Exchange Stabilization Fund

The Exchange Stabilization Fund (ESF) of the United States Treasury was created and originally financed by the Gold Reserve Act of 1934 to contribute to exchange rate stability and counter disorderly conditions in the foreign exchange market. The Act authorized the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President.

When the United States adopted the revised articles of agreement of the International Monetary Fund (IMF) in 1978, Congress amended the Gold Reserve Act to provide that the dealings of the ESF were to be consistent with U.S. obligations to the IMF. The ESF also may provide short-term credit to foreign governments and monetary authorities. These ESF "bridge loans" are financed through swaps. That is, the dollars held by the ESF are made available to a country through its central bank in exchange for the same value of that country's currency.

The ESF is used to hold and administer Special Drawing Rights (SDRs), which are assets created by the IMF that the IMF lends to countries that need help to finance balance-of-payment deficits. SDRs were created to increase international liquidity and are permanent resources of the ESF after they are allocated to, or otherwise acquired by, the United States Treasury.

The Federal Reserve and the ESF
ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury. The New York Fed, which executes foreign operations on behalf of the Federal Reserve System and the Treasury, acts as an intermediary for the parties involved when the ESF provides short-term financing to foreign governments. However, it neither guarantees, nor profits from, the loans.

Several times each day, the foreign exchange trading desk of the New York Fed provides current information on market conditions to the Treasury. Whenever necessary, the trading desk buys or sells foreign currencies on behalf of the Treasury, through the ESF, for intervention purposes. Treasury and Federal Reserve foreign exchange operations are closely coordinated and typically are conducted jointly. Operations on behalf of the Treasury are made under the legal authority of the Secretary of the Treasury and those for the Federal Reserve System under the legal authority of the Federal Open Market Committee, the central bank's policy-making group. The ESF does not provide financing to the Federal Reserve System for foreign exchange operations. Rather, the Federal Reserve participates with its own funds. The Treasury reimburses the New York Fed for expenses incurred in carrying out Treasury actions.

Since 1963, the Federal Reserve occasionally engaged in "warehousing" transactions with the ESF. In warehousing a transaction, the ESF sells foreign currencies to the Federal Reserve for dollars and simultaneously arranges to repurchase them, typically within a year. The dollars are immediately credited to the Treasury's account at the New York Fed, and the Federal Reserve invests the warehoused foreign currency, separate from its regular accounts, to earn a market rate of return. Any effect warehousing has on domestic bank reserves is offset by open market operations.

ESF accounts and activities are subject to Congressional oversight. The Treasury provides monthly reports on U.S. intervention activities and a monthly financial statement of the ESF to Congress on a confidential basis. In addition, the quarterly report to Congress by the New York Fed's manager of foreign operations, covering Treasury and Federal Reserve foreign exchange operations, is issued publicly by the New York Fed.

ESF Financing
The ESF was structured to be self-financing. Its resources, which are held in both dollars and foreign currency, include its original Congressional appropriation and retained earnings. The Gold Reserve Act of 1934 initially funded the ESF with resources resulting from the devaluation of the dollar, in terms of gold. Congress appropriated $2 billion of the resulting valuation gain to the ESF; $1.8 billion of that was later used to fulfill the initial U.S. quota subscription to the IMF.

Currently, the New York Fed invests ESF foreign currency balances in instruments that yield market-related rates of return and have a high degree of liquidity and credit quality, such as securities issued by foreign governments. In addition to interest earned on assets, the ESF's balance sheet also includes gains or losses on exchange operations.

As of March 31, 2007, total assets were $45.9 billion and included $20.8 billion in foreign currencies, $9 billion in SDRs, and $16.1 billion in U.S. Government securities.

May 2007
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