News conference
Berne, 13 June 2019
Andréa M. Maechler
Introductory remarks by Andréa M. Maechler
I would like to start by outlining developments in the financial and foreign exchange markets.
I will then make a few comments regarding the SNB policy rate and the replacement of Libor.
Finally, I will provide some background information on the SNB's recent decision to join the
Network for Greening the Financial System.
Financial and foreign exchange markets
In Q1 2019, the risk markets - especially the equity markets - recovered from the downturn in
Q4 2018. This was partly due to the Federal Reserve signalling its willingness to be 'patient'
on further interest rate hikes, and partly to the fact that economic data for Q1 2019 painted a
more benign picture than the markets had expected at the end of 2018. In April, equity market
indices briefly rose to new highs in several countries. In May and early June, many of these
indices declined in response to a weaker economic and inflation outlook and, in particular, the
abrupt escalation of the trade dispute between the US and major trading partners like China
and Mexico. In aggregate, the major equity markets in North America and Europe have
gained over 5% since the last news conference in December 2018.
By contrast, over the last six months, yields on government bonds have fallen significantly
overall in most advanced economies. Market developments were shaped by the more
pessimistic assessment of the economic outlook and expectations that monetary policy could
remain expansionary for longer. At the end of May and beginning of June, deteriorating risk
sentiment triggered a flight to safe havens and a corresponding decline in government bond
yields.
These developments on the equity and bond markets had only a limited effect on the foreign
exchange markets. In the major currencies, trading ranges were generally narrow and risk
premia low, despite heightened macroeconomic and political risks. Swiss franc volatility also
remained moderate. The trade-weighted exchange value of the Swiss franc has barely changed
overall since the last news conference, and the currency remains highly valued. The Swiss
franc depreciated in April following the postponement of the UK's exit from the EU, however
in May, the escalation of the US-China trade dispute and concerns about Italy's budget
situation reversed this depreciating trajectory.
The risk of renewed upward pressure on the Swiss franc is high, given the many hotspots
around the world. This explains why it still costs more to hedge against Swiss franc
appreciation than against Swiss franc depreciation on the options market. The franc thus
continues to be in demand as a safe-haven currency and the situation on the foreign exchange
market remains fragile. The negative interest rate and the SNB's willingness to intervene in
the foreign exchange market as necessary therefore remain essential.
The transition from Libor to SARON
Let me now turn to the SNB policy rate and the transition away from Libor.
As Thomas Jordan has explained in his remarks, we are introducing the SNB policy rate as
the future of Libor is uncertain. This adjustment does not entail any change in the SNB's
current monetary policy stance.
However, the move away from Libor presents the financial markets, and those operating in
them, with a very challenging task. I would like to discuss three aspects of this transition in
greater detail: first, the choice of the Swiss Average Rate Overnight (SARON) as the
alternative reference rate; second, the importance of using SARON in financial products and
developing a liquid, SARON-based yield curve; and third, the issue of how interest payments
should be calculated over longer periods.
As regards the first aspect - the choice of a new reference rate: In Switzerland, the National
Working Group on Swiss Franc Reference Rates (NWG) recommended SARON as the
alternative as early as 2017. Switzerland, like other currency areas, has thus chosen an
overnight rate as its preferred alternative to Libor. SARON has been in existence for ten years
and, unlike Libor, is based on trades and binding quotes for overnight transactions on the
secured Swiss franc money market. This market segment is broader and more liquid than the
unsecured money market on which Libor is based.
Moving on to the second aspect - the importance of using SARON more actively in financial
products and developing a liquid, SARON-based yield curve: To date, Libor has been widely
used in financial products, however market participants are now working hard on transitioning
to new, SARON-based products. These include derivatives, especially interest rate swaps,
which can be used to hedge against changes in interest rates.1 A SARON-based interest rate
swap market was set up back in 2017. Trading activity in this market remains low, however it
is expected to pick up once SARON becomes more widely used in cash products (such as
loans, mortgages and capital market instruments) and investment products. The SARON-
based yield curve will then be able to take over the role of the current, Libor-based yield
curve. Yield curves are important benchmarks for market participants and serve as the basis
for pricing medium and long-term financial products.
And, finally, the third aspect - how should interest payments be calculated for a period of
three months, for example? Libor provided a three-month rate which could, among other
things, be directly applied to the calculation of interest payments on money market mortgages.
If one were to use SARON in such cases, interest payments would theoretically have to be
made daily, which is impractical. The NWG has recommended using average SARON values
('compounding approach'), and has proposed several possible options. Market participants are
currently working on implementing this recommendation.
Let me conclude this section by emphasising that SARON is establishing itself as the leading
reference rate for financial products. It is the responsibility of market participants to
systematically complete the remaining transition work and prepare themselves for the
postLibor era. As they do so, they can draw on the recommendations of the NWG, whose
activities the SNB supports. The faster SARON is integrated into financial products, the
smoother the replacement of Libor will be. The creation of a liquid, SARON-based yield
curve is fundamental as it will enable our money and capital markets to continue running
efficiently. This is very important not only for our country's financial system but also for the
transmission of the SNB's monetary policy.
SNB joins network dedicated to 'greening the financial system'
To conclude, I would like to say a few words about our decision to join the Central Banks and
Supervisors Network for Greening the Financial System (NGFS). As climate change is a
global phenomenon, institutional and technical knowledge must be analysed and exchanged
globally.
The SNB joined the NGFS, which now comprises 36 central banks and supervisors, in April
2019. The network provides a forum in which members can conduct in-depth analysis and
seek answers to some key questions. For instance: What kind of financial risks do climate and
environmental threats pose for the finance industry? And could these risks weaken the
resilience of the financial system, or indeed affect macroeconomic variables and monetary
policy?
The SNB's goal in joining the NGFS is to engage in dialogue and share knowledge in order to
better understand - and anticipate - the potential impact of climate risks.