Since the 1980s, a large number of international asset management firms have chosen to establish Management Companies, investment firms and investment vehicles in the Grand Duchy.
However, not all of the industries activities are undertaken from one location. Some asset managers opt to have their investment team based where their regional investment expertise lies. This allows them to entrust administration and oversight of their investment vehicles to Luxembourg entities.
In Luxembourg this has meant a growing number of Management Companies taking out AIFM and MiFID licenses and so opening a whole new area of growth for the local industry and a bigger asset servicing footprint. Investment managers also frequently use Luxembourg as the location to develop their Europe-focused asset allocation strategies.
Management companies for UCITS and AIFs
Every investment fund needs an entity that is responsible for its overall performance, risk management, compliance, administration and marketing. While certain funds are “self-amangers”, the more common approach is to have a fund managed by a Management Company or an AIFM.
A Management Company is authorized to manage UCITS funds, while an Alternative Investment Fund Manager (AIFM) is a Management Company authorised to manage alternative investment funds. Management Companies authorised under the UCITS directive may also apply for authorization as an AIFM in order to manage both. These are known as “Super Management Companies”.
UCITS and AIFs benefit from a European “passport”, meaning they can be marketed in any EU Member State with a simple notification.
Third-Party Management Companies
The third-party Management Company is a modern approach to improving fund governance and access to funds for asset managers. The concept is to allow professionally overseen investment vehicles to be used by external asset managers. The third-party Management Company focuses on the fund’s governance, risk, compliance, administration and reporting, leaving the investment manager to focus on the fund’s performance and reducing their administrative requirements.
The third-party management model is widely understood by the industry and the quality of service providers in Luxembourg allows all types of asset managers, from boutiques and mid-rage funds, to large players, to set up vehicles for global distribution without having to create large oversight teams
Luxembourg has become the default setting for alternative assets due to its stable legal system and government, as well as the presence of the world’s biggest asset managers. They all have their centres of operations here, which makes the Luxembourg financial centre very powerful and makes a huge difference to our ecosystem.
Distribution – i.e. the “marketing” or “sale” of funds – is one of the most critical aspects of the asset management lifecycle and is crucial to the success of any fund. However, distribution is a complex business. Investors can have local preferences and may take a traditional approach to buying funds, be it via fund platforms, intermediaries or direct sales.
The Luxembourg fund industry is now the leader in global fund distribution. The local ecosystem has the necessary expertise to overcome most obstacles that arise in worldwide fund distribution because of its understanding of the legal, technical, operational and cultural complexities of the global asset management industry.
Banks specialised in fund services, and the provision of a local and international network of private banking and corporate finance relationships, in Luxembourg can be used to efficiently distribute funds. Additionally, many service providers within the Grand Duchy can also facilitate the direct distribution of funds, as well as the oversight and control of a fund’s distribution network
Fund administration includes all operational functions in the broadest sense of the term. Every fund transaction, subscription, redemption, investment etc. must be recorded according to applicable laws and market practice, and maintained on an ongoing basis, both at fund level and through the custody chain.
Depending on the asset class, fund administration must be carried out multiple times per day, some even instantaneously (e.g. valuation of ETFs), while other asset classes have less frequent – but more complicated – tasks.
The Luxembourg asset management system is very robust. It has everything under one roof, a pioneering regulator, international asset managers, highly skilled lawyers, consultants, and trustworthy auditors. It’s a very well-connected ecosystem and it works very well.
Luxembourg law requires some tasks related to fund administration to be carried out in the Grand Duchy. However, some of these can be outsourced to the wide range of specialist service providers present in Luxembourg.
Banks and Fund Services
Banks provide core services to funds and asset managers, such as safekeeping fund assets (custody) and depositary solutions.
All investment funds appoint a depositary to ensure safekeeping (custody) and segregation of fund assets. A depositary bank has a dual mission: safeguarding the assets of the collective investment scheme and monitoring the lawfulness of its activities.
A depositary bank may also perform the role of registrar, paying agent, transfer agent and domiciliation agent. The role of depository bank goes beyond safekeeping assets as it plays a key role in the oversight of investment funds and it may also carry out a wide range of ancillary administrative tasks for the fund.
