Trading of Swiss Shares in Europe

Trading of Swiss Shares in Europe

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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.

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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