EU-Swiss Exchange Battle Continues, Swiss Exchanges May Create a Monopoly

Talking Points:

• EU officials are unlikely to grant Switzerland a further extension of equivalence, but the final decision will be announced on Friday

• Swiss companies could face being locked out of EU trading venues if the Swiss government retaliates against the EUs decision

Ever since Swiss voters declined joining the European Economic Area back in 1992 several accords have been in place to govern EU-Swiss relations, meaning that Switzerland has enjoyed a generous relationship with the bloc which has extended to its stock market. Most of the Swiss shares traded on the Swiss exchange (SIX) are also available to trade in the EU via various MTFs. And that has been a big boost for large Swiss companies as more than half of their traded volume comes from European investors.

Despite this system being in place for a while and having provided smooth and frictionless trading for EU and Swiss investors, it is all now up in the air as the EU has threatened to revoke Switzerland‘s rights to take part in EU exchanges if they do not sign a new trade deal, and well, the Swiss do not seem that pleased with the draft, seen as having the potential to erode the country’s high wages.

What has happened so far

Non-member countries can operate under the bloc if the foreign-country market rules are compatible with EU legislation. This system, called equivalence, is granted for set periods of time and can be suspended by the EU at any time if certain regulations change in the foreign country.

Back in December 2018 the EU gave the Swiss Government an ultimatum: either accept a deal on future relations between the EU and Switzerland and be granted a two-year extension for Swiss stock exchanges to operate in the bloc, or do not back the draft agreement and risk the EU not recognising Swiss exchanges at the end of the year when the current equivalence regime expires.

But before the year was up the European Commission granted the Swiss Stock Exchange a six-month extension, so they could undergo a consultation process about the proposed treaty agreement. The draft agreement would mean that Switzerland would have to automatically adapt its migration and social security rules to changes in EU legislation, but it was reported that Bern had some questions about the handling of matters such as wages and citizens rights which was making them push back the decision to accept the draft.

And what now？

EU officials commented on Tuesday that there has been no progress regarding treaty talks which means that, with the deadline (June 30) fast approaching, Swiss companies could suddenly find themselves without a trading venue for their European investors.

Comments from a European diplomat seem to suggest that the EU is not going to grant another extension of the equivalence for Swiss exchanges although a formal decision will not be announced until Friday. Under EU rules there cannot be a further extension of the current regime without an agreement in place, but some believe that Switzerland may decide to make a last-minute offer before Friday‘s EU leader’s summit, although it is highly unlikely given the recent comments from Bern.

What does this mean for Brexit？

Many believe that, considering that the crumbling of relationships between the two would also have a damaging effect on the 28 countries of the bloc, part of the hard stance the EU is having with Switzerland is to do with ongoing talks about Britains departure from the bloc, as if the EU is lenient with the Swiss then Britain could look for the same softer conditions once Brexit is completed.

And under the terms of the Brexit Withdrawal Agreement the equivalence regime would also apply to British firms after Brexit, which is why the EU is standing its ground and not giving in to the Swiss Government, saying that the draft is final and cannot be amended.

And what does Switzerland have to say？

Despite the EU guaranteeing that EU investors would still be able to trade Swiss shares through a broker that is a member of the Swiss exchange, Switzerland has threatened to replicate the ban by not allowing Swiss companies to list on the EU exchanges and moving all their trading to the Swiss exchange, effectively creating a monopoly. We do not know the extent of the Swiss retaliation, but we do know from previous experiences that disruption and friction will increase the costs of trading.