INTERNATIONAL: IMF Publishes Survey on SWF Institutional and Operational Practices

Monday September 15 2008

The IMF’s International Working group for Sovereign Wealth Funds (IWG) has released a report entitled “Sovereign Wealth Funds: Current Institutional and Operational Practices”. The latest report which formed part of the IWG’s work to draft a set of Generally Accepted Practices and Principles (GAAP) for Sovereign Wealth Funds (SWFs) is a summary of the first-ever survey of their institutional and operational practices.

The report comes less than two weeks after a preliminary agreement on the GAPP was reached in Santiago. Responses to this survey were solicited from members of the IWG and the IWG used the responses as background information in the preparation of the (GAAPs).

The survey covers three broad areas: (i) the legal framework, objectives and macroeconomic linkages; (ii) the institutional framework and governance structure; and, (iii) investment policies and risk management framework. Some of the findings of the survey conducted by the IWG are:

* On the legal framework, objectives and macroeconomic linkages of SWFs: 50% of the respondents are established as legal entities separate from the state or central bank, whereas the remaining 50% are established as a pool of assets not legally separate from the state.

Typically, their constitutive legislation is publicly available. Their policy objectives are partly tied to the nature of their liabilities and the majority aim to provide savings for future generations or fiscal stabilisation.

* On the institutional framework and governance structure of SWFs: The institutional framework of many SWFs aims to provide it with operational independence, while ensuring its accountability to the government and the public. All respondents prepare and present their financial statements according to a prescribed set of accounting standards. Legislation governing SWFs usually requires public disclosure of information about their institutional structure and operations.

* On investment policies and risk management frameworks: A majority of SWFs have specific investment objectives, with half of them indicating that they disclose them publicly. Their investment strategies vary from traditional to more advanced, with risk objectives typically determined by the owner or the governing body of the fund. SWFs generally observe constraints on investment classes and instruments. Most funds noted that they were not allowed to borrow or use leverage, while many funds indicated that they have established limits on stakes that they can hold on companies, the types of investments they can hold, and/or on other characteristics of their portfolio.

The IWG expects to present the final GAPP to the IMF’s policy-guiding International Monetary and Financial Committee (IMFC) at its October 11 meeting in Washington D.C.