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 and a strong supervisory framework.
i Legislative framework
French capital markets legislation has experienced strong developments in the context of both national and EU initiatives.
Most EU directives and regulations related to capital market transactions (e.g., the Money Market Fund Regulation, the Benchmark Regulation, the Packaged Retail and Insurance-based Investment Products Regulation, the Prospectus Regulation, the Market Abuse Directive and the Market Abuse Regulation, the Alternative Investment Fund Managers Directive (AIFMD) and others) have been implemented under French law, in addition to the Markets in Financial Instruments Directive (MiFID II), which came into effect on 3 January 2018, and the Regulation on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories.2
The stock exchange is of course a key element of the French capital market infrastructure. Stock exchanges in France are operated by Euronext.
ii Law governing the issuance of debt and equity securities
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 Markets Authority (RG-AMF) and related implementing instructions. European regulations, and in particular the Prospectus Regulation (recently amended),3 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 the 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 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 the RG-AMF.
Contractual terms of bonds are subject to party autonomy, and if a transaction is international or cross-border, bonds may be governed by a foreign law chosen by the parties subject to any provisions that 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 Markets 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 a prospectus, the supervisory authority that approved the prospectus will send the certificate of approval and a copy of the prospectus to the AMF,4 with a French translation of the summary note, where appropriate.5 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 the EEA, however, would not be required to obtain approval from the AMF or from the competent supervisory authority of another EEA Member State if no offer to the public is contemplated in France or any other EEA Member States.
iii The AMF
The AMF is divided into two bodies, a board and an enforcement committee, that operate separately and independently of 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 grievances to the enforcement committee. There is then an investigation procedure led by the enforcement committee, which may impose sanctions.
According to Article L621-15 of the M&FC, the enforcement committee may impose sanctions on professionals controlled by the AMF, individuals under the supervision of these professionals and other persons acting on their own.
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 that are 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 aim of creating the AMF, which is vested with strong regulatory supervisory and enforcement authority, was to strengthen the protection of investors. In this regard, several decisions of the Supreme Court during the past few years have endorsed this position6 and have strengthened the advisory duties of financial services providers to inform their clients of the risks linked to financial products. This obligation consists not only in informing a client, but also in assessing a client's ability to properly understand the nature of speculative operations under consideration.
In the interests of transparency, the duties of financial services providers and distributors have been increased, the general perception being that this is also justified by the market environment and the atmosphere of uncertainty produced by the 2008 financial crisis. Like other countries, France implemented its own institutional reform of its financial supervision system in 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. 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 expanded accordingly. Among its extended 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 interests 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 through the authority to require documents and information from entities subject to their supervision to ensure the performance of their mission of monitoring and supervision.
The recent Loi Pacte, which was enacted on 22 May 2019 (Pacte Law), extends the prerogatives of the AMF in respect of sustainable finance by specifying that the AMF must ensure the quality of the information provided by management companies for the management of collective investment schemes on their investment strategy and their management of the risks related to the effects of climate change.
The AMF announced the creation of the AMF's Climate and Sustainable Finance Commission on 2 July 2019, which will bring together stakeholders on the subject of sustainable finance and assist the AMF in carrying out its regulatory and supervisory missions on issues related to sustainable finance.
II THE YEAR IN REVIEW
i Recent developments affecting debt and equity offerings
Recent developments mainly relate to the implementation of the Prospectus Regulation on 21 July 2019 and to the emergence of a new regulation regarding cryptocurrencies, tokens and related transactions (initial coin offerings (ICOs)).
Modification of the French legal and regulatory framework following the entry into force of the Prospectus Regulation on 21 July 2019
Aimed at facilitating access to the market by companies without compromising on the information communicated to investors, the Prospectus Regulation (and two delegated regulations) fully entered into force on 21 July 2019. The Prospectus Regulation provides, inter alia, that:
- Member States can exempt offers of securities to the public with a total consideration in the European Union of between €1 million and €8 million (calculated over a 12-month period) from the requirement to publish a prospectus; in this respect, France decided to exempt offers of securities below the threshold of €8 million from the publication of a prospectus;
- 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 have their prospectuses approved more quickly by a competent authority; and
- the prospectus summary is to be shortened to a maximum length of seven A4 pages. A set format will be required, based on the key information document for packaged retail and insurance-based investment products (PRIIPS), with four main sections specifying the following:
- introductory warning language;
- key information about the issuer;
- key information about the securities; and
- key information about the offer of securities to the public and admission to trading.
