Appendix 2: Survey responses and comments

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

1. Which in your view are the most significant risks facing reserve managers in 2022? (Please rank the following 1–6, with 1 being most significant.)

Annual inflation for January 2022 is at its highest since 1982. Rising inflation reduces the real returns on investments. If the returns on investments do not outpace the annual inflation rate, investment will continue to lose value in real terms.

Answering at the beginning of March, where geopolitical tensions have realised already. Really hope will pass soon though.

As high-rated government bonds are the main reserve assets, the factors that affect their yields the most are considered as the main risk factors for the reserve managers. While changes in expectations for monetary policy normalisation are the main drivers of the recent mostly upward movement in yields, geopolitical tensions – with the safe heaven demand it creates – has become another factor for uncertainty. We think that the effect of the Covid pandemic has decreased significantly as the households and companies learnt to cope with it, but despite diminishing it still is a risk factor due to its effect on supply and demand, and thereby on inflation and growth that ultimately affect the monetary policies.

As reserve managers, our primary responsibility remains the preservation of liquidity for our institutions. In most cases, this stipulates that investment strategies must be conservative by nature. With the onset, and persistence, of the Covid-19 pandemic, many of these strategies have lost their benefits and institutions have found themselves in unprecedented environments seeking to pick up yield and bolster investment returns in ways not forecasted.

Additionally, with the continued mutation and various new variants forming, it is becoming increasingly difficult to project changes in the environment and provides challenges for the expectation of liquidity injections.

Based on the recent declaration of Russia’s war on the Ukraine, this geopolitical issue has taken centre stage with implications for severe repercussions for global economies and, by extension, financial markets. This will invariably impact foreign reserves management.

Central banks will have a great challenge facing rising inflation and monetary policy normalisation this year, which will have a big impact on the financial markets and the reserve management.

Covid-related risks are uncertain; hence they are regarded as the most significant.

Currently the geopolitical uncertainty significantly impacts the FX rates and asset prices. If the situation stabilises (this source of risk turns out short-lived), the importance of rising inflation (and in consequence monetary policy tightening) may increase again, reducing the real value of assets and contributing to deteriorating credit standing of financial institutions and non-financial corporates.

During 2022, inflation and monetary policy actions are expected to be the most relevant ex ante risk factors.

Geopolitical risk is becoming important.

Geopolitics might prove to be a much larger risk factor depending on Russia’s stance towards Ukraine.

If the currently foreseen course of the virus does not change significantly, we believe that the potential next waves of the Covid pandemic have already been priced into the markets. Therefore, we consider the rising inflation and especially the responses by the major central banks as a major “unknown” and, as such, potential risk to manage.

Inflation still the headline in the market, [which] may lead central banks to revert their monetary policy stance. These events may negatively affect the performance of our fixed income portfolio.

It seems that besides the geopolitical issues, everything else goes hand in hand. If the rising inflation is a sort of eruption as a result of very easy monetary policies and business margins under pressure during Covid, then fine. But if the rising inflation is a reaction to a shortage of something, or even a reaction to “economic wars”, then we are in trouble.

Monetary normalisation is the most significant risk factor due to its impact through rising yields on portfolio valuations, especially keeping in mind the expected US Fed rate hikes.

Reserve managers will have difficult times this year. Interest rates have increased. Although our interest income will increase, at least in the first semester we will have capital losses. In addition, current Russia/Ukraine war adds uncertainty.

Rising inflation and monetary policy normalisation are related risks.

Rising inflation and potential policy mistakes by central banks while fighting inflation is a major risk that could lead to economic slowdown.

Rising inflation and subsequent monetary policy tightening cause high interest rate volatility. The impact on the yields is therefore sudden and significant due to sudden swings in market expectations, making the actions to adjust gradually impossible.

Rising inflation can have a strong impact on rates and reserves returns.

Rising inflation is no longer proving to be not transitory.

Rising inflation together with an accelerated monetary policy normalisation may lead to foreign exchange outflows for emerging markets with high public debt.

Rising inflation will prompt monetary policy normalisation and, with higher rates/less accommodation, credit market pressure will occur. Pandemics has taken a back seat with relaxing measures.

The elevated inflation will force central banks to drastically reduce their stimulus and accept corrections in financial markets and the economy.

The first three are close and interrelated, and were chosen in respect to the predominance of fixed income securities in our reserves’ portfolio.

There is some uncertainty as to how monetary policy normalisation will affect advanced (in our case, the US economy is the main focus) economies and how financial markets will react. Given the high level of indebtedness in the US, there is doubt that the planned tightening will occur in its entirety. We believe that some of the inflationary pressures should ease in 2022, but it still is a determinant factor in our asset allocation thought process. Concerning the pandemic, there is still the possibility of another variant affecting economic activity, but we believe the worst is behind and that the world will start living with the virus. A potential slowdown in economic growth caused by monetary tightening should affect corporations, but we do not foresee too much trouble in credit markets, despite historically tight spreads. In terms of FX volatility, we are neutral on that point, considering 100% of our reserves are in USD. As for geopolitical tensions escalating, they generally create a positive environment for the bond market (flight to safety).

We consider monetary policy normalisation to be the most significant risk faced by reserve managers given the possibility of an acceleration in tightening as we observed during January 2022. The relevance of other risks that were highly ranked, such as rising inflation and geopolitical tensions, consists precisely in the impact those elements may have on monetary policy.

With labour markets as tight as they have ever been in the US and Europe, we believe policy normalisation will be driven mainly by unexpected/persistent inflation above central bank goals, which is why policy normalisation is ranked lower than inflation, but both are a concern. The strategic asset allocation of the international reserves portfolio we have in place should cushion the negative effects of higher interest rates and currency depreciation (against USD); however, we expect negative/low real returns for the year because of the composition of the portfolio (high credit rating, mainly sovereign fixed income securities).

