The Luxembourg law of 22 March 2004 on securitisation, as amended (the “Law”), introduced a very favourable legal and tax framework for securitisation vehicles. Since then, the Luxembourg securitisation market has been subject to a steady growth.
The Luxembourg Commission for the Supervision of the Financial Sector (“CSSF”) in its 2007 annual report (the “2007 Report”) clarified some aspects of the legal framework applicable to securitisation vehicles in Luxembourg. The 2007 Report was regarded as an extremely valuable interpretation guideline of the Law both for the Luxembourg practitioners and the Luxembourg tax authorities.
The CSSF has recently published questions and answers relating to the Law and securitisation transactions (the “Q&A”). This Q&A details and replaces the positions and explanations set out in its 2007 Report and aims to complete the regulatory framework applicable to regulated securitisation vehicles.
It must be pointed out that, even if unregulated vehicles are not taken into consideration in the scope of the Q&A, the interpretation of the Law and rules provided by the CSSF in this document serves as very useful guidelines for this kind of vehicle as well. The document also anticipates forthcoming major regulatory changes that may potentially impact the market further to the implementation in Luxembourg of the Alternative Investment Fund Managers Directive 2011/61/EU and the increasing discussions about shadow banking.
Content of the Q&A
The Q&A, comprising 19 questions and answers through which the CSSF addresses important interpretations and analysis of the legal framework applicable to regulated securitisation undertakings, aims to provide a clear interpretation of some provisions contained in the Law and update or confirm some of the technical specifications included in the 2007 Report and/or practices of the market.
Although the Q&A covers regulated vehicles only, it should be used as guidelines and “best practices” rules for the interpretation and application of the Law to non-regulated securitisation vehicles.
The Q&A contains, on one hand, interpretations confirming and reiterating the 2007 Report’s interpretations and, on the other, new guidelines to apply the Law.
Confirmation by the CSSF of interpretations included in the 2007 Report
Definition of securitisation
- “Operation by which a vehicle acquires or assumes risks associated with claims, assets or commitments either assumed by third parties or inherent to all or part of the activities of third parties through the issuance of transferable securities, whose value or yield will depend on such risks.”
- The main objective of a securitisation transaction is to transform existing risks into transferable securities.
Characteristics of securitisation transactions
- Necessity of the implementation of two actions: (i) acquisition or assumption of risks, and (ii) issuance of transferable securities.
- Limited recourse clauses, non-petition clauses and subordination provisions are authorised and expressly recognised by the Law.
- Possibility of using two-tier structures in securitisation transactions.
- Available techniques in order to assume securitised risks: (i) true sale, (ii) synthetic transactions and (iii) whole or partial securitisation.
Funding techniques of securitisation vehicles
- Main technique: Issuance of transferable securities whose value or yield will depend on the risks acquired or assumed.
- Warehousing allowed but only on a temporary basis for an appropriate period of time and taking into account market conditions.
- Debt financing may be possible on a continuous basis as long as it has an ancillary character and the investors are duly informed of its characteristics in the funding documentation.
- Vehicles subject to supervision by the CSSF
Only securitisation vehicles, which issue transferable securities on a continuous basis to the public, must be authorised by the CSSF.
Meaning of the notions “on a continuous basis” and “to the public”:
- The notion of “on a continuous basis” is considered by the CSSF as being fulfilled as soon as the securitisation vehicle makes more than three issues per year.
- The notion “to the public,” as clarified in the 2007 Report, shall be determined according to the following criteria:
- issues to professional clients within the meaning of Annexe II to the Markets in Financial Instruments Directive 2004/39/EC are not issues to the public;
- issues whose denominations equal or exceed EUR125,000 are assumed not to be placed with the public;
- the listing of an issue on a regulated or alternative market does not ipso facto entail that the issue is deemed to be placed with the public; and
- issues distributed as private placements, whatever their denomination, are not considered as issues to the public.
- Security: Possibility of creating security interests over the securitisation vehicle’s assets only if it is exclusively made to satisfy investors’ rights and creditors’ rights that arose in connection with the securitisation transaction.
Asset and portfolio management guidelines:
- The securitisation vehicle may manage itself or entrust a third party with the management of its assets.
- The articles of incorporation shall provide for the possibility and the procedure to be followed for the assignment of its assets.
- Compartments: Possibility of creating different compartments in order to ring-fence distinct assets and liabilities of the securitisation vehicle.
- Investors’ representations: Noteholders may be represented according to the provisions contained in the Luxembourg law governing commercial companies. However, they may as well deviate from those provisions. A trustee governed by a foreign law may be appointed.
- Liquidation of securitisation vehicles: Each compartment of a securitisation company may be separately liquidated without this liquidation entailing the liquidation of another compartment.
New interpretations provided by the Q&A
The Q&A provides for new interpretations of the Law that, as expressly indicated, replaces CSSF’s previous interpretations contained in the 2007 Report.
The principal new guidelines are:
- Provisions to be added to the vehicles’ constitutional documents: The CSSF recommends that securitisation vehicles, which do not intend to issue transferable securities on a continuous basis to the public, clearly state it in their constitutional documents.
- Securitisation of shares: The articles of the securitisation vehicle may as well provide for the possibility of implementing securitisation transactions through the issuance of shares.
- To determine the need of the CSSF’s supervision, the qualification of an issuance as being made “to the public” will be determined depending on the final public to which the transferrable securities will be offered or distributed by the securitisation vehicle.
- Before any new regulated securitisation vehicle is approved, it has been proposed that the sponsor of the project should meet personally with the CSSF for an initial overview and explanation of the project.
- Types of securitisation of claims: It is also clarified that it is possible to implement a securitisation transaction whereby the securitisation vehicle grants credits to third parties rather than acquiring them as long as the vehicle does not perform a professional credit activity on its own account.
- Types of assets and risks eligible for securitisation: Following a very broad definition in the Law, the Q&A provides for examples of risks that may be securitised which include assets of different nature, financial instruments, commodities or other goods of this type. The assumption of risks linked to the holding of shares and parts of undertakings for collective investment may be as well considered as a securitisation transaction.
- Asset management guidelines: The CSSF reminds that the management activity of the securitisation vehicle shall be limited to the management of financial flows or securitised risks resulting from the securitisation transaction as a “prudent man.” In any case, no activity likely to qualify the securitisation vehicle as entrepreneur shall be carried out.
- Applicable accounting rules relating to securitisation vehicles with several compartments: It is confirmed that securitisation vehicles with several compartments shall prepare financial statements where financial information related to each compartment is clearly reflected. It is further recommended that the valuation of underlying assets is made at their fair market value.
The Q&A should be analysed as an update and as a development of the CSSF’s guidelines provided under the 2007 Report, as it reflects the evolution of the interpretation of the Law by the CSSF and its supervision practice since the release of the Law in 2004. As developed above, the Q&A mainly confirms and reiterates interpretations laid down in the 2007 Report and only provides few additional new interpretations that should not significantly affect the practice in the Luxembourg market.
These new interpretations and guidelines of the Law confirm that the Grand-Duchy of Luxembourg has a very stable regulatory environment and remains one of the most convenient places to structure and manage securitisation transactions.