As the UK and EU proceed towards a workable agreement on how their various relations will be governed post-Brexit, the arrangements established with Switzerland are often held up as a guide to what such a framework might look like. There have even been suggestions in parts of the UK press that the UK and Switzerland should be working together to promote a mutually acceptable framework for the financial sector’s relations with the EU.
Switzerland’s useful experience
To many, the parallels are not that clear, other than that Britain and Switzerland are countries in Europe that are not – or will not be – part of the EU. However, there are fundamental differences in the two situations, even if there are some parallels as regards specific issues.
The UK is seeking a divorce from the EU – how amicable it will be is a matter of current negotiation. Switzerland, on the other hand, has been a loyal partner to the EU for over 25 years, is a member of Schengen, allowing the free movement of people across the combined border, has adopted all major EU laws to ensure equivalence from a legal and regulatory point of view, and pays annually into a fund which supports stability in the EU.
Nevertheless, there is one respect in which Switzerland may have some useful experience to impart, having gone through the process of negotiation, albeit with the aim of a closer relationship rather than a more distant one.
Equivalence – a key element for the Swiss financial market
At a more granular level, specific industries face different objectives and priorities. For the exchange services industry (listing, trading, post-trading), one key element in a smooth relationship is the recognition of “equivalence” among the various market infrastructures.
On 21 December 2017, the EU Commission decided to recognize the equivalence of the Swiss legal and supervisory framework for trading venues with that of the EU for a temporary period of one year. The decision allows for European securities traders to trade Swiss equities on the Swiss domestic market over that period following the introduction of MiFID II. Given the close and long-standing relationship between Switzerland and the EU, it is all the more incomprehensible that a decision was taken by the EU Parliament to limit the equivalence status of the Swiss exchange to one year despite explicit acknowledgement that the market and its regulation as well as the exchange itself are indeed technically equivalent to EU entities.
For the EU to restrict capital flows in Europe and jeopardize market stability for political reasons in this manner is indeed odd. This type of protectionism in the heart of Europe serves no purpose other than to create investor uncertainty. Not just in Switzerland, but also in the reliability of the EU and its policy-making process. SIX is working closely with the Swiss government in its dialogue with the EU to correct this anomaly as soon as possible.
With the Swiss exchange services industry having negotiated its arrangements with the EU, Brexit now poses an additional consideration that depends to some extent on the progress of bilateral negotiations between the EU and the UK. Our clearing business serves as an example: We are currently recognized as a third-country Central Counterparty (CCP) under the European Market Infrastructure Regulation (EMIR; granted on 30 March 2016). While we would expect to have to re-apply for recognition in the UK post-Brexit, this can only be done once there is clarity on the UK’s position and rules post-Brexit and is dependent on the definition of the appropriate regulatory framework for that recognition.
As soon as there is clarity on that, we will submit our application for re-approval under whatever the new UK rules will be. This is not a significant cause for concern at this time, but it does, however, serve to illustrate that in a multilateral framework, the stakeholders are myriad, and negotiations are difficult and time-consuming.
Given the fundamental differences in the going-in positions, and the completely different issues at stake, the UK financial services industry should not expect to be able to rely on a common-ground approach with Switzerland for a similar type of deal with the EU. If these expectations are not managed, negotiations will be slow. Nevertheless, reconciling the mindset required for successful negotiations with the demands of the domestic mood is rarely an easy sell. Dialing back on expectations of simplicity would be a good place to start.
Head Securities & Exchanges, Member of the Executive Board, SIX