Brexit and derivatives: France issues measures in case of no deal

On 23 June 2016, the UK voted to leave the EU. The exit procedure was triggered under Article 50 of European Union Treaty, with the departure date set to 29 mars 2019. After Brexit, the UK will become a third country vis-à-vis the EU and will no longer be subject to EU law.

In case Brexit takes place without an agreement having been reached between the UK and the EU as to their future relationship (a "hard Brexit"), the French legislator passed a law enabling the government to decide by way of ordinance the measures required to deal with the UK's departure from the EU.

On the basis of this law, the French government issued Ordinance n°2019-75 dated 6 February 2019 (the Ordinance) relating to preparatory measures for financial services in case of a hard Brexit. Some of these measures apply more specifically to derivatives transactions and are as follows.

(a) Measures for the enforceability in France of the French law-governed ISDA Master Agreement for derivatives transactions

The Master Agreements published by the International Swaps and Derivatives Association (ISDA) are largely used by market participants to document their derivatives transactions. Those master agreements were initially governed by English law or New York law, with English law and the jurisdiction of English courts being usually selected for most of the derivatives trades between counterparties located in different EU Member States.

Following Brexit, the enforcement of judgments within the EU in accordance with the Brussels I Regulation will no longer apply in France to judgments issued by UK courts. This means that judgments by UK courts will be enforced in France in accordance with the rules of the exequatur procedure and international private law applicable to judicial decisions issued by third countries (while the Brussels I Regulation removes this requirement for judgments of EU courts); the exequatur procedure is a contentious procedure carried out by the French Tribunal de grande instance, which basically monitors that the content of the judgment, and the procedure followed by, the English courts is compliant with the French public order. Such a situation raised concerns in the derivatives market about the enforcement in the EU of judgments on derivatives contracts governed by English law and concluded after the effective date of Brexit; consequently, the ISDA published on 3 July 2018 a new template of the ISDA Master Agreement governed by French law and a new template of the ISDA Master Agreement governed by Irish law.

Therefore market participants now have the choice to designate the French law-governed ISDA Master Agreement to document their derivatives transactions: such French law-governed ISDA Master Agreement is substantially similar to English law-governed ISDA Master Agreement but is subject to the law of an EU Member State and the jurisdiction of the commercial court and the Appeal court of Paris, the enforcement of the judgments of such courts benefiting from the advantages provided for by the Brussels I Regulation.

With a view to facilitating the use of this French law-governed ISDA Master Agreement, the Ordinance amends certain French law rules in order to ensure the enforceability of the provisions of the master agreement under French law.

  • The current rules of French law do not allow capitalised interests to be accrued where such interests are due for less than one year. The Ordinance modifies this rule about capitalised interests and allows for master agreements governing the conclusion of derivatives transactions to provide for the capitalisation of interests due for less than one year, as the French law-governed ISDA Master Agreement (which remains unchanged from the English law-governed ISDA Master Agreement on that point) does.
  • Similarly, under French law, the current scope of derivatives transactions eligible for the close-out netting regime described in the French financial and monetary code (and which makes valid and enforceable the close-out netting provisions of derivatives agreements concluded by a French counterparty including where such French counterparty is subject to insolvency proceedings) excludes transactions referencing precious metals or CO2 allowances. The Ordinance removes such exclusion, as it has been identified as a disincentive to the use of the French law-governed ISDA Master Agreement.

(b) Measures promoting the use of the French law-governed ISDA Master Agreement for derivatives transactions

The Ordinance provides that if a bank or an investment firm offers to its French counterparty to conclude a new master agreement for derivatives transactions which: (i) is similar in substance to an existing master agreement previously signed by such French counterparty with a bank or an investment firm, as applicable, incorporated in the UK; and (ii) designates French law and the jurisdiction of French courts, such offer will be deemed to be accepted by the French counterparty, without any further requirement, as long as:

  1. the UK-based bank or investment firm, as applicable, which concluded the existing master agreement and the offeror are affiliates of the same group;
  2. the offeror has a rating equal to or higher than the rating of the UK-based bank or investment firm, as applicable, at the date of receipt of the offer and has obtained the regulatory approvals required in order to provide investments services in France;
  3. the offer is a written offer addressed to the French counterparty in the form required by the existing master agreement concluded between the French counterparty and the UK-based bank or investment firm;
  4. the offer is sent together with the relevant documentation describing the changes to the new master agreement from the existing master agreement concluded between the French counterparty and the UK-based bank or investment firm, the process of the deemed acceptance as well as the identity and rating of the offeror; and
  5. at the expiry of a five business day period following the receipt of the offer, its recipient has concluded a transaction governed by the new master agreement.

The above-mentioned provisions will only be effective during the 12-month period following the effective date of a hard Brexit.

In practice, this deemed acceptance process is clearly intended to promote the use of the new French law-governed ISDA Master Agreement for derivatives; indeed, as of today's date, it is the only master agreement which replicates the terms of an English law-governed master agreement and which complies with the equivalence conditions required for the application of the deemed acceptance process built in by the Ordinance as described above.

(c) Access by French participants to payment and securities settlement systems based in the UK

To ensure the continuity of the access by French banks to payment and securities settlement systems based in the UK, the Ordinance provides that the protection measures described in Directive n°98/26/EC of 19 May 1998, which guarantees that settlements in those systems are final and irrevocable, will continue to apply to French financial institutions which participate in those systems. To this effect, the Ordinance extends the definition of "systems" to include third countries as the UK following Brexit.

(d) Powers of the French banking regulator

The Ordinance also provides that:

  • the sanctioning powers of the French banking regulator (the Autorité de contrôle prudentiel et de resolution or the "ACPR") will continue to apply to acts committed before the effective date of Brexit by banks and investment firms subject to the sanction decisions of the ACPR; and
  • the ACPR will continue to supervise those banks and investment firms in respect of their obligations resulting from the execution of contracts concluded under the freedom of establishment for service providers and the free movement of services within the EU.


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