With the continued spread of the virus and its variants, much uncertainty has remained in the global economy, posing challenges to the path to recovery. Mounting inflationary pressures, normalisation of policy, exchange rate volatility, credit and geopolitical tensions all followed from the repercussions of the pandemic.

2. In light of recent increases in inflation, and subsequent monetary policy tightening, what steps have you taken to protect the value of your reserves portfolio? (Please check as many as appropriate.)

Back in early 2021 we implemented a relatively low duration portfolio (three years) and nearly doubled our exposure to inflation-linked bonds.

By positioning tactically on the lower duration limit we are trying to decrease the interest rate risk.

In order to minimise the losses, we have shorted the duration.

In the face of policy tightening, we aim do that by duration management.

In the past couple of years we have made changes in the composition and size of our liquidity and investment reserves portfolios in order to endure negative yields as well as to weather monetary policy tightening.

Investment strategy at [the central bank] has remained somewhat the same, favouring long bonds in anticipation of turmoil at the shorter end of the curve. Investment committee sees opportunities at longer end.

No changes were implemented at the strategic benchmark level.

Our duration targets are low.

Our portfolio, and currency position, is guided by a strict peg requiring the maintenance of a specific percentage of reserves compared to our domestic currency in circulation. To ensure that we have adhered, and continue to adhere, to these guidelines we have occasionally adjusted our approach to downsize investment positions to strengthen our liquidity portfolio with cash reserves; seeking shorter duration investments in some cases.

Overall duration of portfolio was reduced, with the expectation of increases in CNY holdings in the near term.

Please note that the adjustment to portfolio duration is being done as part of active portfolio management by external asset managers relative to an approved fixed income benchmark. It does not represent the strategic asset allocation.

Shortened duration relative to benchmarks.

Shortened duration remarkably.

Shorter duration investments in some cases.

Since most of our portfolios are enhanced indexed to US Treasury indexes and the deviation limits are small, changes in credit exposure are quite limited. Therefore, returns have not differed significantly compared to our benchmarks.

Slightly change in the duration of the portfolio to account for monetary policy normalisation, although the movement is mainly discounted by the market. We have increased the use of money market instruments although we cannot fully consider this fact as a change in the range of assets invested in.

Strategic asset allocation has not changed. However, due to the current market situation in our local markets, liquidity of the foreign reserves has become an even higher priority.

Tactically shortened duration and utilised inflation-linked securities.

The bank’s portfolio managers have shortened the duration of the reserves portfolios.

The [central bank] aims to maintain a relatively short duration of the portfolio to frequently reposition the portfolio following the gradual monetary policy tightening in 2022 with the aim to be more resilient to interest rate risks related to our reserves portfolio.

The [central bank] has started to invest in shorter-term Treasury notes (two-year T-notes) rather than longer-term notes since interest rates are expected to increase and the value of longer-term securities are most at risk to inflation.

The dilemma of any fixed income investor is whether to bet on higher coupons or on capital gains. As a long term investor we rather rely on coupons and therefore we do not react to monetary policies changes.

The duration of the portfolio has been shortened to mitigate the risk and exposure to the portfolio. No material change has been made to the other metrics.

The size of portfolio investments was substantially reduced and cash balances have increased instead.

To improve the return of the portfolio, the duration was changed in 2021 from 1.5 years (average) to three years. The [central bank] applies a buy and hold strategy to keep a relatively stable portfolio over time.

We are already investing with very short duration and mostly in USDs.

We have changed the share of each assets in portfolio.

We have decided to set up the held-to-maturity portfolio to make the profit and loss account more resistant to rising yields. We also continued currency diversification and increased exposure towards equities in order to further differentiate sources of risk and return, but it was not strictly connected with rising inflation.

We have extended our capabilities of investing in inflation-linked instruments in advanced economies during the last couple of years. Moreover, it is worth mentioning that our strategic asset allocation framework, which did lead to changes in currency and credit exposure, does consider implied market expectations which have inflation and monetary policy embedded and seeks in particular the objective of capital preservation. Nonetheless, we consider that finding the most efficient asset composition is different than a discretionary decision to protect the value of the reserves portfolio, as the question indicates.

We have not taken any additional steps.

We have not taken any specific steps due to the recent inflation risk since we hold TIPS [Treasury inflation-protected securities] as a diversification asset over the long run.

We have reduced the duration of our portfolios.

We have started to invest in inflation-linked bonds and have reduced the credit ratings of some our investments (all of them are investment grade). In addition, we have been some changes in our strategic asset allocation. We have changed our non-US hedged sovereign benchmark: the benchmark has now the most prominent (with the best return/risk profile) investment-grade sovereign. In addition, right now we can invest in one new asset class: corporate bonds.

We hold a quite low duration exposure so our sensitivity to rising rate is low. This will allow us to rise our duration in the future when rates will be higher.

3. Recent years have seen reserve managers diversify into new markets, assets and currencies. In your view, to what extent will rising yields affect this trend in 2022–3? Among reserve managers broadly: (Please check one box.)

A sort of normalisation of interest rates (yields coming back from under zero area and yield curves becoming more steeper) in major reserve currencies may lead to lower demand for “more exotic” currencies and asset classes. The only problem is that the “normalisation” is about to happen everywhere. Meaning that for many reserve managers the asset/liabilities interest rate differential might remain the same and higher return on assets should not in all cases be enough.

Although diversification is the most effective method of financial risk reduction, it could be limited/restricted by the central banks’ objectives, reserve management priorities and risk aversion. Besides, rising yields seem to be a global phenomenon.

Bond yields rise when investors are selling bonds with the expectation that interest rate will increase. As such, investors tend to increase their appetite for riskier investments that would yield higher returns which may result in additional diversification.

