Luxembourg: an innovative leader for the listing of new products

The Grand Duchy of Luxembourg (Luxembourg) has always been at the forefront of the financial markets' and the securities industry's trends and evolutions. Over the years, it grew to become a renowned financial centre with one of the world's safest business environment, notably as a result of its financial, political and social stability and innovative approach of the financial sector. As such, issuers and investors in Luxembourg benefit from strong and stable regulatory and tax frameworks, in line with European Union directives and regulations as well as from the presence in Luxembourg of many cutting edge advisors (law firms, banks, consulting firms). Luxembourg also benefits from a typically quick implementation of European legislation by the Luxembourg authorities, which ensures a predictable and an up-to-date legal framework.

As a result of this favourable legal and regulatory environment and flexible approach to the securities industry, the Luxembourg Stock Exchange (the LuxSE) has become an attractive international marketplace for the listing of securities.

The LuxSE was founded in 1928 and has from its inception offered an innovative marketplace for international issuers and for a large range of securities. Operating in an attractive environment for issuers and having the broadest range of securities listed in Europe, the LuxSE has gained strong market recognition and reputation among international issuers. According to recent figures published by the LuxSE, the markets it operates combine over 40,000 quotation lines of securities, of which more than 26,000 are debt securities, in 54 currencies from over 3,000 issuers in more than 100 countries. 2014 confirmed the leading position of the LuxSE with the listing of 10,669 new securities valued at more than €1tn from 750 issuers. To date, 40% of international securities listed in Europe and 20% of international securities listed worldwide are listed on the LuxSE. Listing in Luxembourg is now a widely recognised label.

The LuxSE is known for offering professional customer-oriented services and providing a fast, flexible and secured listing process as well as competitive fees. The LuxSE also handles efficiently and proactively innovative listing requests. It has indeed a long track record in the listing of "market firsts" products.

The benefits of a listing in Luxembourg are manifold. Not only a listing in Luxembourg enhances the visibility of the product towards international investors, but it also strengthens the transparency of financial information. A listing in Luxembourg also ensures a cost-efficient solution and predicable listing process. Worth noting, a listing on the LuxSE automatically implies admission to trading on the Euronext UTP platform, thus enabling access to a widespread pool of potential investors.

At present the LuxSE operates two markets: (i) a regulated market within the meaning of Directive 2004/39/EC on markets in financial instruments, as amended (MiFID) (the Regulated Market), and (ii) the exchange regulated market called Euro MTF, set up in 2005 as a multilateral trading facility within the meaning of MiFID, which provides an alternative market to the European Union regulated markets and is now well known to international issuers, ranging from emerging market sovereign issuers to leading financial institutions (the Euro MTF).

Whereas the Regulated Market falls within the scope of various European Directives, in particular (i) Directive 2003/71/EC, as amended (the Prospectus Directive), (ii) Directive 2004/109/EC, as amended (the Transparency Directive), (iii) Directive 2004/25/EC (the Takeover Directive) and (iv) Directive 2003/6/EC (the Market Abuse Directive), the Euro MTF on the other hand, lays outside of the scope of these EU regulations (although certain rules pertaining to the prohibitions of insider dealing and market manipulation deriving from the Market Abuse Directive will also apply in case of securities listed on the Euro MTF).

As opposed to an application to trading of securities on the Regulated Market which requires the prior approval by the Luxembourg Supervisory Commission of the Financial Sector (the CSSF) of a Prospectus Directive compliant prospectus, an application to trading of securities on the Euro MTF requires the drawing up of a prospectus in accordance with the rules and regulations of the LuxSE (the Rules) and the LuxSE will be the only authority in charge of the prospectus approval and listing application process as well as of the supervision of compliance with disclosure and reporting obligations. However, only the Regulated Market offers the possibility for issuers to benefit from the European passport, which on the basis of an already approved Prospectus Directive compliant prospectus, allows them to apply for the admission to listing and trading of these securities on a regulated market in another Member State of the European Union.

As a result of less stringent requirements, including post-listing disclosure and reporting requirements (most of which are set out in the Rules), the Euro MTF experienced a continuous growth since 2013, appearing as viable listing venue even in times of crisis. It represents to date approximately 25% of the securities listed on the LuxSE.

The LuxSE has ensured to maintain its first mover attitude over the years. To date, it still remains the first in line for the listing of new products. By doing so, the LuxSE has greatly contributed to making Luxembourg one of the key players in the development of international capital markets. As an example of its forefront approach, the LuxSE listed the first Eurobond in 1963. More recently, the LuxSE along with the Luxembourg authorities have been actively working to develop Luxembourg as an Islamic finance hub and make Luxembourg a popular listing venue for Sukuk (commonly referring to the Islamic equivalent of bond instruments), which led to the listing in Luxembourg of the first international sovereign Sukuk (Malaysia) in 2002. Since then, Luxembourg has become one of the key places in Europe for the listing of Sukuk. Over the last year alone, several Sukuk have been listed on the LuxSE, including one Sukuk issued by Goldman Sachs and 3 sovereign state Sukuk. In total, 20 Sukuk have been listed on the LuxSE since 2002 for a total amount in excess of US$9.5bn. In view of boosting Islamic finance in Luxembourg, the first sovereign Sukuk of the Eurozone was issued by the Luxembourg State in October 2014 for an amount of €200m and subsequently listed on the LuxSE.

