Structured Finance and Securitisation in Luxembourg

Structured finance and securitisation in Luxembourg: overview, Practical Law
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Structured finance and securitisation in Luxembourg: overview
by Vassiliyan Zanev and Natalja Taillefer, Loyens & Loeff Luxembourg S.à r.l.
Country Q&A | Law stated as at 01-Jul-2020 | Luxembourg
A Q&A guide to structured finance and securitisation law in Luxembourg.
This Q&A provides an overview of, among others, the markets and legal regimes,
issues relating to the SPV and the securities issued, transferring the receivables,
dealing with security and risk, cash flow, ratings, tax issues, variations to the
securitisation structure and reform proposals.
To compare answers across multiple jurisdictions, visit the Structured lending and
Securitisation Country Q&A tool. This Q&A is part of the global guide to structured
finance and securitisation. For a full list of contents visit
global.practicallaw.com/securitisation-guide.
Market and legal regime
1. Give a brief overview of the securitisation market in your jurisdiction. In particular:
How developed is the market and what notable transactions and new structures
have emerged recently?
What impact have central bank programmes (if any) had on the securitisation market
in your jurisdiction?
Is securitisation particularly concentrated in certain industry sectors?
Since the entry into force of the Luxembourg Law of 22 March 2004 on securitisation,
as amended (Securitisation Law), the number of securitisation vehicles incorporated
in the Grand Duchy of Luxembourg (Luxembourg) has been steadily increasing. The
flexible and reliable legal and tax regime created under it has resulted in a
considerable number of securitisation vehicles being active in Luxembourg, with
securitised assets located all over the globe.
According to the PWC’s "Securitisation in Luxembourg, a comprehensive guide", as of
May 2020 (PWC Guide), it was estimated that there were over 1,288 securitisation
vehicles existing in Luxembourg. Most of those vehicles are unregulated and not
subject to the supervision of the Luxembourg Supervisory Commission of the
Financial Sector (Commission de Surveillance du Secteur Financier) (CSSF). As of 26
May 2020, there were 33 securitisation vehicles authorised and regulated by the
CSSF in Luxembourg. Based on the PWC Guide, the aggregate amount on the balance
sheet of regulated securitisation vehicles by
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1 Structured finance and securitisation in Luxembourg: overview, Practical Law

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the end of 2019 was EUR47.7 billion, which constitutes an increase of almost 7% or
EUR3.1 billion compared to 2018. It is expected that securitisation activities will
continue their ongoing pace in the near future.
The main securitised asset classes by Luxembourg securitisation vehicles are:
Commercial loans. Mortgage loans. Consumer loans. Lease receivables. Trade

receivables. Non-performing loans. Debt securities. Royalties and IP rights.
In general, the securities issued by Luxembourg securitisation vehicles take the form
of debt securities subject to foreign law (mostly English and New York law).
Most securitisation vehicles are established as a limited liability company (see

Question 4). To date, it appears that no application file for a regulated securitisation
fund (fonds de titrisation) has been submitted to the CSSF. Nevertheless, the private
securitisation market is seeing a rise in popularity of this type of securitisation
vehicle.
The Luxembourg securitisation market as a whole is continuing to grow steadily and
is considered to be a prime location for the setting up of securitisation vehicles for
private placement transactions but also for the public issuance of securities.
Securitisation is not particularly concentrated in any particular industry sector in

Luxembourg, given that the aim of most securitisation transactions involving
Luxembourg vehicles is to securitise assets located abroad.
2. Is there a specific legislative regime within which securitisations in your jurisdiction

are carried out? In particular:
What are the main laws governing securitisations?
What is the name of the regulatory authority charged with overseeing securitisation
practices and participants in your jurisdiction?
The main Luxembourg laws and regulations applicable to securitisation transactions

(including directly applicable EU regulations) are as follows:

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The Securitisation Law.
The Luxembourg law of 10 August 1915 on commercial companies, as amended

(1915 Law).
Regulation (EU) 2017/2402 laying down a general framework for securitisation and
creating a specific framework for simple, transparent and standardised securitisation
(Securitisation Regulation).
The Luxembourg law of 16 July 2019 implementing, among others, the Securitisation
Regulation.
The Luxembourg Central Bank (BCL) Circular 2014/236 regarding the modification of
the statistical data collection of securitisation vehicles.
Luxembourg securitisation vehicles not falling within the scope of the Securitisation
Regulation (see below for a more detailed overview) are in principle unregulated
entities and not subject to any authorisation or prudential supervision, unless the
securitisation vehicle issues securities to the public on a continuous basis. In the
latter case, the securitisation vehicle must be authorised by and will be subject to
supervision of the CSSF (see Question 4).
According to the frequently asked questions guidance on securitisation issued by the

CSSF in October 2013 (Securitisation FAQ), a securitisation vehicle is deemed to issue
securities on a continuous basis if it makes more than three issues of securities to the
public per year (see Question 8). For multi-compartment securitisation vehicles, this
threshold is determined at the level of the securitisation vehicle on a consolidated
basis, and not at the level of each compartment.
More generally, all Luxembourg securitisation vehicles are subject to reporting

obligations to the BCL, essentially for the purpose of collecting statistical data.
With regard to the securitisation transactions falling within the scope of the
Securitisation Regulation (see below for a more detailed overview), the CSSF is the
default competent authority for originators, original lenders and securitisation
vehicles (or "securitisation special purpose entities" or "SSPEs" in the terminology of
the Securitisation Regulation) established in Luxembourg. The Luxembourg Authority
for the Insurance Sector (Commissariat aux Assurances) (CAA) is the competent
authority for originators, original lenders and SSPEs that are already subject to its
supervision.
Securitisation Regulation
The Securitisation Regulation defines the "securitisation" as a transaction or scheme,

whereby the credit risk associated with an exposure or a pool of exposures is
tranched, having all of the following characteristics:
Payments in the transaction or scheme are dependent on the performance of the

exposure or of the pool of exposures.
The subordination of tranches determines the distribution of losses during the
ongoing life of the transaction or scheme.
The transactions falling within the "specialised lending" exception (that is,
transactions which possess all of the characteristics listed in Article 147(8) of
Regulation (EU) 575/2013 on prudential requirements for credit institutions and
investment firms and amending Regulation (EU) No 648/2012 (CRR) (as further
amended by CRR II, see Question 3) are exempted from the scope of the
Securitisation Regulation even if the above conditions are satisfied. The "specialised
lending" relates to exposures in physical assets where the debtor is created
specifically to finance or operate physical assets or comparable exposures,
contractual arrangements give the investors a substantial degree of control over the
assets and the related income, and such income is the primary source of repayment
of the debt.
While there is an overlap between the Securitisation Law and the Securitisation
Regulation, the definition of "securitisation" under the Securitisation Law is broader
than the definition of "securitisation" as used in the Securitisation Regulation.
Namely,

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the Securitisation Law defines the "securitisation" as "the transaction by which a

securitisation acquires or assumes, directly or indirectly through another
undertaking, risks relating to claims, other assets, or obligations assumed by third
parties or inherent to all or part of the activities of third parties, and issues securities,
the value or yield of which depends on such risks". Unlike the Securitisation
Regulation, the Securitisation Law does not, among others, refer to the "credit risk",
require the acquired risk to be tranched, nor does it restrict the securitisation of non-
credit assets and physical assets (for example, commodities).
Therefore, a multitude of securitisation transactions may fall within the scope of the
Securitisation Law, but not of the Securitisation Regulation.
The Securitisation Regulation imposes a broad array of requirements on the SSPEs,

but also on the other actors involved in the securitisation transactions falling within
its scope, including the originators, sponsors, institutional investors and original
lenders.
Institutional investors will be required to comply with certain due diligence standards
prior to holding a securitisation position and will need to have written procedures in
place to monitor, among others, the performance of the securitisation position and
the underlying exposures.
In addition, the originator, the sponsor or the original lender will need to comply
with the risk retention requirements (see Question 3) and restrictions are imposed
on the sale of securitised positions to retail clients (as defined in Directive 2014/65/
EU on markets in financial instruments (MIFID II)).
Further, extensive transparency obligations are imposed on the originator, the

sponsor and the SSPE, which must designate among themselves a reporting entity.
The Securitisation Regulation requires that the holders of a securitisation position,
the competent authorities and the potential investors (upon request) are provided
with, among others, information on underlying exposures, all underlying
documentation that is essential for the understanding of the transaction, a
transaction summary (in the absence of a prospectus) and regular investor reports.
Any inside information and the significant events are also subject to the disclosure.
Subject to very limited exceptions, the Securitisation Regulation introduces a ban on

re-securitisations, specifying that the underlying exposures used in a securitisation
must not include securitisation positions.
With regard to the credit granting, the Securitisation Regulation requires that
originators, sponsors and original lenders apply to exposures to be securitised the
same sound and well-defined criteria for credit-granting which they apply to non-
securitised exposures.
Finally, the Securitisation Regulation lays down the rules for issuing simple,
transparent and standardised (STS) securitisation transactions that would allow
certain regulated investors to benefit from less stringent capital requirements.
Impact of EMIR on securitisation vehicles
Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade

repositories (European Market Infrastructure Regulation) (see below for further
details) (EMIR), entered into force on 16 August 2012 and is directly applicable in
Luxembourg. EMIR applies also to non-financial counterparties which are very
broadly defined. The CSSF has confirmed in its press release 13/26 dated 24 June
2013 that securitisation vehicles are also covered and may therefore be subject to
EMIR obligations (notably clearing and reporting obligations).
EMIR has been implemented in Luxembourg by the Law of 15 March 2016 on OTC
derivatives, central counterparties and trade repositories, as regards the sanctioning
powers granted to the CSSF to guarantee the correct application of rules and
requirements deriving from EMIR.

