Strategic Treasury

WHY LOCATE A CENTRAL TREASURY UNIT IN FRANCE?

by Charles-Henri Taufflieb, Managing Director and Member of the Board, AFTE

IN BRIEF more advantages to corporate The French Association of Corporate Treasurers, AFTE, represents treasuries than that which exists In this article the Managing 1,500 members: 1100 Corporate Treasurers of 1,000 groups and 400 in Paris. Here, we have devel- Director of the French bankers or consultants. AFTE has five activities. oped a new regulatory and Association of Corporate Technical Committees: Asset and financing, forex and interest rate, fiscal framework designed to Treasurers outlines the accounting, cash management, legal documentation, IT, euro. facilitate the creation of a cen- attractions of the French Conferences: with speakers including Ministers, Governors of tral treasury unit. In line with a regulatory and fiscal Central Banks, Chief Executive Officers, Chief Economists and number of other measures taken framework designed to Directors of Capital Market. to improve the competitiveness facilitate the creation of a Education: training courses. of the financial services sector, central treasury unit in Publications: technical committees and newsletters. the French Ministry of Finance France. He describes the Representation of Corporate Treasurers: regular contacts with French has recently adopted new mea- recent measures which have and European Supervisory Authorities. sures to facilitate the location of eliminated the fiscal obstacles centralised corporate treasury which existed previously, and operations in France. compares the French system An Instruction Letter dated with that obtaining in other 3 November 1998 confirmed by European locations such as the Bulletin officiel des impôts of Belgian Co-ordination The French Ministry of Finance has 16 April 1999 clarifies the regu- Centres, Dutch B.V. and the lations under which international Irish IFSC. recently adopted new measures groups, both domestic and The article provides a foreign, can create ‘Central useful list of financing to facilitate the location of Treasury Units’ – a specific products available in the structure for international trea- French markets, and centralised corporate treasury sury operations in their broadest demonstrates the security of scope, which exists in no other the financial channels, in a operations in France. country in Europe. deep and liquid market which is supervised by the Banque Two major fiscal obstacles de France and the COB and HE fundamental needs of 4. A culture of risk management eliminated which has very sophisticated corporate treasuries consti- and clear legal and business The creation of a new, specific settlement and delivery Ttute the basic criteria for rules. fiscal status for central treasury systems. evaluating the structure most like- 5. Unique electronic data units is accompanied by the ly to produce optimum results in exchange system. elimination of the two major the new euro environment. These fiscal obstacles for locating this five requirements are: type of function in France which An accommodating had existed prior to that date: 1. An accommodating fiscal fiscal environment environment and a coherent 1. Elimination of withholding regulatory framework. and a coherent taxes on interest earned on 2. The ability to tap into a regulatory framework balances in current accounts complete range of financing which are part of a compa- instruments. Nowhere else in the Eurozone is ny’s treasury management 3. Secure financial channels. there a structure which presents operation. This means that May 2000 43 Strategic Treasury

