European Union: Brexit And Swiss Financial Markets: Switzerland Takes Steps To Soften A Hard Brexit

Last Updated: 11 March 2019
Article by Rashid Bahar

In less than a month, the deadline set out under Article 50 of the Lisbon Treaty on the European Union for the United Kingdom (UK) to achieve an agreement on the terms of its withdrawal from the European Union (EU) will lapse and the UK could then leave the EU without any sort of transitional regime under a 'hard Brexit' scenario.

While the relationship between the UK and the EU is at the forefront of discussion and comment, Brexit is also likely to affect relations with third countries such as Switzerland. As part of its 'Mind the Gap' strategy, Switzerland took various steps in connection with the insurance sector and derivatives markets to soften the regulatory blow of a hard Brexit on Swiss financial markets; this briefing describes these in further detail.

Banks, Securities Dealers and Financial Market Infrastructures: Keep Calm and Carry On

Switzerland is neither a Member State of the EU nor the European Economic Area and its sectorial bilateral agreements with the EU do not extend to banking, financial markets or capital markets, with the exception of non-life insurances (see below). This now presents something of a blessing in disguise with Switzerland and the UK needing to scramble to ensure continuity in areas where sectorial agreements with the EU defined trade.

Therefore, from the outset, Brexit will have limited direct consequences for the financial industry from a regulatory perspective, even under a hard Brexit scenario. This applies all the more since, to a large extent, the co-operation between Swiss and UK regulators was conducted at a national level, rather than through the European institutions, and therefore will also remain strong after Brexit.

More specifically, UK financial institutions and financial market infrastructures will fundamentally continue to be able to serve clients, access Swiss financial markets and deal with counterparties in Switzerland as they have been doing up until now. In particular, Swiss subsidiaries, branches and representatives of UK financial institutions with a licence from FINMA as banks or securities dealers will continue to be able to carry on their activities and will not need to apply for a new licence. Similarly, financial market infrastructures, including trading venues and central-counterparties, which FINMA has already recognised will not need to apply for any new recognition following Brexit. Conversely, this also means that Swiss financial institutions, institutional investors as well as corporate and private clients will continue to be able to enjoy their existing access to the City of London.

Insurance: Insurance Treaty

One important exception to the above relates to non-life direct insurance: under an Agreement between the European Economic Community and the Swiss Confederation concerning direct insurance other than life insurance dating back to 10 October 1989, which was amended several times in the meantime, the Swiss and EU insurance sector was granted mutual and equal freedom to establish companies and branches in the field of direct insurance for damage, which facilitates the operation of international insurance groups.

To ensure continuity for insurance companies, the Swiss and UK governments entered into a new treaty to take effect when the UK leaves the EU: the Swiss-British Treaty on Direct Insurance Other than Life Insurance of 24 January 2019, which in essence replicates the terms of the existing agreement between the EU and Switzerland, thus ensuring continuity for Swiss and UK insurance companies when accessing the Swiss or UK market.

Therefore, continuity and legal certainty should also be guaranteed in this area.

Derivatives: Provisional Recognition of UK Regulations as Equivalent

While, outside of the insurance industry, access to financial institutions did not require any particular steps from the Swiss regulators, the same cannot be said for rules on derivatives trading. The Swiss Federal Act on Financial Markets Infrastructures of 19 June 2015 (FMIA SR958.1), the Swiss counterpart to Regulation (EU) n° 648/2012 (EMIR) or the DoddFrank Act in the US, provides for obligations for Swiss counterparties to report trades in derivatives to a trade repository. They also have to clear certain OTC-derivatives through a central counterparty, and mitigate risks related to OTC derivatives that are not centrally cleared by regularly valuing their positions, exchanging initial and variation margin, having processes to confirm transaction in a timely manner, to reconcile portfolios, to identify and resolve disputes, as well as to engage in portfolio compression exercises.

While these rules are similar to those provided under EMIR or the Dodd-Frank Act, they are not identical. This can therefore lead to conflicting rules, where a Swiss counterparty would need to apply Swiss law even when it deals with a foreign counterparty. To avoid this issue, Swiss law provides two sets of exemptions: on the one hand, Swiss counterparties applying Swiss law may in certain circumstances be relieved from their obligations if their counterparty is subject to conflicting rules (see, e.g., article 102 and 114 FMIA). More importantly, Swiss counterparties are entitled, under article 95 FMIA, to carry out their duties under Swiss law by applying foreign laws, provided that FINMA recognises their equivalence and that, where applicable, the duties are carried out through a financial market infrastructure that is deemed equivalent.

In 2016, FINMA issued its FINMA Guidance 01/2016 provisionally recognising the EU rules on clearing OTC derivative transactions through a central counterparty, reporting of derivative transactions and risk mitigation duties as being equivalent. This determination is, however, specific to the EU regulations and, consequently, would not extend to UK regulations in the event of Brexit.

To overcome this gap, FINMA issued new guidance 01/2019 on 21 February 2019 provisionally recognising the UK regulations that will apply upon Brexit, namely the Over the Counter Derivatives, Central Counterparties and Trade Repositories Regulations 2018 (the EMIR Transposition Act) which transpose EMIR into domestic UK law with a number of minor formal changes as being equivalent to Swiss legislation, when the EMIR Transposition Act is passed by the UK parliament.

As a practical matter, however, the possibility of relying on substitute compliance under the FMIA will only apply to central clearing and risk mitigation obligations. Indeed, to this date, FINMA has not recognised any trade repository as being able to accept trade reports under EMIR (or under the EMIR Transposition Act).

Big Gap: Recognition and Enforcement of Judgments under the Lugano Convention

From a legal standpoint, the biggest gap following Brexit will come from the fact that the UK will cease to be bound by the Lugano Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters of 30 October 2007 (Lugano Convention).

The Lugano Convention was signed by the EU, Denmark, Iceland, Norway and Switzerland. Upon a hard Brexit, the UK will cease being a State bound by the Lugano Convention and, consequently, judgments issued in the UK will neither receive automatic recognition nor be subject to the enforcement procedure provided by the Lugano Convention, but will need to be recognized and enforced under the Federal Act on Private International Law of 18 December 1987 (PILA; SR 291). This is a much more lengthy and cumbersome process, making the choice of English courts potentially less attractive for contracts with Swiss or European counterparties.

Initiatives are underway to extend the Lugano Convention to the UK after Brexit. However, it is unlikely that they will reach a conclusion in the event of a hard Brexit. Therefore, litigants should expect delays and complications in this area.

Outlook

Overall, while Brexit will yield its share of uncertainty and changes, the impact of it on Swiss-UK relationships across the financial industry is largely manageable from a regulatory perspective and with the Swiss-British Treaty on Direct Insurance Other than Life Insurance of 24 January 2019 and FINMA Guidance 01/2019 the main gaps have already been filled. From a practical perspective, the main concern will be the recognition and enforcement of judgements following a hard Brexit, which will be more cumbersome from a Swiss point of view.

Beyond the regulatory impact, however, as financial institutions reconsider their business model to offer services within the EU and shift teams from the UK to other countries in the EU, it may be necessary to review the set-up used to offer services in Switzerland to ensure that branches and representative offices continue to be linked to the correct entities and if needed apply for new licences in Switzerland if teams there are no longer integrated in the current legal entity but shifted to another entity within the EU.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Rashid Bahar
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions