Compliance in Progress Summary
The International Monetary Fund (IMF) conducted in 2002 a Financial System Stability Assessment, in which securities regulation practices in Luxembourg were benchmarked against the International Organization of Securities Commissions’ (IOSCO) Objectives and Principles of Securities Regulation. It concluded that the basic conditions for effective securities regulation were generally in place, and that the financial sector supervisory authority - the Commission for the Supervision of the Financial Sector (CSSF) - had sufficient powers and resources to conduct effective supervision and regulation of the securities market. Furthermore, the legal and accounting framework in Luxembourg was harmonized with European Union directives and was fully adequate to support the securities regulatory system. The only notable recommendation made by the IMF was for the CSSF to develop an internal Code of Conduct, to which the Luxembourg authorities responded by stating that such a code was being finalized. However, as of October 2009, there is no information as to whether Luxembourg has established such Code of Conduct.
General Overview
The Commission for the Supervision of the Financial Sector (CSSF), the financial sector supervisory authority, started its activities on January 1, 1999, as an independent agency under the authority of the Minister of Treasury and Budget within the Ministry of Finance (MoF), integrating the supervisory tasks of the Central Bank of Luxembourg (Banque Centrale du Luxembourg, or BCL) and the Exchanges Commission. The CSSF is responsible for the prudential supervision of credit institutions, including securities markets, banks, undertakings for collective investment, operators of payment or securities settlement systems, and pension funds. Regulatory work is the responsibility of the CSSF's internal committees, which include internal and external representatives. According to a 2002 study by Weil et al., the CSSF also deals with insider trading and declarations related to stock transactions and significant shareholdings in the capital of listed companies.
In the last Financial System Stability Assessment (FSSA) conducted in 2002, in which securities regulation practices in Luxembourg were benchmarked against the International Organization of Securities Commissions’ (IOSCO) Objectives and Principles of Securities Regulation, the International Monetary Fund (IMF) concluded that the basic conditions for the effective supervision of the securities markets "have in general been put in place" (p. 48). Internal governance procedures, including internal audit functions, were also in place. Furthermore, the assessment stated that the CSSF had sufficient resources and powers to conduct an effective supervision and regulation of the securities market. In the same report, the IMF encouraged the CSSF to develop an internal Code of Conduct. It further recommended undertaking a study of the global supervisory process, including resource allocation. The authorities responded by stating that the Code of Conduct was in the final stages of drafting and that the CSSF would implement it speedily. However, as of October 2009, there is no information publicly available as to whether the Luxembourg authorities established such a Code of Conduct. In its 2009 Article IV Consultation report on Luxembourg, the IMF notes that the country has formally requested an Update to the 2002 FSAP. However, the report does not mention a date for the exercise.
The CSSF’s 2008 annual report gives an overview of current events in the Luxembourg’s stock exchange market. According to the Markets in Financial Instrument Directive Law (MiFID) of 2007, regulated markets need written authorization from the Minister responsible for the CSSF to be established in Luxembourg. The CSSF then scrutinizes the request by the market operator, the Societe de la Bourse de Luxembourg (SBL), under the requirements of Chapter 1 of Title 1 of the MiFID law. (p.139). The report mentions a partnership between the SBL and the NYSE Euronext which was concluded in March 2007. SBL migrated securities under its operation to the Universal Trading Platform (UTP) of NYSE Euronext on 9 March 2009, resulting in the close of the 2007 NSC trading platform.
The legal and accounting framework in which Luxembourg's securities markets operate is harmonized with European Union (EU) Directives and is fully adequate to support the securities regulatory system, as stated in the IMF's 2002 assessment. Laws governing the securities market include the 1998 Law Concerning the Supervision of the Markets of Financial Assets (as amended), and the 1996 Grand-Ducal Regulation. On November 1, 2007, EU Directive No. 2004/39/EC on Markets in Financial Instruments was incorporated into Luxembourg’s law to include new provisions on transparency for shares and transaction reporting. EU Transparency Directive No. 2004/109/EC was also transposed into Luxembourg’s legislation on January 11, 2008, through the Law on Transparency Requirements, in which the supervision of transparency requirements are transferred from the Luxembourg Stock Exchange (Bourse de Luxembourg, or LSEX) to the CSSF.