current account interest paid Comparisons with foreign tax if the parent company treasury function. Although sight by a French-registered trea- treasury units is located in a country of deposits may not be remunerat- sury management subsidiary Eight criteria are to be taken the E.U.; ed, inventive bankers know how to a foreign sister company into account when making a ● Deductibility of interest: no to circumvent this drawback. or to the parent company is decision for the location of a limitation if respecting arm’s not taxable. central treasury unit: length competition principle; The regulatory environment 2. Elimination of the interest ● Ratio of under-capitalisation is French banking regulations and deductibility ceilings which ● The applicable tax system: a problem only if in common French company law are clear, set a limit on tax deductible there are two types of systems: law (Germany, Belgium, Spain coherent, regularly modernised interest that could be paid common law (Belgian and France, except in practice and purposely non-restrictive. by a subsidiary to its parent Co-ordination Centres, new central treasury units); They cover a wide range of prod- company. An intra-company Irish IFSC, subsidiaries ● Tax on capital contributions: ucts, which now extends to financing, for example, will of Luxembourg companies, varies from exoneration derivatives, repurchase agree- generate interest expenses French treasury units, Dutch (Belgium) to registration fee ments (repos), and securitised which are fully tax-deductible, B.V.) and derogatory (former (The Netherlands, Ireland and commercial assets. without limitation. Irish IFSC); France); France is the only European ● Tax basis: all taxable income ● Subsistence required: to be set country to have a banking law Thanks to these new regulations (France, Swiss subsidiaries up at least in several states or which includes specific references and the tax treaties France of Luxembourg companies); continents: The Netherlands to corporate treasury activities. has signed with the majority of lighter taxable basis (Dutch (four countries or two The fundamental legal text is the OECD countries to avoid double Banking Act of 24 January 1984. taxation, France now possesses It has been modified by the the most favourable fiscal Financial Activity Modernisation environment for establishing an Act (loi MAF) of 2 July 1996, operational central treasury unit. which itself is the transposition There are five conditions into French law of the European which treasury operations must Directive of 10 May 1993 (the meet in order to benefit from the Investment Services Directive). new fiscal status: The Banking Act applies the principle of subsidiarity: 1. Treasury operations (borrow- ings and loans) are to involve France is the only European “…The present law does not companies controlled directly stand in the way of a firm, what- or indirectly, pursuant to the country to have a banking law ever may be its nature, from stipulations of the French undertaking treasury operations Banking Act of 1984; which includes specific references with companies having, directly 2. The group to which the com- or indirectly, equity relationships panies belong must be defined to corporate treasury activities. which give one of the related as a multinational corporation, companies effective control over with registered operations in the others.” at least three different coun- tries (not limited to Europe The notion of ‘effective control’ alone); is defined by the French Banking 3. Fiscally, the operations are to and Financial Regulation be of a normal managerial Committee (CRBF, which nature, and be the object of a reports to the Banque de France) treasury management agree- as follows: ment signed by all of the group companies involved; B.V., Belgian Co-ordination continents for at least two “The notion of effective control 4. Movements of funds are to be Centres); years), Belgium (four coun- is to be understood by taking into recorded in specific accounts ● Limitation on certain activi- tries for at least two years), account the measures of company in order to be traceable with ties: Belgian and Dutch centres France (three countries with- law, which addresses the case of a precision in each company ● Withholding taxes: interest out any other restrictions); company considered as being in concerned; paid is, either systematically ● Minimum number of employ- control of another as the holding, 5. Transactions are to be the exonerated (France, Belgium), ees (Belgium, Ireland and The directly or indirectly, of a fraction object of an annual declaration or in practice exonerated Netherlands). (of the shares) which confer the to the fiscal authorities (indi- (Ireland); interest received: it majority of votes in annual cating the identities of the is necessary to examine In conclusion, the French sys- or extraordinary shareholders beneficiaries, the nature of the international tax conventions tem, by providing both flexibility meetings, the disposal of the revenues, and the details of on a case-by-case basis; and security, is becoming an majority of voting rights by virtue taxable amounts). dividends: no withholding attractive location for centralised of an agreement concluded 44 May 2000 Strategic Treasury

