A new draft law is in the works, which would shield funded sub-participants from lender insolvency by ring-fencing the assets a lender owes them. On 30 July 2026, Draft Law No. 8813 (the “Draft Law”) was submitted to the Luxembourg Parliament (Chambre des Députés). It proposes a dedicated statutory regime for “conventions de sous-participation en trésorerie”, internationally known as funded sub-participations. Once enacted, it would place the assets owed by a Luxembourg lender to a participant in a protected estate, shielding them from the lender’s other creditors and the effects of its insolvency.
Background and context
Under a funded sub-participation arrangement, a participant pays the lender an amount corresponding to its share of a loan. In return, it receives a corresponding share of the repayments made by the borrower to the lender. As explained in the commentary to the Draft Law, this allows lenders to share loan risk, free up regulatory capital and preserve lending capacity without the cost and complexity of transferring the loan and its security to a third party.
The participant becomes a direct creditor of the lender, but not of the borrower. The lender remains the borrower’s sole counterparty, leaving the participant exposed to both the borrower’s credit risk and the lender’s insolvency risk. Absent the Draft Law, and without separate security, the participant would rank as a simple unsecured creditor in proceedings under Part II (reorganisation and liquidation) of the amended law of 18 December 2015 on the failure of credit institutions and certain investment firms. The Draft Law seeks to address this exposure.
Key provisions
A separate estate for the participant’s assets
Under Article 2 of the Draft Law, the assets owed by a lender to a participant, together with the related contractual obligations, would be kept outside the lender’s personal estate. They would instead form a dedicated estate held by the lender on a fiduciary basis for the participant’s benefit, separate from both its general assets and any other fiduciary estate it holds. In practice, this would mean that:
- the lender’s other creditors could not seize those assets, even outside insolvency proceedings; and
- the lender’s obligation to transfer those assets would remain unaffected by any reorganisation measure, insolvency proceeding or other situation of creditor concourse concerning the lender.
The fiduciary characterisation also matters for bank resolution. Because it creates a fiduciary relationship between the lender and the participant, qualifying arrangements should fall within the existing exclusion for fiduciary-relationship liabilities from the bail-in tool under the Bank Recovery and Resolution Directive (BRRD), with the rest of the resolution framework continuing to apply.
Which arrangements would qualify?
Under Article 1 of the Draft Law, a qualifying arrangement is a contract between a lender and a participant, where the participant provides cash to the lender and, in exchange, takes on all or part of the credit risk attached to a loan the lender has granted to a third-party borrower. Several boundaries define who and what the regime covers:
- only cash-funded sub-participations are covered - synthetic or unfunded arrangements fall outside the regime;
- credit institutions are the main target, but the regime is not limited to them - any Luxembourg lender qualifies, including financial sector professionals and loan or debt funds;
- individuals cannot act as lenders under the regime. In practice, they rarely act as lenders in sub-participation arrangements given the specific nature of sub-participated loans. Segregating assets for an individual would also raise legal and operational complexities, since an individual carries out both professional and private activities without being subject to an adapted accounting and operational framework; and
- nationality of the lender is what triggers protection in cross-border deals - so long as the lender is Luxembourg-based, the governing law chosen for the sub-participation agreement makes no difference.
New and existing agreements: different starting points
Article 3 of the Draft Law draws a distinction between new and existing arrangements. Agreements entered into after the Draft Law comes into force would benefit from the regime automatically, unless the parties opt out. Earlier agreements would remain outside its scope by default, in line with the principle of non-retroactivity, but the parties could choose to opt in. This approach preserves contractual flexibility, particularly where the sub-participation is documented under foreign law.
What this means in practice
For participants, the proposed regime would mean no longer relying solely on the lender’s general solvency for cash flows owed under a qualifying agreement. For lenders, it is worth reviewing standard documentation now: should the regime apply by default to new agreements, or should the parties opt out? For existing arrangements, would opting in benefit participants? Lenders should also consider whether their internal processes can properly track and evidence the amounts due to each participant.
Next steps and timeline
The Draft Law is currently before the Luxembourg Parliament, and the opinion of the Conseil d’Etat has been requested. BSP is closely monitoring the legislative process and is available to discuss what the proposed regime could mean for your existing arrangements and new transactions.
Share on
