Opinion of the European Central Bank of 4 February 2004 at the request of the Ministry of Finance of the Grand Duchy of Luxembourg on a draft law on securitisation (CON/2004/3)
Date: 2004-02-04
Institutions: European Central Bank
Subjects: Luxembourg, credit institution, financial stability, national law, securities

EN

OPINION OF THE EUROPEAN CENTRAL BANK

of 4 February 2004

at the request of the Ministry of Finance of the Grand Duchy of Luxembourg

on a draft law on securitisation

(CON/2004/3)

1.

On 5 December 2003 the European Central Bank (ECB) received a request from  the Luxembourg

Ministry  of  Finance  for  an  opinion  on  a  draft  law  on  securitisation  -Projet  de  loi  relative  à  la

titrisation- (hereinafter the ‘draft law’).

2. 

The ECB’s competence to deliver an opinion is based on the second indent of Article 105(4) of the

Treaty establishing the European Community, the second indent of Article 4(a) of the Statute of the

European System of Central Banks and of the European Central Bank, and on the sixth indent of

Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European
Central  Bank  by  national  authorities  regarding  draft  legislative  provisions 1  as  the  legislative

proposal  contains  provisions  applicable  to  financial  institutions  that  ‘materially  influence  the

stability of financial institutions and markets’. In accordance with the first sentence of Article 17.5

of  the  Rules  of  Procedure  of  the  European  Central  Bank,  the  Governing  Council  of  the  ECB  has

adopted this opinion.

Preliminary remarks

3. 

The  draft  law,  as  submitted  by  the  Luxembourg  Ministry  of  Finance,  establishes  a  specific  legal

framework  for  securitisation  transactions  in  Luxembourg.  The  draft  law  draws  upon  experience

with  laws  already  in  place  in  other  countries  and  covers  the  legal  status  of  securitisation

undertakings  and  of  securitisation  funds  respectively,  the  authorisation  conditions  for  these

securitisation  entities  and  the  supervisory  powers  of  the  Luxembourg  financial  supervisory

authority – the  Commission de surveillance du secteur financier (CSSF) - regarding these entities,

the  liquidation  of  these  entities,  the  nature  of  the  securitised  risks  and  the  rights  of  investors  and

creditors.  One  chapter  of  the  draft  law  is  also  devoted  to  the  rights,  powers  and  authorisation

conditions  for  a  new  category  of  financial  sector  player  namely  fiduciary  representatives

(représentants-fiduciaires).  Fiduciary  representatives  must  be  registered  in  Luxembourg  and  the

investors  and  creditors  of  a  securitisation  undertaking  may  use  them  to  manage  their  interests.

1 

OJ L 189, 3.7.1998, p. 42.

                                                
Finally, the draft law also contains some provisions relating to the accounting and tax treatment of

securitisation transactions.

4. 

The ECB notes that in Europe both domestic  securitisation  markets  and  structures  as  well  as  the

corresponding legal, accounting and fiscal frameworks are highly fragmented. The ECB therefore

welcomes the initiative of the Luxembourg authorities to provide more secure and transparent rules

for  the  securitisation  market  with  a  view  to  increasing  financial  markets  participants’  use  of

securitisation  techniques.  The  ECB  acknowledges  the  benefits  of  having  an  explicit  and

comprehensive regulatory framework for these complex transactions, which are rapidly growing in

Europe.  In  the  ECB’s  view,  such  domestic  frameworks  should  particularly  aim  to  enhance  legal

certainty  and  transparency  and  ensure  financial  stability  and  should  include  a  robust  supervisory

regime of the entities in charge of securitisation transactions. On the one hand, the ECB notes that

the  draft  law  offers  great  flexibility  for  establishing  securitisation  transactions  and  that  the

objective of the Luxembourg authorities was to provide practicable procedures at reasonable costs.

On the other hand, the ECB is of the view that the objective of flexibility should co-exist with other

goals  of  a  regulatory  nature  such  as  investor  protection  and  risk  control  and  that  the  domestic

framework should contain the legal safeguards necessary to ensure the safe and transparent conduct

of these activities.

5. 