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EMIR has been recently subject to two sets of amendments at the EU level.
EMIR Refit. The first set of amendments aims at amending EMIR as regards the
clearing obligation, the suspension of the clearing obligation, the reporting
requirements, the risk-mitigation techniques for OTC derivatives contracts not
cleared by a central counterparty, the registration and supervision of trade
repositories and the requirements for trade repositories (EMIR Refit).
EMIR Refit, which entered into force on 17 June 2019, is binding in its entirety and is
directly applicable in all member states.
EMIR 2.2. In addition to EMIR Refit, a second set of amendments has been adopted
by Regulation (EU) 2019/2099 of the European Parliament and of the Council of 23
October 2019to enhance the supervision of third-country central counterparties
(CCPs) and make the supervision of EU CCPs more coherent and amending EMIR as
regards the procedures and authorities involved for the authorisation of CCPs and
requirements for the recognition of third-country CCPs. The amendments entered
into force on 1 January 2020.
Directive 2011/61/EU on alternative investment fund managers on securitisation

vehicles (AIFM Directive)
The Securitisation FAQ of the CSSF was last updated to take into account the
implementation of the Law of 12 July 2013 on alternative investment fund managers
(AIFM Law) and its impact on the securitisation undertakings, within the meaning of
the Securitisation Law.
In this context, the CSSF adopted, subject to any future development or clarification
at European level, the following positions.
A securitisation undertaking that meets the definition of "securitisation special

purpose entity" under the AIFM Law does not fall within the scope of the AIFM Law.
Irrespective of whether they meet the definition of "securitisation special purpose
entities" under the AIFM Law, securitisation undertakings only issuing debt
instruments do not qualify as AIFs for the purpose of the AIFM Law, as it appears that
the European legislator did not intend to qualify undertakings issuing such
instruments as AIFs.
In this respect, reference is made to the Questions/Answers of the European

Commission of 25 March 2013 (Questions on Single Market Legislation; General
question on Directive 2011/61/EU; ID 1169, Scope and exemptions). In these, the
European Commission considers that any type of security not representing an
ownership interest in the securitisation undertaking should be excluded from the
scope of the AIFM Directive. Irrespective of whether they fall under the definition of
"securitisation special purpose entities" under the AIFM Law, it is the view of the
CSSF that securitisation undertakings that are not managed according to a "defined
investment policy" (within the meaning of Article 4(1)(a) of the AIFM Law) are not
AIFs.
In addition, according to the Securitisation FAQ, securitisation vehicles issuing

collateralised loan obligation (CLOs) are considered by the CSSF as being engaged in
securitisation transactions and as a result, are not subject to the AIFM Law.
PRIIPs Regulation
Since 1 January 2018, Regulation (EU) No 1286/2014 on key information documents

for packaged retail and insurance-based investment products (PRIIPs Regulation) and
the related Luxembourg law of 17 April 2018 on key information documents for
packaged retail and insurance-based investment products impose additional rules
around the marketing of packaged retail and insurance-based investment products
(PRIIPs) to retail investors in the European Economic Area (EEA). The PRIIPS
Regulation essentially requires a PRIIP manufacturer to produce and publish a key
information document (KID) prior to making the PRIIP available to retail investors in
the EEA. Securitisation transactions involving issuances of securities to retail
investors may therefore fall within the scope of the PRIIPS Regulation and
consequently require a KID to be prepared.

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Reasons for doing a securitisation
3. What are the main reasons for doing a securitisation in your jurisdiction? How are
the reasons for doing a securitisation in your jurisdiction affected by:
Accounting practices in your jurisdiction, such as application of the International

Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy?
Risk retention requirements?
Implementation of the Basel III framework in your jurisdiction?

Usual reasons for securitisation
The customary reasons for doing a securitisation are the following:
Access to the capital markets for the originator.
Improvement of the balance sheet ratio of the originator (mandatory solvency ratios
may be released).
Costs of finance more favourable for the originator.
Improvement of liquidity of the originator/neutralisation of discrepancies of interest

rates.
Reallocation of credit risks.
Luxembourg is more generally known as a hub for securitisation and structured

finance transactions. It offers one of the world's safest business environments,
notably as a result of its financial, political and social stability and innovative
approach of the financial sector, combined with strong and stable regulatory and tax
frameworks, in line with EU directives and regulations.
The Securitisation Law features a high degree of flexibility: a wide range of asset
classes (including non-credit assets, such as commodities) qualify for securitisation
and creation of the segregated compartments of the securitisation vehicle is legally
recognised. The Securitisation Law also recognises customary bankruptcy
remoteness tools and contractual provisions aiming at protecting the securitisation
vehicle from the individual interests of involved parties (for example, subordination,
non-recourse and non-petition provisions) (see Question 6). Unlike the Securitisation
Regulation, the Securitisation Law does not require tranching of the securities.
Accounting practices

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The accounting principles applicable to securitisation vehicles depend on whether

the securitisation vehicle is a securitisation company or a securitisation fund.
Securitisation companies are subject to the same rules as regular commercial

companies, while securitisation funds must comply with the accounting provisions
applicable to investment funds.
The securitisation vehicle's accounts must be audited by an approved independent

auditor (réviseur d'entreprises agréé) who is appointed by the management body of
the securitisation company or by the management company of the securitisation
fund.
Securitisation vehicles established as securitisation companies must comply with the

Law of 19 December 2002 on the trade and companies register and the accounting
and the annual accounts of companies (Accounting Law). This contains a choice
between three different accounting frameworks for valuing financial assets:
Luxembourg GAAP under the historical model.
Luxembourg GAAP under the fair value model.
International Financial Reporting Standards as adopted by the EU (IFRS).
The management reports of the securitisation vehicles must contain all material
information relating to their financial situation which could affect the rights of
investors.
In line with the Securitisation FAQ, multiple compartments securitisation vehicles are
required to draw up financial statements, including a breakdown of the assets and
liabilities allocated to each compartment. Financial information relating to each
compartment must be clearly identifiable.
Also, to provide investors with an adequate overview, the CSSF recommends to carry
out the valuation of the underlying assets at fair value, notably for regulated
securitisation vehicles having issued securities to the public, and whose purpose is
the traditional or synthetic securitisation of one or several financial assets.
Regulation (EU) No 537/2014 on specific requirements regarding statutory audit of
public-interest entities now requires all securitisation vehicles with securities
admitted to trading on an EU regulated market to rotate their approved independent
auditor after a maximum period of ten years. The Luxembourg law of 23 July 2016,
implementing, among others, Regulation (EU) No 537/2014 on specific requirements
regarding statutory audit of public-interest entities, allows, by way of derogation
from and as permitted by Regulation (EU) 537/2014, the maximum duration of this
statutory audit to be up to 20 years, provided a public tendering process for the
statutory audit is conducted in accordance with paragraphs 2 to 5 of Article 16 of
Regulation (EU) 537/2014.
Capital adequacy
Other than the minimum share capital (see Question 4), securitisation undertakings
are not subject to Luxembourg specific minimum capital requirements. However,
most securitisations in Luxembourg involve originators and investors located outside
Luxembourg. As a result, it must be considered to what extent local rules and
regulations regarding capital adequacy requirements may apply to such originators
and investors in their own jurisdictions.
It must be noted that STS securitisations under the Securitisation Regulation may,
subject to certain additional criteria, be subject to lower regulatory capital
requirements and may be enjoying other advantageous regulatory treatment.
Risk retention rules