In this context, the AMF and the Treasury launched public consultations during the spring of 2019 on several amendments of French law and of the RG-AMF necessary for the correct 'negative' implementation under French law of the Prospectus Regulation. The proposed changes, concern in particular the following topics:
- defining the consequences under French law of the change in the definition of public offering of securities as it is now conceived by the Prospectus Regulation. The Prospectus Regulation actually extends the definition of offers to the public and includes in this definition offers that until now were not considered to be offers to the public under French law (such as private placements). Given this new definition, French regulations have to be adapted, with the objective in particular to allow, without additional constraint, the continuation of private placements and crowdfunding offers; and
- ensuring the 'negative' transposition of the Prospectus Regulation: this negative transposition involves, in particular, deleting or modifying numerous articles of the M&FC and of the RG-AMF that have now been replaced by directly applicable provisions of the Prospectus Regulation. In addition, French regulations must be adapted to implement into domestic law the options left up to Member States (the language of the prospectus, the responsibility relating to the publication of a prospectus, commercial documentation and the document serving as an exemption from a prospectus in cases of merger, split-up or spin-off).
The ordinance modifying French law and the new provisions of the RG-AMF was enacted on 21 October 2019.
In September 2019, the AMF also consulted the public on a modification of its doctrine to be incorporated into a new handbook entitled Guide to preparing prospectuses and information to be provided in the event of a public offering or admission to trading of financial securities. Such guide will consist of three sections: information to be provided in prospectuses approved by the AMF as of 21 July 2019; information to be provided if no prospectus is required; and AMF positions and recommendations concerning the issuance and admission to trading of equity securities.
Registration of securities through the use of blockchain
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 made in respect of financial instruments between securities (including both equity and debt instruments issued by stock companies, and 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.
Ordinance 2017-1674 of 8 December 2017 introduced a significant change to the legislation relating to the ownership and transfer of securities by allowing and recognising the validity of transfers of non-listed securities through a shared digital recording device, which refers to the blockchain technology also called distributed ledger technology. This digital registration has acquired the same legal value as a book-entry registration, and the type of registration is chosen by the issuer. Decree 2018-1226 dated 24 December 2018 provided implementing provisions for this new regime. This legal innovation made France a pioneer country in the acknowledgment and use of blockchain-based services.
The Pacte Law introduced into French legislation a new legal framework for fundraising via the issuance of tokens (ICOs) that applies to tokens that are not classified as financial instruments. Prior to that, no specific rules applied to fundraising through the issuance of tokens. The Pacte Law enables the initiators of a project who so wish to submit an information document to the AMF for an optional visa that will be issued on condition that the issue of tokens meets the specified requirements outlined below.
A token is defined by the Pacte Law as any intangible property representing, in digital form, one or more rights that may be issued, registered, retained or transferred by means of a shared electronic recording device that identifies, directly or indirectly, the owner of such property (i.e., blockchain).
An ICO consists of proposing to the public, in any form whatsoever, subscription to these tokens. An ICO that is open to subscription by a restricted circle of less than 150 investors, acting on their own behalf, is not considered as being an offer of tokens to the public.
Token issuers who wish to carry out an ICO may apply for an approval from the AMF. To give its approval, the AMF shall verify whether the offering provides the following guarantees:
- the token issuer is incorporated as a legal entity established or registered in France;
- an information document (commonly called a white paper) has been drawn up in accordance with Article 712-2 of the RG-AMF and with AMF Instruction DOC-2019-06;
- the issuer has implemented a procedure enabling the monitoring and safeguarding of the funds raised by the ICO; and
- the token issuer has put in place a system to ensure compliance with its obligations relating to anti-money laundering and combating the financing of terrorism.
Digital asset service providers
The Pacte Law introduces a new regulatory framework applying to digital asset service providers (DASPs): it creates an optional licence for DASPs, which constitute a new category of regulated service providers licensed and placed under the supervision of the AMF.
The term digital assets comprises tokens issued through an ICO and virtual currencies as defined by European law (such as bitcoin). Financial instruments are excluded from this regime.
The activities that may be carried out by DASPs are, in particular, the following:
- custody of digital assets for third parties;
- purchase or sale of digital assets against legal tender or other digital assets (broker-dealers);
- operation of a digital assets trading platform (stock exchange); and
- other digital assets services such as the reception and transmission of third-party orders, third-party portfolio management, advice, underwriting and placing on or without a firm commitment basis.
