The law of 2021 results from Bill No. 7637, which was submitted to Parliament on July 27, 2021 (for more information, see our newsflash of July 30, 2020).
The law of 2021 amends the law of April 6, 2013 on dematerialized securities (the “Law of 2013”), Which now expressly recognizes the possibility of using secure electronic registration mechanisms, including distributed electronic registers or databases, to issue dematerialized securities. The list of companies authorized to act as account managers for (unlisted) debt securities has also been expanded.
The Luxembourg legislature had already made a number of relevant changes when it passed the law of August 1, 2001 on the circulation of securities and other financial instruments (“2001 law”) With the law of March 1, 2019. This amendment made it clear that account management institutions such as banks could equip securities accounts with distributed general ledger technology. A number of related items have also been introduced, including confirmation that successive registrations of securities using distributed ledger technology have the same effect as transfers between securities accounts (e.g., in relation to the transfer of ownership).
The 2021 law introduces two major changes:
1. Clarification: Issue accounts for dematerialized securities can be managed using distributed ledger technology
When issuing dematerialized securities, records must be kept of the number and type of securities issued. This is done on an “emissions account”. With issuing accounts, the central account holder or liquidation organism can check whether the number of securities in circulation in securities accounts does not exceed the total number of securities issued.
An emissions account is not a securities account. It is merely a record that is kept for the above-mentioned voting checks. Central account managers and liquidation agencies responsible for performing these reviews are now expressly permitted to keep these records using distributed ledger technology. This means that in the future the most important instruments for dematerialized securities can be retained using distributed ledger technology: not only securities accounts (permitted under the 2001 law since 2019), but also issue accounts.
The issuing account has now been defined as an account with a settlement institute or a central account holder, to which the dematerialized securities of an issuer only have to be registered. Such an account can be maintained and securities can be registered using secure electronic record keeping mechanisms including distributed electronic registers or databases.
This definition remains technology neutral, that is, it allows the use of traditional registers and databases as well as distributed ledger technologies and databases.
2. More companies are allowed to act as account managers for unlisted debt instruments
Currently, only certain regulated Luxembourg service providers can act as central account managers under the 2013 law. You also need a special additional license to be able to perform this function. This situation remains unchanged with regard to stocks. In the case of (unlisted) debt instruments, however, the scope of regulated service providers who can act as central account managers will be expanded. This role is now open to all credit institutions or investment firms authorized in a member state of the European Economic Area, provided they have suitable control mechanisms and IT security measures in place for the management of issuing accounts and the performance of other related tasks such as the above-mentioned reconciliation checks. Issuers of unlisted debt instruments subject to Luxembourg law will therefore have a wider choice of service providers for this part of the issuing process.
From now on, Luxembourg and EU credit institutions and investment firms are allowed to perform this role according to the 2013 law, provided they have appropriate control and IT security mechanisms for the maintenance of central accounts that enable them to:
(i) record in an issuance account the entirety of the securities making up each issue admitted to its business;
(ii) to ensure the circulation of securities by transferring them from account to account,
(iii) to verify that the total amount of each issue admitted to its business and recorded in an issues account equals the sum of the securities recorded in the securities accounts of its holders; and
(iv) exercise of the rights attached to securities recorded in securities accounts.