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The new Securitisation Regulation replaces and consolidates risk retention rules
previously scattered across sectoral legislation and provides that, subject to certain
limited exemptions, the originator, sponsor or original lender of a securitisation will
retain on an ongoing basis a material net economic interest in the securitisation of no
less than 5%. The Securitisation Regulation provides an exhaustive list of the types of
retention that qualify as such a retention:
•
•
The retention of no less than 5% of the nominal value of each of the tranches sold or
transferred to investors.
In the case of revolving securitisations or securitisations of revolving exposures, the

retention of the originator’s interest of no less than 5% of the nominal value of each
of the securitised exposures.
The retention of randomly selected exposures, equivalent to no less than 5% of the

nominal value of the securitised exposures, where such non-securitised exposures
would otherwise have been securitised in the securitisation, provided that the
number of potentially securitised exposures is no less than 100 at origination.
The retention of the first loss tranche and, where such retention does not amount to
5% of the nominal value of the securitised exposures, if necessary, other tranches
having the same or a more severe risk profile than those transferred or sold to
investors and not maturing any earlier than those transferred or sold to investors, so
that the retention equals in total no less than 5% of the nominal value of the
securitised exposures.
The retention of a first loss exposure of no less than 5% of every securitised exposure
in the securitisation.
An SSPE cannot be the risk retaining entity.
Where the originator, sponsor or original lender have not agreed between them who
will retain the material net economic interest, such material net economic interest
must be retained by the originator. For the purposes of the risk retention provisions
set out in the Securitisation Regulation, an entity will not be considered to be an
originator where it has been established or operates for the sole purpose of
securitising exposures.
Basel III
The Basel III framework has been transposed into EU law by Regulation (EU) No
575/2013 on prudential requirements for credit institutions and investment firms
(CRR) and Directive 2013/36/EU on access to the activity of credit institutions and
the prudential supervision of credit institutions and investment firms (CRD IV).
The provisions of CRD IV have been implemented into Luxembourg by the Law of 23
July 2015, which amends the Law of 5 April 1993 on the financial sector, whereas
CRR was directly fully applicable as of 1 January 2014. This new regulatory
framework introduced, among others, a minimum capital requirement for
securitisation positions of Luxembourg credit institutions and investment firms.
CRD IV and CRR have been recently amended by the following EU regulations:
•
Regulation (EU) 2019/876 amending CRR as regards the leverage ratio, the net stable
funding ratio, requirements for own funds and eligible liabilities, counterparty credit
risk, market risk, exposures to central counterparties, exposures to collective
investment undertakings, large exposures, reporting and disclosure requirements,
and EMIR (CRR II).
On 28 April 2020, the European Commission published a proposal for a Regulation of

the European Parliament and of the Council amending CRR and CRR II regarding
adjustments in response to the COVID-19 pandemic. This proposal is currently
awaiting Parliament’s position in first reading. The main provisions of this proposal
consist of:

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transitional arrangements for mitigating the impact of its nine provisions on

regulatory capital, that is, an extension of the transitional arrangements to allow
resetting the five-year transition period that began in 2018; treatment of publicly
guaranteed loans under the non performing loans (npl) prudential backstop, that is,
an extension of the preferential treatment to exposures guaranteed or counter-
guaranteed by the public sector; date of application of the leverage ratio buffer, that
is, the date of application of the buffer (originally set to 1 January 2022) is deferred
by one year (to 1 January 2023).
offsetting the impact of excluding certain exposures from the calculation of the
leverage ratio; and date of application of the exemption of "prudently valued
software assets" from capital deductions, that is, the date of application is amended
to permit the exemption to apply earlier, namely as of the date of entry into force of
the draft regulatory technical standards (RTS) to be developed by the European
Banking Authority (EBA).
•
Directive (EU) 2019/878 amending CRD IV as regards exempted entities, financial

holding companies, mixed financial holding companies, remuneration, supervisory
measures and powers and capital conservation measures (CRD V).
The special purpose vehicle (SPV)
Establishing the SPV
4. How is an SPV established in your jurisdiction? Please explain:
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How the SPV is usually owned?
Are there any particular regulatory requirements that apply to the SPVs?
Securitisation vehicles can generally be structured either as a company or as a fund,

in each case subject to the Securitisation Law.
Securitisation vehicles that take the form of company are subject to the 1915 Law.
A securitisation company can be set up as:
A public limited liability company (société anonyme) (SA).

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•
•
A private limited liability company (société à responsabilité limitée) (S.à r.l.).
A partnership limited by shares (société en commandite par actions) (SCA).
A co-operative organised as a public limited company (société cooperative organisée

sous forme de société anonyme) (SCSA).
The first two corporate forms are in practice most commonly used for the
securitisation transactions, with private limited liabilities companies becoming more
popular since the 2016 reform of the 1915 Law, which has allowed S.à r.l. companies
to issue to the public and list debt securities, repealing the restrictions previously in
place.
The 1915 Law sets out the minimum share capital for those vehicles, which ranges
from EUR12,000 for an S.à r.l. to EUR30,000 for an SA or SCA.
Customarily, the shareholder of the securitisation company is an orphan entity, often

taking the form of a Dutch foundation (stichting) or an Anglo-American charitable
trust, with no legal connections whatsoever with the originator or the arranger(s), so
as not to become consolidated with the rest of the originator's or arranger's group
for regulatory, accounting and bankruptcy purposes.
A securitisation vehicle can also be set up as a co-ownership of assets, a so-called

securitisation fund (fonds de titrisation), managed by a Luxembourg-based
management company (société de gestion) in accordance with its management
regulations. A securitisation fund does not have legal personality. The securitisation
fund can further be set up under a fiduciary arrangement, whereby the assets are
held by the fiduciary for the account of the investors. While up to now the
securitisation funds have represented only a marginal part of the securitisation
vehicles in Luxembourg, their popularity is currently on the rise.
Irrespective of the form, Luxembourg securitisation vehicle will need to comply with
the passive management requirement deriving from the Securitisation Law and the
Securitisation FAQ. The role of the Luxembourg securitisation vehicle should be
limited to the administration of financial flows linked to the securitisation transaction
itself and to the prudent-man management of the securitised portfolio, and exclude
all activities likely to qualify the Luxembourg securitisation vehicle as entrepreneur
(for example, by providing services to third parties). Any management by the
Luxembourg securitisation vehicle that creates an additional risk in addition to the
risk inherent to such claims, assets or activities, or which aims at creating additional
wealth or promoting the commercial development of the Luxembourg securitisation
vehicle’s activities, taking advantage of the fluctuations of market prices, would be
incompatible with the Securitisation Law, even if the actual management of the
assets and activities has been delegated to an external service provider.
Regulated securitisation undertakings
Under Luxembourg Securitisation Law, only securitisation undertakings which

continuously issue securities to the public must be authorised and supervised by the
CSSF.
The CSSF's authorisation for regulated securitisation vehicles is in particular subject

to the following requirements:
The submission of the securitisation company's articles of incorporation or of the

management regulations of the securitisation fund to the CSSF for approval.
Having the registered office and central administration located in Luxembourg.

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The communication to the CSSF of the identity of the direct and indirect
shareholders who hold a qualifying holding in the securitisation vehicle, or who are
in a position to exercise significant influence over the conduct of business, together
with the amount of such holding.
The custody of the liquid assets and securities must be entrusted to a Luxembourg-
based credit institution.
The notification to the CSSF of the names of the members of the administrative,
management and supervisory bodies of a securitisation company or a management
company of an authorised securitisation vehicle, together with direct and indirect
shareholders who are in a position to exercise significant influence over the conduct
of the vehicle with professional standing and experience.
See Question 2 with regard to the summary of the requirements applicable to the
securitisation transactions and SSPEs falling within the scope of the Securitisation
Regulation.
5. Is the SPV usually established in your jurisdiction or offshore? If established

offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any
particular circumstances when it is advantageous to establish the SPV in your
jurisdiction?
Due to the flexible and reliable legal and tax framework shaped by the Securitisation
Law, many securitisation transactions are structured with SPVs established in
Luxembourg, the latter being one of the leading centres for securitisation. All
securitisation vehicles incorporated in Luxembourg and subject to the Securitisation
Law will have the benefit of the protections set out in the Securitisation Law (see
Question 3).
Ensuring the SPV is insolvency remote
6. What steps can be taken to make the SPV as insolvency remote as possible in your
jurisdiction? In particular:
Has the ability to achieve insolvency remoteness been eroded to any extent in recent
years?
Will the courts in your jurisdiction give effect to limited recourse and non-petition
clauses?
The Securitisation Law expressly recognises customary bankruptcy remoteness tools

and ensures the validity and enforceability of non-petition, limited recourse and
subordination provisions set out in the issuance and/or constitutional documents of
the securitisation vehicle.

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Non-petition clauses protect the securitisation vehicle against insolvency actions by

investors and creditors. The investors contractually waive their right to bring such
proceedings against the securitisation vehicle. Under the Securitisation Law, an
insolvency suit filed by a contracting party in breach of such clauses will be
automatically rejected by the Luxembourg courts.
Additionally, limited recourse provisions further contribute to the bankruptcy
remoteness of the securitisation vehicle by ensuring that a creditor has no further
claims after having received all available assets from the debtor and all remaining
claims are extinguished.
Subordination provisions are also explicitly recognised by the Securitisation Law. The
investors and creditors of the securitisation vehicle can validly subordinate their
payment rights to the satisfaction of other investors and creditors claims. This
enables a resilient tranching of securitisation transactions.
Further, Luxembourg securitisation vehicles can be compartmentalised, so that the

estate of a securitisation vehicle can be segregated into different compartments,
each representing a distinct part of the assets and liabilities of the securitisation
vehicle. The assets and liabilities of the securitisation vehicle are then ringfenced by
law on a compartment-by-compartment basis, including in the case of its insolvency.
The rights of recourse of the investors and creditors are as a rule limited to the assets
of the securitisation vehicle. Where such rights relate to a specific compartment or
have arisen in connection with the creation, operation or liquidation of a specific
compartment, the recourse of the relevant investors and creditors is then limited to
the assets of that compartment. Proper attention must be paid in preparing the
relevant documentation to ensure an effective segregation between the assets and
liabilities of the compartments.
Ensuring the SPV is treated separately from the originator
7. Is there a risk that the courts can treat the assets of the SPV as those of the
originator if the originator becomes subject to insolvency proceedings (substantive
consolidation)? If so, can this be avoided or minimised?
The assets of a Luxembourg securitisation vehicle are treated separately from the
assets of the originator. As a result, the originator's insolvency cannot, as a rule, have
effects on the securitisation vehicle and its estate.
In addition, it is common to structure transactions where the originator does not

hold the shares in the securitisation vehicle (rather, an orphan vehicle is the
shareholder). This creates an additional layer of protection to ensure that the assets
of the securitisation vehicle cannot fall within the estate of the originator in the case
of insolvency.
The Securitisation Law provides a high level of protection against bankruptcy of the
parties to a securitisation transaction. For instance, in the event of the originator's
bankruptcy, the transfer-of-title rules render it difficult for the seller's trustees in
bankruptcy to recover assets previously sold to the securitisation vehicle. Therefore,
any transfer of title to the securitisation vehicle will remain legally valid. The
Securitisation Law expressly states that, in the event the assignor or a servicer
becomes subject to insolvency proceedings, the securitisation vehicle is entitled to
claim any sums collected on its behalf prior to the opening of such proceedings,
without the other creditors having any rights to such amounts, and despite any
claims raised by the bankruptcy receiver or a similar official. It remains to be seen
whether this clause would in practice be enforceable in the insolvency proceedings
opened abroad.

