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 2019? (Please rank the following 1–5, with 1 being the most significant.)

A trade war between the two largest global economies ultimately affects other economies, directly or indirectly.

A US/China trade war puts global growth at risk, while Brexit fuels uncertainty in euro markets. Stock valuations are stretched and very sensitive to negative news.

All the events that risk globalisation also threaten the worldwide economy, and the EU especially. Hence, they are the biggest risks in our view.

An emerging market sell-off is likely to lead to significant weakening of the emerging market currencies, which may ultimately result in a decline in reserves. The China/US trade dispute is likely to have a lasting impact on global trade relations and growth going forward.

Based on the outcome of these negotiations and given the relative size of both major economies, the geopolitical risks can be very extensive.

Brexit could have a significant impact for financial stocks and the EU economy.

Brexit is our main concern, because, in addition to the market risk, it also involves a significant amount of operational and legal risks.

Due to the US/China trade war, most emerging markets have faced risks in reserve management.

Given the fact that majority of [central bank] reserves are in USD, the increasing probability of a US recession and political uncertainties around the US, such as a US/China trade war, might be major risk concerns.

Increasing trade barriers and political populism is seen as the greatest threat to the growth of the global economy and peace.

Nowadays there is a lot of uncertainty about the Brexit, the US/China [trade] war and growth in the US. As a consequence, the markets have shown a lot of volatility. It is possible that uncertainty will continue for a while.

Political risks will continue to dominate investment markets. We expect a favourable resolution of the US/China trade spat, but fear that geopolitical risks in Europe (Italy, Turkey, Spain), the Middle East and South America will have considerable impact. Brexit is also a political risk, but an orderly and smooth divorce deal with the EU will have a profound impact on the UK economy, but not on the global economy. We estimate a relative low probability of US recession in 2019, only a slowdown in economic growth. US recession may materialise in the 2020s due to the growing imbalances in the US. The stock market will not crash in 2019 as monetary conditions remain accommodative around the globe and investors’ optimism is still high. Once China and the US agree to the terms of the bilateral trade and the Fed maintains its dovish stance, the risks to the emerging markets will have no ground to materialise.

Reserve managers are mainly risk-averse fixed income investors, thus more sensitive to events that may affect that asset class.

The biggest issue from a financial stability perspective, from a market integrity perspective, from a continuity perspective, is a no-deal scenario by the end of March.

The geopolitical risks have risen. Along with the probability of recessions and Brexit uncertainty, 2019 is expected to be a volatile market.

The growing signs of US recession have an impact on the monetary policy to be adopted by the Fed, and this has implications for the valuation of assets going forward.

The main driver for markets in 2019 will be to what extent the US (among other countries) is facing an economic slowdown (and its intensity) or even a recession. Second, geopolitical issues are still important market drivers, introducing market volatility (risk-on/off episodes).

The main risk is around uncertainty – and of course political uncertainty around the US has played, and will continue to play, an important role for 2019 and into election year 2020.

The most significant risk is a no-deal Brexit.

The protracted trade war between the US and China and the prospects of a disorderly Brexit are among key downside risks to global growth in 2019. Global growth for both 2019 and 2020 has been revised downward on concerns that the geopolitics will affect global trade and consequently filter through the global financial markets to shape yields and investment landscape. Fears of a hard landing in China have somewhat eased from previous years on account that the Chinese authorities has been cautioning the effects of trade wars by providing fiscal stimulus, hence concerns about sell-off have somewhat subsided.

The risk of further global slowdown (aiding national negative GDP growth) and US recession are the most significant looming threats.

The US dollar is still the largest reserve currency so far, and of course another crisis in the US economy will be a source of concern, although historically crises often tend to strengthen the US dollar and treasury.

The US/China trade war and Brexit have been, and continue to be, the highlight in world news, thus indicating higher risk currently for reserve managers.

There’s a high likelihood that the US is close to the end of their economic cycle. While a recession is still a low probability scenario, a slowdown in the US in 2019 would have a detrimental effect on global economies that are already experiencing a deceleration. One particular point of concern is the fact that, in a lot of cases, reference rates are still at historically low levels, limiting the tools available for these economies to offset the effects of a slowdown in the main economies in the short term. Other significant risks are the trade tensions between the US and China, as well as the weakening of the Chinese economy. We consider that Brexit, as of now, seems to be a local risk that is not having a significant impact on markets outside of the UK; however, a no-deal Brexit could pose a bigger risk to financial stability.

We consider 1 and 2 are the most tangible risks for 2019. 3 and 5 could have a big impact, but probably not in 2019.

We do think that, if the trade war persists, it will affect the economic performance of many of the economies which reserves managers invest in, it will increase volatilities in financial markets and end up limiting the performance of investment fixed income (in particular, to emerging markets).

We see the above events as adding volatility to US Treasury yields.

We think the US/China trade war and Brexit are the most significant risks that could increase the volatility in the markets.

2. Do you see geopolitical factors impacting currency allocation in the following?

A no-deal Brexit can impact currency allocation in European currencies.

A worsening of the China/US trade relationship could fuel a sell-off in emerging market currencies.

Adverse effects of geopolitical factors alter allocation in favour of the more traditional reserve currencies, while reducing exposure to newer currencies.

At least for an important number of central banks, currency allocation depends on other type of topics, such as current account balance or asset diversification.

At least not in the short run (for central bank reserves).

Capital preservation is a key objective in reserve management for central banks.

Currency allocation could be impacted but I do not see that this impact will be significant. In my opinion, as far as central banks have enough reserves, allocation decisions will depend on structural factors.

Following from question 1, the geopolitical factors mentioned cause central banks to re-look at their strategic/tactical asset allocation to allocate reserves in a manner feasible to the current and forward-looking climate.

For central banks such as ourselves that have adopted a neutral currency composition, we see a minimal impact of geopolitical factors on the allocation to specific currencies given that the weights and composition are a reflection of sovereign obligations and the import of goods and services.

Geopolitical factors could bring changes in asset allocation (due to the reactivation of the search for yield push), but will not impact currency allocation to the same extent.

Geopolitical factors could trigger a flight to safety and alter central banks’ currency allocation.

Geopolitical factors dominated the financial markets in 2018 and will continue to do so in 2019. They impacted the value of the US dollar, the yuan, the Australian dollar and other emerging market currencies.

Geopolitical factors have affected our currency allocation decisions: (i) we decided not to increase our renminbi allocation because of the trade tensions between China and the US, despite its diversification benefits; (ii) we decided to limit our exposure to Korean assets given: (a) the geopolitical risks on the Korean peninsula (although these have clearly diminished); and (b) the negative effect on such economies from China/US trade tensions; and (iii) we decided to eliminate our British pound allocation given the uncertainty around Brexit.

Geopolitical factors have increased market sensitivity.

Geopolitics will impact markets but not necessarily currency allocation decisions.

Global central bank reserves may impact their currency allocation according to geopolitical factors.

Higher risks in certain currencies could definitively cause change sin allocation to those more exposed.

In our case, it does not affect the strategic asset allocation but tactical asset allocation is affected. I believe there definitely are central banks that are reacting more to these geopolitical risks.

In some emerging market countries this may be the case.

It’s been for years the debate whether the euro/US dollar dualism is sustainable. And worse, eurozone economic and political performance, the US trying to redefine globalisation, the huge accumulation of reserves and China internationalising its currency slowly determine an end of this dualism as a natural hedge of purchasing power of FX reserves. There will be more appetite for having either more JPY or RMB, or a mix of Asian currencies in reserves.

Once again, the US dollar was the safe haven currency.

Our currency allocation is mainly driven by the currency of settlement for imports.

