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. These are to be distinguished from foreign currency repo transactions, which the SNB uses to manage its foreign currency investments (cf. Questions and answers on asset management) as well as from repo transactions within the context of liquidity swap arrangements to provide SNB counterparties with foreign currencies (cf. Questions and answers on foreign exchange swaps). 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, an interest rate is charged, referred to as the repo rate. The liquidity-absorbing repo transaction (reverse repo) works in the opposite direction: The SNB sells securities to the counterparty and debits the associated amount of Swiss francs from the counterparty's sight deposit account, on the understanding that the SNB will repurchase the securities at the end of the term. A rate of interest, i.e. the repo rate, is paid for the term of the agreement. In the same way, banks also conduct repo transactions amongst themselves (on the secured interbank market) to manage liquidity and optimise their processes in this regard.

• What function do the SNB's repo transactions perform?

  The SNB conducts repo transactions to ensure that the secured short-term money market rates in Swiss francs remain close to the SNB policy rate. It does so either through overnight bilateral repo transactions (fine-tuning operations) or repo auctions with longer terms. Repo transactions can be used to both provide or absorb liquidity.

• How much does the SNB earn with its repo transactions?

  The SNB uses repo transactions to implement its monetary policy. They are never concluded with the aim of generating returns. Repo transactions are used to manage liquidity and influence interest rates. Depending on the market situation and what is necessary in terms of monetary policy, interest on such transactions is payable either by the financial market participants involved or by the SNB.

• Who is permitted to conduct repo transactions with the SNB?

  In principle, all banks domiciled in Switzerland or the Principality of Liechtenstein are admissible as counterparties for SNB monetary policy operations. Other domestic financial market participants, such as insurance companies and foreign banks, may be admitted to monetary policy operations provided there is a monetary policy interest in doing so and they contribute to liquidity on the secured Swiss franc money market.

• 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 a bid. By placing or accepting bids for repo transactions on the electronic trading platform, the SNB is able to influence interest rates in the money market at all times, not just via the daily auctions, but also through bilateral repo transactions. The SNB conducts its repo transactions via CO:RE, SIX Repo Ltd's electronic trading platform.

• How does the SNB decide which bids 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 bids 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. Rating requirements are based on the credit rating from the international rating agencies Standard & Poor's, Moody's and Fitch. To be eligible as collateral for SNB repos, securities must have a second-best rating of at least AA-/Aa3. If only one credit rating is available for a given security, this is used to establish eligibility. For Swiss public-law institutions which do not have a rating from an international agency, the credit rating awarded by the agency Fedafin may be used. In addition, the securities must have a minimum volume, which is determined by the outstanding amount in the currency of issue. The following foreign currencies are accepted at present: euro, US dollar, pound sterling, Swedish krona, Danish krone, Norwegian krone. Over 90% of the volume of collateral eligible for SNB repos is 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). In areas other than repo transactions - for example in connection with the SNB COVID-19 refinancing facility - the SNB can also accept other collateral.

• How high is the volume of securities eligible for SNB repos?

  The volume of securities eligible for SNB repos is updated daily on the SNB website. The SNB publishes this information in the 'List of collateral eligible for SNB repos (SNB GC Basket)', together with a file showing 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. In addition, securities and modification utilities are 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-2021, the volume of securities eligible for SNB repos, expressed in Swiss francs, was CHF 11.2 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 timeframe.

• 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 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. Almost all of the transactions between financial market participants settled via the repo market are covered by securities eligible for SNB repos. This means that any changes in the SNB's securities policy can also affect the interbank market. Securities eligible as collateral for SNB repos also fulfil the criteria for high-quality liquid assets as per the Confederation's Liquidity Ordinance.

• 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 12 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 at 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 a 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 bids 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 bids as it wishes, and may also vary the interest rate from one bid to another. The SNB obtains liquidity from auction participants that have entered a bid at or below the highest interest rate accepted by the SNB. The SNB pays participants at the interest rate stated in their individual bid. Bids 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.

• Why does the SNB use foreign exchange transactions as a monetary policy instrument?

  In order to fulfil its monetary policy mandate, the SNB may purchase and sell foreign currency against Swiss francs on the financial markets. 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. Even after the discontinuation of the minimum exchange rate, the SNB intervened to influence exchange rate developments as necessary. Over the course of 2020, the SNB purchased foreign currency worth a total of CHF 109.7 billion. The SNB's willingness to intervene in the foreign exchange market as necessary reduces the upward pressure on the Swiss franc. Market expectations are shaped by the willingness to intervene, and this in turn influences demand and supply on the foreign exchange market, and hence the exchange rate. Based on market conditions, the SNB decides if and to what extent interventions should be conducted. Foreign exchange market interventions are mainly required in times of high uncertainty, when the Swiss franc is particularly sought after as a safe investment. For example, due to uncertainty surrounding the coronavirus crisis the appreciation pressure was particularly high in the first half of 2020, which necessitated CHF 90 billion in interventions. In 2021, there was less of a need for foreign exchange market interventions - over the course of the year, the SNB purchased foreign exchange worth CHF 21.1 billion.

  The foreign currency purchased as part of foreign exchange transactions is reported in the balance sheet under 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 SNB's balance sheet is subject to continuous change. Monetary policy purposes aside, foreign exchange transactions are also used in connection with managing the foreign exchange reserves. These transactions, however, are not conducted against the Swiss franc, and are therefore neutral in terms of monetary policy.

• Where are the latest data on the use of monetary policy instruments to be found?

  The SNB publishes information at the end of each month on the conditions and volume of individual monetary policy-related transactions of the previous month. With respect to foreign exchange market operations, the volume of interventions in the previous quarter is disclosed at the end of each quarter. The corresponding figures are available on the SNB data portal (Money market transactions and Foreign exchange transactions).

• What are negative interest rates?

  The negative interest rate is a monetary policy instrument and corresponds to the SNB policy rate when this is below zero percent. It is the interest which the SNB charges on the sight deposits held by banks and other financial market participants at the SNB that exceed a certain exemption threshold.

• Why does the SNB apply interest to sight deposits?

  The application of interest to sight deposits (also known as 'remuneration') is a monetary policy instrument which the SNB uses to influence conditions on the money market. Tiered remuneration encourages liquidity redistribution between sight deposit account holders, thereby promoting an active money market.

• What does the minimum reserve requirement entail?

  The duty to hold minimum reserves, as enshrined in the National Bank Act, ensures that banks have a minimum demand for base money and 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. These are calculated as the sum of short-term (up to 90 days) liabilities in Swiss francs 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.

• What is the SNB COVID-19 refinancing facility?

  In March 2020, the SNB established the SNB COVID-19 refinancing facility (CRF), a temporary standing facility designed to cushion the economic impact of the coronavirus pandemic. The facility allows banks to obtain liquidity from the SNB in the form of a secured loan by assigning credit claims from corporate loans as collateral. Credit claims from corporate loans guaranteed by the federal government and/or the cantons in connection with the pandemic are deemed eligible as collateral. The SNB can also accept other collateral to cover loans. At the end of 2020, the banks had drawn CHF 11.2 billion of liquidity from the SNB via this facility. By the end of 2021, drawdown had declined to CHF 9.2 billion. More detailed information on the CRF can be found in the relevant instruction sheet.

• What other monetary policy instruments has the SNB implemented in recent years?

  In 2009, the SNB used additional instruments to intervene in the money, foreign exchange and capital markets, with the goal of transmitting strong and broadly based monetary policy stimuli. In that year, the SNB purchased Swiss franc bonds on the capital market issued by private sector borrowers. A year later, in 2010, these securities were all sold, or repaid upon maturity.