Investment Firm statutory requirements• French Banking Authorities organisation: CECEI grants or cancels banking licences for trading derivative products on different markets (own account trading and execution for third parties) The « Banque de France » (BF) is in charge of the prudential supervision through the « Commission Bancaire » (CB) The « Autorité des Marchés Financiers » (AMF) is in charge of good conduct business practices• Investment Firm status is granted by CECEI if the following is initally approved: Adequate level of equity capital Capability of shareholders to provide all relevant undertakings and insurances Appropriate infrastructure (IT) and competent workforce Suitability of the business plan and respectability of IF’s managers September 2005 Page - 3
France LicensingSituation in France No need for authorisation for : commodity dealers that provide investment services only to their Under clients and when it is strictly necessary to their main activity ; French law companies which main activity is the production, processing, distribution or selling of commodities, and deal in Financial Institutions for the usual needs of their activity.September 2005 Page - 4
EU licensing Authorisation requirement investment firms : undertakings whose regular business is the provision of investment services (listed in Annex I A)1 Investment member states require that the provision of investment Firms services or activities on a regular basis be subject to prior authorisation ? (main) EU Exemption regime (30 months)2 Non- 2.1(d). Firms dealing only on own account : exempt unless they regulated entities are market makers 2.1 (i). Firms dealing on own account or providing investment services in commodity services to the client of their main business, provided it is an ancillary service 2.1(k). Firms whose main business is dealing on own account in commodities/commodity derivativesSeptember 2005 Page - 5
Investment Firm statutory requirements• Investment Firm status is a banking status which translates into: Minimum level of equity and accordingly profitability by activity Internal control organisation and regulatory compliance reporting Customer based knowledge Professional and personal good conduct rules, especially within Front Office desks• Investment Firm status provides to Gaselys’ shareholders and Gaselys’ counterparties : a strong control structure : internal audit and risk analysis process, process in compliance with bank regulations a balanced management of commitments (diversification, profitability) September 2005 Page - 7
Investment Firm statutory requirementsTo keep its licence the IF must, on an ongoing basis:• comply with strict ratios capital adequacy : minimum level of capital mandatory to cope with large treasury requirements (cash out caused by adverse market movements or counterparty defaults), credit risk portfolio diversification: protection against « large exposure » risk diversification (credit risk and material risk )• comply with regulatory and good conduct rules market manipulation money laundering information and advisoryOngoing supervision by the regulators:• BF on a monthly, quaterly and yearly basis• AMF on request (mainly yearly)September 2005 Page - 8
Investment Firm statutory requirements Minimum capital requirement comprise two aggregates: In compliance with Regulation no. 91-05 of February 1991 – and all further amendments of calculation methods delivered thereafter – any IF must report to the regulatory authorities an amount of capital necessary to face an adverse situations leading to liquidity requirements. This calculation is based on :4. An equivalent risk amount to cover losses due to adverse market movements: this amount is derived from the sensibility of open positions to market movements, measured either by VaR or Greeks.6. An “equivalent credit risk” to cover counterparty default :all open trading positions with a given counterparty bear a risk of loss if the counterparty defaults. This amount is calculated on a trade basis and is derived form the nominal (% of the nominal as potential future loss) and the current MTM (% of the current MTM as replacement risk) of the transaction. It is aggregated at counterparty level, taking into account whatever netting agreement or risk mitigation there might be between the company and its counterparty.September 2005 Page - 9
Investment Firm statutory requirementsThis equivalent Credit Risk is computed – on an individual trade basis - by the following formula :ECR = Weighting contrepartie x (Potential Future Loss + Replacement Risk)whereby :The weighting contrepartie depends on the nature of the counterparty : 0% for an institutional or a state, 20% for banks and other IF firms, and 50% for any other counterparty (art. 4.3.2. & art 4.2 of Regulation 91-05) ;The replacement risk equals “netting factor” * Max (0, MTM), in case there is a netting agreement between us and the counterparty ;The potential future loss depends on the Nominal amount, the residual maturity and the underlying (commodities, stocks, bonds …). On top of this, receivables are also taken into account as amount at risk and added to this figure.September 2005 Page - 10
Gaselys : SG and Gaz de France trading joint venture 3 Investment Firm statutory requirements 10 Regulatory equity requirements 14 Risk control organisation 17 Appendix - Financial statements 2004 - Banque de France Investment Firm Licence - Contact information - Company identificationSeptember 2005 Page - 11
Regulatory equity requirements• Minimum Capital Requirement (« Cooke Ratio »):Any Investment Firm must comply - and report to regulatory authorities - with a floor level of equity capitaldefined as an appraisal of a worst-case liquidity requirement. This appraisal is based on: an equivalent amount at risk to counterparty defaults (payment default of energy product delivered and remplacement cost of derivative product) an equivalent amount at risk representing losses due to adverse market movements (unfavourable price variations modellisation)• Risk Diversification Ratio (« Large Exposures »): the equivalent credit risk on a given client or a given group has to be less than 25% of regulatory capital each group standing above 10% is classified as a « Large Exposure ». The consolidated « Large Exposures » should not exceed 6 times the equity capital. September 2005 Page - 12
Regulatory equity requirementsInvestment Firm Financial Structure : minimum capital to face anadverse situation leading to liquidity requirements Accounting Equity Equity requirements for : Subordinated Debt Foreign exchange 1) Minimum ratios recorded and risk required on a daily basis and communicated to the Banking Based on a VAR99c Authorities every month. Energy market risk 2) Additional securities through : - a back up line of 50 MEUR Credit risk on commodity derivatives Equity - an emergency line of 50 MEURBased on Mark to commitments (capital, reserves,…)Market and (off balance sheet)Nominal values Credit risk on receivables (balance sheet) September 2005 Page - 13
Gaselys : SG and Gaz de France trading joint venture 3 Investment Firm statutory requirements 10 Regulatory equity requirements 14 Risk control organisation 17 Appendix - Financial statements 2004 - Banque de France Investment Firm Licence - Contact information - Company identificationSeptember 2005 Page - 14
Risk control organisation Board of Directors Directors SG, GDF, GASELYS Audit Committee Activities and risks Risk Committee Members: 4 of GASELYS’ overview Members of SG and GDF Risk board members 1 Divisions, Members of SG and Periodic review of GDF Business lines, Gaselys economic and accounting Directors issues Risk analysis and advice to 6 2 Risks overview and decisions prepare Board-level decisions GASELYS SAS Internal Control 5 3 New Products Committee Internal control organisation Members of SG and GDF Risk Regulation 4 Divisions, Members of SG and requirements reporting GDF Business lines, Gaselys (AMF, CB, …) Independent Risk Directors Reporting to the Board President Managers New product review and Credit and Market risks reporting by validation independent Risk Managers Risk limits and authorisations SG and GDF relationsBodies required by Banking Regulation September 2005 Page - 15
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