The SNB as a market player
Dewet Moser, Alternate Member of the Governing Board
Money Market Event, Zurich, 23.03.2017
The Swiss National Bank (SNB) is active on the financial markets for two reasons: to implement its monetary policy and its investment policy. In view of the SNB's mandate, monetary policy has priority. Investment policy is secondary and must not constrain room for manoeuvre in monetary policy. There is, therefore, a key difference in how the two are implemented. For monetary policy, the SNB employs its resources to ensure the greatest possible effect on the market, whereas for investment policy, the aim is minimal market impact. Prices should move as little as possible even if large amounts are invested. The SNB thereby avoids sending out any signals that may be misinterpreted. In its investment policy, as a financial investor, the SNB does not pursue any particular strategic objectives regarding businesses or industries. This guards against conflicts of interest that could impinge on monetary policy.
Investment policy considerations speak in favour of the broadest possible diversification across different currencies and investment categories. The SNB therefore currently holds a fifth of its currency reserves in equities. Around half of these are US equities. This sizeable portfolio - just like our other equity investments - passively replicates the corresponding total market. If adjustments are needed, the SNB aims for minimal market impact by splitting every order into hundreds of transactions that are executed throughout the trading day.
It is also necessary to exercise caution in foreign exchange transactions carried out for investment purposes. In order to shift high volumes with minimal market impact, they are split into small individual transactions, which are staggered over time using trading algorithms. This minimises the impact on the exchange rate. The challenge when investing is to find the right balance between sometimes contradictory goals, such as minimal market influence, minimal price risk, maximum confidentiality and the best price. That is why the SNB retains broad market access and selects the appropriate trading strategy and trading time. In addition, the SNB continually evaluates its transaction costs and optimises its course of action as necessary.
In recent years, foreign exchange reserves have grown significantly due to purchases of foreign currency for monetary policy reasons. This means that the need for - and scope of - investment policy transactions has increased considerably. Against this backdrop, the SNB continuously analyses market structure and uses modern tools for its transactions, thereby ensuring that it can continue to implement its investment policy with minimal market impact whilst obtaining the best possible price.