Questions and answers on repo transactions and other monetary policy instruments
What is a repo transaction?
The SNB uses repo transactions to manage the liquidity in the financial system and thereby the supply of liquidity to the economy. Repo transactions are temporary, with maturities usually ranging between one day (overnight) and a maximum of one year. The SNB conducts liquidity-providing or liquidity-absorbing repo transactions, depending on what is necessary in terms of monetary policy and the liquidity situation on the money market. In the case of a liquidity-providing repo transaction, the SNB purchases securities from a bank (or other market participant) and credits the associated sum in Swiss francs to the counterparty's sight deposit account at the SNB. At the same time, it is agreed that at the end of the term, the counterparty will purchase securities of the same type and quantity from the SNB. For this limited-term Swiss franc loan, which is covered by securities, the counterparty pays interest (referred to as the repo rate). The liquidity-absorbing repo transaction (reverse repo) works conversely: The SNB sells securities to the counterparty and debits the associated amount of Swiss francs to the counterparty's sight deposit, on the understanding that the SNB will repurchase the securities at the end of the term. The SNB pays a rate of interest, i.e. the repo rate, to the counterparty for the term of the agreement. In the same way, banks also conduct repo transactions amongst themselves (on the secured interbank market) to manage their liquidity.
How does the SNB use repo transactions to implement its monetary policy?
If the SNB wants to pursue a more expansionary monetary policy and reduce its reference interest rate, the three-month Libor for Swiss franc investments, it lowers the repo rate in its monetary policy operations. The SNB thereby influences the interest rate level on the interbank market. Banks' refinancing costs sink, which tends to increase the supply of credit. Should the SNB aim to tighten monetary policy (more restrictive monetary policy) and raise the three-month Libor, it increases the repo rate in its monetary policy operations.
What role have SNB repo transactions played in recent years?
The large-scale purchases of foreign currency by the SNB in 2009 and 2010 led to a substantial liquidity surplus in the banking system. As a result, liquidity management between July 2010 and August 2011 was based on the repeated absorption of excess liquidity using repo transactions and the regular issuance of SNB Bills. The strong overvaluation of the Swiss franc led to a further change in the liquidity management strategy in mid-2011. Among other measures, the SNB used repo transactions to achieve a massive increase in liquidity, in line with its monetary policy, and to maintain liquidity at an extraordinarily high level afterwards. The foreign currency purchases to enforce the minimum exchange of CHF 1.20 per euro resulted in a further expansion of liquidity on the Swiss franc money market. The SNB stopped renewing the last outstanding repo transactions in June 2012.
How much does the SNB earn with its repo transactions?
The higher the SNB sets the repo rate, and the more liquidity it provides the banks, the larger the SNB's interest income. Conversely, in the case of liquidity-absorbing repo transactions, the SNB incurs interest expenses. However, the aim of these repo transactions is not to achieve as high a revenue as possible. They serve as an instrument for implementing a monetary policy which is appropriate for Switzerland.
Does it also happen that the SNB pays for repo transactions?
Yes, it does. In the case of liquidity-absorbing repo transactions, the SNB usually incurs interest expenses. In exceptional cases, liquidity-providing repo transactions can also cost the SNB. In August 2011, the SNB massively increased Swiss franc liquidity to counter the strength of the Swiss franc. To this end, among measures implemented were liquidity-providing repo transactions incurring interest expenses (negative repo rate).
Who is permitted to conduct repo transactions with the SNB?
In principle, all banks domiciled in Switzerland or the Principality of Liechtenstein are admitted as counterparties for SNB monetary policy operations. Other domestic financial market participants such as insurance companies and banks domiciled abroad may be admitted to monetary policy operations provided this is in the SNB's monetary policy interest and the said institutions contribute to liquidity on the secured Swiss franc money market. In 2015, around 150 domestic and foreign banks as well as 8 domestic insurance companies were accepted as SNB counterparties.
How and under what conditions does the SNB conduct its repo transactions?
Repo transactions can be carried out via auction or bilaterally. Traditionally, they are auctioned daily on an electronic trading platform, with the SNB publishing the repo rate at which it provides or absorbs liquidity. SNB counterparties in the repo system can then submit an offer. By placing or accepting offers for repo transactions on the electronic trading platform, the SNB is able to influence interest rates in the money market at all times, and not just via the daily auctions, but also through bilateral repo transactions. Such bilateral transactions were used, for example, to provide the market with additional liquidity from August 2011 to June 2012. Since February 2016, the SNB has been conducting its repo transactions via CO:RE, SIX Repo Ltd's electronic trading platform.
How does the SNB decide which offers to consider?
As a rule, repo auctions are conducted in the form of a volume tender. Each counterparty submits an amount constituting the volume of liquidity they wish to offer or take on, at a repo rate specified by the SNB. If the total amount of all the offers exceeds the SNB's predetermined allotment volume, the SNB reduces the amounts offered proportionately. Otherwise, the full allotment is issued. The repo rate, the volume and the term of the transactions depend on the liquidity management in connection with monetary policy requirements.
Why does the SNB only issue loans against collateral?