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

The currency allocations made by [the central bank] are based on the principles of asset–liability management (ALM), and the geopolitical factors are not taken into account. However, those central banks that do not follow these principles, including their views/insights about geopolitical dynamics, would consider it, although they might be central banks with a different risk profile than us.

The currency composition established in our investment policy and guidelines is not likely to change in 2019 given the balance of payments dominated extensively by the USD.

To a lesser extent for global central banks than our assets.

Unless geopolitical factors impact financial markets substantially, [the central bank] will not adjust currency allocation accordingly.

We actively manage our currency allocation.

We consider geopolitical factors in the strategic asset allocation level in an implicit fashion, among other qualitative factors.

We don’t expect to change currency allocations in the short term, but other central banks might change them.

3. To what extent do you agree that the US dollar is still the safe haven currency? (Please check one of the following.)

Based on the IMF’s Special Data Dissemination Standard (SDDS) data, USD remains the dominant reserve currency that the global markets hold.

Despite the current factors affecting the geopolitical climate, the US dollar continues to be the world’s highest reserve currency held.

Difficult to replace under liquidity and convertibility aspects, but with slightly declining importance.

Due to all the problems within the EU, the role of the US dollar has once again strengthened in recent months.

During the last episodes of geopolitical uncertainty, the USD has been the safe haven asset of choice by investors.

It is still possible that the US dollar continues to appreciate, even though the economy in the US is reaching the end of its economic cycle. In general, the US dollar continues to react favourably to risk events, even those in which the US is directly involved. Furthermore, the US Treasury market still represents the most liquid asset worldwide. Thus, we believe that the US dollar still holds the role as the main safe haven currency.

It’s still, by far, the most liquid currency and the most used in international payments.

JPY still offer the best safe haven currency, but USD also offers a similar status.

Most of the countries and central banks have more confidence in USD than other currencies.

Notwithstanding the emergence of China as a dominant power in terms of aid and trade, the market sentiments are still with the US as the safe haven currency for the time being until the regulatory, FX and other challenges are addressed.

Other currencies are still far from the dollar in terms of liquidity and trust.

Other currencies benefit more from risk-averse market movements.

Strong existence of the US in global financial markets, a higher proportion of worldwide reserves being in US dollars, and more faith in the US economy compared to the rest of the world, prove that USD is still the safe haven currency.

The alternatives are not safer, as even with US instability the instability of alternative currencies (the euro, sterling, Chinese yen, etc) cause it to be “safer” relatively speaking.

The problem is that being the best does not necessarily mean good. In other words, among all options I still prefer the US dollar as being relatively the best payment means across the world.

The role of the US dollar in international trade settlement remains absolute. The allocation to the US dollar of slightly over 60% in the IMF’s currency composition of foreign exchange reserves (COFER) data re-enforces this point. While the 2016 inclusion of the RMB into the IMF’s special drawing rights (SDR) is expected to reinforce official reserve diversification inflows to the RMB as global central banks realign their strategic asset allocations, this is expected to be a gradual process.

The US dollar remains the main reserves currency in most countries.

The US dollar remains a major safe haven currency so far as evidenced by its large proportion in foreign currency reserve holdings.

The US dollar showed good performance in 2018 as it appreciated whenever financial conditions deteriorated. However, economic (fiscal and current account deficits) and political risks (political gridlock in the US) could mean the dollar loses some stature as a safe haven.

The US is the most important economy in the world. Its financial markets are very developed and liquid. Its institutional and legal framework is robust and solid.

The USD remains the most liquid and most commonly used trade currency. Most government obligations are USD-denominated.

The USD still accounts for a greater proportion of reserve portfolios.

There is no suitable alternative at the moment.

This could change in the long run, but it is still the highly liquid safe haven market.

Very hard to get away from...

We do think that USD is, and will continue to be, the main currency used to settle international transactions between countries; the US economy will continue to have a strong position in the world economy, pushing other countries to hold USD as a safe haven currency.

We strongly agree that the US dollar is still the safe haven currency, based on such factors as the size and strength of the US economy, its financial system and the international institutional set-up. Basically, there are no such other safe investments you can consider investing in size in a short time period. However, geopolitical challenges and US political developments may potentially harm the US dollar’s safe haven status. That is why we viewed the recent rise of gold as important.

We think that the USD will remain as the main reserve currency in the future.

4. The US Federal Reserve is expected to reduce the rate of policy normalisation in 2019. Have you made any changes to your dollar exposure in light of this?

According to the recent development and improvement in the US economy, it does not seem it will reduce the rate.

Allocation to FX portfolios has increased and duration targets extended slightly.

Asset allocation is based on ALM.

Following on from question 3, we would consider the US dollar as a safe haven.

No change has been made to the US dollar exposure following policy normalisation in the US. The currency composition/weights of the portfolio reflect the currency structure of external obligations, and is a decision that is only informed through the strategic asset allocation (SAA) process.

No changes have been made so far.

Not specifically on the USD exposure, but more on the adjustment to the interest rate exposure of our USD portfolio.

On a strategic level we do not include such changes, but we could slightly change some tactical allocations.

Our currency exposure needs to be thought of in light of the broader portfolio. In this regard, we decided that most of our risk exposure should be allocated to interest rate risk (thus increasing our duration from 1.25 to two years), rather than by increasing our exposure to FX. Therefore, we kept our exposure to non-USD assets almost unchanged from the year before. Note that empirical evidence suggests that US Treasuries have a positive performance in late cycle stages of the US economy.

Our domestic currency is pegged to the US dollar, so this is largely not an option for us.

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

Reduced the dollar exposure.

So far we have not adjusted USD exposure, but we have considered extending the modified duration of our USD portfolio.

The size of the US dollar exposure is determined in a broader strategic asset allocation framework in which several other factors are considered. That is why there is no mechanic consequence, in terms of changes in allocations, of the US policy normalisation. The policy normalisation may be considered for positioning purposes, either at the tactical asset allocation level or the portfolio manager level.

The US portfolio’s duration will change according to the periodic review of SAA.

The USD remains a high-yield currency, and holding it is still in line with our investment objectives.

We are in a currency board and are pegged against the euro.

We are happy with the current exposure to USD, as it allows us to have higher returns compared to other G7 currencies, and using them as the main currency to settle international obligations.

We do not speculate using a market view.

We expect that the global monetary policy will continue showing divergence between US and the rest of the world, with a cycle of increasing rates in the US market, although at a slower pace than previously estimated.

We have made changes to our dollar exposure, but it is not related to US Fed policy changes but changes in the general strategic asset allocation framework.

We have a long-term SAA where currency exposure is determined by external liabilities.

We have not made any exposure changes for the US.

We hedged our US dollar exposure as we see the dollar weakening against the euro.

We increased overall duration by extending outright duration from last year, as well as by underweighting floating-rate notes (FRNs) and money market instruments and overweighting fixed bonds.

We maintained an unchanged tactical position in US dollars in anticipation of an economic slowdown and a pause in the policy normalisation by the Fed. We expect these risks to accentuate towards the end of 2019.

We’ll increase the duration of our USD portfolio.

Yes, changing floating bonds to fixed.

5. The European Central Bank (ECB) has halted its asset purchase programme and signalled the possibility of a rate hike in 2019. Have you made any changes to your euro exposure in light of this?

Asset allocation is based on ALM.

Currently, we do not invest in EUR due to negative (and ultra-low) interest rates. We do maintain minimum exposure to EUR at our working tranche to settle obligations with euro partners.

Definitely, our exposure in EUR will be increased if the rate hike moves on positive interest.

Economic factors are not still supportive for this to happen.

EUR allocation is not only impacted by the normalisation cycle.

Exposure to euros is via tactical allocation from our asset managers pursuing active portfolio management relative to our fixed income benchmark. We have no strategic allocation to euros.