Central banks are typically limited in their ability to take additional risk given the precautionary nature of reserve management. This naturally limits the exploration of new asset classes and currencies despite changes in the interest rate environment. While central banks have explored investment alternatives given the low interest rate environment of the past few years, most retained their exposure to the traditional asset classes, perhaps focusing more on the preservation of capital investment objective than the return objective amid increased uncertainty.

Despite this, we think that trends in the ESG [environmental, social and governance] market will continue to gain traction.

Due to the current environment, investors will probably try to diversify to new assets/markets in order to obtain positive returns.

During times of crisis, diversification helps reduce risk. Hence, with so much uncertainty still at hand despite rising yields, reserve managers will continue to diversify their reserves in order to remain prudent.

Even central banks are very conservative investor, they need to improve the return/risk profile of their investments.

Hard to say, actually, very low and rising yields are the ones probably motivating more to look around, higher yields themselves too do not create an incentive to look around for income.

In our view the low-yield environment has been a main driver to the diversification observed, it may not reverse as changes in asset allocation of reserves is a slow process.

Low interest rates have been pushing investors toward asset classes that are not typically in the central bank universe, and have resulted in taking excessive credit risk in order to preserve the value of the foreign reserves. Rising yields might reduce the incentive to take credit risk and allow central banks to return to the traditional asset classes.

One of the great incentives for the diversification efforts made by reserve managers has been the low-yield environment that prevailed due to accommodative monetary policy implemented by central banks. It is natural to consider that, with rates rising, the motivations related with search-for-yield will fade. Nonetheless, as geopolitical tensions in Europe rise and uncertainty about the inflation landscape evolves, new justifications start to appear for reserve managers to diversify into other types of investments, either by the geographical exposition that they grant or by the convenience of holding them in the new economic context. Thus, it is likely that the reasons for the pace of diversification will change, but we expect the trend to persist.

Over the past two years, portfolio managers have learned how important it is to sustain a well-diversified portfolio. Those who were not prepared prior to the pandemic have made adjustments to prevent potential repeats. With this said, as yields begin to rise, managers will begin to see new opportunities for increased diversification into asset classes previously unexplored.

Reserve managers are looking for new opportunities. Especially now there is a big focus on sustainable investments.

Reserves managers could be tempted to diversify into new asset classes. This is from white papers, research, surveys, etc.

Rising yields could reverse diversification as QT [quantitative tightening] may incentivise investors to move back to their preferred habitat. On the other hand, reserve managers could diversify into floating rate notes (consistent with the preferred habitat), inflation-linked bonds and real assets. Of course, investments into the last two asset classes could actually reverse if/when yields increase sufficiently to lower inflation expectations.

Rising yields will probably reverse totally or partially the diversification trends observed in the past couple of years mainly due to a decreasing pressure on central banks to generate returns. However, our view is that geopolitical uncertainty will still play a major role on asset allocation.

Rock bottom yields in currencies like AUD and CAD drove us away from them since we no longer saw a yield pick-up that justified currency volatility. With higher and more diversified yields levels across the board, on-shore sovereign bonds denominated in currencies other than USD and EUR will become more appealing. Conversely, higher base rates should lower the interest in higher-yielding, non-traditional reserves instruments such as IG bonds, equity or high yield.

The pace of diversification will increase because rising yields attract more reasonable returns.

The recent upward trend in diversification is mostly driven by a surge for yield. Thereby, as the yields rise, the motivation for more diversification may decrease. However, as long as real rates stay low there will be demand for higher rates and thereby diversification to protect the value of assets against inflation. Additionally, the new formal or informal mandates of central banks, such as supporting the greening of the financial system, may contribute to the further diversification of reserve assets.

The rising rates and the uncertainty regarding them may slow down the pace of diversification as investors may prefer to stay in cash equivalent and await a better opportunity to invest.

The trend is driven by reserves managers with excess reserves seeking return, which will likely continue.

In your portfolio: (Please check one box.)

Diversification in terms of looking for return may decline in a rising yield environment as we get more out of our current investment universe.

Given the low interest rates globally, the bank is envisioning diversifying its portfolio to increase it returns on foreign reserves investments.

No change.

Our asset allocation is not that much linked to absolute level of interest rates.

Our objectives of diversification tend to have a medium-term horizon of planification. Thus, we already have clarity of the new instruments and regions where we wish to invest in the next one to three years. Naturally, the evolving context might lead us to prioritise certain objectives, but we do not think this will be the case for rising rates, as we already have added sufficient alternatives for feeling comfortable in a low-yield environment, and we already have others that are suitable.

Our risk profile does not allow investments in the risky assets, but the current allocation allows us some leeway for diversification in the fixed income.

Pressure to support diversification.

Regarding our positions, there will not be a major change in diversification but we see a decreasing pressure to deviate from our benchmarks once the Federal Reserve stops rising its yields.

Rising inflation, together with an accelerated monetary policy normalisation, may lead to a slow pace of diversification in our portfolio as we have to take loss budgets into account for every repositioning of the portfolio.

[The central bank] engages in passive portfolio management with a conservative risk profile; as such, the rising yields will not impact the trend of diversification.

[The central bank] continues to look for avenues of diversification, irrespective of rising yields, to ensure prudent management of the reserves, especially during times of high uncertainty.

The concept of increased diversification is subjective. For our portfolio, we will see an increased diversification; however, the nominal amount of that increase may be significantly smaller when compared to other portfolios.

The international reserves portfolio’s diversification profile is in line with the rising yields environment in our view. Nevertheless, we constantly look for economic/financial developments and their consequences in the SAA [strategic asset allocation] of the reserves portfolio.

The reserve portfolio’s investments are already diversified.

The size of portfolio investments was substantially reduced and cash balances have increased instead.

We are in long process of diversification in our reserve investments which is less impacted by this current change in rates.

We believe that rising yields will not create a significant difference in our tendency to diversify the reserve assets as the rise in yields seems to be valid for all markets we are investing or considering investing in.

