Speech
Embargo
21 November 2024, 6.30 pm
The Swiss repo market at 25: A success story for the financial
centre and the SNB
Money Market Event
Petra Tschudin and Thomas Moser∗
Member of the Governing Board / Alternate Member of the Governing Board
Swiss National Bank
Geneva, 21 November 2024
© Swiss National Bank
∗
The speakers would like to thank Dirk Faltin and Damien Klossner for their support in writing this speech. They also thank Roman
Baumann, Toni Beutler, Florian Böser, Lucas Fuhrer, Alain Galli, Rebecca Gerosa, Oliver Gloede, Anna-Kathrin Keller, Sébastien
Kraenzlin, Christian Myohl, Urs Plüss, Christian Ritzmann, Andy Sturm and Tanja Zehnder for their valuable comments as well as the
SNB Language Services for their translations of the text.
Ladies and gentlemen
A warm welcome to the Money Market Event. My colleague Thomas Moser and I are
delighted that so many of you have accepted our invitation to attend.
This year we are celebrating something very special: the 25th anniversary of the Swiss franc
repo market. In June 1999, the Swiss National Bank conducted its first repo transaction on an
integrated and automated financial market infrastructure, the Swiss Money Market Value
Chain, laying an important milestone in the financial history of our country.1
Today, thanks to cooperation between the infrastructure providers,2 the banks, other financial
market participants and the SNB, the Swiss franc repo market is among the most advanced
and efficient repo markets in the world. It has evolved into the central hub for Swiss franc
liquidity, and repo transactions are the SNB's most important instrument for implementing
monetary policy.
In our speech today, we will first examine the key role the repo market plays for the SNB's
monetary policy and explore the advantages of repo transactions for banks and other financial
market participants. We will then take a look at the development of the Swiss franc repo
market over the last 25 years, before closing with some thoughts about potential future
developments.
Importance of the Swiss franc repo market for the SNB's monetary
policy
The Swiss franc repo market is of central importance to the SNB's monetary policy. It
provides the foundation for the implementation of our interest rate policy. Repo transactions3
are the backbone of our open market operations, which include the issuance of SNB Bills and,
where necessary, foreign exchange transactions.
In implementing its monetary policy, the SNB seeks to keep secured short-term Swiss franc
money market rates close to the SNB policy rate. In doing so, we focus in particular on
SARON (Swiss Average Rate Overnight). SARON is the most important short-term reference
rate in Switzerland. It is calculated on the basis of transactions and binding quotes in the
overnight segment of the Swiss franc repo market, excluding the SNB's transactions.
The dynamic activity in the interbank segment of the repo market provides a robust and
reliable basis for calculating SARON (cf. chart 1).
One of the main advantages of repo transactions from a monetary policy perspective is that
they enable us to reach a large number of market participants, including smaller institutions.
A second advantage stems from the notable fact that the SNB conducts its open market
operations on the same trading platform on which interbank trading takes place. This market
unity contributes to effective monetary policy implementation, as the SNB acts directly in the
relevant market and can provide liquidity to - or absorb liquidity from - the financial sector
via auctions and bilateral transactions, as needed and at any time. This is how we keep
SARON close to the SNB policy rate (cf. chart 2).4
Our monetary policy stance is transmitted from the repo market to the other segments of the
money market (cf. chart 3, left) and the rest of the economy. This transmission is supported
by SARON's role as the leading reference rate. Thus most financial products, such as Swiss
franc-denominated mortgages, loans and bonds, use the SARON-based swap curve as a price
reference (cf. chart 3, right).5
Significance of the repo market for financial market participants
The Swiss franc repo market is not only very important for the SNB's monetary policy, it also
plays a significant role for banks and other financial market participants due to its liquidity,
security and efficiency. Participants in the repo market can quickly and efficiently obtain
short-term liquidity or invest excess liquidity securely, thereby generating additional income.
Chart 4 shows liquidity redistribution in the Swiss franc repo market. The dots represent the
array of market participants and the lines connecting the dots show liquidity redistribution via
maturing and new repo transactions.
Among the key advantages of repo transactions is that they reduce various risks (cf. chart 5).
