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New Legal Framework for Securitization - International Law Office

International Law Office

Securitisation & Structured Finance - France

New Legal Framework for Securitization

September 09 2008

Securitization of Insurance Risk and Future Receivables
Amendments to the Securitization Vehicle
International Securitization
Greater Security and Transparency
Temporary Provisions


The government has made revisions to the country's securitization legislation which set out, in particular, to amend the law governing the activities and supervision of reinsurance companies and to reform the legal framework of the French mutual debt fund by providing greater security to securitization transactions, increasing flexibility and transparency and creating a new enlarged French securitization vehicle.

The securitization reform came into effect with the publication of Ordinance 2008-556 (June 13 2008) and its implementing decree, Decree 2008-711 (July 17 2008), designed to reform the legal framework of French mutual debt funds, taking into account the EU Reinsurance Directive (2005/68/EC). In addition, the publication of three tax regulations on July 25 2008 completes the legislation, except in relation to funds supporting insurance risks.

Securitization of Insurance Risk and Future Receivables

One of the major features of the reform is that it allows for the securitization of insurance risk, including existing risks such as damage to property and people, liability and longevity. The provisions on the securitization of insurance risk are set out in the implementing decree, which has amended the Monetary and Financial Code and the Insurance Code. The transfer of reinsurance risk to the financial markets offers an alternative to conventional methods of reinsurance and increases the number of market participants to such transactions, previously limited to reinsurance companies, thereby increasing competition and reducing costs.

The framework for these securitization transactions was drawn up in accordance with the terms set out in the EU Reinsurance Directive. Accordingly, it provides that the French regulatory insurance authority (Autorité de Controle des Assurances et des Mutuelles) must grant prior approval to securitization entities involved in reinsurance risks. Approval will be conditional upon the entity’s bylaws or regulations, its integrity and the professional qualifications of its management team, as well as sound administrative and accounting procedures and appropriate internal control and risk management mechanisms. The authority will confirm that such requirements are adhered to and has the power to withdraw its approval. Furthermore, in order to carry out its mandate, the authority has been granted certain powers of control and investigation and maintains a continued level of monitoring of securitization transactions.

In addition to insurance risks, the ordinance extends the asset class of receivables which can be securitized to include the assignment of future receivables arising under lease agreements and lease purchase agreements.

Moreover, securitization entities now have the ability to secure financing or to cover their risks by entering into derivatives contracts (constituting financial instruments) through a simplified legal and management process. Similarly, the securitization vehicle can carry out, within the limits of its assets, repurchase transactions or any other transaction to acquire or temporarily transfer financial instruments.

Amendments to the Securitization Vehicle

The other notable feature of the securitization reform is the amendments to the legally governed securitization vehicle. The ordinance creates securitization vehicles specifically designed for risk exposure (insurance, debt and derivative risk) by fully funding or financing through:

"the issue of units, shares or debt instruments, by entering into agreements constituting long-term financial instruments or the transfer of insurance risk or the recourse of loans or by other financing sources."

These entities can take the form of a mutual securitization fund, jointly owned entities without legal personality which are based on the former regime applicable to mutual debt funds or a securitization company which takes the form of either a société par actions simplifiée, in the case of private placements only, or a société anonyme.

If the société anonyme structure is adopted, then in order to facilitate management and operation certain provisions of the Commercial Code relating to administration do not apply due to its limited and specific corporate purpose. To this end:

  • no quorum is required to hold an ordinary general meeting;
  • a second notification is not required for an extraordinary general meeting; and
  • certain derogations from the rule governing the directors' mandates are authorized.

An auditor is appointed and informs the directors and the financial markets authority (Autorité de marchés financiers (AMF)) of any irregularities and monitors any takeover, merger or demerger. The auditor also can be appointed as an expert appraiser. In addition, certified accounts need not be approved by a general meeting of the securitization company.