1 – Negotiable short-term products commercial paper market of a linkage to other than nearly as flexible in timing as interbank money market or running an overdraft; bond market rates. Negotiable debt securities Outstanding (bn €) ● It is now possible for commer- ● Minimum denomination: cial paper to be repurchased The denomination of the secu- by its issuer without condition, rity is fixed at the countervalue € Certificates of deposit (CD) 125.1 giving corporate treasurers of 152,449 (FRF1m). This is greater flexibility in adjusting in line with current market Commercial paper (CP) 54.9 outstanding amounts to their practice, in order to favour needs; a homogeneous and liquid Medium-term notes (MTN) 60.6 ● Commercial paper may be market. issued on a variable rate basis, ● Issuing requirements: TOTAL 240.6 indexed to a designated bench- Commercial paper may be mark figure, thus permitting issued by joint-stock compa- Source: BDF, January, 2000 companies to match their nies (or equivalent legal funding requirements more forms for companies whose closely, including interest registered offices are not between other shareholders, or central treasury unit to cover a rate matching; in France) that have been de facto determination of results, firm’s interests throughout the ● Origination of issues on the in existence for two or by means of the voting rights held, Eurozone. It should be added market is open to investment more years (or guaranteed by of decisions taken by these share- that no central bank authorisa- companies (non-credit granting entities meeting this require- holder assemblies.” tion is necessary for treasury institutions); ment) with paid-up capital operations in the broad sense, ● Domicile of commercial of €228,673 (FRF1.5m) The loi MAF goes on, Article 25: i.e. loans, foreign exchange, paper can be made with or more; by investment com- interest rate swaps, repos, etc. French branches of invest- panies based in France “…investment services can Compared with other coun- ment firms which have their or abroad; by SNCs (collec- be furnished, within the limits of tries, the clarity, coherence, and head offices within the tive investment companies). legislative measures by which they non-restrictive character of European Union (any of the Negotiable medium-term notes are governed, as appropriate,… French banking regulations, 15 member states, including may be issued by entities that by firms which furnish only including both fiscal measures the non-Eurozone). are entitled to issue CDs or investment services, and only to and the code of conduct, pro- commercial paper. legal entities which control them vide the corporate treasurer, The issuance characteristics of ● Repurchase and early directly or indirectly as defined attentive to risks of every kind, CP and the broader category of redemption: Issuers are free by article 355-1 of the law 66-357 with an optimal environment. negotiable debt securities can be to repurchase and to cancel the of 24 July 1966, and to other This constitutes a primary asset summarised as follows : negotiable debt securities they legal entities which are controlled of the Paris marketplace, as issue. In the case of repur- by that same legal entity, in the it is one of the most important ● Currency of issue: Negotiable chase only, notifications to the sense of the pre-cited law.” criteria in the choice of a debt securities may be issued Banque de France are to be location for a Eurozone central in any currency. Thus, it is pos- filed monthly; in the case of The loi MAF thus explicitly treasury unit. sible to issue paper on the Paris cancellation of repurchased expands upon the measures of market in euros, sterling, dol- securities, notifications are to the EC Directive, and covers all lars or yen; and not be put at a be filed weekly. financial instruments: loans, A complete range of disadvantage by any regulation ● Domicile: Issuers of nego- borrowings, foreign exchange financing products for the choice of currency. tiable debt securities have to trading and financial derivatives ● Index linkage: This is an domicile their securities with a for hedging. The French commercial paper option left open to the issuer, credit institution authorised by Taken together, these various (CP) market is the largest in but one which the French the French authorities or a legal texts present a coherent Europe. As of January 2000, out- authorities favour, having French branch of a credit insti- definition and interpretation of standings amounted to €55bn made an innovation on the tution registered in a member the notion of control. There is (FF317.48bn), representing 100 sovereign bond market with a state of the European Union on no possible ambiguity on this issuers, including a number of new index-linked issue in a European passport (freedom subject, unlike the case in other non residents. September 1998. The French of establishment); an invest- European countries which still Recent measures have intro- authorities plan to continue ment firm authorised by the use the notion of ‘linked compa- duced a considerable amount of with issues of index-linked French authorities or a French nies’. This legal and regulatory flexibility into this market. bonds, hoping to create a new branch of an investment firm environment encourages trea- They include: international benchmark cate- registered in a member state of sury operations for non-banking gory for bond issuance. This the European Union. institutions, it creates excellent ● The minimum maturity of option is essentially without ● Delivery and settlement: conditions for operations and paper issued now is in line restriction, since prior notifi- Negotiable debt securities may permits the most favourable with the US market, set at 1 cation to the central bank is be deposited with SICOVAM legal structure for creation of a day, making access to the required only in the rare event SA, the French securities May 2000 45 Strategic Treasury

2 – International debt securities in 3 – The worldwide asset management Continental Europe industry

Corporate issues by country June 1998 Bn Euro Amount Germany France 23.2% 42.9% United States 4,149