Repo transactions are collateralised using securities, legal ownership of which is transferred to
the cash provider at close of business, thereby enabling the latter to hedge its counterparty
risk. Swiss franc repo transactions are mainly secured with high-quality liquid assets
(HQLA).6 On average, around 90% of all Swiss franc repo transactions are currently secured
with HQLA. This is an important reason why haircuts on these securities in the Swiss repo
market are uncommon.7
Standardised collateral baskets are used for securing transactions in Switzerland. This makes
collateral exchangeable, which in turn contributes to market liquidity. It also reduces the cost
of repo trading. Even during the market's early years, high-quality assets were defined, not
just in Swiss francs but in various currencies, and these were ultimately consolidated in the
SNB General Collateral Basket (SNB GC Basket). Used to secure around 90% of all Swiss
franc repo transactions today, the SNB GC Basket has established and proven itself as the
market standard for securing the majority of such transactions.8
Risk associated with transactions in the Swiss repo market is further reduced by SIX SIS Ltd,
which, in its role as Triparty Agent (TPA), values the collateral at current market prices and
triggers an automatic margin call twice a day in the event of a shortfall or excess. If the
collateral has lost value, the cash taker must supply more collateral in the form of securities or
cash. If the collateral has gained value, the cash taker receives collateral back. This system
guarantees continuous and automatic adjustment to market developments and thus almost
completely eliminates credit risk during the term of a repo transaction.9
The CO:RE trading platform operated by SIX Repo Ltd, and the TPA - along with the
SECOM securities settlement system and the SIC real-time payment system - make up the
Swiss Money Market Value Chain (cf. chart 6). This fully automated and integrated
infrastructure significantly reduces settlement and operational risk. Repo transactions carried
out via the Swiss Money Market Value Chain are settled on a delivery-versus-payment basis.
This prevents a party from delivering securities without receiving the relevant payment, and
vice versa. Furthermore, these transactions are exclusively settled in central bank money,
which eliminates the credit risk of market participants vis-à-vis the settlement institution.10
The Swiss Money Market Value Chain also enables fully automated settlement of repo
transactions - we refer to this as 'straight-through processing'. This is cost-efficient, as it
allows market participants to outsource a significant portion of their back-office functions,
such as the selection of securities to be provided as collateral, to the TPA. It also reduces
operational risk considerably as the automated and integrated settlement of repo transactions
is less susceptible to errors than manual settlement. Chart 7 shows that around 80% of
transactions are settled in less than two minutes.
Key milestones of the last 25 years
As we have seen, the Swiss franc repo market plays a very important role for the SNB, the
banks and the other financial market participants. But how did the repo market develop into
what it is today? Let us take a look back at its origins and review the key milestones of the
last 25 years.
Compared to those of other European countries and the US in particular, the Swiss repo
market emerged late. Two important prerequisites for its introduction and success were the
exemption of repo transactions from stamp duty in 199711 and, in the same year, the revision
of the National Bank Act (NBA), which authorised the SNB to conclude repo transactions.
In hindsight, the comparatively late start proved advantageous, because it allowed a modern -
highly standardised and automated - repo system to be created from the ground up. The SNB
worked closely with the banks and infrastructure providers to establish an efficient and secure
market. Thanks to this successful cooperation and the admission of a large number of
participants, the Swiss repo market very quickly developed a high trading volume. In the
monetary policy environment of the time, where banks' sight deposits at the SNB were
scarce, the trading volume in the interbank market increased rapidly from around CHF 1
billion per day in 1999 to over CHF 50 billion per day in 2008 (cf. chart 8).
The global financial crisis interrupted this trend. While demand for secured credit transactions
increased significantly, as banks and other financial institutions sought to limit credit
transaction risk and secured repo transactions offered an attractive solution,12 interbank
trading turnover in the Swiss franc repo market nonetheless declined in the years following
the financial crisis. This was due to the fact that, with the expansion of its balance sheet in the
aftermath of the global financial crisis and the euro area debt crisis, the SNB had significantly
increased liquidity in the banking system. As a result, market participants had less need to
redistribute liquidity via the repo market in order to cover liquidity bottlenecks, and trading
activity decreased.
The global financial crisis also had consequences for Libor, the reference rate at that time.
