Agefi Luxembourg - novembre 2024

Novembre 2024 35 AGEFI Luxembourg Fonds d’investissement By Dr. Sebastiaan Niels HOOGHIEMSTRA* and Benjamin SCHAUB** O n 24 July 2024, the Luxem- bourgMinistry of Finance submitted a bill of lawto the LuxembourgParliament (the “Blockchain IVLaw”) that proposes amendments to the lawof 6April 2013 ondematerialized securities (the “2013 Law”) that further strenghtnens the use of dis- tributed ledger technology (“DLT”) for dematerialized securities. This contribution provides anoverviewof the key aspects of the proposed changes and analyzes the (po- tential) impact onLuxembourg in- vestment funds. Background: Fromthe Blockchain LawI to the Blockchain III Law The Law of 1 March 2019 (the “ Blockchain Law I ”) amendedtheLawof1August2001onthecirculation ofsecurities,asamended(the“ 2001Law ”).Itenabled the holding and transfer of securities using DLT- based systems, recognized DLT instruments as de- materialized securities and the transfer as legitimate transfers between securities accounts. The Lawof 22 January 2021 (the “ Blockchain Law II ”) introduced changesthatcomplementedthemodificationsmade to the 2001 Law. The Blockchain Law I facilitated only the use of DLT securities accounts and did not address issuance ac- counts.Therefore,securitiesinissuanceaccountswere, prior to the adoption of the Blockchain Law II, re- quiredtoexistindependentlyintheformofglobalcer- tificates or registered or bearer securities. The BlockchainLawIIintroducedanewdefinitionof“is- suer account”, according to which an account corre- sponds to that heldwith a settlement organisation or central account keeper for the purpose of registering securities issued using DLT. This allowed central ac- countkeepersandsettlementorganizationstooperate and settle dematerialized securities entirely in a DLT environment. Furthermore, the Blockchain Law II permittedLuxembourgandEUinvestmentfirmsand creditinstitutionstooperateascentralaccountkeepers for dematerialized (unlisted) debt securities. As part of implementing Regulation (EU) 2022/858 (“ DLT Pilot Regime ”), Luxembourg adopted the Lawof15March2023(the“ BlockchainLawIII ”)that containedanumberofamendmentsto,amongstoth- ers, the Law of 5 August 2005 on financial collateral arrangements (the “ Collateral Law ”) and the Lawof 5April 1993 on the financial sector, as amended (the “ 1993 Law ”). The Blockchain Law III expanded the definition of “financial instruments” in both the 1993 LawandtheCollateralLawwithinstrumentsthatare issued and represented under DLT. Practically, this had as an implication that all investment services/ac- tivities and ancillary services related toDLTfinancial instruments would be covered by the 1993 Law, whereas the Collateral Lawnowalso allowed finan- cial collateral arrangements to be taken over DLT fi- nancial instruments. Luxembourg Investment Funds&DLT – Where dowe standnow? In Luxembourg, funds are either exclusively regu- latedundertheLawof10August1915oncommercial companies, as amended (“ 1915 Law ”) (e.g. SCSp/SCS), under the Luxembourg fund product laws (e.g. FCP) or byboth (e.g. SICAVs/SICAFs). De- spite this “piecemeal approach” towards Luxem- bourg investment fund regulation, the “issuance” of fund units/shares for all types of Luxembourg alter- native investment funds (“ AIFs ”) and undertakings for collective investment in transferable securities (“ UCITS ”) is either directly or indirectly (through Luxembourg fund product laws) regulated by the 1915 Law. Under the 1915 Law, fund units/shares may, depending upon the relevant legal forms em- ployed by the fund, be issued in one or more of the following threedifferent forms: bearer/immobilized, registered or dematerialized form. a) Registered & Bearer/Immobilized Fund Units/Shares In the CSSF FAQ published in 2022 on the UCI Ad- ministrators Circular, the CSSF clarifies that anyUCI administrator performing the registrar functionmay usetheDLTtomaintaintheunit-/shareholderregister. In this respect, the CSSF stated that it remains to be “technologyneutral”and“ maintainaflexibleregulatory approach in order not to hinder newopportunities and stay open to innovation ”. In practice, this interpretation