For two decades, Luxembourg’s appeal to fund finance lenders has rested on something decidedly conventional: legal certainty. Subscription facilities have been structured around enforceable capital call rights and secured collection accounts. NAV facilities have relied on carefully constructed security over holding companies, receivables and fund assets. Hybrid facilities have combined elements of both.

Tokenisation does not displace those foundations. It introduces a new infrastructure through which fund interests and collateral may be recorded and transferred, while leaving the lender’s underlying concerns as to ownership, security, priority and enforcement substantially unchanged.

The potential significance of tokenisation for fund finance lies in its ability to improve the movement and use of collateral without diminishing the legal protections on which lenders rely. Tokenised money market funds provide an early illustration of this potential, offering the prospect of greater collateral mobility, continued investment exposure and reduced settlement friction.

The legal analysis must therefore look beyond the technical transfer of the token. What matters is whether that transfer carries the legally recognised fund interest, whether the lender’s security is effective against the authoritative account or register, and whether the collateral can be realised through a legally and operationally reliable enforcement process.

We spoke with partner Ariane Mehrshahi and senior associate Igesa Andrea about why Luxembourg’s established collateral framework may provide a foundation for the next generation of fund finance, and what could be the challenges along the way.

Why has Luxembourg become so important to the fund finance market?

Ariane: Luxembourg combines a major fund-domiciliation platform with a creditor-friendly security regime. Fund finance sits at the intersection of fund structuring, asset ownership and secured lending.

The market has also become broadened. Subscription facilities remain a core product, but the growing use of NAV and hybrid facilities has expanded the range of assets relevant to the lender’s security analysis. The collateral may therefore range from uncalled investor commitments and collection accounts to receivables, shares, debt instruments and interests in holding structures.

Luxembourg’s law of 5 August 2005 on financial collateral arrangements, as amended (the “Financial Collateral Law”), played a central role in that development. It allows collateral arrangements to cover future assets and related claims, including capital call rights, and provides significant protection against the effects of insolvency. This gives lenders a comparatively stable legal framework within which to structure different forms of fund-level financing.

How do the traditional collateral packages differ between subscription, NAV and hybrid facilities? 

Igesa: In a subscription facility, the collateral package typically comprises security over uncalled investor commitments and related capital call rights, together with a pledge over the account into which investor contributions are paid. Investors are generally notified of the security, whether by specific notice, periodic reporting, email or an investor portal. Lenders must also consider any available investor defences and rights of set-off, as well as the implications of any applicable foreign law.

NAV facilities, which have become increasingly prominent, look primarily to the value and cash flows of the underlying portfolio. The security package may extend to accounts, receivables, debt instruments, shares and interests in holding structures. These arrangements are generally more bespoke, particularly where the lender’s ability to realise the collateral is subject to transfer restrictions, third-party consents or competing creditor arrangements.

Hybrid facilities, which continue to develop, combine elements of subscription and NAV financing by relying on both investor commitments and portfolio value. Their collateral, reporting and enforcement arrangements must therefore operate effectively across both sources of repayment.

Where does tokenisation enter this established market?

Ariane: Tokenisation is relevant not only to the issuance and distribution of fund interests, but also to the legal and operational infrastructure through which those interests are held, transferred and used as collateral.
Tokenised money market fund units illustrate the point. For secured lenders, the relevant questions are whether the token or ledger entry represents the legally recognised fund interest, whether effective security can be taken over that interest and whether it can be realised upon enforcement.

The Global Digital Finance report The Case for Collateral Mobility in Europe & the UK using Money Market Funds, co-authored with Ownera, EY and Hogan Lovells (including our London partner Bryony Widdup), examines the potential use of tokenised money market fund units to facilitate collateral transfers and substitutions, reduce reconciliation requirements and support more efficient settlement. It also recognises that these benefits depend on legal enforceability, operational capability and acceptance of the relevant units by receiving institutions.

Those considerations also apply to fund finance, although subscription and NAV facilities generally use security rather than title-transfer arrangements. The key questions are whether the token represents the legally recognised fund interest, whether effective security can be taken over it and whether it can be realised through the relevant account, register and intermediary arrangements.

What did the liability-driven investment crisis teach the market about collateral mobility?

