EU, Switzerland Dispute Threatens Stocks -- Update
June 25 2019 - 4:05PM
Dow Jones News
By Brian Blackstone and Avantika Chilkoti
ZURICH -- Trading in Switzerland's biggest blue-chip companies
could soon be banned in London and other major financial centers,
as a political dispute with the European Union threatens to spill
over into markets.
Switzerland and the EU are at loggerheads over an overhaul of
the complex ties that have guided the relationship for decades.
Switzerland isn't part of the EU, but has extensive financial,
immigration and trade ties with the bloc.
If an EU-imposed deadline passes on Sunday without an agreement,
venues based in the EU would be limited in trading Swiss stocks.
The ability of some investors to trade blue-chip Swiss companies
including Nestlé SA and Novartis AG could be affected by the
spat.
The two sides still have several days to come to an agreement
and avert the loss of market access. Or, the EU could grant another
extension as it did in late 2018. However, the positions appear
hardened, dimming the hopes for a last-minute deal.
If no agreement is reached, investors face the prospect of major
upheaval. Swiss companies make up one-fifth of the Stoxx 50 index
equities benchmark by market capitalization. Around 70% of trading
in the 30 largest Swiss blue-chip companies occurs at exchanges in
Switzerland, primarily Zurich's SIX exchange. The other 30% are
traded in Europe, mostly London.
As the deadline for Brussels' decision nears, exchange operators
LSE, Aquis Exchange, Cboe Global Markets and UBS have announced
they could be forced to remove Swiss stocks from U.K. platforms as
soon as next week. Cboe has said it won't be permitted to trade
securities with a Swiss registered office and listed on a Swiss
exchange from the start of the next trading day if Switzerland
isn't granted equivalence by Sunday.
The EU and Switzerland have been in discussions for years about
bundling the roughly 120 bilateral treaties governing Swiss-EU ties
into one accord. Brussels wants the framework agreement to ensure
that Switzerland can't renege on certain obligations, like free
movement of people from the EU and addressing wage protections in
Switzerland, without paying a broader price in terms of EU market
access.
The EU gave itself leverage in the talks 18 months ago by
changing the way it grants access, known as equivalence, which
allows shares in Swiss companies to be traded throughout Europe. It
is a largely technical arrangement that countries around the world
have with each other to facilitate the smooth functioning of
financial markets.
But in late 2017, the EU only gave the Swiss a one-year
extension, and tied its renewal to the broader framework agreement.
The two sides pushed up against an end-of-2018 deadline without a
deal before the EU gave the Swiss a six-month extension that
expires June 30.
"The current equivalence decision will automatically expire on
30 June," an EU Commission spokeswoman said. "Our door remains open
to conclude the agreement before the end of this Commission's
mandate."
On Monday, the Swiss executive branch said it would launch the
protective countermeasures it had unveiled last November to
maintain trading activity in Swiss exchanges. Under the Swiss plan,
which would come into force on July 1, exchanges based in the EU
would be prohibited from trading Swiss shares, meaning virtually
all of the trading of Swiss stocks would have to be done in
Switzerland.
The measure "serves solely to protect the functioning of the
Swiss stock exchange infrastructure," the federal council said. SIX
welcomed the decision in a statement Monday.
Nestlé and Novartis said in separate statements they don't
expect the EU's move to have a significant effect on their shares.
"Novartis would expect trading volumes to likely shift from EU
trading venues to the SIX" or perhaps other venues such as the New
York Stock Exchange, the company said.
Olivier Carré, a partner at PwC Luxembourg who provides advice
on regulation, says his clients -- including dealers and asset
managers -- now need to assess the cost of rerouting trades if
Switzerland follows through on the retaliatory measures.
"The volumes of trading on the Swiss exchange, at least in the
short or medium term would balloon," Mr. Carré said, adding that
there would be particular concerns for investors executing large
trades that are usually spread over multiple markets.
The issue is unlikely to have major implications on the Swiss
and European economies, analysts said. However, if this is the
start of a broader fraying of relations in other areas like
immigration and trade there could be a bigger economic and
financial effect particularly on Switzerland, which depends greatly
on the EU as an export market.
"Switzerland has nothing to gain from a battle with the EU,"
said ING Bank economist Charlotte de Montpellier.
Neil Dwane, global strategist at Allianz Global Investors, said
the moves were a fresh sign that Brussels is acting like "an
economic bully."
"The EU is sounding more and more antimarkets which may
ultimately lead to higher investment costs, higher trading costs
and possible transaction costs," Mr. Dwane said, adding that this
could make the region less attractive to investors.
Write to Brian Blackstone at brian.blackstone@wsj.com and
Avantika Chilkoti at Avantika.Chilkoti@wsj.com
(END) Dow Jones Newswires
June 25, 2019 15:50 ET (19:50 GMT)
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