Licensed service providers will be subject to a set of core rules common to all services (insurance or equity, internal control procedures, resilient IT system, transparent pricing policy, etc.) as well as a certain number of rules specific to the service offered.
As an exception to the above, service providers who wish to provide digital asset custody services to third parties or to purchase or sell digital assets in exchange for legal currency are subject to mandatory registration with the AMF.
Strengthening the sanction regime relating to foreign investments
The Pacte Law aims at strengthening the sanction regime relating to foreign investment screening by providing the Minister of Economy with a wider scope of sanctions and enforcement powers.
In particular, once a foreign investor fails to file for and obtain an investment authorisation when required by French regulations, in addition to civil sanctions of nullity, the Minister may, under the new rules, issue an injunction requiring the investor to file an application for investment authorisation, abandon the transaction and restore the previous situation at his or her own expenses or modify the transaction.
Furthermore, new powers are vested with the Minister of Economy in cases where conditions linked to a foreign investment authorisation are not fulfilled or are breached by an investor. Remedial measures include the revocation of an initial authorisation, the imposition of new conditions to be complied with within a specified time frame or the obligation to meet initial conditions.
In cases where national interests are likely to be jeopardised, the Minister has the right to take provisional, conservatory measures to protect national interests. These may include:
- a suspension of voting rights;
- a prohibition or limitation on the distribution of dividends or other remuneration attached to shares;
- a restriction on the free disposal of all or certain assets; or
- the appointment of a representative authorised to veto any decision of a corporate body whose expenses are covered by a company concerned.
In advance of the Pacte Law, the government adopted a decree in November 2018 that came into force on 1 January 2019. This decree expands the prior authorisation regime to new strategic sectors such as those involving space operations, electronic and computer systems required for public security purposes and data storage activities, and research and development in the fields of cybersecurity and artificial intelligence,
ii Developments affecting derivatives, securitisations and other structured products
Derivatives and the Netting Law
The French netting regime of derivatives (i.e., the 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 at least one of the parties to the transactions is a qualifying party (credit institutions, investment services providers, etc.), or from any contract giving rise to cash settlement or to delivery of financial instruments if both parties to the contract are qualifying parties.
As far as transactions involving financial instruments are concerned, Article L211-1 of the M&FC defines financial instruments (which include financial securities such as 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 financial contracts (also known as forward financial instruments, which are further defined in Article D211-1-A of the M&FC)).
If both parties are qualifying parties under the Netting Law, the scope of qualifying transactions is wider and includes any 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 in that case.
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 MiFID II.7 Article L211-36-II of the M&FC provides that, for the sole purposes of 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.
Note that the Banking Reform contemplates that when exercising rights available under the resolution tools vested in the ACPR, the ACPR 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 asset 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 a 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, 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 Article L211-36-1 in respect of all or part of the relevant contract concluded with the entity under resolution until midnight on the business day following the publication of the ACPR's motivation for the suspension.
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 et seq. of the M&FC (covering interbank payment systems and delivery versus payment designated systems where only part of but not all assets, rights and obligations are so transferred to another person).
The French netting and collateral regime has recently been modified by Sapin Law II, which extended the French close-out netting regime to financial obligations between a CCP, a clearing member and a client; allows third parties to post collateral; and provides an effective segregation of collateral posted as initial margin pursuant to Article 11 of the European Market Infrastructure Regulation (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 are progressively taking effect, following an agreed schedule that started in February 2017.
The Pacte Law introduces new measures specifically concerning derivatives:
- the Pacte Law extends the material scope of the Netting Law provisions described above to various operations including, inter alia, units mentioned at Article L. 229-7 of the Environment Code, foreign exchange spot transactions and transactions on precious metals (including gold, silver, etc.),
- in view of an anticipated termination of the passport rights of UK credit institutions after Brexit, the Pacte Law provides a mechanism of 'replication' of the master agreements executed with such UK credit institutions that are currently in force; this mechanism will allow, under certain conditions, the parties to such master agreements to terminate the existing agreements and execute similar agreements with an EU (non-UK) credit institution; and
- it provides a derogation to Article 1343-2 of the French Civil Code relating to the compounding of interest (pursuant to which the capitalisation of interest is permitted only where said interest has accrued for at least one year); this derogation allows the compounding of interests on periods shorter that one year when calculated pursuant to a market master agreement.
