Keeping pace with the market — Luxembourg securitisation four years after Modernisation

More than two decades have passed since the Luxembourg Securitisation Law (the Law) first came into force in 2004. In financial markets, twenty-plus years is long enough for even a well-designed framework to start showing its age, and securitisation proved no exception. Like any long-standing structure that aims to stay relevant, the Law eventually needed a refresh to keep pace with the way transactions had evolved. That refresh arrived with the modernisation adopted in 2022, intended not to replace the original and well-accepted framework but to ensure it could continue to operate in a market that had moved well beyond its early contours.

The strengths of the Luxembourg legal framework have been and remained the legal certainty, the built-in flexibility as well as the possibility to create compartments. Nevertheless, with time, the framework adopted in 2004 did no longer accommodate for all the structures seen or desired in the Luxembourg market. What matters, four years after the 2022 Modernisation of the Law, is not only what the Law now permits on paper, but what market participants have actually done with it. As reflected in the results of the 2025 Market Survey conducted by PwC Luxembourg together with the Luxembourg Capital Market Association, and as illustrated in the graph below, the reform’s provisions have not all travelled at the same speed. Some amendments have quickly become standard features in deal structuring, whereas others remain underused and have yet to translate into widespread market practice. 

2025 Market Survey results for the Modernisation of the Luxembourg Securitisation Law in 2022, conducted by PwC Luxembourg together with the Luxembourg Capital Market Association

As securitisation expanded beyond classic asset-backed deals, the market’s funding mechanics became more varied and less “note-centric.” Warehousing phases, liquidity management, private credit leverage and cross-border placements increasingly relied on revolving facilities, loans or hybrid instruments that behave like securities economically, even if they are not always a perfect match from a legal point of view. In that environment, the financing language of the 2004 framework began to matter in a new way. What had once been a comfortable assumption, that securitisation funding meant issuing securities, started to create uncertainty when transactions were built around different funding tools.

That was often triggered by a practical question: what exactly counts as a “security” for the purposes of the 2004 Law? For plain-vanilla note issuances, the answer was straightforward. For bespoke structures, different interpretations emerged. Some practitioners read the concept broadly to accommodate market instruments; others preferred a strict reading tied to traditional transferable notes.

The 2022 modernisation responded by adjusting the statutory vocabulary to match market practice rather than forcing market practice to keep stretching the statute. It did so in two connected steps. First, it moved from a potentially note-centric focus on “securities” to the broader concept of “financial instruments”, better suited for example to cross-border funding forms. Second, it expressly confirmed that a securitisation undertaking may fully finance itself through borrowings/loans, so the vehicle can fall within the securitisation framework even where funding comes through loans or facilities only rather than issued notes.

If the reform can be measured by what the market adopts, the broadened funding toolkit is its standout success. Based on the 2025 Market Survey conducted by PwC Luxembourg together with the Luxembourg Capital Market Association, we observe an increasing trend in the financing of structures through loans, with 27% of respondents indicating that they see this financing method in the vehicles they manage. Early insights from the 2026 Market Survey reinforce this trend, indicating that the use of loans as a financing tool for securitisation vehicles continues to develop further in the market. The direction of travel appears encouraging. As market familiarity grows and structuring practices continue to develop, the expanded funding framework is well positioned to support further growth and to strengthen Luxembourg’s role as a flexible and competitive securitisation centre in the years ahead.  

The modernisation of the Law did not only broaden how Luxembourg securitisation vehicles can be funded, it also broadened the legal form that they can take. Historically, almost all securitisation vehicles were set up as S.A. and S.à r.l.. Even though the legal form as SCA or Scoop SA were permitted since 2004, they have rarely been used. The reform now expressly allows securitisation companies to be set up in additional legal forms, including partnership-style vehicles (notably SNC, SCS, SCSp) and SAS. The idea was simple as giving arrangers more structural choice, especially for private credit-style transactions where partnership features are sometimes preferred for governance, economics, or investor alignment. The possibility to create a securitisation fund instead of a securitisation company remained but also only used by a minority.

In terms of market reaction, this reform pillar has not travelled at the same speed as the funding changes. The option is clearly valued as part of the toolbox, but it has not (yet) displaced the market’s default choices. As per PwC Luxembourg statistics, less than 1% of the new structures are opened in partnership forms (SNC, SCS, SCSp) while the most preferred option still remains S.à r.l.. We guess that the main reason for this limited market adoption may lie in the tax treatment of these partnership-style vehicles. The two partnership forms are tax transparent, meaning that income is attributed directly to the investors rather than taxed at the level of the partnership. While this feature can be beneficial in certain investment contexts, it may also limit access to Luxembourg’s network of tax treaties. Consequently, where treaty access is relevant for the transaction structure, market participants may still prefer corporate forms such as S.A. or S.à r.l..