Given the economic slowdown of the euro region, we believe that the ECB will still conduct an ultra-loose monetary policy. In other words, the probability of seeing higher rates in the eurozone this year has decreased.

No changes have been made so far.

Reduced EUR exposure in favour of the Polish zloty.

Shortened duration.

Since interest rates become negative in eurozone, we have significantly decreased our EUR exposure. Once rates return into positive territory, we will discuss internally the topic of coming back to EUR investments.

Tactically, we might consider reducing euro exposure.

The bank has not had exposure to the euro since 2014, when both money market and fixed income interest rates turned negative. This position is unlikely to change until we see some normalisation in monetary policy and ultimately in interest rates.

The currency composition of our foreign reserves is determined in a broader strategic asset allocation framework. Several other factors are considered, not just changes in the monetary policy stance of central banks.

The EUR portfolio’s duration will change according to the periodic review of SAA.

The programmes have played a significant role in our euro portfolios anyway, and will continue to do so via reinvestments – with the restrictions in government and SSA space that we traditionally would have been investing in, we have invested in newer names outside of the euro area.

The timing of the rate hike is not certain despite the ECB’s optimism/hawkish projections.

This could have an impact on our exposure once rates turn positive.

Unluckily, our assumptions on a possible rate hike in 2019 were wrong so far as we reduced duration – which, until now, was once again not the right decision.

We are not expecting to change the share of euros in our reserves in the short term.

We are reducing our euro exposure.

We currently do not have any exposure to EUR.

We do not speculate using a market view.

We expect that potential adjustments of ECB monetary policy will be gradual and conditional on further macroeconomic development.

We have a very small amounts of euros in our reserves.

We have decreased our allocation due to the negative rate environment, but no specific changes in our investment policy have been made.

We maintained higher exposure to euros, although we changed our view and expect the timing of the first ECB interest rate hike to be postponed to 2020.

We try to keep overall EUR portfolio maturity as short as possible by investing in positive yielding fixed income instruments comprising of corporate bonds, financials, Asian names, etc.

6. Do you see Brexit as having any impact on your central bank?

As we mentioned before, we decided to eliminate the British pound from our benchmark portfolio given the uncertainty around Brexit. Furthermore, a hard Brexit could lead our British counterparties to become ineligible for trading given the higher risk it would pose.

Asset allocation is based on ALM.

Brexit affects everything as it creates uncertainty.

Brexit has been a process for a long time, in which there is still no indication of a final solution for the UK and the EU. Risks on this issue are certainly largely included in the various scenarios of central banks to adjust their portfolio positions.

Brexit will have an impact on different aspects of reserve management, from the short- to the long-term horizon. Holdings of sterling reserves, trading and banking relations with UK counterparties are already being affected by Brexit developments. Uncertainty around the process and preparations for it have already impacted several areas of the operations departments of central banks.

Depending on the deal agreed by EU and UK, there could be changes in contractual relationships with counterparties, but the change should not be significant as they would want to continue to provide the same experience.

For central banks such as ours that have adopted a neutral currency composition and do not have an active position in GBP, Brexit is unlikely to result in a reallocation to that currency. However, we do acknowledge that given that our reporting numerical is the US dollar, the impact of how Brexit negatively affects the performance of the GBP currency is likely to have an impact on the overall reserves position.

Holdings of sterling not in reserves, as we do liability matching.

I am sure the UK remains a large and strong economy. The problem is the short-term volatility of UK assets, including the GBP and the regulatory union break-out. Seeing the banks and trading venues moving from London to Paris or Frankfurt is of course changing our own set-up of the list of counterparties, limits and risk assessment models.

I do expect banking and asset relationships, and trading and risk management practices will be impacted towards the start of 2021 – ie, implementation of Brexit.

I do not see Brexit having a big impact on the holdings of sterling or euro reserves, at least not yet. We are affected by many of our counterparties moving at least some parts of their business out of London or preparing for this, so this has generated a lot of (legal) work for our risk management.

It has mainly had an impact on legal issues of our trading operations and counterparty selection. We do not foresee many short-term changes in holdings of foreign reserves due to Brexit, although we would not be surprised if people would decrease their sterling exposure (if this hasn’t been done yet).

It’s having a significant effect on our relationships with our counterparties – legal agreements, clearing, etc.

No changes have been implemented in our investment approach. GBP risk is hedged, duration risk is low, credit quality is high. However, we have been preparing to trade with entities outside the UK in case we cannot do business through London for some unforeseen legal reason.

[Our central bank] does not hold sterling reserves. A small amount of GBP is held for operational purposes.

Reduced appetite for sterling.

Risk of the hard Brexit has forced several financial institutions to change their operational framework. Replication and amendment agreements facilitate this process, but quite often new entities do not fulfil the counterparty criteria, requiring additional guarantees.

The Brexit process will likely result in lower rates in the UK, and may adversely affect growth in the eurozone. Also, depending on the final agreed format, banking and asset management relations will have to be reviewed.

The percentage of the reserves allocated in euros has reached 10%, and we do not have GBP exposure.

Until politicians can agree a deal that commands a majority in Parliament and is acceptable to the UK and protects our economy, sentiment towards the GBP will continue to deteriorate.

We are in a currency board and pegged against EUR, so we can’t have GBP holdings.

We currently do not hold any sterling in our FX reserves, and our direct exposure to UK financial markets is very low. We expect an orderly and smooth Brexit, otherwise we foresee some negative shocks to the EU economy.

We do have London as our main business centre for the majority of our transactions, and our main partners are located there. If, because of Brexit, some moved to other centres (eg, Frankfurt), it will impact our business and maybe the relation with the partners, demanding we review our relations with corresponding counterparties.

We do not have a significant holding of sterling in any case.

We don’t expect to change currency allocations in the short term, but other central banks might change them.

We don’t foresee material impact for our case. We believe sterling will continue to be a reserve currency by credit and liquidity standards. Brexit could bring only short-term tactical positions.

We don’t hold GBP.

We have not made any changes.

We have some concern about the maintenance of the services with counterparties that cover us from London.

7. What is the current duration of your central bank’s reserves portfolio?

7.b. Has this changed in the past year?

7.c. Are you considering any change in duration in 2019–20?

Accumulation of reserves and introduction of tranching can result in demand for longer duration because the interest risk is the main risk a portfolio of FX reserves can relatively easily bear.

Currently we have no plans to change duration.

Depending on liquidity requirements and some opportunities of better money market rates conditions.

Depends on the yield offers in the market.

Duration is short and will likely increase as rates become more attractive.

Duration will change according to the periodic review of SAA.

In 2017, we reviewed the SAA for our reserves portfolio. As such, we do not anticipate any changes within the next three years.

In the US economy and euro area, it looks like the end of the cycle.

Increase.

Increase duration.

It depends on tranche: working capital, liquidity or investment.

Longer duration, once rates normalise.

No changes are expected.

Not at all.

Not at the moment, at least at strategic asset allocation level.

Not currently.

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

Our strategic benchmark duration is revised on an annual basis, thus we always consider adjusting it in accordance with our interest rate forecasts and the results of the optimisation exercise run periodically.

Over the last three years our main concern has been liquidity, implying a short duration strategy.

Overall duration of the reserves portfolio might change with the implementation of a new strategic asset allocation planned for end-2020 – duration is yet to be determined.

Since growth projections have deteriorated across the markets that we are active in, we are considering increased duration.

Still shortening duration, since the market does not provide return for any risk.

Taking into account the slowdown in the monetary policy normalisation among developed economies, we are considering extending the modified duration.