means that the issuance, transfer and recording of Luxembourg fund units/shares in registered form (through a register of bearer fund units/shares) throughtheDLT,providedthatsuchregisterscomply with the requirements imposedby the 1915 Law. b)DematerializedFundUnits/Shares LuxembourgAIFs andUCITS that are established in certain legal forms, such as a SA or a FCP, may also “issue” dematerialized units/shares, i.e. units/shares that do not have a physical medium. In accordance with the 2013 Law, “dematerialized” fund units/sharesareregistered/createdbywayofinscrip- tion in an account specifically opened by the issuer upon issuanceor conversionof dematerializedsecu- rities (i.e. an issuance account) and which is main- tained by a settlement organization (such as ClearstreamBanking S.A. in Luxembourg) or an ac- count keeper which keeps the dematerialized fund units/shares in its books. The 2013 Lawfurther spec- ifies that such “issuance accounts” may be held within or through secured electronic registration mechanisms, includingDLTordatabases.However, only the registration of dematerialized fund units/shares in a “securities account” gives entitle- ment to the ownership rights ofArticle 3 of the 2001 Law, granted to a securities holder. UnderArticle18aof the2001Law, anaccount keeper maymaintainsecuritiesaccountsandcreditsecurities onsecuritiesaccountswithinorthroughsecuredelec- tronic registration mechanisms, including DLT or databases.Successivetransfersregisteredwithinsuch a secured electronic registration mechanism shall be considered as book transfers between securities ac- counts.Inshort,currently,bothissuanceandsecurities accountsmaybeheld through theDLT for (legal and technical)dematerializedfundunits/shareswithinthe meaning of the 1915, 2013 and 2001 Law. KeyChanges (proposed to be) introducedby the BlockchainLawIV The BlockchainLawIVhas two key changes that are (proposed to be) introduced. a) ExpansionScopewith (unlisted)Debt Securities First,besidesdematerialized(unlisted)debtsecurities, itisnowalsoproposedthatthescopeofthe2013Law would be expanded with unlisted equity securities (fundunitsincluded)forwhichtheuseofDLTforthe issuance, holding and transfer of dematerialized se- curitieswouldbe openedup. b) Introduction of the “ControlAgent Role” The Blockchain Law IV proposes to introduce a new actor by means of the concept of the “control agent”. This actor is proposed to serve as an alter- native to the role of the central account keeper under the 1993 Law.Any investment firmor credit institution that is based in Luxembourg or in the EUand intends toprovide such services on a cross- border basis in Luxembourg may apply for a reg- istration with the CSSF as a “control agent”. The registration for which the application is sug- gested to be required to be filed twomonths ahead of taking upon the “control agent” role needs to contain information in relation to the operational and technical capability that applicants have in order to perform the “control agent” function. Aligned with the authorization conditions for cen- tral account keepers inArticle 28-12of the 1993Law, any applicantwill have todemonstrate that at least, one of the persons in charge of the management of the entity has adequate professional experience by virtue of their having previously carried on similar activities at a high level of responsibility and auton- omy. Furthermore, it alsowill need to demonstrate that it has robust internal governance arrangements, which include: - a clear organizational structure withwell defined, transparent and consistent lines of responsibility; - effective processes to identify, manage, monitor and report the risks it is ormight be exposed to; and - adequate internal control mechanisms, including sound administrative and accounting proce- dures, as well as control and security arrange- ments for information processing systems suitable for the keeping of issuance accounts. TheBlockchainLawIVproposes toassign the following roles to the “control agent” (which are not central account keepers): - the maintenance of the securities issuance ac- count; - the verification of the consistency of the number of securities