The year in review: capital markets in France – Lexology
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The year in review
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)).
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:
The entry into force of the Prospectus Regulation resulted in a revamping of the French public offering regime. This reform has been formalised by Ordinance No. 2019-1067 of 21 October 2019, Decree No. 2019-1097 dated 28 October 2019 and an order dated 7 November 2019. Furthermore, several amendments to French law and the RG-AMF were necessary for the correct ‘negative’ implementation under French law of the Prospectus Regulation. The rationale behind these changes was as follows:
On June 2020, the AMF issued 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’. This guide is divided into three sections: information to be provided in prospectuses; information to be provided if no prospectus is required; and AMF positions and recommendations regarding the different types of transactions (such as IPOs and mergers).
It should be noted that in response to the severe economic crisis resulting from the covid-19 pandemic, the European Commission proposed a legislation package that would, inter alia, modify the Prospectus Regulation to create a new ‘EU Recovery Prospectus’ – a type of short-form prospectus – to facilitate the raising of capital in public markets.
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 No. 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 are not classified as financial instruments. Previously, no specific rules applied to fundraising through the issuance of tokens. The PACTE Law gives the initiators of a project the option to submit an information document to the AMF to obtain an optional visa, subject to the token issue meeting the 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 that 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 fewer than 150 investors, acting on their own behalf, is not considered a public offer of tokens.
Token issuers who wish to carry out an ICO may apply for an approval from the AMF, which will verify whether the offering provides the following guarantees:
In March 2020, the AMF released its legal analysis of the rules applying or likely to apply to security token transactions (STOs) such as issuances of security tokens, acquisitions of security tokens by funds, and settlement and delivery of security tokens; the analysis discusses whether such transactions comply with existing regulations (both EU and French) or whether changes to the regulations are required to allow a harmonised development of STOs. The AMF concluded that STOs were generally compliant with current legislation but the legislation could be improved to increase legal certainty. The AMF was one of the first authorities across Europe to conduct such an analysis.
Following this report, the AMF also issued a position to provide some clarification regarding the distinction between the concept of a trading venue (applicable in particular to financial securities registered in a distributed ledger) and that of a bulletin board (used to advertise buying and selling interests). This clarification was awaited by certain platforms and other participants in the financial sector seeking to develop STO exchange interfaces in compliance with existing regulations but without the requirement to obtain financial service provider authorisation from the ACPR and the AMF.
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’ encompasses tokens issued through an ICO and virtual currencies, as defined by European law (such as Bitcoin). Financial instruments are excluded from this regime.
In particular, the following activities7 may be carried out by DASPs:
Licensed service providers will be subject to a set of core rules common to all services (e.g., insurance or equity, internal control procedures, resilient IT system and transparent pricing policy) as well as a certain number of rules specific to the service offered.
As an exception to the above, service providers that 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. Decree No. 2021-446 of the 15 April 2021 specified that for digital assets, providers who provide a custody service or service of buying and selling digital assets must submit their organisation and internal procedure against money laundering, for the purpose of their registration, to the French ACPR.
More recently, the AMF introduced Article 721-1-1 in its general regulation, which defines the conditions under which a digital asset service is considered to be provided in France. Thus, a digital asset service is considered to be provided in France when it is provided by a digital asset service provider with facilities in France or at the initiative of the digital asset service provider to customers residing or established in France. Such specification allows the determination of whether a given digital assets service provided shall be regulated and supervised under French law.
In 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.
Following the possibility granted to digital asset service providers (PSANs) to obtain an authorisation from the AMF, the latter set up a Q&A published on 22 September 2020 in order to provide guidance to candidates for PSAN in their licensing procedures. There are about 40 questions in the Q&A, and several versions have already been updated, the last one dated 31 May 2022, and addressing the issue of crypto-lending and stacking.
Since 2021, a working group composed of fintech representatives and ACPR agents has been working on a charter to provide guidance to applicants for an ACPR licence. This charter was published on 10 January 2022. A set of guidelines and questions and answers also supplement the information made available to entrepreneurs.
