Hearing on the Implications of Sovereign Wealth Fund Investments for National Security
|Document - Politics|
|March 24 2008|
Sovereign wealth fund (SWF) (Sovereign wealth funds) is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments.
Sovereign wealth funds are, broadly defined, entities that can manage the national savings for the purposes of investment. The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, SDRs and IMF reserve position held by central banks and monetary authorities,. along with other national assets such as pension investments, oil funds, or other industrial and financial holdings.
These are assets of the sovereign nations which are typically (but not necessarily) held in domestic and different reserve currencies such as the dollar, euro and yen. The names attributed to the management entities may include central banks, official investment companies, state pension funds, sovereign oil funds and so on.
There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. The former can be characterized as maximizing long term return, with the latter serving short term currency stabilization and liquidity management. This distinction points in the right direction, but is still unsatisfactory. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management.
Moreover it is widely believed most have diversified hugely into assets other than short term, highly liquid monetary ones (almost no data is available however to back up this assertion). Some central banks even have begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like Overnight Interest Rate swaps).
(From wikipedia, the freee encyclopedia)
About Sovereign Wealth Funds:
What is a Sovereign Wealth Fund?
There is no single, universally accepted definition of a SWF. This appendix will use the term SWF to mean a government investment vehicle which is funded by foreign exchange assets, and which manages those assets separately from the official reserves of the monetary authorities (the Central Bank and reserve-related functions of the Finance Ministry). SWF managers typically have a higher risk tolerance and higher expected return than traditional official reserve managers.
SWFs generally fall into two categories based on the source of the foreign exchange assets:
Commodity funds Commodity funds are established through commodity exports (either owned or taxed by the government). They serve different purposes, including stabilization of fiscal revenues, inter-generational saving, and balance of payments sterilization. Given the recent extended sharp rise in commodity prices, many funds initially established for fiscal stabilization or balance of payments sterilization purposes have evolved into savings funds. Savings funds may invest in a broader range of assets than stabilization funds, which typically focus on liquid, relatively secure assets.
Non-commodity funds Non-commodity funds are typically established through transfers of assets from official foreign exchange reserves. Large current account surpluses (in some cases complemented by capital account surpluses) have enabled non-commodity exporters (particularly in Asia) to transfer excess foreign exchange reserves to stand-alone funds.
Since commodity SWF assets often derive from foreign currency accruing directly to the government, the foreign currency is not converted to domestic currency, does not enter the domestic economy, and therefore does not need to be sterilized through the issuance of domestic debt to avoid unwanted inflationary pressures. In contrast, non-commodity SWFs assets often derive from at least partially sterilized exchange rate intervention and may therefore be thought of more as borrowed funds.
SWFs are also not a new phenomenon, even if they have recently gained in prominence. Two of the largest such funds were founded over 25 years ago the Abu Dhabi Investment Authority (ADIA) in 1976 and Singapores Government Investment Corporation (GIC) in 1981.
What Distinguishes Sovereign Wealth Funds from Official Reserves?
The IMFs Balance of Payments Manual defines reserve assets as those external assets that are readily available to and controlled by the monetary authorities for direct financing of payment imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and for other purposes.
Key issues in determining whether SWF assets can be considered as official reserve assets include their liquidity and marketability as well as whether there is some legal or administrative guidance that would preclude the assets from being readily available to the monetary authorities to meet a balance of payments need.
Whether a given foreign exchange asset can be classified as a reserve asset has to be assessed on a case-by-case basis:
In some cases, SWF assets may be invested in liquid and marketable instruments and the monetary authorities retain a clear legal right to call upon those assets to meet a balance of payments need. These SWF assets are likely to be classified as official reserves.
In many other cases, however, SWF assets may be invested in less liquid instruments and/or the monetary authorities may not have a clear legal right to call upon them. These SWF assets would not be classified as official reserves.
As SWF assets fall out of reserves, even if perfectly appropriate from a statistical perspective, they also risk falling out of the mechanisms that the international financial system has for reserves transparency. The two principal such mechanisms (both voluntary) are the IMFs aggregate quarterly Currency Composition of Official Foreign Exchange Reserves (COFER) database and the Data Template on International Reserves and Foreign Currency Liquidity (Reserves Template), part of the IMFs Special Data Dissemination Standard (SDDS). 119 countries currently participate in COFER, and 64 countries subscribe to the SDDS.
How Large are Sovereign Wealth Funds?
Because relatively little is known about most SWFs, market estimates of their size vary widely. Market estimates of aggregate assets of known SWFs range from $1.5 2.5 trillion. This compares (and is in addition) to the roughly $5.1 trillion in official foreign exchange reserves as of end-January 2007. SWF assets are also currently fairly concentrated. By some market estimates, four funds7 account for around two-thirds of total SWF assets. In addition, market estimates currently attribute approximately two-thirds of SWFs assets to commodity funds and the remaining one-third to non-commodity funds.
Market analysts have also projected various upward paths for global official reserves and SWF assets, though these paths are inherently uncertain and not just because of the individual country decision whether to allocate a given increase in external assets to official reserves or a SWF. For non-commodity SWFs, much will depend on how successful Asian emerging markets in particular are in shifting to increased exchange rate flexibility. Commodity SWF asset accumulation is largely dependent upon the price of oil and the ability of oil exporters to rapidly formulate and implement investment plans. The IMF projects that oil exporters aggregate current account surplus will roughly halve from 1% of global GDP in 2006 to 0.5% in 2009.
How are SWF Assets Invested?
Public disclosure of investment management strategy varies widely and individually by SWF, but overall is quite limited.9 Though SWFs are still considerably smaller than official reserves, their growing size means that their investment allocations will be increasingly important to global financial markets. SWF assets may be invested in a broad range of asset classes, including government bonds, agency and asset-backed securities, corporate bonds, equities, real estate, derivatives markets, alternative investments, and foreign direct investment.
This raises the question of whether the development of operational best practices, focused on governance, transparency, and accountability, would benefit the international financial system. (From U.S. Department of Treasury)
PDF format, 832KB, 155Pages.
FEBRUARY 7, 2008
Opening statement of Chairman Larry Wortzel, Hearing Cochair
PANEL I: CONGRESSIONAL PERSPECTIVES
Panel I: Discussion, Questions and Answers 19
PANEL II: GOVERNMENT PERSPECTIVES
PANEL III: OVERVIEW
PANEL IV: IMPACT OF FINANCIAL SERVICES INDUSTRY
PANEL V: IMPACT ON NATIONAL SECURITY
Panel V: Discussion, Questions and Answers .. 137
|Last Updated ( March 24 2008 )|
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