On 22 January 2021 Parliament approved Bill 7637, which modified:
- the Law of 5 April 1993 on the financial sector; and
- the Law of 6 April 2013 on dematerialised securities.
The bill entered into force on 26 January 2021.
The bill introduces important modifications with respect to the direct issuance of dematerialised securities using distributed ledger technology (DLT). Further, it widens the central account keeper role by enabling any EU credit institution or investment firm to record and operate DLT issuances of unlisted debt securities.
The bill complements the modifications made, most recently on 1 March 2019, to the Law of 1 August 2001. The 2019 modifications enabled account keepers in Luxembourg, from a legal standpoint, to register and hold securities in securities accounts via DLT. However, this amendment facilitated the use of only DLT securities accounts and did not mention issuance accounts. Therefore, securities in issuance accounts were required to exist independently in the form of global certificates or registered or bearer securities.
The new bill extends this legal framework in the following two aspects.
Issuance of dematerialised securities
The bill introduces a new definition of 'issuer account', according to which an account corresponds to that held with a settlement organisation or central account keeper for the purpose of registering securities issued using DLT. Both organisations may now use private or public DLTs to make such records and no other record of the existence of the securities is required. Therefore, central account keepers or settlement organisations may operate DLT wallets to record dematerialised securities that are settled in the same way as native tokens. As such, dematerialised securities may exist and be settled entirely in a DLT environment. By adopting DLT, issuers may be able to reduce the transaction costs for issuers.
Central account keeper role
The second change introduced by the new bill is the amendment of the definition of 'central account keepers' under the Law of 6 April 2013. The bill extends the possibility to act as a central account keeper to EU investment firms and credit institutions for the purpose of holding issuer accounts through DLT for unlisted debt securities (ie, debt securities that are not admitted to trading on EU trading venues), without the need to obtain additional authorisation from the Luxembourg Financial Supervisory Authority under Article 28-11 of the Law of 5 April 1993.
This extension is conditioned by IT security mechanisms, which enable parties to:
- record, in an issuance account, all of the securities that make up each issue admitted to their operations;
- ensure the circulation of securities by transfer from account to account;
- check that the amount of each issue admitted to their operations and recorded in an issuance account equals the sum of the securities that are recorded in the securities accounts of their account holders; and
- exercise all rights attached to such recorded securities.
The new bill is an important addition to Luxembourg's legal framework and strengthens its position as one of the most DLT-friendly and significant financial hubs in the European Union.
This article was originally published in the Banking & Financial Services Newsletter of the International Law Office.