1. Trading obligation for shares under MiFIR
With the Markets in Financial Instruments Regulation (MiFIR), the European Union (EU) introduced a trading obligation for shares, applicable to EU investment firms in order to increase transparency in equity markets (article 23 MiFIR). This means that any trade in shares by EU investment firms on behalf of their clients has to take place on recognized trading venues, given that such shares are admitted to trading or listed on any EU trading venue (some exceptions apply, e.g. for non-systematic or irregular trades). Such recognized trading venues are either regulated markets or multilateral trading facilities authorized in the EU, or foreign exchanges recognized as equivalent by the EU commission for this purpose. Accordingly, since the entry into force of MiFIR on 3 January 2018, EU investment firms may no longer execute trades in shares listed or admitted to trading within the EU on foreign exchanges, unless such foreign exchanges are recognized as equivalent by the EU commission.
2. Equivalence decisions in December 2017: Temporary market access for Swiss exchanges
About one year ago, the EU commission published positive equivalence decisions for trading venues in the United States, Australia and Hong Kong. The Swiss exchanges (SIX Swiss Exchange AG and BX Swiss AG) were recognized as equivalent by the EU commission as well, but in contrast to the other jurisdictions this equivalence decision was made subject of review after one year. Such review would take into account the progress made towards “the establishment of a common institutional framework” between the EU and Switzerland. As a consequence, the positive equivalence decision for Switzerland has always been connected with a high level of uncertainty.
3. Stagnating negotiations on institutional agreement called for countermeasures
This uncertainty increased over the last few months due to the fact that negotiations to establish an institutional framework to cover the Swiss-EU relationship in the future did not seem to lead to a swift agreement between the parties. Since such a lack of progress might threaten EU market access for the Swiss exchanges by preventing EU investment firms from trading at Swiss exchanges, the Swiss Federal Council announced that it would enact countermeasures, if so needed: Foreign exchanges will need recognition by the Swiss supervisory authority (FINMA) for the listing or trading of shares of companies located in Switzerland. If EU trading venues are not recognized under these proposed rules, Swiss shares must not be listed or traded there, meaning that the EU trading obligation is not triggered. Accordingly, EU investment firms could continue to execute share trades on Swiss trading venues.
On November 30, 2018, the Federal Council enacted the respective ordinance specifying the countermeasure, since there were no positive signs in terms of extending the equivalence decision for Switzerland from the part of the EU, and legal certainty should therefore be provided to market participants in due course before market access might be cut off.
4. Swiss countermeasure in practice: Not applicable to current dual/secondary listings
The Swiss countermeasure will prevent foreign trading venues from listing or admitting to trade of shares of Swiss companies, unless such trading venues are recognized by FINMA. FINMA has issued a list of recognized trading venues. Since EU trading venues are not recognized, shares of Swiss companies must not be traded on EU trading venues. This, in turn, leads to the fact that the EU trading obligation does not apply and EU investment firms may continue to trade in these shares on Swiss exchanges, even without equivalence decision.
In contrast to EU law, the Swiss ordinance contains a grandfathering clause: Shares listed or admitted to trading on a foreign regulated market as of 30 November 2018 are exempt from the recognition requirement. Thus, Swiss shares currently dually/secondary listed in the EU (or admitted to trading on an EU regulated market) may be traded in the EU in the future even if the countermeasure is triggered. It is worth noting that in case the EU extends the equivalence decision, EU trading venues will most likely be recognized by the Swiss authorities within short time and the countermeasure would thus be withdrawn in practice.
5. Uncertainty and complications prevail
Even though the countermeasure is a valid and necessary reaction at first sight, it is not a sustainable solution in the long run. Under this current regulatory set up, companies in Switzerland will no longer be able to double list or have their shares traded in the EU after going public in Switzerland. This is detrimental to the capital pool available to them and it might hamper proper price building in their shares. Accordingly, international companies might decide to set up shop outside Switzerland or not to go public in Switzerland. Not only Swiss companies and Swiss stock exchanges would be negatively affected, but also EU investment firms would be disadvantaged if markets were that segregated based on non-equivalence and the respective countermeasure: They will be allowed to trade Swiss shares either on EU trading venues (if double listed or admitted to trading there), or at Swiss exchanges (if not listed or admitted to trading in the EU) only, but they cannot chose or trade in both jurisdictions. This is quite unattractive from a client's perspective and in certain instances contrary to the best execution requirement, which requires investment firms to execute deals on behalf of their clients to the best conditions available.
While capital markets should be accessible, open and undistracted in order to function properly, both regulatory restrictions (i.e. the withdrawal of equivalence and the countermeasure) seal markets off for political reasons. It remains to be hoped, therefore, that the EU equivalence decision for Swiss exchanges will be extended, rendering the Swiss countermeasure redundant. Only this would keep capital markets within Europe open and strengthen them in a way also foreseen by EU’s Capital Markets Union.