A  number  of  issues  addressed  by  the  draft  law  or  its  explanatory  memorandum  highlight  certain

legal uncertainties regarding cross-border securitisation transactions, in particular regarding the law

applicable.  For  example,  the  draft  law  will  apply  only  to  securitisation  entities  situated  in

Luxembourg, which means that, if the acquiring and the issuing vehicles are segregated (see also

paragraph  8),  the  draft  law  will  only  cover  entities  situated  in  Luxembourg.  The  draft  law  also

highlights  gaps  whose  removal  could  reduce  obstacles  to  performing  certain  cross-border

securitisation deals and enhance legal certainty. In this regard, the ECB regards securitisation as an

area  where  considerable  progress  in  integrating  European  financial  markets  could  still  be  made

notably in terms of the convergence of market practices, instruments and legal rules. Recently the

European  Union  (EU)  has  launched  efforts  to  introduce  the  necessary  adjustments  to  any  current

proposal  for  EU  legislation  and  reach  a  common  understanding  of  certain  securitisation-related

concepts. In this respect the ECB would refer to the on-going work in the context of the review of
capital requirements for banks and investment firms 2 and the review of the Basel Accord or in the
context of the implementing measures for the Prospectus Directive3. Looking beyond the Financial

Services  Action  Plan,  the  ECB  sees  merit  in  a  strategy  of  increased  harmonisation  in  the  area  of

securitisation at EU level.

2 

3 

See the Commission Services’ Third consultation paper on the review of capital requirements for banks and investment
firms, Part 1 - Draft proposed risk-based capital requirements of the Working Document of 1 July 2003.
Directive  2003/71/EC  of  the  European  Parliament  and  of  the  Council  of  4  November  2003  on  the  prospectus  to  be
published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ L 345,
31.12.2003, p. 64.

2

                                                
Definition of securitisation

6. 

The  draft  law  defines  securitisation  as  ‘the  operation  by  which  a  securitisation  entity  acquires  or

assumes,  directly  or  through  the  intermediary  of  another  entity,  the  risks  connected  to  debts,  to

other  goods,  or  to  liabilities  assumed  by  third  parties  or  inherent  to  all  or  part  of  the  activities

carried out by third parties in issuing the securities whose value or return depends on these risks’.

The ECB notes the broad definition proposed by the Luxembourg Ministry of Finance. In addition,

the  ECB  understands  the  Ministry’s  desire  to  favour  an  economic  and  financial  approach  to

defining securitisation thus covering all forms of securitisation transactions within the scope of the

draft  law.  However,  questions  could  arise  as  to  whether  the  draft  law  is  sufficiently  explicit  in

defining concepts such as the ‘acquisition of risks’ or ‘the assumption of risks’. For example, in the

context of traditional securitisation, the securitisation vehicle acquires the claims and not only the

‘risks  connected  to  debts’.  The  ECB  considers  that  it  might  also  be  useful  to  clarify  this  in  some

parts of the draft law and in particular its chapter on ‘risk assumption’.

Securitisation vehicles proposed under the draft law

7. 

Under  the  draft  law,  it  will  be  possible  to  create  securitisation  entities,  either  in  the  form  of

securitisation undertakings or of securitisation funds without legal personality. The draft law leaves

open  to  market  participants  the  choice  of  using  securitisation  undertakings  or  securitisation  funds

and  the  Luxembourg  legislator  intends  to  follow  closely  the  model  adopted  for  the  Luxembourg
organismes de placement collectif (OPC)4 while taking into account the particular characteristics of

the  functions  and  purposes  of  securitisation  vehicles.  Firstly,  the  ECB  notes  that,  for  the  sake  of

clarity,  it  would  be  preferable  for  the  draft  law  to  expressly  state  that  these  securitisation  entities

are not undertakings for collective investment in transferable securities within the meaning of the
UCITS  Directive5.  Secondly,  with  regard  to  securitisation  funds,  it  is  provided  that  either  the

management company (cf. Article 7(1) and (3) of the draft law) or the fund itself (cf. Article 9 and

Article  10(1)  and  10(4)  of  the  draft  law)  will  be  the  issuers.  The  ECB  notes  that  a  securitisation

fund’s  lack  of  legal  personality  could  give  rise  to  legal  uncertainty  regarding  its  capacity  to  issue

securities directly. Thirdly, the concepts of valeurs mobilières (securities) and of titres de créances

(debt instruments) seem to be used interchangeably in the draft law and the ECB is of the view that

the link between Article  7(3) and Article 9 of the draft law could be further clarified in this respect.

Fourthly,  the  ECB  understands  Article  7  of  the  draft  law  and  the  explanatory  memorandum  (cf.

page 26) as meaning that the Luxembourg authorities intend to allow securitisation funds to issue

either units -representing a co-ownership right - or debt instruments representing a claim over the

fund. If this choice is indeed available, the ECB considers that it should be expressed more clearly

in  the  draft  law  and  that  rules  relating  to  the  redemption  of  units  should  be  included.  This  might

also  lead  to  a  distinction  having  to  be  made  between  investors  (investing  in  fund  units  or  debt

4 
5 

Luxembourg forms of undertakings for collective investment in transferable securities (UCITS).
Council  Directive  85/611/EEC  of  20  December  1985  on  the  coordination  of  laws,  regulations  and  administrative
provisions relating to undertakings for collective investment in  transferable securities (UCITS), as amended OJ L 375,
31.12.1985, p. 3

3

                                                
instruments  issued  by  the  securitisation  fund  or  the  securitisation  undertaking)  and  originators

investing in the securitisation entities.

