, which will negatively affect its percentage of global reserves.

Gradual process, still barriers of entry.

I revised this submission from previous year numbers as I think the pace will increase.

In our opinion, complete liberalisation of financial markets and exchange rate regime in China will be quite gradual. In addition, central banks are slow movers in regard to new markets, and the institutional and legal framework would have to be revised in order to become a true reserve currency. Thus, we think that the adoption of the renminbi as a reserve currency will entail a slow process.

No comments.

No opinion.

The process of allocation of the global reserves into renminbi will be slow and gradual as the investors are cautious about the short-term prospects of China, and wary of government interventions in markets. However, in our opinion the share of global reserves in 2030 will still lag the share of the renminbi in international trade (currently around 13%). Global FX reserves allocation into renminbi will further decelerate this year as result of Covid-19 and the geopolitical tensions surrounding China.

The share global reserves invested in China is expected to increase with the country’s increasing economic power and the internationalisation of its financial markets, although the way is still long.

We do think that China will increase its influence on the global economy and also in the international payments systems, with CNY been used as one of the main currencies to settle international payments.

We expect the weight of the RMB to continue to increase in coming years.

What percentage of your reserves do you think will be invested in this currency by:

As long as the Chinese government keeps implementing capital control measures, and the legal framework is not strengthened, we will be reluctant to add a substantial exposure to the aforementioned. Our exposure to CNY/ CNH will be a function of the level of liberalisation that the Chinese markets display.

Currently, we do have investments in the money market and fixed income market with exposure around 8%, and in the near term we will increase our exposure to fixed income (CIBM). Up to 2030, we do believe that the Chinese market will be more open and diversified, and also that the economic and financial relations between our country and China will develop.

Depends on benefit from currency swaps to USD.

Depends on strategic currency allocation process.

In the near term, the share of our Chinese exposure is expected to be flat although some increase is very probable in the long run. In addition to the size of investments, it could be important to add new asset classes to the current pure government exposure.

Our two main reserve currencies are (and will be) EUR and USD. Allocation to renminbi will remain a minor part of our reserves.

Steady growth in RMB liabilities.

The amount invested in RMB has been increasing steadily in recent years, and we expect this trend to continue.

The central bank uses an asset/liability approach in allocation of the currencies under the reserve management (which are mainly ZAR and USD). The current renminbi allocation is in line with the weights under the SDR portfolio managed by the bank. However, efforts to increase the RMB portion (to make government payments) have been met with challenges caused mainly by the inaccessibility of the Chinese market.This would depend on the review of long-term prospects in RMB-denominated assets considering the developments in the Chinese economy and its financial market.

This year we suspended investment in RMB due to decreased reserves.

We are concerned about legal issues and liquidity of these kind of investments.

We are investing in renminbi but the information on currency allocation is confidential.

We do consider investing in renminbi, but not specifically due to the addition in the SDR basket.

We do not contemplate any investments in renminbi in the near future due to FX volatility risks. However, our attitude may change based on our perceived view on CNY implied FX volatility, the rate differential and the growth prospects of the economy of China.