France 512

Netherlands Luxembourg 348 12.9% Italy 320

Italy Japan 264 5.9% Others Spain Finland 4.6% Austria 4% 2.3% Source: B.I.S. 4.2% Source: AFG/FEFSI/ICI, Sept 1998

clearing house and handled his company’s rationale for and negotiable short- and medium- to the benchmark index of via the RGV settlement sys- placing its central treasury term securities. money market rates, the tem, or via Cedel or Euroclear, operations in Paris. The market offers three EONIA (euro overnight inter- if desired. Benefits include “We decided to establish our advantages: bank average rate); irrevocability; possibility of European Funding Operation in ● International money market managing issuance and place- France for a number of reasons. 1. It is a market supervised by funds, which invest in foreign ment with a single instruction; First of all, France has one of the Banque de France and the currency money markets. same-day funds; placement on the largest and most active COB, while at the same time international markets. domestic markets for short-term functioning as an over-the- The fierce competition between ● Disclosure requirements: paper in Europe, so it was a log- counter market; asset managers to attract funds Issuers have to prepare a brief ical place to start. Paris has a 2. It is a deep and liquid market from corporations and institu- summary financial disclosure number of distinct advantages. where over 630 issuers, cor- tional investors has led to the document presenting business The money markets are well porations as well as credit active participation of the French activities, financial situation organised and well regulated institutions, intervene every Association of Corporate and their issue programme, to these regulations were appropri- day; Treasurers (AFTE) in designing be filed with the Banque de ately modified in anticipation of 3. It is a market with the most measures to ensure minimum France; these requirements are the single currency. In addition, sophisticated settlement and transparency in the marketplace. modelled on the commercial the market systems are certainly delivery systems, nationally or A recent innovation which paper disclosure requirements among the best in the world. internationally. greatly increases the transparen- in the USA, and are equally SICOVAM SA offers real-time cy, efficiency, and coherence of flexible. processing and security equal to French asset management data presentation of mutual ● Market supervision: The or better than we could have companies funds is a standardised monthly Banque de France ensures the found elsewhere in Europe.” The French asset management management report. The stan- smooth operation of the nego- companies offer mandates and dardised monthly reports present tiable debt security market for Corporate bonds funds to corporate investors. four categories of information: all three categories: CDs, Paris is number one in Europe’s A clear area of excellence is Commercial Paper, and MTNs. corporate bond sector with money market funds. They repre- ● General and ongoing infor- This also involves ensuring a 43 per cent of Euroland’s €150 bn sent €155.3bn and account for mation, including precise and high degree of transparency of issues in 1998. 34.2 per cent of assets in 1998, full identification of the fund, the markets by means of pub- compared with 63.5 per cent five reference dates and reference lishing weekly summaries of years ago. Worldwide, French cash values relating to changes market activity. Secure financial money-market funds rank second in strategies or management ● The architecture of the market channels behind the United States. objectives, opening dates and justifies its present dynamism French money market funds published cash liquidation and attraction for major inter- The Paris marketplace offers a are broken down into two major values, precise category defini- national issuers. wide range of sophisticated categories: tions including investment investment products to corporate duration, orientation, mini- Philippe Martinie, former treasurers, from fixed-term ● Regular money market funds, mum investment grade ratings, treasurer, GE Capital, confirms deposits to money market funds which offer a return very close management identification, 46 May 2000 Strategic Treasury

