Typical types of transactions
Other than transactions between dealers, what are the most typical types of over-the-counter (OTC) equity derivatives transactions and what are the common uses of these transactions?
The market for OTC derivatives transactions in France is well established and equity derivative products are routinely used in the implementation of stake-building transactions, equity price risk hedging strategies and share repurchase schemes.
Typical equity derivatives products used by issuers on the French market include (but are not limited to):
- call options, put options and total return swaps to hedge equity price risks on a bespoke basis;
- funded collar in the context of the leveraged acquisition of a stake in a publicly listed company involving an embedded hedge to the market price of the equity purchase (often on a tranched basis);
- unfunded collar in the context of the disposal of a stake in a publicly listed company involving an embedded hedge to the market price of the equity disposal (often on a tranched basis);
- prepaid equity forward in the context of share buy-backs involving a forward transaction that is settled on the basis of the discounted volume-weighted average price of the shares over a certain period (often to hedge a share employee participation scheme);
- variable prepaid forward in the context of the monetisation of an equity stake combined with a deferral of the taxes owed on the capital gains (this structure is often combined with a call spread);
- accelerated share buy-backs with guaranteed discount in the context of share buy-backs involving the immediate delivery of shares at a discount with a future adjustment based on the volume-weighted average price of the shares over a certain period;
- contingent prepaid forward allowing for the prepayment and purchase of shares being delivered only subject to certain contingencies occurring (ie, regulatory approvals); and
- call spread to hedge certain features of exchangeable bonds.
Margin loans are not widely used in the French market to finance or leverage large shareholdings. This is essentially due to the idiosyncrasies of the transposition of Directive (EU) No. 2002/47/EC of 6 June 2002 on financial collateral arrangements under French law, which has created, in respect of margin loans, uncertainty in the enforcement of the security interest against an insolvent French borrower (as the enforcement process may be potentially affected or limited by the opening of insolvency proceedings in France).
Borrowing and selling shares
May market participants borrow shares and sell them short in the local market? If so, what rules govern short selling?
Yes. The French rules on short selling are derived from Regulation (EU) 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (these rules are therefore applicable across all EU member states for all EU-listed shares unless they are primarily traded on a third-country venue). Naked short selling is prohibited in France, and market participants can only create short positions in shares on the French market if they own or have borrowed the relevant shares or have entered into an agreement with a third party, providing reasonable assurances that the shares will be delivered.
Any natural or legal person that holds a short position equal to or higher than 0.1 per cent of the share capital of a company (the threshold was set at 0.2 per cent until 31 January 2022) whose shares are admitted to trading on a French trading venue must notify the French regulator (l’Autorité des marchés financiers (the Financial Markets Authority (AMF)) of this position within one trading day (and of each movement through a 0.1 per cent threshold above 0.1 per cent). When the net short position reaches or falls below 0.5 per cent of the share capital, the AMF will publicly disclose the information.
In exceptional circumstances (such as during the opening Lehman bankruptcy proceedings or the covid-19 crisis), the AMF has the power to decide to temporarily restrict or ban short selling in case of a significant fall in the price of financial instruments on a given day (a 10 per cent drop for liquid shares, a 20 per cent drop for illiquid shares when the share price is higher than €0.50 and a 40 per cent drop when the share price is below €0.50).
Transactions entered into in connection with market-making activities or as an authorised primary dealer do not fall within the scope of applicable rules, provided that the AMF is notified beforehand. The AMF may prohibit the use of this exemption if it considers that the relevant conditions for its use are not satisfied.
The AMF provides market participants on its website with a file containing the history of net short positions published since 1 November 2012.
Applicable laws and regulations for dealers
Describe the primary laws and regulations surrounding OTC equity derivatives transactions between dealers. What regulatory authorities are primarily responsible for administering those rules?
There is no single body of rules regulating equity derivatives in France. Dealers, as financial counterparties subject to licensing requirements, are generally subject to all the rules and regulations affecting the treatment of derivatives (including equity derivatives). These rules affect various aspects of the life cycle of equity derivative transactions.
