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

 

    


POINTS OF LAW


TYPES OF REPURCHASE AGREEMENTS IN FRANCE

(Up-dated 04.15.1997)



Financial markets are a centre of exchange between economic agents, on the one hand those with a capacity for financing operations on the other, those looking for finance. On the condition that the first receive some payment, they enable the second to carry out their activities. Although this balance between supply and demand seems judicious and constructive, it can sometimes lead to a certain rigidity which if does not paralyse, will at least curb operators' actions. For if the main aim of holding a portfolio of securities is to invest funds, and perhaps to take some control in a company, the invested funds are immobilised and therefore not available, unless the securities are sold. The inconvenience of this partitioning between securities markets and the monetary value of the securities is especially obvious when funds are needed in the short term whether for financing or investment (notably for cash flow management). Financial markets, despite the existence of products that are designed for this kind of need, are not flexible enough to completely satisfy such needs. For this reason each financial market, to some degree or another (often under the creative pressure of its operators), has developed various techniques to resolve the problem. "Temporary" securities sales are designed with this in mind, to enable, by various mechanisms, securities holders to temporarily dispose of their securities and in exchange obtain the funds that are needed, before later recovering the securities that they did not want to sell definitively.

In France there are three principal ways of being able to find a balance between holding on to securities and rapidly obtaining some liquidity from funds that are nonetheless invested. Two are kinds of repurchase agreements known as "vente à réméré" and "opérations de pension" and the third is by the loan of securities. The third technique, which is based on consumer loans and governed by article 1874 onwards of the civil code, will not be examined here. We shall attempt describe the other two mechanisms and evaluate their advantages and disadvantages in view of their common aim. The fact that Paris has such instruments is fundamental given the increased competitiveness between stock market centres in the world. Yet it was not until 1994, no doubt inspired by British and American repurchase techniques, that "opérations de pension" in France became regulated and were given a legal footing (I). In fact it was this new legal framework that in some ways relegated the "vente à réméré" technique to second place (II), because this does not have the same legal framework.



I - The "opérations de pension": an instrument which now meets operators' expectations

A - The arrival of a legal framework for "opérations de pension"

1 - A legal gap is filled

- An undisputed need
- Substantive law of "opérations de pension": security and foreseeability of operations
2 - A strictly defined field of application

- The legal definition of "opérations de pension" (article 12-1 of the law 93-1444 of 31.12.1993)
- People entitled to be part of an "opération de pension" agreement
- Securities or bonds that can be the subject of an "opération de pension"
B - A safe and efficient procedure

1 - The mechanism of "opérations de pension"

- Concluding "opérations de pension": assignment and retrocession of securities; temporary property transfer; delivery of securities or instruments to the assignee
- termination of "opérations de pension"
- Hypothesis of a sale or repurchase agreement of securities or instruments received by an "opération de pension"
- Specialists in "opérations de pension" on government bonds
2 - A deliberately secure regulatory framework

- Call for cover and cover management
- The contribution of law no 94-679: clearing debts and credits relating to "opérations de pension"; hypothesis of failure by one party
C - Tax and accounting treatment of "opérations de pension"

1 - The tax regime (instruction BOI of 18.04.1995)

- The principle of tax neutrality on "opérations de pension" set by article 12-VII of the law no 93-144
- The tax regime and the payment of the assignee
- The tax consequences of disposing or receiving securities or bonds under an "opération de pension"

2 - The accounting framework (inscription into the balance sheets of the assignee and assignor)



II - "Vente à réméré" on securities: absence of a formal obligation of reinstatement

A - "Vente à réméré" - contracts under the civil code

1 - Principles and field of application of "ventes à réméré"

2 - The repurchase faculty of the seller, legally constituting a defeasance clause of the sale

B - "Ventes à réméré" applied to securities

1 - Adapting "ventes à réméré" from civil law

- The pragmatism of operators using a civil law technique and adapting it to their needs
- The repurchase faculty: a legal option left to the seller, in practice insignificant given the aim of the operation in financial matters
2 - Tax and accounting regimes of "ventes à réméré" of securities
C - "Ventes à réméré" in the shadow of the new regime of "opérations de pension"

1 - The limits of "ventes à réméré" considering the use made of them for securities

2 - What is the future of "vente à réméré" now there is a solid legal framework for "opérations de pension".



D.M.


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