Luxembourg: a financial centre at the service of the European economy

ABBL and ALFI EU Representative Office in Brussels

Chairmen’s foreword

Luxembourg: a financial centre at the service of the European economy

Bringing the economy back to full speed and restoring solid growth is an important – maybe THE most important – project currently being taken on by the European Union. As a truly international financial centre, Luxembourg is ready to actively play its role in this crucial mission for the economy and society at large.

Luxembourg has become the second largest investment fund centre worldwide with over 2,800 billion euros in assets under management and the largest private banking centre in the eurozone with 300 billion euros. The inflow of capital from all over the world implies extremely liquid banks, which are also depositaries for global investment funds and hence important liquidity providers for their group. This liquidity in turn is used by parent compa-nies to finance the economy in Germany, France, Italy, the rest of the EU or even the world.

Luxembourg investment funds also invest directly or via trading platforms such as stock markets in shares of local and global companies as well as in corporate and sovereign debt. In March 2014 Luxembourg investment funds invested i.a. 868 billion euros in bonds and 812 billion euros in equity.

Also, as a major financial centre for private equity, its funds invest directly in European companies. A crucial part is also played by venture capital when investing in young and promising start-ups worldwide (e.g. Skype, SurveyMonkeys, Linkedin, Twitter, Tesla, Genentech, Planetary Resources, etc.) Furthermore, Luxembourg is the leading microfinance fund centre internationally and its funds provide liquidity that ultimately helps micro entrepreneurs to set up and expand their small businesses in developing economies as well as in some of the EU Member States. With a 25.1% share of European assets, Luxembourg is also a growing financial centre for Socially Responsible Investment (SRI), therefore playing its part in fostering social aspects of the European economy.

Luxembourg is also a retail and commercial banking service provider for the 11.3 million inhabitants and 375,000 businesses of the entire Greater Region, composed of Luxembourg, the Länder of Rhineland Palatinate and Saarland in Germany, Wallonia in Belgium, and the Lorraine region in France.

The Luxembourg financial centre directly represents around 50,000 jobs for locals and for tens of thousands of the 160,000 daily commuters from Germany, France and Belgium, thereby significantly reducing the unemployment rates in these regions and contributing to the economy of the Greater Region through the spending power of these employees.

Finally, taxes are the revenues that allow the State to function and to invest in the economy and local and cross-border infrastructure projects. The financial centre contributes around one third of the Luxembourg State budget.

Looking ahead to the future, the European Commission has embarked on a project aimed at fostering long-term investments. The Luxembourg financial centre supports this project in particular and sustainable and long-term growth in general. This is the main challenge for the 2014-2019 Commission, the new European Parliament and the Council. And this is where Luxembourg’s banks and its investment fund industry can play their role in the economy and in society as a whole.

Chairmen’s foreword

Yves Maas, chairman of ABBL

Marc Saluzzi, chairman of ALFI

4

ABBL and ALFI

Established in 1939, the Luxembourg Bankers’ Association (ABBL) is the professional organisation representing the majority of banks and other financial intermediaries estab-lished in Luxembourg. Its purpose lies in defending and fostering the professional interests of its members. As such, it acts as the voice of the whole sector on various matters in both national and international organisations.

The ABBL counts amongst its members universal banks, covered bonds issuing banks, public banks, other professionals of the financial sector (PSF), financial service providers and ancillary service providers to the financial industry.

More information: www.abbl.lu

The Association of the Luxembourg Fund Industry (ALFI) is the representative body of the Luxembourg investment fund community.

Created in 1988, the Association today represents over 1,300 Luxembourg domiciled investment funds, asset management companies and a wide range of service providers such as depositary banks, fund administrators, transfer agents, distributors, legal firms, consult-ants, tax experts, auditors and accountants, specialist IT providers and communication companies.

Luxembourg is the largest fund domicile in Europe and a worldwide leader in cross-border distribution of investment funds. Luxembourg-domiciled investment funds are distributed on a global basis in more than 70 countries with a particular focus on Europe, Asia, Latin America and the Middle East.

ALFI sets out its ambition for the Luxembourg fund centre to be a global centre of excel-lence for the asset management industry, thereby creating opportunities for investors, fund professionals and the global community as a whole.

More information: www.alfi.lu

ABBL

ALFI

5

The ABBL and ALFI have common interests and synergies in European Affairs. They both follow closely European regulatory developments.

Their joint EU Representative Office in Brussels represents the ABBL and ALFI towards the European Union. The representative office has been established since 2006. Both associa-tions have been registered since August 2008 in the newly created Transparency Register.

