Swiss bond trading report 2018

Regulation of bond trading: Setting the scene

The following chapter will provide an overview of the key regulatory requirements for trading professionally in securities in the form of a bond in Switzerland.

A bond in the form of a «security» in the sense of Art. 2 para. 1 lit. b FinfraG/FMIA is offered at uniform conditions to multiple parties. Securities are, in other words, standardised, certificated and uncertificated financial instruments suitable for mass trading. They are thus either offered publicly in a similar structure and denomination or placed with more than 20 clients, unless they are being created specifically for individual counterparties.

A security in the form of a bond can trigger multiple legal consequences when being traded. These consequences are:

  • Persons professionally trading in securities will potentially have to apply for a licence as a securities dealer (the Swiss equivalent of an investment firm or broker/dealer).
  • Facilities allowing for the multilateral trading of securities require a licence as a stock exchange or multilateral trading facility (MTF).
  • Facilities allowing for the bilateral trading of securities must be operated by a duly licensed operator (the Swiss bilateral version of an OTF,which replaces the Systematic Internaliser in the EU).
  • The public offering of securities requires a prospectus. The listing of securities on a trading venue (stock exchange and MTF) also requires the filing of a listing application and the creation of an accompanying prospectus.

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Martin Liebi
Director, PwC Legal Switzerland
Tel: +41 58 792 28 86
martin.liebi@ch.pwc.com

Restrictions related to the sale, distribution, or marketing of CFD and Binary Options to EU-domiciled retail investors also for Swiss-based financial market participants coming soon

The European regulator ESMA has announced that soon restrictions related to the sale, distribution, or marketing of CFD and Binary Options to retail investors domiciled in the EU will become effective. The prohibitions will also apply  to Swiss based financial market participants engaging in such activities purely on a cross-border basis. The restrictions will become effective one month in case of Binary Options respectively two months in case of CFD after their publication in the Official Journal and will last for three months, but might be prolonged thereafter. Affected market participants have thus some limited time to prepare.

Restrictions applicable to contracts for difference (CFD)

Affected by the restrictions are contracts for differences (CFD), meaning any derivative other than an option, future, swap, or forward rate agreement, the purpose of which is to give the holder a short or long exposure to fluctuations in the price, level, or value of the underlying that must be settled in cash or may be settled in cash at the option of one party other than by reason of default or another termination event. Warrants and turbo certificates are not affected.

The restrictions will consist of the following measures:

  • Leverage limits: leverage limits will apply on the opening of CFD positions. The following initial margin requirements will apply:
    • 3,33% if the underlying is composed of any two of the following currencies: USD, EUR, JPY, GBP, CAD, or CHF.
    • 5% when the underlying is one of the key mentioned international indices, a currency pair of at least one of the currencies mentioned above, or gold.
    • 10% when the underlying is another commodity or another equity index.
    • 50% if the underlying is a cryptocurrency.
    • 20% if the underlying is a stock not listed above.
  • Margin close-out rules per account: margin close-out rules per account and not per position apply if the sum of the funds in the CFD trading account and the unrealised net profits of all CFD positions connected to that account fall to less than half of all initial margins of these CFD-positions. Margin close-out rules of 50% per position are still applicable.
  • Negative balance protection on a per account basis: negative balance protection on a per account basis limits a retail investor’s aggregate liability for all CFDs connected to a CFD trading account with a CFD provider to the funds in the CFD trading account.
  • Restrictions of incentives of CFD trading: no monetary benefits can be provided to retail investors other than the proof of a CFD. These restrictions will apply to all existing and prospective clients.
  • Risk warning: appropriate risk warnings must be included in all communication and publications containing the percentage of retail investors that lost money over the preceding twelve months.

Restrictions applicable to Binary Options

Restrictions will also apply to Binary Options, meaning any cash settled derivative in which the payment at close-out or expiry of a predetermined fixed monetary amount or zero depends on whether one or more specified events in relation to the underlying occur at, or prior to the derivative’s expiry. There will be a three-month prohibition on the marketing, distribution, or sale of Binary Options to retail investors domiciled in the EU.

