How the CMIM Works?

The chief regional liquidity support mechanism in East Asia is the Chiang Mai Initiative (CMI) that
was established in 2000 under the auspices of the ASEAN+3 finance ministers, and was originally a
network of bilateral swap arrangements among the ASEAN economies, plus the PRC, Japan, and
the Republic of Korea. It was subsequently enlarged and multilateralized to become the Chiang Mai
Initiative Multilateralization (CMIM) in 2010. The CMIM is a crisis resolution mechanism rather
than a crisis prevention mechanism. This is because of the way it is linked to an IMF program once
a countrys borrowing exceeds a certain percentage of its swap quota (30 % most recently).1

Although the CMIM is a common liquidity pool, in reality there is no common or centralized fund.
The contributions remain in the central banks of member countries. Thus, the CMIM is a series of
promises to provide funds.2

In the event of a balance of payments or liquidity crisis, a member government can swap its local
currency for US dollars from this pool. Each country's borrowing quota is based on its contribution
multiplied by its respective borrowing multiplier. The borrowing multiplier is set at 5 for Brunei
Darussalam, Cambodia, Lao PDR, Myanmar, and Viet Nam. For Hong Kong, Indonesia, Malaysia,
Singapore and Thailand, it is 2.5, for Korea it is 1 and for Japan and China it is 0.5.2

A currency swap is an agreement to exchange one currency for another and to reverse the transaction
at a date in the future. These swaps are used widely in the private sector and are also used , though
less often, among central banks. They involve in two simultaneous transactions: (1) a spot transaction,
exchanging currencies at the spot rate and (2) a forward transaction, reversing the exchange at a
specified rate and time. The exchange rate for the reverse transaction can be the market spot rate, the
market forward rate, or another rate specified in the agreement. Th duration of swaps is frequently 3
months, with an option to renew.3

Central banks and finance ministries enter into agreements to make swaps available over a certain
period of time. Under such standing agreements, swaps might or might not be activated. Alternatively,
monetary authorities might swap currencies on an ad hoc basis in the absence of a standing
agreement.3

Basic features of swaps, and points of negotiation over agreements, include:3

Credit risk: Who bears the risk of failure to reverse the swap?
 Exchange risk: Who bears the gains or losses on exchange rate movements while a swap is
activated?
Activation: Must the creditor agree to exchange currencies under a standing agreement, or can
the demandeur activate unilaterally?
Size and terms: Up to what quantitative limit can currency be exchanged? For what duration?
What interest would be paid on outstanding balances?
Conditionally: Can the creditor require policy adjustments as a condition for activating the swap?
Renewal: Can a swap, once activated, be rolled over at the expiration date and, if so, for how
long?

Swaps are technically distinct from loans. They are exchanges of assets, which are recorded as foreign
exchange reserves on the books of the recipients, and no collateral is pledged. But when a covertible
currency is exchanged for a noncovertible currency, the latter serves as minmal security for reversal
of the swap, and the transaction may have the character of a loan.3

References:

1. Kawai, M., Lamberte MB, and Morgan PJ. Reform of the International Monetary
System: An Asian Persepctive. Japan: Springer, 2014. p 12.
2. West J. Chiang Mai Initiative: An Asian IMF? Asian Century Institute, 5 April 2017.
http://asiancenturyinstitute.com/economy/248-chiang-mai-initiative-an-asian-imf.
Accessed 23 September 2017.
3. The Chiang Mai Initiative. Institute for International Economics.
https://piie.com/publications/chapters_preview/345/3iie3381.pdf. Accessed 23
September 2017.