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.
However, since the process required to complete registration varies from company to company based on their specific and individual by-laws, the foreign investor may have some questions on this topic which deserves further explanation in the next section.
SWISS REGISTERED SHARES
On July 1 1992 the current shareholders’ rights law came into effect. The registered share market was liberalized and general sales restrictions regarding foreign investors were lifted.
Shareholders’ rights
When investing in registered shares quoted on the Swiss stock exchange, the investor buys not only the ownership of the security, but also the associated rights. Listed companies can no longer block the transfer of these rights to investors and on the correct lodgement of a registration form must accept the shareholder with rights and obligations. However, some companies’ articles of association may still limit the type of shareholder or the percentage of equity per shareholder. Should the company refuse full acceptance of the investor, they will be registered as a “shareholder without voting right”, but still receive the dividend and right to participate in corporate actions. Communications on voting eligibility are directed to the shareholder by the company.
Settlement procedures
In the past, all registered shares were physically settled between investors, banks and the companies, who acted as their own registrar. However, in 1988 SEGA introduced a new clearing facility for this type of share and it became possible for certain companies to settle their shares through SEGA. Today, depending on the company, there are three procedures by which stock exchange quoted registered shares can be settled.
The first and most common is delivery-versus-payment/book-entry settlement via SEGA. On settlement of the transaction, the custodian bank sends registration documents to the buyer for due completion, and the completed documents are then lodged with the company by the custodian. The shares remain in SEGA throughout the registration process (See diagram on page 18).
The second settlement procedure is basically the same as the first. However, the shares are physically held by the custodian and the selling shareholder’s name has to be removed from the company’s register before settlement is arranged. After settlement and registration formalities, share certificates are forwarded to the custodian bank for safekeeping.
The third method is for the few remaining non-SEGA-eligible registered shares, which are all physically settled via the company registrar. The shares are kept by the custodian bank.
It is important to note that registered shares which have been purchased but not duly registered can be sold at any time, regardless of the registration status.
Registration process
Investors should duly complete and return the form to the custodian bank, usually within 20 working days of receipt. If the custodian does not receive the investor’s reply within this period, a reminder is usually sent. If the reply is still not forthcoming after a further period of time, custodians will continue to hold the shares in unregistered form. However, the shares can still be registered at a later date, when a duly completed registration form is received. Voting rights may not be exercised until completed registration forms have been lodged and accepted by each individual company.
Furthermore, Swiss corporation law mandates that registrars have 20 days to respond to registration requests otherwise they are considered to be granted.
Registration names
Usually companies require their shares to be registered in the name of the beneficial owner, though some companies may have a special nominee arrangement and will allow registration in fiduciary names. The nominee can either be a person or a company and is usually accepted with voting rights if they are prepared to give details such as beneficial owner’s name, nationality, place of domicile and number of shares.
Shares can also be held in a “disposable position”, which means that the shares are held at the company at the disposal of the custodian on a client’s behalf. If the investor does not complete the registration form within the required time-frame, the securities are recorded as being in a disposable position at the custodian bank and at the company register. The custodian is not obliged to disclose names/details of the investor to the company. The investor retains the right to receive a dividend, but forfeits voting rights.
Market participants are looking at the existing practice of each Swiss company having its own registration form and the associated administration formalities in the market. A new development is a standardized one-time application for a registration form, which will also include a power of attorney. If this form is deemed acceptable by Swiss companies, the investor will only need to complete and sign it the one time and their custodian will be able to automatically register any further purchases of shares. However, to date only a few Swiss companies have given their consent to use this form.
With the present integration of all but a very few listed shares into the SEGA clearing system, and the growing automatic exchange of data between custodians and the companies, the handling of Swiss registered shares in the near future will be more transparent to foreign investors.
CUSTODY
Collection of entitlements
The Swiss market does not usually differentiate between the ex-date and the payable date; they are the same, with very rare exceptions. The custodian receives the dividend/interest funds either from the principal agent or from SEGA, if the securities are re-deposited there. Swiss custodians usually credit clients’ cash accounts under re-serve, with income and good value, that is, dividends and interest due on securities held in the clients safe-custody account/s on the payable date. The same principle applies to the redemption of bonds and notes on their expiration date. Professional Swiss custodians also offer a dividend claim service. This will be supported by a future SEGA development, whereby automatic dividend payments will be made for cum-dividend transactions within a certain period of time after ex-date. Based on the trade date, the dividend for the seller will be cancelled and the buyer will be credited with the dividend.