Contact Us

Martin Liebi
Director, PwC Legal Switzerland
Tel: +41 58 792 28 86
martin.liebi@ch.pwc.com

 

A primer on the regulation of the trading in cryptocurrencies and the asset management related to cryptocurrencies in Switzerland

Cryptocurrencies, which are based on distributed ledger technology, have gained importance in financial services in the recent past. This primer seeks to give an overview of the key obligations under Swiss regulatory laws related to:

  • Trading in cryptocurrencies
  •  Initial coin offerings (ICOs)
  • Entities trading in cryptocurrencies
  • Asset management related to cryptocurrencies
  • Anti-money laundering obligations

Trading in cryptocurrencies is increasingly subject to regulation on multiple levels, namely:

  • Trading
  •  ICOs
  • Entities trading in cryptocurrencies
  • Asset management related to cryptocurrencies

Payment tokens, exchange of cryptocurrencies into fiat money, custody wallets, banks, securities dealers and asset managers are generally subject to anti-money laundering requirements, such as registration, supervision and identification of counterparty requirements. Anti-money laundering obligations are the basic regulatory requirements that apply to most entities trading in cryptocurrency markets. Depending on their additional activities, they might require a licence as a bank, securities dealer (Swiss version of an investment firm), bilateral organised trading facility (OTF) or asset manager, or a combination of these licences. Switzerland is also planning to introduce a new licence category in the near future, called fintech-bank. Licences are required in the cases listed below.

  • Accepting client deposits, in particular when issuing OTC derivatives which are not securities, generally requires a banking licence. The banking licence is the highest regulated category of financial market participation. Cryptocurrencies and their associated private keys may be deposits under the Swiss Banking Act.
  • Trading in cryptocurrencies which are securities, either on behalf of clients or on one’s own account (if certain turnover thresholds are being exceeded), generally requires a securities dealer licence. The licensing requirements also apply to the entity’s public issuing of derivatives. Bilateral systematic internalisation of cryptocurrencies and related derivatives or financial instruments is subject to additional regulatory requirements under the Swiss Financial Market Infrastructure Act (FMIA).
  • Asset management activities related to Swiss and foreign collective investment schemes regarding cryptocurrencies and related financial instruments generally require a licence. The distribution of collective investment schemes and the representation of foreign collective investment schemes also require a licence. Individual portfolio management and advisory activities are, under the current regulatory regime, not subject to a licensing requirement (except for AML registration). However, this is likely to change under the new regulatory regime planned to enter into force soon.

Trading in cryptocurrencies that are derivatives may be subject to multiple obligations depending upon the status of the counterparties involved, such as reporting and risk mitigation (trade confirmation, portfolio reconciliation, portfolio compression, dispute resolution and valuation, as well as initial and variation margins).

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Martin Liebi
Director, PwC Legal Switzerland
Tel: +41 58 792 28 86
martin.liebi@ch.pwc.com

The new European rules for securitisations

The EU has enacted a new set of regulations applicable to securitisations, and a more specific framework for simple, transparent, and standardised securitisations (“the regulation”).

A securitisation is any transaction or scheme that tranches the credit risk associated with an exposure or pool of exposures. Payments in the transaction are dependent upon the performance of the exposure or of the pool of exposures and the subordination of tranches determines the distribution of losses. The regulation is the next building block in the ambitious capital market union (CMU) project and is directly applicable without transposition into national legislation of the EU member states beginning as of 1 January 2019.

The new EU rules on securitisations will affect originators, sponsors, original lenders, special purpose vehicles, institutional investors and anyone selling securitisations to retail investors without differentiation whether domiciled in the EU or in a third country such as Switzerland. There are general rules applicable to all securitisations. Other rules are only applicable to certain categories of securitisations called simple, transparent and standardised securitisations, and the sub-category asset backed commercial paper securitisations. Non-compliance with the rules can be sanctioned with fines of up to EUR 5m. or 10% of the total annual net turnover.

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Contacts

Martin Liebi
PwC | Dr.iur., LL.M., Attorney-at-law
Legal FS Regulatory and Compliance Services | Head Capital Markets
Office: +41 58 792 2886 | Mobile: +41 76 341 6543
Email: martin.liebi@ch.pwc.com

Antonios Koumbarakis
PwC | Legal FS Regulatory and Compliance Services
Office: +41 58 792 4523 | Mobile: +41 79 267 8489
Email: antonios.koumbarakis@ch.pwc.com

A primer on the regulation of FX trading and the asset management of FX in Switzerland

Trading in currencies and FX financial instruments is increasingly subject to regulation on multiple levels:

  • Trading
  • FX spot transactions
  • FX financial instruments transactions
  • Entities trading in currencies and FX financial instruments
  • Asset management related to currencies and FX financial instruments

Trading in FX is subject to the FX Global Code which is not a mandatory law, but industry best practice. Trading in FX derivatives is subject to multiple obligations depending upon the status of the counterparties involved, such as reporting and risk mitigation (trade confirmation, portfolio reconciliation, compression, dispute resolution and valuation, as well as initial and variation margins).