We do not believe rising yields can alter the trend of lower long-term interest rates, hence investment strategy remains fairly static. Diversification into long-term corporates was already under way at [the central bank].

We may add additional currencies and/or asset classes.

With rising yields, we assume that we will be able to find more investment opportunities in our core markets and simultaneously will have to seek and spend less in non-core markets.

4. What percentage of your FX reserves is in “non-traditional” reserve assets?

40% of our portfolio is in ZAR, which may not be classified as a traditional reserve asset.

Amount of “non-traditional” reserve assets is the same, but the percentage increased last year because we have reduced the amount of the traditional reserve assets under management.

Due to the nature of work environment and special circumstances.

In order to diversify source of income and enhance return over the long-term horizon, we have started to invest in equity index futures. Initial exposure has been relatively small, but we are planning to expand investments on equity markets.

In particular, increased allocation to equities and EMD [emerging market debt].

Investments in non-traditional currencies accounted for 29%, the remaining 4% is exposure to non-traditional asset classes.

No significant change in the last year.

“Non-traditional” reserve assets include renminbi and ZAR.

Our reserve management is quite conservative.

Since we are following a very traditional management style, we have not yet considered investing in “non-traditional” assets.

The above number is the weight of CPs/CDs [commercial papers/certificate of deposits] from commercial banks.

The [central bank] holds a small portion of CNY in fixed-term deposits.

[The central bank’s] investment strategy has been fairly stable over the years, ie, leaning towards long-term corporates.

The changes in asset allocation are result of a quantitative framework with a forward-looking approach of prices extracted from financial markets. Thus, the change in the composition of “non-traditional reserve assets” does not involve a discretionary view on markets.

The “non-traditional assets” consist of commercial banks debt and covered bonds. Although new investments were halted when the pandemic started, the extensive central banks’ support for the banking sector reduced the perceived credit risk.

The proportion of the asset composition is confidential.

The share of gold and other liquid assets increased within our reserves, which meant a decrease in “non-traditional” assets in 2021.

There was an increase in the SDR [special drawing right] quota which is held in the reserves.

We added equities to our FX reserves around five to six years ago.

We increased equity part, RMB part.

Are you considering any change in 2022–3?

As part of our new strategic asset allocation, in the short term we will start to invest in non-financial corporates.

Change not yet foreseen.

Don’t know.

Holdings in CNY are expected to increase in view of the initiation into CNY bonds under the externally managed portfolio, as well as to maximise its current composition limit.

Invest in renminbi currency.

No major change planned.

No plans to change our current stance.

Not decided yet.

SDR quota will be converted to USD for investment and foreign exchange liquidity.

The bank is considering investments in “non-traditional” assets to diversify its portfolio and generate more reasonable returns.

The changes mentioned in the previous question already contain the modifications of the yearly revision of strategic asset allocation performed for 2022.

Thinking about adding real estate.

We continue to monitor our investments in the renminbi for the past three years. It has shown positive returns, but we are not inclined to increase/decrease at this time.

We may add additional currencies and/or asset classes.

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

Adopted a “wait and see” approach until market volatility reduces.

As a central bank, a portfolio with short duration (zero to three-year maturities) is preferable, and it is aligned with the current market conditions.

Based on the preference for liquidity and expectations of further rate increases in main reserve currencies, we have shortened the total duration of our reserve portfolios and we expect no significant change in that during 2022 as the same conditions are considered to continue.

EUR duration is very short, while USD reserves are longer now (effect of greening).

Given high uncertainties in the market the [central bank] has maintained a shorter duration, at about six months, in line with its current benchmark.

In 2021 our central bank reduced the international reserve amount. The reduction was in the most liquid tranche. That’s why, we extended the duration of our portfolio in that year.

In 2021, to improve the return of the investment portfolio, the [central bank] increased the duration target from 1.5 years (average) to three years.

It depends on the market conditions upon the time decision is being made, but generally under the long-term strategic asset allocation we intend to maintain modified duration of investment portfolios close to the level determined by the market structure. Such an approach allows to enhance yield over long-term horizon.

It is our view that the market has already discounted much of the interest rates changes, so we are inclined to neutralise positions on duration.

Managing liquidity is our main priority for the foreseeable future; a longer duration will be considered should the levels of reserves significantly increase.

Marginal shortening of overall duration due to rebalancing, but will remain in the one- to two-year space.

Not significant change, we decreased it in late 2020.

Overall duration including cash is 1.5 years; duration for USD global bond portfolio is four years.

Since the portfolio duration has been on the shorter side, there is a possible extension in duration once the interest rates cease to increase.

The [central bank] aims to maintain the effective duration of the portfolio relatively low to frequently reposition the portfolio following the gradual monetary policy tightening in 2022 with the aim to be more resilient to interest rate risks related to our reserves portfolio.

The changes mentioned in the “past year” item already contain the modifications of the yearly revision of strategic asset allocation performed for 2022.

The duration is already short, so we are positioned for yield rise while avoiding extremely negative investments in euros that a shorter duration would require.

The normalisation of rates, especially in the eurozone, is going to “open the gate” and invest in longer-term bonds.

The overall short duration reflects an emphasis on liquidity primarily, followed by safety and return.

The strategic duration has been very stable over the past years. In the tactical asset allocation, short- to medium-term deviations from the strategic duration can be made.

Undecided.

We do not disclose our duration.

We have already balanced our shorter duration liquidity portfolio and longer duration investment portfolio to our needs.

We have already reduced the duration of our portfolios at the end of last year.

We increased the duration from two to three years in early 2021.

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

In our opinion, USD is well positioned as a safe-haven currency but other currencies and assets are competing to be considered as safe-haven assets.

It is not about absolute security, it’s about the relations between selected currencies. And measured by relative value, USD is still the largest economy in terms of taxes generation, it is the most technological economy (the largest global technology companies are from US), it has the biggest financial market, the most transparent regulation and the longest tradition.