Following the European Regulation (EU) 2020/1503 establishing a new European regime for crowdfunding, two Ordinances were adopted in 2021 to transpose the aforementioned Directive under French law. The purpose of this Directive and the ordinances is to harmonise the rules applicable to providers of crowdfunding services.
Ordinance No. 2021-738 of 9 June 2021 exempted crowdfunding service providers from the obligation to be licensed by the AMF for financial investment services provided for in Article L531-2 of the M&FC.
The Ordinance of 22 December 2021, supplemented by the decree of 1 February 2022 and the order of 9 March 2022, modified the crowdfunding regime in France accordingly. This crowdfunding Regulation introduced a unique status of participatory finance service provider (PFSP) with the advantage of being able to provide cross-border intermediary services to financing operations. The Regulation focuses in particular on investor protection by imposing obligations on PFSPs (client path, warning mechanism, information). Transposed into French law, this new status of PFSP replaced the status of crowdfunding advisers and crowdfunding intermediaries. This change is also accompanied in principle by a certification obligation for the PFSP and supervision by the AMF supported by the ACPR; existing platforms wishing to continue to provide crowdfunding services have until 10 November 2022 to obtain authorisation as a European provider of crowdfunding services. The PFSP aims to capture the majority of crowdfunding activities in the form of securities and a substantial part of crowdfunding activities in the form of loans. Crowdfunding activities by donations is excluded from the scope of the European Regulation.
Although covered bonds with their numerous advantages were massively used in Europe, they were not harmonised for a long time. The Covered Bonds Directive and Regulation (EU) No. 2019/2160 were adopted on 27 November 2019. They set out the common characteristics of European covered bonds (twofold recourse, no automatic acceleration, investor information, hedging requirements).
The Ordinance of 30 June 2021 transposes Directive (EU) No. 2019/2162 of 27 November 2019, known as Covered Bonds, under French law. The ordinance guarantees the ability of French institutions the following:
Directive (EU) 2019/1160 on the cross-border distribution of collective investment funds, known as the Cross-border Directive, was transposed by the Ordinance 2021-1009 of 31 July 2021, supplemented by Decrees 2021-1011 and 2021-1012. The AMF General Regulation and the AMF doctrine have also been amended accordingly. The Monetary and Financial Code now has an Article L 214-24-0, which provides a legal basis to the notion and regime of commercialisation. This commercialisation is divided into three phases, namely pre-commercialisation, commercialisation and termination of commercialisation. This European harmonisation implemented into national laws makes it possible to increase the legal certainty for the actors and to reduce the costs associated with the identification of the steps to be taken in the context of commercialisation.
A decree of 27 May 2021 was adopted to specify the new information requirements for asset managers and investors to continue the effort to integrate and disseminate information related to climate change and biodiversity erosion in investment strategies. The decree specifies the areas of the fight against climate change. In the area of biodiversity preservation and restoration, each entity must provide a strategy for alignment with the long-term biodiversity targets set for 2035 and every five years thereafter. The entity must also contribute to the reduction of the main pressures and impacts on biodiversity. To achieve this, the entity must use a biodiversity footprint indicator to measure compliance with international biodiversity targets.
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:
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.
More recently, a decree dated 31 December 2019 further reinforced the French foreign investment control regime. Inter alia, the decree expanded the list of strategic sectors (i.e., sectors in which foreign investments require authorisation) to include energy storage, quantum technologies, and media and agriculture. It also amended the prior notice procedure to allow investors to ask the French authority whether the activities carried out by the target entity fall into the strategic sector category. In addition, the threshold for triggering the authorisation procedure has been lowered from 33 per cent to 25 per cent of the target’s voting rights for investors established outside the EU or EEA. The concepts of ‘investor’ and ‘chain of control’ have also been clarified.
As a response to the covid-19 pandemic, Decree No. 2020-892 dated 22 July 2020 lowered the threshold below which prior authorisation was required in respect of listed companies, from 25 per cent to 10 per cent.
