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Strained relations between Switzerland and the European Union are threatening to affect trading in Swiss stocks. The two sides are at odds over a political accord, and the Swiss stock exchange has effectively become a bargaining chip. Brexit makes Brussels unlikely to grant any concessions.

1. What’s the fight about?

Switzerland hasn’t joined the EU and its relations with the bloc are governed by more than 120 bilateral treaties that cover everything from agriculture to civil aviation and the free movement of people. They are supposed to be replaced with the political accord and the EU has linked progress on replacing them to an extension of the Swiss stock exchange’s so-called equivalence status. It recognizes that Swiss securities regulations are as tough as its own. That status expires on June 30.

2. Can’t there be another extension?

The European Commission, which handles such matters for the EU, has already extended Swiss market equivalence once, from an original deadline at the end of 2018. Without progress, the EU could withhold regulatory recognition of trading venues in Switzerland, in effect curbing the access of investors in the bloc to Swiss markets. That could impact some of the world’s biggest companies, including Novartis AG, Nestle SA and UBS Group AG. Market participants are still hoping for an amicable outcome.

3. How is this likely to play out?

It’s not clear how a rupture would play out legally, because the rules leave some room for interpretation. Switzerland has prepared a contingency plan that would prohibit trading of its shares on EU trading platforms, effectively forcing all trading to Swiss stock exchanges. Such a move could cause “some disruption, market fragmentation and increase costs over time,” according to a note that was prepared by the commission and seen by Bloomberg. The U.S. and other locations were granted indefinite equivalence by the EU at the start of 2018.

4. What does this tell us about Brexit?

The difficulties encountered by Switzerland in its negotiations signal the potential risks to the London financial center. For the industry, it highlights the shortcomings of the equivalence system, under which the European Commission can grant and withdraw access to its market unilaterally and at any time.

5. What is the Swiss plan?

Under the Swiss contingency plan, EU-based traders will be prohibited from trading Swiss shares within the EU, and trading volumes are to be re-routed to Switzerland. This will likely mean lower volumes of dealing in Swiss shares at other venues and higher volumes at the SIX Swiss Exchange. According to Torsten Sauter, head of Swiss equities at Kepler Cheuvreux, Swiss preparations mean the potential fallout is likely to be “manageable.” The government in Bern has said that without the emergency measures, and without EU equivalence, the Swiss stock exchange would suffer a 70% to 80% drop in trading volume. The measure would only take effect if the commission doesn’t extend equivalence.

6. Why does this matter?

The SIX Swiss Exchange is the fourth-biggest in Europe. Its annual turnover is about 1 trillion Swiss francs ($1 trillion), the lion’s share of which is being generated by EU-based investors.

--With assistance from Alexander Weber, Catherine Bosley and Jan Dahinten.

To contact the reporter on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Leah Harrison Singer, Jon Menon

©2019 Bloomberg L.P.