8. 

As regards the ‘sub-structures’ of securitisation vehicles, Article 1(2) of the draft law provides that

securitisation  entities  shall  mean  the  entities  that  wholly  perform  securitisation  and  those  that

participate  in  such  transactions  by  assuming  all  or  part  of  the  securitised  risks  (the  acquiring

entities) or by issuing securities to cover the financing of the securitised risks (the issuing entities).

In  this  context,  the  ECB  notes  that  the  draft  law  does  not  make  it  obligatory  for  securitisation

transactions to be exclusively performed through a single securitisation entity. Under this scheme,

it should be possible to transfer the assets of an entity distinct from the entity issuing the securities,

i.e.  the  acquiring  entity  and  even  to  envisage  an  issuing  entity  dealing  with  several  acquiring

entities.  The  ECB  is  aware  that  similar  structures  that  dissociate  the  two  activities  are  used  by

market  participants  and  are  authorised  by  the  legislation  of  other  Member  States.  In  the  ECB’s

view,  it  is  necessary  to  ensure  that  the  complexity  of  such  structures,  especially  in  a  cross-border

context  and  for  vehicles  with  segments,  does  not  create  obstacles  in  terms  of  transparency,  risk

control  and  effectiveness  of  the  legal  transfer  of  assets  and  does  not  contradict  the  objective  of

reinforcing  the  direct  correlation  between  the  rights  of  investors  and  the  underlying  assets  of  the

securitisation entities. In addition, the provisions of the draft law do not specify how the rules that

apply  to  the  acquiring  and  issuing  entities  will  coexist  (see  however  Article  63).  The  ECB  would

also  recommend  clarifying  the  rules  that  apply  to  securitisation  undertakings  and  securitisation

funds  respectively,  since  the  possibility  of  segregating  the  functions  of  acquiring  and  issuing

entities seems to be envisaged for both types of vehicle.

9. 

The  ECB  notes  that  the  draft  law  allows  the  creation  of  some  segments  within  securitisation

entities. This possibility is expressly provided for in Article 8 of the draft law and it is understood
that securitisation undertakings also have this right6. This provision may produce some economies

of scale by allowing several originators to use the same vehicle for issuing asset-backed securities.

However, secure segregation mechanisms must be put in place to ensure strict separation between

pools of assets so that losses incurred in a given segment do not affect the profitability of the other

segments. The ECB considers that this should also be clarified when acquiring entities and issuing

entities are dissociated.

Protection of investors and disclosure requirements

10.  The draft law’s extensive coverage in terms of underlying assets and risks covered aims to follow

developments  in  the  securitisation  markets,  where  the  range  of  asset  classes  is  constantly

expanding. The scope of the draft law is not limited to securitisations resulting from a transfer of

claims  or  other  assets.  This  flows  from  the  definitions  in  Article  1  and  Article  53(1)  of  the  draft

law. The ECB understands that such wide coverage could include highly complex structures. In this

respect,  the  ECB  notes  that  Article  10(4)  of  the  draft  law  obliges  investors  to  accept  the

6 

See for instance Article 33 of the draft law’s Chapter 3 (the liquidation of securitisation entities).

4

                                                
securitisation  fund’s  rules  when  acquiring  securities  issued  by  the  fund.  However,  the  draft  law

does  not  specify  in  detail  the  obligations  imposed  on  securitisation  vehicles  in  terms  of  the

disclosure  of  information  when  securities  are  offered  to  the  public,  especially  as  regards  the

underlying assets and the assessment of the risks involved. The ECB would point out in this respect
that  the  proposed  implementing  measures7  for  the  Prospectus  Directive  (hereinafter  the

implementing measures) aim to define the minimum information necessary depending on the type

of issuer and the nature of the securities offered to the public or admitted to trading on a regulated

market,  to  enable  investors  to  make  an  informed  assessment.  More  details  are  foreseen  regarding

the applicable disclosure regime for issuers of asset-backed securities.