4 – Activity volumes in the OTC A certain number of specific for all the transactions; it will risks are identified: reduce both the systemic risk on interest-rate derivative markets the regulated market and the coun- ● Nullity of derivative product terparty risk on the OTC markets. Negotiable April 1995 April 1998 transactions related to absence debt securities (daily average) (daily average) of authority or capacity of the The French code of conduct counterparty; France is the only European ● The risk that the financial country having a code of conduct Future rate 5 4.6 intermediary will be held between banks and clients based agreements (FRAs) responsible for lack of infor- on the European Directive IDS. mation or advice – a risk that A Code of Conduct for OTC Interest-rate swaps 12.5 32.5 calls for extreme vigilance on forex, interest rates derivatives the part of financial intermedi- and money markets instruments aries in OTC markets. In the was drawn up by the AFTE and Source: Banque de France Amounts in USD billions, variation in percent past decade, jurisprudence has the French branch of Forex been created which clearly Dealers Association (AFTB), focuses on the responsibility negotiated with the banking asso- operating expenses and fees, 2. A clear and secure legal of intermediaries to inform. In ciations and credit institutions etc; framework; French law, the duty to inform associations, in co-operation with ● Performance details, includ- 3. France is the only European and to counsel of a French the CMF, and published in 1998. ing annualised and non- country having a code of con- bank with regard to its client It has been approved by the CMF, annualised performance and duct between banks and is a general obligation; which has recommended it to all benchmark indices, volatility, clients based on the European ● The loi MAF took the investment services providers. performance and volatility Directive IDS. principle of close-out netting Six key points are covered by over one-year periods, varia- (evaluation of the value of the French code: tions from benchmarked The Paris financial marketplace cancelled transactions fol- indices in basis points; ranks third in the global line-up, lowed by the compensation of 1. The code includes only ● Graphic analysis and presenta- behind New York and London related debts and assets) and recommendations; tions of cash liquidation val- in terms of over-the-counter extended it to include all 2. It applies to financial instru- ues, performance variations derivative and interest-rate financial instruments; ments related to interest from benchmark indices and products. This ranking is the The loi MAF assured the rate transactions, foreign portfolio composition; result of a three-yearly interest- Paris financial marketplace a exchange, and advances on ● Technical data, including rate derivative study conducted modern and up-to-date legal securities; global sensitivity, historical by the Bank for International framework, and by its broad, 3. The code underlines that the extremes, loss history, loss Settlements (BIS), with the non-restrictive terms, assured bank and the client are not in recovery time, return/risk ratios participation of 43 central banks. the means to constantly refine the same professional sphere; from reference dates and over The ranking obtained by Paris the law in light of evolution of 4. The duty to inform is a recip- one-year periods, net asset is especially strong for OTC products and methods. The loi rocal duty, both bank-client value, portfolio composition, interest-rate swaps, where Paris MAF: and client-bank; dividend details, and finally ranked number 2 worldwide, 5. The code provides practical commentary by the fund man- behind London but slightly ● strengthened the security of recommendations in the ager concerning management ahead of New York. derivative operations, from absence of a special agreement policy and strategy. the point of view of the risk between the parties; A clear and secure legal of seizure and the transfer 6. An arbitration committee is framework of contracts, created to handle disputes. A culture of risk A second outstanding asset is the ● put into place a specific management and extremely favourable legal envi- regime for sureties to cover These rules clearly specify that ronment of the Paris market- risks resulting from deriva- the duty to inform applies to clear legal and place. In a sector where the tive product transactions, all firms without restriction. business rules amounts exchanged are huge, involving margin calls; This clear statement of blanket and counterparty risks change ● put into place a simplified coverage increases the security Derivatives are available based dramatically with changes in the mechanism for transfer of of transactions for all firms on the performance of assets, levels of interest rates, netting of claims related to derivative which access the Paris financial interest rates, currency exchange risks is clear, collateral has a product transactions. marketplace. rates, and various domestic and legal value, and French laws and These clear and coherent rules foreign indices. regulations are coherent. For the OTC market, the reform of conduct (European Directive The French OTC market has The Financial Activity which is under way makes it on Investment Services, French three advantages: Modernisation Act of 1996 possible to sign a multi-product loi MAF, general regulations of made many changes in the legal netting agreement, subject to the the CMF and French code of 1. The large size of the French framework governing the over- Master Agreement, with a single conduct) increase the security OTC interest rate market; the-counter (OTC) markets. form of collateral, as appropriate, of transactions for all firms and May 2000 47 Strategic Treasury

