The legislation governing French capital markets is designed to promote a flexible framework for issuing or trading capital market products while providing a high degree of legal certainty together with a strong supervisory framework.
i Legislative framework
French securities legislation, together with its capital market legal framework, has experienced strong development in the context of both national and EU initiatives. The stock exchange is of course a key element of the French capital market infrastructure. Stock exchanges in France are operated by Euronext. Euronext is the result of the merger of the Amsterdam, Brussels and Paris exchanges in September 2000, and subsequently, in 2002, of the Portuguese exchange. Euronext also acquired Liffe in 2002. Subsequently, Euronext and the New York Stock Exchange were combined into a new entity called NYSE Euronext; since then Euronext has been floated on the market and is a listed company; 30 per cent of its share capital is owned by European banking institutions.
Over the past few years, many EU directives related to capital market transactions (e.g., the Takeover Directive, the Prospectus Directive, the Market Abuse Directive, the Transparency Directive and the AIFM Directive) have been implemented under French law, in addition to the Markets in Financial Instruments Directive (MiFID), which came into effect on 1 November 2007, and to Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) and Capital Requirement Regulation (CRR).
ii Law governing the issuance of debt and equity interests
The general legal framework for securities offerings and the sale and subscription of securities traded on a stock market is enshrined in the Monetary and Financial Code (M&FC), the general regulations of the French Financial Market Authority (RG-AMF) and related implementing instructions. European regulations, and in particular the Prospectus Regulation (recently amended) are also part of the French legal corpus regarding capital market transactions since they apply directly in France.
When securities are issued and distributed on a cross-border basis, several laws may be applicable: the issuer’s own law applies to certain matters, while other laws may be applicable to the terms and conditions of the relevant securities or to the distribution and placement of such securities. If the securities are listed, the relevant stock market law may also be applicable.
A French court would apply the securities issuer’s own law, lex societatis to the rights of the holders of equity securities. Capacity and authorities matters would also be governed by the lex societatis in respect of debt securities. Therefore, the issuance of equity and debt securities by a French company would in this respect be governed by French law, and in particular by the French Commercial Code, the M&FC and RG-AMF.
Contractual terms of bonds are subject to party autonomy, and if the transaction is international or cross-border, bonds may be governed by a foreign law chosen by the parties subject to such provisions as may be mandatory from a French public policy perspective.
As contemplated by Article 212-1 of the RG-AMF, before conducting a public offer of securities or seeking admission of securities to trading on a regulated market within the European Economic Area (EEA) and by extension in France, persons or entities making a public offer of securities in France need to prepare a draft prospectus and submit it for approval to the Financial Market Authority (AMF) or the competent supervisory authority of another Member State of the European Community or a state party to the EEA agreement.
Where the AMF is not the competent authority to approve the prospectus, the supervisory authority that approved the prospectus will send the AMF2 the certificate of approval and a copy of the prospectus, together with a French translation of the summary note, where appropriate.3 Dispatch of that certificate to the AMF will be made at the request of the persons or entities seeking to offer securities to the public or to have securities admitted to trading on a regulated market in France.
A French issuer seeking admission of securities outside of the EEA, however, would not be required to obtain such approval from the AMF or from the competent supervisory authority of another EEA Member State where no offer to the public is contemplated in France or other EEA Member States.
iii The AMF
The Autorité des Marchés Financiers (the AMF), which is the French market authority, was created by Law No. 2003-706 dated 1 August 2003.
The AMF is divided into two bodies – a board and an enforcement committee – that operate separately and independently from one another. The board sets the AMF’s policy and supervises its oversight function. It also acts as regulator and approves any amendment to the RG-AMF. In cases of infringement of the provisions of the M&FC or of the RG-AMF, the Secretary General of the AMF directs controls and investigations. At the end of an initial inquiry phase, the board opens a sanction procedure and may submit the grievances to the enforcement committee. Following an investigation procedure led by the enforcement committee, the latter may impose sanctions.
According to Article L621-15 of the M&FC, the enforcement committee may impose sanctions against the professionals controlled by the AMF, the individuals under the supervision of these professionals and other persons acting on their own.
Appeals against decisions of the sanction committee are heard by the Paris Court of Appeal, except for sanctions of an administrative nature concerning regulated firms or individuals (credit institutions, investment firms, direct marketers, investment advisers, custodians, members of regulated markets, etc.), which are heard by the Council of State.4 The commercial courts retain jurisdiction for cases that are not under the supervision of the AMF, and litigation before the commercial courts represents a large proportion of the decisions relating to the financial markets.
The four roles entrusted to the AMF (regulation, authorisation, supervision and enforcement) place that authority at the core of the French financial regulatory system. The AMF sets the principles of organisation and operation applicable to market operators, such as Euronext Paris; authorises the creation of open-end and closed-end funds; and regulates capital market activities and disclosures by listed companies. It also extends visas for issues of debt and equity securities offered to the public or to be traded on an exchange.
In addition, an AMF ombudsman, which provides assistance to non-professional investors (consumers and non-profit associations), has been established along the same lines as the Swedish ombudsman model.
The creation of an AMF vested with strong regulatory supervisory and enforcement authority was aimed at strengthening protection of investors. In this regard, several decisions of the Supreme Court during the past few years have endorsed this position5 and have strengthened the advisory duties of the banks to inform clients of the risks linked to financial products. The relevant obligation consists not only in informing the client, but also in assessing the client’s ability to properly understand the nature of speculative operations under consideration.
In the interests of transparency, the duties of the banks have been increased, the general perception being that this is also justified by the current market environment and the atmosphere of uncertainty produced by the 2008 financial crisis. Like other countries, France implemented an institutional reform of its financial supervision system in 2008 with Law No. 2008-776 published on 4 August 2008, and subsequently implemented the various European directives reforming the European financial framework.
The Prudential Control and Resolution Authority (ACPR) shares supervisory authority over investment firms with the AMF. The former banking supervisors, investment supervisors and insurance supervisors were merged into the Prudential Control Authority, established by Law No. 2010-76 of 21 January 2010. It was then renamed the Prudential Control and Resolution Authority following the entry into force of Law No. 2013-672 of 26 July 2013, which broadened the range of the duties of the Prudential Control Authority, entrusting the French banking regulator with the duty of supervising and implementing measures for the prevention and resolution of banking crises.
Pursuant to the Banking Reform, the ACPR has been given the powers of resolution authority, and the scope of its powers and duties has been enlarged accordingly. Among its enlarged powers, the ACPR can order the transfer of all or a portion of credits or deposits of credit institutions if the solvency or liquidity of institutions subject to its authority, or the interest of insured clients or their members, are in jeopardy or susceptible to being in jeopardy.
The AMF and the ACPR’s investigative and supervisory powers have been strengthened, including the authority to require documents and information from entities subject to their supervision to ensure the performance of their mission of monitoring and supervision.
iv The crowdfunding legislative framework
The government has promoted crowdfunding by setting up a new legal and regulatory framework (which derogates to the banking monopoly and public offering rules). Some of the main features of such framework are described below.
II THE YEAR IN REVIEW
i Recent developments affecting debt and equity offerings
Recent developments in France mainly relate to debt offerings both in public or private offerings.
Modernisation of the bond issues legal framework
French securities law has undergone a mini revolution with the publication of the Ordinance of 10 May 2017 No. 2017-979 (the Ordinance) aimed at encouraging the development of bond issues, which cleans up and modernises legal provisions that had remained largely untouched since before the last war.
The Ordinance affects a number of areas including bondholders’ collective decisions and the ongoing relationship between the issuer and bondholders. The issuer can now provide in the issuance agreement (even if not in its statuts) that consents may be granted by written resolution without a meeting, including by electronic means; notices may be effected by the methods more usually employed in the international capital markets (i.e., through the clearing systems rather than in a newspaper or legal bulletin); and bondholders may participate in meetings ‘remotely’, for example, by videoconference.
With respect to bonds aimed at institutional investors (i.e., with a denomination of €100,000 or more (threshold to be set by Decree), other than equity-linked instruments and issuances by the French state), the Ordinance allows the statutory bondholder group (masse) to be dispensed with completely. Thus, the ongoing relationship between bondholders and issuer can be set out contractually in the issuance agreement in a similar fashion to bond issues done under English law – an obvious plus for international investors.
Furthermore, the Ordinance modernises the meeting rules for all types of French-law bonds and exempts from the automatic requirements of the statutory bondholder group all regular bond issues with a denomination per bond of more than €100,000, including purely domestic issuances. There will consequently be ways from now on to contractually reinforce bondholders’ bargaining power by, for example, providing that bondholders of different series may be grouped together for voting purposes, which has not generally been possible to date.
On the other side, there also will be ways to strengthen the issuer’s position using contractual mechanisms that have not previously been available: for example, by increasing the statutory quorum of bondholders required to call a meeting to one-thirtieth of bondholders. In this respect, current French practice for meetings, which derives from the Code, does diverge in a number of ways from Anglo-Saxon and international norms but is in fact generally more issuer-friendly than in the UK or the US . Once a meeting is convened, it can thus be easier to get a resolution passed under French law, and this is an advantage that French issuers may be keen to preserve, notwithstanding the new contractual flexibility.
