Luxembourg
07 January 2011
At the heart of Europe, Luxembourg has long prided itself on being ahead of the game when it comes to financial services. And securities lending is no exception.
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The Grand Duchy of Luxembourg is one of those countries that seasoned Euro travellers often miss out on - a tiny dot on the map, little is known about its history, its culture or its attractions. But in the financial world, Luxembourg is a colossus that has been punching above its weight for decades.
In part this is down to geography. Luxembourg is right in the heart of Europe, and it’s easy to get to from most of the major financial centres elsewhere on the continent. But the country’s success is mostly down to the commitment of its leaders to become the leading domicile for funds in the European time zone.
It faces competition of course. Dublin has been able to attract some serious players and is now a major jurisdiction in its own right. Gibraltar, Malta and the Channel Islands also play a large role in the European fund industry. But for decades Luxembourg has been pre-eminent, and considering the stability it showed throughout the recent turmoil, its position at the pinnacle is unlikely to change any time soon.
One of the key advantages of Luxembourg is its workforce. Having been a major funds centre for decades, the country boasts a highly qualified pool of staff, mainly from Belgium, France and Germany, as well as locals, who are fluent in the major languages and experienced in all aspects of the funds industry. Over 500 fund promoters are based in the country, and the technological infrastructure also means it is straightforward for businesses based there to sell across the continent.
But its regulation that’s the key. Luxembourg was the first European jurisdiction to allow cross border distribution of funds. So a firm could base itself in the Duchy and sell across several countries from one hub. It’s estimated that 80 per cent of European funds that are sold in three or more countries are domiciled in Luxembourg.
It’s also been quick on the uptake when it comes to integrating trans-national regulations. As one of the first countries to be ready for UCITS I and UCITS II, Luxembourg was also one of the first countries to introduce UCITS III into national law in December 2002, a move welcomed by the local fund industry. In fact, the only barrier holding Luxembourg-based funds back is the speed at which other countries have been introducing the legislation - at present there are still restrictions in some jurisdictions on selling UCITS III funds.
Since 2002, Luxembourg has become an increasingly important destination for hedge funds, an area that it didn’t see much of prior to that time. An investment circular published by the Commission du Surveillance du Secteur Financier (CSSF) increased the appeal of the jurisdiction for hedge funds, and further moves - such as the abolition of subscription tax for triple A funds that are solely for institutional investors have increased the inflows of funds to the country. The new hedge fund laws didn’t really change anything; they simply formalised the regulation for what had been generally understood in the markets for some years.
However, the fact that there are now formal laws has reassured a jittery market. The downturn of the past couple of years meant some offshore jurisdictions became wary of a flight to perceived quality - countries where the regulations were understood by regulators and governments who remained concerned that some areas of the financial industry were out of control. While Luxembourg of course experienced some ructions during the downturn, the impact was surprisingly low - due in significant part to the confidence both the industry and European governments had in the strength of the infrastructure of the country. And while there will always be complaints about the favourable tax status Luxembourg-based funds may receive, the mutterings about Luxembourg have been far more muted than in other jurisdictions, such as Dublin.
The main issue affecting providers in Luxembourg has been simply keeping up with the volume of new regulations and laws coming through over the past couple of years as governments and regulators have panicked and tried to bring in barriers to further market turmoil. Whether it’s on a cross-border level, such as the European Union Savings Directive or the impact of US laws such as Dodd-Frank, the new International Accounting Standards or local legislation, such as the recent German tax rules, the workload for some providers has become intolerable.
“As a small firm, we were spending more and more of our time and budget on preparing for new regulation,” says one previous country manager at a boutique administration firm that has now been bought by a larger player. “There have always been issues with economies of scale, but because we offered a bespoke service we could still manage to give our customers the experience they needed. But with all the changes that have taken place in recent years we couldn’t keep up and it’s worked out for the best for both us and our clients that we are now part of a much larger organisation.”
Consolidation has become the name of the game here. Many of the global players have made acquisitions, while several local names have merged. Further consolidation is expected.
The pension fund market has not been quite so successful. Although the law was changed more than a decade ago to allow pension funds to be launched in Luxembourg, so far only a handful have decided to do so. Taxation is thought to be the reason for this.
“Taxation hinders the creation of cross-border pension funds,” says Stephane Ries, head of relationship management at the Investment Fund & Global Custody Department of Kredietbank S.A. Luxembourgeoise. “Luxembourg acknowledged it could not attract many multinational pension funds and began to focus on getting the assets of those funds into the domicile. Nowadays, if a multinational company is running several pension funds for the benefit of its employees, it can create a single investment fund in Luxembourg in order to leverage off economies of scale in pensions management. Luxembourg has just introduced an exemption from the taxe d’abonnement for these funds, which are also called pension-pooling vehicles.”
One area where large amounts of growth is expected is in the servicing of alternative funds. SICARs and property funds are expected to become more popular, and the industry within Luxembourg is gearing up to service these different models.
Securities lending
Luxembourg is more of an administration centre than a jurisdiction where actual trading is carried out, and this is reflected in the limited amount of securities lending business that happens in the country.