Guidelines on the control of foreign investments in France were published on 8 September 2022. They are the result of a public consultation held in March 2022 and are intended to provide investors with a practical presentation of the scope of application of the rules relating to the control of foreign investments in France, the instruction of the control procedure and the monitoring of authorisations issued by the Minister in charge of the economy. They should provide foreseeability, as the Treasury Department undertakes to apply these guidelines each time it investigates a question relating to the audit of foreign investments in France.
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.8 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 based on a resolution measure having been executed, unless a transfer carried out in accordance with the exercise of resolution powers does not make provision for 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, in our view this would permit the exercise of termination rights post-transfer in the event of the occurrence of a post-transfer default.
Arrangements are also stipulated to ensure that such a 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 transferred to another person in this way).
The French netting and collateral regime has recently been modified by the Sapin II Law, 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:
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:
The final 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).
Notably, in a decision of 24 January 2020, the enforcement committee of the AMF sanctioned for the first time an investment service provider for failing to comply with its professional obligations under EMIR. It results from the decision that the AMF strictly controls the compliance with the form and procedures provided by EMIR by CCPs and, in particular, it is expected that they maintain robust compliance function. An effective compliance function must be able to carry out regular checks and proper assessments and detect compliance risks. The compliance function must ensure a thorough and traceable in concreto analysis of each EMIR applicable requirement and should alert management to existing deficiencies, so that they can take appropriate action to remedy them.
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.
In Ordinance No. 2017-1432, of 4 October 2017, which entered into force on 3 January 2018, the French legislature created a broad category of debt funds named ‘financing vehicles’, regrouping the existing securitisation vehicles (OT) and a new category of regulated funds named specialised financing vehicles falling within the scope of the AIFMD 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.
Furthermore, as a response to the covid-19 pandemic, the European Commission has proposed encouraging a broader use of securitisation in the recovery phase, by freeing up bank capital and supporting banks in their efforts to enhance lending to households and businesses. The amendments would extend the ‘simple, transparent and standardised’ framework to on-balance-sheet synthetic securitisation and remove regulatory obstacles to the securitisation of non-performing exposures.
Ordinance No. 2021-1192 of 15 September 2021 reforming the securities law has made changes to the regimes of various security interests, in particular with respect to enforcement of the pledge over securities accounts. Securities admitted on a trading platform may, like securities traded on a regulated market, be realised by sale on the market or appropriation, while securities not admitted on a trading platform may be realised by public sale, judicial allotment or appropriation in execution of a private foreclosure.
The Banking Reform regulates high-frequency trading (HFT) by specifying that any person using automatic trading systems must:
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.
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:
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 the 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.
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 sentenced twice for the same facts by the AMF, the enforcement committee and a French criminal court.9
In its decision, the Constitutional Council considered the legal provisions setting out criminal prosecution for insider trading offences and those providing for administrative prosecution for insider trading breaches to be unconstitutional 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 according to previously well-established jurisprudence, cumulating both administrative and criminal sanctions was deemed consistent with 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 AMF 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 create 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 prosecutions 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.
One notable case in 2018 and 2019 in the French judicial landscape was the UBS case. In this case, UBS AG was found guilty by the French Court of First Instance of Paris of unlawful solicitation of clients on the French territory and helping them to implement tax evasion schemes, and was sentenced to pay €3.7 billion in penalties and €800 million in damages. The Court also found the French branch of UBS guilty of complicity in the same illegal conduct, 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. Furthermore, penalties of this amount are without precedent in France. As a comparison, in the same case, the French Prudential and Control Authority10 imposed a €10 million penalty on UBS France,11 and in a case similar to UBS, to settle a long-running investigation into charges of the same kind, HSBC agreed in 2017 to pay €300 million through a judicial public interest agreement, which is the French equivalent of a US deferred prosecution agreement, introduced by the Sapin II Law.
Although UBS lodged an appeal, the Court of First Instance decision might be a sign that unlawful financial solicitation in France will be repressed judicially in future.