Currency trading, money exchange activities, trading in bank notes and coins, as well as banks, securities dealers, and asset managers are generally subject to anti-money laundering requirements, such as registration, supervision, and identification of counterparties requirements. Anti-money laundering obligations are the basic regulatory requirements that apply to most entities trading in the FX markets. Depending upon their additional activities, they might require a license as a bank, securities dealer, bilateral organised trading facility (OTF), or asset manager or a combination of these licenses.

  • Accepting client deposits in particular related to FX or issuing OTC derivatives which are not securities generally requires a banking license. The banking license is the highest regulated license category.
  • Trading in FX derivatives, which are securities, either on behalf of clients or on one’s own account (if certain turnover thresholds are being exceeded) generally requires a securities dealer license. The licensing requirements also apply to entities publicly issuing FX derivatives. Bilateral systematic internalisation of FX derivatives and FX financial instruments is subject to additional regulatory requirements under the Financial Market Infrastructure Act.
  • Asset management activities related to Swiss and foreign collective investment schemes regarding FX and related financial instruments generally require a license. The distribution of collective investment schemes to non-qualified investors of collective investment schemes as well as the representation of foreign collective investment schemes also require a license. Individual portfolio management and advisory activities are, under the current regulatory regime, not subject to a licensing requirement (except AML-registration). This will however likely change under the new regulatory regime planned to enter into force soon.

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Contact Us

Martin Liebi
Director
Tel: +41 58 792 28 86
martin.liebi@ch.pwc.com

FCA publishes position limits for multiple commodities derivatives

The new MiFID II regime for commodities trading will introduce as of the 1st of January 2018 position limits for certain commodities contracts. A position limit is the maximum size of a position a person/group can hold in any commodity derivative traded on a European Economic Area (EEA) trading venue, in same commodity contracts on other trading venues and in economically equivalent over the counter (EEOTC) contracts. The position limits apply also to non-EU domiciled entities, such as Swiss based commodities traders. The position limit regime introduces two buckets: The spot month contract being the commodity contract with the closest maturity and the other months’ contracts combining all the remaining commodity contracts. The position limits apply generally to the aggregated position of a parent company and their subsidiaries. The position limits are being set by the competent national authorities upon prior consultation of ESMA. The FCA has published on the 24th of October the position limits for multiple commodities contracts traded on UK based trading venues. These are:

There is not much time left to prepare for the new MiFID II regime for commodities trading.

Please contact for further questions:

Martin Liebi
martin.liebi@ch.pwc.com

Silvan Thoma
silvan.thoma@ch.pwc.com

 

Breaking news: FINMA extends transition period for derivatives reporting of NFC- until 1st of January 2019

FINMA has decided to postpone the reporting obligation for small non-financial counterparties (NFC-) from 1st of April 2018 to the 1st of January 2019. The reporting dates for large (FC+) and small financial counterparties (FC-), large non-financial counterparties (NFC+) and central counterparties (CCP) remain unchanged.

Open Over-The-Counter (OTC)-derivatives positions must thus be reported as follows:

  • Beginning as of 1st of October 2017 if the counterparty required to report is a CCP or FC+.
  • Beginning as of the 1st of January 2018 if the counterparty required to report is a FC- or a NFC+.
  • Beginning as of 1st of January 2019 (instead of 1st of April 2018) in all other cases, except transactions between two NFC-, which do not have to be reported.

Exchanged Traded Derivatives (ETD) traded on an organized trading facility (OTF) or a trading venue must be reported as follows:

  • Beginning as of 1st of April 2018 if the counterparty required to report is a CCP or FC+.
  • Beginning as of the 1st of July 2018 if the counterparty required to report is a FC- or a NFC+.
  • Beginning as of 1st of July 2019 (instead of 1st of September 2018) in all other cases, except transactions between two NFC-, which do not have to be reported.

Please contact for further information

Martin Liebi
Director
Tel: +41 58 792 2886
martin.liebi@ch.pwc.com

EU Benchmarks Regulation and Market Impact as of 1 January 2018

The new EU Benchmarks Regulation (BMR) was published in June 2016 and most rules will apply as of 1 January 2018. The BMR introduces new compliance requirements for benchmark administrators, contributors, a12345nd users, with regard to interest rate, foreign exchange, security, commodity, and other benchmarks used in financial transactions. The BMR was enacted in response to public pressure resulting from the aftermath of the LIBOR scandals and follows the recommendations of the IOSCO and ESMA EBA Principles.