The central bank has prioritised capital preservation since 2013. In this sense, we have strived to reduce the exposure to certain risk factors. As a consequence, the duration of the managed portfolio was reduced from two to 1.25 years in 2013, and duration has been maintained at around this level since that date. For 2019, the duration of the portfolio will increase to two years given the current expectation the Federal Reserve is close to completing its hiking cycle, and given that we consider the US to be in the late phase of the economic cycle.

The current [central bank] portfolio duration is optimised at a satisfactory level, and is regularly monitored and analysed. Any possible changes will depend on the international financial markets.

The direction of global central banks, especially regarding interest rate hikes, will continually influence our duration strategies. Additionally, our investment risk appetite is under review.

The duration has slightly decreased in the last 12 months.

The duration of our foreign reserve portfolio is confidential. We haven’t made any decisions regarding duration in 2020.

The overall portfolio duration has not changed in the last year largely due to the continued policy normalisation in the US, which favoured a short-end bias on the curve. Looking ahead to 2019/20, no decision has yet been made to adjust duration. The ability to enhance our reserves position and a more dovish approach towards the Fed policy normalisation will determine our ability and willingness to extend the portfolio duration.

This year we increased the duration of investment portfolio benchmarks from 0–2 years to 0–3 years.

This year we will have our review of the SAA, which is once every three years. During the SAA, the duration of the active managed internal portfolio is decided.

We do not target the duration specifically. Portfolio duration is the result of our SAA, which targets maximum diversification within the determined risk budget.

We don’t see any significant changes in the market and economic environment.

We have defined a maximum one-year global duration, and due to the rising yields in US we are not planning to move to longer maturities.

We have made minor changes in 2019 to some of our portfolios.

We have maintained tactical duration at the same level as last year, but we may lower it as soon as we see that the ECB strengthens its forward guidance towards rate increases.

We increased the dollar portfolio duration for 2019.

We increased our duration given the increase in interest rate levels.

We plan to slightly further reduce our duration as the interest rate hikes hopefully have just been postponed.

8. What is your primary market risk indicator?

8.b. Has this changed in the past year?

Due to a heavy increase in imports this year, we have been observing the drawdown trend for the last nine months.

Due to liquidity requirements and also to benefit for better money markets rate conditions.

Duration is the main risk indicator, even though value-at-risk (VaR), total earnings (TE), conditional value-at-risk (CVaR) are all used as additional indicators.

Even though VaR is the primary market risk indicator, in 2018 we included CVaR as the risk measure in our optimisation model.

FX/interest rate VaR is also measured and reported on an ongoing basis.

Modified duration is our primary market risk indicator, but we also use VaR to calculate our overall market risks in absolute and relative terms. We also use VaR to measure and control our active risk exposure.

Modified duration is tracked by portfolio managers on a daily basis (due to the management of reserves against the benchmark portfolio), while VaR and CVaR are more or less tracked by risk managers (on a monthly/quarterly basis).

No changes were made in the past year.

Our limit system is based on modified duration as the most transparent interest rate risk measure. Modified duration is also one of the major parameters of the strategic benchmark. However, most risk analyses are driven by value-at-risk or conditional value-at-risk as such measures assure comparability of various market and credit risk factors, support in-depth analysis (risk decomposition with incremental VaR) and allow for their aggregation into a single risk budget.

Part of our new investment policy.

Some indicators are not compiled internally. These are provided by our global custodian. Others we have reviewed when we revise the SAA, via the Asset Allocation Workbench (AAW), an application provided by the World Bank.

The central bank uses the global interest and growth rates as risk indicators.

The externally managed portion of the foreign reserves portfolio does utilise modified duration as the primary market risk indicator.

The primary market risk indicator in the daily reports is still VaR, but other risk indicators are in use as well, at least during SAA calculations, and benchmark rebalancing in both modified duration (MD) and expected shortfall are used, maximum drawdown is used in addition to VaR on specific portfolios. We also have nominal risk limits to our credit positions.

There was no significant change in our risk indicators.

VaR was our main market risk indicator, and this year we introduced CVaR.

We also use effective duration.

We are thinking about adding further risk indicators, but are still deliberating.

We have in the past primarily used modified duration as the chief risk measure. However, we have recently updated our investment policy to state chance of loss over a particular time horizon as the risk tolerance. The target modified duration therefore changes depending on market conditions relative to the stated risk tolerance.

We look at different risk indicators as indicators, but do not rank them.

We recently added the use of ex ante tracking error.

We use these two indicators for market risk evaluation.

9. Do you stress test your portfolio?

Backward- as well as forward-looking stress tests are applied.

Different historical stress tests are done, along with ad hoc scenarios on future events.

Expected shortfall 99%.

For example, shocks to underlying asset prices, simultaneous underlying asset and implied volatility shock analysis, stress testing against index.

Only on SAA review, using the AAW.

Part of the model optimisation.

Portfolios are stressed by risk department simulations based on different scenarios for risk factors.

Stress testing does not serve as an input for active management of strategic asset allocation, as an illustration of the future performance shocks.

Stress tests are conducted as part of the strategic asset allocation exercise. We also run ad hoc stress tests. Last year, we conducted one to investigate the potential effect of Brexit on our sterling exposure.

Stress tests are conducted on an annual basis and include simulated stress events and isolated shocks.

Stress tests are performed on a regular basis.

Stress tests are supporting decisions on strategic asset allocation (strategic benchmark) and its quarterly reviews. Stress tests are based on macroeconomic scenarios that are translated into market forecasts.

The portfolio is not stress-tested.

The portfolio is stress-tested as part of the strategic asset allocation process.

The stress-testing procedure used by our institution is split into two components: (i) stress testing the inputs that are used to determine the strategic asset allocation composition; and (ii) historical backtesting of portfolio performance. Regarding the first point, we stress the sensitivity of our allocation to changes in the individual distribution of each asset of the portfolio (marginal distributions) by changing the dates and inputs used for the estimation. Similarly, we evaluate and stress test our risk metrics by changing the dependency structure between assets (correlations); this is done by using methodologies for estimating the correlation matrix, which puts more weight on recent observations arounds periods of market stress. Lastly, we evaluate risk metrics performance by modifying the tail dependency parameter of our distribution. With respect to historical backtesting, once we have a portfolio that satisfies the aforementioned tests, we compare the calendar year performance of the proposed allocation with the current and with the historical results that the reserve portfolio has experienced, with the idea of getting a portfolio that is more efficient in risk/reward-adjusted terms.

We assess the impact of extreme events, as well as probable scenarios using forecasts, to our portfolio.

We currently conduct what we call scenario analysis on the portfolio’s SAA – ie, how the SAA/policy benchmark is expected to perform under severe market conditions, such as the subprime crisis of 2008. We are, however, looking into the possibility of introducing portfolio stress testing.

We don’t have tools for stress testing our portfolio. However, our risk management unit tracks VaR and CVaR regularly.

We don’t stress test our portfolios, but we make scenario analysis with our active trading.

We have not done stress tests in the past, but we plan to do it in 2019.

We measure and observe the trend of reserves, whether it is upward or downward. There is yet to be analysis of stress testing.

We stress test our FX reserves on a regular basis, and report the results to the management of the national bank.

We stress test the strategic benchmark.

We use Bloomberg stress-test scenarios.

We use different six or seven scenarios to stress test the benchmark portfolio (2008 repeat, Japanisation, inflation overshooting, etc).

We use scenario analysis with different paths of interest rates.

With multiple past scenarios and simulated ones to analyse possible portfolio behaviour.

Yes, we do stress test our portfolio to see the possible impact.

10. The 2018 Reserve Management Trends survey noted considerable interest in environmental, social and governance (ESG) principles in reserve management. Which of the following best describes your central bank’s stance? (Please check one.)

100%.

A high ESG rating is desirable but not necessary. No percentage of our assets under management (AUM) is managed formally under ESG principles, although there is encouragement for asset managers to consider such principles.

