Brexit - French ordonnance dated 06 February 2019

The French Ordonnance No. 2019-75 regarding the measures in connection with the withdrawal of the United Kingdom from the European Union in respect of financial services (the Ordinance) was published on 07 February 2019 in the Journal Officiel. The Ordinance is based on the law No. 2019-30 of 19 January 2019, which allows the government to take legislative measures by ordinance to address the consequences of the withdrawal of the United Kingdom from the European Union in case no withdrawal agreement has been reached. It contains several measures designed to ensure the continuity of financing of the economy in the event of a "Hard Brexit".

In order to operate in the European Union after Brexit, a British investment firm will have to either obtain a local licence or apply for an exemption (which may be difficult due to its status as a third-country investment firm) or register with ESMA under the third-country regime, assuming that an equivalence decision concerning the United Kingdom is taken by the European Commission.

Regarding derivatives, in the case of a Brexit without an agreement, European players wishing to pursue their transactions with their UK counterparties will have to liaise with financial service providers authorized to provide financial services within the European Union. It should however be noted that, in order to continue to provide such services, many British financial institutions have taken the initiative to create European subsidiaries that are able to handle their customers' requests locally. However, this change requires a renegotiation between European subsidiaries and European customers of the existing master agreements.

This renegotiation can take place by way of a formal offer addressed by the European subsidiary to its relevant counterparty and express consent by the latter of such offer, but also through an alternative mechanism introduced by the Ordinance1.

The Ordinance establishes a “deemed acceptance” regime. Indeed, its Article 3 provides that the offer to enter into a new master agreement shall be deemed to have been accepted by the offeree, provided that the conditions mentioned hereafter are met.

As a preliminary point, it should be noted that this mechanism shall only apply to the following contracts:

• master agreements relating to derivative transactions entered into before the date of withdrawal of the United Kingdom from the European Union, regardless of the law applicable to that agreement, and 

• the original parties to the agreement are on the one hand a British credit institution or investment firm and on the other hand a legal entity having its registered office in France or established in another Member State of the European Union (the Counterparty).

Article 3 of the Ordinance provides that the Counterparty shall be deemed to have accepted the offer to enter into a new master agreement made by a credit institution or investment firm, provided that the following conditions are met:

• Condition relating to the financial institution: The offeror shall (x) belong to the same group2 as the British credit institution or investment firm, (y) have a credit quality3 at least equivalent to that assigned to the British credit institution or investment firm on the date of receipt of the offer, and (z) be authorised to carry out derivative transactions with the Counterparty.

• Condition relating to the terms of the agreement: The terms of the new master agreement must be identical to those of the master agreement entered into with the British credit institution or investment firm, with the exception of:

  (i) the clauses relating to governing law and jurisdiction, which shall designate French law and the exclusive jurisdiction of French courts, and
  (ii) "any other provision necessary to ensure the performance of the new master agreement pursuant to these amendments"4.

• Condition relating to the method of communication of the offer: The offer must be in writing and in the form prescribed by the original master agreement5.

• Information to be provided to the Counterparty: The offer must be provided together with the relevant documentation highlighting the amendments to the master agreement, the documentation execution process, the corporate name of the relevant credit institution or investment firm, its legal entity identifier6 and its credit quality.

• Deemed acceptance period: Upon the expiration of a period of five business days from the receipt of the offer, the Counterparty will be deemed to have entered into the new master agreement.

The Ordinance specifies that this mechanism only applies to offers received during the twelve months following its entry into force.

Furthermore, the Ordinance introduces two additional changes regarding the legislation applicable to derivatives:

• Extension of the scope of close-out netting: The Ordinance adds spot FX transactions, the sale, purchase, delivery of precious metals and transactions on CO2 quotas to the list of transactions that benefit from the close-out netting regime.

• Compounding of interest: The Ordinance authorizes the parties to provide for the compounding of interest due for late payment (referred to as "anatocisme" under French law), including for interests due for a period of less than a full year. As a reminder, the compounding of interest under French law is currently only available for arrears that have been overdue for at least one year.

The purpose of these two amendments is to promote the development of French law governed master agreements, whether they are in the form of the FBF master agreement or the French law governed ISDA Master Agreement. It is however unfortunate that the entry into force of these two provisions is conditional on the occurrence of a "Hard Brexit".

1In addition to the mechanism of express consent, there is another alternative. Under Part VII of the Financial Services and Markets Act 2000, UK courts have jurisdiction to allow an entity to transfer all or part of one of its activities to another establishment in a Member State. This allows the transfer of the rights and obligations of an entity in respect of its contractual arrangements with third parties without the consent of such third parties. However, this mechanism is strictly regulated, and the relevant institution must meet a certain number of conditions to be able to apply for it.
2Within the meaning of Chapter 6 of Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013.
3Within the meaning of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013.
4The Ordinance does not define what is meant by "any other provision necessary to ensure the performance of the new master agreement pursuant to these amendments". However, it would be legitimate to consider that the French law governed ISDA Master Agreement (in its form published by ISDA) would fulfil this requirement.
5For instance, in accordance with the "Notices" or "Notifications" clause.
6Within the meaning of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014.