The law of 22 January 2021 (the “2021 Law”) modernises Luxembourg’s legal framework on the issuance of dematerialised securities by expressly confirming the possibility to use distributed ledger technology.
The 2021 Law stems from bill of law no. 7637, which was filed with Parliament on 27 July 2021 (see our newsflash of 30 July 2020 for more information).
The 2021 Law amends the law of 6 April 2013 on dematerialised securities (the “2013 Law”), which now explicitly recognises the possibility of using secure electronic registration mechanisms, including distributed electronic registers or databases, to issue dematerialised securities. The list of entities empowered to act as account keeper for (unlisted) debt securities has also been expanded.
The Luxembourg legislator had already made a number of relevant changes, in amending the law of 1 August 2001 on the circulation of securities and other financial instruments (the “2001 Law”) with the law of 1 March 2019. This amendment served to clarify that account-keeping institutions such as banks could provide securities accounts with distributed ledger technology. It also introduced a number of related items, including confirmation that successive registrations of securities using distributed ledger technology have the same effects as transfers between securities accounts (e.g. regarding transfer of ownership).
The 2021 Law introduces two main changes:
1. Clarification: issuance accounts for dematerialised securities may be kept using distributed ledger technology
When issuing dematerialised securities, a record must be kept of the number and type of securities issued. This is done in an “issuance account”. Issuance accounts allow the central account keeper or liquidation organism to verify that the number of securities in circulation in securities accounts does not exceed the total number issued.
An issuance account is not a securities account; it is simply a record kept for the purposes of the aforementioned reconciliation checks. Central account keepers and liquidation organisms responsible for performing these checks are now expressly permitted to keep such records using distributed ledger technology. This means that going forward, the major tools for dematerialised securities can all be kept using distributed ledger technology: not just securities accounts (permitted since 2019 through the 2001 Law), but issuance accounts as well.
The issuance account has now been defined as an account held with a settlement institution or central account keeper in which the dematerialised securities of an issuer must be registered exclusively. Such an account may be maintained, and securities registered in it, using secure electronic recording mechanisms, including distributed electronic registers or databases.
This definition remains technology-neutral, i.e. it allows for the use of both traditional registers and databases and distributed ledger technology and databases.
2. More entities will be allowed to act as account keeper for unlisted debt securities
Currently, only certain regulated Luxembourg service providers can act as central account keepers under the 2013 Law. Moreover, they require a specific additional license in order to be able to perform this function. This situation will remain unchanged in relation to equity securities. However, for (unlisted) debt securities, the scope of regulated service providers able to act as central account keepers will be broadened. This role will now be open to any credit institution or investment firm authorised in a Member State of the European Economic Area, provided it has appropriate control mechanisms and IT security arrangements for keeping issuance accounts and performing other related tasks, such as the aforementioned reconciliation checks. Issuers of unlisted debt securities governed by Luxembourg law will thus have a larger choice of service providers for this part of the issuance process.
Henceforth, Luxembourg and EU credit institutions and investment firms will be permitted to perform this role under the 2013 Law provided they have suitable control and IT security mechanisms for keeping central accounts, enabling them:
(i) to record in an issuance account the entirety of the securities making up each issue admitted to their operations,
(ii) to ensure the circulation of securities by transfer from account to account,
(iii) to verify that the total amount of each issue admitted to their operations and recorded in an issuance account is equal to the sum of the securities recorded in the securities accounts of their holders, and
(iv) to exercise the rights attached to the securities recorded in securities accounts.