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Directive 2014/59/EU establishing a framework for the recovery and resolution of

credit institutions and investment firms, as amended (BRRD) also provides for a
specific protection for securitisation transactions in the presence of a failing
institution party to a securitisation transaction.
The securities
Issuing the securities
8. What factors will determine whether to issue the SPV’s securities publicly or
privately?
Under the Securitisation Law, the issue of securities to the public on a continuous
basis by a securitisation vehicle will require the latter to submit to the authorisation
and prudential supervision of the CSSF (see Question 4).
With regard to the criterion of continuity, the CSSF considers that as long as the
securitisation vehicle does not exceed three issuances per year, it will not be viewed
as issuing securities on a continuous basis. The number of issues to be taken into
consideration is the total number of issues of all compartments of the securitisation
undertaking.
The CSSF has further clarified certain circumstances in which the issuance of
securities will not be considered to be made to the public. The concept of public is
not defined in the Securitisation Law, and differs from the notion of an offer to the
public under the Law of 16 July 2019 on prospectuses for securities, as amended
(Prospectus Law), implementing Regulation (EU) 2017/1129 (Prospectus Regulation).
An issue of securities is not considered to be made to the public under the

Securitisation Law when the securities are exclusively addressed to professional
clients, as defined in Annex II of Directive 2004/39/EC on markets in financial
instruments (MiFID). Given that the Securitisation FAQ predates Directive
2014/65/EU on markets in financial instruments (MIFID II) which applies as from 3
January 2018 and which repeals MiFID (including its Annex II), the reference to MiFID
should be construed as a reference to MiFID II.
Securities with a nominal value of at least EUR125,000 each are also assumed to
have not been issued to the public.
The Securitisation FAQ further indicates that a listing of securities issued by a

securitisation vehicle does not automatically result in the securities being viewed as
being issued to the public.
As a rule, private placements of securities do not constitute issuances to the public

for the purpose of the Securitisation Law. However, the nature of the issuance is
assessed on a case-by-case basis by the CSSF, notably by determining who are the
potential investors, what are the communications means and the distributions
techniques. For example, the subscription of securities by an institutional investor or
financial intermediary with a view to a subsequent placement of such securities to
the public qualifies as an issue made to the public, for the purpose of the
Securitisation Law.

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The securitisation vehicle offering its securities (or, where applicable, the entities
distributing or placing such securities with investors) must ensure compliance with all
legal provisions applicable in the different jurisdictions where the securities are being
offered, notably the restrictions deriving from local securities laws (that is, in
Luxembourg, principally the Prospectus Law).
9. If the securities are publicly issued:
Are the securities usually listed on a regulated exchange in your jurisdiction or in

another jurisdiction?
If in your jurisdiction, please identify the main documents required to make an

application to list debt securities on the main regulated exchange in your jurisdiction.
Are there any share capital requirements?
If a particular exchange (domestic or foreign) is usually chosen for listing the

securities, please briefly summarise the main reasons for this.
Securities issued by Luxembourg securitisation vehicles are usually listed and
admitted to trading on the Luxembourg Stock Exchange, or on stock exchanges
located in the EU (notably the Irish Stock Exchange).
The Luxembourg Stock Exchange operates two different markets for trading of
securities:
A regulated market (Regulated Market) within the meaning of MiFID II. This market is
included in the ESMA list of regulated markets and offers the possibility of a
European passport.
A multilateral trading facility governed by the rules and regulations of the

Luxembourg Stock Exchange (Euro MTF).
The minimum issuance amount of debt securities for an application to listing on

either of the two markets is set at EUR200,000.
An application for trading of securities on the Regulated Market requires a

prospectus prepared in compliance with the EU harmonised regime set out in the
Prospectus Regulation (and approved by the CSSF or approved by a competent
authority in another EEA member state and passported in Luxembourg).
Alternatively, a prospectus prepared in accordance with the rules and regulations of
the Luxembourg Stock Exchange (and approved by the Luxembourg Stock Exchange)
is required for the admission to trading of securities on the Euro MTF. The Euro MTF
is a well-known and flexible venue for the listing of securities issued by securitisation
vehicles. It more generally holds a leading role in the listing of debt securities issued
in the Eurozone. As of June 2020, the Luxembourg Stock Exchange has over 3,500
asset-backed securities listed on its two markets.
The Luxembourg Stock Exchange also offers the possibility for issuers to have their
securities listed on the Luxembourg Stock Exchange Securities Official List (SOL)
without being admitted to trading on one of its markets. The SOL offers a new
alternative for issuers looking for visibility while being spared the extensive
regulatory framework applicable to admissions to trading of securities and to whom
and admission to trading is not a prerequisite.
Constituting the securities

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10. If the trust concept is not recognised in your jurisdiction, what document
constitutes the securities issued by the SPV and how are the rights in them held?
Under Luxembourg law, the securities can be issued in bearer, registered, or

dematerialised form. In most cases, however, the securities are not governed by
Luxembourg law, although certain Luxembourg rules may still apply to these
instruments, unless explicitly excluded in the documentation relating to the
securities.
Luxembourg law does not have a concept of a trust, but a trust can be used if the
issue documents are governed by a law other than Luxembourg (for example, an
English law trust deed).
The Law of 27 July 2003 on trust and fiduciary agreements ratifying the Convention
of 1 July 1985 on the law applicable to trusts and their recognition (Hague
Convention) provides for recognition of a trust duly constituted under a foreign law,
subject to certain conditions.
Transferring the receivables
Classes of receivables
11. What classes of receivables are usually securitised in your jurisdiction? Are there
any new asset classes to have emerged recently or that are expected to emerge in
the foreseeable future?
The Securitisation Law does not limit the types of assets that can be securitised to a
particular class of receivables, or, more generally, to receivables only. Luxembourg
securitisation transactions most often cover commercial loans, mortgage loans, auto
loans and leases, consumer loans, trade receivables and non-performing loans.
Although the definition of the securitisation in the Securitisation Law is very broad,
transactions involving certain types of assets (for example, commodities and other
noncredit assets) require careful structuring.
According to the Securitisation Law, the risks to be assumed by a securitisation

vehicle can relate to the holding of assets, whether movable or immovable, tangible
or intangible, as well as those resulting from commitments assumed by third parties
or that are inherent to all or part of the activities of a third party, such as the risks
associated with a business (see also Question 1).
Unlike the Securitisation Law, the Securitisation Regulation is more restrictive in its
scope and requires the securitisation of "credit risk" (as opposed to "market risk" or
other risks) relating to an exposure or a pool of exposures for the transaction to
qualify as a securitisation. Further, the securitisation of physical assets is restricted
under the "specialised lending" exception (see Question 1).

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Transferring the receivables from the originator to the SPV
12. How are receivables usually transferred from the originator to the SPV? Is
perfection of the transfer subject to giving notice of sale to the obligor or subject to
any other steps?
The receivables are customarily assigned by the originator to the securitisation

vehicle by way of an assignment agreement or transfer deed. The law applicable to
such an instrument would normally be chosen depending on the law governing the
receivables and the location of the debtors. Most securitisations in Luxembourg
involve receivables with debtors located in third countries, and the agreements or
deeds transferring such receivables are typically not governed by Luxembourg law.
Under the Securitisation Law, the acquisition or transfer of existing or future

receivables becomes effective and enforceable against third parties as from the date
of execution of the assignment agreement, unless the parties agree otherwise.
An assignment or transfer of receivables entails a transfer of any related guarantees

and/or security interests. In accordance with the Securitisation Law, assignments of
receivables to or by a Luxembourg securitisation vehicle in a securitisation
transaction are enforceable against all third parties (including the assigned debtors)
with no further formalities, registrations or costs required.
From a Luxembourg law perspective, the underlying debtors do not need to be

notified of the assignment of the receivables by an originator to the securitisation
vehicle.
The Luxembourg Securitisation Law also permits the "synthetic" securitisation, where
only the risk relating to the assets (and not the title) is transferred, whether by
issuance of a guarantee, credit default swaps, credit linked notes or other similar
technique.
13. Are there any types of receivables that it is not possible or not practical to
securitise in your jurisdiction (for example, future receivables)?
All types of receivables can as a rule be securitised from the Luxembourg law
perspective. The Securitisation Law is protective towards securitisation structures. It
specifically provides that a future claim arising out of an existing or future agreement
is capable of being assigned to or by a securitisation undertaking, provided that it can
be identified as part of the assignment at the time it comes into existence or at any
other time agreed between the parties.
The assignment of a future claim is conditional on it coming into existence. As soon
as the claim comes into existence, the assignment becomes effective between the
parties and against third parties as from the moment the assignment is agreed on,
unless the contrary is provided for in the agreement, despite the opening of
bankruptcy proceedings or any other collective proceedings against the assignor
before the date on which the claim comes into existence.