Markets are very liquid. In addition, US Treasuries have a great credit profile.

Other currencies like JPY and CHF may perform better in moments of stress in the financial markets.

The demand for USD tends to increase in market stress episodes.

The price and yield movement in US Treasuries to increases in risk aversion would appear to support this view.

The value of USD rise in time of risk-off mood, USD still keeps the highest position in global reserves and offers deepest, safe and liquid investment opportunities on the most mature markets.

The US dollar remains the most widely used international used currency.

The US dollar remains the strongest world currency.

The USD is still the main currency used by majority of countries for international trades. Apart from that, the US economy is still the biggest in the world and the country has a dominant role in the geopolitics space.

The USD represents the world’s reserve currency, which implies that any event with a high risk of dampening global growth will result in more demand for dollars. Hence, maintaining its safe-haven status, despite challenges faced by the economy.

There has not been any major structural change that reflects otherwise. Indeed, during the recent rise of geopolitical tensions in Europe, the US dollar clearly behaved according to what one would expect of a safe-haven currency.

There is currently no strong alternative.

Until another currency topples the USD as the world currency and the primary denomination for international business deals, the US dollar will continue to be the primary safe-haven currency.

We see the USD as the world’s reserve currency for the foreseeable future, for various reasons: superior economic performance, breadth of financial markets, access to capital, military might, etc.

We still don’t see a currency that can take the primacy from the US dollar.

While rising yields is a short-term concern, in the long term the rising yields will offer better risk-adjusted returns.

7. Do you see central bank digital currencies (CBDC) having an impact on reserve management from operational and investment perspectives?

CBDC remains an extremely young concept, one that is still being developed in many central banks. Until it becomes fully adaptable across countries, the impact that many central banks are expected will not be felt. With this said, the potential is great from both an operational and investment standpoint.

Central banks are generally conservative and risk-averse in nature, especially with regards to reserve management. Since CBDC are a new and an untested concept, most of the central banks will shy away from taking a plunge in investing in this new product. In the long term, this may change, especially during periods of high inflation.

If we understand the CBDC concept a bit wider and would consider general digitalisation of assets, then the impact is obvious.

In the long term we may expect some impact, taking into account that some central banks and international organisations, such as the IMF, have moved beyond the discussion of CBDCs.

No specific view currently on the subject.

Several aspects regarding the design, technology, issuances, and mechanics of CBDCs remain unclear, which will be defined according to the objectives of each jurisdiction; therefore, we consider it would still be highly speculative to think it would have an impact in reserve management in the short term. Nonetheless, it is clear that it has the potential to affect such matters in the long term, at least from an operational standpoint. To have further clarity regarding the impact it could have in the investment process, there are still several details that need to be decided by the potential issuers.

Several central banks undertake initiatives to create digital currencies, but CBDC development is still at an initial stage so it is difficult to predict their future role. CBDC may impact the investment and cashflow channels, but it will be a rather long-term process.

Short-term impact is not expected on our reserve management operations, although developments are closely monitored for potential opportunities.

This is a relatively new initiative so the impact is yet to be seen and felt. We think that it is a little premature to give a definitive position.

We do not expect CBDC issues in short term.

We do not have an opinion regarding this question.

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

As part of the best in class strategy, we increased investment limits in entities with very good green indicators.

As part of the central bank’s strategy, we are considering incorporating the SRI in smaller sizes at first.

Despite being a socially responsible corporate citizen, the [central bank] is not seriously contemplating SRIs at this point.

Negative screening of corporate bond issuers. Corporate portfolio represents 24% of our total financial assets. GSS [green, social and sustainability] bonds (impact investing): 6%.

Pension fund (equities 100%, bonds 20%).

SRI not incorporated in reserve management.

[The central bank] has a dedicated green bond portfolio which demonstrates its clear strategy with regards to sustainability. Besides this, SRI considerations have not yet been implemented into our decision-making process as a separate element, affecting one or more of our traditional portfolios.

The international reserves portfolio has a very small fraction (<1%) invested in green bonds. However, there is no specific framework in place yet that guides the investment process towards sustainability. Nevertheless, the central bank is a member of NGFS [Network for Greening the Financial System] and work is being done in that direction.

The negative screening is applied to the entire foreign exchange reserves.

The percentage specified refers to a mandate where negative screening of certain industries is demanded as part of the investment guidelines. Furthermore, our portfolios contain certain other that qualify with ESG criteria, such as green bonds, which are selected on a case-by-case basis, as they are not part of the strategic asset allocations or required internal investment guidelines.

We are discussing possible frameworks and policy.

We are gradually increasing investment in green and sustainable bonds (sovereign and corporate) but this market is still immature, classification criteria are not transparent enough and controversial in some cases.

We are very much in the beginning of the process, so yes, we are considering SRI but have not worked out the details yet. The long-term (probably 20+ years) goal is to have a climate-neutral portfolio.

We’re considering SRI but there are a lot of taxonomy and methodology issues.

9. Which in your view are the most significant obstacles to incorporating SRI into reserve management? (Please rank the following 1–6, with 1 being most significant.)

Although the market is expanding, it is still small in relative terms and investors are primarily buy and hold which decreases the liquidity and availability of the bonds.

In our view, the main concern is related to find assets classes that are suits to our risk profile.

Incorporation of SRI have not yet been formally discussed by the investment committee. Currently, our main focus has been on gaining experience with more traditional products and updating our technological tools and human resources.

SRI is not incorporated in the central bank mandate with regards to reserve management. Liquidity, safety and return are the primary goals.

Supply is falling short of the rising demand, reporting standards yet need to be defined.

Sustainable development measures remain primarily the responsibility of the government, they go beyond the mandate of a central bank and might undermine its independence. Besides, while managing foreign reserves, central banks are generally seen as neutral market participants. Reputational risk can be also stimulated by the lack of common SRI standards and a harmonised, reliable rating system.

