Summary
Effective from 1 July 2019, two related events have occurred that affect the trading of Swiss shares by European firms and on European venues.
- The E.U. has revoked the recognition of Swiss venues as being equivalent under MiFID II in relation to the ‘share trading obligation,’ which will have the effect of prohibiting in some circumstances the trading of Swiss shares on Swiss venues; and
- Swiss authorities have responded by requiring that almost 300 Swiss domiciled shares are delisted from E.U. trading venues, bringing them out of the scope of E.U. regulation and allowing (and in some cases effectively forcing) E.U. firms to execute trades in these shares on Swiss venues.
Background
This relates to the MiFID II ‘share trading obligation’ that provides that E.U. investment firms are required to trade shares that are traded on (or admitted to trading on) an E.U. venue in one of the following ways:
- On an E.U. regulated trading venue;
- With an E.U. regulated ‘systematic internaliser,’ which is a firm that executes trades on its own account for clients on an organised, frequent and systematic basis and that is subject to specific rules in how it does this; or
- On a non-E.U. trading venue that has been recognised by European regulatory authorities as being ‘equivalent’.
This applies even in the case of dual listed shares, for example where they have their primary listing in Switzerland and a secondary listing within the E.U. The E.U. had previously assessed two Swiss exchanges, SIX Swiss Exchange AG and BX Swiss AG as being equivalent, with many of the shares listed on these exchanges also having secondary listings on E.U. trading venues.
The decision by the E.U. to revoke the recognition of these Swiss trading venues (or technically, allowing the temporary recognition to lapse) appears to have been taken as a consequence of the failure of the E.U. and Swiss authorities to agree a comprehensive trade deal. This may be seen as a form of punishment to bring the Swiss back to the negotiating table and agree to comprehensive E.U. jurisdiction as opposed to the patchwork regime that exists at present.
Impact
The effect of the E.U.’s decision is that E.U. investment firms will be required to execute trades in dual listed Swiss shares on an E.U. trading venue (or with an E.U. systematic internaliser), despite the fact that the primary liquidity pool is likely to be on a Swiss exchange. Without further action this would be detrimental both to Swiss exchanges, which would lose a large proportion of their customers and liquidity, and also to E.U. investment firms (and clients of those firms, including E.U. retail investors) which would suffer from impaired execution quality.
The effect of the Swiss response is twofold. First, by delisting these shares in the E.U., it brings them outside the scope of the E.U. share trading obligation, which relieves E.U. investment firms from their obligation to execute such trades within the E.U. and allows such trading to continue to take place on Swiss exchanges.
Second, as a corollary to this, the delisting effectively prevents such shares from being traded on E.U. venues and therefore encourages such trading to take place on Swiss venues, including where this trading is undertaken by third-country (non-European) firms and investors. While arguably better than the reverse scenario, this situation still represents a reduction in choice for executing Swiss shares and will likely lead to a reduction in execution quality in a similar manner to forcing execution on to E.U. venues.
Impacted Firms
In terms of scope, the share trading obligation applies to E.U. investment firms. This will include any U.K. or E.U. firm that is authorised under MiFID, including where such firms act as sub-advisor to a U.S. fund manager or are part of a U.S. group.
It should be noted however that Full Scope AIFMs are not subject to the share trading obligation under MiFID II and therefore are not directly impacted. That said, all firms (including AIFMs and non-EU firms) will be impacted indirectly to the extent that they use E.U. brokers or trade Swiss shares on E.U. venues.
Final Thoughts
This is not expected to be a permanent state of affairs and is likely already the subject of ongoing negotiations between Swiss and E.U. authorities to remedy the issue. That said, the current situation is not due to any shortage of negotiations, which have been ongoing for many years, so it is not clear how quickly or easily this situation will be resolved.
The parallels with Brexit are also obvious, so it will be interesting to see how this situation is resolved and what the ultimate outcome is.