We note, in particular, the applicability of the following rules (this list is not exhaustive) pertaining to:
- financial netting: France has implemented Directive (EU) 2002/47/EC of 6 June 2002 on financial collateral arrangements in its Financial and Monetary Code, which introduced derogatory rules to French insolvency and security laws (known as the Financial Netting Regime) that are applicable to derivatives transactions entered into between dealers if certain conditions are met. In particular, the Financial Netting Regime allows counterparties to implement the close-out netting provisions of derivatives framework agreements concluded by a French counterparty, including where it is subject to insolvency proceedings;
- threshold crossing: market participants (when they are unable to benefit from the bank trading exemption) need to comply with the relevant provisions of the French Commercial Code and the General Regulations of the French Financial Market Authority relating to the filing of disclosure threshold notifications by the close of trading on the fourth trading day following the acquisition or disposal of a significant holding, including when these exposures are created through forward financial instruments (either cash or physically settled);
- market abuse: market participants are subject to Regulation (EU) 596/2014 (MAR) on market abuse containing provisions on insider dealing, unlawful disclosure of inside information and market manipulation, which all need to be considered in the context of equity derivative transactions (especially where persons discharging managerial responsibilities within issuers, and persons closely associated with them, are involved);
- market infrastructure: market participants are subject to Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR), which imposes risk-reducing or transparency obligations on all EU undertakings (including, but not limited to, dealers and corporates) that enter into derivative transactions (clearing through central counterparties, reporting of transactions to trade repositories, risk mitigation techniques);
- short selling: market participants are subject to Regulation (EU) 236/2012 of 14 March 2012 on short selling and certain aspects of credit default swaps; and
- benchmark: market participants are subject to Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts, or to measure the performance of investment funds.
The AMF is the authority primarily responsible for policing these rules in France.
In addition to dealers, what types of entities may enter into OTC equity derivatives transactions?
There are no general regulatory exclusions on the types of entities that may enter into OTC equity derivatives transactions in France. France has implemented the provisions relating to customer classification under the MiFID II/MiFIR regulatory framework. OTC derivatives counterparties will benefit from a different level of protection depending on their regulatory classification (professional versus non-professional clients). Entities that enter into OTC equity derivatives transactions in France are mainly banks, credit institutions, financial services institutions, funds and large corporates.
Applicable laws and regulations for eligible counterparties
Describe the primary laws and regulations surrounding OTC equity derivatives transactions between a dealer and an eligible counterparty that is not the issuer of the underlying shares or an affiliate of the issuer? What regulatory authorities are primarily responsible for administering those rules?
The primary laws and regulations surrounding OTC equity derivatives transactions between a dealer and an eligible counterparty that is not the issuer of the underlying shares or an affiliate of the issuer are as follows:
- financial netting: France has implemented Directive (EU) 2002/47/EC of 6 June 2002 on financial collateral arrangements in its Financial and Monetary Code, which introduced derogatory rules to French insolvency and security laws (known as the Financial Netting Regime) that are applicable to derivatives transactions entered into between a dealer and an eligible counterparty if certain conditions are met. In particular, the Financial Netting Regime allows a counterparty to trigger the termination of outstanding derivative transactions and implement the close-out netting provisions of derivatives framework agreements concluded by a French counterparty, including where it is subject to insolvency proceedings;
- threshold crossing: market participants (when they are unable to benefit from the bank trading exemption) need to comply with the relevant provisions of the French Commercial Code and the General Regulations of the French Financial Market Authority relating to the filing of disclosure threshold notifications by the close of trading on the fourth trading day following the acquisition or disposal of a significant holding, including when these exposures are created through financial instruments (either cash or physically settled);
- markets in financial instruments: dealers that are trading OTC equity derivative transactions with eligible counterparties (that are not dealers) are subject to the rules relating to the provision of regulated investment services under MiFID to counterparties located in France;
- market abuse: market participants are subject to MAR, containing provisions on insider dealing, unlawful disclosure of inside information and market manipulation, which all need to be considered in the context of equity derivative transactions (especially where persons discharging managerial responsibilities within issuers, and persons closely associated with them, are involved);
- market infrastructure: market participants are subject to EMIR, which imposes risk-reducing or transparency obligations on all EU undertakings (including, but not limited to, dealers and corporates) that enter into derivative transactions (clearing through central counterparties, reporting of transactions to trade repositories, risk mitigation techniques, etc);
- short selling: market participants are subject to Regulation (EU) 236/2012 of 14 March 2012 on short selling and certain aspects of credit default swaps;
- benchmark: market participants are subject to Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts, or to measure the performance of investment funds; and
- securities financing: market participants are subject to Regulation (EU) 2015/2365 (SFTR) on securities financing transactions and collateral reuse, which provides for a legal framework of transparency requirements to facilitate monitoring and risk identification. SFTR sets out, inter alia, reporting rules in respect of details of securities financing transactions (such as securities lending and repo transactions or certain margin lending transactions) to trade repositories and minimum transparency rules and consent requirements for parties involved in collateral use.