The challenges of incorporating SRI are far greater for supranationals and sovereigns than for corporates, in terms of definitions, data and in integration with existing mandates.

The main scope of the current investment approach is to support monetary policy. The constitutional and legislative authorities have deliberately not tasked the [central bank] with using its investment policy to selectively influence the development of certain economic sectors. The [central bank] therefore does not pursue structural policies geared to advantaging or disadvantaging specific economic sectors via positive or negative selections, or inhibiting or promoting economic, political or social change.

The mandate is by far the most important. There is no other area of central bank doing where a central banks self-mandated themselves and spend money on a field where even their governments are not fully in agreement. Regardless of what the final result is, the central banks are demonstrating that if some people inside these central banks want, then they could easily make a central bank the most powerful agent in a country….it is also very difficult to avoid generalisation, but what should one think about having SURE [support to mitigate unemployment risks in an emergency] bonds under the ESG umbrella while the proceeds from the bond issuance is used for repayment of the old bonds? Nothing else than a lot of artificiality is around ESG and SRI.

We are at the very initial stage of discussing ESG in the context of our FX reserve management. Therefore, the answers given are provisional at this stage.

We believe that the amount of available products and their liquidity/return are suitable at least for a exploratory initial investment. On the other hand, we see a lot of reputational risk for the bank because of costly data that has unclear/divergent definitions of SRI.

We consider that there is still a lack of clear standards that allow to make different SRI alternatives comparable, due to the broad spectrum of actions and initiatives that can be included in ESG bonds, for example. Furthermore, in our experience, assets that qualify as ESG tend to exhibit a premium, which is likely associated with the relative scarcity of these issuances. As the market evolves and differences in liquidity reduce, we expect price discrepancies to diminish as well, making more likely that our exposure to such instruments increases on a discretionary basis.

We have contracted an international vendor. It gives us indicators about carbon footprint and environmental measures. We use this information to implement the best-in-class strategy. Nevertheless, we understand that this kind of indicators are in development age yet. There is no benchmark for comparison and data is still quite weak.

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

Although gold is held as a strategic asset, it can be seen as safe haven as well as liquid asset that can be traded and lent for additional income in the FX reserves.

As previously mentioned, inflation is at its highest level in 40 years; therefore, it can be most valuable as a hedge against inflation as it increases in value when purchasing power of the dollar declines.

Correlation between gold and inflation in US seems pretty weak over the last few years so its role as a hedge has somewhat diminished in our view.

Gold allocations have been a decade’s legacy. Even though it certainly has its advantages as a diversifier and safe haven, it has been recently discussed whether the bank should keep it as an option due to its volatility in the balance sheet.

Gold continues to be a strong diversification tool for reserve managers who have the liberty to take on risky approaches in their portfolio operations. It stands as a safe return option to hedge against market fluctuations.

Gold’s share in our reserves is negligible. We are revisiting the question if arising every five to seven years, but have not found enough (strong) arguments for it.

In modern history of reserve management and central banking there is no single intended use of gold.

In view of the high negative correlation of gold versus risk assets and US yields, the demand for gold globally has propelled, including for hedging purposes.

It is primarily in the portfolio as a legacy asset. Additionally, gold holds value as a safe haven especially during period of geopolitical concern and as an inflation hedge.

No gold in FX reserves.

Our strategic asset allocation process, whose robustness is tested throughout different historic scenarios, has evidenced the importance of gold as a diversifier for the risk-adjusted performance of our international reserves. Furthermore, just as the recent geopolitical tension in Europe that generated flight-to-quality movements has evidenced, gold remains a relevant safe-haven asset

Since several years, our central bank does not invest in gold.

[The central bank] is not allowed to hold gold as part of our reserves. We probably should not comment as a non-participant.

Traditional “store of national value” in public perception also.

We are bound by law to hold gold.

We do have gold in our portfolio to ensure more diversification, using as buffer in scenarios of rising inflation (that affect fixed income assets) and allows us to have liquid asset to use it in periods of crisis.

We perceive gold as a strategic component of foreign reserves, firstly because of its unique features (no credit risk, the lack of direct connections with the economic policy of any single country, limited size of the resource, physical features – durability and practically indestructibility) that make gold a safe-haven asset. Besides, gold characteristics leads to its relatively low correlation with major asset classes and reserve currencies, which reinforces the benefits of diversification of the reserve portfolio by improving its risk/return profile.

Do you include gold in your asset allocation decision-making process?

As mentioned in the previous question, we consider gold to be a relevant diversifier for reserve management.

Asset allocation is based on our needs, historical behaviour of asset classes and on a kind of future behaviour forecast. Gold has nothing except it is changing its price over time without knowing why.

At this time, our mandate provides an extremely conservative approach to investment operations that makes investment in gold relatively redundant.

Currently don’t have gold reserves.

Gold is a legacy historical investment, and is managed separately from other reserve assets.

Gold is kept in passive way.

Gold is part of a “historical” portfolio called “other assets”, and position in this portfolio does not usually change over time.

It is our view that gold constitutes by itself a strategic asset in central banks’ reserves.

Not included in asset allocation decision-making. It’s a legacy asset.

The gold portion is not actively managed. The investment strategy of the foreign exchange reserves is determined taking into account the gold holdings.

We consider including gold in the near future.

We have a fixed, stable amount of gold, no changes planned.

We have had discussions on including gold, but found that any meaningful allocation would violate our stated risk tolerance.

We include gold in the SAA definition process of the portfolio. However, the resulting final portfolio does not include it because of its risk/return characteristics.

We intend to start in the short term.

11. Do you use derivatives in your reserve management?

As a rebalancing instrument.

As part of the funding strategy.

Current portfolio does not include derivatives.

Currently used by externally managed portfolio.

Derivatives are used for portfolio rebalancings, tactics, overlay strategies and portfolio management.

