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What is Counterparty Risk?


In the context of investing, Counterparty Risk refers to the risk that the bank or entity issuing the securities of a Plan (the "Issuer”), or the Guarantor of such securities (the “Guarantor”) could fail or become insolvent during the Investment Term, and if this was to occur, the Issuer or the Guarantor would be unable to repay investors with their investment or any return at Maturity. As such, investors would face losing some or all of their investment.


Assessing Counterparty Risk with Credit Ratings

Credit ratings can provide a way for you to assess the risk of a particular product Issuer such as Societe Generale becoming insolvent. Credit ratings are assigned by independent ratings agencies such as Standard & Poors and Moody’s. Standard & Poor’s rate companies from AAA (Most Secure/Best) to D (Most Risky/ Worst) and Moody’s rate companies from Aaa (Most Secure/ Best) to C (Most Risky/Worst). These credit ratings are reviewed on a regular basis and are subject to change by these agencies.

A summary of credit ratings for the major global banks

Name  Standard and Poors Moody's
HSBC Bank PLC  AA- Aa3
BNP Paribas SA A+ Aa3
UBS AG (London) A+ Aa3
Credit Suisse AG  A+ A1
Societe Generale SA A A1
Prudential PLC A A2
Barclays Bank Plc A A2
JPMorgan Chase & Co  A- A2
Aviva PLC A- A2
Standard Chartered PLC BBB+ A2
Morgan Stanley BBB+ A3
Deutsche Bank AG BBB+ A3
Goldman Sachs Group Inc/The BBB+ A3
Lloyds Banking Group PLC BBB+ A3
Citigroup Inc BBB+ A3
Royal Bank of Scotland Group BBB Baa2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Societe Generale, June 2019

The credit rating is not a recommendation to purchase, sell, or hold a financial obligation, as it does not comment on market price or suitability for a particular investor. It also does not provide assurance that the institution cannot fail.


Counterparty Risk with Societe Generale Investment Plans

SG Issuer ("SGI") is the Issuer of Societe Generale Investment Plans and is a member of the SOCIETE GENERALE group of companies. This means that your client receiving their capital back and any income owed to them is dependent on Societe Generale paying back the amounts due under its obligations on the Product. This is called Counterparty Risk or Credit Risk.

If SG Issuer, the Issuer, or Societe Generale the Guarantor is unable to make payments due under a Societe Generale Investment Plan, your client may lose all or part of their investment.


Are Societe Generale Investment Plans protected by the Financial Services Compensation Scheme?

 No - your clients will not have a claim for compensation from the Financial Services Compensation Scheme or any similar scheme.


Spreading Counterparty risk using UK Four Plans

As an alternative to a more traditional plan where investors can lose up to 100% of their investment if the Issuer were to default or become insolvent, Societe Generale offers a range of Collateralised Plans, for the purpose of mitigating Counterparty Risk through the use of Collateral.

Instead of being 100% exposed to SG Issuer as the Issuer of the Plan, or Societe Generale as the Gurantor, these Plans are exposed to the equally weighted risk of 4 major UK institutions (The UK Four).This means that your client’s risk is diversified across four institutions, with 25% of your investment at risk should anyone of them fail.

  • Read more in our guide to collateralisation (UK Four)

  • Spreading Counterparty risk using UK Three Plans

    As an alternative to a more traditional plan where investors can lose up to 100% of their investment if the Issuer were to default or become insolvent, Societe Generale offers a range of Collateralised Plans, for the purpose of mitigating Counterparty Risk through the use of Collateral.

    Instead of being 100% exposed to SG Issuer as the Issuer of the Plan, or Societe Generale as the Gurantor, these Plans are exposed to the equally weighted risk of 3 major UK institutions (The UK Three).This means that your client’s risk is diversified across three institutions, with 33.33% of your investment at risk should anyone of them fail.

     


Spreading Counterparty risk using Global Four Plans

As an alternative to a more traditional plan where investors can lose up to 100% of their investment if the Issuer were to default or become insolvent, Societe Generale offers a range of Collateralised Plans, for the purpose of mitigating Counterparty Risk through the use of Collateral.