EU Representative Office in Brussels

Antoine KremerHead of ABBL and ALFI EU Representative Office

Antoine and Aurélie both interact with policy makers and standard setters and represent the interests of the associations’ members in Brussels.

Contact details:

ABBL and ALFI EU Representative OfficeAvenue de Corthenberg 168, 1000 Brussels, Belgiumantoine.kremer@abbl-alfi.lu, +32 47 03 01 415aurelie.cassou@abbl-alfi.lu, +32 49 51 66 512

Aurélie CassouAdvisor European Affairs

6

Luxembourg market pillars

Finance: a long tradition

Banking is not a new business in Luxembourg: the oldest banking institution and still one of the largest today was created in 1856, partly to support the nascent steel industry and to finance infrastructures. From a small banking centre in the early 20th century, Luxembourg gradually grew into an international financial centre. Today, the financial sector plays a key role in the Luxembourg economy, but contrary to conventional wisdom, it is not synony-mous with the country’s economy: 65% to 70% of the economy is made up of other indus-tries and services.

In the late 1960s, the Luxembourg financial centre really took off and went truly interna-tional with the launch of the Euromarkets. Luxembourg became the primary listing centre for Eurobonds. These dollar denominated bonds issued outside the US also formed the starting point for one of the EU’s largest international central securities depositories or ICSD: CEDEL, today known as Clearstream. This international success was the result of a collective effort and the foresight of all stakeholders, both public and private. This collabo-rative spirit and ability to anticipate and innovate remain the foundations of the Luxem-bourg financial centre to this day.

Private banking and investment funds

One of the financial centre’s earliest and most renowned pillars is private banking. Luxem-bourg specialised in providing global solutions for a predominantly non-resident clientele, which often could not find the same scope and level of services at home. Luxembourg’s cross-border expertise provided more creative and tailor-made products and services that attracted international clients looking for true alternatives to their home markets. The country also offered a very stable political environment at a time when unpredictability was a concern in many EU Member States and abroad. The know-how that Luxembourg wealth managers and private bankers have developed over the decades remains an important asset to this day, allowing the country to attract high-net worth clients and international entrepreneurs.

In the mid-80s, Luxembourg was once again a pioneer, successfully anticipating a real opportunity in a new regulatory proposal: the UCITS (Undertaking for collective investment in transferable securities), or EU investment funds. Luxembourg was the first country to implement the UCITS Directive in national law, therefore international promoters came to Luxembourg to create a UCITS investment fund and to distribute it from here throughout the EU. The growth of this market was explosive. Funds were marketed cross-border to local and European clients for their long-term savings, either via pension plans or through direct investments.

With the UCITS EU regulation, Luxembourg first started to market funds across the EU and later across the globe with the result that today, after 25 years of developing expertise and know-how, Luxembourg is the world’s second largest investment fund centre after the US, and the global leader in terms of offering cross-border funds. Luxembourg has the ambition to repeat the success it had with UCITS in the field of alternative investment funds under the EU AIFMD regulatory framework.

7

A key player in asset custody

Partly as a result of these considerable banking and asset management pillars, Luxembourg is also a recognised brand name in custody and asset administration. A dense network of structures exists to support the fund activity, throughout the value chain. Market infrastruc-tures are also geared to ensuring the sustainability and reputation of the financial centre. With the creation of several Central Securities Depositories, the link with the Stock Exchange or Fundsquare (one of its subsidiaries) and the ECB through T2S (Target 2 Securities), Luxembourg has the tools to become a true hub for pan-European collateral management at the very heart of the banking union area.

Core strengths: well regulated, stable, diversified and international

A small country with a limited national market, Luxembourg has always been a strong supporter of the Single European Market. Luxembourg’s strengths reside in its compliance with and support of EU rules, being a founding member of the EU, and in applying EU rules as its own, without trying to undermine or goldplate them. The fact that Luxembourg thinks European and cross-border in everything it does makes it a model European country which appeals to anyone seeking to do business across Europe and invest inside and outside Europe. Linked to this strict respect for norms and regulations, Luxembourg has always been highly capable in terms of balancing its budgets1, limiting its public debt2 and preserv-ing the highest ratings, which also helped to attract large financial institutions. Its European mentality, with the support of a strong network of professional organisations, such as the ABBL and ALFI, have allowed the country to become an important stakeholder and con-structive advocate for pan-European financial sector regulations such as the banking union, MiFID and many others.