In that sense, the reform is less a call to replace the traditional forms than a back-up option, allowing partnership or simplified structures when they better fit the transaction, without relying on workaround solutions. Over the longer term, the extent to which these alternative forms gain wider traction may shift with market evolution, particularly as private credit structures mature and investor preferences around governance, tax transparency and operational setup continue to develop.

For years, Luxembourg securitisation vehicles were expected to remain passive in relation to the management of assets/risk they acquired. That restriction mattered because a typical European cash-flow CLO/CDO relies on a collateral manager who can trade and reinvest within defined portfolio limits. Without a clear statutory basis for active management, Luxembourg was structurally less attractive for managed CLO issuance and market practice consolidated elsewhere.

Following the modernisation, Luxembourg securitisation vehicles may now be used for managed debt portfolios, meaning the assets (or the risks linked to them) can be actively managed rather than remaining static. This permission is not unlimited. It is limited to portfolios consisting of debt-type exposures, and it is paired with an important perimeter condition: where active management is used, the vehicle must not finance itself through an offer of its financial instruments to the public.

In practice, however, the shift has been gradual and Ireland remains the preferred jurisdiction for European CLO and CDO issuers, supported by long-established structuring practice and a well-developed market infrastructure. Luxembourg activity in this area is still limited, although a small number of Luxembourg-domiciled CLO issuers have begun to appear. There are still some structural limitations of the Luxembourg regime. In particular, the scope of the active management regime currently focuses on debt instruments. Expanding the framework to also cover shares or fund interests could contribute to further growth in Luxembourg. The pace of adoption remains measured, yet there are clear signs of growing interest among market participants following the introduction of the active management framework. This emerging interest is also reflected in industry observations, including the 2025 Market Survey results and early insights from 2026 Market Survey, both conducted by PwC Luxembourg together with the Luxembourg Capital Market Association, which points to continued development of Luxembourg securitisation activity and growing use of the possibilities introduced by the modernisation. The full impact of the reform has yet to unfold, and the CLO/CDO segment appears to be an area where the effects of the legislative update are still developing in practice and may become more visible as market practice continues to evolve. 

One of the most practical contributions of the modernisation was to bring precision to the supervision trigger under Article 19 of the 2004 Law. In broad terms, CSSF prudential supervision is triggered when a securitisation vehicle issues on a continuous basis and those issuances are offered to the public. The challenge was that the 2004 Law did not specify either concept. In practice, the supervisor CSSF gave an application guidance in its 2012 FAQ, but a legal interpretation was missing, particularly for programmes or repeated issuances where parties wanted to avoid unintentionally crossing into the supervised perimeter.

The reform addressed this by effectively codifying existing prudential practice into the Law. First, it turned “continuous” issuance into a measurable test by introducing a quantitative threshold: a vehicle is treated as issuing on a continuous basis if it carries out more than three issues to the public during its financial year.

Second, the modernisation defined what it means for an issuance to be “offered to the public” through a cumulative three-part test. An issue is considered public only if it is (i) not intended exclusively for professional clients, (ii) issued in denominations below €100,000, and (iii) not distributed by way of private placement. The law also makes clear that “private placement” must be assessed case by case, depending on how the instruments are marketed and distributed.

This formulation did more than add clarity. It also corrected a practical mismatch that existed before the reform. Earlier supervisory practice often referred to a €125,000 denomination benchmark, which did not sit comfortably with the Prospectus Regulation approach, where offers with a minimum denomination of €100,000 benefit from a prospectus exemption. This created a grey zone in transactions structured at €100,000 denominations. By setting the denomination threshold at €100,000, the modernised framework reduced that gap and made the perimeter more consistent with wider capital markets standards.

Overall, this reform pillar is less about expanding what securitisation vehicles can do and more about making the regulatory boundary predictable. By defining “continuous” issuance and “public offering” in the law itself, the modernised regime reduces interpretive debates, supports cleaner execution, and gives arrangers a clearer basis to structure intentionally either within or outside the CSSF supervision perimeter, depending on investor base and distribution strategy. In practice, this clarification has not translated into a larger supervised market segment. The number of securitisation vehicles subject to CSSF supervision has in fact slightly decreased in recent years. The clearer statutory tests seem to have helped market participants structure transactions with greater certainty outside the supervisory perimeter where appropriate.  