corporate companies which exchange, thanks to electronic a way as to take into account the access the Paris financial market- signature. professional nature of the person place. Very few and no signifi- The inter bank data transfer for whom the service is provided cant disputes on derivatives standard is applicable to all types […] These principles shall products have occurred on of banking data transfers, assur- ensure that an investment firm the French financial markets, ing greatly improved security for […] seeks from its clients infor- contrary to the London and both banks and their clients mation regarding their financial New York financial centres. The banking sector has for situations, investment experience years benefited from the SWIFT and objectives as regard as the payment transfer system between services requested”. Unique electronic banks. Interested parties include data exchange only a few dozen major players Article 2.2.1 of the French Code and a large, but identifiable, of Conduct states that: system number of banks around the world have keyed into the same “The provider recognises that, France is one of the only coun- standardised system. barring exceptions, the Client’s tries to offer standardised and The ETEBAC 5 system pro- principal activity is not to exe- secure computerised payment vides high performance treasury cute transactions in the financial systems between corporations management software capable of markets” and that, in this and banks. Treasury software running complex simulations of regard, the provider has a spe- programmes forming parts of new corporate finance products cial duty to inform with regard to the system are so sophisticated proposed by Paris marketplace the client. The Code points out in that a number of major French participants. its general principles that “the companies use them to run market participants recognise treasury and accounting in their that each belongs to a different foreign subsidiaries. Further information professional sector and that mar- This standardised contract and ket transactions are within the a standardised IT protocol for The AFTB-AFTE code of provider’s sphere of expertise domestic and international pay- conduct and not that of the client […]”. ment transfers, known as the In France, legal provisions, con- ETEBAC 5 Master agreement tained in a ‘Russian doll’ struc- Most of the information includ- and schedules, was jointly drawn ture, deal with rules of good ed above is excerpts from the up by the French Association of conduct and consequently the booklet Access guide to the Euro Corporate Treasurers (AFTE), duty to inform, based on the financial markets – treasurers, the French Committee for European Directive “concerning issued by Paris Europlace, joint- Banking Organisation and investment services in the secu- ly drawn up by this association Standardisation (CFONB) and rities field” which was adopted and AFTE. the French Banking Association into French law with the (A.F.B.). Modernisation of Financial Useful web sites There are very few equivalents Activities Act and which CHARLES-HENRI in the world to this standardised empowers the French Financial ● AFTE TAUFFLIEB electronic payment transfer sys- Markets Council (the Conseil (French Association of Managing Director and Member of the Board, tem. It involves standardisation des Marchés Financiers or Corporate Treasurers) afte.com AFTE across the board, and across CMF) to implement the General French code of conduct: the banking system, and the Regulations approved by the French and English versions Charles-Henri Taufflieb is Managing same normalised contract and IT Minister of Economy and ETEBAC 5 Master Agreement Director and Member of the Board of protocol applies to all. Finance. Title III, “The rules of and Schedules (French version) the French Association of Corporate The contract and the IT proto- conduct applied to authorised Treasurers (AFTE) and part-time col outline the technical means service providers”, lays down ● Paris Europlace consultant of Tresofi. He was required to put the system into the conditions under which pro- paris-europlace.com previously Deputy Group Treasurer of place, the use and the security fessional associations can draw Usinor Sacilor, Domestic Bank measures involved with identifi- up and have such codes ● Banque de France: Treasurer of Crédit du Nord, and cation ‘smart cards’, bank approved. French commercial paper out- member of the board of the French processing issues, verifications, Article 11 of the European standings Bank Treasurers Association. system modifications, confiden- Council Directive mentioned ear- banque-france.fr He is the co-author of Hedging tiality, legal issues, etc. System lier stipulates that when: foreign exchange and interest rate risks security is based upon authenti- ● Conseil des Marchés in corporates and of the Paris cation of partners’ transfer “Member States shall draw up Financiers Europlace booklet Access guide for by means of ‘smart cards’, rules of conduct which invest- French code of conduct: corporate treasurers to the euro integrity and confidentiality of ment shall observe at all time French and English versions financial markets, and has published data, and non-repudiation of the .[...] they must be applied in such cmf-france.org
many financial articles. 48 May 2000