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14. How is any security attached to the receivables transferred to the SPV? What are
the perfection requirements?
The Securitisation Law provides that the assignment of receivables to or by a

securitisation undertaking entails, except to the extent agreed otherwise, the
automatic transfer of the guarantees and security interests securing such receivables,
and its enforceability by operation of law against third parties, without any further
formalities. However, the assigned debtor will be validly discharged from its payment
obligations by payment to the assignor, as long as it has not gained knowledge of the
assignment.
Prohibitions or restrictions on transfer
15. Are there any prohibitions or restrictions on transferring the receivables, for
example, in relation to consumer data?
Contractual restrictions
The Securitisation Law further provides that contractual restrictions to the

assignment of receivables will not prevent the valid assignment of such receivables
to a securitisation undertaking governed by the Securitisation Law, if at least one of
the below conditions is satisfied:
The debtor has consented to the assignment.
The securitisation undertaking is not aware of the assignment restrictions.
The receivable is a monetary receivable.

Legislative restrictions
As a general principle, all types of receivables can be assigned. There are however a
few exceptions, mainly in relation to receivables relating to consumers to which
certain restrictions may apply.
In addition, any processing of personal data must comply with the requirements set
out in Regulation (EU) 2016/679 on the protection of natural persons with regard to
the processing of personal data and on the free movement of such data. Such
requirements imply, among others, that the processing must be lawful, that is, based
on one of the following legal grounds:

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The data subject’s consent.
The performance of a contract.
The compliance with a legal obligation to which the controller is subject.
The protection of the vital interests of the data subject or of another natural person.
The performance of a task carried out in the public interest or in the exercise of
official authority vested in the controller or the legitimate interests pursued by the
controller or by a third party).
As a rule, the assignment of receivables under public contracts, certain contracts for
work, supplies and services and public procurement contracts require prior
notification to the relevant public entity/authority and the consent of the
entity/authority.
Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as
a secured loan? If so:
Can this risk be avoided or minimised?
Are true sale legal opinions typically delivered in your jurisdiction or does it depend
on the asset type and/or provenance of the securitised asset?
The Securitisation Law is protective towards securitisation structures. It provides that

receivables assigned to a securitisation undertaking become part of its estate as from
the date on which the assignment becomes effective, despite any undertaking by the
securitisation undertaking to reassign the receivable at a later date. Further, the
Securitisation Law expressly states that an assignment cannot be re-characterised on
grounds relating to the existence of the undertaking to reassign the receivables. As a
result, there is no risk that a transfer will be requalified for this reason as (for
example) a secured loan.
Ensuring the transfer cannot be unwound if the originator becomes insolvent
17. Can the originator (or a liquidator or other insolvency officer of the originator)
unwind the transaction at a later date? If yes, on what grounds can this be done and
what is the timescale for doing so? Can this risk be avoided or minimised?

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In principle, it is not possible to unwind an assignment at a later date, given the

specific protection deriving from the Securitisation Law (see Question 16). In
practice, there is also a clean break between the securitisation undertaking and the
originator (orphan securitisation vehicle, distinct directors and offices, and so on).
However, the originators are typically not located in Luxembourg, so local insolvency
laws as a rule apply in this respect.
Establishing the applicable law
18. Are choice of law clauses in contracts usually recognised and enforced in your
jurisdiction? If yes, is a particular law usually chosen to govern the transaction
documents? Are there any circumstances when local law will override a choice of
law?
Generally, the choice of law included in the relevant contracts will be recognised and
enforced in Luxembourg in relation to matters falling within the scope of Regulation
(EC) 593/2008 on the law applicable to contractual obligations (Rome I Regulation).
Luxembourg courts will not apply a chosen law if any of the following applies:
The choice was not made bona fide.
The chosen law was not pleaded and proven.
The chosen law was pleaded and proven but held contrary to mandatory
Luxembourg laws or manifestly incompatible with the public policy rules (ordre
public) of the forum.
All other elements relevant to the situation at the time of the choice were located in
a country other than the country of the chosen governing law, but only to the extent
the parties' choice of governing law affects the application of the provisions of the
law of that other country which cannot be derogated from by agreement, and which
the court may then apply.
The overriding mandatory provisions of the law of the country where the obligations
arising out of the relevant document have to be, or have been performed, render the
performance of the obligations under such documents unlawful and, regarding the
means of enforcement and measures to be taken by a creditor in case of a default in
performance, Luxembourg courts may apply the law of the country in which
performance is taking place.
The overriding mandatory provisions of the law of the forum are applicable
irrespective of the choice of law made by the parties.
Additionally, a Luxembourg court can refuse to apply the chosen governing law if a
person is subject to bankruptcy, composition with creditors, suspension of payments,
liquidation or similar proceedings. In this case, it will apply the insolvency laws of the
jurisdiction in which the insolvency proceedings have been opened to the effects of
the insolvency proceedings, without prejudice to the exceptions in Regulation (EU)
2015/848 on insolvency proceedings (recast).
In relation to the assignment of or security over receivables, Article 14 of the Rome I
Regulation provides that:

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The relationship between the security provider/assignor and the security

taker/assignee is governed by the chosen law of, or the law otherwise applicable to,
the agreement between the security provider/assignor and the security taker/
assignee.
The law governing the claims subject to the security interest or assignment
determines:
whether that claim can be made subject to a security interest or assigned;
the relationship between the security taker/assignee and the debtor;
the conditions under which the granting of a security interest over, or assignment of,
that claim can be enforced against the debtor; and
the question whether the debtor's obligations under that claim have been paid and
discharged in full.
In line with Article 14 of the Rome I Regulation, the Securitisation Law submits the
following items to the law governing the receivable:
•
•
The transferrable nature of the receivable.
The relationship between assignee and debtor.
The conditions of effectiveness of the assignment as against the debtor.
The satisfactory nature of the payment made by the debtor.
The Rome I Regulation does not provide explicitly for any conflict of law rules in
relation to the enforceability of a security interest over or assignment of claims
against third parties. The Securitisation Law fills this gap by providing that it is the
law of the location of the assignor which governs the conditions of effectiveness of
the transfer against third parties. This approach is in line with the solution offered in
the EU Commission proposal of 12 March 2018 for a regulation on the law applicable
to the third-party effects of assignments of claims (Proposal), under which the third-
party effects of an assignment of receivables will generally be governed by the law of
the country where the assignor has its habitual residence. Interestingly, the Proposal
includes an option for securitisation transactions where the assignor and the
assignee can choose the law applicable to the assigned receivable to govern the
third-party effects of the assignment.
In relation to any other assets, the creation, perfection and enforcement of a security
interest over or transfer of assets is governed by the law where the asset is located,
despite the contractual choice of the parties.
Security and risk
Creating security

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19. Please briefly list the main types of security that can be taken over the various
assets of the SPV in your jurisdiction, and the requirements to perfect such security.
According to Luxembourg conflict of law rules, the courts in Luxembourg will

generally apply the lex loci rei sitae or lex situs (the law of the place where the asset
or subject matter of the security interest is situated) in the case of creation,
perfection and enforcement of a security interest over the asset. As a consequence,
Luxembourg law will apply to the creation, perfection and enforcement of security
interests over assets, which are located or deemed to be located in Luxembourg. In
practice, most assets of the securitisation vehicle are located abroad, and will
accordingly need to be pledged and/or charged in accordance with the requirements
of the law applicable to them.
Customarily, the security package consists of:
Pledge over the receivables or other securitised assets held by the securitisation
vehicle.
Pledge over the rights of the securitisation vehicle arising under the relevant
securitisation documents.
Pledge over the securitisation vehicle's bank accounts (including cash accounts and
securities accounts).
Luxembourg law governed receivables and bank accounts located in Luxembourg are
subject to Luxembourg law governed security interests and constitute under
Luxembourg law a financial collateral which benefits from a lender friendly regime
established by the Luxembourg Law of 5 August 2005 on financial collateral
arrangements, as amended (Financial Collateral Law). The Financial Collateral Law
generally applies to security interests over financial instruments (including financial
instruments, bank accounts and receivables).
In relation to the receivables, the security interest is perfected under the Financial
Collateral Law by the mere execution of a written agreement between the security
grantor and the pledgee and notification of the debtors is not necessary. However,
the debtor of the pledged claim or receivable can be validly discharged from its
obligation to the security grantor if it has had no knowledge of the pledge in favour
of the pledgee.
The pledge over the Luxembourg bank accounts is perfected on its notification to the
account bank and, if the general terms and conditions of the bank provide for a first
ranking pledge over the account in favour of the bank (which is standard in practice),
by acceptance of the pledge by the bank.
Securitisation vehicles governed by the Securitisation Law can only grant security
interests over their assets or guarantees in order to guarantee or secure the
obligations they have assumed in view of the securitisation or in favour of their
investors. Security interests, guarantees and other similar arrangements created in
violation of this restriction are void by operation of law. Therefore, due to its status, a
Luxembourg securitisation vehicle is not authorised under Luxembourg law to grant
security interests or guarantees relating to obligations incurred by another entity,
even where the entity is its own subsidiary.
20.How is the security granted by the SPV held for the investors? If the trust concept
is recognised, are there any particular requirements for setting up a trust (for
example, the security trustee providing some form of consideration)? Are foreign
trusts recognised in your jurisdiction?

