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Monetary policy instruments

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 National Bank also acts as lender of last resort. The Guidelines of the Swiss National Bank 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 which securities can be used as collateral for monetary policy operations. Basically, all banks domiciled in Switzerland and other domestic financial market participants, as well as international 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 intended to be used by the 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, the SNB takes the initiative in the transaction. In the case of standing facilities, i.e. intraday and liquidity-shortage financing facilities, the SNB merely sets the conditions at which commercial banks can obtain short-term liquidity.

Open market operations cover repo transactions, the issuance of SNB Bills, as well as the purchase and sale of SNB Bills in the secondary market. 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 term of the transaction. From an economic perspective, a repo is a secured loan. By issuing SNB Bills, the SNB can absorb liquidity.

SNB open market operations serve to provide the Swiss franc money market with liquidity. The SNB may conduct repo transactions in the form of auctions or bilaterally with individual counterparties. The auctions are conducted either by volume tender or by variable 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 variable rate tenders, the SNB’s counterparties inform the SNB 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. The maturity of repo transactions may vary from one day (overnight) to several months. The SNB can influence money market interest rates by means of the interest rate conditions and the volume of these operations. It can also influence price-formation in the money market at any time, by placing or accepting offers for repo transactions in the electronic market. In this way, it can help to stabilise short-term money market rates. SNB Bills are issued publicly by auction or through private placement. Auctions are conducted either by volume tender or by variable rate tender on an electronic trading platform. Maturities can be up to one year. The SNB can repurchase SNB Bills during their term and sell them again. Interest on SNB Bills is paid on a discount basis.

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 via Swiss Interbank Clearing (SIC) and foreign exchange transactions via 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. This facility can be used until the next bank working day (overnight) through special-rate repo transactions. The special rate is based on the SARON (Swiss Average Rate Overnight) plus an interest premium and is announced daily through the electronic market information services. The prerequisites for concluding special-rate repo transactions are the granting of a limit by the SNB and the provision of collateral eligible for SNB repos. Such cover must amount to at least 110 percent of the limit at all times. The limit determines the maximum amount of liquidity that a counterparty may obtain. The limit is drawn down in the form of an overnight repo transaction. The securities are held by the counterparty in a ’Custody Cover Account SNB’ at SIX SIS Ltd.

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 or securities in Swiss francs. The SNB can also create, purchase or sell derivatives on receivables, securities, precious metals and currency pairs.

More detailed information can be found in the Guidelines of the Swiss National Bank on Monetary Policy Instruments and in the five related Instruction Sheets. Further information on open market operations, standing facilities and the Swiss Reference Rates is available under Information for, Financial markets.