However, for certain types of counterparties that are regulated in France, French law imposes additional restrictions that will impact the entry into, or the treatment of, derivative positions (including equity derivatives). For example, with respect to insurance or reinsurance companies licensed in France, the French Insurance Code allows for entry into derivative instruments if these instruments contribute to reducing risks or improving the efficiency of the management of the portfolio of assets. Similarly, for certain collective investment schemes organised in France, derivative positions can only be entered into if their use is consistent with the strategy of the fund in question, and the derivative position can be terminated at any time (at market value or at a predetermined value) by the fund. The AMF is generally primarily responsible for administering these rules, together with, in certain cases, the Prudential Supervision and Resolution Authority.
Securities registration issues
Do securities registration issues arise if the issuer of the underlying shares or an affiliate of the issuer sells the issuer’s shares via an OTC equity derivative?
No specific securities registration issues would arise in France as a result of the issuer of the underlying shares or an affiliate of the issuer selling the issuer’s shares via an OTC equity derivative. In all instances, these transactions would be subject to compliance with the applicable disclosure provisions under MAR relating to persons discharging managerial responsibilities, as well as persons closely associated with them.
May issuers repurchase their shares directly or via a derivative?
Yes. French issuers may repurchase their own shares directly or indirectly via a physically settled OTC derivative within prescribed regulatory limits (French issuers are legally prohibited from holding more than 10 per cent of their own shares). If shares are repurchased via a derivative, it will typically be via an equity forward transaction contemplating the delivery by the dealer counterparty of a certain number of shares to the issuer at maturity, and calculated based on the volume-weighted average price (often discounted) of the shares over a certain period.
The following issues are typical of share repurchases via a derivative:
- the shareholders’ authorisation taken in the context of the repurchase programme of the issuer must set out explicitly that share repurchases can be conducted via derivative instruments;
- the delivery of the shares being repurchased must not result in the issuer holding more than 10 per cent of its own shares, and the shares must be repurchased for one of the objectives stated in the share repurchase programme (ie, cancellation, hedging stock options or other share allocations granted to some or all eligible employees or executive officers);
- share repurchases conducted via derivatives are not covered by the safe harbour provisions contemplated under MAR and, therefore, do not benefit from the presumption relating to the absence of insider trading or market manipulation;
- share repurchases conducted via derivatives will generally need to be calibrated to follow the parameters of transactions eligible to fall within the safe harbour under MAR (notwithstanding that these derivative transactions do not benefit from the safe harbour, counterparties will need to take precautions to ensure that they can demonstrate to the French regulator that relevant anti-abuse precautions have been taken); and
- issuers purchasing their own shares via a derivative instrument will need to immediately inform the market (often via a press release) once they have concluded the derivative. They must also disclose, in that context, various items of information, including the number of shares to be delivered, the maximum price and the period during which the investment service provider will intervene on the market to repurchase the shares.
What types of risks do dealers face in the event of a bankruptcy or insolvency of the counterparty? Do any special bankruptcy or insolvency rules apply if the counterparty is the issuer or an affiliate of the issuer?