11.  The additional information requirements identified for asset-backed securities in the implementing

measures  include  the  types  of  securities  issued,  the  underlying  assets  and  the  structure  of  the

transaction and cash flow (credit enhancements, subordinated debt, priority of payments, etc.) and

should  improve  the  quality  of  the  information  provided  to  investors.  This  applies  particularly  to

information  on  the  nature  of  underlying  assets  and  the  general  characteristics  of  debtors  which

constitute,  in  the  ECB’s  view,  particularly  important  types  of  information.  The  ECB  also  places

great importance on a detailed description of the characteristics of the securities issued and of the

types of structures used (including type of credit risk transfer) as well on an external assessment of

the  risks  involved.  Considering  the  various  securitisation  structures  across  Europe,  it  would  be

advisable  for  the  draft  law  to  clearly  specify  the  respective  obligations  of  the  parties  to  the

securitisation  transaction  vis-à-vis  investors.  Similarly,  a  practical  consideration  in  relation  to

prospectuses  concerns  their  availability  to  the  public;  in  this  respect  the  draft  law  could  specify

more clearly the nature of the legal entity responsible for drafting and disseminating the prospectus

and how access can be obtained to the prospectuses, information notes for investors, management

rules of securitisation funds and segments, etc.

Supervisory aspects

12.  According to Article 19 of the draft law, securitisation entities that continuously issue securities to

the public must be authorised by the CSSF to fulfil their functions. In this respect the ECB would

first  note  that  the  concept  of  ‘continuing  issue’  relates  to  the  definition  of  credit  institution  in  the
consolidated  Banking  Directive 8.  According  to  recital  6  of  the  consolidated  Banking  Directive,

repayable funds may be ‘in the form of deposits or in other forms such as the continuing issue of

bonds’.  The  ECB  deduces,  from  the  wording  of  the  explanatory  memorandum  that  these

securitisation  entities  will  not  be  considered  to  be  credit  institutions  for  supervisory  purposes.

Second, the draft law refers to the continuous issuance of securities to the public, which seems to

imply  that  the  issuance  of  securities  to  professional  investors  (private  placement)  would  not  be

7 

8 

DG Internal Market Services’ working document ESC 36/2003 on the implementation of Articles 5, 7, 10, 11, 14 and 15
of  the  European  Parliament  and  Council  Directive  2003/71/EC  on  the  prospectus  to  be  published  when  securities  are
offered to the public or admitted to trading on a regulated market and amending Directive 2001/34/EC. Text available on
http://europa.eu.int/comm/internal_market/en/finances/mobil/docs/prospectus/working-doc-esc36-2003_en.pdf.

Directive  2000/12/EC  of  the  European  Parliament  and  of  the  Council  of  20  March  2000  relating  to  the  taking  up  and
pursuit of the business of credit institutions, OJ L 126, 26.5.2000, p. 1.

5

                                                
covered. This provision could be interpreted as meaning that, in such circumstances, securitisation

vehicles  would  not  have  to  be  authorised  by  the  CSSF.  The  ECB  considers  that  the  concept  of
‘continuous  issuance’  as  applied  in  this  context  should  be  clarified  so  as  to  leave  no  ambiguity9.

The ECB feels that avoiding any ambiguity in the scope of supervisory competences is particularly

important  in  view  of  the  draft  law’s  aforementioned  objectives  of  providing  more  secure  and

transparent  rules.  These  competences  should  be  designed  to  enable  effective  and  comprehensive

supervision, without introducing undue complications in supervisory regimes for different types of

transactions.  In  particular,  the  complexities  that  are  introduced  by  creating  three  different

authorisation  regimes  for  securitisation  entities,  i.e.  authorised  entities,  non-authorised  entities

falling within the scope of the draft law and a third category comprising the entities not subject to

the draft law, should be assessed against their benefits. The ECB recommends further clarification

on  these  aspects  in  order  to  ensure  sufficient  supervision  coverage  of  the  entities  involved  in

securitisation transactions in Luxembourg.

13.  Article  61(1)  of  the  draft  law  provides  that  ‘a  securitisation  entity  shall  only  be  authorised  to

transfer  its  assets  in  accordance  with  the  terms  and  conditions  laid  down  by  its  statutes  or  its

management  rules’.  The  ECB  feels  that  these  management  rules  should  clearly  specify  the

conditions that apply to the transfer of underlying assets, to ensure that investors are fully aware of

possible  changes  to  the  risk  characteristics  of  the  portfolio  of  underlying  assets.  Such  additional

detail  might  also  cover  certain  safeguards  in  relation  to  securitisation  entities’  ability  to  borrow.

The ECB also notes that under Article 14 of the draft law management companies of securitisation

funds do not solely manage securitisation funds, which means that they are entitled to extend their

activities  to  the  management  of  UCITS  or  pension  funds  provided  that  they  fulfil  the  required

criteria.  The  ECB  would  emphasise  both  the  risks  involved  in  blurring  the  borders  between  these

different types of financial activity and the need for management companies to comply with strict

standards in terms of conflicts of interest, disclosure and risk management rules.

