“Weaponizing” Europe’s financial services, with an eye on the UK after Brexit?
By Nick Corbishley, for WOLF STREET:
In recent days, the stock exchanges of Switzerland, the fourth-largest European market by value-traded, were dealt what seemed at first like a hammer blow: Brussels stripped them of financial equivalence with the European Union after a previous trade agreement between the two sides expired, with the result that traders from the EU’s 28 member states are no longer allowed to trade shares in Swiss companies if those shares are also traded in the EU.
That applies to virtually all heavyweight Swiss companies such as Nestlé, Roche and Novartis, whose shares are included in the portfolio of just about every major European investor.
The EU’s long-telegraphed decision to let Switzerland’s financial market equivalence expire was intended to coerce Bern into signing a comprehensive framework agreement with Brussels to replace the 120 bilateral trade agreements negotiated between the two states since 1992. The new agreement, under which the Swiss would adopt many EU rules automatically, has been under negotiation for years, was signed by the Swiss government but roundly rejected by the Swiss parliament and cantons.
The EU’s ban on financial equivalency for Switzerland also has another purpose: to send a stark warning to the British government of the risks a no-deal Brexit could pose to the UK’s financial markets. Put simply, if the UK leaves the EU without an agreement on Oct. 31, which is looking increasingly likely, and UK stock exchanges lose financial equivalency, prompting a tit-for-tat response from London, any stocks that are dual-traded would have to be traded in their respective jurisdiction.
That would mean that EU investors would have to trade shares of, for example, Shell in the EU while UK investors would have to trade them in London — regardless of their respective price or liquidity. The result will be reduced liquidity, greater operational uncertainty and a higher risk of market disruption.
Brussels might also be trying to send this message to discourage financial service providers fleeing post-Brexit Britain from setting up shop in Switzerland, instead of an EU country.
But the one thing Brussels apparently didn’t count on was that Switzerland’s stock exchange group, SIX, would be more than ready for its latest escalation, having spent the prior six months preparing for it. “SIX has prepared for this eventuality by establishing direct links to all its clients and intensified the regular exchange with all stakeholders over the past months so that trading would not be disrupted,” Thomas Zeeb, head of securities and exchanges at SIX Group, told CNBC on Wednesday.
Bern’s response to Brussels’ ban was both swift and brutal. It removed the recognition that allows EU trading venues to offer trading in around 250 Swiss companies. It also warned that any banks and asset managers caught flouting the ban (excluding those engaged in over-the-counter activity such as systematic internalisers) would face stiff fines or even jail.
This delisting is likely to have major ramifications for Europe’s financial markets, especially if similar treatment is meted out to UK-based stock exchanges in the event of a no-deal Brexit this November. In a worst case scenario, Brussels’ move on Switzerland could be the first step in a balkanization of Europe’s already fragmented financial markets.
As of July 1, not only are Swiss trading platforms unable to export their services to the EU, but EU traders are now blocked direct access to Europe’s fourth largest exchange and must instead operate through intermediaries. If the same happens to the London Stock Exchange after Brexit, it will be Europe’s largest exchange they will be barred direct access from.
For the moment, the disruption to Swiss trading volumes appears to be minimal, though it could take months for the dust to settle. According to research by Tim Cave, an analyst at consultancy Tabb Group, Swiss market volumes were down only marginally from last month despite activity shifting from EU-based venues to the Swiss primary market and its dark book, SwissAtMid.
Some believe that by “weaponizing” Europe’s financial services, the EU may have significantly overplayed its hand. Frank Stocker, the financial editor of German newspaper Die Welt. “(The EU Commission) believed they had found the perfect leverage in a recent dispute with Switzerland. But as “Nestlé & Co.” are mainstays of just about any European investment portfolio and can no longer be traded in the EU, EU investors now have little choice but to trade them in Switzerland using a Swiss-based bank or broker, Stocker says. As a result, the Swiss stock exchange, rather than being squeezed of funds, could end up receiving additional inflows of capital — the exact opposite of what the EU wanted to achieve.
In its two-way showdown with Switzerland and the UK, Brussels runs an even bigger risk. While it may be far and away the biggest fish in Europe’s pond and both Switzerland and the UK depend heavily on it as their prime export market, the EU, in using the former as a pawn in its negotiations with the latter, risks alienating a nation that prizes its independence, neutrality and national sovereignty more than any other in Europe.
What’s more, in Switzerland, when big decisions are made, particularly those seeking to amend the country’s constitution, they are always put to referendum. Which means that even if the government and parliament do finally agree to a deal with Brussels, the voting public, which is broadly skeptical about further integration with the EU, may not. By Nick Corbishley, for WOLF STREET.
Shares of more UK “equity funds” are coming under pressure, raising serious questions about just how liquid “equity funds” in the UK are. Read… Liquidity Fears Hit Other UK “Equity Funds” as Investors Remain Trapped in Woodford Fund
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