In Escalation of Trade War With Switzerland, EU Risks Balkanizing Europe’s Financial Markets

“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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  34 comments for “In Escalation of Trade War With Switzerland, EU Risks Balkanizing Europe’s Financial Markets

  1. Senecas Cliff says:

    Gotta love the Swiss. With their vaults full of gold, their mountains filled with guns, their larders filled with cheese and the vote in the hands of the people they fear no one.

  2. chillbro says:

    The Swiss state and legal system are enabler of corruption, tax evasion, and money laundering. It is about time someone knocked them down a peg again. First time being US FATCA. I am surprised EU allowed this parasitic relationship to go on as long as it did. They want their cake and eat. EU offers them the largest single market within a driving distance. What does Switzerland offer for the regular EU citizens? Obviously they provide a lot perks for high ranking gov officials, business leaders, and capital owners with their “privacy” laws.

    Obviously this development is not about punishing the Swiss what for the right reason but a man takes what he can get.

    • Visitor says:

      @Chillbro: Your information is not very up to date on the James Bond stuff. And on “What does Switzerland offer regular EU citizens?” Well, just the right to enter Switzerland without a passport or ID and the right to work and live in Switzerland permanently. And if EU citizens lose their job while in Switzerland, they get up to $10’000 a month for eighteen months.

      • chillbro says:

        Again a perk for well educated and affluent elites from “good” member states. Good luck trying to a get a job there as a peasant from less desirable locales. Proving my point mate!

        • Strawberry says:

          @Chillbro: Who do you think picks the grapes and strawberries and milks the cows? This link shows thousands of job openings for manual work on farms…

        • SwissBrit says:

          @chillbro – here in Geneva most workers in restaurants and other service industries, airport workers etc. are EU nationals, coming to Switzerland due to the higher salaries than in their home states. The same is certainly true in Zurich and Basle, as well as throughout the region around the Lac Léman (or Lake Geneva if you prefer).
          Any regular EU citizen has the right to live and work (or even simply look for work) here in Switzerland due to some of the very bi-lateral agreements that the EU are looking to replace.
          The EU may offer Switzerland “the largest single market within a driving distance” as you put it, but Switzerland is completely surrounded by the EU on every side, in fact the nearest non-EU country to Switzerland’s border is Bosnia and Herzegovina, which is over 600 KM (or approx 9 hours solid driving) away. What other market is there then “within a drivig distance”?
          Switzerland is more or less forced to deal with the EU due to its geographic placement, but the people rule here by referendum; no political elite can decide the future of the country without being held to acount by the populace, and any decisions taken (such as the agreement with the EU mentioned in the article) which the people do not accept, will not pass into law, no matter what the EU wishes.

    • IdahoPotato says:

      Correct. Every Asian, African and Latin American tinpot dictator has a Swiss account funded by money siphoned off the citizens of those countries.

    • Sadasivan says:

      The Banking Elite control Switzerland.

    • raxadian says:

      The EU is an enabler of corruption, tax evasion, and money laundering. It is about time someone knocked them down a peg like Switzerland is doing.

      Honesty, were do you get yours news, from social media? There wouldn’t be so many people against the Eurozone if their politics and laws didn’t make the rich richer and the poor poorer, while squeezing out the so called middle class.

  3. ZeroBrain says:

    Great article. And good for them! I would welcome a global movement towards national sovereignty and fewer self-dealing overstepping bureaucrats.

    • Argus says:

      Agreed, not to mention the sinister underlying EU globalist agenda. I have always envied the Swiss their democratic system. It is likely the closest thing to a true democracy of any country.

  4. Michael Engel says:

    Switzerland is completely upside down. All rates up to 20Y are underwater.
    If the SPX is upside down, doing an inverse Head & Shoulders, –
    – LS is Feb(L), the Head is Dec 2018(L) and the RS will probably
    come in Oct(L), – if SPX does obey gravity and the low behind us in Dec 2018 :
    ==> SPX next target is 3,250. US will help Europe and
    Switzerland to settle their differences.

  5. MCH says:

    Hilarious. I wonder how much the Swiss actually gives a rats ass about the EU. I suppose the next thing to do is to cut out Nestle chocolates, Roche/Novartis drugs from the EU, and favor internal brands like GSK, AZ, and Cadbury… oh wait.

