LUXEMBOURG Trends and Developments Contributed by: Andreas Heinzmann, Manuel Fernandez, Valerio Scollo and Katharina Schramm, GSK Stockmann SA
Introduction The EU Commission has recognised that secu - ritisations are an important component of well- functioning financial markets, since they contrib - ute to diversifying financial institutions’ funding sources and releasing regulatory capital that can be reallocated to support further lending. Furthermore, securitisations provide financial institutions and other market participants with additional investment opportunities, thus allow - ing portfolio diversification and facilitating the flow of funding to businesses and individuals, both within member states and on a cross-bor - der basis throughout the EU. Important institutions in the ESG sector, such as the European Investment Fund in Luxembourg, are making good use of securitisation techniques to fulfil their mandate and to balance the alloca - tion of risk assumed by them and the provision of direct or indirect funding to banks, corpo - rates or investment funds within the EU. Green securitisations can, amongst other things, help to reduce the burden on banks’ balance sheets and can release additional liquidity, which can then be used to finance sustainable projects, for example in the field of renewable energy or infrastructure. Since the adoption of the Luxembourg Law of 22 March 2004 on securitisation undertakings in 2004, which was last amended by the law dat - ed 25 February 2022, applicable as of 8 March 2022 (the “Securitisation Law”), Luxembourg has been a very active market for the setting up of securitisation vehicles and the structuring of securitisation transactions, and has become one of the major hubs for securitisation transactions in Europe. The Securitisation Law is very flexible and allows any type of securitisation transaction, with private placement or offer to the public, true sale or synthetic, tranched or untranched. Secu -
ritisation vehicles may be regulated or unregulat - ed and can create compartments to ring-fence the assets and liabilities of a securitisation trans - action from those of other transactions of the same securitisation vehicle. Of more than circa 1,500 securitisation vehicles (more than 6,000 compartments) active in Luxembourg at the time of writing, only 29 are regulated. Regulation (EU) 2017/2402 of the European Par - liament and of the Council of 12 December 2017 laying down a general framework for securitisa - tion and creating a specific framework for sim - ple, transparent and standardised securitisation (the “EU Securitisation Regulation”) is further mitigating the negative perception caused by the 2008 financial crisis. In accordance with the EU Securitisation Regulation, a securitisation vehi - cle can issue senior and junior tranches of notes, each having a different risk profile triggering risk- retention requirements and reporting obligations towards the regulator in Luxembourg. Synthetic Securitisation of Loan Portfolios In a synthetic securitisation transaction, the orig - inator is seeking credit protection via the use of credit derivatives in respect of the assets to be transferred but without selling that asset to the securitisation vehicle. A true sale of the assets is, in general, not possible due to the regulatory framework applicable to the originators, which are often regulated financial institutions, such as banks. Generally, the originator, as protection buyer, transfers the credit risk in respect of a portfolio of loans to the securitisation vehicle as protec - tion seller. While the credit risk in respect of the portfolio’s assets is transferred, the legal owner - ship of that portfolio remains with the originator. Credit risk can be transferred via a multitude of derivative instruments embedded, for instance,
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