Traders in Swiss stocks are facing a tense few months. Due to a political dispute between Switzerland and the European Union, EU-based traders are in the dark about where they’ll be able to buy and sell shares of Nestle SA, Roche Holding AG and other companies from next year. That’s because Switzerland still has to negotiate an extension of its equivalence status under the EU’s MiFID II regime, a concession that gives the nation’s bourses access to the bloc.
At least one of the options on the table if equivalence isn’t extended could lead to significant market fragmentation, according to Romeo Lacher, chairman of SIX Swiss Exchange AG, the nation’s main stock exchange.
Under the worst outcome, “volumes will be fragmented on different trading venues with all the consequences” that brings, Lacher said late Tuesday in an interview in Brussels.
“It’s not a one-way positive for the EU and negative for Switzerland,” he said. “I think the impact, especially for EU investors, be they retail or institutional, might also be significantly negative.”
The EU gave Switzerland equivalence status under its revised Markets in Financial Instruments Directive rules for one year in 2017, and made a long-term deal conditional on the two sides achieving progress on broader political issues.
MiFID II states that if a stock is traded on an EU-regulated platform, then investment firms in the bloc must do all their transactions there or on a venue based in a country whose regulation of the sector has been deemed to be as robust as the EU’s. If the European Commission, the EU’s executive arm, doesn’t deliver this equivalence decision, Switzerland could lose cross-border trading.
Switzerland and the EU are negotiating what Brussels calls a new institutional framework, which covers issues including dispute settlement, the supervision of bilateral agreements and how to adjust to new legal developments. The talks have hit a host of obstacles, including opposition from Swiss labour unions and EU concerns about state support for regional banks.
Switzerland’s problems with the EU underscore the willingness of Brussels to make economic issues subservient to its political goals. They’re also a sign of the sort of challenges the UK might face in years to come, even if it succeeds in securing a viable Brexit divorce agreement.
The Swiss government has announced a contingency plan that would kick in if the EU doesn’t extend equivalence status. This would prohibit Swiss shares from being traded in the EU, and would in theory redirect dealing back on to domestic bourses. But there’s a risk that Brussels wouldn’t recognise this backstop, and would force EU traders to do deals within the bloc, cutting off Swiss exchanges.
“Overall, it’s more like a lose-lose than a win-win situation in the worst case scenario,” Lacher said. And even if all trades were successfully redirected to Switzerland, investors could suffer from reduced competition among marketplaces, he said.
About a third of trading in Swiss shares currently takes place within the EU and the rest in Switzerland, according to Lacher. And the majority of the activity in Swiss shares on SIX comes from traders in the EU, giving an idea of what the company has to lose.
Johannes Hahn, the EU commissioner in charge of the talks, said in a newspaper interview on Saturday that it’s hard to imagine equivalence being extended for Switzerland if the political talks don’t conclude soon.
The EU remains “prepared to continue with the negotiations in all good faith,” a European Commission spokeswoman said on Tuesday, while adding that reaching an agreement “will not be easy.”