Luxembourg to boost protection of participants in funded sub-participation agreements

In a funded sub-participation agreement, the participant funds a Luxembourg lender and, in return, acquires a claim against the lender that is limited to the payments made by the borrower to the lender under the underlying loan. As the participant does not acquire a direct right against the borrower, the participant is exposed to the lender’s insolvency, ranking as a mere unsecured creditor if the lender fails.

To address this, bill of law 8813 creates a fiduciary estate by operation of law (patrimoine d’affectation) next to the general estate of the lender, whereby the assets and related obligations owed by the lender to the participant will be held on a fiduciary basis by the lender, separate from the lender’s own assets and from any other fiduciary estate. These assets are therefore ring-fenced from the lender’s creditors, and the lender’s obligation to transfer them to the participant is not affected by any insolvency or reorganisation measure affecting the lender.

From a prudential perspective, sub-participations continue to allow lenders to mutualise risk and free up regulatory capital under the CRR, thereby preserving their lending capacity. In addition, because the mechanism creates a fiduciary relationship between the lender and the participant, the participant’s claims fall outside the scope of the bail-in tool under the BRRD, while the rest of the resolution framework continues to apply.