Dealers with outstanding equity derivative positions with a bankrupt or insolvent French counterparty are, in much the same way as with other derivative positions, subject to the uncollateralised mark-to-market exposure resulting from the termination and close-out of these transactions. On the assumption that these outstanding equity derivative positions are documented under a market derivative framework agreement (a French Banking Federation (FBF) Master Agreement or an ISDA Master Agreement governed by French or English law) (a version of the ISDA Master Agreement governed by French law was published by ISDA in 2018 in the context of contingency planning for Brexit), dealers facing an insolvent French counterparty will be able to terminate their outstanding derivative positions and calculate a net close-out balance owed by one party to the other under that contract and taking into account any amount of collateral previously posted (a net close-out debit or a net close-out credit).
In this context, dealers will be able to rely on the derogatory rules to French insolvency and security laws (known as the Financial Netting Regime) introduced in the French Financial and Monetary Code following the implementation under French law of Directive (EU) 2002/47/EC of 6 June 2002 on financial collateral arrangements. The Financial Netting Regime allows counterparties to implement the close-out netting provisions of derivatives framework agreements concluded by a French counterparty, including where it is subject to insolvency proceedings. The provisions of the Financial Netting Regime operate by exception to the general French insolvency regime. There are no specific applicable insolvency rules that would apply if the counterparty is the issuer or an affiliate of the issuer.
What types of reporting obligations does an issuer or a shareholder face when entering into an OTC equity derivatives transaction on the issuer’s shares?
Issuers are generally subject to the transaction reporting rules to trade repositories under EMIR.
In addition, shareholders entering into equity derivatives transactions on a French issuer’s shares are required to file with the AMF a disclosure threshold notification by the fourth trading day after reaching, exceeding or falling below (1) 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, 30 per cent, one-third, 50 per cent, two-thirds, 90 per cent and 95 per cent of the share capital of an issuer whose shares are listed on Euronext Paris and (2) 50 per cent and 95 per cent of the share capital of an issuer whose shares are listed on Euronext Growth (in either case, under French law, this requirement is triggered at such percentage levels of either voting rights or of non-voting capital). Disclosure is needed where these thresholds are met from holding either shares with voting rights or financial instruments referencing shares with voting rights (entitlements to acquire and financial instruments with similar economic effect) or a combination of both. The notification by the shareholders shall include, inter alia, the total number of shares or voting rights they hold, the number of securities they hold that give deferred access to future shares and the voting rights attached thereto, and the shares already issued that they may acquire by virtue of the derivative instrument. When the underlying securities are effectively acquired, another notification will also need to be filed with the issuer and the AMF.
At the 10 per cent, 15 per cent, 20 per cent and 25 per cent levels, the shareholder’s notification must include a statement of intent whereby the shareholder sets forth its intent with respect to the issuer during the coming six-month period. Any change in plans during such six-month period requires an amended filing (this disclosure must be made by the fifth trading day). Securities representing 5 per cent or less of an issuer’s voting rights held within the trading book of a credit institution are exempt from these filing requirements, provided that the institution ensures that the voting rights in respect of those shares are not exercised or otherwise used to intervene in the management of the issuer (this is commonly referred to as the ‘trading exemption’).
Issuers can also set separate disclosure thresholds in their articles of association, requiring shareholders to notify them when they cross individual thresholds (which can be as low as 0.5 per cent).
Are counterparties restricted from entering into OTC equity derivatives transactions during certain periods? What other rules apply to OTC equity derivatives transactions that address insider trading?
There are no periods during which counterparties are specifically restricted from entering into OTC derivative transactions. However, the applicable rules relating to insider dealing and market abuse will apply to any counterparty to an OTC equity derivative transaction referencing shares admitted to trading on a regulated market. In fact, MAR includes a prohibition on the ability of a counterparty to enter into a transaction (including an OTC equity derivative transaction) on the basis of inside information (information of a precise nature that is not publicly available and that would be likely to significantly impact the price of the shares if it were to be made publicly available) or engage in the unlawful disclosure of inside information or market manipulation. If the counterparty to an OTC derivative transaction involving shares in an issuer is a ‘person discharging managerial responsibility’ in respect of that issuer, that person and any person closely associated with them must not deal in that issuer’s securities during certain closed periods (30 calendar days before the announcement of an interim financial report or year-end report). In addition, equity derivative instruments (like other types of derivatives) do not qualify for the safe harbour exemption under article 5 of MAR, which means that transactions in its own shares conducted by an issuer via a derivative do not benefit from the presumption that they do not constitute market abuse.