Unlike securitisation companies, funds are contractual vehicles without legal personality, and for many years they could therefore feel “invisible” in day-to-day administrative processes that expect an entity identifier. A securitisation fund could be perfectly valid under the original securitisation law, yet still face avoidable obstacles in onboarding, documentation workflows, and when a listing or similar formality required a standard register reference. The reform addressed this by requiring securitisation funds (also existing ones) to register and obtain an RCS number, primarily to remove operational friction.

In practice, the impact has been functional rather than transformative. Securitisation funds remain a minority format in the Luxembourg securitisation landscape (around 7% of securitisation undertakings as per PwC statistics), and market preference continues to lean strongly toward corporate vehicles. This also matches a broader shift in market preferences. After the first ATAD 1 changes, securitisation funds drew more attention because some sponsors and investors saw the fund format as a helpful way to adapt to the new tax rules. Since then, that demand has eased. Following the 2024 tax modernisation, many investors no longer see the same need to use securitisation funds for tax transparency reasons, and corporate vehicles have remained the more common choice. The modernisation therefore made fund structures easier to “use” administratively, but it did not, by itself, change the market’s default choice of vehicle. 

The modernisation also strengthened the rules for subordination, including them in the legal framework of the securitisation law. It sets out a legally defined default order of priority when different layers of financing exist. This is helpful especially in practice because it reduces uncertainty and defines legal subordination contrary to a purely contractual design. As an additional consequence, a financing structure following the legal subordination rules would not fall within the EU Securitisation Regulation 2017/2402 which requires a transaction to establish tranches in the meaning of “contractually established segment of the credit risk associated with an exposure or a pool of exposures” to be in scope.

For securitisation companies, the Law now describes a baseline ranking in which: (1) shares, corporate units or partnership interests sit at the bottom; followed by (2) beneficiary shares; then (3) non-fixed income debt instruments; and finally (4) fixed income debt instruments as the most senior category. Contractual arrangements can still refine the waterfall (and deals typically do), but this statutory hierarchy provides a clearer starting point and helps avoid interpretive debate.

For securitisation funds, the modernised approach is also clearer: fund units are subordinated to other financial instruments issued by the fund and to any borrowings it enters. This aligns the fund format with the same basic logic seen in corporate structures, while reflecting the specific nature of unit-holder interests in a contractual vehicle.

Overall, the reform did not replace contractual waterfalls, but it made the legal baseline more explicit across both companies and funds, which supports cleaner execution and more predictable structuring, also with regards to the EU Securitisation Regulation.  

Before the modernisation, equity-financed multi-compartment securitisation companies often faced a recurring practical issue: how to apply ordinary company-law concepts, especially the legal reserve, to a structure built on compartment segregation. For example, commercial law requires companies to allocate part of annual profit to a legal reserve (generally 5% until it reaches 10% of subscribed capital), but general accounting, company and, so far, securitisation law offer no guidance on how this should work when a single legal entity contains several fully segregated compartments containing equity financing. This created uncertainty not only on reserve allocation, but also on whether a profit-making compartment could distribute dividends when other compartments were loss-making at the same time, and on who should approve those distributions.

With the modernisation of the Law this is now clarified by allowing, where properly provided for in the constitutional documents, compartment-level decision-making for equity-financed compartments. In practice, this supports treating compartments more like separate economic “mini-entities” for reserve and dividend purposes: a profitable compartment can allocate its reserve and distribute profits based on its own results, with approvals taken by the investors of that compartment rather than by shareholders across the whole vehicle. 

Looking ahead, the modernised securitisation framework has already shown its value in bringing the Law closer to the variety of today’s transactions and ensured its flexibility for the future. The 2022 reform successfully addressed several long‑standing frictions, opened the door to new structuring possibilities and reaffirmed Luxembourg’s commitment to remaining a stable and forward‑thinking hub for structured finance. But as with any reform in a fast‑moving market, the journey is not yet complete. The current Law does not fully meet the wishes of arrangers, investors and originators. What is encouraging, however, is the momentum: both on European level with the ”Savings and Investments Union” as well as in Luxembourg industry bodies, practitioners and market participants are actively engaging with policymakers, sharing feedback and working toward a renewed securitisation framework. The dialogue is open, the willingness to modernise is real and Luxembourg’s securitisation landscape continues to evolve in the right direction and ensures that Luxembourg remains not only relevant, but truly ahead of the curve in the years to come.

Authors:

Aynur Jabbarbayli, Senior Associate, PwC Luxembourg
Andrei Radu, Director, PwC Luxembourg
Markus Zenz, Partner, PwC Luxembourg