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The EU may be overplaying its hand in Swiss stock exchange standoff, experts say

Key Points
  • The EU allowed the equivalence, which allows Swiss equities to be traded easily within the bloc, to expire at the end of June.
  • Switzerland and the EU are embroiled in an ongoing dispute regarding long-standing financial, immigration and trade ties between the two.
  • In response, Swiss authorities removed the recognition which allows EU trading venues to offer trading in around 250 Swiss companies, in accordance with a pre-emptive ruling from the Swiss Federal Council in November 2018 to protect Swiss exchanges in the event of talks collapsing.

Switzerland looks likely to have outmaneuvered the European Union, after the latter ended its recognized stock exchange equivalence with the country.

The EU allowed the equivalence, which allows Swiss equities to be traded easily within the bloc, to expire at the end of June.

The EU move formed part of a dispute over the non-member nation's political arrangements with the bloc. Switzerland and the EU are embroiled in an ongoing disagreement regarding long-standing financial, immigration and trade ties between the two.

In response, Swiss authorities removed the recognition which allows EU trading venues to offer trading in around 250 Swiss companies, in accordance with a pre-emptive ruling from the Swiss Federal Council in November 2018 to protect Swiss exchanges in the event of talks collapsing.

Banks and asset managers may face fines or even jail if they flout the ban on trading Swiss stocks on EU exchanges.

Thomas Zeeb, head of securities and exchanges at SIX Group, which operates the Swiss stock exchange, told CNBC the move had "safeguarded and strengthened the running of the Swiss capital market."

EU market participants continue to have access to the Swiss domestic market and are able to trade Swiss shares "in the most liquid and deepest order book," Zeeb explained.

"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," he added.

Zeeb highlighted that the Swiss legal framework has already been judged to be equivalent "numerous times by the EU technical authorities" and said SIX expects that equivalence will be granted once a resolution is found to the Institutional Framework Agreement, which governs ties between Switzerland and the EU.

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Brexit implications

The equivalence stand-off with Switzerland could be indicative of one potential scenario for the EU's negotiations with the U.K. regarding the latter's departure, earmarked for October 31.

Michael McKee, partner at British multinational law firm DLA Piper, told CNBC that the EU's hardline approach towards Switzerland is the one most likely to be deployed in talks with the U.K., but that Switzerland's resilience may weaken its position.

"[Equivalence] has been used in an informal fashion as a tool to get outcomes but usually directed towards getting other countries to make changes to the law or adapt a little more to the EU approach, and usually with smaller countries, not mid-level, well developed countries like Switzerland — it is the first time that a country has really stood up to the EU other than large economies like the U.S. or China," he explained.

McKee added that the "concrete impact in Switzerland has not been significant in financial markets terms," and suggested that the U.K. was in a stronger negotiating position than Switzerland.

"The U.K. stock market and stocks on that market collectively are much more substantial, so if the EU was to take on the U.K. like this, the volumes of the London Stock Exchange and the FTSE 100 are a bit more balanced against the stocks being traded on the various EU countries' markets," he added.

However, the global nature of the U.K.'s stock market interest, compared to Switzerland's more domestic focus, may mean that Britain would be less likely to react in a similar fashion to the Swiss sanction or prohibit trading outside the London Stock Exchange.

"If they did, the likely impact would be more on limiting the capacity of EU investors to invest in the U.K., which might be a bigger problem for EU investors than U.K. investors going the other way," McKee projected.