Stuck In Neutral: Switzerland's Lost Equivalence Status

Author:Mr Michael Huertas and Holger Schelling
Profession:Dentons
 
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August 1 marked Switzerland's national holiday to celebrate its independence from what was then the pan-European Holy Roman Empire. While Switzerland has since then carved out a clear set of rules on what, when, how and to whom it permits access to its financial markets, its bilateral relations with the European Union have been very much in the spotlight over the first half of 2019. In July, a standstill in negotiations concerning a new framework agreement between the EU and Switzerland culminated in tit-for-tat moves that saw the EU withdraw Switzerland's status of financial equivalence i.e. permitting Swiss and EU financial market participants relative freedom to access each other's markets and infrastructure. The move comes against the backdrop of Brexit negotiations and several other recent EU decisions on equivalence. Until now, no negative side effects for Switzerland have arisen, but it is unclear whether this will remain the case. This loss of equivalence status is not only of relevance to two key financial markets but also represents a proxy for the future relationship between the EU and other, what it terms "third countries".

Recent developments

Since 2014, Switzerland and the EU have been attempting to hash out a common institutional framework intended to replace more than 100 bilateral agreements relating to matters as varied as agriculture, labor and air transport.1 A draft agreement was published towards the end of 20182 , but no final deal was struck as the Swiss people and parliament (which is facing a general election this October) refused to concede on issues such as state subsidies, wage protection for Swiss workers, and EU citizens' right to free movement. Somewhat irked, pressured by the fear of setting a negative precedent for Brexit, and feeling pushed to finalize the framework (as its term ends on October 31), the EU Commission (the Commission) let its provisional financial equivalence agreement with Switzerland - which was contingent upon progress made towards the framework - expire at the end of June.34

On July 1, therefore, financial equivalence stopped applying to Swiss financial market rules, resulting in Swiss equity securities no longer being able to trade on EU platforms.5; Up to that date, Switzerland's primary stock exchange, SIX, had a market share of approximately 70% of trading in Swiss large cap stocks and a turnover of around CHF1,361 billion (1,238 billion; £1,128 billion) in Swiss shares in 2018.6The Swiss stock market is Europe's fourth largest7, and several big-league Swiss companies (such as Nestlé, Glencore and Roche) are included in every major investors' portfolio around Europe. To avoid EU investors no longer being able to trade Swiss stocks on Swiss exchanges, Switzerland swiftly implemented their retaliation that same day, banning any Swiss stock listed or traded in Switzerland from being traded in the EU. This resulted in the restrictions under Article 23(1) of the Markets in Financial Instruments Regulation (MiFIR)8 no longer applying to Swiss stocks, enabling EU investment firms to trade Swiss shares on the Swiss stock exchange or exchanges in other non-EU countries. In the short term, this has led to additional inflows of capital and SIX's market share of trading in Swiss stocks increasing...

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