Executive summary

Functioning benchmarks are key to ensuring the smooth functioning of financial markets. However, they lead to conflicts of interest and other integrity issues on the part of contributors of input data and administrators. The scope of the BMR covers all published benchmarks which are used in the European Union with regard to associating financial instruments, financial contracts and/or fund managers. The BMR defines obligations and conduct requirements for both administrators and contributors to ensure market integrity. The Regulation has an extraterritorial dimension in cases where third country administrators request market access. Market access can be granted on the basis of equivalence, recognition, and endorsement by an EU supervised entity. All the legal requirements of the BMR will phase-in on 1 January 2018 and take effect on 1 January 2020 – except for the EURIBOR, which is subject to the BMR today.

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Please contact our experts on this topic for a free consultation:

Martin Liebi
E-mail: martin.liebi@ch.pwc.com
Tel. 0041 76 341 6543

Alexandra Balmer
E-mail: alexandra.balmer@ch.pwc.com
Tel. 0041 79 267 8104

Acquiring a Swiss financial institution or going IPO in Switzerland: Key steps and requirements for Chinese companies

Chinese companies are increasingly looking overseas for their expansion, and are considering the options that Switzerland can offer them.

Some may consider acquiring or investing in a Swiss-regulated financial institution, because of the current low prices of Swiss banking assets and Switzerland’s world class reputation as a financial centre. Others may look closely at an initial public offering (IPO) in Switzerland, because of the advantages associated with being listed on the Swiss stock exchange, such as its deep liquidity, high valuation multiples, outstanding international reputation, market-driven regulatory environment and high-calibre advisors.

In this article, we highlight some of the key elements to consider in any acquisition of a Swiss-regulated financial institution. This includes such entities as a bank, securities dealer, fund management company, asset manager of collective investment schemes or an insurance company (all referred to as “Target”). We also take a close look at launching an IPO in Switzerland.

Acquisition of a Swiss financial institution

Transaction Structure: A Chinese buyer can acquire a Target under Swiss law in many different ways, such as: (1) in a public takeover in the event that the target company is listed on a Swiss stock exchange; (2) a merger by means of an absorption or combination of multiple companies, (3) by purchase of shares (share deal); (4) an individual acquisition of assets (regular asset deal); (4) a de-merger by spinning of a business in exchange for shares in the acquiring company; and (5) an acquisition of assets and liabilities in bulk by means of a specific transfer agreement of selected assets and liabilities listed on an inventory.

The preferred transaction structure will depend upon the goals pursued by the acquisition and the riskiness of the Target. Share deals were the most preferred acquisition method prior to the financial crisis. However, asset and liability deals in bulk have recently replaced share deals. This is because they provide the ability to cherry-pick assets and clients and omit any potential non-quantifiable liabilities attached to ailing Targets, e.g. as a result of impending tax claims by foreign authorities directed at the Target.

Swiss banking secrecy: This feature of operating in Switzerland still has a high impact, and deserves special mention. It generally involves the protection of the secrecy of banking customers’ data. The practice of Swiss banking secrecy affects an acquisition on multiple levels. The names of the bank’s clients might neither be disclosed in the due diligence process nor on the inventory list to be submitted to the commercial register, in case of an asset transfer in bulk.

Regulatory treatment of a transaction by FINMA: The Swiss Financial Supervisory Authority, FINMA, must be informed in detail about any transaction related to a Target. It also has the right to approve such a transaction and to request additional information. FINMA is generally an approachable and reasonable regulator. Much can be gained by approaching FINMA proactively – preferably with a local representative — and clearly communicating the strategy pursued by the acquisition. In a merger or a substantial banking asset transfer, a new licence will have to be obtained from FINMA in case the entity resulting from the transaction will engage in an activity requiring supervision by FINMA.

In a share deal, anyone buying or selling directly or indirectly a participation of at least 10 per cent in the Target or having a material impact on the business activity of the Target must undergo an approval process with FINMA. The authority must also be notified of any later increase or decrease of such a participation exceeding or falling below 20 per cent, 33 per cent, or 50 per cent of the capital or voting rights. FINMA must also approve the purchase by any non-Swiss person or entity (e.g. Chinese) of a qualified shareholding in a Target. In case the Target becomes part of a financial group or conglomerate headquartered in China, adequate supervision in China is required to get FINMA’s approval.

IPOs for Chinese firms in Switzerland

Launching an IPO in Switzerland is a smooth and efficient process. Any IPO candidate has the choice between five main segments, each having different listing criteria and requirements for operating as a public company:

Main criteria for going public

Compliance with local law: The establishment, the articles of association, or the deed of partnership of the issuer must comply with the national law to which it is subject. The auditing body of the issuer must be admitted as an auditing company under state oversight or be subject to a recognised foreign audit oversight authority.