All in all, the success of Luxembourg resides not only in its specific competences in one or the other sector but in the diversity of its activities. Besides its highly diversified banking sector (private, depositary, retail, commercial and corporate banking) and its leading invest-ment fund industry, Luxembourg plays an important role in insurance and reinsurance, international loans, bond listings, payment services and financial technology, Islamic finance, SRI and the Renminbi business. Moreover, Luxembourg is not only about finance and insurance, it also plays host to global industry leaders. Arcelor Mittal not only has its headquarters in Luxembourg, but also some of the world’s most advanced steel mills. Other businesses include global satellite leader SES, international radio and television group RTL, tyre producer Goodyear, US materials and services multinational Dupont de Nemours, US glassmaker Guardian, the large air-cargo company Cargolux as well as a host of SMEs including in the automotive components sector and some 200 SMEs in the clean tech sector. This success is down to Luxembourg’s international orientation, its capacity to be creative, responsive and pragmatic in an open and stimulating environment.

1 Since the financial crisis of 2008, the Luxembourg government budget has only seen two years of deficit (0.7% of GDP in 2010 and 0.8% in 2011). Eurostat; Trading economics.2 In 2013 Luxembourg’s national debt was limited to 23.1% of GDP. Eurostat.

8

Timeline: Luxembourg financial centre

1856

Establishment of the Caisse d’Epargne (Savings bank) and the Banque internationale à Luxembourg.

1927

Creation of the Luxembourg Stock Exchange.

1939

The Luxembourg Bankers’ Association (ABBL) is founded by ten banks in Luxembourg.

The ABBL is a founding member of the European Banking Federation (EBF).

Luxembourg’s first banking supervisory authority, the Commissariat aux banques is created.

1945 1960

199719992001

2003 2004

2006 2007

Law creating pension funds in the form of pension savings companies with variable capital (SEPCAV) and pension savings associations (ASSEP).

Luxembourg ranks as the largest investment fund centre in Europe.

ABBL and ALFI open a perma-nent representative office in Brussels.

Creation of the Financial Technology Transfer Agency (ATTF) with a view to providing technical assistance in financial matters to developing countries and transition economies.

Luxembourg introduces IBAN and BIC codes for cross-border payments.

Luxembourg became the first Member State to implement the UCITS III Directive in its national law.

The Luxembourg School of Finance (LSF) of the University of Luxem-bourg is launched. LSF is born out of the Banking Academy, set up by the ABBL in 1992.

Establishment of the SICAR, an innovative regulated onshore investment company regime, fully dedicated and customised to the needs of Private Equity.

The Luxembourg Fund Labelling Agency (LuxFLAG) is created, aiming to support the financing of sustainable development by providing clarity for investors through awarding labels.

The Markets in Financial Instruments Directive (MiFID) is transposed into national law.

Adoption of the Law of 13th February 2007 on Specialised Investment Funds (SIF).

Law establishing covered bonds issuing banks.

2002

9

A law is passed introducing the coordination of banking regulation on the basis of the 1st European Banking Directive.

The world’s first Eurobond is issued on the Luxembourg Stock Exchange.

Beginning of significant expansion of the Luxembourg financial centre. Between 1971 and 1981 the number of banks in Luxembourg grows from 37 to 111.

It marks the beginning of a rapid expansion of Luxembourg as an international financial centre, attracting numerous interna-tional banks which establish subsidiaries in Luxembourg.

The international clearing company CEDEL is created (later Clearstream), one of EU largest Central Securities Depositories (CSD).

1963 1970 1971 1981

1988198919901993

Luxembourg becomes the first member state to transpose the European Directive for Collective Investments (UCITS), ALFI is also created in this context.

ALFI joined FEFSI, now known as EFAMA, the repre-sentative association of the European invest-ment management industry.

Foundation of the Institute for Training in Banking (IFBL). The IFBL offers training programmes tailored to the needs of the Luxem-bourg financial centre and its actors.

Luxembourg becomes a member of the Financial Action Task Force (FATF), an inter-governmental body setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering.

The Luxembourg Parliament adopts the law implementing the Alternative Investment Fund Manager Directive (AIFMD) in Luxembourg law on 12 July 2013 and introduces a new form of limited partnership into Luxembourg law, the société en commandite spéciale (special limited partnership or SCSp).

The Luxembourg regulator CSSF authorises the first Renminbi Qualified Foreign Institutional Investor (RQFII) fund under the UCITS scheme in November 2013.

The banking law of 5 April 1993 is established as the main law governing banking and financial activities in Luxem-bourg. It also creates the status of Financial Sector Professional (PSF).

Following much discussion and work, the European Parliament adopted changes to the UCITS Directive, known as UCITS IV.

