Luxembourg: Update Of The Law Of 5 August 2005 On Financial Collateral Arrangements

Introduction

The law of 5 August 2005 on financial collateral arrangements, as amended from time to time (the "Collateral Law"), has been updated by the Luxembourg Parliament on 7 July 2022 with some precisions and amendments according to the Luxembourg market practice and a creditor-friendly approach. The revised Collateral Law entered into force on 20 July 2022. Most modifications to the Collateral Law follow the current market practice.

Find below some explanations relating to the updated Collateral Law and the set-up of security interests.

Q.1 What are the new definitions?

Some definitions of the Collateral Law have been updated. The definition of "enforcement event" has been amended with reference to "whatsoever". Indeed, "enforcement event means an event of default or any other event whatsoever as agreed between the parties on the occurrence of which," [...], "the collateral taker is entitled to realise or appropriate financial collateral" [...]. The addition of the word "whatsoever" is an emphasis from the Luxembourg Parliament on the contractual freedom for the parties concerning the determination of events which may lead to the triggering of the collateral without the "relevant financial obligations" having to be due. In this regard, the following paragraph (article 11 (5)) has been added:

"Where the relevant financial obligations are not due at the time the pledge is realised following an event agreed between parties as constituting an enforcement event, the proceeds of the realisation shall be, unless otherwise agreed, applied to satisfy the relevant financial obligations". Thereby, the parties may contractually agree otherwise.

Moreover, now, "a payment institution or an electronic money institution" is a financial institution according to article 1 12) (c) of the updated Collateral Law. Such a financial institution is part of the list of financial sector professionals (article 1 12)) of the revised Collateral Law. Therefore, the scope of financial institutions entitled to be the fiduciary in a transfer of title to collateral for security purposes, by way of fiduciary transfer, is clarified and extended to payment institutions and money institutions.

The definition of trading venue has been added. It is "a regulated market, a Multilateral Trading Facility or an Organised Trading Facility". This is a welcomed precision as a trading venue may be used to assign or cause a pledged collateral to be assigned and to appropriate pledged financial instruments or have pledged financial instruments appropriated by a third party.

Q.2 How have the means of enforcement been modernised?

Firstly, shares or debt securities admitted to trading on a trading venue, as defined above, may be sold on such a trading venue at the market price as enforcement into such pledged financial instruments. The Collateral Law only referred to an unclear "sale over a stock exchange".

Secondly, if the pledged financial instruments are units or shares of an undertaking for collective investment (a "UCI"), they may be appropriated by either the pledgee or a third party at the market price or "at the price of the last net asset value (the "NAV") published by or for this UCI, provided that the last publication of such NAV does not exceed one year.

Thirdly, if an enforcement event occurs, the pledgee may request the redemption of the pledged units or shares of a UCI at the redemption price pursuant to the instruments of incorporation of the UCI. This may be useful if the pledge cannot be enforced with appropriation or private sale.

Fourthly, if an enforcement event occurs, the pledgee may "exercise all the rights arising under the pledged insurance contract, including, in the case of a life insurance contract or a capital redemption operation, the right to surrender, or request the insurance undertaking to pay any sums due pursuant to the insurance contract".

These precisions and additions in relation to the means of enforcement provide clarity and specific enforcement methods concerning units or shares of UCIs and insurance contracts.

Q.3 What are the amendments relating to public auction?

The Luxembourg Stock Exchange is no longer imposed in the public auction regime. Indeed, the pledgee can appoint a sworn notary or bailiff to manage the public auction. The new public auction regime also applies when the parties do not refer to another public auction regime. Before the update of the Collateral Law, the Luxembourg Stock Exchange had to intervene unless otherwise agreed. Now, detailed terms and conditions of the public auction are set out in the updated Collateral Law. The enforcement with the Luxembourg Stock Exchange was obsolete and based on the law of 1 June 1929 on pledging of transferable securities. Although the use of public auction was rarely used in practice, the updated public auction regime is more agile.

Q.4 Does sequestration apply to collateral financial arrangements and netting agreements?

No, sequestration measures do not apply to collateral arrangements governed by the updated Collateral Law, and therefore their enforcement is not impeded by such sequestration measures (article 19 (b)). Attachment, whether civil, criminal or judicial, and penal confiscation may also not be relied upon to hamper the enforcement of collateral financial arrangements and netting agreements, but it was already the case in the Collateral Law.

Furthermore, Part V: Netting and insolvency proceedings of the Collateral Law has been amended (articles 18, 19, and 21 of the Collateral Law) to precise that insolvency remoteness applies to national and foreign law insolvency proceedings concerning set-off arrangements and security interests.

Q.5 Does the Collateral Law prejudice the application of Regulation (EU) 2021/23 of 16 December 2020 on a framework for the recovery and resolution of central counterparties (the "Recovery and Resolution Regulation")?

No, the Collateral Law has been amended with several references to the Recovery and Resolution Regulation in article 2-1 of the updated Collateral Law to clarify that it does not prejudice the application of this regulation. Thus, the revised Collateral Law "shall apply without prejudice to [...] Regulation (EU) 2021/23 of the European Parliament and of the Council of 16 December 2020 on a framework for the recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) No 648/2012, (EU) No 600/2014, (EU) No 806/2014 and (EU) 2015/2365 and Directives 2002/47/EC, 2004/25/EC, 2007/36/EC, 2014/59/EU and (EU) 2017/1132".

Q.6 Are there any relevant changes relating to fungible precious metals?

Yes, the amendment of the Grand-Ducal Regulation of 18 December 1981 on fungible deposits of precious metals (the "amended Grand-Ducal Regulation") provides legal certainty and effectiveness regarding pledges over fungible precious metals. Indeed, article 6 of the amended Grand-Ducal Regulation provides the application of the updated Collateral Law to pledges over fungible precious metals (i.e. gold, silver, and platinum) unless there is a specifically applicable regime or the nature of the precious metals does not entitle it.

Conclusion

The Collateral Law update confirms Luxembourg's creditor-friendly approach with an emphasis on contractual flexibility regarding the financial collateral law arrangements. The amended Collateral Law is now in line with Luxembourg's market trends and practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.