issued by the issuer and the number of securities regis- tered on the DLT network; and - the supervision of the securi- ties custody chain from ac- countholders to investors. The Blockchain Law IV pro- poses to allow the payment process related to dematerialized securities can be done either by direct payment, inwhich the issuer pays the investors di- rectly, or via apayingagent inwhich the issuer pays the agent, who then transfers funds to the holders of the DLT-registered securities. This allows the is- suer to fulfil its payment obligations related to the securities, suchas interest, dividends or repayments, as soon as it has paid the relevant amounts to the paying agent, the settlement agent or the central ac- count keeper, as decided by the issuer in the is- suance documentation. Overall, it is to be noted that the Blockchain Law IV innovateswiththeintroductionofthe“controlagent”, as the “control agent”may hold natively issuedDLT securities on a securities issuance account and, at the sametime,recordsuchDLTsecuritiesinsecuritiesac- counts, thereby effectively eliminating the need for a centralaccountkeeper’stop-tiercustodylayer.Hence, the Blockchain Law IV proposes for “disintermedia- tion”, as it does awaywith themandatory two-tiered central account keeper and account keeper (i.e. credit institution)roles.The“controlagent”,thus,optionally may allow for the direct crediting of securities to in- vestor accounts or their nominees. However, the BlockchainLawIVdoesnotprohibitaccountkeepers from maintaining such an account with a “control agent”. Servicing tasks are, thus, able to be done by smartcontracts,whichmayhelpinavoidingtheneed for manual intermediation. This simplifies signifi- cantly the process for the issuance, maintenance and reconciliationof dematerialized securities. Implications for Luxembourg Investment Funds Similar to Germany with the eWpG, Luxembourg proposestoextenditsdematerializedsecuritiesframe- workwithnot onlyunlistedbonds, but alsowithun- listed equity securities (including fund units). Potentially, this is beneficial for furthering retailiza- tionof(Luxembourg)AIFsthroughdigitalplatforms. Traditionally, the B2B2C (business-to-business-to- consumers)distributionmodelispredominantinEu- rope. Most fund managers distribute funds via distributors,suchasbanks,financialadvisersandin- surance intermediaries. However, the Blockchain LawIValsoallowsinvestorstodirectlyholdtheirse- curities with the “control agent”. Hence, this could further the development of more direct distribution models,inwhichfundsthroughrobo-advisorysolu- tions or throughdigitalmarketingplatforms aredis- tributedtoretailinvestors.Thiscouldalsofurtherthe developmentofmatchmaking,i.e.secondarymarket solutions for retailAIFs. However, when considering the lessons learned in GermanyfromtheeWpG,itisnotguaranteedthatthe introduction of the current fashion of the Blockchain LawIVwill be a success. InGermany, theuptakehas beenlimited,inparticular,withrespecttotheissuance of so-called crypto fund units (DLT-registered fund units inLuxembourg) Some researchpapers suggest that this is due to the fact that only unlisted shares/bondsarecovered.Practitionerssuggest,how- ever, other reasons for the limiteduptake. Among other requirements, fulfilling the role of a crypto securities registrar (equivalent to the control agent role in Luxembourg) necessitates obtaining a corresponding license from BaFin. Financial institu- tions are not afforded any exemptions compared to start-ups, both of which are eligible to obtain such a license. The effort required to obtain such a license is significant,andthetimeframeforpotentiallyreceiving approval remains uncertain.Why the hurdles are set so high, even for credit institutions or other heavily regulatedfinancialinstitutions,andwhataddedvalue this license brings is not immediately evident. Particularly in the area of crypto fund units, German legislation reveals a significant weakness, whichwill likely result in it to be remaining largely a nationally applied regulation. In the area of crypto fund units, the custodian is legally responsible for maintaining thesecuritiesregister.However,thecustodiancandel- egatethistasktoaregulatedcryptosecuritiesregistrar. In