It is a market that typically garners little attention and appeals only to specialists. Yet, its proper functioning is a crucial foundation for the entire financial and banking system in the country to perform its roles and maintain stability.

We are talking about the Swiss repo market. This is where banks conclude repo transactions with each other (interbank market) or with the Swiss National Bank (SNB). Bank A buys securities from bank B and transfers Swiss franc liquidity to it in return, whereby it is agreed that bank A will sell these securities back to bank B at a later date. The securities are therefore the collateral for the loan that bank A grants to bank B at the beginning. In addition, bank B pays interest (repo rate) to bank A over the term of its loan.

Main Instrument for the Implementation of Monetary Policy

Repos are the primary instrument used by the SNB to implement its monetary policy. They ensure that the effects of an interest rate decision are transmitted to the money and capital markets and, ultimately, to the economy as a whole.

The Swiss repo market has existed for 25 years, with the SNB conducting its first transaction on the so-called Swiss Money Market Value Chain in June 1999. This development was tied to the new monetary policy framework introduced in 2000, which brought significant changes to the tools used for implementing monetary policy.

Central Importance of the Repo Market

It was therefore fitting, that Petra Tschudin, newly appointed as a member of the Governing Board and Head of Department III (responsible for implementing monetary policy, among other duties) in October, and Thomas Moser, a seasoned deputy member of the monetary policy decision-making body since 2010, highlighted the 25th anniversary in their joint speech on Thursday at the traditional Money Market Apéro in Geneva. The event likely marked Tschudin's first public appearance as a Governing Board member.

The two speakers once again emphasized the great importance of the repo market, both for the SNB's monetary policy and for financial market participants. They also looked back at the most important milestones since 1999 and ahead to future developments.

From the Unsecured to the Secured Money Market

Today, the SNB uses repo transactions to absorb liquidity and maintain the overnight rate, Saron, close to the SNB policy rate. Saron, calculated based on transactions and pricing in the interbank market (excluding SNB transactions), is the most important short-term reference interest rate for the Swiss franc. The swap curve based on the Saron is used as a reference in the pricing and valuation of many financial products such as mortgages, loans and Swiss franc bonds.

The security offered by repos compared to unsecured money market transactions was an important reason for the SNB to push the market at the time, which not all players considered equally urgent at the time. It is still a central argument today, as Tschudin and Moser made clear. Thanks to its liquidity, security and efficiency, the market also plays an important role for banks and other financial market participants, either to obtain short-term liquidity or to invest surplus liquidity.

A 120-Billion-Franc Business

The volumes on the repo market are high. Around 50 billion francs are currently outstanding on the interbank market, in addition to around 70 billion francs in repos that the SNB has concluded with banks.

The high-quality requirements that the SNB places on the collateral contribute in particular to security. The SNB securities basket (SNB GC Basket) is used as collateral in around 90 percent of all Swiss franc repo transactions. However, the triparty agent (TPA, for risk and securities management) function, introduced in 2020, which is performed by SIX SIS, also further reduces risks, the two speakers emphasized. Collateral is valued at market prices on an ongoing basis and automatic settlement is carried out twice a day in the event of a shortfall or surplus.

Fully Automated and Integrated Infrastructure

The repo market is efficient because it is based on the CO:RE trading platform of SIX Repo, the Secom securities settlement system and the SIC payment system, and thus on a fully automated and integrated financial market infrastructure (the Swiss Money Market Value Chain mentioned above).

The speakers highlighted that the Swiss repo market emerged relatively late by international standards. At the time, the SNB had to engage in considerable persuasion, particularly with the Federal Tax Administration, to ensure repos were exempt from stamp duty—a crucial step, as the tax had made such transactions uneconomical.

Caesura of the Financial Crisis

The global financial crisis of 2008 caused a sharp decline in turnover in the repo market due to expansive monetary policy, which injected significant liquidity into the financial system. Additionally, banks became unwilling to lend money to each other on an unsecured basis. This reluctance—combined with manipulations by banks when fixing rates—ultimately led to the replacement of the Libor reference rate, an unsecured three-month rate, with the Saron.

Looking to the future, Tschudin and Moser reminded the audience that the repo market has remained a market for specialists who should also have a certain flair for technology. Strong innovation activity can be observed in the areas of settlement, intraday liquidity management and collateral mobility.

Outlook: Settlement, Intraday Liquidity and Mobile Collateral

The speed and efficiency of settlement could be increased by optimizing existing systems or setting up new systems based on distributed ledger technology (DLT). The SNB has already gained relevant experience with central bank digital currency (CBDC) as part of the Helvetia III DLT project.

The SNB has observed growing interest from financial institutions in intraday repos, which have maturities of just a few hours, and in the settlement of repos at specific times during the day. Distributed Ledger Technology (DLT) solutions could play a role here by enabling more efficient management of intraday liquidity.

By «collateral mobility», the SNB refers to the ability to move collateral efficiently between different central securities depositories. «For example, the programmability of token-based collateral offers the possibility of automating processes such as the transfer and release of collateral.»