Implementation of EMIR
EMIR was published in 2012. It affects 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:
- clearing via a CCP of certain OTC derivatives entered into between certain market participants;
- reporting of all derivative transactions to a trade repository that were entered into since, or that were outstanding on, 16 August 2012; and
- 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 implementation of EMIR (i.e., collateral requirements for non-centrally cleared derivatives) has progressively taken effect from 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 European Union that would be an FC or NFC+ if they were established within the EU).
On March 2018, the AMF released a legal analysis that it had carried out on cryptocurrency derivatives. As a result of this analysis, in certain cases, cryptocurrency derivatives may be classified as financial instruments pursuant to Article D211-1 A I of the M&FC, and therefore are subject to the related regulation thereof, in particular the requirement for participants who market those products to be regulated and to be authorised to provide investment services, compliance with EMIR and a ban on advertising on certain financial contracts.
Securitisation and the 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, was initially 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 an Order dated 20 February 2007.
The provisions of Regulation (EU) 2017/2402 of 12 December 2017 lay down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, which entered into force on 1 January 2019. This Regulation establishes, inter alia, harmonised due diligence and transparency requirements for investors. It also prohibits resecuritisations, and creates a label and a legal framework for simple, transparent and standardised securitisations, which allows preferential prudential treatment. More importantly, it establishes a new direct obligation to retain a 5 per cent material net economic interest. Implementing and delegated acts of this text are still awaited.
The obligation for the originator, sponsor or original lender to retain 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.
Revamping of the securitisation legislation
By Ordinance 2017-1432, of 4 October 2017, which entered into force on 3 January 2018, the French legislator has created a broad category of debt funds named financing vehicles, which regroups the existing securitisation vehicles (OT) and a new category of regulated funds named specialised financing vehicles falling within the scope of AIFM that may benefit from the European long-term investment fund label.
This Ordinance also introduced the possibility for French securitisation funds to grant loans to non-financial companies and to enter into loan sub-participations. These funds may also benefit from the Dailly Law assignment regime, which is a simplified way of transferring professional receivables that was formerly reserved to credit institutions.
High frequency trading
The Banking Reform regulates high frequency trading (HFT) by specifying that any person using automatic trading systems must:
- report to the AMF the use that has been made of such systems to generate, buy and sell orders of securities issued by companies that have their head office in France;
- ensure that the order directed to a regulated market or a multilateral trading facility is traceable;
- keep a record of any element allowing a link to be established between a given order and the algorithms used to determine that order; and
- keep a record of the algorithms used to elaborate the orders transmitted to the markets, and transmit those algorithms to the AMF 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 highly volatile 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: MiFID II
Algorithm trading and HFT have been regulated by the M&FC since MiFID II was transposed into French law on 23 June 2016. The entry into force of the Directive, which was delayed until 3 January 2018, provides for:
- 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;
- strengthening of the organisational requirements of market actors using algorithm trading to ensure their trading systems' resilience. These requirements include imposing on investment companies the obligation to notify the competent authority and test the algorithms they use, and for 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. Market actors using HFT are subject to the obligation to maintain and deliver, on request, to the competent authority their order data;
- 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 device platforms are fair and non-discriminatory and provide for incentive mechanisms during stress periods; and
- supervision of the fee structures of trading platforms that need to be transparent, fair and non-discriminatory.
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. In 2017, it issued several positions setting such position limits for certain commodities traded on Euronext (Position 2017-12) and Powernext (Position 2017-11). The AMF will also be responsible for specifying exemptions to the 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 daily reporting to the AMF. Aggregated positions will be published weekly by the AMF.
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 Association française des marchés financiers, the Enforcement Committee and a French criminal court.8
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 administrative definitions of insider trading are similar, aim at punishing the same facts and protect the same public interest.
Until this decision and well-established jurisprudence, cumulating administrative and criminal sanctions were 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 was deemed to have an immediate effect, including on individuals who had 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 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 M&FC 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, a 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. Similarly, the AMF cannot start an administrative sanction procedure when the prosecutor has already started a criminal prosecution for the same market manipulation. However, both the AMF and the criminal courts can start prosecution after mutual consultation. In the absence of an agreement, both parties are heard by the General Prosecutor of the Paris Court of Appeal, who renders a decision on allowing the criminal proceedings.
It is important to point out that this law also modifies the sanctions applicable for market manipulation by raising them to five years' 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.