What additional legal issues arise if a counterparty to an OTC equity derivatives transaction is the issuer of the underlying shares or an affiliate of the issuer?
If a counterparty to an OTC equity derivatives transaction is also the issuer of the underlying shares, it will be constrained by the requirement imposed by French law that an issuer cannot hold more than 10 per cent of its own shares. Issuers entering into an OTC equity derivatives transaction on their own shares will typically have to represent that the physical delivery of shares under the OTC equity derivative transaction will not entail a crossing of this 10 per cent threshold and, if it did, the transaction would have to be terminated. This is in addition to legal issues relating to market abuse under MAR. In particular, if a counterparty to an OTC equity derivatives transaction is also an affiliate of the issuer, it is often the case that issues relating to ‘persons discharging managerial responsibilities’ within issuers, and persons closely associated with them, have to be examined in the context of the applicability of market abuse regulations.
What types of taxation issues arise in issuer OTC equity derivatives transactions and third-party OTC equity derivatives transactions?
French tax law provides for a specific corporate income tax regime applicable to equity derivatives traded on organised markets (or markets assimilated to organised markets) that revolves around the recognition of latent capital gains or losses on such instruments (ie, mark-to-market taxation) and the possibility to benefit from a tax rollover regime on certain specific transactions. For all other aspects of French direct and indirect taxation, French tax law does not provide for specific rules but more general tax provisions may apply depending upon the means pursuant to which equity derivatives transactions are structured (eg, exercise of options, conversion or exchange of equity or debt instruments). Issues related to the characterisation of income and gains may also be triggered regarding the application of French withholding tax in the case of cross-border transactions. Consequently, a tax analysis generally needs to be conducted on a case-by-case basis.
In practice, counterparties to equity derivatives transactions will consider the timing of the physical delivery of the shares and the nature of the securities being transferred as collateral in the context of their potential tax implications (including the crystallisation of a gain or a loss at a particular point in time, the tax characterisation of this gain or loss and the possibility to benefit from a tax rollover regime under certain circumstances). In addition, counterparties will generally explicitly address in the documentation the allocation of the payment of French transfer taxes or the French financial transaction tax (when the shares are those of a French company that is listed on a stock market with a market capitalisation greater than €1 billion), irrespective of fall back indemnity provisions that may already be contained in the related derivative framework agreement.
Describe the liability regime related to OTC equity derivatives transactions. What transaction participants are subject to liability?
There is no specific liability regime applicable to OTC equity derivatives transactions. Counterparties to OTC equity derivatives transactions are subject to the general principles and mandatory rules of civil law liability arising under contracts (consent, certainty and legality of the contract’s purpose, absence of fraud) and to defined statutory offences governing, in particular, the provision of regulated investment services, market abuse and market manipulation, short selling, and compliance with applicable disclosure thresholds. These offences may, in some instances, give rise to criminal liability (in particular, in relation to insider dealing, unlawful disclosure, market manipulation, attempted market manipulation or the provision of regulated investment services in France without a proper licence).
Stock exchange filings
What stock exchange filings must be made in connection with OTC equity derivatives transactions?
There are no specific stock exchange filings that must be made in connection with OTC derivatives transactions under French law. However, some stock exchange markets have set out specific rules governing reporting obligations when trading on their derivative markets.
In addition, various filing requirements with the AMF and, potentially, the issuer, will arise in the event of crossing an ownership or voting rights threshold (under the French Commercial Code or the bylaws of the issuer), the build-up of a short selling position (under the Short Selling Regulation) or the involvement of persons discharging managerial responsibilities and persons closely associated with them (under MAR). Also, in connection with a share buy-back, some issuers using equity derivative instruments have chosen, in addition to reporting share buy-back transactions to the AMF, to report to the competent authority of the trading venue on which the shares have been admitted to trading or are traded each transaction relating to the share buy-back programme (irrespective of the fact that these transactions do not fall within the safe harbour under MAR).