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The security interests granted by the securitisation vehicle for the benefit of the
investors and creditors are typically held by a security trustee or agent. In relation to
Luxembourg law security interests, the Financial Collateral Law expressly recognises
such structures and states that collateral can be provided in favour of a person acting
for the account of third party beneficiaries, present or future, provided the
beneficiaries are determined or determinable. No parallel debt structures are
required in Luxembourg in relation to the financial collateral.
Trusts as such cannot be set up under Luxembourg law and the documents setting up
the trust or establishing the agency are usually governed by a foreign law.
Foreign law trusts are generally recognised in Luxembourg, subject to the conditions
set out in the Hague Convention (ratified by the Luxembourg law of 27 July 2003 on
trust and fiduciary contracts).
Credit enhancement
21. What methods of credit enhancement are commonly used in your jurisdiction?
Third party guarantees, letters of credits, insurance and over-collateralisation are

normally used to enhance credit of the issuing vehicle and its securities.
Typically, the securities issued by the securitisation vehicle are split into several
tranches, which reflect different risk and return profiles relating to the securitised
portfolio of assets (see Question 23).
Another credit enhancement technique is the granting by the securitisation vehicle

of security interests over its assets for the benefit of certain transaction parties.
Risk management and liquidity support
22. What methods of liquidity support or cash reservation are commonly used in
your jurisdiction?
According to the Securitisation FAQ, Luxembourg securitisation vehicles can borrow
for liquidity purposes, notably in case of lack of synchronisation between the cash
flows relating to the securitised assets and the financial flows relating to the
securities issued by the securitisation vehicle. Borrowing and leverage can also be
used to improve the investors' return. In this scenario, borrowing is only acceptable if
it remains accessory to the main transaction and if the financing of the securitisation
transaction also includes the issuance of securities for a proportionally substantial
amount. In each case, the issuance documentation must properly disclose any
additional risks for investors resulting from such leverage.

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Cash flow in the structure
Distribution of funds
23. Briefly set out the main points of the cash flow index in your jurisdiction. In
particular, will the courts in your jurisdiction give effect to "flip clauses" (that is,
clauses that allow for termination payments to swap counterparties who are in
default under the swap agreement, to be paid further down the cash flow waterfall
than would otherwise have been the case)?
Luxembourg securitisations typically split the securitised risk into several tranches
with different risk profiles.
The most senior tranche is usually very high-rated and is protected from credit losses
by having priority on the cash flow from the assets (customarily after tax liabilities
and administration fees). The lower mezzanine and junior tranches have a lower
rating (or no rating at all). Most junior tranches are designed to be the first to absorb
any credit losses. Consequently, these lower tranches have higher margins to
compensate for the additional risk.
To implement the tranching of the securities, the "waterfall" payment sequence

would normally be included in the issuance documentation, establishing the
payment order of the cash return on assets.
Waterfall provisions and subordination clauses are explicitly recognised by the

Securitisation Law, and Luxembourg courts have accepted the validity of such clauses
outside the scope of securitisations.
Waterfall provisions are typically negotiated on a case-by-case basis, depending on

the circumstances of the transaction at hand (for example rating agencies
requirements).
As regards the validity of "flip clauses", the law governing the agreements in which
such clauses are included will determine their validity. Luxembourg courts will as a
rule seek to give effect to contractual provisions agreed by the parties, except where
such provisions prove to be against Luxembourg public order or possibly insolvency
laws.
Profit extraction
24. What methods of profit extraction are commonly used in your jurisdiction?

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In many Luxembourg securitisation transactions, the securitisation vehicle may

generate residual profit during the lifetime of the transaction, that is, the excess
income received by the securitisation vehicle from the underlying assets over interest
payable under the securities issued by the securitisation vehicle.
If the residual profit is not needed to maintain the cash reserve at the required level,
such excess spread can be paid to the holders of the subordinated securities or to the
originator using various techniques (for example, as a deferred purchase price, or
payments relating to subordinated debt or equity securities), either on an ongoing
basis or at the end of the securitisation transaction.
The Securitisation Law provides that the articles of incorporation, the management
regulations of the securitisation undertaking or any other transaction agreement can
grant to the originator a right over all or part of the assets of the securitisation
undertaking, which are available after payment of all other investors and creditors.
The role of the rating agencies
25. What is the sovereign rating of your jurisdiction? What factors impact on this and
are there any specific factors in your jurisdiction that affect the rating of the
securities issued by the SPV (for example, legal certainty or political issues)? How are
such risks usually managed?
As Luxembourg benefits from a strong credit profile (including the best rating (AAA)
from the three major rating agencies: S&P, Moody's and Fitch), a wealthy economy
with low government debt and robust growth prospects, a strong institutional
framework and fiscal strength, there are no specific macroeconomic factors affecting
the rating of securities issued by Luxembourg companies.
Tax issues
26. What tax issues arise in securitisations in your jurisdiction? In particular:

•
What transfer taxes may apply to the transfer of the receivables? Please give the
applicable tax rates and explain how transfer taxes are usually dealt with.
Is withholding tax payable in certain circumstances? Please give the applicable tax
rates and explain how withholding taxes are usually dealt with.
Are there any other tax issues that apply to securitisations in your jurisdiction?
Does your jurisdiction's government have an inter-governmental agreement in place

with the US in relation to FATCA compliance, and will this benefit locally-domiciled
SPVs?

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Registration taxes
Agreements entered into in the context of a securitisation transaction and all other
instruments relating to the transaction are not subject to registration formalities,
provided that they do not have the effect to transfer rights to either:
Immovable property located in Luxembourg, which must be transcribed, recorded or

registered.
Aircraft, ships or riverboats, recorded on a public register in Luxembourg.
However, a fixed registration duty will apply in case of voluntary registration of

agreements entered into in the context of a securitisation transaction.
Withholding taxes
Interest and dividend payments to investors by a securitisation company are not
subject to Luxembourg withholding tax. Distributions by a fund type of securitisation
vehicle are also not subject to withholding tax.
In relation to securitisation vehicles that have issued shares, non-resident

shareholders (those without a Luxembourg permanent establishment or permanent
representative to which the shares of a securitisation company can be allocated) are
taxable in Luxembourg when they realise a capital gain on an important shareholding
(generally, at least a 10% shareholding) either:
Within six months after the acquisition of the shares in the securitisation company.
If the non-resident shareholders became non-resident taxpayers, less than five years
before the disposal took place, after having been Luxembourg resident taxpayers for
more than 15 years.
However, shareholders who reside in a country with which Luxembourg has a tax
treaty in force should generally not be taxable on such capital gains, if an exemption
is provided for in the treaty.
Corporate taxation
A securitisation company is fully subject to Luxembourg corporate income tax, levied

at a combined general rate of 24.94% for 2019 in Luxembourg City. A securitisation
company benefits from a special tax deduction right which aims to achieve tax
neutrality. Under such right, commitments towards and payments to investors and
creditors are tax-deductible. As a result, interest on debt instruments and
commitments to pay out dividends to equity holders are considered tax deductible
for income tax purposes (subject to the interest deduction limitation rule, see
below).
A securitisation company is only subject to a minimum annual net wealth tax. As the
assets of a securitisation company generally consist of at least 90% financial type
assets such as shares, loans, securities and cash, the annual minimum tax should not
exceed EUR4,815.
As securitisation companies are fully taxable Luxembourg resident companies, they

should be considered as "liable to tax" in the sense of tax treaties and therefore
qualify as resident under such tax treaties. A resident under a tax treaty is generally
entitled