In an interesting decision of the 30 April 2021, the enforcement committee of the AMF provides a complete analysis of the notion of reverse solicitation that results from the implementation of Article 42 of the MiFID II under French law, pursuant to which investment services providers from a third country may provide investment services to customers located in the European Union/European Economic Area, if the solicitation for the provision of the service comes from them. In this decision, the AMF specifies that the requests for information from clients and relating to AIF shares are artificial and formal in nature, and that they do not make it possible to characterise a reverse solicitation: these requests were formulated as standard letters of information requests that had been sent by the financial investment adviser to its clients. It further specifies that ‘the nature of the reverse solicitation, by nature unpredictable and at the sole initiative of the client, is not compatible with the use of such a document, provided in advance’.
In its decision of 25 May 2022, the AMF enforcement committee stated that for a financial investment adviser to advise its clients to invest in units – or stocks or shares – of AIFs that are not authorised for marketing in France is by definition contrary to the interests of the clients, who must obtain advice in compliance with the applicable regulations. In this case, after analysing the exchanges with the client, the AMF ruled out the qualification of reverse solicitation or passive commercialisation, according to which the purchase or subscription order is spontaneously transmitted by the client for execution, and which is not punishable.
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 AMF enforcement committee of 24 October 2018, the AMF ruled that knowledge of the forthcoming publication of a press article giving substance to a rumour 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 in view of 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 considered inside information, a journalist at the source of such information would therefore be considered an insider and could not disclose such information other than for the purpose of journalism. By disclosing this information to a single person, the journalist in the case at hand 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, 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 assess whether it prohibited the way the journalist dealt with the financial information that he or she had produced or disseminated.
In a decision dated 11 December 2019, the press agency Bloomberg LP was fined €5 million by the enforcement committee of the AMF for having disseminated, without verification, information that it should have known to be false and likely to set the price of the shares of a listed company (Vinci) at an abnormal or artificial level. This decision means that the protection afforded to journalists under the MAR is conditional upon them acting in good faith to provide information that is exact and credible.
More recently, in an important decision of 1 April 2020, the criminal chamber of the Court of Cassation ruled in an insider dealing case that French authorities have jurisdiction to prosecute and judge an inside deal where none of the shares concerned in the underlying transactions were admitted to trading on a French regulated market (the issuer in the case was listed in New York). This decision means that the reference to the ‘regulated markets’ in the French provision prohibiting insider dealing is not limited to French regulated markets and extends to all regulated markets, therefore allowing an expansive interpretation of the scope of the offence of insider dealing under French law.
Recently, the Criminal Chamber of the French Court of Cassation reaffirmed the need of proof of insider trading by the bundle of indicators method with precise, serious and concordant evidence. Although the regulator has tried to objectify the offence of insider trading as much as possible, some elements of proof are still difficult to establish, such as the information, its possession, its use and its communication. The 30 March 2022 decision of the Criminal Chamber of the Court of Cassation reaffirms that the judge must not only implement the bundle of indicators method with precise, serious and concordant evidence but also establish the absence of any other credible explanation.
Over the past few years, the AMF enforcement committee has 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 the 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 the MAR’s entry into force if the provisions are more lenient in accordance with the principle of retroactivity in mitius.
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 the low probability of the sell orders 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’.
In a decision dated 4 December 2019, the enforcement committee of the AMF ruled that it had jurisdiction over a market manipulation case that took place outside France (in London). The market manipulation concerned the massive acquisition by Morgan Stanley International of futures in OATs (French bonds) and, a few minutes later, the sale of OATs (not the futures from the initial acquisition, but the bonds directly). French law provides that the AMF enforcement committee may have jurisdiction where the market manipulation concerns financial instruments traded on a regulated market supervised by the AMF and financial instruments related to such financial instruments traded on such a regulated market. Therefore, the fact that the sale transaction in question took place in London was irrelevant in determining the jurisdiction of the AMF enforcement committee since the French bonds were traded on a French regulated market. Regarding the acquisition of futures, there remained doubt about whether the two financial instruments (i.e., the futures and the underlying OAT) were ‘related’ within the meaning of the French regulation. The enforcement committee clarified that the term ‘related’ shall mean a factual (and not a legal) link or relation between the two financial instruments. As a result, since the futures were factually related to a financial instrument (the OATs) admitted to trading on a French regulated market, the enforcement committee had jurisdiction to sanction the market manipulation.
