Luxembourg Client Briefing: Modernisation of Luxembourg Securitisation Law

Luxembourg has amened the Law of 22 March 2004 on securitisation (the Securitisation Law) by the law of 25 February 2022 on the amendment of the Securitisation Law and other laws (the Amendment Law). Under the Securitisation Law, securitisation vehicles (SVs) can be set up either as a securitisation fund (Securitisation Fund) or as a securitisation company (Securitisation Company). SVs may define in their constitutive document that they consist of one or more sub-funds that are ring-fenced from one another (Umbrella-SVs). Further to the Amendment Law – which was published on 4 March 2022, effective since 8 March 2022 – the Securitisation Law was amended in respect to the following.

1. Additional legal forms for Securitisation Companies have become available, such as general partnerships (société en nom collectif), common limited partnerships (société en commandite simple), special limited partnerships (société en commandite spéciale) and simplified public limited liability companies (sociétés par actions simplifiées).[1]
2. Securitisation Funds must now be registered with the Luxembourg register for trade and companies (registre de commerce et des sociétés - RCS). Securitisation Funds existing before 8 March 2022 must register with the RCS within 6 months from 8 March 2022.
3. Investors may invest in SVs by subscribing to Financial Instruments issued by the SV (Financial Instruments) or by granting loans to the SV (Investor Loans, together with Financial Instruments: Funding Instruments). For the issue of Funding Instruments to the public on a continuous basis the SV needs prior approval from the Commission du Secteur Financier (CSSF). The notions “Issue offered to the public” and “issuing on a continuous basis” are now defined in the Securitisation Law.
4. The Securitisation Law provides subordination ranking provisions that apply between different Funding Instruments (essentially prioritizing debt over equity). However, the constitutive documents of a SV can define different ranking provisions.
5. A SV can actively manage a bond portfolio, if the SV issues no Funding Instruments to the public.
6. SVs are allowed to acquire directly or indirectly the assets of which they securitise the risks. SVs may grant security for the obligation of a third party in connection to the securitisation.
7. If Securitisation Companies are Umbrella-SVs and they issue shares or partnership interest, the SV’s constitutive documents can allow that
   • decisions about the annual accounts and profit allocation are made at sub-fund level and
   • the provisions about a legal reserve shall apply at sub-fund level[2].

N.B.: It has to be analysed on a case-by-case basis if a SV falls also in the scope of other legislation such as the Securitisation Regulation[3], the legislation about alternative investment fund managers, the Luxembourg prospectus law[4] or the Prospectus Regulation[5].

More about Funding Instruments

The term “financial instruments” replaces the term “securities”. For the purposes of the Securitisation Law, references to Financial Instruments shall be understood as implying a reference to Investor Loans[6] Financial Instruments are defined by reference to article 1 point 8 of the law of 5 August 2005 on financial collateral arrangements (excluding claims and rights under article 1 point 8 letter f of this provision). Article 1 point 8 of the law of 5 August 2005 on financial collateral arrangements reads:

““financial instruments” has the broadest possible meaning, including:

• all securities and other instruments, including, but not limited to shares in companies and other securities equivalent to shares in companies, participations in companies and units in collective investment undertakings, bonds and other forms of debt instruments, certificates of deposit, loan notes and payment instruments;
• securities which give the right to acquire shares, bonds or other securities by subscription, purchase or exchange;
• term financial instruments and instruments giving rise to a cash settlement (excluding instruments of payment), including money market instruments;
• all other instruments evidencing ownership rights, claim rights or securities;
• all other instruments related to financial underlyings, indices, commodities, precious metals, produce, metals or merchandise, other goods or risks;
• (…),

whether these financial instruments are in physical form, dematerialised, transferable by book entry or delivery, bearer or registered, endorseable or not and regardless of their governing law;”

More about Issuing Funding Instruments to the public on a continous basis

The Amendment Law introduces definitions for an “issue offered to the public” and “issuing on a continuous basis”. Issuing “on a continuous basis” means offering more than three issues within one financial year of the SV. Umbrella-SVs are considered to issue on a continous basis if during one financial year the aggregate issues of all sub-funds exceed three.

An issue is made “to the public” in the sense of the Securitisation Law, if (i) it is addressed to investors other than professional investors in the sense of Article 1 point 5 of the law of 5 April 1993 of the financial sector, (ii) if it is made in denominations inferior to EUR 100,000, and (iii) if it is not distributed in the form of a private placement.

This corresponds mostly to the position the CSSF is expressing in its Frequently Asked Questions.[7]

[1] Otherwise Securitisation Companies can take the form of a public limited company (société anonyme), partnership limited by shares (société en commandite par actions) and private limited liability company (société à responsabilité limitée).
[2] Investment Companies are subject to the law of 10 August 1915 on commercial companies. According to Article 461-1 of the law of 10 August 1915 on commercial companies, companies must allocate every year at least 5% of their ret profits as a reserve as long that reserve amounts to less 10% of the company’s capital (capital social) or falls below that threshold. The Securitsation Law permits Securitisation Companies to apply this principle at sub-fund level.
[3] Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012.
[4] Law of 16 July 2019: 1° on prospectuses for securities; 2° implementing Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC.
[5] Regulation (EU) 2017/1129 of the European Parliament AND OF THE COUNCIL of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC.
[6] Article 1(3) of the amended Securitisation Law.
[7] FAQ CSSF on securitisation published on 23 October 2013. The CSSF FAQ had considered Issuings whose denominations equal or exceed EUR 125,000 as not being issuings to the public.