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 agreements 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, 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 from the counterparty's sight deposit account, 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.

  • 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 significant 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 exceptionally high level afterwards. The foreign currency purchases to enforce the minimum exchange rate of CHF 1.20 per euro (in effect from 6 September 2011 to 15 January 2015) 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. Since November 2019, in connection with the market's response to the adjustment of the exemption thresholds as of 1 November 2019 and 1 April 2020, the SNB has been conducting repo transactions to ensure that the secured short-term money market rates in Swiss francs remain close to the SNB policy rate. The SNB thus provides overnight liquidity as needed through bilateral repo transactions (fine-tuning operations) in order to counter any excessive rise in SARON.

  • 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 admitted as counterparties for SNB monetary policy operations. Other domestic financial market participants such as insurance companies as well as 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.

  • 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. Since November 2019, the SNB has been conducting repo transactions as part of fine-tuning operations to counter the rise in SARON. 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. For Swiss public-law institutions which have no such rating, the credit rating awarded by the agency Fedafin may be used. 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. In addition, the securities must have a minimum value which is determined by the outstanding volume 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 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. 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-2019, the volume of securities eligible for SNB repos, in Swiss francs, was CHF 9.7 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 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. Almost all of the transactions between financial market participants settled via the repo system are 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?

    In 2019, the outstanding volume of the SNB's monetary policy repo transactions averaged CHF 40 million. On the secured interbank market of SIX, in the Swiss franc segment, the average outstanding volume in 2019 was around CHF 20 billion. The corresponding volume on the unsecured interbank market was estimated as being significantly lower. Already in 2008, during the financial crisis, there was a first shift 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. The charging of negative interest by the SNB from early 2015 led to a moderate revival of turnover. Institutions whose sight deposits at the SNB were above the relevant exemption threshold reduced their account balances (e.g. via repo transactions), while other institutions which had not yet exhausted their exemption threshold increased their balances. The revision of the exemption threshold regime as of 1 November 2019 and the increase in the threshold factor as of 1 April 2020 led to a significant revival in trading activity on the repo market.

  • 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. 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?

    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 2019, the SNB purchased foreign currency worth a total of CHF 13.2 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. The SNB decides if and to what extent interventions are to be conducted, while taking market conditions into consideration. Foreign exchange market interventions are mainly required in times of high uncertainty, when the Swiss franc is particularly sought after as a safe investment. In March 2020, the SNB thus announced that it would intervene more strongly in the foreign exchange market, in order to counter heightened upward pressure on the Swiss franc due to the coronavirus crisis.

    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 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, 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 already 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, since 1 April 2020, the threshold is 30 times the three-year average of the minimum reserve requirement. 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 2019, income from negative interest amounted to CHF 1.9 billion for the SNB.

  • What is 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.

  • 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 to cushion the economic impact of the coronavirus pandemic. The facility allows banks to obtain liquidity from the SNB in the form of a covered loan by assigning credit claims from corporate loans as collateral. Credit claims from corporate loans guaranteed by the Confederation and/or the cantons in connection with the COVID-19 pandemic are deemed eligible as collateral. The SNB can also accept other collateral to cover loans. 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 the same year, the SNB purchased Swiss franc bonds on the capital market issued by private sector borrowers. In 2010, these were all sold, or repaid upon maturity.