Derivatives: liabilities of financial intermediaries
A number of cases have also addressed the issue of the duty of a financial intermediary to inform its counterparty of the way it will be remunerated in respect of hedging arrangements concerning commodities. In one case, the issue at stake was the setting up by a 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 had the duty to inform its client of the way it was 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 the Court of Appeal decision and referred the parties before the same, but differently composed, Court of Appeal.
The Supreme Court ruled in particular that the Court of Appeal 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 the transactions.
On 4 May 2010, the Supreme Court ruled on a matter arising from Lehman-related prime brokerage transactions, in which Lehman Brothers International (Europe) (LBIE) acted as prime broker for a French alternative investment fund (AIF) and a French credit institution acted as a depository.9 Following the LBIE insolvency, the investment fund requested that the credit institution act as a depository to redeliver the 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 Supreme 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 AIF using prime brokerage services is governed by the provisions of Ordinance No. 2013-676, of 25 July 2013, (Article L214-24-10 of the M&FC), which transposes the AIFMD into French law.10
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 Paris Court of Appeal considered that an investment service provider should inform clients of banks' margins relating to the hedging transaction they had entered into. However, this decision was overruled by the Supreme Court in a judgment dated 17 March 2015, where the judges considered that the investment service provider, as a party to a hedging agreement against the risk of fluctuation in commodity prices, was not required to disclose the expected profit to the other party.
UBS case: solicitation on the French territory
One notable case in 2018 and 2019 in the French judicial landscape was the UBS case. In this case, UBS AG was found guilty of unlawful solicitation of clients on the French territory and helping them to implement tax evasion schemes by the French Court of First Instance of Paris, which sentenced it to pay €3.7 billion in penalties and €800 million of damages. The Court also found the French branch of UBS guilty of complicity in the same illegal actions, ordering it to pay €15 million in penalties.
These penalties could constitute a turning point in the judicial repression of banking and financial institutions involved in illicit activities. Indeed, this amount of penalties is without precedent in France. As a matter of comparison, in the same case, the French Prudential and Control Authority11 sentenced UBS France to a €10 million penalty,12 and in a case similar to UBS, HSBC agreed in 2017 to pay €300 million to settle a long-running investigation for the same charges through a convention judiciaire d'intérêt public, which is the French equivalent to an American deferred prosecution agreement, introduced under French law by Sapin Law II.
Although UBS appealed the decision, it might be a sign of the repression of unlawful financial solicitation in France.
Euro medium-term notes qualification
Euro medium-term notes (EMTNs) are debt instruments that have a shorter maturity than bonds and that bear a fixed or floating interest rate or a yield linked to an index or a formula, and a repayment amount that is fixed, variable or linked to a formula or index. Although EMTNs are not directly regulated by French law, it is commonly admitted that they fall within the category of debt securities within the meaning of Article L 211-1 of the French Monetary and Financial Code.
In a case brought before the Paris Court of Appeal, it was argued by an investor who bought an EMTN through its life insurance contract that a structured EMTN does not qualify as a bond (obligations) since its repayment amount could be for less than its nominal amount and thus was not a financial instrument eligible to life insurance contracts. The Court of Appeal followed this reasoning and condemned the insurer to pay damages to the investor. This decision was quashed by the French Court of Cassation in a decision of 23 November 2017 on the grounds that the qualification of a security as a bond (obligations) is not subject to the full repayment of the relevant security.
This decision clarified a debated legal issue in a way that brings more legal certainty as to the legal and tax regime regarding EMTNs in France.
In 2018, the sanction board of the AMF rendered several decisions regarding insider dealing.
In particular, in a decision of the enforcement committee of the AMF of 24 October 2018, the AMF ruled that knowledge of the forthcoming publication of a press article giving substance to a rumor may constitute inside information, provided that this knowledge meets the conditions of precision, non-publicity and significant influence on the stock price. These conditions were met in the case at hand given the reputation of the journalist and the precision of the rumour, and the context of the market made this rumour credible and therefore sensitive for the market. However, the rumour itself was not deemed to be inside information.
With the knowledge of a rumour being inside information, a journalist being at the source of such information is therefore considered to be an insider, and could not disclose this information other than for the purpose of journalism. By disclosing this information to a single person, the journalist breached the obligation to refrain from disclosing or using inside information and committed a market abuse.
