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SNB EFFECTIVE AND EFFICIENT FOREX RESERVE MANAGEMENT 2012


To: The Right Honourable Swiss National Bank President Thomas Jordan

From: Athinarayanan Sanjeevraja

Date: November 16, 2012

RE: Swiss National Bank Forex Reserves Challenges

Suggestion: SNB Effective and Efficient Management of Forex Reserves.

Good Morning Mr. President. I am writing to express that “Financial Times, London” reported that “SNB warns on challenge of forex reserves”. It is true that forex reserve management have inexorably raised significant challenges for SNB in recent years. If I am not mistaken, SNB foreign exchange reserves surged from CHF 50 billion at the end of 2008 to nearly CHF 500 billion in November 2012. It accounts nearly 70 percent of the GDP. SNB forex reserves expanded very rapidly in recent years due to SNB monetary policy. As you pointed out earlier “diversification is the only way for the SNB to mitigate the impact of foreign exchange fluctuations”. I agreed Mr. President because hedging the exchange rate risk is the main cause of the changes in SNB’s foreign exchange reserves. Hedging lead to the diluting the effectiveness of monetary policy. If we want to limit the exchange rate, credit and risk of foreign currency investments we have to diversify more. Here I would like to highlight some of main challenges of SNB’s forex reserves and how to mitigate the foreign exchange fluctuations.

(i) I observed that SNB has increased the proportion of equities to 12 percent of the portfolio in 2012. From my perspective, it is very large and it would incur greater risk. I agreed that increase in the proportion of equities incur more risk and more return but exposure to the exchange rate is the challenge of SNB’s monetary policy. We must eliminate this risk. That is SNB’s priority. I would like to recommend the level of equities to be 5 -10 percent of the portfolio. Secure is the key to mitigate the impact of foreign exchange fluctuations.

(ii)  SNB’s investment should not disrupt the market. I observed few of SNB’s investment disrupt the market because of huge volumes. SNB take care to ensure that its investment either more liquid assets or control volumes. SNB should avoid niche market and focus more on major markets like US or Europe which they can easily absorb. Europe is SNB’s major investment and followed by US. Japan, UK and Canada are niche market. I would like to recommend SNB try to reduce investment especially in Japan and Canada. Liquid assets or low volumes are the key to mitigate the impact of foreign exchange fluctuations. If SNB’s want to invest in Japan and Canada, SNB take care to ensure that its volume should be low.  

(iii)  SNB’s bond investments are in AAA or AA rated assets. SNB take care to ensure that its bond investment only in AAA rated assets to mitigate the impact of foreign exchange fluctuations.

Let me conclude Mr. President, many investment markets are niche and do not meet the SNB’s liquidity requirements. I recommend SNB’s try to avoid niche markets investments. This will lead to significant losses for the SNB. SNB always tries to pursue the most effective and efficient foreign exchange reserve management possible to mitigate the impact of foreign exchange fluctuations.

Vielen Dank, dass Sie mich heißt meiner Meinung nach Mr. President.

Grüßen,
Athinarayanan Sanjeevraja. 

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