(Bloomberg) -- The City of London is getting a warning from Switzerland about just how fraught its dealings with the European Union could become after Brexit.

Officials in Brussels and Bern are holding stock trading hostage to a broader agreement on their economic relationship, including issues like immigration and wage laws. The two sides may yet work out a deal before a year-end deadline, but the takeaway for future Brexit talks is already clear: a seamless European equity market is not anything to be taken for granted.

“This is a very precarious situation and potentially very damaging for the U.K.,” Alasdair Haynes, chief executive officer of Aquis Exchange Plc, a London-based equities-trading firm, said in a phone interview. “This is a very depressing situation.”

The root of the Swiss-EU spat on equity markets is the same so-called equivalence process that the EU will use to decide if U.K. investment banks, hedge funds and trading firms can do business in the bloc after Brexit -- assuming Prime Minister Theresa May beats the long odds and finds a way to pass the withdrawal deal through the U.K. parliament. In that system, Brussels policy makers get the power to review a foreign country’s rules to determine if they are equivalent to their own and tough enough to grant access to non-EU firms. The decisions, which can take years to reach, come with strings attached and can be revoked on short notice.

Talks began in 2014 on the terms of the wider EU-Swiss relationship and unless there is progress by the end of the month, EU policy makers are threatening to cut off Zurich’s SIX Swiss Exchange AG. In return, the federal government in Bern has vowed retaliatory steps to repatriate trading in Swiss shares from EU-based venues run by companies such as Cboe Global Markets Inc. and London Stock Exchange Group Plc.

Read more: How ‘Equivalence’ Stands to Shape Post-Brexit Banking: QuickTake

Switzerland is planning criminal penalties unless EU firms comply. The EU is weighing next steps as the clock ticks down. Frustration is rising among European investors, who see a lesson for London.

In late 2017, the EU deemed Switzerland’s equity rules to be up to European standards and extended access to the bloc until the end of 2018. At that point, the Swiss were told that further access would depend on progress being made on the broader economic agreement.

“It was clearly a sign towards the Brits to say: ‘Look, we will be extremely tough with equivalence,’” Karel Lannoo, chief executive of the Brussels-based Centre for European Policy Studies, said in a Dec. 4 phone interview. “Equivalence decisions will be used for political reasons.”

The City of London’s lobbying army and the U.K. government are pressing hard for the future financial relationship to allow a more level playing field in negotiations over equivalence to prevent the kind of situation now facing the Swiss exchange where the EU can decide unilaterally.

So far though, U.K. and EU negotiators have pledged only to consult and be transparent and say that they will reach equivalence decisions in their own interests.

“The existing equivalence framework is patchy, precarious and politicized,” said Catherine McGuinness, policy chair at the City of London Corporation. “We hope to see considerable improvements to the existing regime when Brexit negotiations shift focus to the future trade relationship.”

--With assistance from Viren Vaghela, Catherine Bosley and Alexander Weber.

To contact the reporter on this story: Silla Brush in London at sbrush@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, James Hertling, Patrick Henry

©2018 Bloomberg L.P.

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