From an economic perspective, a repo is a credit transaction. According to art. 9 of the National Bank Act (NBA), the SNB may only enter into such transactions with banks and other financial market participants if the loan is backed with sufficient collateral. In this way, the SNB protects itself against losses.
What is meant by 'sufficient collateral'?
Securities eligible for SNB repos comprise interest-bearing debt certificates in Swiss francs and foreign currencies, usually excluding issues by financial institutions. The SNB's minimum requirements for the credit rating and marketability of these securities are high by international standards. They must in principle be rated AA-/Aa3 by two of the international rating agencies (Standard & Poor's, Moody's or Fitch), and have a minimum volume of CHF 100 million (for securities in Swiss francs) or equivalent to CHF 1 billion (for securities in foreign currencies). The following foreign currencies are accepted at present: euro, US dollar, pound sterling, Swedish krona, Danish krone, Norwegian krone. Currently, around 95% of the securities eligible as collateral for SNB operations are denominated in foreign currencies. Other criteria must also be met (Instruction sheet on collateral eligible for SNB repos). The securities accepted by the SNB are detailed in the List of collateral eligible for SNB repos (SNB GC Basket).
How high is the volume of securities eligible for SNB repos?
The volume of securities eligible for SNB repos is updated daily and can be viewed on the SNB website. The SNB maintains this list of collateral eligible for SNB repos and updates it every day. It also publishes a file showing all modifications to the basket (Modifications to list of collateral eligible for SNB repos). This file documents inclusions, exclusions and redemptions over the last 12 months and is also updated every day. There are also securities and modification utilities available on the SNB website for reviewing the eligibility of collateral for SNB repos. The modification utility allows users to filter by modification type, including new inclusions, exclusions and redemptions. At end-2015, the volume of securities eligible for SNB repos, in Swiss francs, was around CHF 9 trillion.
Why does the SNB rely on external ratings in selecting the securities?
The agencies' credit ratings form the basis of the assessment. In view of the number of securities, a systematic analysis of issuers by the SNB would be costly and time consuming. The agencies' ratings are also used as a basis on the bond market. However, where necessary, the SNB may also apply other, additional criteria to assess a security's repo eligibility.
What happens when a debt security loses its eligibility for SNB repos?
The SNB applies its eligibility policy consistently, and publishes the modifications to its list of collateral eligible for SNB repos on a daily basis. Debt securities which lose their repo eligibility are immediately removed from the list. Banks or other financial market participants with such securities pledged as collateral in a repo transaction with the SNB are required to replace them with eligible securities within a reasonable time frame.
What happens when securities pledged as collateral, despite meeting admission criteria, decline rapidly and heavily in value?
Price movements and currency volatility within the term of a repo transaction can significantly alter the market value. Twice a day, the system calculates the resulting difference in value and automatically generates the corresponding margin call. This margin call is normally resolved via a transfer of securities. If no securities are available, the counterparty's SNB sight deposit is debited. This minimises the risk for the SNB and increases the stability of the repo market.
How important for banks is the eligibility of securities for SNB repo transactions?
Securities eligible for SNB repo transactions play a central role in the secured interbank market for Swiss franc liquidity. In 2015, almost all of the transactions between financial market participants that were settled via the repo system were covered by securities eligible for SNB repos. This means that any changes in the SNB's securities policy can also impact the interbank repo market. Securities eligible as collateral for SNB repos also fulfil the criteria for high-quality liquid assets as per the Confederation's revised Liquidity Ordinance.
How high is the outstanding volume on the repo market and the unsecured interbank market?
At end-2015, there were no SNB monetary policy repo transactions outstanding. On the secured interbank market of SIX, in the Swiss franc segment, the average outstanding volume in the fourth quarter of 2015 was around CHF 14 billion. The corresponding volume on the unsecured interbank market was estimated as being significantly lower. Already in 2008, during the financial crisis, a first shift took place from the unsecured to the secured money market. Following the massive expansion of liquidity in August 2011, call money turnover in the secured and unsecured Swiss franc money market fell sharply. Activity on the secured money market subsequently recovered slightly, while the unsecured money market stagnated. In 2015, trading activity on the repo market remained minimal, due to low money market rates and high levels of Swiss franc liquidity. The introduction of negative interest by the SNB did, however, lead to a moderate revival of turnover. Institutions whose sight deposits at the SNB were above their exemption thresholds reduced their account balances using repo trades, while other institutions which had not yet exhausted their thresholds increased their balances.
What are SNB Bills?
SNB Bills are interest-bearing debt certificates issued by the SNB and denominated in Swiss francs. They were first issued in autumn 2008. The SNB uses this instrument to temporarily absorb Swiss franc liquidity from the market. The amount of the SNB Bill is withdrawn from the counterparty's sight deposit at the SNB, and the SNB increases the liability item SNB debt certificates. SNB Bills have a maximum term of twelve months. They are eligible as collateral in SNB repo transactions. Like other money market instruments, SNB Bills can be traded on the secondary market. Further information is available under SNB Bills.
What is the procedure for auctions of SNB Bills?