External management services are allowed to use derivatives for the sole purpose of mitigating risk.

Internally, we do not use derivatives but our external managers do.

Investments in derivative instruments are allowed for hedging purposes only and not be used for speculative purposes, and are restricted to standard types with a simple expiration date and strike price with no additional features.

It is used only for hedging purposes.

Not yet, but [the central bank’s guidelines] allow for the use of derivatives solely for hedging purposes.

Our use of derivatives is basic, yet we have plans to expand using them.

Used by external managers, represents a very small portion relative to overall reserves.

We consider derivatives to be an integral component of our reserve management process, as they represent complementary tools that expand our decision-making capabilities.

We have started using in derivatives in 2021.

We use derivatives for external managers mandates, mainly for hedging purposes.

We use mainly interest rate futures and gold swaps for hedging and taking positions according to market views.

Yes, mainly for active positions and FX hedging.

If yes, which derivatives do you use? (Please check as many as appropriate.)

Although the [guidelines] makes provision, they are not used at this time.

Dual currency deposit.

FX forwards.

Others: FX forwards, bond futures, gold options, inflation swaps.

The “other” category for FX derivatives refers to forwards.

These are used for hedging purposes.

Use of interest rate futures to adjust portfolio duration would be allowed

We also invest in credit-linked notes and dual currency deposits, which are option-embedded instruments.

We use FX forward for hedging purposes.

We use FX forwards.

We use TBAs [to be announced trades] for US agency MBS [mortgage backed security] exposure.

If you use derivatives, please say for what purpose(s):

As part of our funding strategy.

Implementation of relative value strategies.

Only used for hedging not speculation.

Rebalancing position.

We find that interest rate derivatives can be particularly useful to express trades associated with monetary policy perspectives, and that derivatives in general provide enhanced liquidity for directional trades. Furthermore, the flexibility that options grant allows alternatives ranging from simple to significantly complex trading strategies with broad applications, not only for our reserve management objectives, but also for our responsibilities related with the services we provide to the federal government that include hedging commodities. Finally, we enhance the returns we obtain in money markets using FX swaps to invest in various G10 short-term sovereign debt issuances.

We use bond futures for active portfolio management and we gain exposure towards equity markets with equity index futures (such an approach reduces operational challenges, allows to avoid stock picking).

Has your use of derivatives changed in the past year?

In essence, we maintain the objectives for which we utilise derivatives. The volume traded for certain purposes can change contingently through time, given the macroeconomic circumstances and the opportunities identified in financial markets, but the general purposes have not changed.

More relative value strategies and higher rate volatility.

No change in policy regarding derivatives use during the last year.

No material changes over the past year.

Not applicable.

Reducing use of equity futures while focusing more on equity ETFs [exchange-traded funds].

The low volatility in rates was not favourable for taking active positions with derivatives.

We added to our investment universe equity index futures.

We have optimised our risk consumption parameters through the update of our contractual framework.

12. Which of the following best describes your approach to external management services?

Cash management mostly via repos.

Content with using external management by supranationals.

Currently don’t have external managers.

Despite the fact that several categories from the presented options are available to us, it is important to specify that commercial asset managers are the main focus of our external management services, given that they allow us to expand the diversity of our available assets and engage in knowledge transfer that benefits the central bank.

Due to the level of [central bank] reserves, it is not cost-effective to hire external managers at this time.

External asset manager for the past three years. The managers are guided by our internally approved investment policy guidelines and returns have met expectations. Intangibly speaking, the asset managers’ assistance in various market discussions and available training for in-house staff has also been a benefit that we are pleased with over the years.

No comment

We invest our equity and MBS portfolios to ETFs.

[The central bank] has joined the Reserve Advisory & Management Partnership (RAMP) program of the World Bank in 2018 in order to further enhance reserve management capacities at the institution.

[The central bank] uses three external fund managers with defined mandates plus pooled funds for the renminbi portfolio.

The intention is to move from fund investments to mandate investing.

There are talks of exploring ETFs, in context of our investment policy and guidelines.

We are currently a member of the RAMP from the World Bank.

We are currently studying the possible use of ETFs to invest in specific asset classes.

We are investing in equity ETFs (passively), BIS [Bank for International Settlements] CNY fund (passively).

We consider external managers programme as a vital part of our reserves management for return enhancement, diversification of the investments and also for capacity building.

We currently outsource our reserves to five commercial asset managers who are guided by the Investment Management Agreement and sets out the investment guidelines of the asset managers. Investments are in fixed income, deposits and cash is managed using a pool of funds (money market fund). All investments are hedged back to the US dollar and duration can be managed using futures.

We have been using the services from multilaterals and have good experience by adopting best practices in portfolio and risk management, knowledge sharing, as well as gaining experience in trading new instruments. Should we decide to introduce a new specific asset class, we would consider an external mandate as an option for exposure and acquiring expertise.

We have experience with World Bank’s external management services.

We invest in ETFs directly and not through external managers.

We might consider in the medium term the use of ETFs for ESG strategies.

We will start to invest in non-financial corporates. In the future we could invest in MBS. For both instruments we will contract external managers.

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

Although we do not invest in US agency bonds, we invest in other countries’ agency bonds.

In terms of deposits, only gold deposits are being conducted.

Portfolio is concentrated on “traditional” reserves assets.

The bank has approved a small percentage exposure to corporate bonds and equities in 2021, yet to be implemented.

The internal portfolio is more oriented to traditional asset classes (TD [term deposits], government bonds, supranationals). The external mandates can explore more risky assets (ex. corporate bonds).

We are a very conservative investor.

We are in the final phase of a strategic asset allocation review that may bring changes to our current framework, including investing in new asset classes.

We don’t comment on investment considerations.

14. Which of the following best describes your attitude to exchange-traded funds (ETFs)?

Adjusting portfolio with a low transaction cost and high liquidity.

