SWITZERLAND
A EUROMONEY SURVEY - MARCH 1996
INTRODUCTION
Stable political, economic and social conditions, a strong Swiss franc and the efficiency and know-how of the Swiss institutions have made Switzerland a top-ranking financial centre. Swiss securities are included in any significant international investment portfolio and volumes from overseas investors continue to increase. Switzerland has the third-largest equity market in Europe with a market capitalization in 1995 of over Swfr458.6 billion and a turnover of approximately Swfr374 billion for domestic equities.
Over the past five years the Swiss market has undergone tremendous changes and its market participants can now take full advantage of one of the world's leading technically-advanced infrastructures. Today, the Swiss financial network electronically links SOFFEX (The Swiss Options and Financial Futures Exchange), EBS (Electronic Stock Exchange), SECOM (SEGA communication system), SIC (Swiss interbank clearing) and Telekurs (market information provider), thereby increasing the liquidity and transparency of the market and reducing settlement risk to a minimum. These developments could only be achieved through extraordinary cooperation between the leading Swiss financial institutions and the longsightedness of the federal and cantonal bodies.
Standardized options and futures, ranging from options on individual shares and index-linked options to index- and interest-linked futures contracts, are traded on SOFFEX, which started in 1988 and ranks amongst the leading European derivatives exchanges. Trading and clearing are fully integrated and automated.
EBS commenced the first phase of its operations with the trading of foreign equities on December 8 1995. It is a computerized and continuous order-driven trading system, replacing the existing exchange floors of the three regional exchanges (Zurich, Basle and Geneva) and assuming their central tasks. The next phases will occur later in 1996. The floors will finally cease to exist when the remaining products are also traded through EBS. The electronic exchange will enable all market participants to have access to a central pricing mechanism and order size will be visible via computer screen. As was the case under the old open outcry system, the investors still place their orders with a bank, and in this respect the new electronic exchange does not affect them. Nevertheless, the investor is indirectly affected by numerous changes such as new trading hours (from 9:30am to 4:30pm) and compulsory trading of small and middle-sized transactions. For investors, the main advantage of EBS is a fairer market due to the increased transparency which results from the continuous reporting of prices as well as volumes. These changes will not only lead to a greater flexibility in the operation of the Swiss stock exchange, but, above all, to greater efficiency in the back offices.
With the introduction of EBS, settlement on a rolling basis of trade date plus zero becomes a technical possibility. On the completion of automatic trade matching on EBS, settlement in SEGA takes place without separate settlement instructions from the respective EBS members. SEGA, the Swiss securities clearing corporation, was founded in 1970 as a joint undertaking by Swiss banks, with the patronage of the Swiss Bankers Association. The company is owned by some 160 Swiss banks and no one bank possesses a majority stake. SEGA provides for collective custody of eligible Swiss securities and for clearing services. Securities are immobilized and change of ownership takes place through a book-entry system. Custody, clearing and settlement-related payments are made via electronic link to SIC, which is operated by Telekurs, owned by the Swiss banks and guaranteed by the Swiss National Bank.
CLEARING AND SETTLEMENT
On a consolidated level, the securities industry has, for a number of years, been using the nine recommendations on
clearing and settlement, issued by the Group of Thirty as a benchmark for the service quality offered by a national market as a whole.
At the time the recommendations were published in 1989, Switzerland was in the comfortable position of already meeting six out of the following nine recommendations:
*Trade comparison for direct market participants
*Trade comparison for indirect market participants
*Central securities depository
*Trade netting system
*Delivery versus payment
*Same day funds
*Rolling settlement
*Securities lending and borrowing
*International securities identification number (ISIN) and other ISO security standards.
Today, Switzerland meets all but recommendation number two, that is, trade comparison for indirect participants. This is due to the prevailing Swiss market practice of banks acting as principal (for their own account), as an effective contracting party and as a member of the stock exchange.
In a series of international conferences organized by the International Society of Securities Administrators (ISSA) last year, 35 national markets took the opportunity to present status reports about their compliance with the G-30 recommendations. Switzerland's report demonstrated forcefully that the very substantial joint-efforts of the Swiss securities industry were directed towards reducing settlement risk and improving the efficiency of market systems and procedures. With EBS and SECOM/SIC, Switzerland now has one of the most advanced and integrated trading, clearing and settlement infrastructures in the world. True, irrevocable real-time simultaneous exchange of securities and cash on a transaction-by-transaction basis takes place.
The G-30 status updates were an outcome of the ISSA conferences. The main purpose of ISSA's G-30 review was to amend the original recommendations, where appropriate, in order to reflect today's market demands more accurately. Some of the benchmarks were set higher. Switzerland once again meets most of the more stringent criteria, which ultimately benefits investors. Apart from EBS, the SEGA communications system SECOM, which has replaced the old SEGA system, is the key factor for this achievement.
Via SECOM, clearing and settlement with SEGA/Intersettle and its participants in Switzerland and abroad is effected by electronic book entry which is on-line and real-time. Users can trace the current status of settlement and payment transactions almost 24 hours a day. The unique simultaneous delivery-versus-payment facility provides for risk-free settlement between participants, in that securities and cash are available and blocked before the matched transaction is irrevocably settled. The market deadline for delivery-versus-payment instructions at SECOM/SIC is 2:00pm on value day. Free delivery instructions for same-day settlement can be input into the SECOM system up until the start of the end-of-day processing at 7:00pm. This procedure pertains to all SEGA-eligible securities, which include bearer and registered shares, bonds, listed mutual funds, rights etc. The settlement of Swiss registered securities is usually not influenced by the registration process.
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