THE FRENCH STOCK EXCHANGE
& RELATED FINANCIALMARKETS
How they operate
and how they are regulated

The constitution of this working party was motivated by two observations, which moreover are linked. First reprehensible behaviour by financial intermediaries during security investment operations of listed companies. These attitudes are partly due to the fact that such operations are above all commercial operations for banks who proceed (as the leading party or member of an investment syndicate), and partly to the multi-capacity nature of these establishments (i.e. they are active in both primary and secondary markets), which is a source of possible interference between the two activities. The second observation concerns the development of new techniques for capital security investments, imported mainly from the United-States and that are now used in the Paris marketplace. France has found itself behind English speaking countries in matters of development of these new procedures, which explains why proposals made in the report are inspired by regulations in countries that were faced with the same problems at an earlier date (notably Great Britain) and that have already adapted their regulations to deal with them. It should also be noted that a member of the Securities and Investments Board (SIB), controlling body for British financial markets, was part of the working party. It was even more necessary for the French to react vis a vis its primary share market because the tendency to global world financial markets has considerably increased competitiveness between different financial markets, thereby forcing Paris to introduce regulations which will offer investors sufficient guarantees and reduce the risk of such investors ignoring the Paris market.

Proposals made in the report aim to clarify requirements incumbent on establishments taking part in operations on the primary market. Indeed the framework of norms existing until now to safeguard the moral standards of this kind of operation, that were founded on principles of primacy of interest of the client and the integrity of markets, proved to be insufficient because of varying degrees of application between establishments. For example some establishments carried out operations for their own benefit or operated on the second market using information obtained from their activities on the primary market. The principal measures proposed in the report consist of defining a "sensitive" period preceding issues during which establishments acting in the operation must refrain from operating on the security, and of modifying the internal organisation of multi-capacity establishments as a preventative measure. Finally if the proposals made are initially aimed at French financial markets the working party would also like to see them serve as a base for harmonising principles pertaining to issues on an international scale.

I - Instituting a period of abstention before operations on the primary market

A - Towards an abstention requirement for members of the investment pool

1 - The field of application of the abstention requirement

2 - The privileged character of information on the main characteristics of the planned operation

B - The consequences of the abstention requirement

1 - In matters of market surveys

2 - In matters of price pegging

3 - A posteriori declaration requirements (for pool members) on operations carried out during the abstention period

II - A stronger code of practice for multi-capacity establishments

A - A "Wall of China" is necessary but not sufficient

1 - The limited efficiency of separating activities on primary and secondary markets

2 - Designating codes of practice that manage relations between different activities in multi-capacity establishments

B - The transparency of financial analysis reports

1 - Risks due to possible ties between the author of the analysis and the promoter of the operation in question

2 - The suggested solution: putting into context the contents of published analysis by clearly identifying their authors

III - What is the future of the working party's proposals?

A - On a national level

- Finding the right balance between self-disciplinary actions and regulations

- Are these proposals simple recommendations or measures that will be obligatory?

B - On an international level

- The increasing internationalisation of financial operations naturally leans towards harmonising rules governing such operations

- Developing new international codes of practices for financial operations (perhaps in the framework of the IOSCO)?

D.M.

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