Monetary policy instruments
The SNB's instruments comprise open market operations, standing facilities and interest on sight deposits at the SNB.
Open market operations
In the case of open market operations, the SNB takes the initiative in the transaction. Open market operations include repo transactions, the issuance, purchase and sale of its own debt certificates (SNB Bills), as well as foreign exchange transactions. They serve primarily to manage liquidity in order to keep the short-term money market rates in Swiss francs close to the SNB policy rate.
In the case of liquidity-providing repo transactions, the SNB purchases securities from a bank (or another financial institution admitted to the repo market) and credits the corresponding sum in Swiss francs to the counterparty's sight deposit account with the SNB. At the same time, it is agreed that the SNB will resell securities of the same type and quantity at a later date. In the case of a liquidity-absorbing repo, the transactions are conducted in the opposite direction. For the term of the repo agreement, the cash taker generally pays interest (the repo rate) to the cash provider. Repo transactions can be conducted by way of auction or on a bilateral basis with a wide range of counterparties.
Issuing SNB Bills enables the SNB to absorb liquidity. It can repurchase SNB Bills via the secondary market in order to increase the supply of liquidity to the financial system where necessary.
In order to fulfil its monetary policy mandate, the SNB may purchase and sell foreign currency against Swiss francs on the financial markets. Foreign exchange transactions conducted by the SNB are usually spot or swap transactions. In foreign exchange swaps, the purchase (sale) of foreign currency at the current spot rate and the sale (purchase) of the foreign currency at a later date are simultaneously agreed. They serve to manage liquidity in Swiss francs. The SNB can conclude foreign exchange transactions with a wide range of domestic and foreign counterparties.
Moreover, the SNB can purchase and sell securities in Swiss francs. This instrument has not been used for a number of years.
In the case of standing facilities, the SNB only sets the conditions under which eligible counterparties can, on their own initiative, draw liquidity. Standing facilities include the intraday facility, the liquidity-shortage financing facility and the SNB COVID-19 refinancing facility (CRF).
During the day, the SNB provides its counterparties with interest-free liquidity (intraday facility) through repo transactions so as to facilitate the settlement of payment transactions. The funds received must be repaid by the end of the same bank working day at the latest.
To bridge unexpected liquidity bottlenecks, the SNB offers a liquidity-shortage financing facility. For this purpose, it grants its counterparties a limit which must be covered by at least 110% collateral eligible for SNB repos. Counterparties can obtain liquidity up to the limit granted until the following bank working day. The liquidity-shortage financing facility is granted in the form of a special-rate repo transaction. The special rate is calculated as the SNB policy rate plus a surcharge, and is at least 0%.
Furthermore, since 26 March 2020, the SNB's monetary policy instruments have included the SNB COVID-19 refinancing facility. Under the CRF, liquidity can be drawn at the SNB policy rate as a covered loan against credit claims in accordance with the COVID-19 ordinance on joint and several guarantees (COVID-19-Solidarbürgschaftsverordnung) and against other collateral the SNB deems eligible. The loan has no fixed term. It can be raised or reduced daily by the bank drawing the loan.
Interest on sight deposits
The SNB applies interest to, or 'remunerates', sight deposits in Swiss francs held by banks and other financial market participants at the SNB. By remunerating sight deposits, the SNB influences the interest rate level on the money market, so that the secured short-term Swiss franc money market rates remain close to the SNB policy rate. The SNB uses a system of tiered remuneration. This encourages liquidity redistribution between sight deposit account holders and thereby promotes an active money market. Sight deposits up to a certain threshold are remunerated at the SNB policy rate and sight deposits above this threshold are remunerated at the SNB policy rate minus a discount.