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to the benefits of that tax treaty. Ultimately, the relevant source country must
confirm whether it grants tax treaty benefits to securitisation companies.
A fund type securitisation vehicle is transparent for tax purposes and is not subject to
income tax and net wealth tax. A fund type of securitisation vehicle should generally
not qualify as a resident under tax treaties and should therefore generally not be
entitled to treaty benefits. A securitisation fund is also not in the scope of the
European Anti-Tax Avoidance Directive (EU) 2016/1164 of 12 July 2016 (ATAD 1).
In contrast, a securitisation company is in principle in the scope of the ATAD 1. The

most relevant provision of the ATAD 1 for securitisation companies is the interest
deduction limitation rule, which applies as from 1 January 2019. A securitisation
company may be subject to certain interest deduction limitations if it realises income
other than taxable interest (and economically equivalent) income.
Securitisation companies may also be subject to the anti-hybrid rules implementing

the Anti-Tax Avoidance Directive II ((EU) 2017/ 952) with effect as from 1 January
2020.
Securitisation vehicles and their investors may also potentially have reporting
obligations pursuant to the law implementing the Council Directive (EU) 2018/822
amending Directive 2011/16/EU as regards mandatory automatic exchange of
information in the field of taxation in relation to reportable cross-border
arrangements (DAC 6), which provides for mandatory disclosure of certain cross-
border arrangements by intermediaries or (on a subsidiary basis) taxpayers to the tax
authorities. Reported information is automatically exchanged among the EU member
states.
Value added tax (VAT)
Management services provided to a securitisation vehicle benefit from a VAT

exemption and VAT leakage is therefore reduced to a minimum. As long as they are
specific and essential to the management of the securitisation vehicle, collateral
management fees and investment advisory fees may be considered to be covered by
this exemption. Subscription, underwriting and placement fees may also be VAT
exempt, based on the general exemption of fees on the negotiation of securities.
A securitisation company qualifies per se as a VAT taxable person in Luxembourg. As

a result, the securitisation company must register for VAT if it receives services from
non-Luxembourg service suppliers in order for it to self-assess the Luxembourg VAT
(in the absence of a general exemption for such services).
FATCA
On 28 March 2014 Luxembourg signed an Intergovernmental Agreement (IGA) for
the exchange of tax information with the US, under the US Foreign Account Tax
Compliance Act (FATCA). The IGA was implemented in Luxembourg domestic law
through the Law dated 24 July 2015. The IGA follows the Model 1 IGA and governs
the classification of Luxembourg entities as a Financial Institution (FI) or a Non-
Financial Foreign Entity (NFFE).
Under the IGA, a Luxembourg securitisation vehicle is considered an FI if it qualifies

as a Custodial Institution, Depository Institution, Specified Insurance Company or
Investment Entity. While a securitisation vehicle should generally not be considered
neither as a Custodial Institution nor a Depository Institution nor a Specified
Insurance Company within the meaning of the IGA, a securitisation vehicle could be
considered as an Investment Entity under the IGA if it conducts as a business (or is
managed by an entity that conducts as a business) for or on behalf of a customer one
or more of the following activities or operations:
Trading in money market instruments.

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Individual and collective portfolio management.
Investing, administering, or managing funds or money on behalf of other persons.
On 31 July 2015, guidance was published by the Luxembourg tax authorities in the
form of circular ECHA - n° 2 (Circular). The Circular provides that securitisation
vehicles that are subject to the authorisation and supervision of the CSSF should, in
principle, qualify as an Investment Entity under the IGA. The Circular further provides
that the FATCA status of securitisation vehicles that are not subject to the
authorisation and supervision of the CSSF should be assessed following the
guidelines laid down in the Circular for Luxembourg holding companies, meaning
that the appropriate qualification will essentially depend on the nature of the assets
held by the securitisation vehicle as well as the number and volatility of its investors.
A securitisation vehicle that qualifies as an FI is subject to registration and reporting

requirements under the IGA, unless it qualifies as a Non-Reporting FI. A securitisation
vehicle that does not qualify as an FI qualifies as a NFFE under the IGA. NFFEs are
divided into Active NFFEs and Passive NFFEs. NFFEs are not subject to registration
and reporting obligations under the IGA, but a Passive NFFE must provide details of
its US controlling persons to FIs with which it holds a financial account.
CRS
The OECD has developed the Common Reporting Standard (CRS) which aims at
implementing automatic exchange of financial account information among
participating countries. On 9 December 2014, Directive 2014/107/EU amending
Directive 2011/16/ EU was adopted to implement the CRS among the EU member
states. The latter was implemented into Luxembourg law by the law of 18 December
2015 (the CRS Law) which governs the classification of Luxembourg entities as an FI
or NFFE.
Under the CRS Law, a Luxembourg securitisation vehicle is considered an FI if it

qualifies as a Custodial Institution, Depository Institution, Specified Insurance
Company or Investment Entity. While a securitisation vehicle should generally not be
considered neither as a Custodial Institution nor a Depository Institution nor a
Specified Insurance Company within the meaning of the CRS Law, a securitisation
vehicle could be considered as an Investment Entity under the CRS Law if it either:
Conducts as a business for or on behalf of a customer one or more of the following

activities or operations:
trading in money market instruments;
individual and collective portfolio management;
investing, administering, or managing funds or money on behalf of other persons;
It is managed by a Custodial Institution, Depository Institution, Specified Insurance

Company or by an entity that conducts as a business one or more of the activities or
operations described in the bullet point above, and the securitisation vehicle's gross
income is primarily attributable to investing, reinvesting, or trading in financial
assets.
A securitisation vehicle that qualifies as an FI is subject to reporting requirements

under the CRS Law, unless it qualifies as a Non-Reporting FI. A securitisation vehicle
that does not qualify as an FI qualifies as a NFFE under the CRS Law. NFFEs are
divided into Active NFFEs and Passive NFFEs. NFFEs are not subject to reporting
obligations under the CRS Law, but a Passive NFFE must provide details of its
controlling persons to FIs with which it holds a financial account.
Recent developments affecting securitisations

Country...
27. Give brief details of any legal developments in your jurisdiction (arising from case
law, statute or otherwise) that have had, or are likely to have, a significant impact on
securitisation practices, structures or participants.
See Question 2. Luxembourg implemented the Securitisation Regulation through the

law of 16 July 2019 (SR Law). Under the SR Law, the CSSF and the CAA are designated
competent authorities in Luxembourg to ensure compliance by the relevant
securitisation parties with their obligations set out in Articles 6 to 9 of the
Securitisation Regulation (that is, risk retention, transparency requirements for
originators, sponsors and SSPEs; ban on re-securitisation and criteria for credit-
granting), as well as with the STS securitisations framework.
Under the SR Law, the CSSF and the CAA can, within their respective competences
(see Question 2), impose administrative sanctions in case of an infringement, starting
from a public statement regarding the identity of the natural or legal person and the
nature of the infringement up to a monetary fine (a maximum of EUR5 million or up
to 10% of the total annual net turnover of the legal person, according to the last
available accounts approved by its management body).
CSSF and CAA are granted certain investigative powers, including the right to request
information or documents, carry out onsite inspections and refer information to the
state prosecutor for criminal prosecution.
Other securitisation structures
28. What other structures, including synthetic securitisations, are sometimes

employed in your jurisdiction?
Securitisation transactions structured through Luxembourg typically can take the

form of:
•
"True sale" transactions where the securitisation vehicle acquires the underlying
assets from the originator.
"Synthetic" securitisations, where the ownership of the underlying assets remains

with the originator but the risk (for example, credit risk or insurance risk) is
transferred to the securitisation vehicle through the use of guarantees, credit
derivatives and so on.
Following the financial crisis, the tendency is to have simplified structures to identify
more easily the underlying assets. However multi-level transactions are also
frequently seen, involving an acquisition vehicle and an issuing vehicle (two-tier
structures).
Additionally, under the Securitisation FAQ, securitisation vehicles can, in certain

circumstances, grant loans directly, instead of acquiring them on the secondary
market. A securitisation vehicle can originate loans, provided it does not allocate
funds raised from the public to a credit activity on its own account. In any event, the
documentation relating to the issue must either:

Country...
Clearly define the assets on which the service and the repayment of the loans
granted by the securitisation undertaking will depend.
Clearly describe the borrower(s) and/or the criteria according to which the
borrowers will be selected, so that the investors are adequately informed of the risks,
including the credit risks and the profitability of their investment at the time
securities are issued.
In both cases, information on the characteristics of the loans granted must be

included in the issuance documents. The CSSF will assess compliance with these
conditions on a case-by-case basis.
Reform
29. Please summarise any reform proposals and state whether they are likely to
come into force and, if so, when. For example, what structuring trends do you
foresee and will they be driven mainly by regulatory changes, risk management, new
credit rating methodology, economic necessity, tax or other factors?
It remains to be seen what precise impact Brexit may have on Luxembourg
securitisation practice. A number of securitisations carried out through Luxembourg
securitisation vehicles have a strong nexus with English law, or feature entities
located in the UK (including originators, sponsors and underlying assets themselves).
Notably, collateral managers of assets securitised through a Luxembourg SPV are
often based in the UK. Where such collateral managers do not have a presence in
Luxembourg (for example, through a branch) they do in principle not need to be
licensed or regulated in Luxembourg to provide services to Luxembourg
securitisation vehicles. As such, Brexit should therefore have a limited impact from a
Luxembourg perspective on the collateral management activities provided to
Luxembourg securitisation vehicles. However, there are many other questions that
need to be addressed further to Brexit becoming effective, such as the risk retention
requirements for sponsors, and the impact on the proposed regulation on simple,
transparent and standardised securitisations.
European and international initiatives
Basel Committee. The Basel Committee published a report on Criteria for identifying
simple, transparent and comparable short-term securitisations and their capital
treatment (May 2018).
The Basel III securitisation framework is part of the Basel Committee on Banking
Supervision’s efforts to increase the resilience of the banking sector (Basel III:
Securitisation framework – Executive Summary, 19 December 2019).
International Organisation of Securities Commissions (IOSCO). In October 2019,

IOSCO published a report on Update to the IOSCO Peer Review of Implementation of
Incentive Alignment Recommendations for Securitisation. This report summarises
IOSCO's ongoing efforts to monitor implementation of reforms for securitisation
since IOSCO published its original peer review in September 2015.
It covers two topics (incentive alignment arrangements and disclosure requirements)

and finds that, overall, progress remains mixed across participating jurisdictions in
implementing the recommendations for incentive alignment for securitisation.

