On 24 July 2022, the Luxembourg Law of 20 July 2022 entered into force and comprises a set of provisions amending the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the “Collateral Law”). This and other proposed changes (bill n° 8055) are intended, among other things, to clarify and consolidate current market practices and to adapt the Collateral Law to apply to distributed ledgers technologies (“DLT”).
i. Luxembourg Law of 20 July 2022
The Luxembourg Law of 20 July 2022 has strengthened the legal certainty of parties when determining an enforcement event. Under the former legal framework, the term was debatable, due to the slightly different definition of “enforcement event” in Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (the “Directive”) than in the Collateral Law, which implements the Directive. Some parties before courts have concluded, based on the Directive’s definition, that a financial collateral arrangement could only be enforced if the secured obligations had become due. The Luxembourg Law of 20 July 2022 confirms the position taken by the Luxembourg courts, which stresses the autonomy of the financial collateral arrangement from the secured obligations as well as the ability of the parties to stipulate that their financial collateral arrangement could be enforced upon the occurrence of any agreed event (i.e. breach of covenant, a representation or warranty, etc.) even if the secured obligations have not become due.
The second key change introduced by the Luxembourg Law of 20 July 2022 is a modernization of the enforcement methods, by introducing a possibility for the creditor to demand the redemption of the pledged units or shares of a collective investment scheme and to exercise all rights arising from the pledged insurance contract. This confirms that a pledge governed by the Collateral Law can be taken over:
- units or shares of a collective investment scheme; and
- an insurance contract.
The Luxembourg Law of 20 July 2022 has also modernized the procedure for a public sale in the event of an enforcement of the financial collateral arrangement (which is now aligned with the auction procedure).
ii. Bill n° 8055 and pledge over DLT financial instruments
Bill n° 8055 is in line with reforms that have already been carried out by the Luxembourg legislator in the field of digitalization of financial instruments. This began with the amendment of the Luxembourg Law of 1 August 2001 on the circulation of securities, as amended by the Luxembourg law of 1 March 2019 (Securities Circulation Law), and the Luxembourg law of 6 April 2013 on dematerialized securities, as amended by the Law of 22 January 2021 in order to enable the use of distributed electronic ledgers for the maintenance or/and registration of securities accounts.
The Collateral Law already sets out that application of the law, the situation of the securities that are still held with the relevant account keeper, the validity or effectiveness of the collateral set up in accordance with the Collateral Law, may not be affected by the maintaining of securities accounts within such a secured electronic registration mechanism or by the credit of securities on securities accounts through such secured electronic registration mechanism.
In light of the Securities Circulation Law and the Dematerialized Securities Law, the proposed bill aims to expressly recognize pledges over financial instruments using distributed ledger technology and enable the use of technology of distributed electronic registers in financial collateral arrangements in a legally secure manner, without regard to the technology being used.