A draft update of Luxembourg’s covered bond legislation is being circulated, which The Covered Bond Report understands could remove the specialist bank principle from the country’s framework.

Luxembourg's Chambre des Députés

An official at a Luxembourg issuer said that the draft has been out since Friday and is yet to be discussed by interested parties, so further details could not be released.

However, a market participant said the main change in the update will be to remove the specialist bank principle in favour of allowing universal banks to issue covered bonds.

Luxembourg’s lettres de gage framework was established in 1999 and drew upon Germany’s Pfandbrief market, which was centred on the specialist bank principle, whereby the activities of most issuers were restricted. However, this was removed when a new Pfandbrief Act was introduced in 2005, allowing universal banks to issue.

Bankers in the duchy have been working on possible changes to Luxembourg’s legislation for some time, according to Michael Schulz, head of fixed income research at NordLB.

“They have been planning to bring in this new legislation since 2010,” said, “but developing a new legislation needs time.

“I know now that the process is speeding up now.”

There are five covered bond issuers in Luxembourg: Dexia LdG Banque, Eurohypo Luxembourg, NordLB Covered Finance Bank, Hypo Pfandbriefbank International (a subsidiary of Hypo Real Estate), and Erste Europäische Pfandbrief- und Kommunalkreditbank, wholly owned by Commerzbank.