Instead of being 100% exposed to SG Issuer as the Issuer of the Plan, or Societe Generale as the Guarantor, these Plans are exposed to the equally weighted risk of 4 major global institutions (The Global Four).This means that your client’s risk is diversified across four institutions, with 25% of your investment at risk should anyone of them fail.


Spreading Counterparty risk using UK Gilts Plans

In addition, Societe Generale offer a range of Collateralised Plans, for the purpose of mitigating Counterparty Risk through the use of Collateral linked to the UK Gilts.

Instead of being 100% exposed to SG Issuer as the Issuer of the Plan, or Societe Generale as the Guarantor, these Plans are exposed to The UK Government. This means that your client is exposed to the risk of a Credit Event on the UK Government.

Read more in our guide to collateralisation (UK Gilts)


Counterparty Risk with Societe Generale Deposit Plans

SG Hambros Bank Limited is the Deposit Taker, which means that receipt of the initial deposit made by your client and the payment of any returns owed to them at Maturity, is dependant on SG Hambros Bank Limited paying back the amounts due under its obligations of the Plan. This is called Counterparty Risk or Credit Risk. Credit ratings can be a useful way to assess the level of Counterparty Risk.

Credit ratings, (i) can help compare the Credit Risk associated with different product providers and related investments and as such can be useful in assessing how likely the issuer of a security is to meet their obligations to repay any money due to investors, and (ii) are assigned by independent companies known as ratings agencies and reviewed regularly.


Who is  your Counterparty Risk with for Societe Generale Deposit Plans? 

Your client's money is invested in the Trustee's account of the Deposit Taker, SG Hambros Bank Limited, therefore, your client's main Counterparty Risk is with SG Hambros Bank Limited. SG Hambros Bank Limited is a subsidiary of Societe Generale Group but is a completely separate UK entity. It is managed in the UK and authorised and regulated by the inancial Conduct Authority (‘FCA’). SG Hambros Bank Limited were founded in 1839 and employ over 520 people in the UK.

In order to provide the performance of the Plan, the Deposit Taker will enter into a linked transaction with Societe Generale. This means that investors also have a degree of Counterparty Risk with Societe Generale. If Societe Generale were to become insolvent, and the Deposit Taker is unable to match the terms of the linked transaction with another provider, the Deposit Taker may not be able to maintain the potential return.

Prior to the Plan Start Date, when your client initially invests, their cash will be held by the Plan Administrator in a separate client money account with Barclays Bank PLC (“Barclays”) along with money belonging to other clients of the Plan Administrator. The Plan Administrator is not responsible for acts or omissions of Barclays. If Barclays became insolvent during this period, investors may be eligible to claim under the FSCS.

After the Plan Start Date, your clients' deposit will be held by the Deposit Taker for the Trustee. If the Deposit Taker is unable to meet its financial obligation to return your clients'  money to the Plan Administrator on the Plan Maturity Date (i.e. goes bankrupt or similar), the initial deposit may not be returned by the Plan Administrator. In this instance your client may be able to seek compensation from the FSCS.


Credit rating profile of SG Hambros Bank

SG Hambros Bank Limited is not a rated entity. However, we can look at their investment policy and the parent company Societe Generale in order to make an assessment of the credit rating profile. The investment policy of SG Hambros Bank Limited is defined and monitored by their Asset and Liability Committee.

The main themes of the policy are diversification and minimal credit risk. The result is that over 25% of the investment portfolio is rated ‘AAA’ grade, with less than 5% rated below ‘A’ grade, as of the 30th September, 2012. The portfolio is monitored closely by the Treasury and Risk Management teams, in particular the lower rated investments or those with a negative or deteriorating outlook.

Societe Generale Group

Issuer Moody's credit rating Standard & Poor's credit ratng

Societe Generale

As at August, 2018 As at August, 2018

A1

A


 

 

 

 

Both Moody’s and Standard & Poor’s are independent ratings agencies. You should note that Moody’s rate companies from Aaa (Most Secure/Best) to C (Most Risky/Worst) and Standard & Poor’s rate companies from AAA (Most Secure/Best) to D (Most Risky/ Worst).