All issuers are ESG-compliant, but no active ESG investment policy.

Although we don’t currently have an explicit ESG mandate, we have some investments in green bonds.

At the moment (meaning that it can change in the future) ,we think that ESG is: (i) a marketing sticker and not an investment strategy; (ii) more a policy (like economic, health, education, etc) that is primarily performed by a government; (iii) the role of the FX reserves is to back monetary policy, and therefore ESG can be out of the central bank mandate; and (iv) in many cases, the ESG is behind the line between developed markets and emerging markets, and without being allowed to invest in emerging markets, ESG is not eligible.

Currently, ESG does not feature explicitly as a factor in making investment decisions, but this is likely to change in the near future.

Currently, no portfolios are managed according to ESG principles, although portfolio managers selectively buy ESG bonds. However, in accordance with our broader, bank-wide ESG initiative, we have been planning to set up a dedicated green bond portfolio in the near future.

Currently, we do not explicit consider ESG principles within our reserves management decision. However, we are planning to explicit consider this in the next revision of investment policy.

ESG principles are not considered for our investment decisions, hence we have 0% in our AUM for the time being.

ESG principles currently not considered in investment decisions.

It is a topic of interest for the future, but not yet considering any new policy about it.

Less than 10%.

No part of our AUM is managed according to ESG principles. At the moment, we think ESG principles can be costly in terms of liquidity.

No plans to invest in these in the near future.

None.

Not currently.

Not sure of the percentage because we haven’t been reporting this feature, although some of our fund managers have adopted ESG principles. ESG principles are not in our current investment guidelines.

Our ESG principles cover all asset classes, but in practice not all government bonds are possible for inclusion.

Part of the list of eligible assets (eg, green bonds).

The bank has not officially adopted ESG principles in its reserves management approach, and as such has no AUM are managed according to ESG principals. However, the bank does support sustainable and socially responsible investing.

The bank is seriously looking at this and how we might manage it. Currently, 1% of our discretionary assets are ESG-eligible but this is not a target.

The extent of adherence to ESG investment principles differs by asset class. The percentage of investment portfolio adhering to ESG principles is around 75–100%.

The mandate is not managed fully according to ESG principles, but is not allowed to invest in specific sectors such as weaponry, tobacco, adult entertainment, alcohol and gambling. The central bank also has some sharia-compliant mandate, which should cover some of the ESG principles. Together, this would make up to approximately 40% of the AUM.

The principle of good governance is enforced in the reserves management process.

There is no investment in ESG from our side.

They are eligible but are treated as all other bonds.

We are aware of the value of these criteria, but they are more important for investments into equities and corporates, which we do not currently hold. We currently hold no investments in ESG instruments.

We do not apply this principle yet, but are considering it.

We do not have a dedicated ESG portfolio. Where we do active security selection, we consider ESG as one of many relevant aspects. Moreover, we do not purchase securities issued by companies that seriously violate fundamental human rights and systematically cause severe environmental damage.

We have introduced sectoral exclusions for corporate bonds (corporate bonds account for around 1% of foreign reserves), taking into account our investment policies, values or social norms. ESG criteria are also taken into account when deciding on government bonds’ investment ,and governance is taken into account in counterparty selection.

We set up a working group to study what our approach should be.

We started to implement ESG criteria in 2018; the percentage of AUM managed with ESG criteria is currently below 5%.

Within the ECB and together with other NCBs, we have discussed a common approach. For the time being, we have around 3–5% of our AUM managed according to ESG principles and plan to increase this share.

10.b. If you answered one of the first two options, what were your reasons?

Apart from ethical reasons, we consider that ESG could be a source of additional information on the bond issuer/counterparty, enhancing our internal assessment of this entity. This information is hard to find and include in other ways, using only credit spreads or price volatility, credit default swaps (CDS), etc.

Current focus is on exclusion.

ESG bonds are less liquid as their buyers generally have a “buy and hold” strategy.

Not really considering implementing ESG principles as of yet, but the topic is on the table and there might be move towards implementation during this year.

Our institution is committed to ESG principles, and wants to lead by example in the domestic financial system. Diversification advantages of ESG investments are under investigation.

Precaution. Protection of reputation.

Reputational benefits and promotion of green finance are also important reasons.

The [central bank] hopes to set a good example and encourage more financial institutions to adopt sustainable investment principles.

The national bank as a socially conscious investor of the FX reserves will use ESG standards to screen potential investments. Because of the selected reasons, we plan to manage our FX reserves according to these principles.

They are eligible but are treated as all other bonds.

We will include it because we do identify with the principles/ideas of ESG, and also follow best practices.

10.c. If you answered either the third or fourth options, what were your reasons?

Although not considered at present, discussions/research around ESG investments are planned for the near future.

Definitions and benefits are not yet clear.

In addition, the ESG universe in some currencies is too small.

Irrelevant because FX reserves are invested mostly in sovereign bond markets.

It is hard to establish specific ESG guidelines to determine asset eligibility since there isn’t a common and homogeneous rating system for all assets.

No interest yet.

The market is not deep enough, the market data are confusing, and the effects of ESG, other than financial, are difficult to measure.

We are still trying to understand ESG.

We have not considered ESG principles.

We would add the longer duration of these instruments in general.

11. Do you apply any form of tranching in the management of your central bank’s reserves?

Classical split between liquidity tranche and investment tranche. The allocation is not public information.

Liquidity and investment. The main purpose of the liquidity tranche is to meet the demand of the reserve currency.

Net reserves are divided into three tranches with different horizons. Also, liabilities to third parties are a different tranche to net reserves and managed against an ALM framework.

Not tranching in terms of liquidity; however, we have several portfolios besides the main investment portfolio.

Portfolios are divided into liquidity tranches for their purposes.

The primary purpose of the forex reserve is to ensure we will be able to intervene in the forex markets to support the fixed exchange rate policy. Moreover, forex reserves must be able to support financial stability and lend to the IMF at short notice. To ensure the fulfilment of these objectives, reserve assets are categorised into two tranches: a liquid tranche (tier 1); and a less-liquid tranche (tier 2). The amount that may be invested in the less-liquid tranche is capped.

The reserves are divided into four tranches, namely liquidity, investment, stable and special purpose.

We distinguish between liquidity, government and investment (partly high-grade credit) portfolios.

We divide reserves into three tranches – ie, cash equivalent, liquidity and investment.

We do have three tranches: working, liquidity (or buffer) and investment tranches.

We do not apply a formal tranching; however, we do have a flexible portion of our reserves for long-term investments in non-traditional reserve management asset classes – eg, equities, convertible bonds, emerging markets.

We first separate reserves into gold reserves, SDR reserves and FX reserves. FX reserves are tranched into three different portfolios: working capital portfolio, coverage portfolio and investment portfolio. The investment portfolio has two tranches, a short-term one (liquidity) and a long-term one (investment).

We have four portfolios with different time horizons. The shorter portfolio goes from zero to three months, and the longer from one to five years.

We have historically used two tranches. We are working towards implementation of a third tranche.

We split reserves into two parts, based on the IMF risk assessment matrix (RAM) concept. The liquidity tranche, which is considered as the core reserve, stands at 125% of the RAM.

11.b. Has this changed in the past 2–3 years?

Holding a higher level of liquidity.

In the last years, the [central bank] has gradually increased the percentage of the liquidity tranche.

In the past two to three years, there has been no tranching done at the central bank.

It was launched about 18 months ago.

Part of our new investment policy.

Regarding the percentage, since the reserves has been decreasing the investment and gold reserve tranche has gained more participation to the total reserves.

Reserves tranche was created one year ago.

