The recent decision by the French Court of Appeal (handed down on 8 April 2009) has sparked a great deal of comment in the financial press. In summary, the decision effectively imposed an obligation on a French depositary to return assets sub-custodied by a prime broker – even though the depositary had no access to the assets to be returned.

Some international commentators declared that this decision heralded the end of the short marriage between prime brokers and French depositaries, whilst others merely scoffed that French hedge funds have shot themselves in the foot. The truth of the matter is that the decision will impact the French hedge fund world, but not in the manner suggested by recent press articles.

The reason why we remain relatively blasé about the decision is that industry concerns had already caused certain pertinent aspects of the French fund legislation to be amended four months prior to the date of the decision. If this new legislation had been in force at the time of the administration of Lehman Brothers International Europe (LBIE) then the outcome of the case would have been very different. As a result, it is highly unlikely that we are witnessing the demise of French domiciled hedge funds.

Case summary
For those who have not followed this case in detail, the key facts to note are that:-