The implementing decree sets out the various components of the assets of the securitization entity, of which there are four:

  • receivables, whether governed by French law or foreign law;
  • cash;
  • transferred assets at the time of creating the security or following enforcement, guarantees and ancillary rights attached to the assigned receivables by the securitization entity; and
  • assets transferred to it under derivatives contracts.

In addition, the implementing decree states that a securitization entity can grant guarantees in order to carry out its aim when the security deed sets out the nature of the assets or the beneficiary’s rights as well as the maximum amount that can be used or set aside, as long as it does not exceed the amount of the beneficiary's receivable in relation to the securitization entity.

The management of securitization entities can be carried out by existing mutual debt fund management companies, as well as by portfolio management companies with investment fund status and, in each case, with any 'active' management activity specifically approved by the AMF.

The securitization entity can comprise two or more 'compartments' if its bylaws or regulations allow for it. Unless there is a specific provision to the contrary in the entity's constitutional documents, the assets of the compartment correspond only to the debts, commitments and obligations, and benefit only from the rights and assets, of the relevant compartment.

Each compartment is subject to its own accounting and every six months of the financial year the management company must draw up an inventory, for each entity, of the assets under the control of the custodian.

Although the concept of compartments has been applied to mutual debt funds for some time, this is a new provision in relation to companies as it introduces into French law the concept of protected cell companies, which are already well known in other jurisdictions.

A custodian or credit institution within the European Economic Area or another jurisdiction approved by the minister for the economy maintains the accounts and the receivables of the securitization company as well as ensuring adherence to securitization company decisions.

International Securitization

This reform will facilitate the use of the French special purpose vehicle at an international level. The new regime avoids the requirement of two separate structures for French receivables and foreign-originated debt.

The reform provides that the resolution of conflicts of law shall be governed by the law of the transfer of the receivable which may be carried out by transfer form or any other French or foreign transfer method, "whatever the law applicable to the receivable and the home jurisdiction of the debtors". The decree clarifies the rules applicable to the assignment and collection of receivables. However, there are concerns about recognition by foreign laws, which may contradict or limit the application of this provision.

Greater Security and Transparency

The bankruptcy risk of the transferor is negated by way of a special dedicated account which protects the payments made by the originator and received by the special purpose vehicle.

The special purpose vehicle cannot take on debts above its net asset value and is bankruptcy remote. In particular, it is expressly provided that assigned receivables under a lease agreement or successive lease agreements will not have an impact on the agreement itself and will remain beyond the reach of the other creditors following the commencement by a bankruptcy receiver of a collective procedure against the originator.

In relation to insurance risk, the ordinance provides that the insurer remains solely responsible as against the insured risks that have been securitized.

The security of the investments is guaranteed as the securitization vehicle must provide information on the risks to which it is exposed. In this respect, on the basis of the decree, the securitization fund regulations or bylaws of the securitization company must provide for:

  • the nature of the risks to which the entity is exposed;
  • the financing or hedging mechanism; and
  • the guarantees that the entity intends to receive.

Temporary Provisions

Title 2(3) of the ordinance, relating to the reform of the legal framework for mutual debt funds, provides that unless it chooses to opt for the new regime, a mutual debt fund created before the ordinance came into effect will remain subject to the provisions of the previous regime unless amendments are made to its regulations in its capacity as a securitization fund.

From now on the transfer form can be prepared, signed, retained and transmitted in electronic form, which differs from the ‘Dailly’ forms.


Publication of the implementing decree dated July 17 2008, followed by the tax regulations of July 25 2008, completes the implementation of this securitization reform. However, certain points remain outstanding - in particular, the regime for French sociétés à compartiments, as well as the tax regime for securitization funds supporting insurance risks, which are not covered by the tax regulations.

For further information on this topic please contact Philip Boys at Lovells by telephone (+33 1 53 67 47 47) or by fax (+33 1 53 67 47 48) or by email (philip.boys@lovells.com). The Lovells website can be accessed at www.lovells.com.

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