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Background information to the ordinance on the Recognition of Foreign Trading Venues for the Trading of Equity Securities of Companies with Registered Office in Switzerland

In December 2017, the European Commission recognised Switzerland’s stock market equivalence for a period limited to only one year, until the end of 2018. Because the competent EU authorities have assessed Switzerland’s stock exchange regulation and determined it to be equivalent, the decision of the European Commission is purely political. Whether the European Commission extends the limited stock exchange equivalence before its expiration as of December 31, 2018 or whether it grants unlimited equivalence – as called for by Switzerland – is currently unclear.

If stock exchange equivalence is granted, EU securities traders will have the possibility to trade Swiss shares on Swiss stock exchanges and therefore to trade on their preferred primary trading venue. The trading volume attributable to EU securities traders on Swiss stock exchanges is substantial, which is why recognition of equivalence is very important for the Swiss financial centre.

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Situation without stock exchange equivalence: dramatic decline in trading volume on Swiss stock exchanges

Without recognition, EU securities traders would no longer be permitted to trade Swiss shares on Swiss stock exchanges if these Swiss shares are also traded on EU stock exchanges. Almost all shares of larger Swiss issuers that are traded on the SIX Swiss Exchange are also traded on EU stock exchanges or trading venues, and would therefore be impacted. If the European Commission does not extend recognition of equivalence of Swiss stock exchange regulations, Swiss stock exchanges will lose a substantial share of their trading volume. The entire Swiss financial centre is confronted with major legal uncertainty as a result of the limitation of the recognition of equivalence. This is all the more problematic due to the fact that the Swiss stock exchange is the fourth largest in Europe and an important element of the Swiss financial system.

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Federal Council’s protective measure for the Swiss stock exchanges

In order to avert a situation in which Swiss stock exchanges lose a dramatic amount of trading volume due to the lack of stock exchange equivalence, the Federal Council has now enforced the protective measure for the Swiss stock exchange infrastructure, which he had announced as ‘contingency measure’ earlier this year. This is to create legal certainty for investors and companies. In practice, it will only have an effect in the event that stock exchange equivalence is not extended by 31 December, 2018.

How the protective measure works

The Federal Council’s protective measure provides for the introduction of an additional recognition obligation for foreign trading venues to Swiss financial market law if these venues wish to admit Swiss shares to trading. Recognition of the foreign trading venue is contingent on certain prerequisites. If stock exchange equivalence expires, the EU trading venues would be denied this recognition on the basis of systematic discrimination against Swiss stock exchanges.

This protective measure is not a matter of ‘tit for tat’. Instead, it is a clear interpretation of a specific article of the law that would result in EU securities traders being able to continue to trade shares on Swiss stock exchanges even without stock exchange equivalence.

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The protective measure pertains to an exemption provided for under European financial market regulation (Markets in Financial Instruments Regulation, MiFIR) regarding the trading of shares on trading venues outside the EU. In principle, MiFIR Article 23 provides that all shares must be traded on EU trading venues if they are permitted for trading there. However, the EU trading obligation does not apply to shares that are non-systematic, ad-hoc, irregular and infrequent; or are carried out between eligible and/or professional counterparties and do not contribute to the price discovery process (MiFIR Article 23(1)). If, due to the protective measure, EU stock exchanges are no longer recognised by Switzerland, Swiss shares can also no longer be traded “regularly” or “contribute to the price discovery process”.

 

In concrete terms, this means that EU securities traders continue to have unrestricted access to the Swiss stock exchange for the trading of Swiss shares. In this case, EU investors also have direct access to the liquidity pool on the Swiss stock exchange and can ensure the best possible trade price. This prevents disadvantages from arising for EU investors investing in Swiss shares.

Unlimited recognition of equivalence remains primary objective

Irrespective of the protective measure adopted by the Federal Council, the primary objective of the banks in Switzerland remains the unlimited extension of the recognition of equivalence. The technical equivalence of Swiss stock exchange regulation has already been confirmed by the competent EU authorities. A favourable decision by the European Commission regarding recognition of stock exchange equivalence for Switzerland at the political level would therefore be welcome for all market participants, both in Switzerland and the European Union.

The SBA welcomes that the Federal Council continues to advocate decisively for the recognition of stock exchange equivalence by the EU. Further to this, it is expedient that in the event of the expiry of stock exchange equivalence, the ordinance be in place to protect a systemically important element of the Swiss financial centre. This is particularly important also given the fact that the Swiss banks rely on open and efficient capital markets.