Current money market developments
Thomas Jordan, Alternate Member of the Governing Board
Money Market Event, Zurich, 23.03.2006
The Swiss National Bank (SNB) implements its monetary policy by influencing the interest rate level in the money market. Repo transactions are the SNB's major monetary policy instrument. In recent years, the Swiss franc repo market has grown strongly, and continues to exhibit considerable growth potential. The SNB works to create favourable conditions in order to increase the efficiency of the Swiss franc money market, thereby enhancing the resistance of the financial system to crises.
The paper discusses two current developments in the money market – first, the replacement of Lombard advances by the liquidity-shortage financing facility and second, the extension and restructuring of the SNB securities baskets for repo transactions.
Over the course of 2005, traditional Lombard advances were replaced by the liquidity-shortage financing facility. This facility is the ultimate source of refinancing for a bank that is unable to obtain sufficient liquidity in the market. Consequently, all banks should have a liquidity-shortage financing facility limit that provides them with a liquidity buffer for unexpected liquidity bottlenecks. This enables them to procure liquidity in times of need. Within the limit allocated to them, banks have the right to obtain liquidity via a repo transaction at the special rate, until the next banking business day (overnight). The special rate is fixed daily, at a level 200 basis points above the Repo Overnight Index (SNB). The limit must always be covered by collateral eligible for SNB repos amounting to at least 110%. The collateral required to cover the limits is now held at SIS in a Custody Cover Account "SNB" in the name of the bank concerned. A great advantage of the new system is that the collateral can also be used for intraday repo transactions, and that the banks can manage these securities themselves. At present, allocated limits amount to a total of more than CHF 11 billion.
With effect from 1 June 2006, the SNB will restructure the SNB repo baskets and extend the list of collateral eligible for SNB repos. It is necessary to restructure the baskets so that additional categories of collateral can be accepted in future. The present Euro GC Basket will be renamed Government GC Basket (Gov. GC Basket), while the German Jumbo Pfandbriefe GC Basket will be called the International GC Basket (Intl. GC Basket). Both baskets will contain bonds denominated in euros, US dollars, pounds sterling and Swiss francs. The debt certificates must be rated at least AA- or Aa3 by one of the two rating companies, S&Ps or Moody's, and the size of the bond issue must amount to at least one billion in the currency concerned. In future, the Gov. GC Basket will only contain government bonds. All other collateral that meet the requisite standards will be allotted to the Intl. GC Basket, provided the SNB accepts them for repo transactions. For the time being, there will be no changes to the CHF GC Basket.
Furthermore, the SNB will admit additional categories of collateral for monetary policy repo transactions with effect from 1 June 2006, and these will be included in the baskets. They include debt certificates issues by European countries, German territorial bodies and international organisations, and bonds issued by individual borrowers with state guarantees.