14.  According to Article 22 of the draft law, authorised securitisation entities must entrust the custody

of their liquid assets and their securities to a credit institution that is established or has its registered

office  in  Luxembourg.  According  to  the  explanatory  memorandum,  this  provision  aims  to  ensure

optimal  protection  for  investors  and  facilitate  the  CSSF’s  supervision  of  authorised  securitisation

entities. The ECB understands this provision as including branches of credit institutions established

in the EU.

Cross-border legal issues

15.  The draft law aims  inter  alia   to  make  it  easier  for  securitisation  entities  to  acquire  or  transfer

receivables. However, in the case of foreign debtors, the question of the conditions under which the

assignment  could  be  invoked  against  third  parties  might  not  fall  within  the  scope  of  Luxembourg

law,  thus  highlighting  the  limits  of  a  strictly  domestic  approach.  Cross-border  securitisation

9 

In the context of the Prospectus Directive, securities ‘issued in a continuous or repeated manner’ means ‘issues on tap or
at least two separate issues of securities of a similar type and/or class over a period of 12 months’ (Article 2(1)(l)).

6

                                                
transactions have to deal with conflict of law issues, which may affect the validity or enforceability

of  international  assignments  of  receivables.  In  its  Green  Paper  of  14  January  2003  on  the

conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a
Community  instrument  and  its  modernisation10,  the  European  Commission  points  out  that  ‘the

Rome Convention does not deal explicitly with the question under which conditions the assignment

can  be  invoked  against  third  parties.  The  question  is  important  because  it  determines  the

effectiveness  of  the  assignment  of  the  claim  and  the  transfer  of  the  property’.  Currently  each

Member  State  applies  its  own  rules  in  this  area  and  the  solutions  vary  widely  from  one  court  to

another. At international level the General Assembly of the United Nations adopted a Convention

on the assignment of claims in international trade in New York on 31 January 2002. The ECB notes

that certain of the provisions of the draft law are inspired by this Convention (cf. the commentary

to Articles 55 and 58) which,  inter alia ,  aims  to  make  key  aspects  of  the  rules  on  the  conflict  of

laws  more  consistent  and  remove  legal  obstacles  to  certain  international  financing  practices.

Among the Member States to date only Luxembourg has signed the Convention on 12 June 2002.

The  ECB  hopes  that  the  solutions  adopted  and/or  examined  at  international  level  will  lead  to  an

increased convergence of the applicable rules in this area at EU level.

Use of asset-backed securities as collateral for central bank operations

16.  From a collateral policy point of view, the ECB would highlight the criteria that assets must fulfil

in order to be eligible as collateral for Eurosystem monetary policy and intraday credit operations.

Asset-backed securities may be accepted as collateral provided they fulfil these eligibility criteria.

A  case-by-case  assessment  is  always  performed  by  central  banks,  carrying  out  this  task  might

necessitate  them  obtaining  any  relevant  information  from  supervisory  authorities.  The  ECB  notes

that the draft law potentially allows the issue of a wide range of types of assets, some of which may

be  eligible.  The  obligation  that  the  securities  are  transferable  in  book-entry  form  is  one  of  the

requirements  laid  down  for  eligibility  as  collateral.  The  ECB  therefore  welcomes  the  fact  that

Article 7(3) of the draft law, despite the absence of a general regime for dematerialised securities in

Luxembourg,  allows  the  management  company  of  the  securitisation  fund  to  issue  book-entry

securities.

Statistics reporting

17.  The regular and timely collection of accurate and reliable statistical data on securitisation vehicles

across  Europe  is  of  importance  for  monetary  policy  purposes.  Work  is  currently  under  way  to

improve  euro  area  statistics  on  securitisation.  In  general,  in  carrying  out  its  statistical  tasks,  the

ECB  identifies  reporting  agents  using  a  combination  of  criteria  based  on  EU  law  and  national

regulatory provisions, including supervisory agreements or tax provisions.

10 

COM(2002)654 final.

7

                                                
The  ECB  would  recommend  that  the  Luxembourg  authorities  add  a  provision  to  the  draft  law  to

ensure that securitisation entities provide the Banque centrale du Luxembourg with the information

necessary to comply with the statistical obligations imposed by the ECB.

18.  This opinion will be published on the ECB’s website.

Done at Frankfurt am Main on 4 February 2004.

[signed]

The President of the ECB

Jean-Claude TRICHET

8