These credit ratings are reviewed on a regular basis and are subject to change by these agencies.

If SG Hambros Bank is unable to meet its financial obligation to return your clients' money to the Plan Administrator on the Plan Maturity Date (i.e. goes bankrupt or similar), their initial deposit may not be returned by the Plan Administrator. In such circumstances your client may be able to seek compensation from the FSCS.


Are Societe Generale Deposits protected by the Financial Services Compensation Scheme?

Your client may need to seek compensation from the FSCS in the following circumstances:

  • Prior to the Plan Start Date if Barclays is unable to meet its financial obligations; and/or
  • After the Plan Start Date if the Deposit Taker is unable to meet its financial obligations.


The FSCS can pay compensation to depositors, and to the beneficiaries of trusts held by depositors which are trustees, if a bank is unable to meet its financial obligations. Most individuals (including a trust beneficiary) and small businesses are likely to be covered by the FSCS.

In respect of deposits, an eligible depositor (including a trust beneficiary) is entitled to claim up to £85,000. For joint accounts each account holder is treated as having a claim in respect of their share so, for a joint account held by two eligible depositors, the maximum amount that could be claimed would be £85,000 each (making a total of £170,000). The £85,000 limit applies to the combined amount in all the eligible depositor’s accounts with the bank, including their share of any joint account, and not to each separate account.

The FSCS is mainly in place for individuals and small companies to seek compensation. There are specific eligibility restrictions for other customers. For further information about the scheme (including the amounts covered and eligibility to claim) please refer to the FSCS website, www. FSCS.org.uk, or call 0800 678 1100.


 

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This website is issued by the London Branch of Societe Generale. Societe Generale London Branch is authorised by the ECB, the ACPR and the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (FCA) and the PRA. Details about the extent of our authorisation, supervision and regulation by the above mentioned authorities are available from us on request.

 

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Société Anonyme with a capital stock of € 1 009 897 173, 75 as of December 11th, 2017

Paris Trade Register No. 552 120 222

APE No.: 651C

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The information, services and products on this website are intended for use only by financial advisers (herein “Financial Advisers”) and are not aimed at or intended for use by retail investors or persons who are residents of any other jurisdiction, other than the United Kingdom.


PROFESSIONAL REGULATIONS

 

Societe Generale is a licensed French credit institution supervised by the Autorité de Contrôle Prudentiel et de Résolution, (“ACPR”: 4 place de Budapest CS 92459 75436 Paris Cedex 09), controlled by the Autorité des Marchés Financiers (“AMF”) and under the prudential supervision of the European Central Bank (ECB). In accordance to the provision of French Code Monétaire et Financier (Monetary and Financial Code), Societe Generale, as a credit institution licensed for the provision of investment services, is authorized to carry out all banking operations and provide all investment services except for the investment service of the operation of a multilateral trading facility (“MTF”) or an organized trading facility (“OTF”).

 


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The potentials information or material about financial instruments on this website are provided for general information purposes only and should not to be construed as a solicitation or an offer to buy or sell any financial instruments, or any substitute for any form of advice or recommendation with respect to such financial instruments.

Societe Generale accepts no liability for losses or damages which may be directly or indirectly sustained by any visitor to the website or other person who obtains access to the material on the website. 


Any person wishing to obtain information about Societe Generale products or services is requested to contact Societe Generale to obtain the regulatory information document (where applicable), and any other relevant information on the availability, terms and conditions, and prices.


The Plans described within this website are not suitable for everyone. Investors’ capital is at risk. Financial Advisers should not advise their clients to invest in these Plans unless they understand their nature and the extent of their exposure to risk.


The value of these Plans may be exposed to fluctuations in rates of exchange, and these may have an adverse effect on the value or price of the Plan. Information in the website on past performance cannot be relied upon as a guide to future performance. The value of these Plans can go down as well as up and investors may get back less than their initial investment.


This disclaimer cannot disclose all the risks and other significant aspects of the Plans. You should study the risk factors attached to these products that are disclosed below and throughout this website.


