Proposed Changes to the Luxembourg Securitization Regime: Increased Flexibility and New Opportunities

On 8 June 2026, the Luxembourg Government approved and submitted to the Parliament a bill of law¹ (the Bill of Law) amending the Luxembourg law dated 22 March 2004 on securitization, as amended from time to time (the 2004 Law).

This proposed update to the Luxembourg securitization regime aims to clarify certain aspects of the 2004 Law, and to adapt it to the requirements of the current securitization market. The proposed changes are intended to further increase the appeal of Luxembourg securitization vehicles and bring new opportunities to the Luxembourg financial services industry.

This Dechert OnPoint discusses the main changes the Bill of Law proposes to make to the 2004 Law.

Additional Financing Options

Under the current regime, the acquisition of the risks that a Luxembourg securitization vehicle (SV) intends to securitize can be financed by the issue of financial instruments (instruments financiers) or by entering into any form of borrowing, partially or totally.

The Bill of Law proposes expanding this so that SVs will also be permitted to finance their activities, partially or totally, by entering into any form of financing or other financial commitment (aside for issuances offered to the public which can be funded exclusively through the issuance of financial instruments).

Expanding the financing options available to SVs is in response to growing demand from market participants facing specific constraints in certain investment segments — notably in the context of Islamic finance where recourse to loans and traditional financial instruments is prohibited. The Bill of Law aims to reinforce the attractiveness and competitiveness of the Luxembourg securitization framework by adapting it to contemporary market practices and the needs of institutional investors, whilst ensuring legal certainty and the clarity of the legislative framework.

Ring-Fencing of Securitization Funds' Assets in Their Management Company Insolvency

The Bill of Law clarifies and expressly confirms that in the case of the insolvency of the management company of securitization funds, the assets of the securitization funds do not form part of the bankruptcy estate of the management company. Consequently, the securitization funds’ assets are not accessible to, and cannot be seized by, creditors of the management company. While the 2004 Law already restricts creditor recourse against securitization fund assets, the Bill of Law goes further by expressly confirming that those assets fall outside the management company's bankruptcy estate — leaving no room for doubt in an insolvency scenario.

This welcome clarification, which draws inspiration from the legislation applicable to management companies of investment funds², provides additional protection for investors in Luxembourg securitization funds.

Cross-Compartment Investments

A new Article 59-1 is proposed to be introduced into the 2004 Law providing that, subject to the articles of association, management regulations and offering documents of the SV, a compartment may invest in another compartment of the same SV.

Circular investments remain prohibited: a compartment cannot invest in another compartment that already holds an investment in the first compartment.

Furthermore, in terms of creditor rights and by way of derogation from Article 1300 of the Luxembourg civil code which provides that an obligation is extinguished when the same person is both creditor and debtor of such obligation (confusion), the compartment investing in another compartment of the same SV by means of debt-type instruments will benefit from all the rights available to  creditors, including the ability to exercise any voting rights and receive all proceeds from such investment.

The recognition of such cross-compartment investments — which already exists in Luxembourg specialised investment funds (SIFs)³ and reserved alternative investment funds (RAIFs)⁴ — is designed to increase legal certainty and operational flexibility for multi-compartment SVs.

Making cross-compartment investments will need to be carefully considered from a tax perspective for a corporate type SV. SVs are structured, in principle, as tax neutral, are fully taxable and constitute only one taxpayer — notwithstanding the fact that they may comprise a number of compartments.  Any cross-compartment investment will need to be organized in order to ensure this tax neutrality is maintained.

Security Interests and Guarantees

Under the current Article 61(3) of the 2004 Law, an SV may only grant security or guarantees to secure obligations “relating to the securitization transaction” — a formulation that proved ambiguous in practice, particularly where the SV is required to support obligations of its own investors whose exposure arose indirectly from their investment in the transaction. The Bill of Law proposes clarifying the regime governing the granting of security interests and guarantees and provides that such security interests and guarantees may be granted on the SV’s assets to (i) cover the SV’s own obligations; (ii) guarantee the obligations of a third party directly or indirectly related to the securitization transaction; or (iii) guarantee the obligations of a third party in the context of a direct or indirect investment in the securitization transaction.

Since the reform of the 2004 Law in 2022 which extended the financing options available to securitization undertakings (the 2022 Reform)⁵, financing structures have evolved, necessitating the clarification of the type of security interests and guarantees that an SV can grant over its assets. The Bill of Law builds on the 2022 Reform by proposing more precise drafting of Article 61(3) of the 2004 Law, thereby reinforcing legal certainty.

Active Portfolio Management

The 2022 Reform introduced the possibility for SVs to actively manage, directly or through a third-party manager, a portfolio of assets consisting of debt financial instruments or claims, provided that the acquisition of those assets is not financed by the issuance of financial instruments to the public.

This development was very much welcomed by the market, increasing the attractiveness of SVs as standalone investment vehicles as well as core parts of wider investment structures that manage debt portfolios, and opened the door to the establishment of the first Luxembourg CLO structures.

The Bill of Law proposes removing from Article 61-1 of the 2004 Law the reference to the debt nature of the assets constituting the SV’s portfolio which can be actively managed. This means that the composition of the portfolio which may be securitized would no longer be restricted by the 2004 Law. Notwithstanding this amendment,  and in line with investor protection considerations, active management remains permissible only where the financing instruments issued by the SV for the purpose of the securitization are not offered to the public.

The proposed amendment  is recognition of  the need to modernise the 2004 Law to ensure a level playing field for Luxembourg SVs compared to other jurisdictions’ securitization regimes which have long permitted the active management of portfolios held by securitization undertakings, including where those portfolios hold equity positions.

The proposed new wording of Article 61-1 of the 2004 Law also acknowledges that a securitized asset portfolio, even if passively managed, cannot remain entirely static throughout the life of the securitization transaction, and that certain operations relating to the replacement, addition or marginal adjustment of assets within the portfolio do not constitute active management.

Ranking of Reference Rate-Based Debt Instruments

The Bill of Law clarifies the subordination rules introduced by the 2022 Reform by confirming that debt instruments where the return is based on a reference rate (such as Euribor) coupled to a fixed margin, have the same ranking as debt instruments with fixed return (i.e. where the return is determined or determinable independent of the residual performance of the SV’s assets) and therefore rank senior to debt instruments with non-fixed return.

Alignment With Luxembourg's Modernised Insolvency Framework

The Bill of Law replaces in the 2004 Law references to abolished insolvency procedures - the concordat and gestion contrôlée - with their modern equivalents introduced in 2023⁶ - including judicial reorganization, amicable reorganization and administrative dissolution without liquidation. While technical in nature, these updates ensure the 2004 Law remains consistent and aligned with Luxembourg's current insolvency framework. 

Conclusion

The Bill of Law represents further modernisation of the Luxembourg securitization framework, building on successive reforms since 2004, proposing changes that offer enhanced flexibility and greater legal certainty for market participants, particularly with regard to financing options, active portfolio management and cross-compartment investments. The proposals have been welcomed by the Luxembourg financial services industry given the additional opportunities and flexibility for SVs that they would bring. Although the timing of approval of the Bill of Law is currently unclear, we will provide further updates as the legislative process progresses.