As we plan to expand exposure towards equity markets, we may consider investments in ETFs. Besides, ETFs may offer access to complex, nontraditional asset classes. The major concerns are connected with legal risk, transparency issues, costs and taxes ,as well as accounting rules.

Broad stock indexes, diversification, easy access, low costs, no corporate actions.

Cost, liquid, easy to trade.

Ease and cost-effective and no security selection.

ETFs are being considered as a less costly alternative to futures to get exposure to specific emerging market equities that, for regulatory reasons, cannot be invested directly.

ETFs are fine for an investor without needed infrastructure (skills, trading platforms, back office, etc)… It would be nice to have an ETF on as much as possible asset classes.

ETFs provide diversification.

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 compared to direct equity investing.

It represents an efficient mechanism in terms of costs to acquire the exposition we seek for certain fixed income assets where our interest is limited to a passive investment strategy.

Low cost with wide risk spread.

MBS.

Not at this time.

Our equity investment strategy is passive. Reasons: liquidity, no need for finding EAM [equity asset management], cost-effective.

[The central bank’s] external managers that have equity mandates invest in ETFs for various reasons.

The ETFs are useful instruments for taking market exposure, especially when lacking expertise in new asset classes or the intention is to have small but diversified exposure towards an asset class or geographic region.

We are assessing the use of ETFs as a way to introduce flexibility in our ESG portfolio management.

We think that it could be a good diversifier and good starting point to enter into credits.

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

Diversifying our external management portfolio to include CNY bonds.

Exploring the idea but concerns exist on the transparency of the market.

In 2021, policy bank bonds were introduced as an eligible asset class in the RMB portfolio. This decision was substantiated as policy bank bonds offer higher yield with higher liquidity as onshore Chinese government bonds, and they also have the implicit guarantee of the PRC [People’s Republic of China].

It offers an attractive risk-adjusted return and a source of additional portfolio diversification.

No changes expected.

Not interested because of restrictions to the RMB market.

Only started a small CNY mid-2021, the share might be increased at a later stage.

Our current guideline provides the authorisation to invest in renminbi; however, we do not currently hold any exposure.

Our intention is to access the onshore Chinese bond market in 2022.

So far, the experience has been positive, specifically in 2021, where the CNY portfolio performance has helped us boost overall returns, as the traditional G7 fixed income did not perform well.

Specific to equities, this will depend on the change in the [central bank’s] charter.

The bank has not considered investing in the onshore renminbi market.

The market is considered a developed one, with all it belongs to it, the market platforms, the market organisation, the regulation, the legal framework, the infrastructure…but it is making progress as well as investors gaining more skills.

We continue to monitor our current investments in the offshore and will make further investment decisions based on the performance.

We don’t comment on investment considerations.

We have been investing in Chinese assets for a long time. We haven’t had any difficulties and the level of liquidity is satisfactory.

We invest in CNY via the BIS fund.

17. The IMF added the renminbi to the SDR in October 2016 with an 11% share. What percentage of global reserves do you think will be invested in the renminbi by 2022 (end), 2025 and 2030?

Although the popularity of the renminbi has been increasing and the number of overseas investors is rising, the foreign holdings is relatively small as well as the share of the renminbi in the international payments.

China is expanding is role in global trade; additionally, progress has been made in reforms to China’s monetary, foreign exchange, and financial systems. In that way, it is expected that the renminbi’s inclusion in the SDR basket will continue to grow.

China is opening up its markets to the international community and usage of the RMB currency has also been on the rise.

Chinese currency offers diversification opportunities given its positive long-term outlook.

For many central banks the renminbi is still a new investment currency. With growing importance, further deregulation and easier market access, CNY share in central bank portfolios could increase.

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

Increase likely to be driven by easy loans and investments into Africa and Asia by China.

No idea really.

No specific opinion.

No view.

The absence of floating exchange rate arrangement and persistent government control over the exchange rate are still important limitations towards boosting the international status of the renminbi. Additionally, uncertainty arising from unknown consequences of Covid-19 may result in diminishing interest in investing in less stable currencies, including RMB.

The share of RMB may rise gradually and take time before it converges to the 11% share in SDRs.

Too difficult to predict.

We hope our reserves held in other currencies will increase, lowering the overall SDR percentage share.

What percentage of your reserves do you think will be invested in this currency by 2022 (end), 2025 and 2030?

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

Based on the performance so far and the growth trajectory of China’s market, from all indications it is reasonable to assume that we will increase our allocation to this asset class.

[Central bank] law, policies and procedures along with its risk appetite does not support investment in this currency.

Composition in CNY will increase by end of 2022, given initiation in CNY bonds under external management. Expected to increase thereafter to the ideal composition level, and thereafter the maximum composition level allowable to CNY as per SAA.

Confidential.

Depends on the strategic currency allocation process.

Due to our internal currency allocation criteria (country exposure to China), this year we expect to increase the exposure to renminbi and expect also to implement this approach in the coming years in order to enhance returns.

It depends on the liquidity of the currency, the diversification benefit, operational difficulty and the availability of its assets.

Low risk appetite.

No specific opinion.

No view.

No view.

Not relevant to [the central bank] given low level of reserves and lack of economic relationship with mainland China.

[Our country’s] foreign debt denominated in RMB has increased over the years.

RMB may be included as part of reserve investments for diversification purposes.

The size of the market and the size of the economy should deserve a bit more attention than now, which might result in a higher portion of reserves in RMB.

This will depend on the review of long-term prospects in RMB-denominated assets considering the developments in the Chinese economy and its financial market, as well as this year’s IMF review of the SDR basket.

We expect no significant change in our RMB portfolio in the coming years as it is already above the world average.

We invest only in securities denominated in US dollars and are not considering a change in our investment policy.

We would introduce the renminbi and Chinese bonds as part of the portfolio diversification and as a yield enhancer, having in mind the risks that are arising from the possible depreciation of the currency.