The Swiss repo market recently celebrated its 25th anniversary, highlighting its importance in maintaining liquidity, security, and efficiency in the banking system.
The Swiss repo market facilitates transactions between banks and the Swiss National Bank (SNB) through repo transactions. In these transactions, one bank purchases securities from another with an agreement to repurchase them later. This mechanism provides liquidity and collateral, with the lending bank receiving interest throughout the loan's duration. The repo market is crucial for the SNB's monetary policy implementation and plays a significant role in the stability of the financial system.
Since its establishment in 1999, the Swiss repo market has evolved, especially after the introduction of a new monetary policy framework in 2000. Repos have become a central component of the SNB's liquidity management, aligning the overnight rate (Saron) with its policy rate. The transition from unsecured to secured transactions has enhanced the market's reliability, and the SNB has set high-quality collateral requirements to ensure security.
The Swiss repo market has impressive transaction volumes, with approximately 50 billion francs outstanding in the interbank market and an additional 70 billion francs in repos between banks and the SNB. The market's security is reinforced by stringent standards, including the use of the SNB GC Basket in most Swiss franc repo transactions. The introduction of a triparty agent function in 2020 has further mitigated risks associated with repo transactions.
Technological advancements, such as distributed ledger technology (DLT), hold promise for optimizing settlement processes, intraday liquidity management, and collateral mobility in the repo market. The SNB's experience with central bank digital currency (CBDC) positions it well to explore these innovations. Intraday repos and the concept of collateral mobility are gaining interest, and DLT solutions could facilitate efficient management and transfer of collateral.
The repo market's significance extends beyond transactions; it plays a vital role in the stability of the banking sector and the transmission of monetary policy decisions to the broader economy. The collaboration between the SNB and financial institutions ensures swift and secure access to liquidity. As the financial landscape evolves, the Swiss repo market remains adaptable and poised to leverage technology to enhance its operations and maintain its critical role in the financial system.