Short-term tranche for possible needs 12 months ahead. Medium-term to longer-term needs mean a higher portfolio horizon.

Size of the tranches usually change based on the SSA process, which is done annually.

Small increase in the liquidity and investment tranches.

Structure of the [central bank’s] FX reserves as of 31 December 2018 was: 82% investment portfolio; 9% special purpose assets (for urgent payments, liquidity for interventions on domestic interbanking FX market, execution bank’s orders related to liquidity reserves, etc); 6% gold; and 3% banknotes (FX cash).

The allocation is dynamic using an ALM approach.

The reserve was tranched but we decided to revert.

The tranches have not changed, but the percentages change depending on obligations each year.

The tranches sizes have remained roughly the same over the past two years.

The transaction tranche has increased from about 15% due to increased government debt.

There was a marginal increase in the liquidity trance during 2017 when a new strategic asset allocation was rolled out.

This changed in line with our asset and liabilities as well as market expectations.

Updates have been made to reflect the exposure resulting from current and expected global trends.

We don’t consider constructing portfolios with identical methodologies critical to our activity, but they are rebalanced on different days.

We had tested the tranching approach, but quite recently decided to reintroduce a unified foreign exchange reserves management framework. It facilitates integrated investment strategy and risk management with more a straightforwardly defined desired expected risk/return profile. Moreover, the majority of our assets are invested in highly liquid government securities.

We have been diversifying away from interest rate investments into long-term investments like equities and real estate.

We increased our liquidity tranches due to increases in our international reserves.

Yes, the respective tranche weights were revised following the revision of the SAA in 2016.

12. When accounting for your reserves, do you designate any of your reserves as “held to maturity”?

100% of our reserves are mark-to-market.

Accounting certainty.

All mark-to-market.

Approximately 50% of our reserves are held in fixed deposits that are accounted as held until maturity (HTM).

Depends on the type of assets, but since reserves should generally be liquid they would tend to be classified at fair value and available for sale.

For protection against increasing interest rates.

High interest rate, lower liquidity.

In order to generate a stable cashflow and stabilise the profit and loss account, among other reasons.

Long-term investment objectives.

Long-term strategy and less volatile results.

No market movement in the balance sheet, and you can buy long-dated bonds to increase yields and hence your constant revenue stream.

Our HTM portfolio is currently very small as we just started to build it. The motivation behind this portfolio would be to have stable and predictable income over the years.

Our reserve management is guided by security, liquidity, then return. So, we manage funds in highly secure instruments and highly liquid instruments.

Part of our invested fixed income securities are classified as held to maturity securities (investment securities held at amortised cost) with the intent to reduce interest rate exposure and obtain stable income in a low-yield environment.

Passive management, lower result fluctuation.

Risk management purposes.

Securities are not bought with the intention for sale but are held “available for sale”.

Stability in returns and forecasts, and conformity to IFRS 9.

Stable return.

The assets of the investment portfolio are reported using marked-to-market accounting. We do actively explore the possibilities of setting up a “held to maturity” portfolio, and have done so in the past.

[The central bank] follows public sector accounting standards when accounting for reserves.

The liquidity tranche is “held to maturity”. This is a very short duration tranche and we do not mark-to-market this tranche.

There are some small equity holdings under the special purpose tranche that are not held as available for sale or held for trading. However, these are not a significant part of the reserves.

This is regarding time deposits only.

To avoid balance-sheet volatility.

To avoid price fluctuations in those securities that don’t need to be liquid.

To smooth the plurennial results.

With the adoption of IFRS 9, the classification of our reserves has been changed to fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVOCI).

13. Do you make use of any algorithmic trading strategies in your reserve management?

Some of our FX transactions and equity futures are traded using algorithmic. It is currently done for a relatively small percentage of our total turnover on these transactions.

The bank does not utilise algorithmic trading strategies.

We are considering this option to help portfolio managers in their decisions.

We do not use algorithmic strategies directly. However, our counterparties execute our FX orders using algorithms.

14. What proportion of your reserves is managed by external managers?

31%.

About 12%. However, our external management programme and SAA are under review and the current allocation might change.

All equity portfolios are managed by external managers.

Currently, the [central bank] does not have a mandate for engaging an external manager.

Currently, there is only one external manager, which is under the reserves advisory and management programme (RAMP).

Exchange-traded funds (ETFs).

External managers are responsible for our equity and corporate bonds (investment-grade and high-yield) portfolios.

No external managers.

No mandate is given to external asset manager companies.

Only small equity tranche – managed passively versus benchmark.

Our equity investment is done using external managers as well as part of our corporate bond investment.

Our main interest is to obtain advisory and capacity building services through outsourcing the management of part of our FX reserves.

Our US agency mortgage-backed security (MBS) portfolio is managed by external managers.

Reserve management (execution of asset/funding transactions and cash management) is conducted by the [central bank] in its role as fiscal agent to the government.

The bank has two external mandates, and the managers currently manage slightly over 30% of the overall portfolio.

The interest rate portfolio is managed in-house, whereas long-term investments are outsourced.

The investment policy limits of holdings by external fund managers is 30%, but the allocation is about 17%.

There is no external manager used in reserve management.

We do not outsource foreign reserves management.

We don’t use external managers for the management of our own reserves.

We have four external managers but they have only a risk budget they are expected to use to generate active return (using derivatives), no assets. Out of our overall risk budget, they have around 40%.

We have four external managers. Two of them have a mandate on US Treasuries and the others have a mandate on non-US sovereigns.

We recently added a corporate bond mandate managed externally, and we increased our absolute return mandate given its good performance in the last two years.

We use an external manager for equity portfolio management, and will shortly start using them for the US agency MBS portfolio.

We use external managers to invest into asset classes for which we have no own expertise, and to reduce overall portfolio risk (investments in little- or non-correlated asset classes).

We use managers for active global mandates that increase return, diversification and knowledge transfer.

World Bank Treasury is the current external manager.

14.b. Where, over the next 2–3 years, do you see potential for use of external managers in your central bank?

According to our external management objectives.

Additional asset classes like MBS might be attractive to get exposure via external managers.

Depends on asset classes and our view of market efficiency and manager skill.

External managers are struggling to provide alpha, and they charge huge management fees and the view of a possible movement into benchmarking.

External managers are used to add some diversification in return, manage more complex or new assets, and to provide training.

I personally believe in active management styles that in the long run deliver alpha. Nevertheless, new asset classes will come into our focus, and in the portfolio context worldwide diversification will become more important to preserve your own reserves.

If new external managers are added, the main motivation is likely to be the need for expertise in managing new asset classes, which may be lacking internally.

If we add new external managers, it will be to explore new markets (in particular, emerging markets), and to use them as a benchmark, and exploring the knowledge transfer and their network.

In order to increase a risk/return profile of the total portfolio.

Issues like not investing in derivatives, willingness of exposure to other hard currencies apart from USD, EUR and GBP can be achieved via external mandates.

It will depend on the evolution of the level of our reserves and the market context.

No interest in investing with external managers at this time.

None.

Not in our case.

Possible new asset classes are agency MBS and corporates.

Potential investments in new financial instruments (eg, equities) and accessing new markets may motivate us to extend a mandate to an external manager for managing a part of our FX reserves. However, we attach more significance to advisory services, transfer of knowledge, training and capacity building services. These criteria rank higher relative to fees and performance of the portfolio manager.

The current portfolio has room for further diversification.

The major rationale for central banks to outsource management of part of the foreign exchange reserves is to benefit from analytical and operational resources available for external asset managers, their market expertise and infrastructure, as well as the possibility to diversify portfolio management styles. However, contrary to expectations, the cooperation with external asset managers may result in a lower flexibility of portfolio management (adjustments of the investment guidelines) and hinder control over the risk profile (especially for complex, non-transparent strategies). Also, the administrative burden, need to assure coherence with internal accounting rules, reputational and confidence concerns should not be underestimated, especially if the external management mandate is of limited scale.