    Well, at least there is still Sanofi Aventis.

    With NIRP and ZIRP, the Swiss are probably thinking that closer alignment to the EU is not necessarily a good thing. Wonderful though that the Germans have found a way to “punish” those cuckoo clock makers for their insolence, and their neutrality through WWII.

    • Sadasivan says:

      All parties in WW2 respected the Banking Elites as Switzerland is THE LATTER’S country.

  6. Javert Chip says:

    The EU keeps making the mistake of thinking it’s relevant. In fact, it’s really only relevant to the 525M member-Europeans subject to the anything-but-democratic EU’s bureaucratic power-trips & hissy-fits.

    The NYSE (or NASDAQ, or any number of other exchanges) will be more than willing to substitute for whatever tinker-toy political bovine excrement the EU was trying to cram down on the Swiss.

    Chronologically, the last time this might have worked was about 1955…

  7. "United in diversity" but dumb says:

    French colonial rule in Africa is still in operation today. West African exports are cheaply sold into France over other markets. France has the first right to buy or reject any natural resources found in the land of the Francophone countries. So even if the African countries can get better prices elsewhere, they can’t sell to anybody until France says it doesn’t need the resources. In the award of government contracts, French companies must be considered first; only after that can these countries look elsewhere. It doesn’t matter if the CFA countries can obtain better value for money elsewhere.

    14 African states are mandated to put 65% of their foreign currency reserves into the French Treasury. This means these 14 African countries only ever have access to 15% of their own money and France get to play on the stock exchange with the reserves.

    Overall the Colonial Pact gives the French a dominant and privileged 
position over Francophone Africa, but in Côte d’Ivoire, the jewel of the former French possessions in Africa, the French are overly dominant. Outside parliament, almost all the major utilities – water, electricity, telephone, transport, ports and major banks – are run by French companies or French interests. The same story is found in commerce, construction, and agriculture.

    If this isn’t illegal and an international crime, then what is?

    To provide an example Niger is a world producer of Uranium but it has no power plants using Uranium, only coal ! France has 58 nuclear power stations. I’d hate to see France go dark.

    Since 1999 the African CFA has been pegged to the euro. In the last week, Nigeria signed the AfCFTA (Africa free trade area). The EU is not liable for the CFA guarantee but it does rest solely on the shoulders of France.

    If the EU continue to bully, they themselves will get bullied. There are a greater number of countries outside of the EU than there are in it. Just how far are the EU willing to go in confrontation? Greece wants war reparations. UK’s turn next.

    Any change manager knows the process – Unfreeze (mass migration) – Change (forcing through policy with deaf ears) – Freeze (confrontational stance). EU laws are based upon EU laws. It is a corporation which has decided to invent its own law. Legal boundaries belong to countries, not corporations. It’s a hard lesson to learn but I think the messages are finally starting to sink in. The pipe dream needs to negotiate at the table in a democratic way. Take your time, wake up when you are ready.

  8. John says:

    Thanks wolf! UK still at positive rates.

  9. chillbro says:

    In late June they revived a proposal to exempt from taxation interest income from Swiss bond. The exemption would cover nonresidents too.

    I am out of my depth on the implications but I have a feeling it has something to do with their “song and dance” with EU.

    • char says:

      Interest income on Swiss bonds? Is there such a thing?

    • SwissBrit says:

      English text below:

      Federal Council adopts guidelines for tax reform

      Bern, 26.06.2019 – At its meeting of June 26, 2019, the Federal Council decided to resume the reform of the advance tax which is currently pending. It has adopted the objectives and guidelines of this reform. A project for the consultation should be ready in autumn.

      The Federal Council intends to strengthen the Swiss third-party capital market and extend the advance tax guarantee function at the national level. To define the guidelines for its project, the Federal Council relied on the subcommittee set up by the Commission for the Economy and Royalties of the National Council and also charged with a reform of the advance tax (initiative parliamentary 17,494); this subcommittee co-ordinates its work with that of the Federal Council.

      The reform proposal has two key elements. The first is the exemption from withholding tax on interest-bearing Swiss investments made by Swiss domiciled companies and foreign investors. This measure considerably strengthens the Swiss bond market. The second key element is to extend the guarantee function for natural persons domiciled in Switzerland and thus to fight against tax evasion. The technical implementation of these key elements will be accompanied by new tasks for the banks and possibly for the administration as well.