According to a 2009 U.S. Department of Commerce’s (DoC) Country Commercial Guide, Luxembourg has a small but active Stock Exchange, which has a preeminent position in the international bonds (Eurobonds) sector. With 49,097 securities listed on the LSEX as of December 2008, of which bonds make up 67 percent, Luxembourg has strengthened its leading position in terms of the number of domestic and international bonds listed by a European exchange, as reported in a 2007 press release by the Luxembourg ‘s Bankers Association (ABBL). Despite a slowing down of listing activities since October 2008, the LSEX retains its leading position in terms of the number of international bonds listed by a European exchange. According to the LSEX website, this growth is demonstrated by the attractiveness of the Luxembourg financial center for admissions to trading of international securities. On an international level, the LSEX remains the primary listing center for Global Depositary Receipts. Its main role, according to its website, is to organize markets by simultaneously ensuring investor protection. The LSEX entered into a cooperation agreement with Euronext in November 2000, as well as with the Brussels, Paris, and Amsterdam exchanges, which began operations in early 2001, as noted in the 2009 U.S. DoC’s Country Commercial Guide.
The IOSCO Multilateral Memorandum of Understanding (MMoU) is based on the thirty IOSCO Objectives and Principles of Securities Regulation adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. Being a signatory to the MMoU implies that the IOSCO screening committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13 and that the country’s securities regulator has therefore the legal capacity to share supervisory information with and provide assistance to its foreign counterparts. Luxembourg's CSSF is a signatory to the MMoU and an ordinary member of IOSCO.
The Principles
FC1. The responsibilities of the regulator should be clear and objectively stated.
In its 2002 report, the IMF notes that the CSSF's "responsibilities are clear and objectively stated" (p. 49).
FC2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.
According to the IMF's 2002 assessment, the CSSF "is an operationally independent body, with a council that is responsible for approval of budgets, sanctions, and rules of management" (p. 49).
II3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
As noted in the IMF's 2002 assessment, the CSSF has sufficient resources and powers to conduct an effective supervision and regulation of the securities market, and is funded by taxes applied to entities under its supervision. Furthermore, the Minister of Treasury and Budget (within the MoF), approves licensing upon recommendation of the CSSF. The IMF report recommended undertaking a study of the global supervisory process, including resource allocation. As a follow-up to the IMF's assessment, Luxembourg’s authorities responded that they would address the issue regarding the evaluation of their supervisory effectiveness. However, there is little further information publicly available as to whether this change did occur.
II4. The regulator should adopt clear and consistent regulatory processes.
The IMF’s 2002 report notes that regulatory work is the responsibility of the CSSF's internal committees, which include internal and external representatives. Per the same report, the legal and accounting framework in Luxembourg, in which securities markets operate, is harmonized by EU Directives and is fully adequate to support the securities regulatory system. However, the IMF’s assessment does not directly address Luxembourg's compliance with this principle.
II5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
In its 2002 report, the IMF encouraged the CSSF to develop an internal Code of Conduct to address its staff's holding and trading of financial instruments. As a follow-up to the IMF's assessment, Luxembourg authorities responded that they agreed to develop and implement a Code. However, as of October 2009 there is little further information publicly available as to whether Luxembourg authorities established such a Code of Conduct.
II6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.
Under the 1998 Law concerning the Supervision of the Markets of Financial Assets (as amended), according to the IMF's 2002 assessment, the LSEX is entrusted with "the task of organizing the market for a fair access by its members and of supervising the market on a real-time basis, including the trade-execution process" (p. 49). The CSSF’s 2008 report also mentions that there are currently two markets in Luxembourg namely Luxembourg Stock Exchange, LSEX, and the “Euro Multilateral Trading Facility (EuroMTF)”, both of which are operated by the Societe de la Bourse de Luxembourg S.A. (SBL). However, per information on the LSEX, in 2009 the Luxembourg Stock exchange migrated its securities to the NYSE Euronext UTP platform. Nevertheless, there is little further information addressing Luxembourg’s compliance with this principle.
II7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
The LSEX is subject to effective oversight of the CSSF, as noted in the IMF's 2002 assessment. However, the IMF’s assessment does not directly address Luxembourg's compliance with this principle.
CP8. The regulator should have comprehensive inspection, investigation and surveillance powers.
