Trends in reserve management 2021: survey results

The survey questionnaire was sent to 140 central banks in February 2021. By mid-April, replies had been received from 78 reserve managers, responsible for a total of $6.4 trillion, or 44% of the world’s total.¹¹ This figure uses data from the IMF, with gold valued at market prices, as of August 2020. The average holding of respondents was $82.5 billion. Breakdowns of the respondents by geography, country income group and reserve holdings can be found in the tables below.²² This survey follows the World Bank classification of countries by income group (see https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lendinggroups), and the United Nations classifications for geography (see https://en.wikipedia.org/wiki/United_Nations_geoscheme).

Which of the following have you found the most challenging during the Covid-19 crisis, ie since March 2020? (Please rank the following 1–6 with 1 being the most challenging.)

Reserve managers have found the reduction in yields since March 2020 the most challenging aspect of their work. This was especially the case among those respondents responsible for less than $10 billion. As central banks’ monetary policy actions led to further easing in financial markets, especially developed, reserve currency ones, so yields declined. Almost three-quarters of the survey respondents ranked this first or second. Thirty-seven reserve managers, responsible for $1.35 trillion in reserves, placed it first. As a group, their holdings were weighted towards the lower end with an average holding of $36 billion, well below the survey average of $82 billion. Although this group did feature a large holder from Asia, it was dominated by holders with less than $10 billion, including two-thirds of the $1–10 billion holders who took part overall. Respondents from high income countries made up less than 40% of the group, with reserve managers from middle income countries representing just over half. All three low income country reserve managers selected this option.

Reduced market liquidity was the next most challenging aspect, with 40% of respondents ranking this option first or second. Reserve managers in this group were fairly large holders, with $1.48 trillion overall and an average of $56 billion. Central banks from high income countries were prominent in this group, indeed nine of the ten who placed it first were from that income bracket. A similar pattern was observed for contingency, staffing and IT limitations, which placed third overall, with five of the eight who found that the most challenging coming from high income countries. This group had a slightly lower average holding of $52 billion, but those placing contingency first tended to be larger with an average of $65 billion.

Which of the following have you found the most challenging during the Covid-19 crisis, ie since March 2020? (Please rank the following 1–6 with 1 being the most challenging.)

A reserve manager from the Middle East was unequivocal in their view: “[the] biggest challenge was the collapse in yield levels globally.” A similar view was offered in a comment by a reserve manager in the Americas: “Low rates of return going forward is our primary concern related to reserves management,” while a reserve manager from North Africa said that their next steps were “Looking for extra yield return in the callable bonds market.” For a central banker in sub-Saharan Africa, further quantitative easing bringing yields close to zero had affected “our returns on the money market portfolio, where we have the majority of our reserves.” A reserve manager from Europe noted a secondary impact: “The difficulty is that the period of low yields, ie coupons, has lasted so long and Covid-19 even prolonged this abnormality. Lower yields increase the uncertainty of how long asset prices can be increasing.”

A look at data cross-sections revealed nuanced views among income groups and reserve holdings. Reserve managers from high income countries found yields most challenging, but the share who placed this first (at 45%) was below the survey average of 57%. They found liquidity more challenging than the group overall, with 29% of this group placing it first. Contingency, IT and staff aspects also scored higher at 16%. In contrast, an overwhelming majority of reserve managers from upper middle income countries was chiefly exercised with yields. Fully 71% of this cohort placed this first. Second placed was credit deterioration, with 12% of the sample finding it most challenging. A reserve manager from Europe who ranked this first explained their thinking:

Among lower middle income countries, reduced yields were placed first, similar to the overall result, although one in five said a decline in reserves had been the most challenging aspect. All three reserve managers from low income countries placed reduced market yields first.

Among smaller holders, reserve managers were mainly concerned by the reduction in yields: 68% of those with less than $10 billion placed this first. As reserve levels rose, however, this rate declined: 45% of those with more than $10 billion in reserves found reduced yields most challenging, and liquidity concerns increased: 26% placed this aspect first. A reserve manager from the

Asia–Pacific explained: “Liquidity in US markets at times was less than ideal but we hold two-year bonds in our asset allocation and yields fall in a crisis so we are somewhat sheltered.”

Has the Covid-19 crisis impacted reserve management in your central bank in the following areas over the past 12 months?

The Covid-19 crisis has impacted reserve managers’ working practices in most central banks, and its effects have been felt in asset allocation and risk management over the past 12 months. Two extended comments, from reserve managers in the Americas and Europe, respectively, summarised this view. The first central banker, from the Americas, said:

And the European central banker noted:

Almost all respondents said the crisis had impacted their remote working or contingency plans. A reserve manager from Africa noted that this had meant rolling out new technology: “With the Covid-19 crisis, new/more technologies had to be deployed to assist with remote working arrangements during periods of lockdown restrictions on movement.” A reserve manager from Europe felt the change had worked well, despite reservations from above: “It is a whole new environment we are working in – some levels of discomfort about it from senior management but [it] has worked very well despite the restrictions.”

Two-thirds of respondents, responsible for reserves worth $2.8 trillion, said the crisis had meant a change in their TAA. This group’s average holding was $58 billion, below the survey average, but it did feature two very large holders from Asia. “We became slightly more conservative”, said a reserve manager from Eastern Europe, while a reserve manager from Africa said that although no changes were made to the investment policy, the search for higher yield made the team realise that “existing risk parameters could be more efficiently utilised.”

Just over half of respondents, a group of somewhat smaller holders, noted an impact on strategic asset allocation (SAA). These 38 reserve managers were responsible, on average, for $56 billion in reserves. One reserve manager from Europe said their central bank had “decided to include other asset classes in the strategic asset allocation to improve diversification and risk adjusted returns. Moreover, focus on SRI [socially responsible investing] compliant investments has significantly increased.” A reserve manager from Africa noted a change in guidelines, but also a search for higher yielding currencies: “Adjusting the guidelines to get access to lower rating asset class, investing more in the currency which gives better return (CNH/CNY), for instance.” The latter strategy was mentioned by another reserve manager in Africa who said they had increased their exposure to emerging markets.