Tax reclamation
In Switzerland a tax of 35% is automatically levied on all income from dividends and interest on Swiss securities, with no relief at source. Interest on Swiss franc bonds issued internationally (Eurobonds), is generally not subject to withholding tax. The withholding tax is not related to the nature and domicile of the beneficial owner’s securities, nor is it legally or operationally linked to ownership of the cash account. The reclaiming of this tax is dependent on the tax treaty concluded between Switzerland and the domicile of the beneficial owner. As a rule, the tax relief takes the form of a refund.
Tax returns must be signed by the beneficial owner or his representative. The forms used are defined under the current double taxation treaties between Switzerland and the domicile country of the beneficial owner. Due to this process, claimants generally file the appropriate refund claim forms directly with the Swiss federal tax administration in Berne. The reclaiming time period is within three years from the end of the calendar year in which the income was received. Refunds for more than one year may be claimed on the same form. Claims are usually dealt with by the Swiss tax administration within three to six months of being lodged. The Swiss tax authorities will only remit a cheque to claimants who do not hold a cash account with a Swiss bank.
Corporate actions
In Switzerland the most common corporate actions are capital increases, bonus issues, stock splits, stock option/cash dividends and conversion of bonds. On the official announcement date of a corporate action, the custodian bank provides its clients with information such as an announcement date, a description of the action and restrictions, entitled share positions, response deadlines and taxes or deductions that may apply. Corporate actions are executed according to clients’ instructions. The rights claim process is similar to the dividend claim process, and in the future will be supported by the SEGA development mentioned under entitlements for cum-dividend transactions.
Proxy voting
Swiss companies have to announce details on annual general shareholders’ and/or any other extraordinary meetings at least 20 days before the meeting. Custodians in turn advise investors of the meetings. The official publication with full agenda/proposals is mostly in the company’s native language, ie German, French or Italian. Only in a few cases is it in English. Swiss custodians with international institutional clients usually provide a short English translation with all the relevant information.
Market practice in Switzerland differentiates on the information flow for bearer and registered shares. Bearer shareholders receive the respective documentation from their custodian bank. Registered shareholders receive information direct from the company. However, as mentioned under the shareholders’ rights section, until investors of registered shares have lodged a duly completed registration form and been fully recognized by the company, the voting right cannot be exercised. Should the company refuse full acceptance, the investor will be registered as a “shareholder without voting right”, and will be directly advised of this fact by the company.
If bearer shareholders cannot personally attend the shareholders’ meeting, they can give their proxy vote to their custodian bank, or to the official independent proxy representative.
CONCLUSION
After the steps taken by the Swiss financial community over the past few years, 1996 will be a year of consolidation and system optimization. Due to all these achievements, Switzerland will be in an excellent position to meet the ever increasing demands of the professional international investor.
The Swiss market is one of the best organized, and also has the flexibility to cope with the ongoing developments in various current and future financial products, as well as the related communication needs. Therefore Switzerland will undoubtedly confirm its traditional leading position in the cross-border investment streams.
Union Bank of Switzerland
Bahnhofstrasse 45
CH-8021 Zurich
Switzerland
SWIFT: UBSWCHZH80A
Telex: 813 811 UB CH
Custody servicesMarc Rüttimann
head of custody services
Tel: +41 1 235 31 15
Facsimile: +41 1 235 34 05
Ronald Akkermans
head of relationship management
Tel: +41 1 235 65 01
Facsimile: +41 1 235 34 05
Doris Rein
relationship manager
Tel: +41 1 235 50 38
Facsimile: +41 1 235 34 05
Securities borrowing and lendingFelix Oegerli
head of securities lending and prime brokerage
Tel: +41 1 235 61 04
Facsimile: + 41 1 235 32 32
Martin Schoenenberger
head of global marketing coordination
Tel: +41 1 235 75 44
Facsimile: +41 1 235 84 12