Luxembourg announces that it will adopt the automatic exchange of information under the EU Savings Directive as of 1st January 2015.

Opening of ALFI Asia office.

Luxembourg ranks as second biggest domicile for non-UCITS in Europe.

Bank of China successfully launched its first offshore Renminbi (RMB) “Schengen bond” which makes it to be the first Chinese mainland company to issue RMB bonds in the Eurozone.

2009

2010

2014

2011

2013

10

A financial centre that is reinventing itself

The Luxembourg financial centre has been continuously evolving and reinventing itself in order to adapt to the international environment. Aspects of its core business only 20 years ago have drastically diminished and other parts have developed at the same pace. Whereas in the past banking secrecy was non-negotiable for a number of traditional mass affluent private banking clients, nowadays Luxembourg private banking is dominated by wealthier and tax-transparent clients who are primarily looking for expertise in multi-jurisdictional wealth management. Within the framework of the Savings Tax Directive, Luxembourg will introduce automatic information exchange from January 2015 and is a strong supporter of the practice at global level.

The activities of the financial centre have also evolved. While in the past private banking and Eurobonds were predominant, nowadays the financial centre is well diversified with a strong investment fund and asset management pillar, an international banking centre (retail and

11

commercial banking, depositary banking, private banking, etc.), a globally relevant stock exchange and an internationally recognised insurance sector. This diversification makes Luxembourg as a whole more resilient to any exogenous hit to one of its activities.

In the wake of the 2008 financial crisis, many financial groups had to reorganise internation-ally. These changes have also impacted the Luxembourg banking centre, where the number of banks has decreased, giving way to fewer but larger entities via mergers and acquisitions. In the last few years, however, new banks from third countries have established their Euro-pean hubs in Luxembourg, among which – but not exclusively – 3 of the 6 largest Chinese banks, including ICBC, the world’s largest bank. In addition, many international banking groups are today establishing their competence centres in Luxembourg, either in private banking, fund administration, the custodian business, treasury management or as booking centres for international loans.

12

Throughout its history, Luxembourg has always been a place of contrasts, built on traditions with well-established roots, while at the same time open to innovation. Today the country may appear to be at a crossroads between a traditional banking model (in retail or private banking) and a mature position in the asset management industry. The reality is, in fact, very different. Not only is the financial centre now spearheading new or emerging trends like offshore Renminbi centres, Islamic finance or electronic and virtual currencies, it is also reinventing its traditional financial activities in order to shape the future.

Its current dominant markets will continue to thrive in the future. Investors need vehicles for their long-term savings, such as funds or pension funds. Net new assets continue to increase. In terms of private banking, Luxembourg is readier than ever to adapt to the changing landscape, proving that in spite of a bygone era it can build up new business and attract a new, internationally mobile clientele. 2014 saw an increase in net new assets under manage-ment (disregarding market fluctuations).

Luxembourg has a long-term vision for its core activities. In order to reinforce its role as the backbone of asset administration, the country had to deploy a strategy to adapt to T2S, the ECB central securities settlement project. Thus, whereas previously only one institution was active in the field, Luxembourg now has four, more than any other EU member state. This will not only help the asset management industry but will also be instrumental for pan-Euro-pean collateral management in support of the EU economy. Besides strengthening the country’s position in asset management, this will also allow Luxembourg to become an EU collateral management hub, since the EMIR and CRD IV regulations have significantly increased the need to access high quality collateral. Thanks to the combination of CSDs and the potential for tri-party arrangements, combined with the new possibilities opened up by the forthcoming T2S project, Luxembourg is clearly positioned as a lead operator.

If the previous example illustrates the country’s capacity to adapt to a changing environ-ment, there are also numerous examples of how the financial centre shapes its own future. Luxembourg aims to become one of Europe’s most attractive places to trade in Renminbi, be it through listing, issuing instruments or as a point of access. As a gateway to Europe, Luxembourg is already the preferred place for Chinese banks opening headquarters in the EU. Luxembourg is also Europe’s number one in RMB deposits, loans and bonds and has the largest volume of RMB-denominated funds.

Luxembourg finance for the future

13

While Luxembourg is best known as a centre for cross-border retail investment funds, the introduction in 2007 of the Specialised Investment Fund regime has highlighted its fast-growing vocation as a centre for alternative investment vehicles. The entry into force of the EU Alternative Investment Management Directive in 2013 has boosted the development of hedge funds, real estate funds and private equity funds, and Luxembourg is set to make the alternative investment business a third pillar of its investment fund sector next to UCITS and Responsible Investing.