The other area where French practice has hitherto differed from international practice is in the absence of ‘reserved matters’ for particularly sensitive areas, such as changes to payment or voting provisions. In the Code, there are provisions that protect bondholders in the case of changes that would increase their obligations or give rise to an inequality of treatment within a particular series. But, except in limited situations, this refinement in the voting system whereby two or three levels of vote can be provided for (ordinary resolutions, extraordinary resolutions and reserved matters) has not generally formed a part of French bond practice to date; it may henceforth start to appear with more regularity.
Finally, and among other novelties, the Ordinance:
- a allows companies (in certain circumstances) to issue bonds without having two approved, reviewed or audited historical balance sheets;
- b facilitates the approval process by allowing the board of directors and the executive board to delegate the authorisation of a bond issue to any person of their choice;
- c clarifies the provisions relating to the constitution and release of security; and
- d changes the way that the représentant de la masse, bondholders’ representative, is appointed and operates: henceforth the representative may reside in any European state, not just France, and it is now able to delegate powers to a third party, such as a security agent.
Publication of the Prospectus Regulation
Aimed at facilitating the access to the market by companies without compromising on the information communicated to investors, Regulation EU 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (the Prospectus Regulation) was published on 30 June 2017 in the Official Journal of the EU and will enter into force on 21 July 2019 (with the exception of certain provisions that will enter into force on 21 July 2018). As a first observation, it should be noted that the distinction between ‘retail’ securities (i.e., securities of a nominal value lower than €100,000) and ‘wholesale’ securities (i.e. securities of a nominal value of €100,000 or higher) has finally been maintained. As a result, issuers may, therefore, continue to benefit from an exemption to the public offering legal framework on this ground. Otherwise, the Prospectus Regulation provides inter alia that:
- a offers of securities to the public for a total amount in the EU of less than €1 million do not require a prospectus, and Member States may, as from 21 July 2018, exempt offers of securities to the public with a total consideration in the EU of between €1 million and €8 million (calculated on a 12-month period), from the requirement to publish a prospectus;
- b a ‘universal registration document’ detailing the issuer’s business and financial position may be filed with a competent authority every year. This document may then be incorporated by reference into the prospectus. This mechanism (which has existed in France for many years) would enable issuers to get their prospectuses approved more quickly by a competent authority; and
- c the prospectus summary is to be shortened to a maximum length of seven pages of A4. A set format will be required, based on the key information document (KID) for packaged retail and insurance-based investment products, with four main sections specifying the following: (1) introductory warning language; (2) key information about the issuer; (3) key information about the securities; and (4) key information about the offer of securities to the public and admission to trading.
AMF Guidelines regarding the preparation of prospectuses
The above-mentioned changes to the Prospectus Regulation will induce changes to the RG-AMF and its implementing guidelines regarding issuance documents. In September 2013, the AMF published guidelines governing the preparation of bond prospectuses and related approval procedures, and on marketing materials relating to complex debt securities. Through these guidelines, the AMF aims to increase issuers’ responsibilities and address practices in breach of applicable regulations. It also aims to improve investor information and, as a result, the transparency of transactions.
The guidelines seek to streamline and simplify bond prospectuses, in the form of either a stand-alone or a base prospectus, both of which require AMF approval. Furthermore, the approval procedures have been simplified, particularly in terms of language requirements and review times, highlighting the AMF’s determination to respond to bond market needs. The same concerns apply to all bond issues in Europe, and the AMF does not add any requirements other than those reflected in the Prospectus Directive.
The regulatory prospectus approval deadline provided for in the Prospectus Directive, which has been transposed into the RG-AMF, is 10 working days. In general, whenever a draft stand-alone or base prospectus is submitted, the AMF will send an acknowledgement of receipt to the issuer if the file is complete. It will then issue its decision on whether to approve the prospectus within 10 days of issuing the acknowledgement of receipt. The deadline is reduced to five working days for issuers that have already provided comprehensive information by way of a registration document filed with the AMF.6
On 4 February 2013, the AMF issued Position No. 2013-03 specifying the information to be given to the market by an issuer that issues shares or securities giving access to its capital in the absence of publication of a prospectus. To ensure investors access to an equivalent level of information, the AMF restates, in Position No. 2013-03, the minimum information that must be included in releases announcing these operations: the nature of the operation, the type of offer, its legal framework and the amount and the reasons for the issue. This Position applies to issues open to the public while not constituting public offers (of an amount of less than €5 million and not representing more than 50 per cent of the capital of the relevant issuer). It also applies to private placements.
On 6 December 2012, the AMF issued Position-Recommendation No. 2012-18 relating to the information to be provided to the market in the event of equity lines or step-up equity financing (i.e., financial arrangements that consist of capital increases split into several tranches over time). The AMF provides in the Position-Recommendation additional information on the type of information to be disclosed to the market when entering into an equity line financing arrangement, and this disclosure requirement applies throughout the entire term of that arrangement.
Euro private placements (Euro PPs)
A Euro PP is a medium or long-term financing transaction between a listed or unlisted company and a limited number of institutional investors based on deal-specific documentation negotiated between a borrower and investors, generally with the participation of an arranger. A Euro PP can be in the form of a bond or in the form of a loan; it is generally used by issuers who have no access to the market of publicly listed bonds.
A Charter for Euro PPs was published in March 2014 by several professional associations, including the Association française des marchés financiers, the Association française des trésoriers d’entreprises and the Association française des investisseurs institutionnels. The purpose of this industry guidance document, which is the result of cross-market work carried out by various actors (issuers, intermediaries and investors), is to produce a documentation basis for developing Euro PPs and creating a benchmark market for them, both in France and internationally. It is built on existing practices in the bond and bank loan markets, as well as practices in other international private placement markets.
In January 2015, the same professional associations published two templates for Euro PP documents: one under a loan format and one under a bond format.
Negotiation of contractual terms and conditions is an important feature of Euro PP transactions; it distinguishes them from public and syndicated bond issues, such as Eurobond issues, where investors merely subscribe an issue without having any say on the terms and conditions. For this reason, the process for carrying out a Euro PP transaction more closely resembles negotiating a bank loan agreement than preparing the documentation for an issue of listed bonds.
A Euro PP may take the form of a bond issue or a loan.
Between 2012 and the end of 2015, approximately €13.5 billion was raised by French unrated medium-sized companies to develop their activities within the framework of Euro PP private placements.
Softening the placement of securities rules in respect of pre-marketing activities relating to undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs)
By introducing the concept of ‘pre-marketing’ in its rules, the AMF has softened the marketing rules applicable to UCITS and AIFs. In Position No. 2014-04 (Guide to regimes for marketing UCITS and AIFs in France), the AMF admitted that the marketing rules are not applicable to certain types of UCITS and AIF transactions.
By way of example, the following transactions will not be considered to be marketing of UCITS and AIFs in France and will not be submitted to marketing rules:
- a the purchase, sale or subscription of units or shares of a UCITS or AIF in response to an investor’s unsolicited request regarding a specifically designated UCITS or AIF, provided that the investor is authorised to do so;
- b the purchase, sale or subscription of units or shares of a UCITS or AIF under the terms of a third-party portfolio management agreement, provided that such financial instruments are authorised in the investor’s portfolio;
- c the purchase, sale or subscription of units or shares of a UCITS or AIF under the financial management of a UCITS or AIF, provided that such financial instruments are authorised in the assets of the UCITS or AIF;
- d pre-marketing by a management company or a third party acting on its behalf to up to a maximum of 50 investors, provided that:
• the investors are either professional investors, or non-professional investors with an initial subscription of at least €100,000; and
• the investors are not provided with subscription forms or definitive documentation containing the fund characteristics that would allow them to subscribe or commit to subscribe to a fund’s shares or units;
- e the purchase, sale or subscription of:
• units or shares in a UCITS or AIF in the context of a management company’s compensation policy;
• units of shares in a UCITS or AIF on behalf of the management team of the management company that manages them, its managers or the management company itself; or
• carried interest units;
- f secondary transactions between investors provided that they are not organised by the management company or a third party;
- g attendance by the management company at conferences or organisations of meetings provided that only professional investors are present, and that they are not asked to invest in a specific fund or given information regarding a UCITS or AIF of which shares or units can be subscribed to; and
- h response by a management company to a request made by a professional investor that is a legal person for the setting up of a UCITS or AIF.
Crowdfunding emerged as a new way to obtain loans or to issue equity or bonds securities through electronic platforms. In May 2012, the AMF and the ACPR published a guide addressing the current legal regime for crowdfunding activities in France in which the AMF and the ACP identified three types of crowdfunding activities and made each of them subject to specific regulations. Crowdfunding activities similar to gifts or donations and crowdfunding activities based on loans fall within the scope of French banking regulations (French banking monopoly), while debt-based and equity-based crowdfunding activities fall within the scope of French public offering rules and regulations regarding the provision of investment services.
On 30 May 2014, the government issued Ordinance No. 2014-559 relating to crowdfunding (the Crowdfunding Ordinance) with a view to promoting crowdfunding activities in France and to address some of the regulatory constraints that could prevent the development of such activities.
As far as debt-based and equity-based crowdfunding activities are concerned, the Crowdfunding Ordinance create a new status of adviser in crowdfunding (CIP) defined as legal entities whose main activities consist in providing on a regular basis the service of investment advice in respect of offers of equities and debt securities exclusively by way of an internet website.
Persons wishing to obtain CIP status have to comply with certain rules of good conduct and register with the Organisation for the Register of Insurance Intermediaries.
