Is there any legislation or proposed legislation in your jurisdiction under which financial institutions are prohibited from dealing in investments as a principal?

French law n° 2013-672 of 26 July 2013 on the separation and regulation of banking activities (Loi n° 2013-672 du 26 juillet 2013 de séparation et de régulation des activités bancaires) (the Law) made extensive changes to the French Monetary and Finance Code (the Code), including changes to existing banking legislation which will require credit institutions, financial companies and mixed financial holding companies exceeding certain thresholds (to be determined) to transfer certain proprietary trading activities to specialised subsidiaries. The Law also increases the powers of regulatory authorities, creates a new framework for the resolution of systemic banking risk and makes other changes not directly relevant to the present discussion, including reinforcing provisions intended to combat money laundering, terrorism financing, insider trading and tax evasion and limiting remuneration of certain banking executives.

The Law was enacted following campaign promises made during the last French general election. It is generally recognised that the subject matter of the Law may need further amendment in light of proposed European legislation resulting from the Liikanen report. But it was apparently considered important that the new government be seen as following through on its campaign promises.

To which financial institutions do the prohibitions relate?

The Law requires the transfer of proprietary trading activities in financial instruments by credit institutions, financial companies and mixed financial holding companies to specialised subsidiaries where certain thresholds are exceeded. These thresholds will be set out in a subsequent governmental decree (separate thresholds will also apply to the conclusion of unsecured transactions for own account by credit institutions, financial companies and mixed financial holding companies with certain leveraged collective investment undertakings and similar investment funds). While the relevant decree has not yet been promulgated, there have been reports in the French financial press that the proposed text has been submitted to the Conseil d’Etat (the French administrative body which examines proposed Government texts for compatibility with constitutional principles), and that it is expected that the five largest French banking groups (BNP Paribas, Société Générale, Crédit Agricole, BPCE (which in turn encompasses Banque Populaire, the Caisse d’Epargne savings bank group, Natixis and the real estate financing institution Crédit Foncier) and Crédit Mutuel, as well as the French subsidiary of the HSBC group, HSBC France will fall within the relevant thresholds, although press speculation is that only BNP Paribas and Société Générale will create such specialised subsidiaries, while the other banks mentioned will limit proprietary trading to those activities excepted from the requirements as mentioned in the following paragraph. There is no indication that the Law is intended to apply to French branches of foreign banks (as opposed to French subsidiaries of foreign banks such as HSBC France).

What exceptions to the ban on proprietary trading are contemplated by the legislation?

Certain proprietary trading activities are specifically excluded from such requirements and may continue to be effected directly by the credit institutions, financial companies and mixed financial holding companies, including where such trading is effected within the framework of customer investment services, clearing, hedging and certain market making activities, as well as intra-group investment management and (where required for “sound and prudent management”) intra-group cash flow transactions.

Can any other entity within the relevant financial institution’s group of companies carry on the prohibited activity?

Yes. The Law does not (somewhat to the disappointment of certain critics who were hoping for a more radical reform) require a complete ban on proprietary trading activities in financial instruments by credit institutions, financial companies and mixed financial holding companies. Instead, it requires that certain activities are to be carried on by such institutions only through dedicated specialised subsidiaries which are themselves licensed as investment firms or credit institutions (and in the latter case may not accept deposits from the public which benefit from the French deposit guarantee scheme or offer payment services to customers whose own deposits benefit from such guarantees), a process known as “filialisation”. The purpose is to “ring-fence” such activities within the specialised subsidiaries, which will themselves be required to comply individually with the relevant prudential ratios, and may not affect certain high frequency trading transactions and must have management separate from the credit institutions, financial companies and mixed financial holding companies. To protect the parent credit institutions, financial companies or mixed financial holding companies from absorbing future losses of the specialised subsidiaries, prior approval of the French banking authorities is required before the specialised subsidiary can increase its share capital.

When will the proposed legislation come into effect?

The Law is already in force but the decrees setting the relevant thresholds have not yet been promulgated (although this is expected to occur shortly). The credit institutions, financial companies and mixed financial holding companies which are affected by the requirements to transfer proprietary trading activities to specialised subsidiaries must identify the relevant activities by 1 July 2014 and to effect the actual transfer by 1 July 2015. The transfer will occur by transmission universelle de patrimoine, i.e., transfer of all rights and liabilities (and any related guarantee or security) by pure operation of law and (at least as a matter of French law) without any counterparty being entitled to exercise contractual rights to terminate or require early repayment as a consequence of such transfer.

Links to the proposed legislation and any other relevant material

However, as the bulk of the text effects modifications to the Code, it is advisable to refer to the text of the Code itself. The decrees implementing the relevant thresholds will be published upon promulgation in the Official Journal (Journal Officiel) and will be available on Legifrance, the French online directory of legislation.