Banks in Luxembourg are particularly reliable in terms of solvency and liquidity, having a national average for Tier 1 Capital of 22.1%. The stability and financial health of Luxembourg’s banks is also supported by the country’s AAA sovereign rating, making it a very safe place to safeguard and domicile funds.
Transfer Agents and Registrar
The Luxembourg Transfer Agent model is based on registered shares, and it is usually performed by a trust, a bank or a Professional of the Financial Sector.
The TA records transactions, subscriptions and redemptions, processes investor mailings and issues registered certificates at investors’ request. An independent Registrar limits its operations to keeping records of registered owners and depository entities responsible for a publicly issued security.
The Luxembourg TA model offers an advantage for investors who are named directly in the share register of the fund since they can avoid custody charges levied by an intermediary custodian. This increases its appeal to digital financial distribution platforms.
Professionals of the Financial Sector
Many independent service providers in Luxembourg offer one or more of these fund administration services. To do so, they operate under a specific licence as Professionals of the Financial Sector (PFS).
PFS are further subdivided into three categories: Support PFS, Specialised PFS and Investment PFS. These specialist service providers are authorised and regulated by the financial sector supervisory authority, the CSSF.
Luxembourg law recognises a number of different PFS investment first and specialised PFS firms, providing various different services. Support PFS firms are covered under a wide range of activities under the law, however similar to Specialised PFS’ they do not benefit from a European passport. PFS investment firms, on the other hand, do benefit from the passport and are therefore able to offer their services across the EU.
Financial market infrastructures is essential to ensuring the smooth functioning of financial operations, such as listing, payments (cash transfers), clearing and securities settlement (shares, bonds, fund units, etc.). Given the large volumes that market infrastructure handle, their operations are vital to ensure that all financial transactions are completed correctly and to maintaining financial stability.
Market infrastructure in Luxembourg include the Luxembourg Stock Exchange, fund platforms and International Central Securities Depositories. These are all part of the asset management value chain.
The Luxembourg Stock Exchange
Established in 1927, the Luxembourg Stock Exchange is today the primary centre for the listing of international securities and also lists UCITS, AIFs, and Exchange Traded Funds (ETFs).
The Luxembourg Stock Exchange has three listed markets: The first is for securities admitted to trading on the regulated ‘Bourse de Luxembourg’; The second is for securities admitted to trading on the ‘Euro MTF’ market; the third is for securities admitted to the LuxSE Securities Official List (SOL), without admission to trading on either of the two markets operated by the Luxembourg Stock Exchange.
Fund platforms support an open architecture model of fund distribution, providing many-to-many connections and order routing between fund initiators, fund distributors and investors.
Platforms based in Luxembourg provide international distribution of fund information and documents, as well as order routing and information services aimed at facilitating cross-border fund distribution.
Central Securities Depositories
Luxembourg is home to one of only two international central securities depositories (ICSDs) worldwide. This ICSD acts as an issuer CSD for international securities, leveraging a global network of common depositories to ensure international issues can be distributed cost-effectively and efficiently in multiple currencies worldwide.
Luxembourg also operates a national CSD, responsible for the issuance, settlement and custody of Luxembourg securities. This CSD also offers access to the European Central Bank (ECB) TARGET2-Securities (T2S) facility.
Banks provide collateral management services to manage risk, improve front office decision making, and minimise the impact on portfolio performance, so sparing clients the heavy investment needed to comply with complex collateral requirements.
Luxembourg has always been a step ahead in terms of collateral management due to its early exposure to cross-border assets and multiple currencies. It has also been home to trailblazers in the field, with Automated Securities Lending in the 1980s, and in 1992 with the Luxembourg- based Centrale de Livraison de Valeurs Mobilières (CEDEL – today known as Clearstream) organising the first European triparty repo transaction.
In recent years, financial markets have developed instruments that are specifically designed to raise money for sustainable development goals. Luxembourg has been at the forefront of this development, thanks to close cooperation between the public, private, and civil society sectors.
Today, Luxembourg is the primary centre for listing sustainable bonds, the leading European domicile for impact funds, and a pioneer in the area of sustainable finance labels for more than a decade.