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The Luxembourg law on financial guarantee contracts of 5 August 2005, as amended (the “Law”), has provided market participants with a solid and proven framework since its entry into force. As part of the implementation of Regulation (EU) 2021/23 of 16 December 2020 on a framework for the recovery and resolution of central counterparties, the Luxembourg legislator took the opportunity to further update the Law (the ” Update “). The update was voted by the Luxembourg Chambers of Parliament on July 15, 2022 and will soon come into force.

Main characteristics

Some of the key features of the update are:

-Any triggering event agreed between the parties involved will be recognized to allow execution.

-Performance of the financial guarantee agreement even in the event that no guaranteed obligation is due and payable.

-Updating and clarification of the possibilities of execution, in particular with regard to pledges granted on units or shares of undertakings for collective investment, life insurance contracts or capitalization contracts.

-Express recognition of the possibility for electronic money institutions and payment institutions to act as fiduciary in the context of the transfer of ownership for security purposes

-Further clarification that the insolvency distancing of netting agreements and collateral is to be understood as being vis-à-vis domestic and foreign law insolvency proceedings.

This update will be welcomed by market participants as the legislator not only used this update to clarify various elements but also introduced some novelties, adding to the robustness of the Luxembourg financial collateral framework.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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