7 August 2018

French law clarifies eligibility conditions for senior non preferred ranking by defining "non-structured" instruments

Published on 5 August 2018, Decree no. 2018-710 (the Decree) adds an important component to the bail-in tool1 under French law, by setting out the conditions in which a security (titre), receivable (créance), financial instrument (instrument) or right (droit) (each an Instrument) may be considered as non-structured for the purposes of article L. 613-30-3 I-4° of the French Code monétaire et financier, which defines the unsecured senior non-preferred ranking.

The Decree, which came into force on 6 August 2018, enacts article 151 of Law no. 2016-1691 of 9 December 2016 in relation to transparency, anti-corruption and the modernisation of the economy (known as the Sapin II Law) which modified the ranking of creditors in the case of liquidation of credit institutions. By way of reminder, the Sapin II Law has, since its entry into force on 11 December 2016, allowed credit institutions to issue Instruments which are eligible for senior non-preferred ranking, but left the task of defining "non-structured" to a decree. Given that one of the essential conditions of eligibility for such ranking is that the relevant Instruments must be "non-structured", this Decree was awaited with some impatience.

The Decree provides that an Instruments is non-structured for the purposes of article L. 613-30-3 I-4° of the Code monétaire et financier and can therefore be admitted to the unsecured senior non-preferred ranking if it fulfills the following conditions:

  • Structure:
    • the Instruments must not contain an embedded derivative; and
    • the redemption amount and any other payment amounts, and each payment date, must be known and not dependent upon any uncertain future events.
  • Currency: the principal, repayments and interest must all be in euros or in another single currency.
  • Maturity: the initial minimum term of the Instrument must be more than one year, notwithstanding that the Instrument may have no fixed maturity.
  • Remuneration:
    • If the Instrument bears no interest, it must be redeemed at par or at no less than par.
    • If the Instrument does bear interest, such interest must be:
      • fixed (linear or resettable at predetermined dates which are know at the issue date and the reset rate must be a market rate that is standard for financial transactions); or
      • linked to an interest rate for interbank transactions recognized as such at the issue date by the Benchmark Regulation2 (such as LIBOR and EURIBOR, etc.), with, where applicable, a fixed margin, and may have a zero floor and be capable of being reset.
    • The contract relating to the Instrument may provide for changes in remuneration: after one or several predetermined dates a different remuneration may be applied, provided that it meets the conditions set out in second paragraph above (fixed rate or linked to an interest rate recognized as such at the relevant issue date by the Benchmarks Regulation). These changes are also permitted in the case where the issuer or borrower has decided not to exercise an early redemption option.
  • Early redemption options: these are not authorised except at the issuer's or borrower's option only and if they customarily feature in the standard documentation for the type of Instrument, that is:
    • for tax reasons;
    • for regulatory reasons (for example, relating to eligibility criteria for capital loss absorption requirements which would render Instruments ineligible); or
    • where they are provided for in the relevant issue contract further to a predefined calendar.
  • Substitution and modification: (by way of a "Substitution and Variation" clause) the contract relating to the Instrument may allow the issuer or borrower to unilaterally modify certain characteristics of the Instrument in order to maintain accounting, tax or regulatory treatment initially provided for.

Decree no. 2018-710 dated 3 August 2018


1 Directive 2014/59/EU on bank Recovery and Resolution (BRRD)

2 See paragraph 1 of Article 3 of Regulation (EU) 2016/1011 of 8 June 2016


Hervé Ekué +33 140065359
Partner, Paris herve.ekue@allenovery.com
Julien Sébastien +33 1 40 06 53 51
Partner, Paris julien.sebastien@allenovery.com
Delphine Marchand-Sauri
City delphine.marchand-sauri@allenovery.com

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