Focus on foreign exchange market and reference interest rates
Dewet Moser, Alternate Member of the Governing Board
Money Market Event, Geneva, 16.11.2017
Stable and reliable reference interest rates are of major importance for the smooth functioning of modern financial markets. In Switzerland as in other currency areas, the Libor is by far the dominant reference value - and not just on the money market. It is used as the reference point in the market for interest rate swaps, where variable-rate and fixed-rate payments are exchanged over a range of maturities. Owing to the high liquidity on this market, the swap curve has been used as the basis for price formation and valuation of Swiss franc bonds and loans for decades.
However, the financial crisis saw a dramatic slump in trading volumes for all currencies on the unsecured interbank money market - which is used to calculate the Libor - and these volumes have not recovered. The UK regulator thus announced in July that it would not support the Libor beyond the end of 2021. Given the Libor's dominance, stepping away from it represents something of a challenge in Switzerland too. All those involved must play their part in ensuring the smoothest possible transition, by preparing well in advance for the changeover. The responsibility for selecting an alternative also lies ultimately with the private sector. The Swiss National Bank (SNB) has been an advocate for the money market for many years, and is also involved in the process. It participates in the national working group on reference interest rates in Swiss francs, the body overseeing and coordinating the transition away from the Libor. In October, the working group recommended that SARON be adopted as the alternative to the Libor. SARON, the overnight rate on the repo market, is a well-established, broad-based and transparent variable.
On the foreign exchange market, it is noticeable that the upward pressure on the Swiss franc has been easing for some time now. This could be attributable to the fact that both conditions and confidence in the euro area turned positive in the first half of this year, that developments in the US continue to be favourable and that the global economy overall appears to be on solid foundations.
Many analysts - and, probably, quite a few market participants - were surprised by the magnitude and speed of the franc's depreciation this summer. Even so, the depreciation was remarkably broad-based across the market. Despite high momentum at times, generally trading was orderly. For instance, bid-ask spreads hovered around their long-term average, suggesting good market quality.
Although the situation on the foreign exchange market has eased somewhat, it is still fragile, and the risk of a renewed large-scale franc appreciation cannot be ruled out. Thus, the SNB's expansionary monetary policy stance, with the negative interest rate on sight deposits and the willingness to intervene on the foreign exchange market as necessary, continues to be appropriate.