As a result of this case, and in accordance with Article 21 of the Market Abuse Regulation (MAR) regarding disclosure or dissemination of information in the media, in order for an authority to assess whether a journalist has committed a market abuse, the authority must review the code of conduct applying to the journalist and whether the code of conduct prohibited the way the journalist dealt with the financial information that he or she produced or disseminated.
In 2018 and 2019 the enforcement committee of the AMF also rendered several decisions regarding market manipulation.
Provisions regarding market manipulation were provided in the RG-AMF that have now been replaced by equivalent provisions of MAR. In a case dated 16 July 2018, the enforcement committee of the AMF had the opportunity to clarify how MAR provisions could only apply to market manipulations that occurred before MAR's entry into force if such provisions are more lenient in accordance with the in mitius retroactivity principle.
The market manipulation that was sanctioned in this case was carried out on the MATIF, which is the regulated market for derivatives products in France, and resulted in particular from sell orders placed by a company on a futures contract 'in the last 10 seconds before closing, at a distance very close to the last buyer limit . . . on the smallest possible amount and having a period of validity limited to the same day'. This approach was repeated each day for more than four months with a few exceptions, and had the effect of reducing the bid ask spread.
Although selling orders were not cancelled, they had little chance to be executed, and therefore the AMF assimilated such low probability to the cancellation of an order. The market manipulation was therefore evidenced as, in accordance with Article 12.1(a) of MAR, the transactions consisted in placing an order to trade or any other behaviour 'which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument'.
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 Commercial Code. Since 2006, these proceedings have been supplemented by a safeguard proceeding as a result of the enactment of the Safeguard Law. Pursuant to the 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 prepackaged reorganisation plan.
The Ordinance of 12 March 2014 introduced an accelerated safeguard proceeding.
French insolvency proceedings are initiated by a judgment admitting a 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 et seq. of the 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 an enterprise, leading to the continuation of its business, job preservation and discharge of its liabilities.
A reorganisation phase approved by judgment is followed by an appraisal period. During the latter, the debtor remains in possession as it is administered by its managers. However, the bankruptcy judgment may 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 Articles L631-4 and 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 allows a debtor to reach a voluntary restructuring agreement with its primary financial creditors (financial institutions and bondholders). This procedure enables 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, an inability to meet current liabilities with current assets constitutes the insolvency test. However, it may be noted that, for credit institutions, there is a specific insolvency test that is defined as the inability to meet payments either immediately or in the immediate future.13 In addition, under Article L613-27 of the M&FC, a safeguard proceeding, a judicial reorganisation proceeding or a judicial liquidation proceeding may only be opened against a credit institution, a payment institution or an investment firm by a commercial court having jurisdiction following conforming advice by the ACPR.
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 this time, a reorganisation plan is prepared by the judicial administrator appointed in the bankruptcy judgment. The plan contemplates 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 the 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 a business.
The court may convert the safeguard proceeding into a judicial reorganisation proceeding if a debtor meets the insolvency test, 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 M&FC 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 the 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 an LCH SA entity licensed as a bank through which clearing operations are carried out, operating under the LCH trade name.
LCH SA today is a wholly owned subsidiary of LCH Group Holdings Ltd, of which 57.8 per cent of the shares are owned by the London Stock Exchange.
LCH 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, EMIR was 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 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 European Central Bank (ECB) Regulation.14
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 ECB money.15
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 Regulation (EC) No. 1060/2009 on credit rating agencies of 16 September 2009, as modified by Regulation (EU) 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 to:
- avoid conflicts of interest and to require an increasingly high degree of independence from stakeholders within the rating process;
- improve rating quality by achieving higher standards in respect of methodology;
- improve governance and internal controls of rating agencies; and
- 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 rating agencies were published. These technical standards out:
- the information to be provided by a credit ratings agency in its application for registration with ESMA;
- the presentation of the information to be disclosed by credit rating agencies in a central repository so that investors can compare the performance of credit rating agencies in different rating segments;
- how ESMA will assess rating methodologies; and
- the information that credit rating agencies must submit to ESMA, and at what time intervals, 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 European 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.
It was further provided that, by 7 June 2010, each Member State should designate a competent authority for the purpose of the Rating Regulation. The AMF was 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 (EU) 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:
- ratings will be published on a European rating platform;
- ratings of sovereign bonds will be limited and made more transparent;
- financial institutions will have to strengthen their own credit risk assessment; and
- the risk of conflicts of interest will be mitigated.