There is some consideration around including gold to the bank’s foreign reserves asset universe. Should the bank decide to trade derivative products such as gold swaps and forwards or participate in the lease market, an external manager may be engaged.

This decision is made during the SAA. However, we currently use external managers for active management to be able to fulfil our ESG objectives.

We believe that absolute return strategies have the biggest potential, not only in terms of return but because they could provide access to new asset classes, markets and currencies. They also provide more insight into different types of management styles and investment strategies that could be replicated internally.

We do not see any potential to use external managers in managing our reserves.

We do not see any potential use of external managers over the next two to three years.

We haven’t decided yet.

We use them for active management, and I think we are not expanding to other potential areas. Unfortunately, the last years have not been too successful for our external managers.

With regards to benchmarking, a majority of our portfolios outsourced to external fund managers is managed against a benchmark.

15. Which of the following best represents your view of the value gold brings to reserves portfolios in central banking today? (Please rank 1–6, with 1 being closest to your view.)

15.b. Do you see central banks globally increasing or decreasing their exposure to gold over the next 2–3 years?

Central banks collectively are expected to remain net buyers for reasons such as diversification, geopolitical risk and re-balancing.

Central banks holding gold for trade and lending purposes may increase their holding. For others, it is expected to remain unchanged.

Currency wars and a flood of fiat money.

Despite the decreasing role of gold in the global financial system, most central banks treat it as a strategic asset, taking into account the physical properties of gold, its scarcity and lack of credit risk or direct connections with the economic policy of any country. Several, especially developing economy, central banks have increased gold holdings in order to ensure an adequate share in the growing reserves.

Due to risk-adverse factors and inflation hedging, gold exposure has been on the rise.

Due to the uncertainty in the global trade war and geopolitics.

For diversification and as a safe haven, gold holdings should increase in the next two to three years.

Global instability and geopolitical issues are driving central banks, especially from emerging markets, to increase their gold holdings. This trend may continue in 2019.

Gold has remained an important diversification strategy for many central banks, and we do not expect this trend to change in the medium term. Concerns over slowing global growth and a relatively weaker US dollar have reinforced the importance of gold as a reserve asset.

Gold is illiquid. In many countries, gold holding became so sensitive that to sell or buy gold a central bank needs the consent of every inhabitant.

Heightened geopolitical and economic uncertainty throughout the year increasingly drove central banks to diversify their reserves and re-focus their attention on the principal objective of investing in safe and liquid assets.

High costs of reserves conversion.

In line with the global trend observed in recent years, gold holdings are likely to increase in the future.

Maybe some central banks will increase their exposure to gold, but certainly other ones will decrease their exposure to gold.

Repatriation of gold reserves has been gaining popularity, and this trend might continue.

Some Asian central banks will keep increasing their allocation.

[The central bank] manages gold reserves passively consistent with the rationale of holding gold for insurance and security.

The increasing geopolitical risks, trade wars and volatilities in financial markets will demand more exposure to gold as a safe haven asset.

The official sector as a whole has turned into a net buyer of gold since 2009.

There has been a recent trend of big emerging market countries increasing their holdings. This trend may continue.

This will mostly be driven by geopolitical concerns and diversification of reserves.

Trade barriers, and economic and political crises, which significantly affect the stability and predictability of global financial markets, at the same time encourages central banks to invest more in the safe asset classes in their reserves. Gold is not actively managed in case of the [central bank].

We do not have a definite view on this question.

We do not have a strong view.

We expect that central banks’ exposure to gold will further increase in the coming years.

We expect the trend of central banks increasing their gold exposure to continue in the forthcoming years. Gold is a liquid asset with no credit risk (no country’s liability), will serve as a portfolio diversifier in times of market stress, will provide long-term returns and will enhance the overall performance of the FX reserves.

Who are biggest buyers of gold at the moment? ...Russia, China, Hungary... and why?

With the addition of geopolitical risk and inflation prospects, there might be increased demand for gold.

16. Have you added (removed) and any asset class to (from) your central bank’s reserve portfolio in the past 12–18 months?

Added ETFs.

Added exchange-traded options on eurodollar futures, covered bonds and FX forwards.

Added global high yield.

Added inflation-linked bonds as a segregated benchmark portfolio, although it had already been an eligible instrument in all portfolios for a number of years.

Added investment in equities.

Both.

Decision on higher currency exposure, implementation in 2019.

Emerging market bonds.

Equities.

Equities, CNY bonds.

ETFs (US equities and fixed income) and local governments.

Exposure to the positive yielding markets – UK and onshore China bond market.

In an environment of low or negative yields, gold offers a safe place to obtain 0% return (which may be higher than other safe alternatives).

Investment in investment-grade euro corporate bonds.

Marketable securities.

MBS (external mandate).

Neither added nor removed.

No.

No addition or removal.

No asset class has been added or removed.

No asset class has been removed or added.

No change.

No change.

No change.

No change.

No change.

No change.

No change.

No change has been made to the permissible asset classes.

No change in asset classes in the last 12–18 months.

No changes.

No changes.

No changes.

No changes.

No changes.

No changes in asset classes during this period.

No new asset classes were added or removed during the period.

None.

None.

Supranational agencies.

Supranational investments.

The asset class weights have changed, but no new asset class has been added or old one removed.

Unchanged.

US agency MBS and European covered bonds.

US agency MBS have been added as a strategic asset class and will be actively managed.

We added “investment-grade” and “high-yield” corporate bonds portfolios last year.

We began investing in inflation-linked bonds on the short end of the yield curve to capitalise on mispriced breakeven levels of inflation using these instruments.

We did not add or remove any new asset class.

We didn’t add or remove any instruments from our reserve portfolio.

We have added a corporate bond mandate and included government bonds from Australia and New Zealand in our benchmark portfolio.

We have increased/reduced exposure in existing asset classes due to liquidity concerns; however, we have not added/removed any asset class.

We have not added or removed any asset class from our reserve portfolio.

We have started to invest in commercial papers.

We removed nothing but added gold and via an external manager started investing in emerging markets and non-investment grade bonds.

We started to invest in liquidity funds from last year.

17. Which view best describes your attitude to the following asset classes? (Please check one box per asset class.)

AAA–A government bonds and agencies, and covered bonds as spread instruments will continue to provide good value in 2019, 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 the 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. Also, 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. Also, some of the emerging markets (euro) bonds provide attractive yield pick-up compared to developed countries’ issues. We expect gold to find some support in low real rates and increased geopolitical risks. It will trade in a tight range at price levels similar to 2018, so any investments in gold will not provide significant gains unless major geopolitical shocks materialise.

As stated above, gold holdings may increase in the future.

Central bank investments are restricted to high-quality asset classes.

For corporate bonds, the minimum rating is AA–.

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

Highly rated government bonds became less attractive than those with a lower rating. Also, the public sector is more attractive over govies of the same rating and equities over bonds.

New investment classes have to make sense from a risk perspective and our risk appetite.

The bank is not allowed to invest in classes below BBB– (with the exception of South Africa, as almost half our reserves are in rand).

The bank’s investable universe is restricted to obligations of sovereign governments, sovereign agencies, supranationals and multilaterals with a minimum credit rating of A–. In addition, deposits with banks with the minimum rating of A– is equally permitted.

The [central bank] can invest in the following financial assets dominated in US dollars, euros and pound sterling: (i) deposits with central banks and other institutions of foreign countries; and (ii) securities issued by governments and other institutions of foreign countries with maturity not exceeding five years.

