Repos and SNB Bills anchor SNB monetary policy

The Swiss National Bank (SNB) implements monetary policy by steering secured short-term rates, aiming to keep them close to its policy rate.

In an environment of abundant sight deposits, the SNB remunerates these deposits held by banks and other financial institutions.

Crucially, it also absorbs some deposits through open market operations (OMOs), specifically repo transactions and the issuance of SNB Bills.

These OMOs ensure sight deposits are sufficiently scarce relative to banks' thresholds, preventing SARON (Swiss Average Rate Overnight) from falling too far below the policy rate.

The SNB uses a tiered remuneration system: deposits up to a bank-specific threshold earn the policy rate, while those above it receive a lower rate.

This encourages interbank market activity.

The SNB's strategy is price-driven, reacting to SARON's level rather than targeting a specific quantity of absorbed deposits, allowing flexible adjustment to supply and demand changes.

The SNB employs distinct open market operations.

Term repos primarily anchor SARON near the policy rate.

Offered at 5 basis points (bps) below the policy rate for one week via fixed-rate full-allotment auctions, they stabilize SARON and provide a common pricing reference.

To foster interbank market activity, term repo rates are discounted, and a two-day settlement lag (T+2) encourages banks to use the interbank market for short-term liquidity.

Overnight repos serve as a rare backstop for SARON, conducted at 10 bps below the policy rate to prevent significant deviations.

SNB Bills strengthen monetary policy transmission and create collateral for repo transactions.