The Luxembourg law dated 5 August 2005 on financial collateral arrangements, as amended (the “Collateral Law”), has been tremendously successful in providing a framework for Luxembourg security interests, offering bankruptcy remote security instruments and attracting a wide range of use with a very creditor-friendly approach. The Luxembourg legislator now intends to amend the Collateral Law, in order to implement regulation (EU) 2021/23 of 16 December 2020 on a framework for the recovery and resolution of central counterparties and also to further amend the Collateral Law, notably with respect to the enforcement of security interests. The corresponding draft bill (draft bill number 7933 (the “Draft Bill”)) has been published on 20 December 2021. Some technical amendments from the Luxembourg state council (conseil d’Etat) have been taken into account and published on 20 June 2022, and the President of the house of representatives suggested that the Draft Bill could be adopted before 15 July 2022.

What are the key items/updates?

• Emphasis on the fact that enforcement triggers do not require non-payment. Regarding triggers to enforcement of security interests, the term “whatsoever” (“quelconque”) will be added to the existing reference to “any event as agreed between the parties”. This strengthens the Luxembourg law concept that non-repayment is not required to allow enforcement. Any event agreed between the parties will be recognised as an enforcement event. In practice, this amendment is a welcome confirmation that the violation of a representation or covenant for example, can be an agreed event of default granting to the pledgee the right to enforce the security agreement.

• A financial collateral agreement can be enforced even if no secured obligations are due and payable. If the secured obligations are not due and payable at the time of enforcement, the proceeds of the enforcement would be applied as payment of such secured obligations (even if such secured obligations are not due and payable at that time). With this contemplated change to the Collateral Law, the rule would be that a financial collateral agreement is hence directly enforceable if the agreed trigger event occurs. The Draft Bill, however, also provides for flexibility to deviate from this, allowing the parties to agree on a different mechanism where, for example, enforcement would require the secured obligations to be due and payable for the pledge to be enforceable.

• Additional methods and clarification on enforcement option for shares, fund units and insurance claims are added.

  • Regarding enforcement into shares or debt securities, the Draft Bill clarifies that such assets if admitted to trading on a trading venue (being defined in the Draft Bill as a Luxembourg or foreign regulated market, multilateral trading facility or organised trading facility) could be sold on such trading venue at their market price. The Collateral Law currently simply refers to a “sale over a stock exchange” without clear specification.

  • Regarding the appropriation of financial instruments, the Draft Bill creates a distinction between (i) the appropriation of financial instruments admitted to trading on a trading venue (which could, as the default option, be made at the market price of such financial instruments) and (ii) the appropriation of units or shares in a collective investment undertaking (which could, as the default option, either be made at their market price, if they are admitted to trading on a trading venue, or at the price of the last published net asset value, provided that the last publication of the net asset value is not older than one year).

  • Regarding the enforcement of pledges over units or shares in a collective investment undertaking, the Draft Bill provides that the pledgee may enforce the pledge by requesting the redemption of the pledged units or shares of such collective investment undertaking at their redemption price in accordance with the constitutional documents of such collective investment undertaking. This enforcement method could be of real interest to pledgees who are not in a position to easily enforce the pledge via appropriation or private sale. As a matter of fact, some pledgees may not be able to appropriate because they are unable to hold such units or shares directly or indirectly via a vehicle for regulatory or internal policy-related reasons. If the Draft Bill is passed as such, a pledgee would upon the occurrence of the enforcement event be able to simply access cash amounts by requesting the redemption of these instruments.

  • Regarding claims arising from insurance contracts, the Draft Bill provides that the pledgee may enforce the pledge by exercising all the rights arising under the pledged insurance contract. The Draft Law further details that such rights include, in the case of a life insurance contract or capitalisation transaction, the right to surrender such insurance contract or demand payment from the insurance company of any sums due under such contract.

• The public auction regime of enforcement will be amended and updated to no longer refer to the Luxembourg Stock Exchange as this enforcement method is now obsolete. The current public auction regime is based on a law dated 1 June 1929 and stems from the fact that the Luxembourg Stock Exchange used to benefit from a specific governmental concession. Nowadays, the Luxembourg Stock Exchange has become a professional from the financial sector and the Luxembourg legislator deems it inappropriate to keep delegating this role to the Luxembourg Stock Exchange. A new procedure involving a Luxembourg notary or bailiff is set out in the Draft Bill, which would also apply in case the parties did not agree on a different public auction mechanism. Although this update is welcome, it should be noted that the public auction procedure itself is rarely used as pledgees tend to turn to the shorter, less costly appropriation or private sale methods.

• It is further clarified that for security assignment agreements, security agents, fiduciaries or trustees can hold the security for the beneficiaries.

• Clarification as to the insolvency robustness and protection, including against Luxembourg insolvency procedures, as well as foreign law insolvency procedures. The provisions of the Collateral Law relating to the effectiveness of set-off arrangements and security interests will be amended, notably to clarify that the insolvency remoteness of such instruments should be understood as towards national and foreign law insolvency procedures. The Draft Bill also clarifies that confiscation measures (“séquestre”) do not prejudice such set-off arrangements and set-off measures, adding an additional layer of protection.