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Why Swiss Spat With EU Could Spill Into Stock Markets 

Why Swiss Spat With EU Could Spill Into Stock Markets 

(Bloomberg) --

Strained relations between Switzerland and the European Union are threatening to impact trading in Swiss stocks. The two sides are at odds over a sweeping political accord that’s been in negotiation for years, with the Swiss stock exchange effectively becoming a bargaining chip. Brexit makes Brussels unlikely to grant any concessions that risk setting a precedent.

1. What’s the fight about?

Switzerland isn’t a member of the EU and its relations with the bloc are governed by more than 120 bilateral treaties that cover everything from agriculture to civil aviation and the free movement of people. They are supposed to be replaced with the single bilateral accord and the EU has linked progress in those talks to an extension of the Swiss stock exchange’s so-called equivalence status, which allows shares in Swiss companies to be traded on exchanges across the bloc. That status, which means the EU recognizes that Swiss securities regulations are as tough as its own, expires on June 30.

2. Can’t there be another extension?

The European Commission, which handles such matters for the EU, has already extended Swiss market equivalence once, from an original deadline at the end of 2018. Without progress, it could withhold regulatory recognition of trading venues in Switzerland, in effect curbing the access of investors in the bloc to Swiss markets. That could impact some of the world’s biggest companies, including Nestle SA, Novartis AG and Roche Holding AG, the three most-heavily weighted companies in the Stoxx Europe 600 Index. While market participants are still hoping for an amicable outcome, London-based trading venues run by UBS Group AG, London Stock Exchange Group Plc, Aquis Exchange Plc and Cboe Global Markets Inc. warned clients that they will exclude securities by Swiss issuers if Switzerland is left to defend its stock market against punitive EU measures. One company is already taking precautions: Zurich-listed Newron Pharmaceuticals SpA has announced an additional listing in Germany to ensure liquidity for investors.

3. How is this likely to play out?

It’s not clear how a rupture would play out legally, because the rules leave some room for interpretation. Switzerland has prepared a contingency plan that would prohibit trading of its shares on EU trading platforms, effectively forcing all trading in Swiss-based companies to Swiss stock exchanges. Such a move could cause “some disruption, market fragmentation and increase costs over time,” according to a note that was prepared by the European Commission and seen by Bloomberg. The U.S. and other locations were granted indefinite equivalence by the EU at the start of 2018.

4. What does this tell us about Brexit?

The difficulties encountered by Switzerland in its negotiations signal the potential risks to the London financial center in the event the U.K. leaves the EU without a withdrawal agreement. For the industry, it highlights the shortcomings of the equivalence system, under which the European Commission can grant and withdraw access to its market unilaterally and at any time.

5. What is the Swiss plan?

Under the Swiss contingency plan, EU-based traders will be prohibited from trading Swiss shares within the EU, and trading volumes from venues such as the London-based ones are to be re-routed to Switzerland. This will likely mean lower volumes of dealing in Swiss shares at other venues and higher volumes at the SIX Swiss Exchange. According to Torsten Sauter, head of Swiss equities at Kepler Cheuvreux, Swiss preparations mean the potential fallout is likely to be “manageable” in the short term. Still, the “escalation” in Swiss-EU negotiations could cause “lasting damage to the relationship and fuel economic uncertainties,” said Daniel Kalt, UBS Chief Investment Officer Switzerland. The government in Bern has said that without the emergency measures, and without EU equivalence, the Swiss stock exchange would suffer a 70% to 80% drop in trading volume. The measure would only take effect if the commission doesn’t extend equivalence.

Why Swiss Spat With EU Could Spill Into Stock Markets 

6. Why does this matter?

The SIX Swiss Exchange is the fourth-biggest in Europe. Its annual turnover is about 1 trillion Swiss francs ($1 trillion), the lion’s share of which is being generated by EU-based investors. Europe’s Stoxx 600 Index includes 55 Swiss companies, accounting for about around 15% of the index’s weight. This makes Switzerland its third most-important contributor, after the U.K., whose companies account for 25% of the Stoxx 600’s weigh, and France, with around 17%.

The Reference Shelf

--With assistance from Alexander Weber, Catherine Bosley and Jan Dahinten.

To contact the reporter on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net

To contact the editors responsible for this story: Jan Dahinten at jdahinten@bloomberg.net, Leah Harrison Singer, Melissa Pozsgay

©2019 Bloomberg L.P.