In addition, the Crowdfunding Ordinance relaxes public offering rules by providing a new exemption to prospectus publications for securities offering on a crowdfunding platform. The conditions to be met to benefit from such exemption are:
- a the securities offered are not admitted to the negotiation on a regulated market or on a multilateral trading facility (MTF);
- b the securities are proposed by the intermediary of an investment services provider or a CIP by way of an internet website meeting certain conditions to be specified by the RG-AMF; and
- c the amount of the offer (calculated based on a 12-month period) is less that a certain amount to be specified by decree.
Those measures came into effect on 1 October 2014 pursuant to Decree 2014-1053 dated 16 September 2014 and to an amendment to the RG-AMF dated 22 September 2014. In 2016, several texts were issued to streamline the legal framework of crowdfunding brought by the Crowdfunding Ordinance, in particular Ordinance No. 2016-520 of 28 April 2016, Decree No. 2016-1453 of 28 October 2016 and an amendment to the RG-AMF dated 12 October 2016.
Regarding CIP and the ‘crowdequity’ activity, issuers may now propose investment projects on these platforms amounting to €2.5 million, instead of €1 million as before, under certain conditions. CIP platforms may now also propose to underwriting ordinary and preference shares, fixed rates bonds and convertible bonds and participatory securities.
It must also be noted that a new category of debt securities has been introduced into French law and may be traded on CIP platforms. Those are named minibons, which are themselves a sub-category of saving certificates. The main characteristics of these minibons are the following: their maturity may not exceed five years, their rate must be fixed, they may be underwritten both by individuals and companies (if such investment is accessory to their main activity), and they may be issued by French limited liability companies.
Transposition of the revised Transparency Directive
The transposition into French law of the revised Transparency Directive was implemented in December 2015.
The new provisions relate to, inter alia, an increased period for storing annual and semi-annual financial reports from five to 10 years and an extended deadline from two to three months for publishing half-yearly financial reports of issuers listed on a regulated market.
The notion of ‘issuer’ of securities has been revised, and may now extend to entities without legal capacity and natural persons. The French Monetary and Financial Code now defines an ‘issuer’ as a person or an entity whose securities are admitted to trading on a regulated market or whose securities, whether or not admitted to trading, are represented by certificates admitted to trading on a regulated market.
The major shareholding disclosure rules have been enhanced, and they now apply to any natural or legal person that directly or indirectly acquires financial instruments with economic effects similar to holding shares such as equity derivative products. In cases of non-compliance with the major shareholding disclosures, the French Monetary and Financial Code now specifies that the AMF can impose heavy fines, although these are limited to 5 per cent of the total annual turnover or €100 million.
Euronext private placement bonds negotiation platform (EPPB)
In March 2015, Euronext launched a new type of listing, EPPB, primarily targeting SMEs wishing to diversify their source of funding by listing their private placement bonds issues on Alternext. For such purpose, a modification of the rules of Alternext regarding private placement of debt securities was therefore approved by the AMF by a decision of 17 February 2015.
Under the modified rules, issuers that have completed a private placement of debt securities with a denomination of at least €100,000, and have applied for a first admission to trading of the relevant debt securities subject to such private placement on an Alternext market, are not required to publish an annual report or to appoint a listing sponsor.
The purpose of these modifications is to offer a fast, simple and standardised procedure allowing SMEs to list their private placement issues on the French market.
Modernisation of securities law
France was the first country to introduce the mandatory and general dematerialisation of securities as early as 1984. In view of ongoing initiatives in Europe aimed at strengthening the integration of securities markets and at adopting a common approach to securities law, Ordinance No. 2009-15 was published on 8 January 2009. Through the enactment of this reform, the French legislature sought to modernise French securities law and reinforce its attractiveness, competitiveness and security.
Dispositions on transfers of ownership, pledges, repurchased transactions, securities loans and security for financial obligations are brought together in Book II, Title I, Chapter I. A distinction is now made in respect of financial instruments between securities (including both equity and debt instruments issued by stock companies, together with participations in collective investment undertakings, all of which are susceptible to being credited to a securities account) and financial contracts (which correspond in essence to derivatives and forward financial instruments). Key modifications focus on strengthening ownership rights over securities credited to a securities account and protecting bona fide acquirers of securities. Provisions governing closeout netting previously incorporated in Article L431-7 and following the M&FC have also been incorporated in the same legal body. These provisions are now covered by Article L211-36 to L211-40 of the M&FC (the Netting Law).
Regarding shareholders voting rights, it should be noted that double voting rights have been attributed to shares traded on a negotiated market by Law No. 2014-384 of 29 March 2014, which aims to foster long-term investments and shareholdings in French companies. These double voting rights are automatically attributed to shareholders holding nominative shares (i.e., registered in their name) for two years; however, such right may be defeated by a specific provision of the relevant company’s articles of association if adopted after the enactment of the above-mentioned Law.
In respect of the transparency requirement, the requirement to publish quarterly financial information imposed upon corporations whose shares are traded on a regulated market has been abolished by Law No. 2014-1662 of 30 December 2014, which transposes the revised Transparency Directive (2013/50/EU).
The process of identifying bondholders has been streamlined by an Ordinance of 31 July 2014. This Ordinance amends the Commercial Code, allowing issuers to identify bondholders in the same manner as shareholders upon request for the relevant information by central depositories. The issuer may not share this information with third parties.
Certain legal and regulatory provisions relating to takeover bids have been amended by a Law of 29 March 2014 to protect minority shareholders against ‘creeping’ takeovers and to ensure that employees of a target company have the right to information regarding any such takeover. These rules entered into force in July 2014.
Under the Banking Reform, the offences of insider dealing, market manipulation and dissemination of false or misleading information are extended to cover transactions entered into by a MTF. The Banking Reform also broadens the definition of market manipulation to expose to AMF prosecution persons attempting to manipulate the prices of commodities through the use of financial instruments. In 2016, two landmark laws, Law No. 2016-819 of 21 June 2016 and Law No. 2016-1691 of 9 December 2016 (known as ‘Loi Sapin 2’) reformed the French legal framework of market abuse repression, in particular to transpose Directive 2014/57/EU of 16 April 2014 on criminal sanctions for market abuse (MAD II) and Regulation No. 596/2014 of 16 April 2014 on market abuse and to adapt French law to these texts. MAD II was a minimal harmonisation Directive but French law went further regarding prison sentences by providing, for example, a sentence of five years in prison for insider dealing and market manipulation and a sentence of five years in prison instead of two for unlawful disclosure of insider information. It may also be noted that the amount of fines have been aligned between criminal and administrative sanctions.
The Banking Reform specifies that the general meeting of shareholders of credit institutions and investment firms (other than portfolio management companies) must be consulted on an annual basis on the overall envelope of compensation paid to senior managers, and to certain categories of employees that include risk-takers and persons exercising compliance functions, as well as certain employees whose activities have a significant impact on the risk profile of such entities.
Separation of own account transactions from core activities of banks and investment firms dedicated to financing the economy
The Banking Reform states that, as a matter of principle, French credit institutions, financial and mixed financial companies are prohibited from carrying out the following activities other than through a dedicated subsidiary if relevant transactions would exceed exposure thresholds set by a decree of the Minister of the Economy: trading on financial instruments by the aforementioned entities for their own account, with the exception of the following activities:
- a provision of investment services to clients;
- b clearing of financial instruments;
- c hedging of risks incurred by the credit institution or its group within the meaning of Article L511-20 of the M&FC (excluding hedging risks incurred by the dedicated subsidiary);
- d market making activities;
- e the sound and prudent management of the treasury of the group, and financial transactions between credit institutions, financial and mixed financial companies, on the one hand, and their subsidiaries belonging to the same group (as defined by Article L511-20 of the M&FC) on the other;
- f the operations of investment of the group within the meaning of Article L511-20 of the M&FC; and
- g any unsecured transaction entered into by the credit institution for its own account with (1) leveraged collective investment schemes, (2) similar investment vehicles, or (3) collective investment schemes themselves invested or exposed to the vehicles defined in (1) and (2) when such investments or exposures exceed thresholds to be determined by the Ministry of Economy.
The Banking Reform further specifies the scope of the aforementioned exemptions (definition of investment services, risk hedging, market making activities, etc.).
The dedicated subsidiary that may be constituted by the credit institution to perform the aforementioned trading activities must be licensed as an investment firm or credit institution, and is not authorised to receive deposits from the public that benefit from the deposit guarantee scheme or to provide payment services to clients. The Banking Reform also specifies, inter alia, that the trading subsidiary must comply with prudential ratios on an individual (or sub-consolidated) basis and that the parent credit institution (or financial and mixed financial company) must obtain the prior authorisation of the ACPR before subscribing to a share capital increase of the trading subsidiary.
Trading subsidiaries are prevented from carrying out high frequency trading (HFT) subject to tax under Article 235 ter ZD of the General Tax Code; and transactions on financial instruments using, as underlying assets, an agricultural commodity.
Both the trading subsidiaries and their parent companies must set objectives and limits, and adopt organisation rules, rules of conduct and other professional conduct rules allowing them to comply with the aforementioned requirements.
The Banking Reform provided that credit institutions had to identify, at the latest on 1 July 2014, activities to be transferred to the trading subsidiary, and then to transfer such activities to the trading subsidiary by 1 July 2015.
The Banking Reform provides that the transfer to the dedicated trading subsidiary will not trigger any termination or modification in any other contract to which the above institutions are a party.
