Last-Minute Christmas Gift With a Catch: Swiss Stock Exchange Equivalence With 1-Year Limitation

Two weeks before the Markets in Financial Instruments Regulation (MiFIR) was to become applicable in the EU, the European Commission issued its decision allowing EU investment firms to continue share trading on Swiss exchanges. In contrast to such decisions for other countries (United States, Australia, Hong Kong), the equivalence decision for Switzerland is valid for one year only, but may be extended then. While this approach does not bring the hoped-for long-term legal certainty, it ensures continued market access for Swiss stock exchanges in the EU. Nevertheless, the decision has to be understood as a political power play and an obvious discrimination against Switzerland.

In November 2017, a draft equivalence decision for Swiss trading venues leaked. This document did not contain a time limit nor a link to political developments, as the final decision does. The latter makes an extension of the equivalence decision conditional upon progress in the bilateral negotiations towards a Swiss-EU institutional framework agreement. Obviously, the EU Commission fears that Switzerland is procrastinating rather than negotiating in good faith. Interestingly, it is the first time that an EU equivalence decision explicitly refers to political issues instead of regulatory technicalities only (see, e.g., EMIR, Solvency II).

Up until a few weeks ago, Swiss negotiators also kept claiming that equivalence assessments should be based on technical criteria only, and not be mingled with political discussions. Therefore, it came as a surprise when voices were raised in Switzerland a few weeks ago that called for a connection between the equivalence for Swiss exchanges and the so-called enlargement contribution («Kohäsionsmilliarde»). Therewith, the starting shot of a political power play was fired and the EU Commission returned with its own political link, amending the draft equivalence decision by making the extension conditional upon progress in bilateral negotiations. The official explanation by the EU Commission reveals that Switzerland is treated differently from other third countries due to the larger scope of the Swiss decision, as trading of Swiss shares in the EU – and vice versa – is more widespread than that with the United States, Hong Kong and Australia. According to the EU Commission, the closer commercial ties between the EU and Switzerland require a special framework such as the institutional framework agreement. It is questionable though, whether this is true in the case at hand, since access to third country stock exchanges is a rather technical issue which is, moreover, crucial for the flourishing of the internal capital market.

It cannot be denied that this approach has also to be seen in the light of Brexit: The EU is reluctant to open up its internal market to third countries, especially in the area of financial services. Favors offered to Switzerland have to be given to the United Kingdom as well, especially if the United Kingdom and the EU decide to develop Swiss-type relations after Brexit. In order to keep expectations low, maintain significant bargaining power, and not incentivize EU member states to leave the Union, the EU Commission is currently adopting a hardline stance towards third countries that are in a similar situation to that of the post-Brexit United Kingdom. This also holds for Switzerland, where the EU Commission has now clearly demonstrated that there is no legal claim for a positive equivalence decision, and that third countries without institutional framework agreement may not rely on it in order to get market access.

Overall, and despite the recent events, it is in Switzerland’s best interest not to politicize equivalence decisions. Such assessments and the subsequent decision should be a purely technical matter without consideration of political issues. The use of (potential) political power by Switzerland turned out to be an own goal: The issuance of the equivalence decision for third country trading venues is clearly (also) in the EU’s interest, since investment firms located in the EU need access to Swiss liquidity pools. Therefore, the announcement of political measures was not only unnecessary, but also counterproductive. Looking forward, it is wise to return to the previous strategy of insisting on purely technical criteria – since in many instances, Switzerland clearly fulfills them. Strictly speaking, equivalence issues are not related to Swiss-EU bilateralism (they are not based on treaties). The bilateral way offers enough room for issue linkages and politicization. Parties should refrain from going too far to pressure their counterparts, especially in these uncertain Brexit times.

Lea Hungerbühler is heading foraus' «Financial Center» program , and Cenni Najy is heading foraus' «Europe» program .

Image: https://upload.wikimedia.org/wikipedia/commons/f/fd/Paradeplatz_Z%C3%BCrich.jpg

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Cenni Najy

Cenni Najy is a researcher at the University of Geneva and head of the Europe Programme at foraus. His research focuses on Swiss-EU relations and on the EU’s external governance.

cenni.najy@foraus.ch