Libor was calculated on the basis of reports from a panel of banks regarding the interest rates
at which they could borrow or lend funds in the unsecured interbank market. Given the
decline in turnover in this market and manipulation issues, Libor increasingly lost its function
as a reference rate. In Switzerland, the National Working Group on Swiss Franc Reference
Rates (NWG), co-chaired by a representative of the private sector and a representative of the
SNB, was tasked with finding an alternative to the Swiss franc Libor. The new reference rate
was to be as risk-free, reliable and transparent as possible. The NWG ultimately agreed to
replace Libor with SARON. As already mentioned, this rate is based on the overnight
segment of the Swiss franc repo market, the most liquid part of the Swiss franc money
market, and is calculated using actual transactions and binding quotes.13
In the years following the global financial crisis and the euro area debt crisis, too, the
monetary policy stance heavily influenced the repo market. At the end of 2014, for example,
the SNB introduced a negative interest rate and simultaneously introduced tiered
remuneration of the sight deposits that banks and other financial market participants hold at
the SNB.14 This reduced the burden on banks and strengthened incentives for trading in the
money market.15 Trade based on tiered remuneration contributes significantly to creating a
robust foundation for calculating SARON. This is why the SNB decided to keep tiered
remuneration when, given global inflationary pressure, it decided in September 2022 to return
to a positive policy rate.16
Future of the repo market
After this review of the past 25 years, let us now cast our minds forward and imagine how
things might look in the future. The repo markets abroad and in Switzerland are in a state of
ongoing transformation. In addition to the monetary policy of central banks and changing
regulatory requirements, technological progress is also an important driver of this
transformation. The focus here is often on increased settlement speed.17 Settlement could be
accelerated by further developing or linking existing systems or by building new systems
based on distributed ledger technology (DLT). Innovation is currently particularly strong in
the following three areas: delivery-versus-payment settlement, intraday liquidity management
and collateral mobility (cf. chart 9).
As already noted, delivery-versus-payment settlement reduces market participants' settlement
risk substantially, as the money and the securities are exchanged almost simultaneously.
Today, the technical platform architecture of TPAs enables this almost simultaneous
exchange by means of coordinated settlement via separate but interconnected securities and
payment systems.18 In the future, settlement efficiency could be improved further thanks to
DLT, so that the transfer of the securities and the relevant payment takes place in a single,
inseparable step.19
If DLT becomes generally accepted for securities settlement in the future, it is important that
central banks be prepared. As part of a pilot known as Project Helvetia III, the SNB has
therefore explored how a repo transaction can be settled using token-based securities and
wholesale central bank digital currency on a DLT-based platform. The repo transaction was
conducted on SIX test systems. The transaction was initiated on the CO:RE trading platform,
administered via the TPA and settled on SIX Digital Exchange (SDX).20
The second area currently witnessing a lot of activity is intraday liquidity management.
Financial institutions have become more interested in intraday repo transactions with
maturities of a few hours. We also observe growing interest in the settlement of repo
transactions at a specific time during the day, rather than at any given time on a value date, as
is the usual practice. Such functionalities can be provided using conventional technologies as
well as DLT-based solutions. These developments are interesting because they could
influence the market over the long term by giving intraday liquidity an explicit price.21 We
are monitoring developments in this area very closely and are designing our systems in a
flexible way so as to be well prepared for future changes.
The third and final area with high potential for innovation is collateral mobility. The ability to
move collateral efficiently between various central securities depositories, accounts and
counterparties brings significant advantages: The pool of collateral available immediately can
be expanded and obligations to deliver certain items of collateral can be met more effectively
and accurately. Moreover, operational risk associated with the transfer of securities can be
reduced.
A range of new technologies is being developed and approaches investigated to increase
collateral mobility. For instance, the programmability of token-based collateral offers the
possibility of automating processes such as the transfer and release of collateral. The SNB is
open to these kinds of new technologies and developments and has run its own projects in this
connection, such as the aforementioned pilot Project Helvetia III. Furthermore, the SNB also
includes collateral issued on the platform of a DLT-based central securities depository such as
SDX in the SNB GC Basket. Already today, a number of token-based bonds can be used for
repo transactions, just like conventional collateral.
These and other developments will change the repo markets in the future. It is important to us
that the Swiss franc repo market remain secure, liquid and efficient. We look forward to
delving deeper into these and other topics with our experts during the panel discussion and to
exploring future developments in the repo markets from a variety of angles.
References
BIS (2012), Principles for financial market infrastructures, Bank for International
Settlements, IOSCO, April 2012.
Guggenheim, B., S. Kraenzlin and S. Schumacher (2010), Exploring an uncharted market:
Evidence on the unsecured Swiss franc money market, SNB Working Papers 2011-05, Swiss
National Bank.
Guggenheim, B., S. Kraenzlin and C. Meyer (2020), (In)Efficiencies of current financial
market infrastructures - a call for DLT?, SNB Working Papers 2020-24, Swiss National
Bank.
