What Is a Reserve Tranche? Definition, Meaning, and IMF Funding

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Updated September 10, 2024
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Foreign Currency

What Is a Reserve Tranche?

A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF). The reserve tranche can be utilized by the individual country for its own purposes—without a service fee or economic reform conditions. According to the IMF, the reserve tranche is about one-quarter of a member nation's quota. This reserve tranche can be used for different purposes, including balance of payments.

Key Takeaways

  • The reserve tranche is a segment of an International Monetary Fund member country’s quota that is accessible without fees or economic reform conditions.
  • Although reserve tranches are 25% of the member nations' quota, this position can change according to IMF lending from its holdings of the member’s currency.
  • The reserve tranches with the IMF are considered their facilities of first resort, meaning they can tap into them before seeking a formal credit tranche that charges interest.

Understanding Reserve Tranches

The IMF is funded through its members and their quota contributions. The reserve tranche is an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee. In other words, a portion of a member country’s quota can be withdrawn free of charge at its discretion.

The reserve tranches that countries hold with the IMF are considered their facilities of first resort, meaning they will tap into the reserve tranche before seeking a formal credit tranche. In theory, members can borrow over 100% of their quota. However, if the amount being sought by the member nation exceeds its reserve tranche position, then it becomes a credit tranche that must be repaid in three years with interest.

Member nations’ reserve tranches are normally 25% of their quota. However, their RTP can change according to any lending that the IMF does with its holdings of the member’s currency.

Prior to 1978, the reserve tranche was paid in gold, which was non-interest bearing and known as the gold tranche.

Special Considerations

The RTP increases when the IMF borrows out of a nation’s currency that was gathered as part of the quota. The country whose currency is lent out is considered to be in a creditor position and is remunerated for the use of its funds beyond a portion set out as the unremunerated portion of the reserve tranche.

If the IMF is lending out a country’s currency above the unremunerated portion, the amounts above that become an additional reserve tranche for the country, called the remunerated RTP.

Special Drawing Rights (SDR)

Contributions to the IMF are made up of a combination of national currency and special drawing rights (SDR). Because IMF member nations have many different national currencies, the IMF denominates its members' quotas in terms of SDRs, which is an IMF creation backed by a specified basket of major international currencies.

The SDR was initially defined as equivalent to 0.888671 grams of fine gold—the equivalent to one U.S. dollar at the time—until the collapse of the Bretton Woods fixed exchange rate system.

As of the latest IMF review, the basket currencies for SDRs included the:

This was enacted in August 2022. Together, the dollar and euro make up 70% of the basket’s value. The currencies featured in the SDR basket have to meet two criteria:

  1. Export criterion: "Its issuer is an IMF member or a monetary union that includes IMF members, and is also one of the top five world exporters".
  2. Freely usable criterion: "It has to be widely used to make payments for international transactions and widely traded in the principal exchange markets."

The SDR basket is reviewed every five years and sometimes earlier if warranted. Reviews take place to ensure that the SDR reflects the relative importance of currencies in the world’s trading and financial systems.

What's the Difference Between a Reserve Tranche and an SDR?

A reserve tranche is part of the total amount of money that a member nation provides to the International Monetary Fund. The member country can access the reserve tranche without incurring any fees or having to meet any conditions. Special drawing rights, on the other hand, do not represent currencies. Rather, this is an international reserve asset that IMF member countries can use to supplement their reserves.

Is a Reserve Tranche the Same Thing as a Reserve Requirement?

No, reserve tranches and reserve requirements are different concepts. IMF member nations set aside an amount of money with the IMF. A portion of that quota is called the reserve tranche. This is available for use by the member nation without any fees. Reserve requirements, on the other hand, refer to the funds that banks must keep in their reserve if it needs to meet its liabilities. This requirement is set by the board of governors of the U.S. Federal Reserve.

What Does the IMF Do?

The International Monetary Fund is a global organization with 190 member countries. The IMF aims to reduce poverty, promote sustainable economic growth, facilitate global trade, and foster financial cooperation between nations. The IMF reaches its goals by providing member nations with policy advice, financial aid, and technical assistance.

The Bottom Line

The IMF is a global organization with 190 member nations. One of its primary goals is to provide its member nations with financial aid and assistance. Members set aside a certain amount of their currency with the IMF. If there's ever a time of need, such as a balance of payment issue or a liquidity crisis, a member nation can tap into a certain percentage of those holdings. This is known as the reserve tranche, which is accessible without fees or conditions.

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  1. International Monetary Fund. "Classification of Reserve Position in the IMF." Page 2.

  2. International Monetary Fund. "Financial Organization and Operations of the IMF: Chapter 2: General Department." Pages 19-20, 40-42.

  3. International Monetary Fund. "Financial Organization and Operations of the IMF: Chapter 2: General Department." Page 19.

  4. International Monetary Fund. "Financial Organization and Operations of the IMF: Chapter 2: General Department." Page 23.

  5. International Monetary Fund. "Classification of Reserve Position in the IMF." Page 1.

  6. International Monetary Fund. "Special Drawing Rights (SDR)."

  7. International Monetary Fund. "IMF Financial Operations; Chapter 4: Special Drawing Rights." Page 82.

  8. International Monetary Fund. "About the IMF."

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