While the Banking Reform is inspired by the Liikanen Report, it diverges from the conclusion of that report in some key areas, including, inter alia, going as far as the exclusion of market making activities, which is perceived as a key tool to facilitate access to liquidity.
New regime for the resolution and the recovery of credit institutions
On 20 August 2015, an ordinance from the government transposed under French law the provisions of the Banking Resolution and Recovery Directive (BRRD).
Articles L613-34 et seq. of the M&FC, which transposes the BRRD, provides a legal and regulatory framework applicable to the resolution of French credit institutions and investment firms meeting certain conditions (the French Banking and Resolution Regime).
The French Banking and Resolution Regime states that credit institutions and investment firms (with the exception of portfolio management companies) are required to prepare and submit to the supervision committee of the ACPR a preventive plan that contemplates various potential recovery modalities in the event of the occurrence of a significant impairment of their financial situation.
The resolution committee of the ACPR must prepare for credit institutions and investment firms a preventive recovery plan including specific recovery measures to be taken.
Where the relevant institution is found to be in default, or where it is determined that a default may not be avoided within a reasonable time frame, the resolution committee of the ACPR may take one or more of the following measures as described below.
The ACPR may first take early intervention measures against a credit institution or an investment firm in circumstances where the financial situation or the liquidity of such credit institution or investment firm is rapidly deteriorating may result in such institution not complying notably with the prudential regulation (CRR).
In such circumstances, the ACPR may require that the credit institution or the investment firm take several measures, such as:
- a implementing the preventive recovery plan;
- b implementing an action plan for restructuring its debts with its creditors;
- c modifying its commercial strategy; or
- d dismissing the senior managers of the institution subject to resolution.
Under the French Banking Resolution Regime, when a credit institution or an investment firm is subject to a resolution process, the ACPR may also take certain resolution measures, including, inter alia:
- a appointing a temporary administrator;
- b using a bridge bank in whole or in part, or one or several activity branches of the credit institution subject to the resolution proceeding in view of a sale at a later stage. It is specified that, notwithstanding any legal or contractual provision to the contrary, contracts related to transferred activities are continued and no termination or set-off may occur solely as a result of such transfer or assignment;
- c selling of assets (transfer of one or several branches of activity);
- d creating an asset separation tool; and
- e bailing in (reduction or cancellation of equity securities or debt, or the conversion of debt to absorb the amount of depreciation) of equity or securities assimilated to the equity.
Furthermore, when the ACPR exercises the rights available to it under the resolution tools and orders the transfer of one or more business units by operation of law under the regime of universal transfer of patrimony to a third party (asset separation tool), or orders the transfer of assets, rights and obligations to a bridge institution (bridge institution tool), the following consequences will apply to contracts concluded by the entity under resolution:
- a notwithstanding any legal or contractual provision to the contrary, contracts related to transferred activities are continued and no termination or set-off may occur solely as a result of such transfer or assignment;
- b transactions governed by contracts covered by Article L211-36-1 of the M&FC (i.e., the French netting law, which covers transactions on financial instruments including derivatives) when transferred under the French Banking Resolution Regime to a third party or to a bridge institution shall not be partially transferred, or modified or terminated; and
- c provided that the substantive obligations under the contracts continue to be performed under the agreements, termination rights (i.e., close-out netting) may not be exercised solely on the ground that a resolution measure has been exercised unless a transfer pursuant to the exercise of the resolution powers does not cover such contracts.
In addition, in the exercise of its resolution authority, the ACPR may elect to suspend temporarily the exercise of termination and close-out remedies under contracts governed by Article L211-36-1 of the M&FC in respect of all or part of such contracts concluded with the entity under resolution until midnight on the business day following the publication of the ACPR decision.
The new French legal regime transposing the BRRD into under French law has been ratified by the Loi Sapin 2. The purpose of the ratification was to confirm the terms of the aforementioned ordinance and to correct the perceived gaps and discrepancies identified between the text of the BRRD and certain provisions of the M&FC.
Certain modifications are substantial, such as modifications of Articles L613-45-1 and L613-50-4 of the M&FC. The content of such Articles has been modified in order to restrict the right for a counterparty to terminate, suspend, modify or set off a contract in the event of an early intervention measure or that a resolution measure affecting a credit institution applies unconditionally to such counterparty and also to entities belonging to its group.
Similarly, Article L613-55-6 of the M&FC has been amended to provide that the capacity of the resolution board of the ACPR to exercise its write-down and conversion powers of financial instruments only after the liquidation of the positions relating to these instruments applies not only to liabilities arising from derivatives but to any financial contract.
Tax on financial transactions
By an amending budget law of 14 March 2012, as further amended by a law dated 16 August 2012, a 0.2 per cent transfer tax has been introduced on the acquisition of certain equity capital securities and assimilated securities. That tax applies also to the cancellation of certain high frequency trades and to acquisitions of certain credit default swaps concerning an EU Member State default.
From 1 August 2012, transfers of equity securities (or assimilated securities) issued by French listed companies whose market capitalisation exceeds €1 billion on 1 January of that year will be subject to a 0.2 per cent tax.
The transfers in question are all transfers against consideration (acquisitions, exchanges, etc.), excluding:
- a the allocation of shares upon a capital increase of the issuer;
- b transfers made in the context of execution of liquidity arrangements;
- c transfers made between members of the same group;
- d transfers made via a clearing house or a central depository; and
- e certain temporary transfers of securities.
Bonds (convertible or exchangeable as the case may be) are not assimilated to equity securities.
A ministerial decree will summarise the list of companies concerned.
The tax will be due by the person executing the transfer order on the first day of the month following each transfer.
At the European level, and upon the request of 11 Member States, the Commission adopted on 14 February 2013 a proposal providing that all transactions with an established link to the financial transaction tax zone will be taxed at the rates of 0.1 per cent for shares and bonds and 0.01 per cent for derivatives. Such tax would deeply affect HFT, as well as the activities of hedge funds, market makers and the repo market. However, agreement on the proposal could not be reached by all 28 Member States. While 10 countries are still discussing the proposal, no compromise has been reached so far. This matter remains controversial, in particular in the context of Brexit, and its adoption is not free of uncertainty.
The Single Supervisory Mechanism
Within the framework of the Banking Union, since November 2014, the European Central Bank (ECB) is the supervisor of all 6,000 banks in the euro area under the framework of the Single Supervisory Mechanism. The degree of direct European supervision by the ECB on a daily basis and the role played by national supervisors vary according to the size of the banks. However, the ECB is responsible for ensuring appropriate monitoring of all those banks’ performance under supervisory tasks. The ECB particularly has responsibility for direct supervision of banks having assets of more than €30 billion or constituting at least 20 per cent of their home country’s GDP, or that have requested or received direct public financial assistance from the European Financial Stability Facility or the European Stability Mechanism.
Governance of credit institutions and investment firms
Ordinance 2014-158 of 20 February 2014, which implements CRD IV under French law, extended the specific requirements of availability, competency and integrity applying to individuals who are effectively managing a credit institution, and to all members of the boards of directors or the supervisory board of a credit institution or investment firm. The ACPR is authorised to oppose where necessary the appointment of members of the board of directors in cases where they do not meet the aforementioned availability, competency and integrity criteria.
To implement the provisions of Regulation (EU) No. 909/2014 of the European Parliament and of the Council of 23 July 2014 introducing improvements of securities settlement in the European Union and on central securities depositories, the provisions of the RG-AMF were modified by an order of 15 September 2014, which provides that the settlement date for transactions in transferable securities that are executed on regulated markets and MTFs shall be no later than on the second business day after the trading takes place (T+2).
Holding collateral through a security agent
The concept of security agent was introduced in 2007 in order to have a security agent regime competitive with the Anglo-Saxon security trustee. However, certain legal uncertainties affecting this regime has lead practitioners not to use it, in particular because of the legal uncertainty related to the nature of the security agent’s powers and its too limited scope. In order to address the drawbacks of the security agent legal regime, a recent Ordinance No. 2017-748 dated 4 May 2017 has modified the security agent regime with the new provisions entering into force on 1 October 2017.
The new regime provides in particular that:
- a the security agent holds any security interest or guarantee in its own name;
- b the security agent is entitled to receive and enforce all type of securities, including personal guarantees; and
- c creditors are protected against the insolvency of the security agent security since security interests and personal guarantees are held by it as segregated assets. In the event of the security agent’s insolvency, the assets and cash held as collateral by the security agent should not be available to its his or her creditors.
There is a clear expectation that the holding of collateral through a security agent will facilitate the creation of security packages in complex transactions, especially when security is granted on the same assets to one or more groups.
ii Developments affecting derivatives, securitisations and other structured products
Derivatives and the Netting Law
The French netting regime of derivatives (Netting Law) is governed by the provisions of Article L211-36 to L211-40 of the M&FC, which transposed into French law the EU Collateral Directive as amended. It is applicable, inter alia, to financial obligations resulting either from transactions on financial instruments (within the meaning of Articles L211-1-I and D211-1A of the M&FC) if only one of the parties to the transactions is a qualifying party, or from any contract giving rise to cash settlement or to delivery of financial instruments if both parties to the contract are qualifying parties.7
As far as transactions on financial instruments are concerned, Article L211-1 of the M&FC defines financial instruments, which include:
- a financial securities, including shares and other securities issued by stock companies; debt instruments, other than payment instruments and loan notes; and units or shares in collective investment undertakings; and
- b financial contracts, also known as forward financial instruments, which are further defined in Article D211-1-A of the M&FC.8
If both parties are qualifying parties under the Netting Law, the scope of qualifying transactions is wide, as the Netting Law includes in such cases financial obligations that result from any contract giving rise to cash settlement or to delivery of financial instruments. Accordingly, all financial obligations resulting from transactions on financial instruments are included in the scope of qualifying transactions.
