Stocks from Nestle to Swatch Group traded without a hitch Monday as Switzerland's never-before-tested provisions to safeguard liquidity kicked in following a showdown with the European Union.
Swiss shares rose as much as 1.3% in Zurich, broadly in line with European peers on a positive day for equities after the U.S. and China reached a truce in the trade war and agreed to resume talks. Volume on the SMI index was about 6% above the 20-day average for this time of day, in line with increased activity on the Stoxx Europe 600 index.
"So far, so good for trading into Swiss stocks," said Eric Hassid, a trader at Aurel BGC in Paris. Index provider MSCI said in a statement that "there is no immediate impact, but we are monitoring the situation."
The Swiss trading activity will be watched for any indications it may provide for the post-Brexit U.K. market. Investors who've had to revise their game plan and reroute trades after the Swiss bourse lost recognition EU rules, will also continue to be on the lookout for price distortions or shortage of liquidity. A spokesman for Zurich bourse operator SIX Swiss Exchange said it was business as usual and too early to make an assessment of the changes.
"In terms of impact for Swiss companies and financial institutions — this is not clear," said Scott Evans, a researcher at London Business School. "This also sends a very clear message to the U.K. regarding equivalence in the post Brexit period — which so far has been viewed by the Brexiteers and the current U.K. government as a given."
The government responded to the looming loss of so-called equivalence for its exchanges under MiFID II on June 30 by taking the unprecedented step of banning trading in Swiss shares within the bloc. That's intended to force flows back into Switzerland.
The origins of the stock trading ban lie in a dispute between Bern and Brussels over an umbrella agreement to streamline political ties. Much as with U.K. Prime Minister Theresa May's Brexit deal, the EU has declined to re-open talks about several provisions in the treaty that are unpopular in Switzerland. The EU used Switzerland's stock market as a bargaining chip.
That was possible because under MiFID II if a stock is regularly traded on an EU-regulated platform, the bloc's investment firms must transact all their dealing there or on a foreign venue deemed equivalent.
Under EU equivalence, about a third of trading in Swiss shares took place in the EU.
While buying and selling most stocks probably won't be an issue with equivalence lapsed and the Swiss government's countermeasure in force, trading in shares that have a dual listing in EU markets — such as engineering company ABB Ltd. or cement-maker LafargeHolcim Ltd. — could prove tricky.
Not complying with the new rules on trading in Switzerland is a criminal offense, and U.K.-based trading venues run by companies including Cboe Global Markets Inc. and London Stock Exchange Group, where most of the EU trading of Swiss shares takes place, have already told clients that they will exclude securities from Swiss issuers.
There's also the possibility of some trading disappearing into off-exchange venues that allow for less transparency although transaction costs are higher there.
As SIX Swiss Exchange Chairman Romeo Lacher noted last year, even if all trades are successfully redirected to Switzerland, investors could suffer from reduced competition among marketplaces.