With a view to align the national legislation with the EU legal framework on the issuance of covered bonds, the Luxembourg Minister of Finance submitted draft law 7822 (the “Draft Law”) to the Luxembourg Parliament (Chambre des Députés) on 7 May 2021. If adopted, the Draft Law will result in substantive amendments to the national legal regime applicable to the issuance of covered bonds currently in force.
The purpose of the Draft Law is to:
- transpose into Luxembourg law Directive (EU) 2019/2162 of 27 November 2019 on the issue of covered bonds and covered bond public supervision (the “Directive (EU) 2019/2162”); and
- operationalise the Regulation (EU) 2019/2160 of 27 November 2019 as regards exposures in the form of covered bonds (the “Regulation (EU) 2019/2160”).
Background
Under the Luxembourg legal framework currently in force, the issuance of covered bonds (lettres de gage) is primarily regulated by articles 12-1 to 12-12 of the Law of 5 April 1993 on the financial sector, as amended (the “Financial Sector Law”). According to these provisions, the issuance of covered bonds is restricted to credit institutions specifically authorised as covered bond banks (banques d’émission de lettres de gage), whose range of activity is limited to mortgage and public sector lending, including funding loans purchased from other credit institutions.
More specifically, credit institutions authorised in Luxembourg as covered bond banks may issue the following types of covered bonds, with respect to the category of assets, which makes up the cover pool:
- “mortgage bonds” (lettres de gage hypothécaires) secured by claims resulting from loans secured by rights in rem over real estate;
- “public-sector covered bonds” (lettres de gage publiques) secured by claims resulting from loans to public sector entities;
- “moveable-property covered bonds” (lettres de gage mobilières) secured by claims resulting from loans secured by rights in rem over movable property;
- “common covered bonds” (lettres de gage mutuelles) secured by claims resulting from loans granted to credit institutions, which are members of a system of mutual guarantee; and
- “renewable energy covered bonds” (lettres de gage énergies renouvelables) secured by claims resulting from loans secured by rights in rem or charges over assets generating renewable energy.
Key changes
The Draft Law adopts a product-based approach to the issuance of covered bonds. Thus, the relevant legal provisions will be extracted from the Financial Sector Law and a separate law will be dedicated to the issuance of covered bonds.
New financing opportunities for universal banks
Pursuant to Article 3 of the Draft Law, the issuance of covered bonds will no longer be restricted to specialised credit institutions. Henceforth, all Luxembourg banks (including credit institutions specifically authorised as covered bond banks) will be able to issue covered bonds, without a need to obtain previous authorisation as specialised covered bond banks. Thus, the current regime of specialised covered bond banks will remain in force and will apply in parallel with the new regime designed to allow universal banks to access the activity of issuance of covered bonds. However, universal banks wishing to engage in this activity must ensure that the aggregate cover asset pools linked to covered bonds will not at any time represent more than 20% of the bank’s total commitments, including own funds, but deducting eligible deposits.
New types of covered bonds available to investors
As Directive (EU) 2019/2162 does not preclude the maintenance of existing national frameworks on covered bonds, insofar as they do not contradict with the EU provisions, its implementation will result in the combined application of the existing provisions on covered bonds with the provisions resulting from Directive (EU) 2019/2162. Thus, the current types of covered bonds, as described above, will continue to exist (with the exception of common covered bonds, which are being abolished), while the implementation of Directive (EU) 2019/2162 will result in the introduction of two additional types of covered bonds:
- the “European covered bonds” (obligations garanties européennes); and
- the “(high-quality) European covered bonds” (obligations garanties européennes (de qualité supérieure)).
While the “European covered bonds” and “(high-quality) European covered bonds” always qualify as covered bonds (lettres de gage) under Luxembourg Law, the existing types of covered bonds under Luxembourg Law may not always qualify as covered bonds for the purposes of Directive (EU) 2019/2162. This is explained by the fact that the “European covered bonds” and “(high-quality) European covered bonds” comply at the same time with the existing national legal rules on covered bonds and the additional requirements deriving from Directive (EU) 2019/2162, particularly in relation to the quality and segregation of cover pools, bankruptcy remoteness of covered bonds, the asset and liability risks affecting cover pools and disclosure of the composition of cover pools.
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