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Clarification changes to the August 2005 Luxembourg Act

Clarification changes in relation to the Luxembourg Act dated 5 August 2005 on financial collateral arrangements, as amended (the Luxembourg Collateral Act).

The Luxembourg legislator has adopted certain amendments with a view to the modernisation and clarification of various enforcement-related and other provisions of the Luxembourg Collateral Act. The adopted changes, which are in line with the creditor-friendly spirit of the Luxembourg Collateral Act, are mainly of a technical nature and their effects should be limited in practice. Most of these amendments merely confirm a well-established market practice on these points and are consistent with the approach taken by Luxembourg practitioners over recent years.

On 7 July 2022 the Luxembourg parliament adopted bill of law no. 7933 (the Act), which will come into force on 24 July 2022. The Act amends, among others, the Luxembourg Collateral Act.

The expressed purpose of the Luxembourg legislator when amending the Luxembourg Collateral Act was to modernise certain enforcement methods, such as the public sale procedure. A public sale is, however, very rarely used in practice as an enforcement method (and the secured parties would typically opt for either out-of-court appropriation or private sale at normal commercial terms in the vast majority of situations). For further details on the reformed public sale procedure reference is made to the provisions of the Act.

More importantly, the Luxembourg legislator implemented some other explanatory changes when it comes to the enforcement of pledges over certain specific types of assets, including in particular the following noteworthy additions to article 11 of the Luxembourg Collateral Act:

  • for units or shares of an undertaking for collective investment it is clarified that direct redemption constitutes an enforcement method in that the pledgee is entitled to request the redemption of the units or shares at the redemption price determined in accordance with the constitutional documents of the undertaking for collective investment (new paragraph 11, (1)(f));
  • for pledges over insurance contracts, it is clarified that the pledgee is entitled to exercise all rights under the pledged insurance contract, including for life insurance contracts or capitalisation operations, the redemption right or the right to request the insurance undertaking to pay any amounts due pursuant to the insurance contract (new paragraph 11, (1)(g)).

Among the other notable changes, the Act introduces a new definition of “negotiation platform”, which refers to “a regulated market, a multilateral trading facility or an organised trading facility”. The term encompasses Luxembourg, European and third-country negotiation platforms.

The Act accordingly extends the enforcement methods to refer to (i) a sale of the pledged assets on the negotiation platform on which they are admitted to trading and (ii) out-of-court appropriation at the market price (prix en cours) if the financial instruments are admitted to trading on a negotiation platform.

The Act also provides that with respect to fungible precious metals which fall within the scope of the Luxembourg Grand Ducal Regulation dated 18 December 1981 on the deposit of fungible precious metals, the Luxembourg Collateral Act applies to pledges over such fungible precious metals, thereby increasing the legal robustness thereof.