According to the IMF's 2002 assessment, the CSSF has appropriate regulatory powers to conduct effective supervision and enforcement in the securities market. It has also the authority to "attend meetings of Stock Exchange bodies, suspend rulings, fine persons for not declaring transactions concerning listed securities, suspend decision makers in market intermediaries if they fail to observe legal, regulatory, or statutory provisions, and also suspend whole or part of an entity's business" (p. 49), the assessment stated. Furthermore, the Minister of the Treasury and Budget is responsible for the withdrawal of licenses upon recommendation of the CSSF. The IMF report notes however that Luxembourg relies heavily on the use of external auditors for on-site supervision.
CP9. The regulator should have comprehensive enforcement powers.
See Principle 8.
CP10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
See Principle 8.
EN11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
According to the IMF's 2002 assessment, cooperation between the respective supervisors within the CSSF is "good" (p. 49). Furthermore, under the 1998 Law concerning the Supervision of the Markets of Financial Assets (as amended), the CSSF has the authority to exchange information with other supervisory authorities. Per the same report, the CSSF has concluded numerous MoUs with foreign counterparts, and has ratified the "Rio Declaration" regarding mutual assistance on market oversight.
The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. Being a signatory to the MMoU implies that the IOSCO screening committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13 and that the country’s securities regulator has therefore the legal capacity to share supervisory information with and provide assistance to its foreign counterparts. Luxembourg's CSSF is a signatory to the MMoU and an ordinary member of IOSCO.
EN12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
See Principle 11.
EN13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
According to the CSSF’s 2008 annual report, the CSSF may conduct inquiries in response to a request for assistance from a foreign administrative authority within the framework of international co-operation. Also, being a signatory to the MMoU implies that the IOSCO screening committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13, and that the country’s securities regulator has therefore the legal capacity to share supervisory information with and provide assistance to its foreign counterparts.
II14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors' decisions.
As noted in the IMF's 2002 assessment, the LSEX's rules specify listing requirements, including full, timely, and accurate disclosure of financial results. Furthermore, the now abrogated 1990 Grand Ducal Regulation on issuance and listing procedures required the disclosure of information for over the counter (OTC) traded securities, except when specifically permitted by the EU Directives. According to a 2008 PriceWaterhouseCoopers’ report on the Luxembourg Stock Exchange, “issuers of the Luxembourg Stock Exchange Market are subject to the requirements of the Prospectus and Transparency Directives, including the preparation of consolidated financial information in accordance with the International Financial Reporting Standards (IFRS), or in the case of non-EU issuers, with accounting standards deemed equivalent.” Nevertheless, Luxembourg's compliance with this principle is not directly addressed.
II15. Holders of securities in a company should be treated in a fair and equitable manner.
As noted in the IMF's 2002 assessment, the LSEX's rules contain provisions for the equitable treatment of shareholders. Furthermore, the LSEX, under the supervision of the CSSF, is responsible for organizing a fair market in line with the 1998 Law concerning the Supervision of the Markets of Financial Assets (as amended) and the 1996 Grand-Ducal Regulation. However, the IMF assessment does not directly address Luxembourg's compliance with this principle.
II16. Accounting and auditing standards should be of a high and internationally acceptable quality.
The IMF’s 2002 report notes that the legal and accounting framework in Luxembourg in which securities markets operate is harmonized by EU Directives, and is fully adequate to support the securities regulatory system. Under Luxembourg's 1915 Law on Commercial Companies (as amended), firms are required to hire an external auditor to audit their accounts. Moreover, an audited financial statement is mandatory for all public offerings. In addition, according to a 2008 PriceWaterhouseCoopers’ report on the Luxembourg Stock Exchange, “issuers of the Luxembourg Stock Exchange Market are subject to the requirements of the Prospectus and Transparency Directives, including the preparation of consolidated financial information in accordance with the International Financial Reporting Standards (IFRS), or in the case of non-EU issuers, with accounting standards deemed equivalent.” Nevertheless, the IMF assessment does not directly address Luxembourg's compliance with this principle.
II17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
Per the IMF's 2002 assessment, legislation regarding collective investment schemes "is based on EU Directives and is well developed, including terms of entry, structure of Undertakings for the Collective Investment of Transferable Securities (UCITS), segmentation and protection of assets, and information to be included in prospectuses" (p. 50). However, the IMF report noted that the CSSF lacks policies on investment risk disclosure, as well as fee structures. The EU Directive on UCITS was transposed into Luxembourg law on February 13, 2007, superseding the existing law governing UCITS. Nevertheless, there is insufficient information publicly available regarding Luxembourg's compliance with this principle subsequent to the transposition.
II18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
See Principle 17.
II19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investors interest in the scheme.
See Principle 17.