Luxembourg is also strongly promoting Responsible Investing, where investors seek to both achieve a financial return and do social good. This is a broad area, ranging from microfi-nance to social entrepreneurship and from “green” or ethical investing to impact investing. Luxembourg and France dominate the Responsible Investment fund landscape in Europe with about 42.5% of the total number of funds and 51% of assets under management.3

Luxembourg also plans to open up to new market segments, including in the developing area of Islamic finance. Today as an active partner, notably with the new law on issuance of Sukuk, and tomorrow hopefully with local Islamic banks servicing the European market.

Luxembourg, moreover, plays a leading role in the field of financial technology. Ever since the advent of PayPal, local authorities and stakeholders have been proactively encouraging the development of innovative payment solutions out of Luxembourg. Some of the biggest names in cashless payment solutions have set up their headquarters in Luxembourg, while start-ups in Luxembourg are in the process of shaping the payments of tomorrow. Luxem-bourg is also encouraging the development of alternative financing solutions, such as crowd funding or peer-to-peer lending, and analysing how they could fit into the EU agenda. The EU project of Long Term Investment Funds is also a major topic as it should help build EU infrastructures over the next decades. Luxembourg also has ambitions to become a Euro-pean hub for the digital economy. Because of its huge data processing capacities and the availability of skilled workers from around the globe, Luxembourg will be able to prepare EU-wide financial services solutions for the world of tomorrow.

Probably more important than success in one or the other business field is the fact that Luxembourg’s forward-thinking spirit and friendly business environment stimulate the creativity and responsiveness of stakeholders at all levels to the benefit of a more open economy.

3 European Responsible Investing Fund Survey 2013, KPMG.

14

Statistics Statistics

0 10 20 30 40 50

2

7

5

2

6

1

1

15

35

1

3

10

5

1

1

5

1

2

2

3

2

3

7

12

9

6

3

AndorraBelgiumBrazilCanadaChinaCyprusDenmarkFrance

GreeceGermany

ItalyIsrael

Japan

Liechtenstein

NorwayPortugal

Luxembourg

Latvia

QatarRussiaSpainSwitzerlandSweden

TurkeyThe Netherlands

United KingdomUnited States

Development of the average solvency ratio over the last years (%)Development of the average liquidity ratio over the last years (%)

0

10

20

30

40

50

60

70

80

2001

12.7

65

2002

14.3

66

2007

13.9

61

2008

16

67

2009

19.7

65

2010

18.3

65

2012

21.1

69

2011

18.2

69

2013

23.5

70

Number of banks per country of origin (total 150)

Development of banks’ solvency and liquidity ratio over the last years

Sour

ce: C

SSF

(31

July

201

4)So

urce

: CSS

F/B

CL

(31

Dec

embe

r 20

13)

15

12 000

15 000

9 000

6 000

3 000

0

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

June 2014

The main UCITS exporting countries in Europe

Net assets under management in Luxembourg funds (millions EUR)

Luxembourg is the largest investment fund centre in Europe. Net assets under management in Luxembourg total more than 2,800 billion euros, and are managed across more than 13,000 investment fund units.

Luxembourg is the leading centre for cross-border distribution of investment funds with 67% of the European market.

nr. of funds / fund units

2 500 000

3 000 000

2 000 000

1 500 000

1 000 000

500 000

0

EUR millions

Sour

ce: C

SSF

(30

June

201

4)

Source: Global Fund Distribution Poster, PricewaterhouseCoopers 2014

funds

units

net assets

67

Luxembourg

Ireland

France

Jersey

United Kingdom

19

67

19

4

32

67% of all UCITS registered in at least 3 countries (including home state) are Luxembourg funds.

September 2014© ABBL/ALFI. All rights reserved.September 2014© ABBL/ALFI. All rights reserved.

ABBL & ALFI EU Representative Office

Avenue de Corthenberg 168, 1000 Brussels, Belgium

Antoine Kremer, Head of the ABBL & ALFI Representative OfficeEmail: antoine.kremer@abbl-alfi.luTel: +32 47 03 01 415

Aurélie Cassou, Advisor European AffairsEmail: aurelie.cassou@abbl-alfi.luTel: +32 49 51 66 512

ALFI Head Office:

P.O. Box 206 L-2012 Luxembourg12, rue ErasmeL-1468 LuxembourgEmail: info@alfi.luTel: +352 22 30 26 1Fax: +352 22 30 93

ABBL Head Office:

P.O. Box 13 L-2010 Luxembourg12, rue ErasmeL-1468 LuxembourgEmail: info@abbl.luTel: +352 46 36 601Fax: +352 46 09 21