Just under half of respondents said their risk appetite had changed, with comments typically mentioning a reduction. However, a contrarian view was offered by a reserve manager from the Americas who had increased their risk appetite over the course of 2020, but this followed a lowering and it was still lower than it had been in 2019.

The survey pattern was followed among high income countries, although there was more emphasis on risk appetite: 56% of respondents from this group said it had changed, and less on TAA, with 61% saying this had changed. Almost one in five said it had impacted work on environmental, social and governance (ESG) policies. Among upper middle income countries, the impact was more strategic: 55% noted a change to their SAA compared to a survey average of 51%. Lower middle income countries by contrast were more tactical: 76% said they changed their TAA, and only 29% said their risk appetite changed.

Do you envisage the Covid-19 crisis impacting reserve management in your central bank in the following areas over the coming 12 months?

The effects of Covid-19 will continue to be felt in remote working, TAA and SAA, and to a lesser extent in risk appetite and risk frameworks. A reserve manager from the Americas encapsulated this view in their comment: “We expect that some of the challenges that we saw in 2020 will also be present for some time. For instance, working remotely will continue as long as the pandemic persists and we will try to improve the current infrastructure.” A reserve manager from Europe was of a similar view with respect to remote working, noting it “might become standard even after the Covid-19 pandemic is fought back.” For a central banker from sub-Saharan Africa, any changes would be at the strategic level: “Basically it would impact less, as our risk appetite remains and we will use SAA mostly in trying to manage our reserves in a more prudent manner.” In a similar vein, a reserve manager from the Americas noted their plans for SAA: “We are reviewing our strategic asset allocation in several dimensions: (i) to invest in new asset classes (corporates); (ii) to increase our investment horizon (from one to three years); (iii) to reduce admissible credit ratings (from AA– to A); and (iv) to invest in green bonds (governments and corporates).” In contrast, a reserve manager from Europe envisaged a period of stability after the disruption of the past 12 months – ESG, however, would be an exception to this: “Given the many changes done this year, not much changes are anticipated in the coming 12 months. Further developments on ESG policies are expected to be continuous.”

Considerably more change was anticipated among reserve managers from upper middle income countries, notably in portfolio construction and management, where 67% saw changes in TAA and 58% in SAA. Similar figures of 65% and 59% were found among respondents in lower middle income countries. In contrast, for reserve managers among high income countries, a change in risk appetite was most likely (45%), with change at the tactical asset level (44%) and at the strategic (42%) close behind. A majority of respondents from lower middle income countries envisages risk appetite changing over 2021 and into early 2022.

Early 2020 witnessed disruptions in markets – even in the most liquid government bond markets. Has this experience led to a reassessment of how liquidity is managed in your reserves portfolio?

In March 2020, unprecedented uncertainty triggered high volatility in the US Treasury market, precisely when asset managers were seeking to raise cash to meet redemptions, and central banks were selling Treasuries to acquire dollars to manage capital outflows and exchange rates. The severe disruptions in the $20 trillion market which followed precipitated action by the Federal Reserve on a hitherto unseen scale.⁴⁴ This episode and the Fed’s response is the subjective of extensive analysis in Chapter 5. The disruptions have not in the main led reserve managers to revisit how they manage liquidity, however. Fifty-four respondents, responsible for reserves worth $4.6 trillion and with an average holding of $84 billion, were of this view, a group that was dominated by high income countries. Indeed, 80% of respondents from this income group said they had not revisited liquidity management. In contrast, almost 40% of respondents from upper middle income countries, responsible for $192 billion, said they had reassessed this, as had all the respondents from low income countries. These tended to be smaller holders, although the group of upper middle income countries included three holders with more than $50 billion in reserves.

Analysis by region showed a clear variation. Reserve managers from Europe were much less likely to have reviewed liquidity management: only 10% said they had, compared to a survey average of 30%. In Africa, the situation was the reverse: 73% of respondents from central banks there said they had reviewed how they manage liquidity. Central bankers in the Americas were more concerned with reviewing liquidity, although not to the same extent: 47% said they had, a figure significantly higher than the survey average. The pattern of answers for respondents from Asia and Middle East followed that of the survey.

In their comments, reserve managers noted the robustness of their portfolios and lessons learned from previous crises as reasons why they had not reconsidered liquidity management. “We link liquidity to reserve adequacy, so no impact from Covid,” said a reserve manager from the Middle East. For a reserve manager from the Americas, the lessons learned about liquidity paid off in 2020: “In the past years we have witnessed different episodes of market disruptions that has led us to have a more comprehensive approach towards the importance of liquidity. The Covid crisis just reinforced that approach.” A reserve manager from Europe cited the balance of their holdings:

Among the minority who had reassessed the way they managed liquidity, comments typically focused on a change in liquidity measurement and/or a rethink on benchmarking. A reserve manager from a high income country in the Asia–Pacific region said they would be reassessing how liquidity is measured, adding: “We have two portfolios, one is benchmarked and we had to weigh transaction costs versus DV01⁵⁵ “Dollar duration or ‘DV01’ is the change in price in dollars, not in percentage. It gives the dollar variation in a bond’s value per unit change in the yield. See https://en.wikipedia.org/wiki/Bond_ duration, accessed 5 May 2021. risk to the portfolios to determine if increase transaction costs due to lower liquidity would cover these risks. We strengthen our cash management strategy in face of higher tail risks.” A reserve manager from Africa was considering setting a different benchmark for their liquidity portfolio, while a reserve manager from Europe said they had but had not made any “concluding assessments yet.” A central banker from the Americas explained the changes they had made regarding management and outflows of foreign exchange: “Liquidity has been managed with more caution by shifting investments to short-term assets (3 months – 6 months) to ensure that there is access to cash if needed. Additionally, limits have been placed on the outflow of foreign exchange whereby essential goods and services are prioritised.”

In light of the continuing low-yield environment, are you considering the following in order to generate extra yield/preserve the purchasing power of your reserves?

