UPDATE 1-SNB keen to not to disrupt markets with its investments

Thu Nov 8, 2012 1:06pm EST

* SNB's reserves about 70 pct of annual GDP

* Monetary policy more important than generating a profit

* SNB always considering new types of investments

GENEVA, Nov 8 (Reuters) - The Swiss National Bank will defend its cap on the franc with the utmost determination and tries to invest its foreign exchange reserves in ways that do not disrupt the market, a policymaker said on Thursday.

The SNB set a cap of 1.20 per euro on the franc a year ago to ward off deflation and a recession when investors rushed to buy the Swiss currency as a safe haven from the euro crisis.

"This exceptional measure was designed to mitigate the risk of deflation that threatens the Swiss economy. We are convinced that this policy is effective, and we shall continue to pursue it with the utmost determination," Board Member Fritz Zurbruegg said in the text of a speech.

The SNB's reserves have ballooned to around 70 percent of the country's annual output, as it has sometimes had to inject large sums to make the limit stick.

But an easing of market tension in the euro zone in September has allowed the franc to weaken towards 1.21 per euro, stemming the need for the SNB to intervene and allowing it to diversify out of euros in the third quarter.

In 2010, the central bank came under heavy fire after it ran up a record loss of 27 billion francs on its currency holdings as it intervened to try to weaken the franc, resulting in calls for then Chairman Philipp Hildebrand to resign.

By contrast, the SNB's current efforts to keep a lid on the franc have drawn broad support at home. It has helped to stabilise the economy and the bank has managed to post profits despite the expanding of its balance sheet.

"The management of foreign exchange reserves takes place independently from monetary policy," Zurbruegg said. The reserves were managed with a view to security and liquidity, as well as return, he said.

In September, ratings agency Standard & Poor's said its buying of euro assets had helped to push down yields on "core" euro zone bonds. The SNB rejected the report.

"We are aware that the huge amounts we have under management could impact significantly on market prices," Zurbruegg said, in a bid to rebut further such contentions. "To prevent this kind of problem, we control the volumes we place on the markets, so as to avoid having any perceptible market impact."

In addition to euros, the holds about a quarter of its reserves dollars, as well as small holdings of South Korean won, the Singapore dollar, and other currencies. Much is invested in bonds or placed with other central banks, and 12 percent is in equities, the highest proportion of stocks since 2004.

The stock holdings are managed passively, with the portfolio corresponding to the main international benchmarks, Zurbruegg said, adding that derivatives such as futures or interest rate swaps were occasionally used, if the underlying instrument met the central bank's criteria.

The SNB was always willing to consider further investment options, Zurbruegg also said.

"We actively analyse and monitor new asset classes and different currencies in both advanced and developing economies, in order to reduce our risk concentration over time," he said.

Zurbruegg, previously head of the federal budget office, was appointed to the SNB after Thomas Jordan became chairman following the resignation of Philipp Hildebrand over a forex trading scandal last January. He heads the SNB's markets department, in charge of defending the cap.

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