UCITS: impact of the covered bonds reform

As part of the implementation of Directive (EU) 2019/2162 on the issue of covered bonds and covered bonds public supervision (“Covered Bonds Directive”), the Law of 8 December 2021  (Loi du 8 décembre 2021 relative à l’émission de lettres de gage) (“Law”) amends, amongst other things, the provision of the UCI Law on the single issuer limit which applies to UCITS.

Article 43 of the UCI Law currently allows Luxembourg UCITS to raise the general 10% single issuer limit up to 25% when they invest their assets in certain covered bonds issued by the same issuer.

According to the Law, the benefit of the 25% single issuer limit will be limited in the future to UCITS investing in the following covered bonds:

• Bonds that fall under the definition of covered bonds provided for by the Covered Bonds Directive; and
• On a transitional basis, certain bonds (including mortgage bonds) that have been issued before 8 July 2022 and meet the previous requirements set out in Article 43(4) of the UCI Law on the date of their issue, i.e. bonds that have been issued by a credit institution which has its registered office in a Member State and is subject by law, to special public supervision designed to protect bondholders.
  
  In this case, these bonds may continue to be referred to as covered bonds in accordance with the Covered Bond Directive and to remain invested by Luxembourg UCITS under the benefit of the 25% single issuer limit until their maturity.

The changes detailed above will start to apply on 8 July 2022.