Regulation n° 98-05 of the Banking and Finance Regulatory Committee (CRBF) sets out the conditions governing the grant of credit facilities by investment firms, in accordance with article 5-b of the law n° 96-597 of July 2 1996 on Modernization of Financial Activities (the 'MFA Law').

Article 5 of the MFA Law deals with ancillary services which may be provided by investment firms without any additional licence or authorization. Article 5-b constitutes an exception to credit institutions' monopoly over loans and credit facilities, as it was set out in the French banking law n° 84-46 of January 24 1984 (the 'French Banking Law'), since it allows an investment firm to grant loans or credit facilities to an investor under certain circumstances.

Regulation n° 98-05 implements article 5-b of the MFA Law.

Pursuant to articles 2 and 3 of the CRBF Regulation n° 98-05, only those investment firms holding client funds or financial instruments and the fully paid-up capital of which amounts to at least FF12.5 million may be entitled to grant loans or credit facilities.

Furthermore, such loans or credit facilities must satisfy three conditions:

(i)the credit may only be extended to an investor related to the investment firm by a direct business relationship (thus excluding a 'client of a client');

(ii)the credit facility must have been granted the sole aim of enabling that investor to deal in a financial instrument; and

(iii)the investment firm must act on behalf of the investor in relation to those dealings.

Such conditions are imposed by article 5-b of the MFA Law.

Subject to these conditions, any loan transaction as defined by article 3(1) of the French Banking Law (i.e. "any act whereby a person, acting for consideration, makes or undertakes to make funds available to another person or commits itself in favour of another person's interest by the execution of a deed such as an aval, a cautionnement or a garantie") is permitted to investment firms, so that in addition to lending cash, investment firms might, for example, provide a guarantee on behalf of an investor.

Pursuant to article 5 of the CRNF Regulation n° 98-05, the credit may take one of two forms: either a loan intended for a specific dealing (requiring the express prior agreement of the parties), or a credit facility agreement enabling its beneficiary to use credit facilities for the purpose of dealings which are not determined in advance.

The investment firms are thus in a position to charge the investor interest in the event of delayed payment following the execution of an order. The credit facility agreement shall be for a fixed maximum limit and for a period of no more than one year. Since there will be no implied prolongation of this period, any subsequent renewal of the credit line shall be expressly agreed between the parties.

These rules will enable investment firms to compete with credit institutions under identical conditions. It is now possible, for example, for an investment firm to satisfy the regulatory requirements of margin cover by an investor (on the monthly settlement market, the Monep or the Matif) through the transfer of funds from the investor's current account to a 'margin cover' account. In this situation, the investment firm simply bears the risk of the investor's insolvency.

For further information on this topic please contact Philippe Portier at Jeantet & Associés, Paris office by telephone (+33 1 45 05 81 96) or by fax (+33 1 47 04 87 98) or by e-mail ([email protected]).

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