II20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.
The IMF’s 2002 report notes that the UCITS law "ensures that the prospectus must state the rules for asset valuation and pricing/redemption rules" (p. 50). The EU Directive on UCITS was transposed into Luxembourg law on February 13, 2007, superseding the existing law governing UCITS. Nevertheless, there is insufficient information publicly available regarding Luxembourg's compliance with this principle subsequent to the transposition.
II21. Regulation should provide for minimum entry standards for market intermediaries.
As stated in the IMF's 2002 assessment, the Minister of Treasury and Budget approves the licensing of market intermediaries upon recommendation of the CSSF and in accordance with EU Directives. However, the IMF report does not directly address Luxembourg's compliance with this principle.
II22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
The IMF’s 2002 report notes that "capital adequacy and risk control systems are monitored through on-going supervision" (p. 50). However, the IMF report does not directly address Luxembourg's compliance with this principle.
II23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.
According to the IMF's 2002 assessment, "a licensed market intermediary has to guarantee by law a strict segregation of client assets from own assets" (p. 50). Nonetheless, the IMF report does not directly address Luxembourg's compliance with this principle.
II24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.
There is insufficient information publicly available addressing Luxembourg's compliance with this principle.
II25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
As stated in the IMF's 2002 assessment, the CSSF supervises the LSEX, which is the sole authorized exchange in Luxembourg. However, the IMF report does not directly address Luxembourg's compliance with this principle.
II26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.
The CSSF’s 2008 report states that the CSSF has been given the mandate to execute the provisions of the Law on Market Abuse of 2006, which was enacted to combat insider dealings and market manipulation/abuse. The law was enacted to ensure the integrity of the financial markets and ensure a fair playing field for all participants. The report goes on to say the CSSF initiates inquiries itself or conducts them in response to a request for assistance from a foreign regulatory body within the framework of international co-operation. However, the above report does not directly address Luxembourg's compliance with this principle.
II27. Regulation should promote transparency of trading.
The LSEX reports all trades in listed securities on a daily basis, as noted in the IMF's 2002 assessment. Daily reports are also received from the LSEX's market surveillance department. Furthermore, investment firms notify the CSSF of all OTC-transactions or trades on other stock exchanges. According to the CSSF’s 2008 report, the CSSF keeps abreast of market activities and related issues daily through active reports provided by the market operator, SBL, and has the authority to access information on stock exchange transactions electronically. Nevertheless, the above reports do not directly address Luxembourg's compliance with this principle.
II28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.
The CSSF, according to the IMF's 2002 assessment, is required to directly report any breach of the law regarding insider trading or market manipulation to the public prosecutor. Additionally, the CSSF 2008 report states that the CSSF has been given the mandate to execute the provisions of the Law on Market Abuse of 2006, which was enacted to combat insider dealings and market manipulation/abuse. The law was enacted to ensure the integrity of the financial markets boost, ensuring a fair playing field for all participants. The report goes on to say the CSSF initiates inquiries itself or conducts them in response to a request for assistance from a foreign regulatory body within the framework of international co-operation. However, the above reports do not directly address Luxembourg's compliance with this principle.
II29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
According to the IMF's 2002 assessment, the LSEX reports all trades in listed securities on a daily basis. Daily reports are also received from the LSEX's market surveillance department. Furthermore, investments firms notify the CSSF of all OTC-transactions or trades on other stock exchanges. The above-mentioned reports enable the CSSF to detect large exposures of intermediaries. In addition, "both the CSSF and LSEX have responsibilities towards combating market disorders" (p. 50). Nevertheless, the IMF report does not directly address Luxembourg's compliance with this principle.
II30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.
The IMF’s 2002 report notes that securities transactions settlement mainly occurs through Clearstream Banking Luxembourg S.A. (CBL), which is supervised by the CSSF. The CBL's clearing functions are however subject to oversight by the BCL. Regarding post-trade activities, the CSSF’s 2008 report states that a central counterparty model was set up in collaboration with the French LCH. Clearnet S.A. that allows members to operate with CBL and Euroclear Bank to ensure the settlement and the delivery of securities. It also mentions that regulated markets may agree upon appropriate arrangements with such systems established in Luxembourg or in any other member country with the objective to provide settlement or clearing of some or all trades, concluded by their members under their systems, in accordance with Article 15 of the Law on Markets in Financial Instruments. However, the above reports do not directly address Luxembourg's compliance with this principle.
