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EU trading of Swiss stocks threatened amid Bern-Brussels political standoff

Stock markets across the bloc brace for a rocky first week of July
posted onJune 28, 2019

EU stock exchanges will no longer be able to trade in Swiss companies including blue-chip giants such as Nestle, UBS and Novartis  from Monday (July 1) as talks on a political agreement between Brussels and Bern seem to have failed.

The government said Thursday (June 27) it will block trading of Swiss shares in the EU after the European Commission, EU's executive arm, announced that it saw no reason to extend the “equivalence status” it has granted Swiss stock exchanges beyond June 30.

“Trading venues in the EU would thus be prohibited from offering or facilitating trading in certain shares of Swiss companies from that date,” the Swiss Federal Department of Finance said in a statement. 

Equivalence makes a trade on the Swiss stock market equivalent to a trade on an exchange in an EU country, allowing trades to be pooled across countries, something that supports world trade and improves international market liquidity.

Switzerland and the EU are embroiled in an ongoing dispute over a broader deal  that is designed to replace a patchwork of treaties governing areas as diverse as immigration, agriculture, civil aviation, industrial standards along with equivalence for Switzerland’s financial services sector. 

The proposed accord has been opposed both by the political right and labour unions on the left in Switzerland because it would require the country to adopt EU single market rules. The rich Alpine nation received a one-year extension to agree to Brussels’ demands in late 2017, and a further six-month extension at the end of 2018, which expires on Sunday, June 30. 

In November 2018, the Swiss Federal Council adopted an ordinance to safeguard and strengthen the functioning of the Swiss capital market. If the recognition of equivalence is not extended, this measure shall ensure that EU market participants continue to have access to the Swiss domestic market and continue to be able to trade Swiss shares there. 

The ordinance is going to be activated with effect from 1 July 2019, as the European Commission will most probably no longer recognise the Swiss legal framework as equivalent.

 “Activating the protective measure with regard to trading venues in the EU serves solely to protect the functioning of the Swiss stock exchange infrastructure” the Swiss government stated.

SIX, the operator of Switzerland's main exchange, welcomed the Swiss decision to activate the protective measures.

“The intended consequence of the Federal Council’s ordinance is that EU securities firms should continue to have access to the Swiss domestic market and continue to be able to trade Swiss shares in their home market, because the shares are no longer subject to the EU trading mandate (Share Trading Obligation) in MIFIR (Art. 23)” SIX said.

“While the long-term consequences are difficult to assess right now, in a general manner this kind of situation would be a negative factor for the attractiveness of the Swiss capital market,” Fabien Bruegger, a trader at Banque Cantonale Vaudoise told Bloomberg.

Meanwhile, a Nestle spokesperson told CNBC that the company is “observing the situation” but does not anticipate a “significant impact” on its shares. 

Switzerland's stock market is Europe’s fourth largest.  About one-third of trading in Swiss shares currently takes place within the EU. The EU is Switzerland's largest trading partner and Switzerland is the EU's third-largest trading partner, after the US and China. 

In April, trading turnover on the Swiss stock exchange was up 2.3% on the previous month and reached CHF 121.8 billion. There was also an increase in the number of transactions by 7.1% to 4,665,486, according to SIX data.

No matter what happens on July 1, Swiss elections are approaching and will take place in October. As politicians are entering election mode, Swiss officials say there is no point signing a deal now that will likely not be passed by parliament or be voted down under the Swiss system of direct democracy.