The investment objectives of the exchange fund account (EFA) is to maintain the standard of liquidity and preserve capital. Accordingly, the EFA holds assets that can be sold or otherwise deployed at very short notice with minimal market impact and loss of value.

We are considering investing in Chinese financial markets both internally and externally and in other Asian countries through external managers.

We are investing in government bonds, corporate bonds, emerging market bonds, inflation-linked bonds, agencies, deposits, ABS, MBS, covered bonds, gold and equities.

We do invest inflation, covered, ABS/MBS bonds via external managers and others, both internally and externally.

We invest only in A-rated instruments and in some selected countries in B or better.

18. If your central bank is investing in equities, please say how you access this asset class?

By law, we cannot invest in equities.

Considering.

Current [central bank] investment guidelines do not allow investment into equities.

Currently, the bank does not invest in equities. Existing equity holdings are for incidental reasons only.

Equities are managed externally.

External management of passive fund.

For the time being [the central bank] does not consider investment in equities. Given the high risk nature of equities, risk and return objectives, risk tolerance and liquidity needs of [the central bank], if we decide to invest in equities we will not have enough capacity for other options apart from passive mandate.

No exposure to equities.

None.

Not investing.

Not investing in equities.

Not investing in equities.

Not public information.

Passive externally managed mandate.

Passive fund, not a mandate.

Replication of broad market indexes.

The bank does not invest in equities.

The [central bank] is not allowed to invest in equities.

The investment is outsourced.

The investment policy does not permit investing in equities.

The law ruling the central bank prohibits investment in equities, even though we do believe they provide diversification benefits.

We currently do not invest in equities in our reserves portfolio.

We do not invest in equities.

We do not invest in equities.

We do not invest in equities.

We do not invest in equities.

We do not invest in equities.

We don’t currently invest in equities.

We don’t invest in equities.

We have regional equity portfolios.

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 invested.

Currently no active hedging is done.

Less than 0.1%.

Less than 1%.

No.

No.

No currency hedge.

No hedge.

No hedge.

No hedging of the renminbi exposure.

Not applicable.

Part of our unhedged FX portfolios.

RMB exposure is not hedged. The allocation to RMB was increased in 2017.

The bank has had exposure to the RMB since 2014 through an external mandate with the Bank for International Settlements (BIS) via the BIS investment pool, which is synonymous with a mutual fund. The external mandate provides unhedged RMB exposure to the onshore, domestic Chinese sovereign debt market with a target duration of three years.

The [central bank] primarily invests in US-denominated instruments.

The currency composition is not public, but would have a high allocation to USD given the pegged FX arrangement.

The currency is not hedged but there is investment in a pooled fund.

The investment is not hedged.

To exploit opportunities in the FX basis market, we can take off benchmark (FX hedged) positions in DKK and SEK. Investment opportunities in hard and local currencies have been closely monitored in emerging Asia.

Up to 10% (credit rating also plays a role for the currencies that we can invest in).

We are in a currency board and are pegged against EUR; currency exposure is not allowed.

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

We do have exposure to RMB based on our exposure/liabilities to China. We do not hedge back to USD.

We do not hedge the exposure.

We don’t hedge at the moment.

We don’t hedge our renminbi exposure.

We have RMB exposure through direct access to the domestic government bond market (achieved few month ago), and the BIS fund on CNY, securities in CNH, and non-deliverable forwards (NDFs) on CNY.

We hold small currency position in CAD, NOK, SEK and DKK, but are not investing in bonds.

Yes, we hedge.

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 in the renminbi by 2019 (end of), 2020, 2025, 2030?

A market with growing importance.

Among central banks there is big interest in investment in renminbi, and we believe this trend will grow over the coming years as China gains more importance in the world economy, and develops financial markets and its position in global trade.

Assumption of about a 1% increment every year.

China needs to open their economy much more to make the renminbi a serious player on global financial markets.

Don’t see a major shift.

Holdings in global reserves in the long run will reflect the economic strength of China as well.

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

RMB payments have increased globally.

Some central banks announced plans for replacing portion of their USD portfolio with CNY, so definitely will increase but at which pace it will continue is hard to know (trade war, etc).

The data on the renminbi share in the global reserves is disrupted by the magnitude of Chinese reserves. But the trend towards entering Chinese financial markets seems to be slowing down/expiring.

The inclusion of RMB-denominated bonds in major indexes would drive an increase in the allocation of global reserves to this currency.

The inclusion of the renminbi is likely to reinforce official reserve diversification inflows to the RMB as global central banks seek to re-align their strategic asset allocations. However, this is expected to be a gradual process as some capital account restrictions still remain, making direct investment into China still difficult. In addition, the ongoing trade dispute with the US is still a concern for investors, at least in the medium term.

The process of allocation of the global reserves into renminbi will be slow and gradual as 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%).

The proportion of RMB is likely to grow significantly in the near future as the importance of China in the world economy grows.

The reserve position in CNY is an increasing trend in global reserves. So this may go up to 25% of global reserves.

There is significant currency risk in renminbi, and the market needs to develop further to compete for allocation from alternatives like USD, EUR and GBP.

These percentages are rough estimates based on the trajectory of investments in renminbi, which has been growing rapidly in recent years.

We expect the percentage of renminbi exposure to increase in the future, although we believe there is still a long way to go, mostly due to challenges in investing in the Chinese financial markets.

We think that the participation of Chinese currency will be steady.

20.b. What percentage of your central bank’s reserves do you think will be in renminbi by 2019 (end of), 2020, 2025, 2030?

As long as the Chinese government keeps implementing capital control measures, we will be reluctant to add a substantial exposure to said currency.

Our exposure to CNY/CNH will be a function of the level of liberalisation that the Chinese markets display.

As our currency allocations depends on the ALM of our country, if our financial exposure increases over China, and the China Interbank Bond Market (CIBM) introduces news products, rules that converge with the international standards, and free capital markets, by 2030 we will definitely have more exposure to this financial segment.

Current swap arrangements for renminbi-denominated public sector debt do not warrant an allocation to this currency in the official reserves portfolio.

Don’t see a huge change in our reserves.

For the moment it is not under consideration because we are in a currency board.

In the foreseeable future we plan to maintain the size of our RMB exposure, although we might consider diversifying our government bond portfolio, eg, by adding other asset classes such as development banks, to enhance returns and gain more experience. The administrative challenges considerably slow down the investment process.

In the last decade, trade and investment flows between [our country] and China have greatly increased. Over time, we do expect the strengthening of trade between the two nations to become more reflective in the strategic asset allocation.

It depends on the trade between China and us.

My forecast about reserves in RMB is just a guess considering the importance that China will have on the future.

No.

No decision taken about increasing the percentage of renminbi.

No plans to invest in renminbi.

Our country has commercial relationships with China. Maybe, in the future, there can be interest in investing some little part of our reserves in renminbi.

The increase seems motivated by the global movement towards holding RMB; the slow increase is due to both China’s current performance and historic trade patterns/foreign obligations.

The percentage of investment in renminbi in the next five to ten years depends on SDR allocation and the role of CNY in global financial markets.

The proportion of RMB is likely to grow significantly in the near future as the importance of China in the world economy grows.

This is a forecast only. At the moment we are not considering making investments in CNY.

This would depend on the review of the long-term prospects of investing in RMB-denominated assets amid developments in the Chinese financial market.

We are currently considering investment in the renminbi, and plan to hold the currency in the near future and progressively increase investments as the Chinese economy becomes more open.

We are currently looking into renminbi, and hope to get started throughout the year 2019.

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 because of FX risks. However, our attitude may change based on our perceived view on CNY-implied FX volatility.

We foresee some increase once we implement direct investments.

We will need to modify our strategic asset allocation by giving more importance to our liquidity needs.