Swiss-EU stock exchange dispute should not worry the City

It was while working as a technical expert at the Federal Office for Intellectual Property in Bern, Switzerland, that Albert Einstein came up with the genesis of his theory of relativity. It’s a place he described as “that worldly cloister where I hatched my most beautiful ideas.”

Some say that Bern is the scene of another lightbulb moment, one that could have earth-shattering consequences for the UK’s financial services industry.

From Monday next week, the federal government in Bern has said it will ban European Union stock exchanges from trading Swiss shares. It has also threatened criminal penalties if EU firms do not comply.

Bern’s ministers have taken this dramatic move to punish Brussels following its decision to freeze Switzerland’s bourses out of the EU market. The spat follows the European Commission’s refusal to grant Switzerland’s stock exchanges access to its exchanges after losing patience over negotiations for its new partnership treaty.

Put more simply, equity trading has become the piggy in the middle in the fight between Bern and Brussels over a wider agreement on their future economic relationship. Equity trading has become hostage to a more controversial row over immigration and wages.

De facto, this means that “equivalence”, the system of regulatory recognition used to govern access for financial services in non-EU countries will lapse next Monday.

On the face of it, this stand-off between Bern and Brussels looks pretty grim. The row shows that the EU is prepared to play dirty, and to play any cards it has to get the agreement it wants with the Swiss through blackmail. And damn the consequences.

Indeed, the London Stock Exchange, the EU’s biggest equity market by miles, has already announced that it will halt trading in 254 equity securities issued by Swiss companies. All of these shares are traded on the LSE’s MTF XLOM platform, but are not listed on the LSE itself.

So too has Equiduct, the electronic trading segment of Börse Berlin, which is ready to suspend trading of Swiss shares if agreement between regulators cannot be reached by June 30th.

You can see why many in the City are worried. They fear the EU’s muscle-flexing – or “willy waving” as one trader put it bluntly – is not a great look for the future of post-Brexit trade negotiations. As one trader says: “What the EU has done to Switzerland shows how precarious the UK’s position will be when it comes to negotiating our own future trade agreement.”

They are scared because the equivalence process, which has existed between the EU and Switzerland since 2017, is the process by which the EU will also decide if UK trading firms and investment firms can continue doing trading after Brexit. What this means is that Brussels decides whether the rules of a non-EU country and what’s known as “third countries” are equivalent – and at least match – those of the EU.

Until now, equity trading has not been a big area of dispute between the EU and the Swiss. The EU gave the thumbs-up to Switzerland’s equity rules in 2017, agreeing to extend access to the single market until the end of last year when the wider economic agreement was due to be signed off.

The Swiss refused to sign the treaty because they are not happy with certain parts of this partnership agreement, particularly over citizens rights, state aid and wages. Which is why the EU’s decision to play the equity card and pull the plug on extending stock market equivalence, has sent shivers through the City. If you listen to some of the lobbyists, you would think this suggests that any new trade agreement is impossible to achieve or that the EU will play this card with the UK as well as with the Swiss.

But here’s a contrarian view: trying to compare negotiations between the EU and UK and the EU and the Swiss is like comparing chalk and cheese, and one with holes in it too.

The EU can afford to play muscle man with the Swiss because it knows the Alpine stock markets are peripheral, and there will not be much damage to other EU trading houses. So far it doesn’t look as though it will be such a big deal  – the SIX bourse has been preparing for such an event for months. It’s been in contact with all its clients across the continent – and new ones too – and been setting up links so they can trade direct with the domestic market.

What this spat does not show is that the EU will play the same cards with the UK, or that it is not worth the Brexit team standing up to them. London’s stock markets are simply too big for them to play such games of poker with, and the EU’s companies and investors know that as well as the regulators. The LSE is still the most liquid, the most international and the most efficient at raising capital of all the EU bourses.

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