Jordan, T. (2009), The Swiss franc repo market - a successful first decade, SNB Repo
Meeting, 2 July.
Jordan, T. (2024), Project Helvetia III - The SNB's pilot for wholesale CBDC, remarks at the
BIS Innovation Summit, 6-8 May.
Lee, M., A. Martin and B. Müller (2022), What Is Atomic Settlement?, Federal Reserve Bank
of New York Liberty Street Economics, 7 November.
Maechler, A.M. and T. Moser (2022), Life after Libor: A new era of reference interest rates,
SNB Virtual Money Market Event, 31 March.
Maechler, A.M. and T. Moser (2022a), Return to positive interest rates: Why reserve tiering?
SNB Money Market Event, 17 November.
Martin, A. and T. Moser (2024), The implementation and transmission of the SNB's monetary
policy during the recent tightening cycle, SNB Money Market Event, 18 April.
Moser, D. (2018), The financial markets in changing times - Changes yesterday and today:
the money and foreign exchange markets, SNB Money Market Event, 5 April.
Moser, T. (2023), Implementing monetary policy with positive interest rates and a large
balance sheet: First experiences, SNB Money Market Event, 17 November.
Kraenzlin. S. (2007), The characteristics and development of the Swiss franc repurchase
agreement market, Financial Markets and Portfolio Management 21 (2), pp. 241-261.
Kraenzlin. S. and T. Nellen (2010), Daytime Is Money, Journal of Money, Credit and
Banking, Vol. 42, No. 8 (December 2010).
SNB (2007), The Swiss National Bank 1907-2007, Verlag Neue Zürcher Zeitung, pp. 302-
313.
The Swiss repo market at 25: A success story for the
financial centre and the SNB
Petra Tschudin
Member of the Governing Board, Swiss National Bank
Thomas Moser
Alternate Member of the Governing Board, Swiss National Bank
Money Market Event
Geneva, 21 November 2024
Chart 1
The Swiss franc repo market is of central importance to the SNB's
monetary policy
SNB
SIX,
Source(s):
1 21.11.2024 The Swiss repo market at 25: A success story for the financial centre and the SNB | Petra Tschudin and Thomas Moser | © Swiss National Bank
Chart 2
Repo transactions enable effective interest rate steering
SNB
SIX,
Source(s):
2 21.11.2024 The Swiss repo market at 25: A success story for the financial centre and the SNB | Petra Tschudin and Thomas Moser | © Swiss National Bank
Chart 3
The SNB's monetary policy stance is transmitted from the repo market
to the rest of the economy
SNB
SIX,
Bloomberg,
Source(s):
3 21.11.2024 The Swiss repo market at 25: A success story for the financial centre and the SNB | Petra Tschudin and Thomas Moser | © Swiss National Bank
Chart 4
Participants in the repo market can quickly obtain liquidity or invest
excess liquidity
NETWORK OF LIQUIDITY FLOWS IN THE SWISS FRANC REPO MARKET
Reference period: first week of September
SNB
SIX,
Active market participants
Source(s):
Liquidity flows
Chart 5
Swiss franc repo transactions are a particularly secure financial
instrument
High-quality collateral
Standardised collateral baskets
Various factors contribute to the
security, liquidity and efficiency of
the Swiss franc repo market
Integrated risk management
Automated settlement
Chart 6
The Swiss Money Market Value Chain efficiently links trading,
settlement and collateral management
SIX Repo CO:RE
Trading
Trading platform
Triparty Agent (TPA)
Administration
Straight-through
Collateral and risk management system
SIX SIS
Delivery
SIC
Settlement
processing
versus
Central securities
Payment system
payment
depository
Chart 7
Swiss franc repo transactions are settled within a few minutes
SNB
2 5
SIX,
Source(s):
7 21.11.2024 The Swiss repo market at 25: A success story for the financial centre and the SNB | Petra Tschudin and Thomas Moser | © Swiss National Bank
Chart 8
The tiered remuneration of sight deposits helped to revive trading
activity
Structural liquidity deficit Liquidity surplus Liquidity surplus with tiered remuneration
SNB
SIX,
Source(s):
8 21.11.2024 The Swiss repo market at 25: A success story for the financial centre and the SNB | Petra Tschudin and Thomas Moser | © Swiss National Bank
Technological progress is an important driver of transformation in the
repo markets
DvP
Simultaneous delivery Intraday liquidity Collateral
versus payment management mobility
Thank you for your attention.
© Swiss National Bank