Typical document types
What types of documents are typical in an OTC equity derivatives transaction?
OTC equity derivatives transactions are typically documented under a transaction confirmation forming part of either the FBF Master Agreement governed by French law or the ISDA Master Agreement governed by English or French law (a version of the ISDA Master Agreement governed by French law was published by ISDA in 2018 in connection with contingency planning for Brexit. Counterparties using the FBF Master Agreement and the ISDA Master Agreement governed by French law do, in much the same way as counterparties using the ISDA Master Agreement governed by English law, have the benefit of market legal opinions relating to the enforceability of close-out netting. The type of master agreement and the governing law used to document equity derivatives transactions in France will mainly depend on the jurisdiction of incorporation of the relevant bank.
When using the FBF Master Agreement, parties will often incorporate the Share Option Technical Schedule published by the FBF, as well as additional relevant technical schedules for the transaction. The Share Option Technical Schedule contains a set of definitions used by counterparties in their equity derivative transactions (it is very high-level and counterparties often amend these definitions in the transaction confirmation to bring them closer in line with the 2002 ISDA Equity Derivative Definitions). When using the ISDA Master Agreement, parties will incorporate the 2002 ISDA Equity Derivatives Definitions. Although the 2002 ISDA Equity Derivatives Definitions were updated in 2011, French market participants rarely use the 2011 version. Parties to OTC equity derivatives transactions may also be required to adhere to ISDA protocols or equivalent bilateral documentation for the purpose of complying with various regulatory requirements under EMIR.
When the equity derivatives transaction is a structured transaction, counterparties will often (but not always) document the transaction on the basis of a long-form confirmation (a standalone confirmation incorporating the terms of the relevant derivatives framework FBF or ISDA agreement) so as to ensure that the close-out netting set related to that transaction with a particular dealer does not overlap with the close-out netting set under the derivatives framework agreement used for the day-to-day treasury activities of the counterparty with such dealer.
For what types of OTC equity derivatives transactions are legal opinions typically given?
If transactions are entered into under an ISDA Master Agreement or an FBF Master Agreement, the parties will usually rely on the industry market opinions. However, these industry opinions cover only the enforceability of close-out netting in specific scenarios and, therefore, the parties may agree on the need to provide legal opinions if there are specific enforceability issues in a given transaction. Similarly, legal opinions of capacity may be required when there are restrictions on the ability of a non-dealer counterparty to enter into derivative transactions. It is also not unusual for an enforceability opinion to be given in relation to collateral arrangements.
May an issuer lend its shares or enter into a repurchase transaction with respect to its shares to support hedging activities by third parties in the issuer’s shares?
An issuer may lend its shares or enter into a repurchase transaction with respect to its shares to support hedging activities by third parties in the issuer’s shares subject to applicable share buy-back rules.
If the stock-lending or repurchase transaction involves a transfer of title to the counterparty, the issuer will repurchase its own shares at the maturity of the transaction. Therefore, the issuer will need to ensure that it complies with the 10 per cent restriction on the holding of its own shares. A shareholder resolution will also be needed for the share buy-back at maturity unless the shareholder resolution authorising the issuer’s buy-back programme is already in place and such transactions fall under the programme. The title transfer of shares under a stock-lending or repurchase transaction may potentially trigger disclosure threshold notifications for the dealer counterparty unless an exemption is available.
As in other jurisdictions, stock-lending and repurchase transactions can raise market manipulation and market abuse issues. The return of shares upon the maturity of such transactions should comply with MAR and the guidance from the AMF on share buy-backs (including, but not limited to, restrictions on transfers during closed periods). Repurchase transactions, securities lending and sell-buy back transactions qualify as securities financing transactions, and these transactions will likely be subject to reporting obligations under Regulation (EU) 2015/2365 of 25 November 2015 on transparency of security financing transactions and of reuse and amending Regulation (EU) 648/2012.
