INTERNATIONAL PRACTICES IN FOREIGN EXCHANGE RESERVES MANAGEMENT

The paper explores modern international practices in foreign exchange reserves management. First, key goals of FX reserves management are presented. According to the goals, there are two dimensions of reserve portfolio management that are employed by monetary authorities: achieving optimal size of the portfolio and constructing optimal structure of the portfolio. Then, general rules of FX reserves management are discussed. Best practices developed by IMF and major world central banks require several salient features to be implemented into the reserve management framework. The strategy of reserve management and its targets should be clearly defined with basic principles ingrained in the everyday routine of portfolio managers. Technological and organizational practices should produce a reliable and efficient operational system that processes transactions quickly and without interruptions. Sufficient flexibility and possibilities for upgrade should be factored into all IT-systems. Reserve facilities and back-up systems need to be created and installed in advance so that they can be put into use instantly and provide uninterrupted functioning and transactions execution. Risk management framework should incorporate rules dealing with all major types of risks and at the same time meeting operational targets that are specific to central banks as portfolio managers. Thus, among the most important questions of risk management is matching ample liquidity of the portfolio with the necessity to maintain its value and provide some extra yield. This directly influences the asset structure of FX reserves portfolio with large share of high-rated and liquid assets (mostly sovereign issued bonds). Finally, FX reserves management system in Japan and Norway are analyzed. With 2nd largest reserves portfolio in the world Japan pays surprisingly low attention to FX portfolio management keeping most of its reserves in highly liquid US-issued papers. Norway's experience of managing its oil and gas revenues provides insights in how it should be done in an efficient manner for a resource-exporting country.