The decision came on 20 December 2017 – just two short weeks before MiFID II/MiFIR become applicable on 3 January 2018. EU investment firms can thus continue to trade shares on SIX Swiss Exchange and BX Swiss under MiFID II/MiFIR. However, in contrast to similar decisions for other countries, the decision in Switzerland’s case will be subject to review after one year. As a reaction, the Swiss government considers, among others, to fully abolish Swiss stamp taxes in order to improve competitiveness.
Article 23 of the new Markets in Financial Instruments Regulation (MiFIR) introduces a trading obligation for shares traded by EU investment firms. In particular, this provision requires EU investment firms to trade shares on an EU trading venue, with an EU systemic internalizer or on an equivalent third-country exchange, unless an exemption applies (for details, see our publication here). This new obligation is applicable as of 3 January 2018.
Switzerland: review of the decision after one year
A first batch of equivalence decisions regarding foreign trading venues was published on 13 December 2017 and included the United States, Hong Kong and Australia. Hong Kong and Australia received an equivalence decision which is not limited in terms of its duration. However, it is stated in each decision that it may be reviewed and repealed by the EU Commission at any time. As for the United States, a caveat has been introduced regarding alternative trading systems (ATS): A review for equivalence of these trading venues will take place one year after entry into force of that equivalence decision.
A similar provision is included in the equivalence decision for Switzerland: The equivalence decision for Swiss stock exchanges shall expire on 31 December 2018, unless the EU Commission extends it. For such decision upon extension, the EU Commission should consider the progress made in terms of bilateral negations towards an institutional agreement. Since the EU Commission has the right to re-assess and repeal any equivalence decision at any time, and because there is no legal claim for third countries to receive a positive equivalence decision, the expiration as well as the review criteria are of political rather than legal relevance.
The fact that the decision for Switzerland will expire after one year does not reflect any regulatory discrepancies between Switzerland and the EU. Rather, it has been an issue at the political level: After Switzerland expressed its intention to link the granting of a positive equivalence decision to the “enlargement contribution” (Kohäsionsmilliarde, i.e. payment to be made by Switzerland to Eastern European countries to support their development), the EU made a long-term equivalence decision conditional upon progress in bilateral negotiations on an institutional agreement. The limitation also has to be seen in the light of Brexit which complicates the bilateral relationship between Switzerland and the EU.
As a reaction to this time limit, the Swiss Federal Council announced to propose certain measures to the parliament in order to further improve the competitiveness of the Swiss market. As part of these measures the government intends to propose abolishing Swiss stamp taxes. Whereas Switzerland has for some time now been considering to abolish the issuance stamp tax on equity instruments, the government now also appears to consider abolishing the transfer stamp tax levied on the transfer of certain securities. Moreover, it mentioned that in light of these developments the second instalment of the enlargement contribution to be paid by Switzerland might be subject to further discussions.
Importance of the decision for Swiss trading venues
In general, cross-border financial transactions with EU counterparties are highly relevant to the Swiss financial sector. In particular, for SIX Swiss Exchange it is crucial that it may provide its services to market participants located in the EU, because a large part of the share trading activities on SIX derives from EU investment firms. Had the equivalence decision for Switzerland gone the other way, EU investment firms would have had to switch to other trading venues recognized for the purpose of the share trading obligation. This positive equivalence decision is, therefore, important for Swiss trading venues as well as for the Swiss financial market as a whole. After all, strong share trading venues with an international network of participants are crucial to an international financial center such as Switzerland.