Country...
European Commission
On 29 November 2019, the European Commission published on its website three

technical standards relating to the registration and operational standards of
securitisation repositories based on drafts submitted by ESMA on 13 November
2018:
•
Commission delegated regulation supplementing the Securitisation Regulation with

regard to RTS on securitisation repository operational standards for data collection,
aggregation, comparison, access and verification of completeness and consistency
with the relevant annexes.
Commission implementing regulation laying down implementing technical standards

with regard to the format of applications for registration as a securitisation repository
or for extension of a registration of a trade repository under the Securitisation
Regulation and its annexes.
Commission delegated regulation supplementing the Securitisation Regulation with

regard to RTS specifying the details of the application for registration of a
securitisation repository and the details of the simplified application for an extension
of registration of a trade repository.
ESMA. In the context of the implementation of the Securitisation Regulation, ESMA

published the final reports relating to the draft regulatory and/or implementing
standards concerning:
The content and format of the STS notification under the Securitisation Regulation
(ESMA33-128-477).
The requirements relating to third-party firms providing STS verification services

(ESMA33-128-473).
The disclosure requirements under the Securitisation Regulation (ESMA33-128-474).

On 31 January 2019, ESMA also published an opinion concerning amendments to the
draft technical standards on disclosure requirements (ESMA33-128-600) following
the request of the European Commission after the submission in August 2018 of the
first version of the draft standards.
The information and format to be provided as part of an application by firms seeking
to register with ESMA as securitisation repositories as well as operational standards
and access conditions to the information collected and maintained by securitisation
repositories (ESMA33-128-488). In this context, ESMA also published final technical
advice on fees to be charged by ESMA for registering and supervising securitisation
repositories (ESMA 33-128-505).
The co-operation, exchange of information and notification between national

competent authorities and the European Supervisory Authorities (ESMA33-128-557).
ESMA also published further guidance to market participants on ESMA’s

arrangements for being notified of a securitisation’s STS status (ESMA33-128-585).
This guidance also includes an STS notification template (ESMA33-128-585a).
Further, ESMA also issued a statement addressing various topics related to its near-
term implementation activities under the Securitisation Regulation. This statement
aims to provide additional information to facilitate market participants’
understanding regarding the next steps of this implementation (ESMA33-128-577).
On 31 January 2019, ESMA published Q&As relating to the application of the

Securitisation Regulation (ESMA33-128-563) which provide technical clarifications to
help the entities concerned to fill in the templates to be used. This Q&A has been
updated on 28 May 2020.
On 17 January 2020, ESMA published a Consultation Paper on the Guidelines on

securitisation repository data completeness and consistency thresholds (ESMA 33-
128_488).

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European Banking Authority (EBA). EBA published final reports containing draft
technical standards that cover:
The homogeneity of underlying exposures in securitisation (EBA/RTS/2018/02).
Risk retention for securitisation transactions (EBA/RTS/2018/01).
EBA also published a final report on the guidelines on the STS criteria for ABCP
securitisation (EBA/GL/2018/08) and on STS criteria for non-ABCP securitization
(EBA/GL/2018/09).
More recently, EBA published the following documents:
Final Draft Regulatory Technical Standards on the conditions to allow institutions to

calculate capital requirements of securitised exposures in accordance with the
purchased receivable approach under Article 2555 of the Securitisation Regulation (8
April 2019) (EBA/RTS/2019/01).
Consultation paper on Draft Guidelines on the determination of the weighted

average maturity of the contractual payments due under the tranche (31 July 2019)
(EBA/CP/2019/08).
Discussion Paper on Draft Report on STS Framework for synthetic securitization

under Article 45 of the Securitisation Regulation (24 September 2019)
(EBA/DP/2019/01).
Opinion on the regulatory treatment of non-performing exposure securitisation of 23

October 2019 (EBA-Op-2019-13).
Guidelines on the determination of the weighted average maturity of contractual

payments due under the tranche of a securitisation transaction of 4 May 2020
(EBA/GL/2020/4).
Report on STS framework for synthetic securitisations under Article 45 of the

Securitisation Regulation of 6 May 2020 (EBA/OP/2020/07).
30. Has the nature and extent of global, regional and domestic reforms had a positive
or negative affect on revitalising securitisation in your jurisdiction?
Many legislative initiatives have been recently launched at international and national
levels, most notably the Securitisation Regulation, which has overhauled the
European securitisation market by introducing a large number of new requirements
imposed on its participants to boost the securitisation industry, following the
financial crisis.
While the introduction of the Securitisation Regulation has resulted in a degree of
uncertainty in the field of securitisation due to the insufficient guidance, it remains to
be seen whether this new legislative initiative will facilitate the revival of
securitisations in the EU.
At the same time, the securitisation industry in Luxembourg continues to attract

increased interest and there is little doubt that it will continue to build on its
extensive experience and dynamism in the coming years, thanks to Luxembourg's
reliable legal and tax environment set up with the help of proactive national
authorities and regulators.

Country...
Contributor profiles
Vassiliyan Zanev, Partner
Loyens & Loeff Luxembourg S.à r.l T +352 466 230 257 F +352 466 234 E
vassiliyan.zanev@loyensloeff.com W www.loyensloeff.com
Professional qualifications. Luxembourg, Attorney-at-law, 2003 Areas of practice.

Banking and finance law; securitisation; structured finance; fund finance; lending.
Natalja Taillefer, Counsel
Loyens & Loeff Luxembourg S.à r.l T +352 466 230 517 F +352 466 234 E
natalja.taillefer@loyensloeff.com W www.loyensloeff.com
Professional qualifications. Estonia Bar, 2007; Luxembourg (List IV), 2012 Areas of
practice. Banking and finance law; lending; securitisation.
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Structured finance and securitisation in Luxembourg: overview, Practical Law

Structured finance and securitisation in Luxembourg: overview

Country Q&A | Law stated as at 01-Jul-2020 | Luxembourg

A Q&A guide to structured finance and securitisation law in Luxembourg.

Market and legal regime

1. Give a brief overview of the securitisation market in your jurisdiction. In particular:

Is securitisation particularly concentrated in certain industry sectors?

© 2023 Thomson Reuters. All rights reserved.

1 Structured finance and securitisation in Luxembourg: overview, Practical Law

The main securitised asset classes by Luxembourg securitisation vehicles are:

Commercial loans. Mortgage loans. Consumer loans. Lease receivables. Trade

Most securitisation vehicles are established as a limited liability company (see

Securitisation is not particularly concentrated in any particular industry sector in

2. Is there a specific legislative regime within which securitisations in your jurisdiction

What are the main laws governing securitisations?

The main Luxembourg laws and regulations applicable to securitisation transactions

© 2023 Thomson Reuters. All rights reserved.

2 Structured finance and securitisation in Luxembourg: overview, Practical Law

The Securitisation Law.

The Luxembourg law of 10 August 1915 on commercial companies, as amended

According to the frequently asked questions guidance on securitisation issued by the

More generally, all Luxembourg securitisation vehicles are subject to reporting

The Securitisation Regulation defines the "securitisation" as a transaction or scheme,

Payments in the transaction or scheme are dependent on the performance of the

© 2023 Thomson Reuters. All rights reserved.

3 Structured finance and securitisation in Luxembourg: overview, Practical Law

the Securitisation Law defines the "securitisation" as "the transaction by which a

The Securitisation Regulation imposes a broad array of requirements on the SSPEs,

Further, extensive transparency obligations are imposed on the originator, the

Subject to very limited exceptions, the Securitisation Regulation introduces a ban on

Impact of EMIR on securitisation vehicles

Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade

© 2023 Thomson Reuters. All rights reserved.

4 Structured finance and securitisation in Luxembourg: overview, Practical Law

Directive 2011/61/EU on alternative investment fund managers on securitisation

A securitisation undertaking that meets the definition of "securitisation special

In this respect, reference is made to the Questions/Answers of the European

In addition, according to the Securitisation FAQ, securitisation vehicles issuing

Since 1 January 2018, Regulation (EU) No 1286/2014 on key information documents

© 2023 Thomson Reuters. All rights reserved.

5 Structured finance and securitisation in Luxembourg: overview, Practical Law

Reasons for doing a securitisation

Accounting practices in your jurisdiction, such as application of the International

National or supra-national rules concerning capital adequacy?

Risk retention requirements?

Implementation of the Basel III framework in your jurisdiction?

The customary reasons for doing a securitisation are the following:

Access to the capital markets for the originator.

Costs of finance more favourable for the originator.

Improvement of liquidity of the originator/neutralisation of discrepancies of interest

Reallocation of credit risks.

Luxembourg is more generally known as a hub for securitisation and structured

© 2023 Thomson Reuters. All rights reserved.

The accounting principles applicable to securitisation vehicles depend on whether

Securitisation companies are subject to the same rules as regular commercial

The securitisation vehicle's accounts must be audited by an approved independent

Securitisation vehicles established as securitisation companies must comply with the

Luxembourg GAAP under the historical model.

Luxembourg GAAP under the fair value model.

International Financial Reporting Standards as adopted by the EU (IFRS).

Risk retention rules

© 2023 Thomson Reuters. All rights reserved.

7 Structured finance and securitisation in Luxembourg: overview, Practical Law