      This reform project will lead to a decrease in revenue estimated at 200 million francs a year. The Confederation will assume 90% of these losses and the cantons, 10%. In return, the strengthening of the capital market will lead to a dynamic increase in revenue for the Confederation, the cantons and the municipalities. To this will be added additional income resulting from the strengthening of the advance tax guarantee function. The cost / utility ratio of this reform is therefore extremely advantageous. The guidelines set by the Federal Council help to achieve the objectives. In addition, the proposed system is less complex than other reform models. The Federal Council thus takes into account the concerns of the financial sector with regard to the administrative burden and risks of liability. The Federal Department of Finance (FDF) has received review mandates, including administrative burdens and liability risks.

      In advance of its decision, the Federal Council inquired about the conclusions of two studies conducted by BAK Economics and KPMG on behalf of the FDF.

      From the point of view of the Federal Council, the implementation of a comprehensive tax reform is currently excluded because it would result in a decrease in revenue in the billions. Such a reform would involve the total elimination of stamp duty (up to $ 1.2 billion in revenue reduction) or a reduction in the tax rate on dividend yield ($ 1.6 billion in revenue reduction). according to the KPMG study).

  10. caradoc_again says:

    Have to love the Swiss. God bless them and their independence.

    If you can’t see what the EU is morphing into youhave a problem perceiving reality & deserve pity. They are now moving into the “imposing their will” phase. It only ever ends one way. Might take some time but conflict is coming.

    • Sadasivan says:

      You are warned!EU don’t play with The Banking Elite.

    • Cynic says:

      Just like ancient Rome: you started off as ‘a friend of Rome’, which could pay off well – then later the gates would shut on those within the Empire……..

      The curious thing is that Brussels is throwing its weight around at the point when the whole structure is trembling, the peak of prosperity within the EU is long past, and in many regions, and for many demographic groups, irrecoverable.

      Many citizens though refuse to see the permanence of this decline, that their assets are hollow and prospects ever poorer, and so support the imperial structure and its totalitarian expansion.

  11. otherbrother says:

    Cash hoarding may be an issue with bonds yields, policy, bank runs, money markets and the global dollar (reserve) shortage. As fewer people use banks in normal old ways, digital cash could be on the horizon sooner, than later. Cash and currency is a weird area that morphs into several liquidity matters.


    “In a study that has implications for officials at central banks, who must figure out how much below zero they can cut interest rates before the public begins stockpiling cash, the authors calculate that in between 80% and 90% of 1,000-franc ($1,007) notes were hoarded in 2017. For the 200-franc note the proportion was between 30% and 60%.”

    • Sadasivan says:

      When FULLY DIGITIZED [ I doubt it],ALL THE MONEY of the Citizens will be in the Banks leading to loss of accountability and HUGE Corruption.And of course during Natural Calamities and War,the internet may fail creating problems.Taking the above 2 points [natural calamities and War] into account even Sweden,an almost a Cashless Society, has asked its Citizens to keep Cash under the mat,just in case

      • Age of Trust says:

        The Age of Trust is coming – Blockchain – and they know it. This is the panic we are seeing.

        • otherbrother says:

          I was reading this stuff yesterday (published a few years back) which is a topic that is being discussed lately with currency gurus, i.e., what happens with negative rates, hoarding and cash. I think it would take a systemic global shock, perhaps bigger than the Great Recession for central banks to coordinate an effort to limit the ability to use cash and instead have everyone use digital means. The argument presented is to allow CBs to use negative rates to lower the cost of money, and thus stimulate growth. It’s entertaining but probably not realistic …

          ==> The bottom line is that all we have to do to give the Fed (and other central banks) unlimited power to lower short-term interest rates is to demote paper currency from its role as a yardstick for prices and other economic values—what economists call the “unit of account” function of money. Paper currency could still continue to exist, but prices would be set in terms of electronic dollars (or abroad, electronic euros or yen), with paper dollars potentially being exchanged at a discount compared to electronic dollars.

        • Jack says:

          That is total rubbish , absolutely Not true.

          The Fickleness of the System that relies on “ Electricity “ will always be in doubt!

          Never mind what you’ve been indoctrinated onto!

          our evolution as human species biologically speaking is far behind your “ blockchain “ Revolution to be adapted as a means for trade and economic interactions.

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