Reserve managers, especially those in high income countries or with less than $10 billion in reserves, are actively considering new asset classes in the light of continuing low yields. They also have an appetite for additional currencies and inflation-protected bonds. Extending duration, as well as investing in less-liquid assets and gold, are also being considered by significant minorities.

Just over half of respondents, a group responsible for $1.97 trillion in reserves, said they were considering new assets as they looked to increase yield or preserve the value of their reserves. There was strong support too for new currencies and inflation-protected bonds with 44% and 42%, respectively, saying these were under consideration. While smaller in terms of numbers, these two groups were responsible for more reserves: $2.06 trillion and $2.16 trillion, respectively. There was considerable overlap across these three: of the 36 respondents who said they were looking at new assets, 23 (nearly two-thirds) were also looking at new currencies. Nineteen said they were looking at inflation-protected bonds. Indeed, 15 central bankers, responsible for $1.6 trillion in reserves, indicated all three were under consideration, a group dominated by high income countries.

One of this group, from the Americas, explained their thinking in an extended comment:

Just over one-third of respondents were looking at extending duration, as a reserve manager from Asia, who was also considering gold, explained: “We are adding allocation of spread products to get higher yield within the board’s risk appetite and balancing other reserves management principles (security, liquidity) as well.” Nineteen respondents mentioned less-liquid assets, a group that included five from the Asia–Pacific region. This option was also mentioned with duration in over half the cases. Gold was identified by 16 respondents, the lowest number, but as a group this included several large holders, notably from Asia. Of this group, just over half were also considering inflation-protected bonds.

A reserve manager from Europe, while not considering new assets, was looking at inflation-protected bonds, as well as extending duration and gold. They explained:

Managers from high income countries were the most exercised by the low yield environment, with the proportions considering the options higher than, or the same as, the survey average across all aspect choices, with the exception of gold (see table overleaf). In this group of high income countries, 55% of respondents said they were looking at new assets and just under half, 47% were doing the same for currencies. A comment from a reserve manager in Europe summed up the sentiment here, although they were themselves looking at gold and not considering extending duration: “I think most of these along with other things will be in the melting pot going forward. I don’t think increasing duration at this time would make sense – how low can yields fall?”

Among lower middle income countries there was more caution around less-liquid assets and inflation-protected bonds, but above average interest in three areas: new currencies (60% said they were considering this), gold (40%) and extending duration (40%).

As a group, reserve managers from upper middle income countries were perhaps the most cautious. The shares for gold and new currencies were well below the average, new assets and duration marginally so. Only inflation-protected bonds seemed to enjoy traction with exactly half the group looking at this class. Among those with less than $10 billion in reserves, new assets stood out as an area of interest: 59% of this group said they were considering this. For larger holders – ie, those with more than $10 billion – it was new currencies: 52% of this group were looking at this.

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

Reserve managers have been actively adding new asset classes to their portfolios, especially in Europe, but this was less the case in currencies, with a significant minority removing exposure. Of the 26 reserve managers who indicated a change in asset classes, the overwhelming majority said they had added rather than removed from the portfolio. These 23 reserve managers were responsible for reserves worth $1.37 trillion, and were distributed across income groups in a similar way to the survey. The average holding among this group was just short of $60 billion, lower than the survey average, although the group featured several large holders from Asia and the Middle East. In comments, a reserve manager from Asia said they had added spread products, while a European central banker mentioned green bonds.

The 17 reserve managers who said they had added a currency were responsible for less, $929 billion, with high income countries somewhat underrepresented compared to the survey average, and the lower middle income group overrepresented. Three reserve managers in this group mentioned the renminbi (two from Europe and one from Africa) and one from Europe mentioned sterling. Another reserve manager from Europe said they had added a small portfolio of Central and Eastern European currencies. Seven reserve managers, responsible for $360 million, noted they had added both asset classes and currencies. One reserve manager from Europe said they had added both equity exchange-traded funds (ETFs) and the renminbi.

Viewed regionally, reserve managers from Europe and Asia were most acquisitive. All the reserve managers from these regions who answered the question, 11 and four respectively, said they had added assets. Africa was next, with only one of the five from that region saying they had removed assets. In contrast, reserve managers from the Americas were 2:1 in favour of removing. As regards currency, again Europeans were more likely to add with a 7:3 score, followed by Africa and then Asia with a slender 3:2 score in favour. All four reserve managers from the Americas who answered said they had removed currencies: one mentioned the Canadian dollar and another cited a need for US dollars leading to selling others. A large holder from the region stopped investing in Korean won as a result of their SAA process.

Which factors restrict your ability to diversify the reserves portfolio? (Please rank 1–8, with 1 having the most restrictive impact.)

Reserve managers unambiguously find their internal guidelines and the central bank’s risk appetite the most restrictive factors when considering diversification of the reserve portfolio. In reserve management, the guidelines for reserve management are typically set by the board of the central bank or an investment committee of the board. The risk appetite, similarly, is typically set by the board as the ultimate decision-making authority of the central bank. Almost three-quarters of respondents placed this either first or second, a group of central banks responsible for $1.86 trillion. This group had a lower average reserve holding than the survey overall ($41 billion) and included nearly 60% of those with $1–10 billion.

The next factors in terms of significance are the central bank law, placed first or second by 33% of respondents, and reserve management governance with 31%. The 17 placing law first were dominated by respondents from upper middle income countries, and were on the whole somewhat smaller reserve holders with a total of $653 billion under management. Only a handful placed governance first, but twice that number ranked it second. This group was divided almost equally between high, upper middle and lower middle categories. Just under a quarter placed reserve adequacy first or second: nine of these 14 respondents were from high income countries.

Indeed, for respondents from high income countries, guidelines was ranked first most often (42% of this group), with adequacy second at 23%, ahead of central bank law, which was placed first by only 15% of the group (see table on page 18). The top two were reversed among upper middle income countries for whom nearly half the group placed the law first. Guidelines were second with 29% of the group ranking it first. Only one respondent from this group found reserve adequacy considerations the most restrictive. A reserve manager from the Americas was representative of this view: “The main restriction is the central bank law and governance, which prioritise high liquidity and capital preservation.” For lower middle income countries, guidelines again weigh heaviest, followed by the law, but reserve adequacy is not seen as significant.

