Minimising risk and securing liquidity through the use of repo transactions

Thomas Jordan, Alternate Member of the Governing Board

Swiss National Bank Conference "Liquidity - a challenge for banks", Zurich, 11.01.2005

Repo transactions have long been an important refinancing instrument internationally. By contrast, repo trading in Switzerland was introduced only in 1998. In order for the repo market to establish itself in Switzerland, repo transactions first had to be exempted from stamp duty and be included in the National Bank's monetary policy instruments. The late introduction of repo transactions in Switzerland had the advantage that a new repo system – internationally leading in terms of infrastructure and procedures – could be established from the ground up.

With regard to minimising risk and securing liquidity, repo business in Swiss francs has clear advantages over traditional money market transactions. In a repo transaction the credit risk is minimised because the financial claim is always fully covered by securities. Moreover, owing to the automated processing and integrated risk management of SegaInterSettle (SIS), operational risks as well as the performance risk have nearly been eliminated in the Swiss franc repo system. Since risk costs have not sufficiently been taken into consideration in traditional money market transactions, the volume of repo transactions is still relatively small. It is the task of the each bank’s management to provide the proper incentives for its money market business.

Repo transactions can minimise liquidity risks substantially. Securities eligible for SNB repos can be exchanged for cash on the interbank market at any time, even if these securities already come from a repo transaction. A functioning repo market thus makes a significant contribution to securing liquidity in the banking sector. In addition, as of 2006, access to all the National Bank’s facilities will only be possible via repo transactions. In order to secure liquidity at all times, every autonomous domestic bank ought to affiliate itself with the Swiss franc repo system.