But that’s not to say it doesn’t have an impact. “We’re in Luxembourg not only for the administration services we offer, but because it is a vital hub for the information that we can provide our clients,” says one back and middle office provider. “The data that we have is used by the Luxembourg-domiciled funds through their offices in this country for trades across Europe and the rest of the world. However, we carry out virtually no securities lending activity in the country itself. And I’m pretty sure no-one else does either.
In part this is down to geography. Luxembourg is right in the heart of Europe, and it’s easy to get to from most of the major financial centres elsewhere on the continent. But the country’s success is mostly down to the commitment of its leaders to become the leading domicile for funds in the European time zone.
It faces competition of course. Dublin has been able to attract some serious players and is now a major jurisdiction in its own right. Gibraltar, Malta and the Channel Islands also play a large role in the European fund industry. But for decades Luxembourg has been pre-eminent, and considering the stability it showed throughout the recent turmoil, its position at the pinnacle is unlikely to change any time soon.
One of the key advantages of Luxembourg is its workforce. Having been a major funds centre for decades, the country boasts a highly qualified pool of staff, mainly from Belgium, France and Germany, as well as locals, who are fluent in the major languages and experienced in all aspects of the funds industry. Over 500 fund promoters are based in the country, and the technological infrastructure also means it is straightforward for businesses based there to sell across the continent.
But its regulation that’s the key. Luxembourg was the first European jurisdiction to allow cross border distribution of funds. So a firm could base itself in the Duchy and sell across several countries from one hub. It’s estimated that 80 per cent of European funds that are sold in three or more countries are domiciled in Luxembourg.
It’s also been quick on the uptake when it comes to integrating trans-national regulations. As one of the first countries to be ready for UCITS I and UCITS II, Luxembourg was also one of the first countries to introduce UCITS III into national law in December 2002, a move welcomed by the local fund industry. In fact, the only barrier holding Luxembourg-based funds back is the speed at which other countries have been introducing the legislation - at present there are still restrictions in some jurisdictions on selling UCITS III funds.
Since 2002, Luxembourg has become an increasingly important destination for hedge funds, an area that it didn’t see much of prior to that time. An investment circular published by the Commission du Surveillance du Secteur Financier (CSSF) increased the appeal of the jurisdiction for hedge funds, and further moves - such as the abolition of subscription tax for triple A funds that are solely for institutional investors have increased the inflows of funds to the country. The new hedge fund laws didn’t really change anything; they simply formalised the regulation for what had been generally understood in the markets for some years.
However, the fact that there are now formal laws has reassured a jittery market. The downturn of the past couple of years meant some offshore jurisdictions became wary of a flight to perceived quality - countries where the regulations were understood by regulators and governments who remained concerned that some areas of the financial industry were out of control. While Luxembourg of course experienced some ructions during the downturn, the impact was surprisingly low - due in significant part to the confidence both the industry and European governments had in the strength of the infrastructure of the country. And while there will always be complaints about the favourable tax status Luxembourg-based funds may receive, the mutterings about Luxembourg have been far more muted than in other jurisdictions, such as Dublin.
The main issue affecting providers in Luxembourg has been simply keeping up with the volume of new regulations and laws coming through over the past couple of years as governments and regulators have panicked and tried to bring in barriers to further market turmoil. Whether it’s on a cross-border level, such as the European Union Savings Directive or the impact of US laws such as Dodd-Frank, the new International Accounting Standards or local legislation, such as the recent German tax rules, the workload for some providers has become intolerable.
“As a small firm, we were spending more and more of our time and budget on preparing for new regulation,” says one previous country manager at a boutique administration firm that has now been bought by a larger player. “There have always been issues with economies of scale, but because we offered a bespoke service we could still manage to give our customers the experience they needed. But with all the changes that have taken place in recent years we couldn’t keep up and it’s worked out for the best for both us and our clients that we are now part of a much larger organisation.”
Consolidation has become the name of the game here. Many of the global players have made acquisitions, while several local names have merged. Further consolidation is expected.
The pension fund market has not been quite so successful. Although the law was changed more than a decade ago to allow pension funds to be launched in Luxembourg, so far only a handful have decided to do so. Taxation is thought to be the reason for this.
“Taxation hinders the creation of cross-border pension funds,” says Stephane Ries, head of relationship management at the Investment Fund & Global Custody Department of Kredietbank S.A. Luxembourgeoise. “Luxembourg acknowledged it could not attract many multinational pension funds and began to focus on getting the assets of those funds into the domicile. Nowadays, if a multinational company is running several pension funds for the benefit of its employees, it can create a single investment fund in Luxembourg in order to leverage off economies of scale in pensions management. Luxembourg has just introduced an exemption from the taxe d’abonnement for these funds, which are also called pension-pooling vehicles.”
One area where large amounts of growth is expected is in the servicing of alternative funds. SICARs and property funds are expected to become more popular, and the industry within Luxembourg is gearing up to service these different models.
Securities lending
Luxembourg is more of an administration centre than a jurisdiction where actual trading is carried out, and this is reflected in the limited amount of securities lending business that happens in the country.
But that’s not to say it doesn’t have an impact. “We’re in Luxembourg not only for the administration services we offer, but because it is a vital hub for the information that we can provide our clients,” says one back and middle office provider. “The data that we have is used by the Luxembourg-domiciled funds through their offices in this country for trades across Europe and the rest of the world. However, we carry out virtually no securities lending activity in the country itself. And I’m pretty sure no-one else does either.
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