Financial instruments (financial securities and contracts as defined by Article L211-1-I of the M&FC) may only be issued by the state, a legal entity, a mutual fund, a real estate investment fund or a mutual securitisation fund. Forward financial instruments are further defined in Article D211-1A of the M&FC.
Article L211-36-II of the M&FC extends the scope of application of the Netting Law to instruments that may not fall within the scope of the definition of financial instruments under MiFID9 and Commission Regulation EC 2006/73 of 10 August 2006 implementing MiFID. Article L211-36-II of the M&FC provides that, for the sole purposes of Article L211-36 et seq. of the M&FC (i.e., the Netting Law), options, futures, swaps and any forward contracts other than those mentioned in Article L211-1-III of the M&FC (i.e., MiFID-qualifying forward financial instruments) are considered as forward financial instruments provided that they give rise, in the context of trading, to registration by a recognised clearing house or to periodical margin claims.
It should be noted that the Banking Reform contemplates that when exercising its rights available under the resolution tools vested in the ACPR, it may order the transfer of one or more business units by operation of law under the regime of universal transfer of patrimony to a third party, or of assets rights and obligations to a bridge institution. It is specified that, notwithstanding any legal or contractual provision to the contrary, contracts related to transferred activities are continued, and no termination or set-off may occur solely as a result of such transfer or assignment.
It is further specified that transactions governed by contracts covered by Article L211-36-1 of the M&FC (which covers transactions on financial instruments including derivatives, and also repos and securities lending transactions), when transferred under the resolution tool regime to a third party or to a bridge institution, may only be transferred as a whole. Termination rights (close-out netting) may not be exercised solely on the ground that a resolution measure has been exercised unless a transfer pursuant to the exercise of the resolution powers does not cover such contracts. Furthermore, in the exercise of its resolution authority, the ACPR may elect to suspend the exercise of termination and close remedies under contracts governed by L211-36-1 M&FC in respect of all or part of the relevant contract concluded with the entity under resolution until 5pm on the business day following publication of the ACPR.
When contracts have been transferred as stated above within the scope of the exercise by the ACPR of its resolution authority, this would, in our view, permit the exercise of termination rights post-transfer in the event of the occurrence of a post-transfer default.
Arrangements are also contemplated to ensure that such transfer may not affect the operation of systems governed by Article L330-1 and following the M&FC (covering interbank payment systems and DVP designated systems where only part but not all assets, rights and obligations are so transferred to another person).
The French netting and collateral regime has recently been modified by the Sapin 2 Law, which (1) extended the French close-out netting regime to financial obligations between a central counterparty, a clearing member, and a client; (2) allows third parties to post collateral; and (3) provides an effective segregation of collateral posted as initial margin pursuant to Article 11 of EMIR.
The collateral exchange requirements apply to financial entities dealing in derivatives and to non-financial firms whose derivatives positions exceed the clearing threshold. They apply to all OTC derivative contracts that are not centrally cleared. They will progressively take effect starting in February 2017, following an agreed schedule.
Implementation of EMIR
In 2012, EMIR was published. EMIR impacts all entities active in the EU derivatives market whether they use derivatives for trading purposes, to hedge themselves against a particular risk or as part of their investment strategy.
EMIR imposes three main obligations on market participants, namely:
- a clearing via a central counterparty (a CCP) of certain over-the-counter (OTC) derivatives entered into between certain market participants;
- b reporting of all derivative transactions to a trade repository that were entered into since, or that were outstanding on, 16 August 2012; and
- c subjecting OTC derivatives that are not cleared via a CCP to risk mitigation obligations, which include, in particular:
• the timely confirmation of transactions;
• performing of daily mark-to-market valuations of transactions;
• having dispute resolution processes in place;
• engaging in portfolio reconciliation;
• considering portfolio compression; and
• exchanging collateral.
The last stage of EMIR’s implementation, EMIR collateral requirements for non-centrally cleared derivatives, progressively take effect starting in February 2017.
Mandatory central clearing is a risk mitigation technique. When a contract is ‘cleared’, a CCP is interposed between the two parties to an OTC derivative contract. The aim of clearing is to promote financial stability by reducing counterparty credit risk (as parties become exposed to the CCP’s credit risk instead of each other’s) and operational burdens, as well as increasing transparency and standardising the default management process. The clearing obligation under EMIR will only apply if the relevant OTC derivative is of a class that has been declared subject to the clearing obligation by the European Commission and the European Securities and Market Authority (ESMA) and is entered into between any combination of financial counterparties (FCs) and ‘non-financial counterparties’ (NFCs) that are above certain thresholds (NFC+s) (or certain entities established outside the EU that would be an FC or NFC+ if they were established in the EU).
Interest rate derivatives and credit derivatives are the first asset classes subject to mandatory clearing under EMIR following the entry into force of regulatory technical standards adopted by the European Commission. The clearing obligation will take effect gradually starting from 21 June 2016.
Obligations de financement de l’habitat
Obligations de financement de l’habitat constitute a new type of covered bonds (similar to the German Pfanbriefe) introduced under Law No. 2010-1249 of 22 October 2010 relating to banking and financial regulations. This new type of financial instrument is an example of the modernisation of French financial and banking regulations. It puts the finishing touches to the French financial reforms by creating, alongside the obligations foncières (which constitute the classic French covered bonds), a highly secured financial instrument. These bonds are intended to allow credit institutions to refinance mortgage-backed housing loans. They are inspired by traditional covered bonds and will be issued by credit institutions registered as sociétés de financement de l’habitat (SFHs), and are designed as an additional tool facilitating access to liquidity. According to Article L513-30 of M&FC, the obligations de financement de l’habitat benefit from a super-priority lien.
Hence, SFHs may issue bonds benefiting from the statutory super-priority lien regime available to covered bonds, and grant to any credit institution loans secured by an assignment of, or pledge over, residential housing loans secured by a first-ranking mortgage or a surety issued by a credit institution or an insurance company. They may also acquire promissory notes issued by a credit institution as provided by Article L313-43 to L313-48 of the M&FC and that, by derogation, may use residential housing loans as collateral or grant residential housing loans secured by a first-ranking mortgage or a surety issued by a credit institution or an insurance company.
It is expected that obligations de financement de l’habitat will have a beneficial effect on credit supplies to households.
In 2007, France adopted its own trust (fiducie) regime, introducing into the French legal corpus the equivalent of the common law trust. This regime has already been modified to widen its scope and clarify its effects in the event of insolvency proceedings.
This form of trust can be used to create security over assets, but may also be used to manage assets for a purpose defined in the fiduciary contract. For instance, in the context of mergers and acquisitions, because of its ability to isolate assets, it can be used to hold the shares of a company during the period when an acquisition has not yet been finalised or has been challenged by a contrary decision of the various authorities potentially involved in the transaction, chiefly the antitrust authorities, but also authorities that hold pre-emptive rights allowing them to acquire, with priority, certain assets (particularly real estate assets), or that are more generally likely to oppose or prohibit the transaction.
Securitisation through loan funds for the economy
To promote financing of unlisted companies (in particular very small enterprises, SMEs), Decree No. 2013-717 of 2 August 2013 modifies the list of admissible assets to cover regulated liabilities of insurance companies, as well as the rules on the diversification of investments and limitation by categories of investment. In particular, such regulations are made more flexible to authorise more widely insurance companies to extend loans to non-listed companies, directly or indirectly, by investing in ‘loan funds to the economy’. Such investment funds qualify either as French securitisation funds or specialised professional investment funds meeting certain conditions.
Securitisation and ‘skin-in-the-game’ rule
In the wake of the 2008 financial crisis, regulations regarding the calculation of capital requirements of credit institutions and investment firms have been amended to include a 5 per cent retention requirement for originators of securitisations.
This retention requirement, often referred to as ‘the skin-in-the-game rule’, is set out in two separate sets of amendments to the Capital Requirement Directive (referred to as CRD II and CRD III, and transposed under French banking regulations by way of an amendment to the Order dated 20 February 2007, which became effective on 30 December 2010 (the 2007 Order)).
The key provisions are embodied in Articles 210 to 218 of the 2007 Order. Under such provisions, a bank will only be allowed to apply the securitisation framework to a securitisation position acquired by it if the originator, sponsor or original lender discloses that it will retain, on an ongoing basis, a material net economic interest in the securitisation of no less than 5 per cent.
However, these rules are replaced by the CRD IV package, which is split into a Directive (Capital Requirement Directive IV (CRD IV Directive)) and a Regulation (CRR), which entered into force on 28 June 2013. It became applicable as of 1 January 2014. CRD IV addresses matters such as liquidity standards and insufficient capital levels, both in quantity and in quality. It lays down stronger prudential requirements for banks, requiring them to keep sufficient capital reserves and liquidity. It also contains specific mandates for the European Banking Authority (EBA) to develop Binding Technical Standards, guidelines and recommendations that will form part of the Single Rulebook.
