The financial markets in changing times - Changes yesterday and today: the money and foreign exchange markets
Dewet Moser, Alternate Member of the Governing Board
Money Market Event, Zurich, 05.04.2018
Change in the financial markets is not a new phenomenon. In the 19th century, the creation of a telegraph network led to a hitherto unheard of acceleration in the flow of information, which set in motion a fundamental shift in the stock exchange landscape. Today's technological progress in the form of digitalisation means that trading is now largely electronic, which has lowered search costs, improved price determination and raised market efficiency. Settlement and accounting processes are now automated. These developments have also transformed market structures - the platforms, the financial instruments, and the line-up of market participants. With electronic platforms becoming widespread, the significance of traditional merchant banks has declined. Moreover, investors are increasingly bypassing intermediaries and dealing directly with the market. Needless to say, change does not stop here. Since it does not proceed in a single straight line, however, anticipating it is no easy matter.
It is important to scrutinise innovations as to their purpose and benefits. Experience shows that transparency pays off - for market players so that they can remain efficient and competitive, but also for the economy as a whole, since transparency allows the financial market to put capital to use in a way that best enhances overall prosperity. The Swiss National Bank (SNB) not only adapts to change, but also plays a part in shaping it. It is of vital importance to the SNB that the markets in which it implements its monetary policy are robust and function smoothly.
The SNB has played a key role in shaping the repo market since its inception almost 20 years ago. Repo transactions are among the most important monetary policy instruments, and are also pivotal to liquidity adjustments between banks. The greatest challenge at present is to establish SARON as the alternative to the Libor and to ensure a smooth transition. The Libor has for many years been based almost exclusively on assessments by banks, since hardly any transactions are now effected in the unsecured money market. In autumn 2017, the national working group on Swiss franc reference interest rates recommended using SARON as an alternative. SARON is the interest rate for secured overnight money and its calculation is based on a solid foundation.
The SNB reacts to changes in the markets and their environment by regularly adjusting and expanding the instruments it applies in the pursuit of its monetary policy objectives. Its instruments for absorbing and for providing large quantities of liquidity are well-established and flexible. The SNB also keeps pace with the times in the areas of market observation and data analysis. Since the volume of data to be collected, stored and processed is constantly on the rise, the SNB is building up capacities for the analysis of high-frequency data.
The market turbulence since early February has largely been confined to the stock market and has had little impact on the foreign exchange market. It does, however, serve as a reminder of how important it is for the SNB to continue to keep a close eye on the situation, so that it can step in to influence developments should the need arise.