The Swiss Franc Benchmark
SIX developed SARON with the Swiss National Bank in 2009 to allow market participants to better manage their short-term refinancing needs. Since then, SARON has played a critical role in daily liquidity management activities.
SARON represents the overnight interest rate of the CHF money market. This is typically the lowest available rate, and only available to the most creditworthy institutions. SIX ensures daily calculation and distribution. There is an international consensus that financial benchmarks need to be resilient and reliable. Repo markets, being liquid, highly regulated and of high integrity, are ideal. The National Working Group on the Swiss Franc Reference Rate recommends SARON as the alternative for CHF LIBOR.
Five Key Differences Between SARON and LIBOR
Reference interest rates are important. And not just as far as monetary policy is concerned. Financial contracts for loans, savings deposits and mortgages all refer to these rates, which also provide an essential baseline on the derivatives market or for structured products. In less than two years, support for LIBOR will be removed and banks will have to switch contracts, products, systems and processes based on the rate to new, alternative reference rates (ARR). For the Swiss market, SIX provides a robust alternative to the CHF LIBOR with SARON that offers five key advantages:
Overview of the 5 Differences
|Money Market||SIX operates the fully automated trading platform (SIX Repo) for the secured money market (short-term credit funding) in Switzerland. The SARON reference rate reflects this repo market. “Funding against collateral” is the rule here.||The LIBOR reference rate reflects the unsecured money market (short-term credit funding). “Funding against creditworthiness” is the rule here (no collateral required).|
|Participants||Some 160 banks and insurance companies take part in the Swiss repo market, including the Swiss National Bank (SNB), which uses it to supply Switzerland’s economy with liquidity.||A group of 11 to 16 panel banks is involved in setting LIBOR.|
|Basis||Banks receive funds from the SNB by depositing securities as collateral. They pledge to buy back those securities at a later date and pay interest. Banks also borrow money from each other using this principle (secured interbank market).||The panel banks answer the question of what interest rate they could borrow funds at if they ask for an interbank offer in a reasonable market size. Illicit collusion between some of those panel banks caused the LIBOR scandal in 2011.|
|Values & Calculation||Actual concluded transactions and quotes flow into the calculation of SARON. That’s approximately 110 interest rates per day on an annual average.||The estimates submitted by the panel banks flow into the calculation of LIBOR. Between 5 and 8 interest rates are used, depending on the number of banks involved. The 3 to 4 highest and lowest interest rates are discarded.|
– Calculated/published every ten minutes|
– Fixing conducted three times a day (closing rate: 6:00 pm)
– Available in one currency (CHF)
– Calculated once a day|
– Published once a day
– Available in five currencies (CHF, EUR, GBP, JPY, USD)
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Support for LIBOR will be removed in less than two years. SARON is a robust alternative with key advantages over LIBOR, recommended by the National Working Group on the Swiss Franc Reference Rate.