Therefore, the retention obligation by the originator, sponsor or an original lender of a 5 per cent stake is a material consideration for institutions resorting to securitisation, and one that may influence the appetite of market participants for the acquisition of securities in such a securitisation.
Short selling and credit default swaps
EU Regulation No. 236/2012 of the Council of March 2012 on short selling and certain aspects of credit default swaps has entered into force and is fully applicable from 1 November 2012. It is supplemented by delegated regulations adopted by the European Commission specifying certain technical elements of the aforementioned Regulation to ensure its compliance and to facilitate its enforcement.
The AMF specified in its Position 2013-09 of 19 June 2013 that it will apply the European Securities and Markets Authority guidelines, from ESMA 2013/74, in relation to the exemptions to the short selling regulations for market-making activities and primary market operations under Regulation No. 236/2012.
The Banking Reform regulates HFT by specifying that any person using automatic trading systems must:
- a report to the AMF the use that has been made of such systems to generate, buy and sell orders of securities issued by companies having their head office in France;
- b ensure that the order directed to a regulated market or a multilateral trading facility is traceable;
- c keep a record of any element allowing a link to be established between a given order and the algorithms used to determine such orders; and
- d keep a record of the algorithms used to elaborate the orders transmitted to the markets, and transmit to the AMF such algorithms upon request.
In addition, the Banking Reform provides for new duties applicable to market operators or persons who operate multilateral trading facilities to ensure that their systems have the capacity to handle the number of orders generated by automatic trading systems, so as to permit orderly trading under high-volatility market conditions. There must be mechanisms in place to permit the suspension or rejection of orders exceeding set thresholds or otherwise in the event of manifestly erroneous trades. There must be procedures in place of such a nature as to maintain the orderly functioning of the markets.
New rules on algorithm trading – MIF II
Algorithm trading and HFT have been regulated by the French Monetary and Financial Code since the European MiF II regulation was transposed into French law on 23 June 2016. The entry into force of the directive was delayed by a year and is now expected on 3 January 2018, after which the following new provisions will be law:
- a implementation of a harmonised regime of minimum tick sizes based on the price and liquidity of stocks, deposit certificates and exchange traded funds traded on European trading platforms;
- b strengthening of the organisational requirements of market actors using algorithm trading to insure their trading systems resistance. These requirements include imposing on investment companies the obligation to notify the competent authority and test the algorithms they use, and for the trading platforms to implement the necessary measures to enable the realisation of these tests, the identification of the algorithms used by their members by marking orders or the suspension of the provision of direct electronic access by a member. Regarding market actors using HFT, they are subject to the obligation to maintain and deliver, on request, to the competent authority their order data;
- c supervision of the market-making activity with the introduction of common minimum requirements applicable to anyone wishing to exercise this activity, and requirements to ensure that devices platforms are fair, non-discriminatory and provide for incentive mechanisms during stress periods; and
- d supervision of the fee structures of trading platforms that need to be transparent, fair and non-discriminatory.
Transposition of the Alternative Investment Fund Managers Directive (AIFMD)
The AIFMD was transposed into French law by Ordinance No. 2013-676 of 23 July 2013 and Decree No. 2013-687 of the same date.
The implementation into French law of the AIFMD was used by French authorities as an opportunity to modify the French asset management regulations to render them more competitive, in particular for foreign investors and sponsors.
One of the main modifications was to simplify the product range, leading to fewer categories of investment funds, and with two distinct sets of regulations (i.e., one set for UCITS funds – which are the sole investment funds authorised to call themselves OPCVMs – and another for alternative investment funds).
Trading of agricultural commodities
The Banking Reform introduces new regulations with a view to fighting excessive speculation in relation to trading of agricultural commodities. The AMF is vested with the authority to set, as from 1 July 2015, thresholds of positions that a single person may hold in financial instruments, the underlying assets of which include an agricultural commodity. The AMF will also be responsible for specifying the exemptions to such thresholds where positions are taken for hedging purposes.
Furthermore, persons whose positions exceed thresholds specified in the RG-AMF for financial instruments that include underlying assets of an agricultural commodity will be subject to specific reporting to the AMF on a daily basis. Aggregated positions will be published by the AMF on a weekly basis.
iii Cases and dispute settlement
Non bis in idem
The French Constitutional Council, in a landmark decision following the jurisprudence of the European Court of Human Rights’ in its Grande Stevens decision, ruled on 18 March 2015 that the same person could no longer be prosecuted and condemned twice for the same facts by the French financial markets authority, the Enforcement Committee and a French criminal court.10
In its decision, the Constitutional Council considered as being unconstitutional the legal provisions setting forth criminal prosecution for insider trading offences, and those providing for administrative prosecution for insider trading breaches, on the grounds that the criminal and the administrative definitions of insider trading are similar, aim at punishing the same facts and protect the same public interest.
Until this decision and a well-established jurisprudence, cumulating administrative and criminal sanctions was deemed consistent with both the French Constitution, provided, however, that the total penalties did not exceed the maximum possible amount under either offence.
The 18 March 2015 Constitutional Council decision is to have an immediate effect, including on individuals having already been sentenced or prosecuted by the French financial markets authority or a French criminal court.
Questions remained as to how and when criminal courts would align their case law; in two decisions dated 6 and 18 May 2015, the Paris criminal court applied this new principle to cumulative prosecutions under market abuses where the AMF had already prosecuted the case, even if defendants had not been ultimately sanctioned by the AMF (this was notable in the EADS case). These decisions concern insider trading cases, but should also cover market manipulation and false information spreading offences.
The censored provisions were amended by a law dated 21 June 2016 that reorganised the French Monetary and Financial Code relating to market manipulation. The new provisions maintain a duality of procedures with administrative and criminal prosecutions, but creates a referral mechanism to ensure that a person is not prosecuted and condemned twice for the same acts. Therefore, the prosecutor cannot bring a criminal prosecution for insider trading when the AMF has already started an administrative prosecution against the same person and for the same offence. Respectively, the AMF cannot start an administrative sanction procedure when the prosecutor has already started a criminal prosecution for the same market manipulation. Both the AMF and the criminal courts can also start prosecution after mutual consultation. In the absence of agreement, both parties are heard by the General Prosecutor of the Paris Court of Appeal, who renders a decision regarding allowing the criminal proceedings.
It is important to point out that this new law also modifies the sanctions applicable for market manipulation by raising them to five years of imprisonment and up to €100 million in fines. This amount may be increased up to 10 times the amount of the benefit derived from the manipulation, without the fine being inferior to this benefit.
Structured products sold to local authorities
Certain structured loans or derivative transactions entered into from 2005 to 2010 between banks and municipalities, local governments or other types of public entities (known as ‘toxic loans’) generated heavy losses largely attributable to the market turmoil that followed the demise of Lehman and turned into litigation. In this respect, several public entities are attempting to seek damages against banking institutions on various grounds (including lack of proper advice, speculative nature of such loans, mis-selling, fraud) or seeking that the interest provision of such structured loans be declared void. In three similar decisions rendered on the same day11 involving Dexia, the Nanterre Court of First Instance decided that the contractual interest rate of the disputed loans had to be replaced by the legal interest rate as a result of the omission of the effective global rate in the faxes exchanged between the public local entity and the bank during the preparation process of the loan agreements (although this effective global rate was stated in the final loan agreements). Apart from this omission, however, Dexia succeeded on all grounds in these decisions. A more recent decision12 opposing another credit institution to the same local public entity ruled in favour of the bank, considering, inter alia, that the bank complied with all of its duties and that the local public entity consent was not vitiated. Other decisions are expected to be rendered during the next few months.
Recent decisions rendered by appeal courts show that the judges tend to adopt a case-by-case approach, seeking to assess, on the basis of the facts of each case, whether banks have properly informed their clients about proposed products. In many instances, the public entities’ claims against the bank have been rejected, with no fault or failure to advise being characterised against he bank.
The French government has set up a specific fund – half financed by the state and half by a special tax on French banks – that will provide €100 million annually to help municipalities and local public entities deal with toxic structured loans on their books. It is currently planned that the fund will be available for 15 years and provide a total €1.5 billion in support. Further to the January rise of the Swiss franc, it already appears that this fund may not be sufficient. Under the fund’s rules, one of the conditions to benefit from the fund is that all existing litigations with the banks are settled. Therefore, one can expect that the number of court cases involving structured loans or derivatives with municipalities will diminish.
The Parliament has also adopted additional measures to limit the right of municipalities and local governments to enter into structured products and to validate existing loan contracts that may fall foul of the rules regarding the indication of the effective global rate on loan documents.
In a significant and controversial decision at the end of 2011, the AMF Enforcement Committee sanctioned the market behaviour of commercial parties to equity swap transactions that were designed to be cash-settled and that were allegedly used ultimately to take a position in the issue of underlying assets.13 The case was appealed, and the Paris Court of Appeal confirmed the AMF Enforcement Committee decision.14
In a high-profile case, LVMH SA had built up a 17.1 per cent stake in Hermès International SCA by buying equity swaps in 2010. In view of the fragmentation of the exposures, the positions crossing the 5, 10 and 15 per cent thresholds were not declared under Article L233-7 of the French Commercial Code. In response to the LVMH build-up in Hermès International, the Hermès family transferred a portion of its shares to a holding, which as a result owned in excess of 30 per cent of the Hermès capital and voting shares. Such a holding required the filing of a takeover bid, but an exemption was sought by the Hermès family and obtained from the AMF. LVMH lodged an appeal against that decision. The Paris Court of Appeal dismissed the appeal, and the Court of Cassation15 upheld this decision. In the meantime, the AMF Enforcement Committee launched an inquiry into LVMH’s investment in Hermès International; LVMH was fined a record €8 million for failing to comply with public disclosure requirements (Article L223-6 of the RG-AMF).