As a rule, SNB Bill auctions are conducted in the form of a variable rate tender with allotment according to the American system. Any party holding a sight deposit with the SNB and admitted as participant in both the CHF repo market and the OTC spot market of SIX Repo Ltd may take part in the auction. Participants submit their offers comprising the amount of liquidity they are willing to provide and the price (interest rate) at which they will do so. Each counterparty may submit as many offers as it wishes, and may also vary the interest rate from one offer to another. The SNB obtains liquidity from auction participants that have bid at or below the highest interest rate accepted by the SNB. The SNB pays participants at the interest rate stated in their individual offer. Offers that are below the highest interest rate accepted by the SNB are fully satisfied. If the total amount of bids with the highest accepted price exceeds the remaining amount to be absorbed/allotted, this remaining amount is allotted to the participants' bids according to the ratio between the remaining amount to be absorbed/allotted and the total amount of these bids. Bids that exceed the highest interest rate accepted by the SNB are not considered.
What can the SNB use SNB Bills for?
The issuance of SNB Bills allows the SNB to absorb large amounts of liquidity quickly. The SNB can also repurchase SNB Bills via the secondary market in order to increase the supply of liquidity to the financial system where necessary. From mid-2010 to mid-2011, the SNB issued SNB Bills to absorb excess liquidity. From August 2011, in view of the massive expansion of liquidity, the SNB stopped issuing SNB Bills and renewing SNB Bills that fell due, and repurchased outstanding SNB Bills. The last SNB Bills matured and were repaid at the beginning of July 2012.
Why does the SNB use foreign exchange transactions as a monetary policy instrument?
To counter the excessive appreciation of the Swiss franc, the SNB maintained a minimum exchange rate of CHF 1.20 per euro from 6 September 2011 to 15 January 2015. In 2014, the SNB conducted foreign currency purchases of approximately CHF 25.8 billion in order to enforce the minimum exchange rate. In 2012 and 2011, the SNB purchased foreign currency worth approximately CHF 188 billion and CHF 17.8 billion respectively, in order to enforce the minimum exchange rate and counter the substantial overvaluation of the Swiss franc. The purchases were conducted with a wide range of domestic and foreign counterparties. Already in 2009 and especially in 2010, the SNB had intervened on the foreign exchange market to counter the substantial overvaluation of the Swiss franc. Even after the discontinuation of the minimum exchange rate, the SNB can intervene in the foreign exchange market to influence monetary conditions. In 2015, the SNB purchased foreign currency amounting to CHF 86.1 billion, with the vast majority being made in January.
The foreign currency purchased is reported as part of foreign currency investments; the Swiss francs sold are credited to the banks' sight deposits. In contrast to other monetary policy instruments (e.g. repo transactions and foreign exchange swaps), foreign exchange transactions are for unlimited periods, i.e. the change to the SNB's balance sheet is permanent. Monetary policy purposes aside, foreign exchange transactions are also used in connection with managing the foreign exchange reserves. These, however, are not conducted against the Swiss franc, and are therefore neutral in terms of monetary policy.
What are negative interest rates?
If reference interest rates are at zero, but there is a need for further monetary policy relaxation, the central bank can lower interest rates into negative territory. On 18 December 2014, the SNB announced the introduction of negative interest on sight deposit account balances held at the SNB by banks and other financial market participants. Negative interest has applied since 22 January 2015, at a rate of -0.75%. The negative interest rate is intended to make Swiss franc investments less attractive, thereby countering upward pressure on the currency. The SNB grants each account holder an individual exemption threshold, below which negative interest is not charged. This measure is to ensure that the banking system is not unnecessarily burdened. For domestic banks, the threshold is 20 times the minimum reserve requirement over a specified period. For account holders not subject to any minimum reserve requirements, the threshold is set at a minimum of CHF 10 million (cf. Instruction sheet governing negative interest on sight deposit account balances). In 2015, income from negative interest amounted to CHF 1.2 billion for the SNB.
What’s the minimum reserve requirement all about?
The duty to hold minimum reserves, as enshrined in the National Bank Act, ensures that banks have a minimum demand for base money; it thus fulfils a monetary policy objective. Eligible assets in Swiss francs comprise coins in circulation, banknotes and sight deposits held at the SNB. The minimum reserve requirement currently amounts to 2.5% of the relevant liabilities, which are calculated as the sum of short-term liabilities in Swiss francs (up to 90 days) plus 20% of liabilities towards customers in the form of savings and investments. If a bank fails to fulfil the minimum reserve requirement, it is obliged to pay the SNB interest on the shortfall for the number of days of the reporting period during which the minimum reserve requirement was not observed. Since monetary policy in recent years has provided the banking system with very high liquidity, banks' reserves are currently at a level that exceeds the statutory minimum reserve requirement several times over.
Which other monetary policy instruments has the SNB implemented in recent years?
In 2009, the SNB used further instruments to intervene in the money, foreign exchange and capital markets, with the goal of exerting strong and broadly based monetary policy stimuli. In the same year, the SNB purchased Swiss franc bonds issued by private sector borrowers. In 2010, these were all sold, or repaid upon maturity.