the SCF assets with legal requirements (ALM).<sup>61</sup> The minimum capital requirement is 15 million euro.<sup>62</sup> The sole objects of a SCF are:

- _To grant or acquire secured loans and loans to public entities_ (government and public sector borrowers).  These loans<sup>63</sup> must meet strict requirements (described in the law) concerning the quality of the loan (loans may be secured by a first-tier rank mortgage<sup>64</sup> hypothèque de premier rang) or a link over real property, a bank guarantee or a guarantee given by an insurance company to a certain extent), the collateral must be located in Europe<sup>65</sup> and the risk-weighted assets which must at all times exceed the outstanding obligations foncières.

- _In order to finance its assets, to issue obligations foncières_ .  An obligation foncière is a preferred senior bond.  If the issuer is subject of judicial receivership or liquidation proceedings, holders of obligations foncières have preferred claim (le privilège) on the underlying loans (even before the state or employees.)<sup>66</sup> However a SCF can also issue unpreferred debt.  The failure of the SCF's parent would not have an impact on the SCF.

There are four SCFs in France, la Compagnie du Financement Foncier (CFF), CIF euromortgage, the Credit communal d'Alsace and Dexia Municipal Agency (DMA). DMA's assets are only composed with public loans (Dexia main sector of activity is to grant loans to public entities). Until now all issues have been granted AAA by international rating agencies except for one issued by the Credit Communal d'Alsace (which was rated AA).

Practically all SCFs have been created to optimize the funding of the parent group. Therefore they are not aimed at making profits.

From September 1999 to the end of February 2003, about 45 billion Euros of obligations foncières<sup>67</sup> (with an average maturity of seven years) have been issued by SCF (CFF for 19 billion, DMA for 21 billion, CIF euro mortgage for 4 billion and Crédit Communal d'Alsace for less than 0.2 billion).

Some bonds issued by The Compagnie du Financement Foncier (one issue) and Dexia Municipal Agency (two issues) are eligible to Euro Credit MTS.<sup>68</sup>

> 61 The legal framework governing the activities of sociétés de crédit foncier is based on: Act No 99-532 of June 25, 1999, Decrees No 99-710 of August 3, 1999, and No 99-1217 of December 30, 1999; Government Order No 99-10 Article 12 of July 21, 1999; Regulation No 99-11 modifying the regulation No 9105 of Comité de réglemantation bancaire et financière.

> 62 Normally, the capital stock is reinforced by subordinated debts issued by the SCF and most of the time owned by the parent (due to their high level of remuneration).

63 Units of debt mutual funds shall be treated as loans provided that their assets consist of at least 90 percent of debts of the same nature as if they were loans.

64 The loan must be limited to 60 percent of the housing value.

> 65 This requirement may be modified in 2003 to enlarge the possibilities to Canada and Japan.

66 Practically, to avoid any problems with trade unions, an SCF has no employees (except the management board) and is managed by its parent.

67 Sources: dialogic and bondware.

68 EuroCredit MTS is a division of EuroMTS which opened for trading on May 22, 2000. EuroCredit MTS is an electronic trading platform for high quality covered bonds, such as Pfandbriefe, Obligations Foncieres and Cédulas Hipotecarias. In order to be listed on EuroCredit MTS, non-government bonds must be: collateralized with either 57