Swiss Spat With EU Prompts London Curbs on Country’s Shares
(Bloomberg) -- With no signs of a resolution to a political spat between the European Union and Switzerland a week before a key deadline linked to the country’s stock market, the finance industry is bracing for the potential fallout.
London-based trading venues run by UBS Group AG, Aquis Exchange Plc and CBOE Global Markets Inc. warned clients that they will exclude securities by Swiss issuers starting next week if Switzerland is left to defend its stock market against punitive EU measures.
Switzerland and the EU have locked horns over a political accord that’s been in the works for years and which is meant to replace the patchwork of treaties now governing relations between the two trading partners. To put more pressure on the country, the EU decided in 2017 to tie progress on the accord to the regulatory recognition of Swiss stock exchanges.
Under the EU’s MiFID II rules, certain stocks can only be traded in the EU or at a venue outside the bloc that’s been recognized by the European Commission, the EU’s executive arm, as being subject to “equivalent” regulations. Officials approved Swiss exchanges in late 2017, limited for one year, and extended this finding once -- to the end of this month.
The political agreement at the heart of the issue -- which seeks to replace treaties on everything from agriculture to immigration and civil aviation -- was finalized in November last year. It hasn’t been endorsed by the Swiss government because it’s unpopular at home, in part because of fears it’ll erode high local wages.
Earlier this month, while saying it was still “broadly positive,” Switzerland asked for some “clarifications.” That was seen in Brussels as an attempt by the country to renegotiate the accord, which the EU has ruled out.
The EU has also complained about “foot-dragging” by the government in Bern, and unless the commission decides otherwise, regulatory equivalence of the Swiss stock exchange will expire at the end of the week.
Although the chances are slim, Switzerland and the EU may strike a last-minute deal that could extend the regulatory recognition of Swiss stock exchanges. Failing that, talks could drag on for months.
“Neither side seems to be able to make an approach to the other in coming months,” UBS Chief Investment Officer Daniel Kalt wrote in a note to clients. “The EU commission stuck in Brexit negotiations wants to avoid sending the wrong signal to London by giving in to Switzerland. Switzerland will hold federal elections in October and no political party wants to be seen as giving in. There is a danger of escalation in the negotiations, which could cause lasting damage to the relationship and fuel economic uncertainties.”
In the meantime, Switzerland has said it will activate a contingency plan that would effectively prohibit the trading of Swiss shares in the EU and re-route all of the liquidity back to exchanges within its borders.
The finance ministry “will activate the measure to protect the Swiss stock exchange infrastructure in the event of non-extension” of the EU’s equivalence finding, it said on Monday.
In practice, that would drain liquidity in Swiss shares from trading venues in the EU, such as those based in London and owned by companies including London Stock Exchange Group Plc, CBOE and Aquis. LSE declined to comment.
About a third of trading in Swiss shares currently takes place within the EU and the rest in Switzerland, according to SIX Swiss Exchange AG Chairman Romeo Lacher. And the majority of the activity in Swiss shares on SIX comes from traders in the EU.
SIX, Switzerland’s main stock exchange, said the contingency plan wouldn’t disrupt trading because it established “direct links to all its clients” over the last months. “In addition, it has implemented a Fast Track process for bringing new participants on board,” it said.
Business Europe, which represents companies across the EU, wrote to Commission President Jean-Claude Juncker last week, urging him to avoid “decisions that lead to escalation.” Swiss Holdings, whose members include Novartis AG and ABB Ltd., said it expects “concrete measures” from the commission and the Swiss government to stabilize economic relations between the two.
Swiss shares have been relatively unfazed by the dispute so far. The SMI stock index has risen 3.9% this month, while the Euro Stoxx 50 Index is up 5.1%.
(Updates with note to clients from UBS CIO Daniel Kalt.)
--With assistance from Jan Dahinten.
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