Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: France

Status: September 21, 2001

Recommendation 1
Recommendation 2
Recommendation 3
Recommendation 4

Recommendation 5
Recommendation 6
Recommendation 7
Recommendation 8

Market selection

Recommendation 8

Local laws and regulations should ensure that there is segregation of client assets from the principal assets of their custodian; and no possible claim on client assets in the event of custodian bankruptcy or a similar event. Regulators and markets, to further improve investor protection, should work:

to ensure clarity on the applicable law on cross border transactions
to seek international agreement on a legally enforceable definition of finality in a securities transaction
to ensure that local law fully protects the rights of beneficial owners
to strengthen securities laws both to secure the rights of the pledgee and the protection accorded to client assets held in Securities Systems.

1. Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository? Pursuant to article 6-3-3 law of the rules of the CMF (Commission des Marchés Financiers) an account keeper must take all necessary steps, to ensure the segregation in the accounts it holds with the securities system between client assets and proprietary assets. Client assets are held in an omnibus account with the securities system. Furthermore, account keepers must ensure the segregation of CIS (collective investment schemes) assets from other client assets.

2. How are clients' assets protected in the event of insolvency of a custodian or depository? 1. In the event of insolvency of the securities system:

The rules of the securities system and French law do not envisage the insolvency of the securities system. It should be emphasised that it is not the role of the securities system to assume risk on the services that it offers. The securities system does not guarantee securities borrowing activities nor cash credit (the securities system never advances funds or securities to or on behalf of other intermediaries; the securities system proposes payment in central bank money (thus avoiding settlement bank risk)). Furthermore, the securities system has a number of protective measures in place to cover the risk of a failure on the part of an intermediary. In particular, in the case where a participant goes bankrupt Banque de France will withhold the financial instruments. The system is therefore protected against any default. In view of the system structure, the securities system is not exposed to any risks concerning collateral.

2. In the event of insolvency of custodians:

With regard to the recovery of cash deposits, French law provides that the client becomes, in respect of any insolvency proceeding, an unsecured creditor of the insolvent entity. However, pursuant to the banking law of January 24, 1984, a mandatory cash deposit guaranty system was established which indemnifies certain categories of depositors up to a specified amount.

With regard to the recovery of securities French law provides that clients can recover their assets in the event of the custodian's bankruptcy. Article 115 of the bankruptcy law of January 25, 1985 specifies a period of three months as of the opening of insolvency proceedings during which the depositor of securities in certificate form must make a claim for the recovery of such securities. The same principle applies to dematerialised securities held in a current account pursuant to Article 30 of the law dated January 3, 1983 which states that client assets must be transferred to an account opened with another financial intermediary or by an issuer. Furthermore, French law also provides for a securities guarantee fund for securities deposited with credit institutions, investment firms and intermediaries authorised by the CMF to provide custody and administration services. The purpose of the fund is to indemnify clients in the event the account keeper is unable to return certain client assets and cash deposits linked to an investment service or to custody of securities which are not covered by the "cash guarantee fund". Furthermore, indemnification is limited to EUR 70,000 for securities and EUR 70,000 for eligible cash deposits.

3. Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security? French law does not recognise the distinction between beneficial owners and legal owners. Further to the deposit by a client of assets with a custodian, French law provides that the custodian becomes the apparent owner of the said assets in respect of the securities system as long as they remain in its custody. Consequently, the custodian is deemed to be the sole owner of the assets as far as third parties are concerned. Beneficial owners always remain unknown to the securities system. However, pursuant to article 6-3-3 3 of the rules of the CMF the custodian is under an obligation to redeliver the assets in its custody to the client upon termination or expiration of the term of the custody or in the case where the custodian is declared insolvent.

4. Does local law clearly define the point of time when a settlement, both for the security and the cash involved, achieves finality and thus cannot be unwound? As soon as the parties to a transaction agree on the terms of the said transaction they are irrevocably bound to pay for/ deliver the securities.

With regard to securities traded on a regulated exchange, Article 47 bis of the law dated January 3, 1983 as amended by law n° 98-546 dated July 2, 1998 provides that title over cash and securities traded on a regulated exchange which are held on account with the issuer or an authorised intermediary is transferred upon the credit to the purchaser's account, on the date and in accordance with conditions defined by the market: under current market rules such transfer occurs at T+3.

With regard to securities traded outside of a regulated market, Article 47 bis provides that title on those securities which are registered on the books of an authorised intermediary, which is a member of a securities system, is transferred occurs upon the irrevocable settlement of the transaction as determined by the operating rules of the above mentioned securities system, In the case of the RGV settlement system the irrevocable settlement of the transaction occurs when the securities are credited to the custodian's account with the securities system.

5. Does a pledgee have an absolute right to realise their security at all times? The pledgee has an absolute right to realise its security interest at all times, subject to the existence of a debt of the pledgor towards the pledgee which is undisputed, due and liquid. In this respect, French law recognises a pledge over an account of financial instruments and pledges over cash.

The pledge is over an account of financial instruments rather than on the financial instruments themselves, this allows the pledgor to continually substitute the financial instruments in the account. The pledgee has a right of retention even in case of insolvency proceedings against the pledgor, which allows him to always realise the security interest respecting the 8 days delay after notification of the realisation. In that case, the creditor receives title over the pledges securities.