A geographic view of the data showed the significance of guidelines for reserve managers in Europe: over half placed this first, whereas in Asia it was more a matter of the central bank law; guidelines, governance and adequacy were placed joint second. In the Americas, the law was most significant followed by guidelines and adequacy tied for second place. In Africa, reserve managers saw the law and guidelines as joint first, but staff and technology are also significant for this group. As one reserve manager from that group commented: “The main reason is associated with staff skills (lack of people with specialised skills, etc) and the IT systems to help the team monitor the risks involved.”

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

Duration is on average largely stable at 1–2 years for reserve managers, although significant minorities noted a change over the past 12–18 months and were considering a change this year. Broadly speaking, duration can be seen to increase with reserve holding (see table below). Twenty-three reserve managers, a group responsible for $617 billion in reserves, said their duration was 1–2 years. This group were considerably smaller holders, on average, than the survey overall. Of this group of 23, eight reserve managers said they had changed duration and eight said they were considering it in 2021. Both the groups that had changed and those considering were heavily weighted towards the high income category. Six of the nine high income country respondents in this duration bucket were considering change.

Indeed, a view across income categories showed a clear tendency towards longer duration among high income countries, with half the group in the 2–5 year ranges. Upper middle income countries were weighted towards the lower end: 43% were in the 0–1 year range. This was even more the case for lower middle income countries, where one in five were in the 0–6 months range and the distribution was narrower.

Has this changed in the past year?

Just under one-third of respondents said they had changed duration in the past year, a group responsible for $732 billion in reserves and chiefly made up of high income and upper middle income countries. Viewed by geography, reserve managers from Europe were more likely to have changed (40%) than the survey average, whereas those from Africa were considerably less likely (13%).

Are you considering any change in 2021?

A similar share of respondents said they were considering changing duration, with comments indicating an inclination to reduce. This group of 23 was dominated by high income and lower middle income countries: only three upper middle income countries said they were considering changing duration. In total, they were responsible for $1.1 trillion in reserves, although half this figure was contributed by two large holders from Asia. Twelve respondents said they had both changed in the past 12–18 months and were considering change this year. These were on average smaller reserve holders, a group responsible for $274 billion in reserves. Two-thirds were from high income countries, and a European reserve manager from this group explained their thinking: “We reduced the duration in the last quarter of 2020 accurately anticipating that financial conditions will change anticipating improved investment sentiment. In 2021 we might increase duration in the latter part of the year in case that market participants overreact to the optimism in the financial markets.”

In their comments, reserve managers indicated a marginal preference for reducing duration, although this was from a sample of 11 comments. Seven reserve managers said they were considering reducing duration. A reserve manager from the Americas said they would have “less duration given the liquidity needs”, a view echoed by a large holder in Asia who shortened to reflect the yield curve forecast. A reserve manager from North Africa also cited liquidity as a key driver. For those considering increasing, diversification was mentioned by one holder from Europe and in Asia, who explained their thinking: “Duration has slightly increased as a consequence of our policy toward spread product and as a response to negative yield environment in some asset classes, but it’s still and it will be kept on that range (3–5 years).” For a reserve manager from Africa, an increase in the reserves would be the deciding factor: “We are considering a bit longer duration should the levels of reserves significantly improve.” A thoughtful comment from a reserve manager in Europe, who had changed in the past 12–18 months, highlighted the dilemma facing reserve managers:

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

Central banks are increasingly incorporating SRI into reserve management, with support strongest among those from higher income countries with large reserves. Although less than one-third do so at present, three-quarters of respondents either do or are considering it, a group of 57 central banks responsible for $3.8 trillion.⁶⁶ The comparable number from the 2020 survey is 51 central banks. See chapter 1 in HSBC Reserve Management Trends 2020. Note the two survey samples are not the same.

Twenty-three respondents, a group dominated by high income countries and including several very large holders, said they had introduced an element of SRI. As a group, they are responsible for just over $2.5 trillion reserves with 18, nearly 80%, from the high income bracket. Indeed just over half of the high income group as a whole said they had introduced SRI, compared with 18% of lower middle income countries and 10% of those from the upper middle income group. No low income country had implemented SRI. In terms of region, Asia at 58% had the highest percentage implemented, with European central banks close behind (45%). Those from the Americas (7%) and Africa (0%) were some distance back, although 60% of respondents from both regions said they were considering it. The size of reserves is clearly also a determining factor. Among holders with less than $10 billion, 13% said they had brought in SRI, compared with 50% for those with more than $10 billion. Of the group of 23, 18 respondents, responsible for $1.3 trillion, gave a figure for the proportion of their reserves they considered to be SRI. The average figure was 29%, although answers ranged from near zero to 100% in three cases. Weighted by reserves, the average was 14.7% of their reserves, or $186 billion in total across the group.

The 34 central banks considering SRI were dominated by middle income countries (13 upper and seven lower), with 13 drawn from the high income bracket. Europe was again the best represented region, but this group featured nine central banks from the Americas and eight from Africa. The 19 not considering SRI tended to be smaller holders on average, responsible as a group for $655 billion, although it did include several large holders. Lower middle income countries had the highest representation here with seven, followed by six upper middle and four high income countries.

If no, what do you see as the major obstacles?

Of the 53 respondents who said they had not implemented SRI, 47 indicated what they saw as the major obstacles to this. Nearly two-thirds of this group cited the challenge of integrating SRI with the central bank’s mandate. This was closely followed by concerns over returns or liquidity, with just over half the group noting this. Lack of a clear definition and difficulty in obtaining data were both selected by just under 40% of the group. Only one in five sees consistency of disclosure as a major issue.

