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The Mémorial, the official journal of the Grand Duchy of Luxembourg, in its edition dated May 29 1996, published the law of May 9 1996 on netting of claims in the financial sector (loi du 9 mai 1996 relative à la compensation de créances dans le secteur financier, portant modification de la loi modifiée du 5 avril 1993 relative au secteur financier).

In implementing the netting legislation, Luxembourg has furthered the development of international transactions in the financial sector by recognizing netting as a means to reduce financial risk, especially in insolvency situations, where the effectiveness of risk-management techniques is put to the ultimate test. Covering the netting of claims in the financial sector, the new provisions have been added to the section of the 1993 Banking Act which deals with the liquidation of credit institutions.

Intense discussions between the Luxembourg Conseil d'Etat and the authors of the draft netting legislation and the Luxembourg Banks' and Bankers Association preceded the adoption of the legislation.

Discussions on the draft legislation

Although expressing a restrictive view in its opinion of the draft netting legislation, the Conseil d'Etat acknowledged the usefulness of the legislation in the sense that it creates legal security in netting transactions, allows professionals in the financial sector to participate in international interbank netting and payment systems on the same terms as those for foreign credit institutions (under their respective netting legislations) and improves prudential supervision.

Essentially, the Conseil d'Etat made the criticism that the draft netting legislation was aimed at making netting clauses globally binding against third parties, thereby derogating from Article 1298 of the Luxembourg Civil Code, which states that "... set-off may not prejudice the rights of third parties ...". It also expressed the view that the new provisions, to the extent they apply to commercial or industrial enterprises benefiting from professional access to the financial market, were ambiguous and too broad.

Adoption of the legislation on netting

In the adoption of the initial draft of the legislation on netting, the authors' views outweighed the Conseil d'Etat's comments.

First, the final version of the netting legislation does not prejudice the rights of third parties given that where a right (or a claim) has been validly transferred to a third party that right (or claim) can no longer be the subject of netting.

Secondly, although there is no definition of "commercial or industrial enterprises benefiting from professional access to the financial markets", it would not be unreasonable to say that only large companies, such as companies having finance departments comparable to those of credit institutions, would fall within the scope of the relevant description, thereby clearly excluding small or medium-sized companies. Insurance and reinsurance companies, finance companies and financial participation companies active, on a regular basis in, for example, swap and forex transactions, will presumably be covered by the new netting legislation.


Although there was a general concern that the opinion of the Conseil d'Etat would be followed and the legislation modified accordingly, parliament in the end aligned itself with the intention of the bill's sponsors. What makes the new netting legislation so attractive is that it applies to all types of transactions (and allows, for example, cross-product netting and netting of claims whatever their term or currency) that are normally documented under a master netting agreement. Also, for the netting legislation to apply, it suffices that one of the entities described in the new provisions is established or operates in Luxembourg. It further recognizes the validity of nexus clauses (clauses de connexité), automatic or express close-out clauses and termination clauses. Finally, the scope of application of the new legislation (which is its cornerstone) is wider than, for instance, in France or Belgium. As a result, Luxembourg now has well-publicized and attractive legislation in the field of netting which will promote the development of the country as a major banking and finance centre.

Henri Wagner

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