By Brian Blackstone and Avantika Chilkoti
ZURICH -- Trading in Switzerland's biggest blue-chip companies could soon be banned in London and other major financial centers, as a political dispute with the European Union threatens to spill over into markets.
Switzerland and the EU are at loggerheads over an overhaul of the complex ties that have guided the relationship for decades. Switzerland isn't part of the EU, but has extensive financial, immigration and trade ties with the bloc.
If an EU-imposed deadline passes on Sunday without an agreement, venues based in the EU would be limited in trading Swiss stocks. The ability of some investors to trade blue-chip Swiss companies including Nestlé SA and Novartis AG could be affected by the spat.
The two sides still have several days to come to an agreement and avert the loss of market access. Or, the EU could grant another extension as it did in late 2018. However, the positions appear hardened, dimming the hopes for a last-minute deal.
If no agreement is reached, investors face the prospect of major upheaval. Swiss companies make up one-fifth of the Stoxx 50 index equities benchmark by market capitalization. Around 70% of trading in the 30 largest Swiss blue-chip companies occurs at exchanges in Switzerland, primarily Zurich's SIX exchange. The other 30% are traded in Europe, mostly London.
As the deadline for Brussels' decision nears, exchange operators LSE, Aquis Exchange, Cboe Global Markets and UBS have announced they could be forced to remove Swiss stocks from U.K. platforms as soon as next week. Cboe has said it won't be permitted to trade securities with a Swiss registered office and listed on a Swiss exchange from the start of the next trading day if Switzerland isn't granted equivalence by Sunday.
The EU and Switzerland have been in discussions for years about bundling the roughly 120 bilateral treaties governing Swiss-EU ties into one accord. Brussels wants the framework agreement to ensure that Switzerland can't renege on certain obligations, like free movement of people from the EU and addressing wage protections in Switzerland, without paying a broader price in terms of EU market access.
The EU gave itself leverage in the talks 18 months ago by changing the way it grants access, known as equivalence, which allows shares in Swiss companies to be traded throughout Europe. It is a largely technical arrangement that countries around the world have with each other to facilitate the smooth functioning of financial markets.
But in late 2017, the EU only gave the Swiss a one-year extension, and tied its renewal to the broader framework agreement. The two sides pushed up against an end-of-2018 deadline without a deal before the EU gave the Swiss a six-month extension that expires June 30.
"The current equivalence decision will automatically expire on 30 June," an EU Commission spokeswoman said. "Our door remains open to conclude the agreement before the end of this Commission's mandate."
On Monday, the Swiss executive branch said it would launch the protective countermeasures it had unveiled last November to maintain trading activity in Swiss exchanges. Under the Swiss plan, which would come into force on July 1, exchanges based in the EU would be prohibited from trading Swiss shares, meaning virtually all of the trading of Swiss stocks would have to be done in Switzerland.
The measure "serves solely to protect the functioning of the Swiss stock exchange infrastructure," the federal council said. SIX welcomed the decision in a statement Monday.
Nestlé and Novartis said in separate statements they don't expect the EU's move to have a significant effect on their shares. "Novartis would expect trading volumes to likely shift from EU trading venues to the SIX" or perhaps other venues such as the New York Stock Exchange, the company said.
Olivier Carré, a partner at PwC Luxembourg who provides advice on regulation, says his clients -- including dealers and asset managers -- now need to assess the cost of rerouting trades if Switzerland follows through on the retaliatory measures.
"The volumes of trading on the Swiss exchange, at least in the short or medium term would balloon," Mr. Carré said, adding that there would be particular concerns for investors executing large trades that are usually spread over multiple markets.
The issue is unlikely to have major implications on the Swiss and European economies, analysts said. However, if this is the start of a broader fraying of relations in other areas like immigration and trade there could be a bigger economic and financial effect particularly on Switzerland, which depends greatly on the EU as an export market.
"Switzerland has nothing to gain from a battle with the EU," said ING Bank economist Charlotte de Montpellier.
Neil Dwane, global strategist at Allianz Global Investors, said the moves were a fresh sign that Brussels is acting like "an economic bully."
"The EU is sounding more and more antimarkets which may ultimately lead to higher investment costs, higher trading costs and possible transaction costs," Mr. Dwane said, adding that this could make the region less attractive to investors.
Write to Brian Blackstone at firstname.lastname@example.org and Avantika Chilkoti at Avantika.Chilkoti@wsj.com
(END) Dow Jones Newswires
June 25, 2019 17:09 ET (21:09 GMT)
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