Comparing the answers for obstacles for those considering SRI with those not considering shows a clear emphasis on integrating with the mandate among the latter. While this factor was still significant for those considering SRI, reserve managers in this group tended to be more concerned with the impact on returns. Practical considerations such as data and disclosures are also significant. Among those considering SRI, return is the biggest concern with 69% of the 29 who provided a comment. Mandate was selected by 62%, but data was much more of an issue than the survey as a whole, with 59% of the group citing this as an obstacle.

If no, what do you see as the major obstacles?

If yes, does this include:

Overwhelmingly, reserve managers’ approach to SRI includes ESG principles. For those who have implemented SRI, integrating ESG principles as a part of the SAA or investment guidelines was the most popular strategy. Seventeen respondents, nearly three-quarters of the group, said they used this combination. Ten respondents said they used standalone portfolio mandates with ESG principles, although half of this group also integrated ESG through SAA or investment guidelines.

If yes, how do you integrate these into your investment process?

Which strategies do you employ?

Negative screening is by far the most popular strategy employed by reserve managers, although most (almost two-thirds) use a combination-based approach. The most popular option was a combination containing negative screening and ESG integration, which was used by nine reserve managers. A reserve manager from Europe who used only these two strategies explained their approach: “All of our reserves are in one way or another affected by our SRI policies. Next step is to make these policies more robust and take more SRI tools into use in each asset class.” Another reserve manager, also from Europe, explained how they made use of these two strategies:

A reserve manager from Asia, who said 5% of their reserves were SRI, applied negative screening, saying they: “invest in green bond as part of TAA and add SRI filter for [a] corporate bonds index.” A central banker from the Americas explained how their central bank was feeling its way into the area, with 1% of reserves marked as SRI: “We exclude some industries from our corporate bond mandate and we have a small position in green bonds; furthermore, we have continued to explore this integration with other central banks from the region.” A contrarian view was offered by a reserve manager from Europe:

What proportion of your FX trading is carried out via the following?

Electronic trading is the mainstay of modern reserve management, although there is still a share for voice. There is considerable use of algorithmic platforms, albeit concentrated in only a handful of central banks. Sixty-four respondents, responsible for $3.5 trillion in reserves, said they used electronic platforms for at least some of their trading, with the average share being just over 80%. Weighted by reserves this was only slightly lower at 77%.

This group was distributed in line with the survey in terms of income group, although upper middle income countries were most likely to use electronic trading, with an average of 92%, lower middle income at 80% and high income countries at 73%.

A reserve manager from the first group, who said that 90% of their trading was electronic, noted the change: “In the past couple of years the move from voice trading to electronic trading [has sped up].” A central banker from Europe, whose trading was 100% electronic, noted that: “In home-office no voice trading allowed.”

Twenty-seven reserve managers responsible for $2.1 trillion said that voice trading played a part in their reserve management operations. The average share for this group was 43%, which fell to 25% when weighted by holdings. These were on average larger holders, although the group did range from less than $1 billion to several holders with $100 billion+. Over half this group was from high income countries; indeed, these countries as a group had the highest average voice share of 23%, followed by lower middle at 20% and upper middle at 8%.

Three central banks use algorithmic trading. All were high income countries from Europe and the Middle East, and were large holders. The average share of trading among the three that involved algorithmic trading was 39% on both an unweighted and unweighted basis.

Has this changed in the past 12 months?

Trading operations have largely been characterised by stability over the past 12–18 months, although the impact of the Covid-19 pandemic was clear in most of the comments from the nine reserve managers who reported a change. A reserve manager in the Americas, whose voice trading was 5%, noted: “Before [the] Covid-19 crisis we traded a higher percentage per voice (around 35%).” Similarly, for a reserve manager in Africa: “Pre-Covid the trading via voice was about 40%, this reduced due to work from home policy introduced in past year.” A reserve manager in Europe had “Moved to do nearly all FX trading on platform,” while a reserve manager in the Caribbean was split 60:40 in favour of voice described their situation in this way: “We have in past used a combination of voice, e-mail and electronic platform. Since the pandemic it has largely been via voice and email. We currently have to transition to a new electronic platform provider.”

For a reserve manager from a high income country, there has been an ongoing move away from voice, which as of April 2021 accounted for half their trading: “We have been changing the execution of our FX trading to electronic platforms and we expect to continue to do it in the near future.”

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

Has this changed in the past 12–18 months?

The introduction of new technologies is the preserve of a select few reserve managers, typically in central banks with large reserves and from richer countries. Three of the four who said they had were from high income countries, and all but one, again, were large holders responsible for more than $50 billion. Two reserve managers said this had changed in the past 12–18 months, with a central banker from Europe commenting: “We sometimes use algorithm trading for equity futures,” and, in an extended comment, a reserve manager from the Americas explained how they made use of these technologies and techniques:

A third manager, also from Europe, gave two examples of where these are used: “We use AI techniques in the construction of our in-house quantitative duration model for active management. Additionally, we use data mining to assess market impact of monetary policy changes, among other uses, in market intelligence analysis.” A reserve manager from Europe noted this was still under consideration.

What proportion of your reserves is managed by external managers?

The outsourcing of reserves to external managers is an integral part of reserve management. Fifty-three respondents, almost three-quarters of those who responded, said they outsource a proportion of their reserves. Combined, these reserve managers are responsible for just over $3 trillion.

The share under external management varied from just above zero to 100% in one central bank, but the distribution was skewed towards the lower brackets. Most common is a minor share: almost half of the survey sample entrust 1–20%. The simple average of percentage shares was 14%, weighted by reserves this declined slightly to 12%. Taking mid-points yielded a figure of $372 billion outsourced from these 54 central banks.

Analysis by income category showed upper middle income countries less likely to outsource overall (60%) compared to lower middle income countries with 83%. In terms of reserve holdings, having more reserves slightly increases the chances of some reserves being outsourced: 70% for less than $10 billion compared to 74% for more than $10 billion, but those with less reserves who did outsource tended to outsource a greater share.

