Monetary policy instruments (situation in 2009)
It is the task of the Swiss National Bank (SNB) to provide the Swiss franc money market with liquidity (art. 5 para. 2 (a) National Bank Act [NBA]). The transactions that the SNB may conduct with financial market participants are listed in art. 9 NBA. Based on art. 9 para. 1 (e) NBA, the SNB also acts as lender of last resort. The “Guidelines of the Swiss National Bank (SNB) on Monetary Policy Instruments” dated 25 March 2004 contain more explicit information with regard to art. 9 NBA and describe the instruments and procedures used by the SNB for the implementation of its monetary policy. They also define the conditions under which these transactions are concluded and what securities can be used as collateral for monetary policy operations. Basically, all banks domiciled in Switzerland as well as internationally active banks abroad that meet the conditions stipulated by the SNB are accepted as counterparties. The guidelines are supplemented by five instruction sheets, which are primarily aimed at the SNB’s counterparties.
Open market operations and standing facilities
For monetary policy instruments, a distinction is made between open market operations and standing facilities. In the case of open market operations (as for standing facilities), the most important monetary policy instrument is the repo transaction. In a repo transaction, the cash taker sells securities spot to the cash provider. At the same time, the cash taker enters into an agreement to repurchase securities of the same type and amount from the cash provider at a later point in time. The cash taker pays interest (repo rate) for the duration of the transaction. From an economic perspective, a repo is a secured loan. Another open market operation available to the SNB is the issuing of its own interest-bearing debt certificates (SNB Bills), which it uses to absorb liquidity. In the case of standing facilities, these include the intraday facility and the liquidity-shortage financing facility.
SNB open market operations serve to provide the Swiss franc money market with liquidity. The purpose of liquidity absorbing operations, by contrast, is to withdraw surplus liquidity from the banking system. Open market operations that create liquidity are usually concluded by way of auction. These auctions are conducted either by volume tender or by rate tender. In the case of volume tenders, the SNB’s counterparties request a certain amount of liquidity at a fixed price (repo rate). In the case of rate tenders, the SNB’s counterparties inform the National Bank of the amount requested and the interest rate that they are willing to pay for the auctioned liquidity. The repo rate, the size of the individual operations and their maturities depend on monetary policy requirements. Repo transactions are generally concluded with a one-week maturity. In special circumstances, the maturity may vary from one day (overnight) to one year. The SNB sets the maturity of repo transactions in such a way that it is able to influence money market rates on a daily basis. Due to the maturity structure of the repo transactions, the commercial banks have to request liquidity almost every day to ensure they have the sight deposits required to meet minimum reserve requirements.
In order to offset the effects of unexpected external factors on liquidity supply and counter undesired developments in short-term money market rates at any time, the SNB can place or accept offers (quotes) on Eurex Zurich Ltd, the electronic trading platform.
SNB standing facilities include the intraday facility, with which the SNB provides its counterparties with interest-free liquidity during the day (intraday liquidity) by means of repo transactions. This liquidity facilitates the settlement of payment transactions in Swiss Interbank Clearing (SIC) and foreign exchange transactions in Continuous Linked Settlement (CLS), the multilateral payment system. The funds received must be repaid by the end of the same bank working day at the latest. These funds do not qualify when evaluating compliance with minimum reserve requirements or liquidity requirements under banking law.
The other SNB standing facility is the liquidity-shortage financing facility, which is available to SNB counterparties for bridging unexpected liquidity bottlenecks. The interest rate for liquidity provided through this facility is 0.50 percentage points above the call money rate. The reference rate is the SARON (Swiss Average Rate Overnight) 12.00 noon fixing of the current bank working day. Since the beginning of 2006, the only way of accessing the liquidity-shortage financing facility has been via special-rate repo transactions. The precondition for concluding special-rate repo transactions is that the counterparty has access to Eurex Zurich Ltd and that it has been granted a limit by the SNB which is covered by collateral eligible for SNB repos. The limit determines the maximum amount of liquidity that a counterparty may obtain. Claims on the limit occur by means of an overnight repo transaction. The securities are held by the counterparty in a Custody Cover Account “SNB” at SIX SIS Ltd.
In the case of open market transactions, the initiative for concluding a transaction generally lies with the SNB. Only in the case of standing facilities (intraday and liquidity-shortage financing facilities) does the SNB merely lay down terms under which commercial banks can obtain short-term liquidity.
Further monetary policy instruments
In addition to regular instruments, the SNB has a number of other instruments at its disposal, including foreign exchange spot and forward transactions, foreign exchange swaps and the purchase or sale of securities in Swiss francs. The SNB can also create, purchase or sell derivatives on receivables, securities, precious metals and currency pairs.
