Impact of Brexit and MiFID II on OTC derivatives contracts between third country investment firms and UCITS / AIFs

Among other provisions, French decree No. 2019-1078 of 22 October 2019 amends article R214-19 of the French monetary and financial code (code monétaire et financier) (the “Financial Code”) to broaden the list of eligible counterparties to over the counter (OTC) derivative transactions entered into with Undertakings for Collective Investments (UCITS). Indeed, this decree removes the requirement for French branches of third country investment firms, to be specifically passported in France in respect of the investment service of safekeeping and administration of financial instruments for the account of third parties, and to hold a minimum level of capital (within the meaning of EU Regulation No. 575/2013 (CRR)) of 3.8 million euro. Such amendments were necessary to be consistent with the MiFID 2 regime as French law would otherwise indirectly impose additional conditions to the EU requirements for licensing the French branch of a third country investment firm.

In the same vein, article R214-32-28 of the Financial Code, as amended by this decree, removes the same requirement in respect of the third country investment firms authorised to provided financial collateral guarantees (within the meaning of article L. 211-38 of the Financial Code) to the benefit of Alternative Investment Funds (AIFs) structured as retail investment funds (Fonds à vocation générale, as defined in such code). These two amendments are in force since 25 October 2019.

Further, article 6 of this decree provides that Investment firms headquartered in the United Kingdom being counterparties to OTC derivatives transactions entered into before the date the UK leaves the European Union, assuming no agreement with the EU entered into in accordance with article 50 of the Treaty on European Union, may remain counterparties to OTC derivatives transactions entered into with UCITS (and continue to provide financial collateral to AIFs in the form of retail investment funds (Fonds à vocation générale)) for a period of twelve months as of the day after such leaving date.