Covered Bonds

The Luxembourg covered bonds regime was introduced in the Luxembourg legal order in 1997 and has since been incorporated into the Law of 8 December 2021 relating to the issue of covered bonds (hereafter the “Law”)  transposing Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issue of covered bonds and covered bond public supervision and amending Directives 2009/65/EC and 2014/59/EU (hereafter “Directive (EU) 2019/2162”). This regime includes four main types of covered bonds: the public-sector covered bond (loans to public authorities), the mortgage bond, the movable-property covered bond (loans secured by ships, planes or trains), and the renewable energy covered bond.

This regime also incorporates the so-called ‘European covered bond’ and ‘European covered bond (premium)’ labels introduced by Directive (EU) 2019/2162.

Another innovation of the Law is the opening of the activity of issuing covered bonds to every Luxembourg credit institution without requiring the establishment of a specialised credit institution whose main purpose is the issue of covered bonds (“Spezialbankenprinzip”), as was the case previously. The opening of the issue of covered bonds to “universal banks” offers them additional possibilities to cover their financing needs by giving them access to a wider range of refinancing instruments. However, in order to provide sufficient legal certainty and adequate protection for the creditors of credit institutions operating according to the “universal bank” principle, the latter must comply with a prudential limitation (condition set out in point 2° of Article 2 of the Law) for the issue of covered bonds, unlike “specialised banks” which are not subject to such a limitation.

In accordance with Articles 2 and 14 of the Law, any credit institution referred to in point 1° or 2° of Article 2 must apply to the CSSF for specific prior authorisation for each new covered bond issue programme.

As part of this authorisation, the CSSF assesses compliance with the requirements laid down in the Law based on a duly completed and detailed application file submitted by the issuing credit institution.

Each application for authorisation must be accompanied by a letter in which the issuing credit institution formally requests authorisation to issue covered bonds.

In this letter, the management body in its management function of the issuing credit institution declares that all relevant information is provided in the file and that this information correctly reflects the situation at the time of the submission of the application.

The management body in its management function of the issuing credit institution also confirms that it has carried out a self-assessment of compliance with the legal and regulatory requirements for the issuance and management of covered bonds, resulting in a positive outcome. The letter must be signed by at least two members of the management body in its management function.

The application for authorisation must include all the information required in accordance with the provisions of Article 14 of the Law. Authorisation is only granted if the CSSF has received all this information. The CSSF may also request any additional information it deems necessary to process the application for authorisation for the covered bond issue programme.

The “Covered bond issue programme Authorisation Application Form – Conditions specific to each covered bond issue programme” specifies the minimum information and supporting documents to be provided as part of an application for authorisation for a covered bond issue programme.

Furthermore, any credit institution referred to in Article 2, point 2°, of the Law, other than a covered bond issuing bank referred to in Article 2, point 1°, of the Law, wishing to issue covered bonds must have previously defined or adapted its strategy and risk appetite to take this financing method into account and have put in place an appropriate organisational structure.

The “Covered bond issue programme Authorisation Application Form – Conditions relating to the organisation of the credit institution issuing covered bonds” specifies the organisational conditions to be met by the credit institution referred to in Article 2, point 2°, of the Law. This form must be submitted when first applying for authorisation for a covered bond issue programme.

The letter, accompanied by the duly completed forms and required supporting documents, must be sent to the CSSF supervisory teams responsible for supervising the issuing credit institution concerned, via the usual communication channel.

The inventory and identification of cover assets as well as their entry in the cover register are fundamental prerequisites for the issuance of covered bonds. The entry of cover assets in the cover register grants investors in covered bonds a preferential right to those cover assets, in priority to all other rights, privileges and priorities of any kind.

Issuing credit institutions must establish and maintain the cover register and may register in the cover pool only assets that comply with the conditions of the Law.

These institutions must appoint a special “réviseur d’entreprises agréé” (approved statutory auditor) (hereafter “REAS”), independent of the approved statutory auditor of the issuing credit institution, who is responsible for verifying compliance with the legal and regulatory requirements, which apply to the issuing credit institutions.

Circular CSSF 26/907 specifies the requirements applicable to issuing credit institutions and their REAS, notably:

1. the conditions to be met by the REAS;
2. the mission of the REAS prior to the issue of covered bonds;
3. the annual mission of the REAS after the issue of covered bonds; and
4. the due diligence to be carried out regarding the cover pool.

Pursuant to Article 16 of the Law, issuing credit institutions shall communicate:

• Quarterly, using the tables defined by the CSSF, information on:
  • the eligibility of assets and cover pool requirements
  • coverage requirements
  • liquidity requirements
  • for credit institutions referred to in Article 2, point 2°, of the Law, the total of the cover pools related to the issued covered bonds, the total of liabilities in the balance sheet, including own funds, as well as the total of eligible deposits.
• Annually in a report, information on the segregation of cover assets, the tasks of the REAS. For credit institutions referred to in Article 2, point 2°, of the Law, this report must also contain the measures put in place to ensure that the total of the cover pools related to the issued covered bonds does not exceed, at any moment, 20 per cent of its total liabilities in the balance sheet.

The purpose of Circular CSSF 25/895 is to define the format, content and methods of transmission of the information to be transmitted to the CSSF.

Under Article 22 of the Law, the CSSF is required to publish and keep up to date the list of credit institutions authorised to issue covered bonds.

Under Article 22 of the Law, the CSSF is required to publish and keep up to date the list of covered bonds other than European covered bonds, specifying the categories referred to in Article 3(1) of the Law.

Directive (EU) 2019/2162 introduces two European labels: the ‘European Covered Bond’ label for issues complying with the requirements of Directive (EU) 2019/2162 and the ‘European Covered Bond Premium’ label for issues complying with the requirements set out in Article 129 CRR allowing for preferential prudential treatment. Under Article 22 of the Law, the CSSF is responsible for monitoring and granting these labels and is required to publish on its website the list of labelled programmes.

In compliance with Article 41 of the Law, covered bonds issued before 8 July 2022 are not subject to Articles 3, 4, 6 to 15, 17 and 18, subparagraph 4, of the Law, and may, by way of derogation from Article 27 of the Law, use the name ‘covered bond (“obligation garantie”)’ until their maturity.

Banks issuing covered bonds shall ensure that such covered bonds continue to comply with the provisions of Part I, Chapter 1, Section 3, of the Law of 5 April 1993 on the financial sector, as amended, as in force on 7 July 2022.

The related Circulars CSSF 01/42, 18/705, 18/706 and 18/707 are also still applicable to them. These circulars do not apply to covered bonds issued after that date.