The Transparency Directive, as amended, adopted by the European Parliament in June 2013, includes provisions requiring disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies, thus closing the loophole used in the Hermès case.
Meanwhile, legislation was enacted in March 2012 in France, amending Article L233-7 et seq. of the French Commercial Code so that the holder of a cash-settled financial instrument is subject to the threshold disclosure requirement contemplated by that Article (applying, inter alia, where the underlying asset of that financial instrument is constituted by shares issued by a French issuer traded on an EEA regulated market, over which the holder of the relevant financial instrument holds an economic benefit similar to possession of such shares).
Derivatives – liabilities of financial intermediaries
Some recent cases have also addressed the issue of the duty of the financial intermediary to inform its counterparty of the way it will be remunerated in respect of hedging arrangements concerning commodities. In this case, the issue at stake was the setting-up by the bank, at the request of its client, of hedging transactions against a decline in the nickel price in the form of zero-premium options. The client was challenging the underwriting and implementation conditions of these transactions. The Paris Court of Appeal, in a decision dated 26 September 2013, ruled that the bank has the duty to inform its client of the way it is going to be remunerated and ordered the bank to pay damages (US$8 million) to its client for breach of its duty of information.
In its decision dated 17 March 2015, the French Supreme Court quashed this decision of the Paris Court of Appeal and referred the parties before the same, but differently composed, Court of Appeal.
The French Supreme Court ruled in particular that the Court of Appeals breached Article 1147 of the Civil Code by considering that the bank was bound by a duty to inform its client of the methods it was using to draw benefit from these transactions.
On 4 May 2010, the Supreme Court ruled on a matter arising from Lehman-related prime brokerage transactions where Lehman Brothers International (Europe) (LBIE) acted as prime broker for a French alternative investment fund and a French credit institution acted as a depository.16 Following the LBIE insolvency, the investment fund requested that the credit institution acting as a depository redeliver assets to fund investors under prime brokerage with LBIE. The credit institution had filed an appeal against an AMF injunction to redeliver those assets. The Paris Court of Appeal upheld the AMF injunction and the Supreme Court confirmed that decision, all on the basis of overriding public policy considerations. It also dismissed on the same grounds defences raised under the provisions of Article 5.2 of the EU Collateral Directive regarding resort by the collateral taker to the remedy of set-off where the security collateral arrangement so provides. The Court disapplied the provisions of the prime brokerage agreement in respect of the right of use that prohibited the resort to setting off the value of equivalent collateral against the discharge of financial obligations.
The liability of a depository in the context of a French alternative investment fund using prime brokerage services will be governed by the provisions of Ordinance No. 2013-676 of 25 July 2013 (Article L214-24-10 of the M&FC), which transposes in French law Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers (AIFM Directive).17
Margin disclosure obligations applying to investment service providers
The issue of whether an investment service provider is required to disclose its remuneration and profit margins to its counterparty contracting party has been subject to several judicial decisions in France. In a decision dated 26 September 2013, the Court of Appeal of Paris considered that an investment service provider should inform the client of the banks’ margins related to the hedging transaction they had entered into. This decision was, however, overruled by the French Supreme Court in a judgment dated 17 March 2015, where the judges considered that the investment service provider, party to a hedging agreement against the risk of fluctuation in commodity prices, was not required to disclose to the other party his expected profit.
iv Insolvency law
Insolvency, composition or rehabilitation proceedings in France are proceedings of judicial reorganisation and judicial liquidation governed by the bankruptcy provisions contained in the French Commercial Code. Since 1 January 2006, these proceedings have been supplemented by a safeguard proceeding as a result of the enactment of the Safeguard Law. Pursuant to the new Safeguard Law No. 2010-1249 of 22 October 2010, effective 1 March 2011, the judicial reorganisation proceeding, the judicial liquidation proceeding and the safeguard proceeding are supplemented by an ‘accelerated financial safeguard procedure’, which allows a debtor to reach a voluntary restructuring agreement with its primary financial creditors (financial institutions and bondholders) on an accelerated basis. This corresponds roughly to the equivalent of a US Chapter XI pre-packaged reorganisation plan.
More recently, the Ordinance of 12 March 2014 introduced an ‘accelerated safeguard proceeding’.
French insolvency proceedings are initiated with a judgment admitting the debtor to the safeguard proceeding or otherwise declaring a debtor insolvent and ordering its judicial reorganisation or liquidation under the appropriate proceeding.
A safeguard proceeding introduced pursuant to the provisions of Article L620-1 and following the French Commercial Code is available on demand to a debtor who, while not meeting the insolvency test, justifies the existence of difficulties that it is unable to overcome and that may lead to its insolvency. It is aimed at facilitating the reorganisation of the enterprise leading to the continuation of its business, job preservation and discharge of its liabilities.
A reorganisation phase approved by judgment then follows an appraisal period. During the appraisal period, the debtor remains in possession as it is administered by its managers. The bankruptcy judgment may, however, appoint one or more judicial administrators whose duties are to monitor the debtor in respect of its management or to otherwise assist the debtor in any managerial acts.
Under Article L631-4 and Article L640-4 of the Commercial Code, the opening of judicial reorganisation or liquidation proceedings is requested by the insolvent debtor within 45 days of the date of insolvency, provided it has not applied for the opening of conciliation proceedings within that period.
The French Commercial Court also has jurisdiction to order such proceedings on its own initiative or at the request of the public prosecutor or a creditor.
The accelerated financial safeguard procedure will allow a debtor to reach a voluntary restructuring agreement with its primary financial creditors (financial institutions and bondholders). This procedure will enable a debtor to move from the conciliation procedure into the accelerated safeguard procedure when it proves to the French Commercial Court that the restructuring plan ensures the continuity of the company and has a good chance of being approved, within a short period of time (see below). The restructuring plan must be adopted by a majority of two-thirds of the claims in the committee (consisting of banks and financial institutions) and in the bondholders’ general meeting, if any. This procedure is shorter than the ordinary safeguard procedure, and lasts one month from the opening of the procedure with a possible extension of one further month only.
Under Article L631-1 of the Commercial Code, inability to meet current liabilities with current assets constitutes the insolvency test.
A period of appraisal also applies in respect of a judicial reorganisation proceeding. As in a safeguard proceeding, the period of appraisal starts from the date of the bankruptcy judgment and may, subject to the court’s determination, extend for a period of up to 18 months. During such period, a reorganisation plan is prepared by the judicial administrator appointed in the bankruptcy judgment. Such plan contemplates the continuation of the activities of the debtor and – as the case may be – the termination, addition or assignment of one or several activities (provided that such assignment is subject to the provisions relating to judicial liquidation proceedings).
At any time during the appraisal period, the court may order, upon application of the debtor, the judicial administrator, the representative of the creditors, the controller or the public prosecutor, or sua sponte, the partial closing down of the business.
The court may convert the safeguard proceeding into a judicial reorganisation proceeding if the debtor meets the insolvency test, or the safeguard proceeding or the judicial reorganisation proceeding (as the case may be) into a judicial liquidation proceeding if the reorganisation of the debtor appears to be manifestly impossible otherwise or if the assignment of its assets is otherwise contemplated either as a whole or separately.
At or prior to the expiry of the appraisal period, the court either approves a plan or declares the judicial liquidation of the debtor. The judicial liquidation may be ordered without the benefit of a prior appraisal period when the relevant business has ceased its operations or when a judicial reorganisation appears to be manifestly impossible. A liquidator is then appointed.
v Role of exchanges, CCPs and rating agencies
Article L440-1 et seq. of the MF&C provides that clearing houses ensure monitoring of positions, margin calls and, if need be, mandatory liquidation of positions. A clearing house is required to have the status of a credit institution, and its operating rules are approved by the AMF, the French markets and securities regulator.
The Banking Reform modifies the legal regime applicable to French clearing houses, with particular attention to the conditions under which, in the event of default by a participant, a clearing house may transfer the position and collateral of the participant’s clients to another participant.
Relations between the clearing house and participants are governed by contract. Banque Centrale de Compensation is the LCH.Clearnet SA entity licensed as a bank through which clearing operations are carried out, operating under the LCH.Clearnet trade name. Banque Centrale de Compensation was initially created in 1969, and in 1975 it started to clear OTC markets. In 1990 it became a subsidiary of Matif SA, the clearing house of the derivatives market, licensed as a financial institution.
In 1988 SBF was created as a market undertaking and clearing house for regulated markets in the form of a financial institution. SBF-Bourse de Paris took control of Matif SA in 1998, and during that year Clearnet also launched a clearing service for French government securities and was the first organisation in Europe to allow remote clearing.
In 1999, the French markets were restructured, as a result of which all regulated markets were run by a single body, SBF (trading under the name of Euronext Paris). Clearnet was spun off as a subsidiary of Euronext and became the clearing house for all products traded in the Paris market. It clears through Banque Centrale de Compensation.
