A Central Bank in Central Eastern Europe
The Special Drawing Right (SDR) is an interest-bearing international reserve asset created by the IMF to supplement other reserve assets of member countries.
Given that the SDR is not traded as a currency, in order to utilise the SDR, Central Banks have to exchange their SDR for the underlying currencies either via voluntary exchange between members or with IMF designated members with strong reserve holdings.
The Central Bank purchased a Citi issued capital-protected yield enhancement “SDR Note” that pays an enhanced interest and redeems the initial SDR invested.
The SDR Note ensures that the liability and the asset match (both SDR denominated, and interest based on IMF SDR Rate), plus a spread earned.
A single SDR denominated Note avoids the logistics of decomposing and investing each currency in a separate product.
The note is also capital protected, which means there is no FX mismatch in the client’s balance sheet.
The Central Bank benefits from an expected higher yield compared to interests on SDR liabilities. Since 2016, the Citi floating rate used in the Citi SDR Note has outperformed the IMF equivalent Rate. The Basis was +21 bps on average, the minimum being +5 bps.
The Citi SDR Note ensures that, on a net basis, all the risks (currency, rates) are perfectly hedged, while earning some additional carry (the spread).