The 21 reserve managers who said they did not use external managers were responsible for $832 billion and were almost entirely from high or upper middle income countries, with Europe (57%) and the Americas (29%) the best represented regions, with only two from Asia and one from Africa saying they did not use external management. A European reserve manager from this group explained this was a recent development: “We finished our External Management programme (that lasted for around 20 years) end of 2020 as we were not satisfied with the results.”

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

Reserve managers see considerable scope for using external managers in the near to medium term, in particular around new asset classes, active management and new markets. Just over 80% of respondents, a group responsible for $2.1 trillion, sees potential for outsourcing new asset classes. Upper middle income countries were well represented in this group, and one reserve manager, from the Americas, indicated where they were looking: “We are thinking in investing in corporates. A possible way to do that is using external managers.” A large holder in Asia was focused on one area in this regard: “ESG investing”, they said. A central banker from Europe has their eye on an equity mandate: “We see potential for use of external manager if we add equities as an eligible asset class, with a mandate for passive or a factor-based investing approach.”

Active management was noted as a potential avenue by 37 respondents responsible for $1.2 trillion in reserves. Middle income countries were again well represented in this group, with high income countries accounting for less than one-third of the group. Two respondents, both from southern Africa, explained their thinking: “We see them in active management simply because of their vast experience and expertise in the reserves management space,” and: “Enhance efficiency of portfolio management and excess returns.” A reserve manager from the Asia–Pacific region was looking for this approach in new asset classes: “We have requested them to suggest new asset classes and manage the portfolio actively in the current mandate.”

Thirty-five respondents noted new markets as an area for potential use. This group was responsible for a similar $1.2 trillion in reserves, but featured a stronger showing by high income countries. Middle income countries accounted for half of this group and, as with new asset classes and active management, all three low income countries were represented. In particular, a reserve manager from Africa mentioned Chinese markets: “We are considering [whether] to hire an external manager for a CNY portfolio to use them as benchmark for our internal portfolio, apart from seeking more returns opportunities.” Most respondents gave more than one potential use, and indeed 21 reserve managers included the three most popular in their answer.

The 15 reserve managers who selected benchmarking tended to be larger reserve holders, with the group featuring one very large holder. The group was responsible for $1.7 trillion in reserves and was almost exactly split between high, upper middle and lower middle income categories. A reserve manager from the Americas explained their thinking: “The external managers are used as a benchmark for the active management of the internal team, for knowledge transfer and for increasing the return of the reserves.”

Do you see central bank digital currencies (CBDCs) having an impact on reserve management?

Reserve managers increasingly see CBDCs as having an impact on reserve management in the long term, but are clear they will not have an impact in the short term. Forty-five reserve managers were of this latter view, just under two-thirds of those that expressed a view on the long term, and almost all who said there would be an impact.

These 45 reserve managers were responsible for $1.7 trillion in reserves, and were drawn from income brackets in a pattern similar to that of the survey sample. Smaller holders tended to be more likely to see an impact. Of those with less than $10 billion in reserves, 80% said they could see CBDCs having an impact, a share that fell to 47% among those with more than $10 billion.

In their comments, reserve managers offered a range of views on their impact, but also motivation – as a central banker from Asia noted: “With CBDCs, zero lower bound can be easily broken.” Three reserve managers from Europe saw the change in a broad context: “In the medium-long term the potential launch of CBDCs would change the macro-financial landscape and, of course, it would have an impact on central banks’ currency and asset allocation, FX trading and the way FX reserves are managed,” said one.

For another, investment and payments could be impacted; “It depends on the pace and the path of implementation of CBDC, but it may impact the current investment and cash flow channels,” said a central banker from CEE. A third found an interesting parallel in the literary world: “CBDC is a form of cash. We have libraries full of paper books, I have [a] Kindle full of ebooks. What is the difference?” The 25 who said there would be no long-term impact tended to be larger holders on average, but were similarly distributed across income groups.

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

Central banks’ growing interest in SRI is evident in reserve managers’ assessment of asset classes with green bonds invested in by 43% of respondents, a higher share than inflation-linked bonds and mortgage-backed securities (MBS) (see table overleaf). In addition, just over a quarter of respondents invest in social and sustainability bonds. The 32 reserve managers who invest in green bonds are responsible for $3.7 trillion in reserves, giving an above-survey average of $116 billion. In addition, almost exactly the same percentage again (44%) was considering this asset class. Investment-grade corporate bonds are invested in by just over half of the respondents, a group of 40 reserve managers responsible for $2.8 trillion. Just over half invest in covered bonds and 49% in emerging market bonds, with a further quarter of respondents considering this class. Twenty reserve managers said they invest in equities, and a further 19 said they would look at them now or in the next five to ten years. Combined, these 39 respondents made up more than half of the 73 who provided an answer: over 50% of reserve managers either invest in equities or are considering doing so.

Respondents from high income countries were more invested in corporate bonds (68%) and green bonds (63%) than the survey as a whole (see table on page 35). Just over half of the respondents (55%) from high income countries invest in equities. Turning to upper middle countries, respondents were more invested in emerging market bonds (53%), while interest in green bonds (30%), corporate bonds (10%) and equities (5%) was below average. Lower middle income countries were above average for gold and below average (although above upper middle income) for corporate bonds (29%), green bonds (24%) and equities (6%). One reserve manager from Europe noted they were conducting an SAA review “which may bring changes to our current framework, including investing in new asset classes.”

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

The strategy among reserve managers looking for equity exposure is clear: if managing directly, reserve managers make use of ETFs; if using external managers, cash equities are preferred. Reserve managers make active use of external managers and direct exposure, although only four respondents (20%) said they used both. All 20 reserve managers who indicated they invest in equities responded to this question, a group responsible for just over $2 trillion, all but two of which were from high income countries. Three-quarters were from central banks in Europe. The most popular single choice was cash equities, via external manager. Almost all respondents who said they use external managers employ this approach. However, only three respondents said they used this strategy exclusively, and four used it in combination with direct management.