This website does not constitute an offer for sale of securities in the United States and the securities will not be registered under the U.S. Securities Act of 1933, as amended (the « Securities Act »). The securities may only be offered, sold, pledged or otherwise transferred in an “offshore transaction” (as defined under Regulation S) to or for the account or benefit of a Permitted Transferee.  A “Permitted Transferee” means any person who (a) is not a U.S. person as defined in Rule 902(k)(1) of Regulation S and (b) is not a person who comes within any definition of U.S. person for the purposes of the U.S. Commodity Exchange Act (CEA) or any rule of the U.S. Commodity Futures Trading Commission (CFTC Rule), guidance or order proposed or issued under the CEA (for the avoidance of doubt, any person who is not a “Non-United States person” defined under CFTC Rule 4.7(a)(1)(iv), but excluding, for purposes of subsection (D) thereof, the exception for qualified eligible persons who are not “Non-United States persons,” shall be considered a U.S. person) and (c) is not a "U.S. Person" for purposes of the final rules implementing the credit risk retention requirements of Section 15G of the U.S. Securities Exchange Act of 1934, as amended (the U.S. Risk Retention Rules) (a Risk Retention U.S. Person).  The securities are available only to, and may only be legally or beneficially owned at any time, by Permitted Transferees.

 

 

Key risks for Investment Plans

 

Capital is at risk and investors could lose some or all of their capital.


If SG Issuer and Societe Generale were to default or become insolvent, the products will terminate immediately. The amount that your client receives back for their investment will depend on i) the market value of their Investment at that time and on ii) the value of the collateral assets at the time of expiry and your client may receive back less than your initial investment.


Liquidity risk: Societe Generale aims to provide a secondary market for the products during the investment term. However, certain exceptional market circumstances may have a negative effect on the liquidity of the products, and even render the products entirely illiquid, which may make it impossible to sell the products and result in the partial or total loss of the invested amount. There is no liquid market on which these products can be easily traded, and this may have a material adverse effect on the price at which these products might be sold. Therefore, the investor may lose part or all of the invested amount.


As with all similar structured investments, in the event of Counterparty or Issuer insolvency your client will not have recourse to the Financial Services Compensation Scheme.


Market risk: The products may be subject to significant price movement at any time before maturity, which may in certain cases lead to the loss of your entire capital invested.

 

 

Key risks for Deposit Plans

 

If Societe Generale Hambros Bank Limited becomes insolvent or fails to repay the amounts due, you could lose some or all of your initial deposit and any gross return owed to you on the Plan maturity Date. As with any deposit, if the Deposit taker fails to pay or becomes insolvent you may be eligible to claim under the UK Financial Services Compensation Scheme (“FSCS”) up to the scheme limits. For further information visit www.fscs.org.uk


In order to provide the performance of a Deposit Plan, the Deposit taker will enter into a linked transaction with Societe Generale. In the event an ‘Extraordinary Event’ were to occur whereby for example, Societe Generale becomes insolvent, and the Deposit taker was unable to match the terms of the linked transaction with another provider, the Deposit taker may not be able to maintain the returns or income stipulated for a Deposit Plan. In such circumstances the income or return investors receive from a Deposit Plan may be less than the headline rate. The investor’s Counterparty Risk with Societe Generale relates only to the terms of the income or return which can be offered by a Deposit Plan. The solvency of Societe Generale has no effect on the actual deposit.


Market risk: The deposit Plans may be subject to significant price movement at any time before maturity. If you were to withdraw from the Plan early you could get back less than your initial deposit.

 

 

Suitability test

 

The purpose of the suitability test is to ensure that the products and services offered meet the client’s investment objectives. In addition, it ensures that the client shall be able financially to bear the risks of the investment (including any relevant loss of capital) and that the client has the necessary experience and knowledge to understand these risks. When providing personal recommendations in relation to these Plans each Financial Adviser is required to and must have undertaken a suitability test and must only recommend products and services that are in accordance with the results of the suitability test.


Please note that Societe Generale does not provide investment advice.

https://www.handbook.fca.org.uk/handbook/COBS/9/

 


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