practice, this approach has seen limited adoption, partlybecausemanyoftheprovisionalcryptosecuri- tiesregistrars(undergrandfatheringprovisions)orig- inate from the start-up sector. The key hurdle, however, lies in the fact that EUoperatingcustodians (with or without branches inGermany) may not ob- tainalicenseascryptosecuritiesregistrar.Affectedin- stitutionswouldfirst need toestablisha subsidiary in Germany before they could begin the licensing pro- cess.Inpractice,thisscenarioisvirtuallynon-existent. The Blockchain Law IV seems not to propose such a restriction.vOn the contrary, it proposes to lay the foundation for offering the services of the control agent cross-border within the EU. Hence, the future fortheLuxembourgsolutionseemstobemoreappe- tizing for big institutions in this respect. It alsomust be noted, that, due to restrictions arising from the CSDR (Regulation (EU) 909/2014)) and the DLTPilot Regime, the uptake ofDLTdematerialized securitiesforlistedinstrumentsisnotpossibleforAIFs and limitedlypossible forUCITS. Lastly, it is unclear whether the status of “control agent” will be subject to an extensive examination of the CSSF.Albeit, officially speaking, it is only subject toa“registrationprocedure”therequirementsarestill (partly) aligned with those under the 1993 Law for central account keepers. This could hamper the up- take of this newalternative. (*) Dr. Sebastiaan Hooghiemstra is an associate in the investment management practice of Loyens & Loeff Luxembourg and Senior Fel- low/GuestLectureroftheInternationalCenterforFinancialLaw&Gov- ernanceattheErasmusUniversityRotterdam. (**) Benjamin Schaub is managing partner of intas.tech, a blockchain and digital asset consultancy focusing on the strategic assessment of blockchain use cases and the integration of digital assets into existing businessmodelsandIT infrastructures. The Potential Impact of the Blockchain IV Law on Luxembourg Investment Funds D espite global uncertainties, investor confidence in European ETFs re- mained strong inH1 2024, with in- flows reaching EUR 104.0 bn and assets under management (AuM) surpassing EUR 1.8 trillion. In particular, EU-domici- led ETFs surged fromEUR 1.47tn to EUR 1.72tn betweenDecember 2023 and June 2024, reaching record-breaking growth. Published on 7 November, PwC Luxembourg's latest European ETF Listing and Distribution 2024 poster offers a comprehensive global view of the fund distribution landscape, highlighting key trends, regional developments, and the evo- lution of cross-listing strategies. The key data points fromthe poster include: - ETFs gainpopularity overmore traditional, active funds: The EU ETF market continues to grow, pus- hing totalAuMto a newhigh of EUR 1,814.2 bn and driving record inflows of EUR104.0 bn. - Leading European domiciles: Ireland and Luxem- bourg were still the most popular ETFs domiciles in Europe, accounting for respectively70.8%and18.1% of cross-border registrations. - Growthof the industryandESGprevalence: The ETFmarket grewby 10.4%between June 2023 and June 2024. Of the EU-domiciled ETFs, 36.5% are ESG ETFs, disclosing as perArticle 8 orArticle 9 of the SFDR. - Asset class split: Equity ETFs continue to exhibit robust growth, increasing their share of the Euro- pean ETFmarket to 73.3%by June 2024. With EUR 1.3tn inAuM, they represent a 3.5% year-over-year increase. - Growth region: TheAsia Pacific region experien- ced a large increase in terms of cross-border distri- bution fromJune 2023 to June 2024,withan increase of 17%. Singaporewas both the topETFmarket and the fastest growingmarket in the region. The research reveals the European ETF market ex- perienced an increase of 10.4% in cross-border re- gistrations between June 2023 and June 2024, driven by theongoingpopularityof ETFs, displaying subs- tantial growth over the past year. Meanwhile, EquityETFs remain thedominant asset classwithin the EU ETF market, accounting for a substantial 73.3%of all EU-domiciled ETFs and representing a 3.5%year-over-year increase. Report: https://www.pwc.lu/en/asset-management/etfs/etf-poster.html European ETFs thrive amidst global uncertainty