A very close second overall was direct exposure to ETFs: these ten reserve managers tended to be smaller holders, with seven responsible for less than $10 billion in reserves. In contrast to cash portfolios managed externally, direct exposure to ETFs was employed solely by six respondents, just over half of the group. Eight respondents said they used futures or options, although in all cases this was as a complement to at least one other approach. All those who used futures or options with an external manager also had cash portfolios with them. Broadly speaking, those using external managers tended to be larger holders. In terms of strategy, 12 respondents commented, of which the overwhelming majority (ten) said they used a passive strategy. A reserve manager from Europe offered a pithy explanation for this: “We use passive index full replication. It gives us exposure on the economy, not on the manager.” The remaining two said they employed both active and passive strategies.

Does your central bank use exchange traded funds (ETFs) in reserve management? If yes, please say which underlying assets they give exposure to.

ETFs are a growing area for reserve managers, especially among high income countries, who find they offer an easy, cost-effective and liquid way to diversify. This view was neatly summed up in a comment from a European central banker investing in both equities and fixed income: “It’s cost-efficient and an easy way to get a diversified portfolio.” Twenty-one respondents, of which three-quarters from high income countries, use ETFs to gain exposure to equity and fixed income markets, with the former more favoured. Just under one-third of the sample said they used ETFs for both equity and fixed income. These six were all from high income countries. As a group, the 21 are responsible for $1.2 trillion in reserves.

A reserve manager from Asia explained why they used ETFs for equities, and noted the operational benefits of accessibility at a low cost: “For portfolio diversification, and tactical exposure to over- or under-weighting certain regions, countries, sectors on the basis of short-term views. It also provides accessibility and cost-efficiency in terms of taxation, as compared to direct equity investing.” A similar view was offered by a reserve manager from Africa, who also invested in equities: “Mainly [the reasons] are reduced cost, access to markets and return perspective.” For a large holder from Asia, ETFs provide flexibility: “To allow external managers to easily adjust their exposures.” For a reserve manager from Europe, the problem was there wasn’t enough: “Availability of large enough products is a challenge. ETFs offer best solutions, even if we don’t really need the liquidity.” Two reserve managers from the Americas, who both used ETFs for fixed income, noted slightly different reasons: “Efficient way to get exposure. Mitigate reputational risk,” said one, and: “The ETFs is a vehicle to invest and have exposure to an asset class relatively quickly,” said the other.

Of the 52 respondents who said they did not use ETFs, 25 offered comments explaining why. These could be broadly divided into five buckets: “law and guidelines”; “resources”; “risk profile or lack of interest”; “thinking about it”; and, lastly, “size of reserves.” Comments from ten fell into the first group, with a reserve manager from the Americas being typical: “Central bank law restrictions.” A reserve manager from Asia noted simply: “not allowed yet in our investment guideline,” while several also mentioned that ETFs were not permitted, as did this reserve manager from Europe: “ETFs are not an eligible instrument for investing the FX reserves.” Seven central bankers said ETFs did not fit their risk profile or there was no interest in them. One reserve manager, from the Americas, elaborated: “We prefer direct exposure to individual assets for liquidity reasons.” Four noted resources, both human and system, and three said they were considering this. One reserve manager said their reserves were too large to make it cost-effective.

If your central bank is investing in emerging market bonds, please give the percentage share of reserves invested?

Exposure to emerging market bonds is typically a small element of reserve portfolios, although reserve managers unequivocally see this growing over the next two to three years. Thirty-four of the 36 reserve managers who said they invested in emerging market bonds gave a percentage figure for the amount they invest. This group, responsible for $2.6 trillion in reserves, had an average holding of 7.8% of reserves invested in the sector, or 2.9% weighted by reserves. This varied by income category, with exposure broadly speaking inversely associated with income category. The 14 high income countries had an average share of 5.1%, the 11 upper middle income 10.4% and the seven lower middle income 10.8%. The two low income countries however had an average exposure of 2.25%. The question of denomination revealed a near three-way tie, although analysis by income category showed that the 50% of high income countries favoured local, whereas just under 50% of upper middle income preferred foreign currency. Smaller holders also tended to favour foreign denomination, with 50% of those with less than $10 billion indicating that option alone.

In contrast, among those with more than $10 billion in reserves, there was a slight preference for exclusively local (44%) compared with 39% for both.

Internal management was favoured overall by the group, and was the clear preference among high income countries (64% of the group) and those with more than $10 billion. The most popular single choice was local denominated, internally managed, which was indicated by just over a quarter of the sample.

Reserve managers see scope for expansion into this asset class. Twenty-three of the 34 reserve managers who said they invest in emerging marketing bonds envisage this share increasing; this was over 90% of those providing an answer to this question. The average share of reserves invested in emerging market bonds among these 25 was 10%. A common thread running through the comments offered by reserve managers was the opportunity for yield. A European reserve manager summed up the prevailing view: “The share of the emerging market bonds will increase in search for higher yield pick-ups.” A reserve manager from Africa agrees, but also stressed the diversification benefit: “Emerging market bonds offer more attractive yields in addition to the diversification benefit.” In an extended comment, a reserve manager from the Americas offered several reasons for increasing:

A further three reserve managers, two of which did not give their exposure to emerging market bonds in the earlier part of the question, indicated they thought this exposure would increase; a third noted they were considering investing in the sector.

Which view best describes your attitude to the following currencies?

Reserve managers continue to explore new currencies for diversification purposes, with interest in the renminbi in particular growing. The Australian and New Zealand dollars are most favoured, with over half of respondents saying they invest in these currencies. Forty-two respondents, responsible for reserves worth $3.2 trillion, said they invest in the Australian dollar, with slightly less (38), responsible for $3.2 trillion, investing in the Canadian dollar. There was considerable overlap between the two groups, with 30 respondents saying they invest in both. High income and lower middle income countries favoured the Australian dollar, while upper middle income counties marginally favoured the Canadian dollar. In third place was the Chinese renminbi onshore: just under half of respondents said they invested in this currency, and a further 20% are considering investing. This group was dominated by high income countries (18) with 12 middle income countries, split evenly between upper and lower categories. Indeed, 43 respondents responsible for $3.4 trillion in reserves said they invest in either onshore or offshore. Those investing in offshore alone were fewer, but were on average larger holders. As a group, they were dominated by middle income countries, which made up just under three-quarters of the total. Reserves managers from only five high income countries said they invest offshore.

