The entry into force of the European Union Prospectus Directive, the European Union's (EU) decision to require companies to adopt international accounting standards, and the adoption in December 2004 of the Transparency Directive constituted significant milestones in the development of a unified capital market in the EU. The new regulations will soon allow investors to benefit from enhanced and more easily comparable disclosure documents. Issuers will benefit from the passporting regime, which will simplify EU-wide public offerings and allow them to tap into larger liquidity pools.

These benefits will, however, come at the price of material increases in the cost to issuers of preparing disclosure documents, the administrative burden of keeping these documents up to date, and probable delays in launching retail-targeted debt securities. Infrequent EU and non-EU issuers will probably bear the bulk of these costs. Non-EU issuers are also confronted with uncertainty as to which accounting standards will ultimately be recognised as equivalent to the International Financial Reporting Standards (IFRS). They are, therefore, facing the risk of expensive account restatements or reconciliations.

The Swiss Stock Exchange (SWX) has identified this situation as an opportunity to attract issuers – particularly non-EU issuers – from the main eurobond exchanges to its all-electronic and highly integrated market. It has taken steps in its bid to position itself as a credible alternative to London or Luxembourg for those issuers who feel that the benefits of the new EU regime do not offset the increased costs of compliance.

First, the SWX has increased the number of currencies in which bonds could be traded on its market.

Under earlier policies, only bonds denominated in Swiss Franc, US Dollar or Euro were eligible for trading. The new regime adds several currencies to this list, including the Canadian and Australian dollars, the yen and sterling.

Second, the SWX has significantly relaxed its requirements as regards governing law and places of jurisdiction. Under the current regime, which applies until the end of January 2005, listed bonds must be governed by Swiss law. Exceptions are made for medium-term note (MTN) programmes, sovereign debts and asset-backed securities. However, an alternative place of jurisdiction in Switzerland might be required. The new regulations put an end to this regime, which is unattractive to most foreign issuers. They allow the listing of debt securities governed by the laws of any OECD (Organisation for Economic Cooperation and Development) member state. A place of jurisdiction in Switzerland is not required, provided that the courts of the state whose legal system governs the terms from the bonds have jurisdiction. The same principles apply to guarantees and keepwell agreements of third-party guarantors. The implications of the application of foreign law must, however, be disclosed in the listing prospectus.

Third, the SWX has made it possible for issuers to register MTN programmes with the SWX. Once a programme is registered, listing only requires submission of a pricing supplement. This is a significant departure from the current practice, which only allows the listing of individual bond issues based on a stand-alone prospectus.

Fourth, the SWX allows issuers to incorporate by reference into their listing prospectus certain voluminous documents, such as financial statements or programme circulars.

Finally, the SWX has adopted transitional provisions intended to help issuers who wish to de-list from EU-regulated markets to re-list their securities in Switzerland. The migration can be made based on an abridged listing prospectus.

The new rules are not the first attempt by the SWX to capture trading in foreign issuers' bonds. Since 1998, the SWX has specifically dedicated one of its market segments to the trading of bonds that are already listed on a foreign stock exchange recognised by the SWX.

These bonds, however, are not deemed to be 'listed' on the SWX for regulatory purposes. Admission to trading does not require an application or consent of the issuer and it consequently does not trigger any ongoing disclosure duties. By contrast, the new rules provide for a listing of the relevant bonds on the SWX. Such a listing can only occur upon request of the issuer and entails significant on-going disclosure obligations.

It is too early to tell whether the new regime will allow the SWX to capitalise on the foreign issuers' unwillingness to comply with the new EU regulations.

One factor of uncertainty in this respect lies in the willingness of foreign issuers to give up on the possibility of offering their securities to the public in the EU. Under the Prospectus Directive, any offer of securities to the public in a member state requires – subject to certain exceptions – the publication of a prospectus (required particularly if more than 100 persons are being solicited in any member state). However, offers addressed solely to qualified investors benefit from a general exemption. Issuers whose securities are listed in Switzerland will therefore be in a position to tap into the primary market of professional investors without having to comply with the EU prospectus requirements, with the benefit of a liquid secondary market for their securities.

For the SWX, attracting eurobond trading to Zurich might not be the only important question raised by the new EU regulations. The regime that will apply to equity trading, and in particular to virt-x and to the issuers whose securities are traded on this exchange, will be also relevant.

Virt-x is a wholly-owned subsidiary of the SWX and a recognised investment exchange supervised by the Financial Services Authority in the UK. It was launched in 2001 in an effort by the SWX to create a pan-European equity market for blue chips from London. To achieve this goal, the SWX transferred the trading of the SMI securities – the Swiss blue-chips – to virt-x. At the time, issuers were told that this measure would only have marginal regulatory implications.

This assumption, however, has become increasingly inaccurate as the new EU regulations have developed.

Issuers whose shares are traded on virt-x are now potentially caught into the EU regime. Swiss issuers, as non-EU issuers, are confronted with the extremely challenging question of electing the appropriate 'lead regulator' under the Prospectus Directive. They must also make the difficult decision either to continue being traded on a regulated market in the EU and comply with the new demanding EU regulatory requirements, or to seek to move their listing back either to Switzerland or to a non regulated market. Virt-x – and the SWX – face similarly difficult choices. If virt-x remains in the EU as a regulated market, issuers might decide to transfer their listing to similarly regulated but more prestigious EU marketplaces such as the London Stock Exchange (LSE).

On the other hand, repatriating all trading to Switzerland might also lead to the defection of certain issuers, who might wish to keep an unlimited access to the European securities markets. The SWX has been holding discussions with issuers and reviewing its options in the past few months. It currently seems to consider creating a non-regulated market alongside its London regulated market, where issuers could keep on being traded without the need to comply with the EU directives.

Given the uncertainties as to how the directives will be implemented by member states and the numerous implications of the new regulations for the Swiss markets, it is difficult to identify and anticipate trends. The increased interest among foreign issuers in the Swiss marketplace would certainly trigger a renewal of activity for capital market specialists in Switzerland. However, Swiss firms might find themselves competing with foreign players on this market.

Switzerland is traditionally liberal in the way it regulates incoming cross-border financial services. It has been liberalising its market lately where other jurisdictions, such as Germany in particular, have taken steps to protect their own.

In May 2004, the Swiss National Bank revoked its regulations setting out the so-called 'anchor principle' – the requirement that issues of Swiss Franc-denominated debt securities, with a maturity of more than 12 months, be lead-managed from Switzerland by banks or broker-dealers regulated by Swiss authorities. Swiss Franc denominated bonds issues can consequently now be lead-managed from outside Switzerland and be subject to foreign law.

Moreover, the SWX does not reserve the ability to act on behalf of issuers to Swiss firms. Persons domiciled outside Switzerland can also be granted the status of 'recognised representative' by the SWX. As a result, offerings and listing applications could – at least in theory – be carried out from outside Switzerland.

Andreas von Planta is a partner and Jacques Iffland a lawyer at Lenz & Staehelin in Geneva.