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SARON: Swiss Money Market and Interest Rate Environment

SARON · Work through your exam, one topic at a time.

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Swiss Money Market and Interest Rate Environment

This domain tests how the CHF money market actually clears: how the SNB steers short-term rates, which instruments build the CHF curve, and why SARON sits where it does inside that framework. Questions typically ask you to turn a policy decision into a cash-flow or curve outcome, not to recite definitions.

Policy implementation

  • The SNB sets the SNB policy rate and implements it through sight deposits and liquidity operations (repo, SNB bills, FX swaps). SARON normally trades close to the policy rate, but it is a market rate, not an administered one.
  • Sight deposits are remunerated in tiers: balances up to a threshold linked to the minimum reserve requirement earn the policy rate, balances above it earn a lower rate. Tiering keeps SARON near the policy rate without subsidising the entire balance sheet.
  • The SNB has announced a gradual shift towards a liquidity-shortage framework, supplying CHF liquidity mainly through repo. Desks therefore watch repo operations, not only the policy rate, when forecasting the fixing.
  • Instruments: SNB bills (short discount paper), Confederation money market bills, unsecured call money and time deposits, SIX Repo (bilateral and CCP), and a thin CHF commercial paper market. From 2015 to 2022 the policy rate was -0.75%: SARON traded negative and the zero cash floor mattered.

Curve

Overnight SARON anchors everything: compounded SARON covers one, three and six months, SARON OIS prices further out, and balance-sheet costs plus term premia explain why three-month compounded SARON usually trades above OIS.

Worked example

A treasurer places CHF 20,000,000 for 92 days. Fixed at 1.00%: 20,000,000 x 0.01 x 92/360 = CHF 51,111. Compounded SARON, expected average 0.95%: 20,000,000 x 0.0095 x 92/360 = CHF 48,556. The fixed deposit earns CHF 2,555 more, which is the term premium given up by staying floating in exchange for upside if the SNB hikes and no locked-in loss if it cuts.

Traps

  • Equating SARON with the policy rate: a 25bp cut does not mechanically move SARON by 25bp when tiering or balance-sheet effects bind.
  • Using act/365 or 30/360; CHF money market conventions are act/360.
  • Applying a zero floor to SARON after 2015.
  • Forgetting that compounded SARON is set in arrears, so the floating investor bears reinvestment risk.