Another area of particular focus lies with the Renminbi (RMB) denominated debt products, generally referred to as "Dim Sum Bonds" (or "offshore RMB Bonds"). This area of focus goes hand in hand with the larger initiative launched by the Luxembourg authorities to make Luxembourg the centre for the RMB business in the Eurozone.

For several decades already, there have been strong economic ties between China and Luxembourg coupled with a recent initiative to attract RMB business in Luxembourg. A first landmark was the establishment of a Luxembourg branch by Bank of China in 1979. Since then, the six largest Chinese banks have established presence in Luxembourg. Efforts have paid off when Industrial and Commercial Bank of China, Bank of China and China Construction Bank have made of Luxembourg their European hub. Luxembourg is nowadays the leading offshore financial centre for RMB in Europe. In parallel, Luxembourg has also grown to being the main recipient of Chinese foreign direct investment flows to Europe.

Before 2010, only Chinese and Hong Kong banks were allowed to issue Dim Sum Bonds. As a result of the efforts made to internationalise the RMB business, Dim Sum Bonds have become a growing portion of China's total local currency debt. Whilst being undoubtedly one of the world's most attractive destination for foreign investments, China is altogether seeking to internationalise its currency to continue attracting further foreign investments. In this respect, Dim Sum Bonds have proven to have substantial benefits in comparison with other types of debt securities. On the issuers' side, Dim Sum Bonds constitute a diversified and competitive source of financing, and furthermore entail lower transaction costs for companies which export to or import from China. Also, issuers of RMB denominated bonds are able to increase their margins by reducing forex transaction costs. At the same time, on the investors' side, Dim Sum Bonds enable them to benefit from potential appreciation of the RMB against the US$ and generally from the Chinese capital market growth.

The LuxSE has been very active in making Luxembourg becoming the leading Dim Sum Bonds listing venue outside Asia. About two thirds of Dim Sum Bonds listed on European stock exchanges are listed in Luxembourg. The LuxSE was the first stock exchange to list a Dim Sum Bond in Europe in 2011, issued by Volkswagen. Since then, 86 RMB denominated bonds have been listed on the LuxSE, with a large variety of issuers including many from Asia. The total capital raised through Dim Sum Bonds on the LuxSE amounts to US$54bn. In 2014, the LuxSE listed the first "Schengen Bond", that is, the first RMB denominated bonds in the Eurozone issued by a Chinese mainland company (Bank of China). This first offshore RMB denominated bond was named "Schengen Bond" by reference to the name of a small town at the borders of Luxembourg, France and Germany which symbolises free movement within Schengen Member States, but also at the same time referring to the pronunciation of "Schengen" in Chinese which stands for "root here and develop here".

In line with its strategy to develop Dim Sum Bonds listing, the LuxSE has recently signed memoranda of understanding with a number of Chinese stock exchanges (such as the Shanghai Stock Exchange, the Shenzhen Stock Exchange, the Hong Kong Stock Exchange and the Taipei Exchange) but also directly with banks (such as Bank of China and Industrial and Commercial Bank of China).

In addition to Dim Sum Bonds, the LuxSE is also a leading listing venue for warrants with Chinese companies and other China related securities as underlying asset. Currently, 47 out of the 50 issuers included in the SSE50 (Shanghai Stock Exchange index) are present on the LuxSE as underlying of warrants.

The granting of a 50 billion RMB Qualified Foreign Institutional Investor Program (RQFII) quota to Luxembourg by the People's Bank of China on 20 April 2015 is expected to further consolidate Luxembourg's position as one of the leading offshore RMB centres in the Eurozone.

In times of uncertainties and rapid evolution of the capital markets and securities industry, Luxembourg will continue to provide issuers and investors with a stable and secure business environment and will continue to develop its capital markets business by consolidating its position as market leader, notably in the fields of Islamic finance and RMB business. In respect of the latter, Luxembourg is expected to remain a key player in Europe, thanks to supporting initiatives from the Luxembourg authorities and the impressive dynamism put forward by the multiple Luxembourg-based actors.

		Judith Raijmakers T: +352 466 230 208 E: Judith.Raijmakers@loyensloeff.com	About the authors Judith Raijmakers, Cédric Raffoul and Arnaud Barchman are members of the capital markets team within Loyens & Loeff Luxembourg and regularly advise Luxembourg and foreign corporate clients and financial institutions on capital markets and financing transactions including debt and equity transactions, initial public offerings, takeovers, placements of securities, listings, transparency requirements and on all related regulatory matters in securities law and capital markets regulation. They have accumulated significant experience in the fields of securities laws in general, including innovative issuances and listings such as Dim Sum Bonds. The capital markets team further provides the full range of listing agency services with the Luxembourg Stock Exchange.
		Cédric Raffoul T: +352 466 230 415 E: Cedric.Raffoul@loyensloeff.com
		Arnaud Barchman T: +352 466 230 311 E: Arnaud.Barchman@loyensloeff.com Loyens & Loeff Luxembourg S.à r.l. 18-20 rue Edward Steichen L2540 Luxembourg T: +352 466 230 F: +352 466 234 www.loyensloeff.lu