LCH.Clearnet SA today is a wholly owned subsidiary of LCH.Clearnet Group Ltd, 57 per cent of the shares of which are owned by the London Stock Exchange.
LCH.Clearnet SA has been designated by the Minister of Finance as a system under the EU Settlement Finality Directive as transposed in France under Article L330-1 et seq. of the M&FC.
To reduce the systemic risk posed by derivatives in compliance with G20 commitments relating to clearing standardised OTC derivatives, EU Regulation No. 648/2012 of 4 July 2012 on OTC derivatives, CCPs and trade repositories (EMIR) has been adopted and came into force on 16 August 2012. It lays down clearing and bilateral risk management requirements for OTC derivative contracts, reporting requirements for derivative contracts and uniform requirements for the performance of the activities of CCPs and trade repositories.
LCH.Clearnet SA, under its Rule Book, guarantees performance with regard to its participants. The ACPR assimilates a clearing house to a payment infrastructure.
As mentioned above, Banque Centrale de Compensation is licensed as a bank or credit institution for the purposes of the EU Banking Directive. As such, it is also subject to mandatory reserve obligations under the ECB Regulation.18
Under the provisions of the M&FC it is mandatory for a clearing house to be licensed as a credit institution, and this has been confirmed by the Banking Reform.
Being subject to reserve requirements also entitles Banque Centrale de Compensation to Central Bank money.19
Although already subject to EMIR, a CCP is also subject to comprehensive requirements, including in the areas of capital and compliance. These requirements fall short, however, of requiring that a CCP be licensed as a credit institution. Authorisation as a CCP is granted by the competent authority of the Member State in which it is established.
The French regulatory environment relating to rating agencies is governed by the EU Regulation on credit rating agencies issued on 16 September 2009 No. 1060/2009, as modified by Regulation No. 513/2011 issued on 11 May 2011, which reinforces the direct supervision and control powers limited in the first version (Rating Regulation).
The Rating Regulation imposes on rating agencies duties:
- a to avoid conflicts of interests and to require an increasingly high degree of independence from stakeholders within the rating process;
- b to improve the rating quality by achieving higher standards in respect of methodology;
- c to improve governance and internal controls of rating agencies; and
- d to introduce rules to improve the transparency of the rating process regarding the rated entity as a sine qua non condition to win public confidence in financial markets.
On 30 May 2012, four Commission Delegated Regulations establishing regulatory technical standards for credit ratings agencies were published. These technical standards set out:
- a the information to be provided by a credit ratings agency in its application for registration with ESMA;
- b the presentation of the information to be disclosed by credit ratings agencies in a central repository so investors can compare the performance of different credit ratings agencies in different rating segments;
- c how ESMA will assess rating methodologies; and
- d the information that credit rating agencies must submit, and at what time intervals, to ESMA for it to supervise compliance.
Ratings used either for regulatory purposes or in a prospectus to be used for admission to trading on a regulated market must be issued by credit rating agencies established in the Community and registered in accordance with the Rating Regulation. A credit agency may, subject to certain conditions, endorse a credit rating issued in another country. Exemptions to endorsement are subject to certain conditions. Such credit rating agencies must apply for certification.
The Regulation further provided that by 7 June 2010, each Member State should designate a competent authority for the purpose of the Rating Regulation. The AMF has been designated by Law No. 2010/1249 of 22 October 2010 as the competent French authority for registration and supervision of credit rating agencies.
Key provisions of Regulation No. 462/2013 of the European Parliament and of the Council of 21 May 2013, amending Regulation (EC) No. 1060/2009 on credit rating agencies contemplate that:
- a ratings will be published on a European rating platform;
- b ratings of sovereign bonds will be limited and made more transparent;
- c financial institutions will have to strengthen their own credit risk assessment; and
- d the risk of conflicts of interest will be mitigated.
Article 544-5 of the M&FC addresses the liability of credit rating agencies with regard to clients and third parties for damage resulting from the fault or negligence of the credit rating agencies in the performance of their obligations under the Regulation. Any agreement designating in advance a jurisdiction located outside the EU to settle such disputes is deemed null and void if the French courts would otherwise have jurisdiction over those matters.
As a result of the economic crisis and of the new EU legal framework governing rating agencies, the three agencies dominating the French rating market (Moody’s, Standard & Poor’s and Fitch) have reorganised their structures, reinforcing their supervisory activity. The rating agencies in France had already substantially modified their methodology in 2009 relating to bonds so that estimated liquidity risk could be taken into account and addressed.
III OUTLOOK AND CONCLUSIONS
The French banking system has emerged stronger from the turmoil of 2007–2009, although a few institutions have been subject to severe stress.
The focus on universal banking, combining a robust retail banking sector (which benefits from strong shareholder support) with corporate investment banking activities operating in a well-established regulatory and supervisory environment, has been at the root of France’s ability to overcome the severe difficulties and substantial losses of the past few years.
Losses sustained in this period were essentially attributable to structured products (and a substantial portion of those losses related to sub-prime products), monoline exposure and market counterparties. Operational risk and compliance failures also resulted in losses. Liquidity remains, however, a matter for concern, as has been shown by the problems of Dexia Bank.
The French government, together with its European counterparts, has taken swift measures to enable banks to strengthen their own funding requirements and to ensure continuous dialogue between the French bank supervisor and major French banks in the context of the Basel II Pillar 2 measures. Tools created and used between 2008 and 2009 to solve bank liquidity problems and to strengthen own funds may be easily reactivated. Those actions resulted in the restoration of confidence, leading to a phase-out of emergency measures in 2009 as liquidity improved.
The events of the past few years have shown that remedies for a global crisis lie only in global (and regional) actions. The need for improvement of the supervisory framework at the European level, in close coordination with Member States, has become compelling. The adoption, therefore, of Basel III measures has constituted a particular challenge in the context of strengthening regulatory capital levels. The entry into force of CRD IV and CRR is expected to strengthen the trend towards disintermediation, together with enhanced recourse to capital market instruments and securitisation. It is in this context that the initiatives under consideration by European governments to create a single supervisory banking framework under ECB oversight are to be considered.
With the aim of enhancing access to credit facilities for SMEs and to facilitate access to export financing on competitive terms to French corporate entities, Law No. 2012-1559 of 31 December 2012 has created a public investment bank. The crisis has also shown the importance, and challenges, of the reform and harmonisation of accounting standards. Reduced complexity, better coordination and the improvement of risk-provisioning rules are of the utmost importance.20
Following the publication of the Liikanen report in October 2012, in January 2014 the European Commission adopted a proposal for a regulation the purpose of which was to impose structural measures to improve the resilience of EU credit institutions by providing in particular for the mandatory separation of proprietary trading and related trading activities. This draft regulation is controversial.
The long-awaited creation of pan-European supervision authorities, including the EBA, the ESMA and the European Insurance and Occupational Pensions Authority, has helped address the compelling need for supervision at European level. The adoption on 12 June 2014 of the Directive on Markets in Financial Instruments No. 2004/39/EC (MiFID 2) and Regulation No. 600/2014 on the Markets in Financial Instruments (MiFIR) is also a major item on the agenda of the reform of the European securities markets.
1 Antoine Maffei is a founding partner and Olivier Hubert is a partner at De Pardieu Brocas Maffei.
2 Article 212-40 to 212-42 of the RG-AMF.
3 Article 212-3 of the RG-AMF.
4 The highest administrative jurisdiction.
5 See, in this respect, on www.dalloz.fr: C cass, Ch com, 13 December 2011, 11-11.934; C cass, Ch com, 13 September 2011, 10-199.07; C cass. Ch civ, 15 February 2011, 10-12.185; C cass, Ch com, 17 May 2011, 10-30.650; C cass, Ch com, 3 May 2011, 10-14.865.
7 Transactions fall within the scope of Article L211-36-1 of the M&FC if at least one of the parties to such transactions is a party referred to in Article L211-36-1 of the M&FC (each, a ‘qualifying party’):
a a credit institution;
b an investment services provider;
c a public establishment;
d a local authority;
e an institution, firm or an establishment referred to in Article L531-2 of the M&FC;
f a clearing house;
g a non-resident establishment with a comparable status; or
h an international financial organisation or body of which France or the European Union is a member.
8 Which, in essence, transposes into French law the provisions of Annex I, Section C of MiFID.
9 As such instruments do not fall within the scope of application of MiFID, they cannot benefit from the provisions of MiFID relating to the ‘European passport’.
10 Cons const, No. 2014-453/454 and No. 2015-462.
11 Nanterre Court of First Instance, 8 February 2013, 6th Chamber (three judgments).
12 Paris Court of First Instance, 25 June 2013, 9th Chamber, Section 1.
13 Decision of the AMF Enforcement Committee issued on 13 December 2010.
14 Paris Court of Appeal, 31 May 2012, No. 2011/05307.
15 C cass, Ch Com, 28 May 2013, No. 11-26.423 and No. 12-11-672.
16 C cass, Ch civ, 4 May 2010, 09-14.976.
17 Article 21, Subparagraphs 12 et seq. of the AIFM Directive.
18 Regulation No. 2818/98 of the European Central Bank.
19 General Documentation on Eurosystem monetary policy instruments and procedures, p. 10.
20 A Maffei, ‘A survey of current regulatory trends’, The International Bar Association’s Task Force on the Financial Crisis, October 2010, pp. 175–6.