Swiss Bourse Fate Hangs in Balance on EU Brexit Hardball
Swiss Bourse Fate Hangs in Balance as EU Plays Brexit Hardball
(Bloomberg) -- Blame it (at least in part) on Brexit.
In an unprecedented move, Switzerland said Thursday it will block trading of its shares in the EU starting July 1 and put in place measures to offset a loss of liquidity, after the European Commission said it wouldn’t extend recognition of the country’s stock exchange beyond the end of this month. The EU cited the lack of progress on a new umbrella treaty governing relations between Switzerland and the bloc to replace a smorgasbord of individual arrangements.
Mired in a standoff with London over the U.K.’s exit from the bloc, EU officials are making an example of Switzerland for fear of jeopardizing their position with British politicians, many of whom want to renegotiate Prime Minister Theresa May’s Brexit agreement.
“The EU-Switzerland story is colored by the Brexit situation,” said Nicolas Veron, a senior fellow at the research institute Bruegel in Brussels. “I can understand why Switzerland feels it’s taking a stray bullet.”
Brussels declined Bern’s request to reopen talks on contentious points in the bilateral treaty designed to streamline relations. For their part, the Swiss -- preparing for parliamentary elections in October -- refused to back an accord that remains deeply unpopular at home.
Sticking Points
While the Swiss have said ironing out issues including wage protection, state subsidies and immigration is a condition for their signing on, the EU used Switzerland’s stock market as a bargaining chip.
As matters stand, Friday is the last trading day for equities before recognition under EU equivalence rules expires. Without the Swiss countermeasures, EU investors would have lost access to the country’s stock exchanges.
London-based trading venues run by London Stock Exchange Group Plc, UBS Group AG, Aquis Exchange Plc and Cboe Global Markets Inc. have warned clients they will have to exclude securities from Swiss issuers. About one-third of trading in such shares currently takes place within the EU, and the rest in Switzerland. The majority of the activity in Swiss shares on SIX, Switzerland’s main stock exchange, is generated by traders in the EU.
Swiss-listed drugmaker Newron Pharmaceuticals SpA on Thursday became the first company to take action, announcing plans for an additional listing in Germany to ensure liquidity for investors and citing the political standoff. Others may weigh similar actions.
Swiss Countermeasures
Earlier this month, the Swiss government seemed optimistic about a deal, saying it expected the EU would extend equivalence after it backed the so-called framework agreement in principle and only wanted clarification on outstanding issues. That didn’t work out.
The EU deal is designed to replace a complicated mix of 120 treaties governing ties between the two, but it’s unpopular with the Swiss public after running into an alliance of euro-skeptics on the right and trade unionists on the left.
The commission said Thursday that its “door remains open to conclude the agreement” before the close of the current executive body’s mandate in October.
Under countermeasures announced by the government, it would ban the trading of Swiss-registered firms in the EU, re-routing flows back to Switzerland. Because of a legal loophole, EU traders would then be allowed to trade Swiss shares in Switzerland again, even without the equivalence recognition.
Way Around
“As long as your private banker or your clearer has a Swiss office it’s usually fine for trading Swiss stocks,” Keith Temperton, a trader at Tavira Securities in London, wrote by email in response to a query on the impact of the standoff. “There’s always a way around these things.”
The EU said Thursday that the countermeasures have “caused uncertainty” in markets about how exactly they would work. The commission said it’s up to trading venues to decide how to adjust their operations. “We would anticipate most EU exchanges and trading facilities that currently offer trading in Swiss shares to comply with the Swiss countermeasures,” it said.
While analysts agree the immediate impact of the Swiss plan should be manageable, in the longer term it could cause trouble.
“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,” said Fabien Bruegger, a trader at Banque Cantonale Vaudoise.
--With assistance from Albertina Torsoli.
To contact the reporters on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net;Alexander Weber in Brussels at aweber45@bloomberg.net
To contact the editors responsible for this story: Jan Dahinten at jdahinten@bloomberg.net, Vidya Root, Paul Sillitoe
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