In a decision dated 28 May 2021, the AMF enforcement committee reaffirmed its extraterritorial jurisdiction to hear cases of market manipulation in connection with financial instruments whose underlying assets are sovereign bonds, even if this link is only economic. This position follows a recent decision confirmed on appeal. In this case, the company was accused of having manipulated the market by giving false or misleading information and having benefited from an abuse of dominant position.
In a warning statement dated 28 October 2021, the AMF clarified the rules applying to investment recommendations on social media. In February the ESMA already recalled that these recommendations may constitute an investment recommendation within the meaning of the MAR Regulation of 16 April 2014 on market abuse and must therefore comply with this Regulation. The French market authority recommends that investors question the financial skills of influencers and whether or not they are remunerated. The AMF specifies that it monitors this phenomenon with the algorithms of its artificial intelligence named ‘ICY’.
More recently, in a decision dated 4 March 2022, regarding a person having published articles equivalent to press articles in which he recommended buying the shares of a listed company, the AMF enforcement committee considered that there was on the one hand a breach under the Regulation on investment recommendations, and on the other hand a breach under the Regulation on market manipulation. The originality of this decision lies in the double sanctioning of these same facts with different means.
In a decision dated September 8, 2021, the Court of Cassation ruled based on the facts examined by the Paris Court of Appeal that a loan agreement and a swap agreement constitute an ‘indivisible contractual unit’, and as a consequence, the early repayment of the loan entails the nullity of the swap agreement.
In the case at hand, Société Générale granted a loan with variable interest rate to a société civile immobilière (SCI) real estate company for the purchase of real estate property and entered into a swap agreement with the same SCI to hedge the variable rate of the loan.
The SCI then sold the real estate property, which led to the early repayment of the loan. As a result, Société Générale terminated the swap agreement and withdrew from the SCI’s account a termination indemnity with respect to the swap. It should be noted that the loan agreement did not specifically address the consequences in the event of early repayment of the loan.
Considering that it was not required to pay a termination indemnity, the SCI sued the bank for restitution of the termination indemnity.
According to the Court of Cassation, the annihilation of the loan agreement resulted in the lapse of the swap agreement, and therefore required the bank to reimburse the indemnity to the SCI. This decision is, however, based on the fact of this specific case.
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 Ordinance No. 2010-1249 of 22 October 2010 (the Safeguard Law), effective from 1 March 2011. Pursuant to the Safeguard Law, 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 11 prepackaged reorganisation plan.
Ordinance No. 2014-326 of 12 March 2014 introduced an accelerated safeguard proceeding. More recently, as a result of the covid-19 pandemic, the French legislature jointly with the government enacted several acts to mitigate the effects of the crisis on French companies. In that respect, Ordinance No. 2020-318 of 25 March 2020 introduced several changes to the French insolvency regime. Inter alia, this Ordinance provides that a company in reorganisation, judicial liquidation or safeguard proceedings may benefit from a full postponement or a staggering of its rents and its bills (water, gas and electricity) for its professional and commercial premises. The payment deadline must be between 12 March 2020 and 10 September 2020. No financial penalty, suspension, interruption or reduction of supplies will apply during this period.
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.12
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.13
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 (the Rating Regulation).
The Rating Regulation imposes the following duties on rating agencies:
On 30 May 2012, four Commission delegated regulations establishing regulatory technical standards for credit rating agencies were published. These technical standards set out:
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, and credit rating agencies seeking such an exemption 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, stipulate that:
Until recently, French law provided 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 French 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.
It is crucial that financial actors such as investment firms or management portfolio companies remain updated regarding the continuing flow of new obligations resulting from the application in France or implementation under French law of sustainable finance-related texts such as SFDR (Sustainable Finance Disclosures Regulation), TR (Taxonomy Regulation), CSRD (Corporate Sustainability Reporting Directive), MiFID, UCITS or AIFMD. There is no doubt that the financial authorities will monitor closely compliance with such Regulations, which opens a new era of financial regulations and a new challenge for financial actors.
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