Track record: The issuer must have existed as a company for a minimum of three years and presented its annual accounts for the three complete financial years that precede submission of the listing application, such accounts being in conformity with the accounting principles to which the issuer is subject. Exemptions might, however, be granted.

Minimum capital requirements: Capital resources must amount to at least CHF25m (USD25.2m). If the issuer is the parent company of a group, this requirement refers to consolidated capital resources. A guarantor providing a guarantee can step in to fulfil this requirement.

Securities: At the time of listing, the securities must have been issued in accordance with the law to which the issuer is subject and must satisfy the provisions that apply to those securities. The form of those securities must also comply with the law that applies to both the securities and the issuer. The listing must comprise all of the issued securities in the same category. The proper trading of securities on the stock exchange must be ensured, and there must be rules on establishing legal ownership. Securities that are subject to approval or to restrictions with respect to potential purchasers may be listed if their tradability is guaranteed and there is no risk to the fulfilment of the transaction.

Financial statements: The issuer must have produced annual financial statements that comply with the financial reporting standards applicable to the issuer for the three full financial years preceding the listing application.

Free float: Distribution of equity securities must have reached an adequate level by the time of listing — at the latest. An adequate level of distribution is reached if at least 25 per cent of the issuer’s outstanding equity securities of the given category are in the hands of the public, and the capitalisation of the equity securities in the hands of the public amounts to at least CHF25m (USD25.2m) — or, if the capitalisation cannot be calculated due to lack of off-exchange trading, a projected capitalisation to the same amount.

Main requirements as a public firm

Financial Reporting: Depending on the chosen segment, the listed company will have to report financials based on Swiss GAAP, IFRS, or US GAAP, and on a semi-annual or annual basis.

Corporate Governance: The listed company will have to comply with certain basic requirements related to corporate governance and must report any changes to these requirements.

Ad hoc publicity: Any new information related to company matters that has the potential to materially influence the stock price of the listed company must generally be reported immediately in most segments, unless certain exemptions or reasons to postpone the disclosure apply.

Management transactions: Any transactions in stocks or options of the company’s management or closely related persons must be reported and disclosed in most segments.

In no segment, however, can insider lists be established.

The IPO process

The IPO process in Switzerland consists of five distinctive phases. The approval process at the Swiss stock exchange takes only approximately four weeks. Please refer to the chart below:

Please get in contact for your free consultation:

Martin Liebi
Director
Tel: +41 58 792 2886
martin.liebi@ch.pwc.com

Swiss securities and investment business – like trying your way through the jungle.

Doing securities and investment business in Switzerland can be like trying to find your way through the jungle. An expert at PwC offers new guidance for the uninitiated.

Switzerland poses unique challenges for companies intending to do business related to securities and financial services – not least because of the country’s independent status and simultaneous close ties with the European Union. For one thing, it’s not always immediately clear to the uninitiated whether an individual or company needs to be licensed to trade securities professionally. Companies often also need special guidance on what’s involved in marketing Swiss-based investment services to people in the EU, or how to comply with Swiss anti-money-laundering rules.

This lack of clarity has prompted Dr Martin Liebi, a legal expert at PwC specialising in the regulatory framework for investment firms and securities dealers in Switzerland, to write a concise but comprehensive guide to some of the most important regulatory aspects of engaging in financial services in Switzerland. A qualified attorney in both Zurich and New York, Martin is uniquely qualified to bridge the gap between Switzerland and other jurisdictions, and regularly guides companies though licensing in both Switzerland and the EU.

His new guide is entitled “Securities trading/execution in Switzerland: the Swiss regulatory framework for investment firms/securities dealers, options for accessing the European financial markets and recent Fintech developments. It covers a number of key areas:

  • The regulation of bond trading and execution (including the tricky question of whether people trading professionally in securities will need a securities dealer licence)
  • The regulation of investment firms trading professionally prior to the new Swiss Financial Services Act (with specific sections on Swiss-based and foreign dealers)
  • Information on the licensing, organisational, capital and reporting requirements for securities dealers
  • Information on direct electronic market access and the latest fintech developments relating to securities dealers
  • The regulation of investment firms and the relevant requirements under the new regulatory regime in Switzerland
  • The regulation of Swiss investment firms doing securities business on EU markets or serving clients in the EU
  • The Swiss anti-money-laundering rules (including how they apply to securities dealers, the requirements for identifying clients, controlling persons and beneficial owners, and the requisite organisation)

Probably not ideal bedtime reading, but a must-read for companies (and even individuals) who are considering doing financial business in Switzerland. Check out the guide here, or contact Martin Liebi for more details.