Luxembourg: A financial collateral legal framework even more attractive

In brief

On 15 July 2022, a new law ("Law") amending inter alia the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended ("2005 Law"), was adopted.

Whilst Luxembourg financial collateral legal framework is already considered as being one of the most attractive in Europe (if not the most), the Law aims to reinforce contractual flexibility between parties and legal certainty to the benefit of secured lenders, endorse by law certain existing practices with respect to enforcement options and methods, and modernize the system of public auction of the pledged assets.

The 2005 Law is regarded as the law implementing Directive 2002/47/EC on financial collateral arrangements, as amended, in the most secured creditor and protective manner in Europe. Indeed, the 2005 Law already offers an attractive legal framework for creditors in both cross-border and domestic financing transactions to govern their pledges and transfer of title for security purposes over financial instruments, including, without limitation, securities issued by private and public companies, provided that the assets are located or deemed to be located in Luxembourg.


Contents

The purpose of this alert is to inform you about the key changes provided for by the Law, expected to enter into force soon.

Key changes

The key changes are as follows:

  • Enhancing legal certainty further through:
  1. Clarification in Article 1 of the 2005 Law that 'any event' agreed on by the parties can serve as a basis to enforce the pledge, allowing the parties to determine, on a contractual basis, the factual reasons that may lead to the enforcement of the financial collateral arrangement.
    • In practice, it means that the parties may decide, for example, that the mere breach of a representation or covenant (outside of any payment default) or any default from the obligor (not being necessarily the pledgor) qualifies as an event of default, triggering the right for the pledgee to enforce the pledge.
    • The cases for enforcement of the pledge are therefore not limited to the sole financing aspects (non-reimbursement) of the secured transaction and may particularly prove useful in the context of cascading funds/holding companies with collateral arrangements at each level. 
  2. Clarification in Article 1 of the 2005 Law that payment institutions and e-money institutions qualify as financial sector professionals, and are therefore eligible under Article 13 of the 2005 Law to hold the security for the beneficiaries within the context of a fiduciary transfer of title to collateral for security purposes.
  3. Clarification, through the insertion of a new paragraph in Article 11 of the 2005 Law, that the enforcement proceeds — when the financial obligations secured are not due and payable at the time the pledge is enforced (which may notably be the case in case of non-financial events of default as mentioned above) — should be applied immediately upon discharge of the underlying secured obligations, unless otherwise determined between parties.
  4. Clarification in Article 19 of the 2005 Law that provisions providing for connexity of claims or positions in financial instruments — as well as termination provisions, indivisibility provisions, margin provisions, substitution provisions, close-out netting provisions — are valid and enforceable against third parties, commissioners, receivers and liquidators or other similar persons and are effective notwithstanding any sequestration measures (tout séquestre) in respect of such claims or positions in financial instruments.
  • Adapting the enforcement methods:
  1. The financial instruments admitted to trading on the trading platforms can be sold on the same at market price in the context of their enforcement – A definition of 'trading platform,' covering the notions of regulated markets, multilateral trading facility systems, and organized trading facility systems, is also inserted within the 2005 Law.
  2. With respect to the enforcement of units or shares of an undertaking for collective investment:
  • If they are admitted to trading on the trading platforms, they can either be sold at market price or at the price of the last net asset value published by or for this undertaking for collective investment, provided that the last publication of the net asset value is not older than a year.
  • They can be redeemed at the redemption price determined in accordance with the constitutive documents of this undertaking for collective investment, clarifying that the redemption request is part of the available enforcement methods along appropriation or private sale.
  1. The pledged insurance contracts may be enforced by exercising all rights resulting therefrom including, for life insurance contracts or capitalization operations, the right of redemption, or requesting payment from the insurance company of all sums due under the insurance contract.
  • Modernizing the system of public auction: While the Luxembourg Stock Exchange has a mandatory role in enforcing pledges by way of public auction, it is now proposed that the public auction be executed by a Luxembourg bailiff or sworn notary, although the parties may still decide otherwise.

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For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.

 


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