From a geographical perspective, reserve managers from Africa were the most invested: 54% and 53% invest in onshore and offshore, respectively. Asia had the highest participation rate: 55% invest onshore but only 36% invest offshore. There was also a clear preference among European managers for onshore exposure: 45% to 14%. A further 30% of respondents from this region were also considering onshore. Reserve managers from the Americas were the most cautious: 21% invest onshore and 29% invest offshore.

There was also considerable support for the New Zealand dollar and Swedish krona, with around a third of respondents saying they invest in either of these. Just over a quarter invest in the Danish krone and one in five the Singapore dollar.

Among high income countries, there was a clear preference for the Australian dollar and renminbi offshore compared to the survey, but also the Norwegian and Danish crowns and the Singapore dollar (see table on page 43). Respondents from upper middle income countries tend to look to the Canadian dollar and offshore renminbi more than the survey, but also the Korean won and New Zealand dollar. Reserve managers from lower middle income countries tended to be less adventurous compared to the survey sample overall, with notable exceptions being offshore renminbi and the South African rand.

The average holding of renminbi, taken from the 37 respondents responsible for $2.7 trillion, who gave a figure was 4.2%, or 3.2% on a weighted basis.⁸⁸ At the end of 2020, the renminbi accounted for 2.1% of foreign exchange reserves according to the IMF, see Appendix 3. By region, the average holding ranged from 7% among Asian respondents to just over 6.5% in Africa, with the Americas and European having 3% and just over 2%, respectively.

Which of the following best describes your attitude to investments and products in the onshore renminbi market?

Reserve managers concentrate on onshore investments in the renminbi in government bonds with some engagement in policy bank bonds. Investing or active consideration of investing in credit bonds, interest rate swaps, repo and equities is confined to small numbers, although upwards of 20% do say they would consider these in the next five to ten years. Thirty-five reserve managers, just over half the 66 respondents who gave a view on government bonds, invest in that asset class and a further 22% are considering the move. The group of 35 reserve managers was responsible for $3.2 trillion and dominated by high income countries (20), with seven from upper and five from lower middle income countries. Reserve managers from all three low income countries were included in this group. The 22 considering the move were much smaller holders on average, managing $216 billion collectively. There were only five high income countries in this group, with 10 lower middle income and seven upper middle income countries. The ten reserve managers investing in policy bank bonds all invest in government bonds, although in this case high income countries made up less than half the group. Eight reserve central banks accounted for the participation in credit bonds, swaps, repo and equities. These were on average large holders, but featured representatives from Europe, Africa, Asia and the Middle East.

From a regional perspective, European managers were more actively considering policy bank bonds than the survey sample. Asia showed more engagement and 25% of reserve managers from this region were considering repo. Africa was the most engaged region with at least one central bank investing in all six options. The Americas was the least engaged with less than one in three investing in government bonds.

The size of reserves unsurprisingly has a bearing. Almost three-quarters of those with more than $10 billion in reserves (22 out of 30) said they invested in government bonds compared to 36% among those with less than $10 billion. For policy bank bonds, the figures were 23% in the first group and 12% in the second. A further 27% of those with more than $10 billion were considering investing now, compared to 12% for those with less than $10 billion. Three of the group of larger holders said they were investing in repo and a further three were considering it. Again, not surprisingly, those with a greater share of their reserves invested in renminbi tended to be more diversified. There was at least one of those with more than 2% allocation, according to the answers to the previous question, investing in each of the six areas, with more than 25% in policy bank bonds and almost one in three considering repo now. In contrast, those with shares of less than 2% were almost all concentrated in government bonds.

The IMF added the renminbi to the SDR in October 2016 with a weight of just below 11%. What percentage of global reserves (and your own reserves) do you think will be invested in the renminbi by the end of 2021, 2025 and 2030?

Reserve managers see the renminbi’s share of global reserves rising from 2% to above 10% over the next decade as markets liberalise and the currency is increasingly used commercially. Broadly speaking, reserve managers from high income countries or the Americas region are the most cautious, whereas those from low income countries or Africa and Asia are the most optimistic. Smaller reserve holders tend, all else being equal, to be optimistic whereas larger holders see a steadier rise over the decade. As would be expected, reserve managers whose holding of the Chinese currency was greater than 2% were more optimistic than those for whom it was less. Two comments from reserve managers summed up the optimistic view. One reserve manager who saw the renminbi at 20% of global reserves in 2030 said: “Chinese assets a gaining traction and may overtake some of the major markets.” A second reserve manager, also from southern Africa and who also saw the Chinese currency accounting for 20% of global reserves, stressed the asset-liability management (ALM) aspect as well as returns: “Due to increasing role of China in the global economy, capital/infrastructure loans in majority of countries in Asia, South America and Africa, we do believe that reserve managers will increase allocations to CNY/CNH for liabilities purposes, apart from returns.” A more cautious note was sounded by a reserve manager from the Americas, who saw the renminbi at 5% in 2030:

Reserve managers tend to be more cautious when predicting the renminbi’s share in their own reserves. Their predictions for the renminbi’s share in global reserves in 2030 (11.5%) was just under five percentage points higher than their predictions for its share in own reserves. This narrowed among high income countries to just under four, and then less than two and a half in lower income countries. In Europe and the Americas, there was a six to seven percentage point difference in the figures. A reserve manager in Europe who saw the renminbi rising from 2.1% at the end of 2020 to 5% of reserves in 2030, explained: “FX reserves are for interventions or other crisis functions. Currently RMB would be an investment decision or a political decision, and we don’t have a case for either of these now. Maybe in the future.” In Asia the gap was five percentage points, but in Africa just over half a point. Again, the most optimistic reserve managers are those from central banks in Africa, low income countries or with more than 2% of their own reserves invested in the currency.