On June 30, 2019, the temporary recognition by the European Commission (EC) of certain Swiss trading venues as eligible for compliance with the MiFID II1 share trading obligation (STO) is due to expire. This will affect the venues on which MiFID investment firms (including European Union (EU) sub-advisers of U.S. fund managers) are able to trade shares that are admitted to trading, or are traded, on both an EU trading venue and a Swiss trading venue (Swiss/EU Shares).
With respect to shares admitted to trading, or are traded, on an EU trading venue, the STO requires MiFID investment firms to trade those shares only on an EU trading venue, with an EU systematic internalizer (SI) or on a non-EU trading venue that has been determined as equivalent by the EC (an Equivalent Third Country Trading Venue). The EC’s Implementing Decision (EU) 2018/2047 (Implementing Decision) had granted temporary recognition to SIX Swiss Exchange AG (SIX) and BX Swiss AG (BX) as Equivalent Third Country Trading Venues which expires on June 30, 2019. This means that, until and including June 30, 2019, MiFID investment firms are able to trade Swiss/EU Shares on SIX and BX (in addition to other Equivalent Third Country Trading Venues, including certain trading venues in the U.S., Australia and Hong Kong), as well as on EU trading venues and with EU SIs. From July 1, 2019 (and unless this temporary recognition of equivalence is renewed, which is now unlikely), MiFID investment firms will no longer be able to trade Swiss/EU Shares on SIX and BX. Instead, these shares must be traded only on an EU trading venue, with an EU SI or other (i.e. non-Swiss) Equivalent Third Country Trading Venue. However, we understand it is likely that the majority of the current Swiss/EU Shares will cease to be admitted to trading, or traded, on an EU trading venue from July 1, 2019. That is because the Swiss Ordinance on the Recognition of Foreign Trading Venues for the Trading of Equity Securities of Companies with Registered Office in Switzerland (the Swiss Ordinance) will operate to ensure that the shares of certain Swiss issuers may no longer be admitted to trading on an EU trading venue once Swiss trading venues lose their status as Equivalent Third Country Trading Venues under MiFID II. The result is that these shares will be removed from the EU Financial Instruments Reference Data System (FIRDS)2 from July 1, 2019 and, therefore, trading in these shares will fall out of scope of the STO and these shares may continue to be traded on SIX or BX (or any other trading venue) on and after July 1, 2019. For the remaining Swiss/EU Shares that are not removed from trading on EU trading venues as a result of the Swiss Ordinance (and which thus remain admitted to trading, or are traded, on an EU trading venue and also a Swiss trading venue on and after July 1, 2019) the STO will still apply. Accordingly, MiFID investment firms must trade those Swiss/EU shares only on an EU trading venue, with an EU SI or on another (i.e. non-Swiss) Equivalent Third Country Trading Venue on and after July 1, 2019. There is a possible argument that the overall EU trading activity in these residual Swiss/EU shares is, or would become on or after July 1, 2019 “non-systematic, ad-hoc and infrequent” (which, if so, would exempt trading in these shares from the STO). However, recital 27 of the Implementing Decision notes:
“Overall Union trading in a multitude of shares admitted on the Swiss exchanges is of such frequency that investment firms in the Union could not avail themselves of the exception set out in [the STO]. This implies that [the STO] would apply to a significant number of shares admitted to trading in Switzerland.”
This would indicate that, in the EC’s view, there is sufficient EU trading activity for the STO to apply to Swiss/EU Shares currently. For Swiss/EU Shares not being removed from trading on EU trading venues as a result of the Swiss Ordinance, the EC has not indicated as yet that it will change this view on or after July 1, 2019.
As for practical steps, where trading in potential Swiss/EU Shares on or after July 1, 2019, MiFID investment firms should first check FIRDS to determine whether those shares are in scope of the STO.