6. Does the depository have loss sharing provisions in its rules, and how would these be applied? French law provides for loss sharing where insolvency proceedings are initiated by or against a custodian. As indicated in paragraph 2 above, client assets are transferred to another custodian where an insolvency procedure is initiated against the custodian. In the case where the custodian does not have sufficient securities and/or cash on its accounts with the securities system, or the cash or securities are blocked in the accounts of the custodian, the clients of the custodian are protected through a guarantee fund which offers indemnification. Within 3 months after intervention of the Bank Committee, the clients are reimbursed EUR 70.000 for deposited securities and another EUR 70.000 for related cash. With regard to the sharing of the costs of the indemnification of the clients of the defaulting custodian in amongst the members of the guarantee fund, such costs are divided pro-rata between the custodians which are members of the securities system.

1.	Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository?	Pursuant to article 6-3-3 law of the rules of the CMF (Commission des Marchés Financiers) an account keeper must take all necessary steps, to ensure the segregation in the accounts it holds with the securities system between client assets and proprietary assets. Client assets are held in an omnibus account with the securities system. Furthermore, account keepers must ensure the segregation of CIS (collective investment schemes) assets from other client assets.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	1. In the event of insolvency of the securities system: The rules of the securities system and French law do not envisage the insolvency of the securities system. It should be emphasised that it is not the role of the securities system to assume risk on the services that it offers. The securities system does not guarantee securities borrowing activities nor cash credit (the securities system never advances funds or securities to or on behalf of other intermediaries; the securities system proposes payment in central bank money (thus avoiding settlement bank risk)). Furthermore, the securities system has a number of protective measures in place to cover the risk of a failure on the part of an intermediary. In particular, in the case where a participant goes bankrupt Banque de France will withhold the financial instruments. The system is therefore protected against any default. In view of the system structure, the securities system is not exposed to any risks concerning collateral. 2. In the event of insolvency of custodians: With regard to the recovery of cash deposits, French law provides that the client becomes, in respect of any insolvency proceeding, an unsecured creditor of the insolvent entity. However, pursuant to the banking law of January 24, 1984, a mandatory cash deposit guaranty system was established which indemnifies certain categories of depositors up to a specified amount. With regard to the recovery of securities French law provides that clients can recover their assets in the event of the custodian's bankruptcy. Article 115 of the bankruptcy law of January 25, 1985 specifies a period of three months as of the opening of insolvency proceedings during which the depositor of securities in certificate form must make a claim for the recovery of such securities. The same principle applies to dematerialised securities held in a current account pursuant to Article 30 of the law dated January 3, 1983 which states that client assets must be transferred to an account opened with another financial intermediary or by an issuer. Furthermore, French law also provides for a securities guarantee fund for securities deposited with credit institutions, investment firms and intermediaries authorised by the CMF to provide custody and administration services. The purpose of the fund is to indemnify clients in the event the account keeper is unable to return certain client assets and cash deposits linked to an investment service or to custody of securities which are not covered by the "cash guarantee fund". Furthermore, indemnification is limited to EUR 70,000 for securities and EUR 70,000 for eligible cash deposits.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	French law does not recognise the distinction between beneficial owners and legal owners. Further to the deposit by a client of assets with a custodian, French law provides that the custodian becomes the apparent owner of the said assets in respect of the securities system as long as they remain in its custody. Consequently, the custodian is deemed to be the sole owner of the assets as far as third parties are concerned. Beneficial owners always remain unknown to the securities system. However, pursuant to article 6-3-3 3 of the rules of the CMF the custodian is under an obligation to redeliver the assets in its custody to the client upon termination or expiration of the term of the custody or in the case where the custodian is declared insolvent.
4.	Does local law clearly define the point of time when a settlement, both for the security and the cash involved, achieves finality and thus cannot be unwound?	As soon as the parties to a transaction agree on the terms of the said transaction they are irrevocably bound to pay for/ deliver the securities. With regard to securities traded on a regulated exchange, Article 47 bis of the law dated January 3, 1983 as amended by law n° 98-546 dated July 2, 1998 provides that title over cash and securities traded on a regulated exchange which are held on account with the issuer or an authorised intermediary is transferred upon the credit to the purchaser's account, on the date and in accordance with conditions defined by the market: under current market rules such transfer occurs at T+3. With regard to securities traded outside of a regulated market, Article 47 bis provides that title on those securities which are registered on the books of an authorised intermediary, which is a member of a securities system, is transferred occurs upon the irrevocable settlement of the transaction as determined by the operating rules of the above mentioned securities system, In the case of the RGV settlement system the irrevocable settlement of the transaction occurs when the securities are credited to the custodian's account with the securities system.
5.	Does a pledgee have an absolute right to realise their security at all times?	The pledgee has an absolute right to realise its security interest at all times, subject to the existence of a debt of the pledgor towards the pledgee which is undisputed, due and liquid. In this respect, French law recognises a pledge over an account of financial instruments and pledges over cash. The pledge is over an account of financial instruments rather than on the financial instruments themselves, this allows the pledgor to continually substitute the financial instruments in the account. The pledgee has a right of retention even in case of insolvency proceedings against the pledgor, which allows him to always realise the security interest respecting the 8 days delay after notification of the realisation. In that case, the creditor receives title over the pledges securities.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	French law provides for loss sharing where insolvency proceedings are initiated by or against a custodian. As indicated in paragraph 2 above, client assets are transferred to another custodian where an insolvency procedure is initiated against the custodian. In the case where the custodian does not have sufficient securities and/or cash on its accounts with the securities system, or the cash or securities are blocked in the accounts of the custodian, the clients of the custodian are protected through a guarantee fund which offers indemnification. Within 3 months after intervention of the Bank Committee, the clients are reimbursed EUR 70.000 for deposited securities and another EUR 70.000 for related cash. With regard to the sharing of the costs of the indemnification of the clients of the defaulting custodian in amongst the members of the guarantee fund, such costs are divided pro-rata between the custodians which are members of the securities system.