It may be noted that, until recently, French law provided for a specific liability regime for credit rating agencies that was distinct from the one provided in the EU regulations. However, this regime was abrogated by Law No. 2018/727, of 10 August 2018, to align its legislation with EU law.
As a result of the economic crisis and of the 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, which has reinforced their supervisory activity. The rating agencies in France had already substantially modified their methodology relating to bonds in 2009 so that estimated liquidity risk could be taken into account and addressed.
III OUTLOOK AND CONCLUSIONS
The French financial system has emerged stronger from the turmoil of 2007 to 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.
The events of the past 10 years have shown that remedies for a global crisis lie in global (and regional) actions. The need to improve the supervisory framework at the EU 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 was expected to strengthen the trend towards disintermediation, together with enhanced recourse to capital market instruments and securitisation.
The long-awaited creation of pan-European supervision authorities, including the European Banking Authority, ESMA and the European Insurance and Occupational Pensions Authority, has helped address the compelling need for supervision at European level. However, it also appears that in a post-Brexit context, it is time to streamline the governance framework at the EU level, and in this respect the European Commission made a legislative proposal to review the European Supervisory Authorities. This was supported by the AMF in a position paper of February 2018, in which it proposed a few adjustments to the proposal to enhance harmonisation across the European Union, a supervisory convergence and uniform interpretation of the European regulations.
An outlook of the near future of capital markets has been provided by the AMF in a recent report on the markets and risk outlook for 2019 in which the following trends are highlighted:
Over the past year, the financial markets landscape has deteriorated, with a slowdown in world GDP, growing uncertainties and geopolitical tensions. In this respect, the valuation of financial assets nevertheless remains very high, and the (admittedly temporary) fall in equity markets at the end of 2018 illustrates the factors that could potentially trigger a correction: an upward revision of the risk premium or new expectations regarding monetary policy standardisation.
Changes underway in the financial markets bring new risks, such as the underachievement of the transparency objective under MiFID II, a concentration of transactions in the closing auction on Euronext and a boom in private equity funds. The risks linked to derivatives markets, meanwhile, seem to be easing, and knowledge of AIFs continues to improve (AIFM reporting);
The international environment is also a source of vulnerabilities both in the short term with Brexit, and in the longer term with the risk of a less cooperative environment: market fragmentation, regulatory competition and a race to the bottom. The risk for the financial sector might also come from its inability to adapt to all these changes, to which the challenge of the energy transition and digital transition can also be added.
The risk of an interest rate snapback seems low since the prospect of monetary normalisation has faded away. On the contrary, it is precisely the risk of interest rates remaining too low and for too long that prevails, along with the related drawbacks: an inability of the markets to price time and risks in order to guide investors, savers torn between zero-yield bank deposits (a new record in France at €61 billion in 2018), bubbles and the search for the sort of unrealistic yields that can only turn out to be scams; in addition, this context of low interest rates is exerting pressure on actors' margins, raising questions over their business models and, by focusing clients' attention on the level of fees, favouring the development of passive management methods.
The financial sector finds itself facing multiple upheavals bringing risks of brutal disruptions; in the short term, Brexit is adding to these transition vulnerabilities, even though the French authorities have been quite active in enacting measures for adapting to this new situation and preserving access to major London market infrastructure and clearing capabilities. In a more subtle way, the reform of benchmark interest rates will force market participants to make numerous adjustments and adaptations in their systems.
1 Olivier Hubert is a partner and Arnaud Pince is counsel at De Pardieu Brocas Maffei.
2 Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, CCPs and trade repositories, part of the European Market Infrastructure Regulation (EMIR) – a body of European legislation for the regulation of OTC derivatives.
3 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.
4 Articles 212-40 to 212-42 of the RG-AMF.
5 Article 212-3 of the RG-AMF.
6 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 As these instruments do not fall within the scope of application of MiFID II, they cannot benefit from the provisions of MiFID II relating to the European passport.
8 Cons const, No. 2014-453/454 and No. 2015-462.
9 C cass, Ch civ, 4 May 2010, 09-14.976.
10 Article 21, Subparagraph 12 et seq. of the AIFMD.
11 The ACP became the ACPR in 2013. It is an administrative authority and not a judicial authority.
12 In a decision dated 25 June 2013.
13 Article L631-26 of the M&FC.
14 Regulation No. 2818/98 of the European Central Bank.
15 General documentation on Eurosystem monetary policy instruments and procedures, p. 10.