What securities registration or other issues arise if a borrower pledges restricted or controlling shareholdings to secure a margin loan or a collar loan?
If the shares are freely transferable, there are no specific securities registration requirements if a borrower pledges restricted or controlling shareholdings except for (if security is established via title transfer) the requirement to comply with applicable disclosure threshold obligations and, as the case may be, filing requirements set out under MAR in case of the involvement of persons discharging managerial responsibilities and persons closely associated with them.
If a borrower in a margin loan files for bankruptcy protection, can the lender seize and sell the pledged shares without interference from the bankruptcy court or any other creditors of the borrower? If not, what techniques are used to reduce the lender’s risk that the borrower will file for bankruptcy or to prevent the bankruptcy court from staying enforcement of the lender’s remedies?
If a French corporate borrower in a margin loan files for bankruptcy protection, the lender will not be able to seize and sell shares provided as collateral and subject to a French pledge without potential interference from the French bankruptcy court or other creditors from the borrower.
This is because a margin loan does not qualify as an instrument eligible to the benefit of the Financial Netting Regime within the meaning of the French financial collateral arrangement rules resulting from the transposition into French law of Directive (EU) 2002/47/EC of 6 June 2002 on financial collateral arrangements (at least not if only one of the parties is an eligible financial counterparty). As a result, as from the opening of an insolvency proceeding against a French corporate borrower, the pledge would be potentially subject to a stay of enforcement and, therefore, the lender may not be able to appropriate the collateral and apply it against debt owed to it under the margin loan without being potentially subject to a risk of stay.
As a consequence, a margin loan with a French borrower will typically be structured as a derivative under an ISDA or FBF framework agreement, such that it would qualify as a category of financial instrument benefiting from the provisions of the financial collateral arrangement regime (which does not completely rule out the risk that a court may recharacterise the derivative as a loan so that the financial collateral arrangement would not benefit from the financial collateral arrangement regime).
Alternatively, French corporate borrowers tend to use English-law documentation and custody the shares in the UK for the purpose of ensuring that the security structure under English law benefits from the financial collateral arrangement regime as implemented in the UK. However, this structure remains largely untested and, in the absence of case law, some commentators have argued that French shares credited to an account in the UK may still be deemed located in France for the purposes of French insolvency proceedings. Following the UK’s departure from the European Union, the enforceability of this regime has come under further scrutiny.
What is the structure of the market for listed equity options?
The equity option market allows trading of both stock options and index futures and options (such as on the CAC 40 index).
The main market for options on French shares are MONEP in Paris (part of the Euronext Group) and EUREX (Deutsche Boerse Group). A much smaller portion of options on French shares is traded on Euronext Amsterdam, the Italian derivatives market or ICE. According to a document published by the AMF in July 2021, more than half of the trades are placed outside the order book in the form of blocks of option trades.
There is a great variety of instruments for the same underlying share proposed for trading (mainly due to the combination of different maturities and exercise price) but a small number of these is actually traded.
Describe the rules governing the trading of listed equity options.
Trading of listed equity options on Euronext France is governed by the Euronext Rulebook (the Harmonised Rules in Book I and specific rules applicable to the French regulated markets in Book II). Part II contains the rules applicable to MONEP (Marché des Options Négociables de Paris).
Trades carried out on the MONEP are cleared and guaranteed by Banque Centrale de Compensation (LCH.CLEARNET), according to the conditions and limits specified by the operating rules of the clearing house LCH.CLEARNET.
The clearinghouse fixes the required amount of collateral deposit and calculates margin calls (if the position is out-of-the-money) and the relevant settlement price per option. Options expire several times a year. The standard expiry date is the third Friday of the expiry month unless the third Friday is a public holiday and the exchange is closed, in which case it is the third Thursday. For the CAC 40 Index derivatives, Euronext France offers weekly futures, mini-index derivatives and total return futures. The participants are clearing members, broker dealers and dealers for own account authorised to carry out execution.
The main rules governing the trading of listed equity options on Eurex include the Exchange Act (BörsG) as the overall statutory framework, the Exchange Rules, and the Trading Conditions of Eurex as well as the Eurex Contract Specification Rules.
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