Ariane: It illustrates that an asset’s economic liquidity does not necessarily mean that it can be transferred or realised within the required timeframe. For fund finance lenders, collateral value therefore depends not only on valuation, but also on the legal and operational steps required for transfer and enforcement.

Distributed ledger technology (“DLT”) may reduce certain operational steps, but it does not replace the requirements for legally effective security and enforcement. Blockchain Law III expressly permits financial instruments recorded in DLT-based securities accounts to fall within the Financial Collateral Law, while Blockchain Law IV extended the Luxembourg dematerialised securities framework to certain equity instruments and fund units. Where a fund unit is validly issued and held within that framework, it may therefore be subject to security under the established Luxembourg collateral regime.

How does Luxembourg’s existing securities framework deal with DLT?

Igesa: Luxembourg has adopted a technology-neutral approach as the legislation refers to secure electronic record-keeping mechanisms, including DLT or databases, rather than regulating a particular technology. The Luxembourg laws of 1 March 2019 (“Blockchain Law I”), 22 January 2021 (“Blockchain Law II”), 15 March 2023 (“Blockchain Law III”) and 20 December 2024 (“Blockchain Law IV”), relating to the use of secure electronic record-keeping mechanisms in the securities framework, are together referred to as the “Luxembourg Blockchain Laws” and adapt existing securities-law concepts to accommodate DLT without creating a separate property-law regime for digital securities.

Under the dematerialised securities framework, securities are represented by entries in securities accounts and transferred by book entry. The relevant issuance accounts and securities accounts may be maintained within or through DLT. The technology changes how the securities are issued, recorded and transferred, without altering their legal nature or the rights attached to them.

Where a tokenised fund unit is validly issued and held within this framework, the analysis remains based on established concepts of ownership, book-entry transfer and control over the relevant account. Registered fund units and partnership interests require a separate analysis: a transfer recorded only on a tokenisation platform may be ineffective unless reflected in the legally operative register. That register may itself use DLT, subject to the applicable legal and constitutional requirements.

Can the Luxembourg Financial Collateral Law apply to DLT-held assets? 

Igesa: Yes, provided that the relevant asset qualifies as a financial instrument within the scope of the law of 5 August 2005 on financial collateral arrangements, as amended, the Financial Collateral Law.

Blockchain Law III clarified that financial instruments may be recorded in securities accounts maintained within or through secure electronic record-keeping mechanisms, including distributed electronic ledgers or databases. A financial collateral arrangement over qualifying instruments recorded in such an account may therefore be structured under the Financial Collateral Law and benefit from its creditor-protection and insolvency framework.

Blockchain Law IV subsequently extended the dematerialised securities framework to additional instruments, including certain equity securities and fund units, and introduced the role of control agent. The applicable security mechanics nevertheless depend on the legal nature of the asset, the relevant account structure and the role of the account keeper or control agent.

What would a lender need to perfect security over tokenised fund interests? 

Igesa: The security must be created and perfected over the legally recognised fund interests or the account in which such interests are recorded, rather than merely over the digital representation thereof.

The applicable requirements depend on the legal form and holding structure of the interests. For registered fund units, the pledge may need to be recorded in the units register. For dematerialised units held in a securities account, perfection may be achieved through the book-entry or control arrangements applicable to such account. Where the token represents only contractual rights against an issuer or intermediary, security may instead need to be taken over those rights. Where the token or ledger entry represents rights against an issuer or intermediary, the lender must identify the precise legal asset and perfect its security in accordance with the rules applicable to that asset. The relevance of any registration, notification, acknowledgement or control arrangement will depend on the applicable holding structure.

The same principles apply to conventional fund finance collateral. A Luxembourg law receivables pledge is generally perfected upon execution of the pledge agreement. Notice to the relevant debtor is not a perfection requirement, but prevents the debtor from validly discharging the pledged claim by paying the pledgor. In the case of a bank account pledge, any account-bank acknowledgement, waiver or blocking arrangement must be assessed separately by reference to the applicable account structure and the rights of the account bank. A qualifying financial collateral arrangement may generally be enforced without prior court proceedings, in accordance with its terms and the applicable statutory requirements.

What are the most important enforcement questions?

Igesa: The principal considerations remain legal control and effective realisation. The lender must identify the account or register that is legally relevant to the holding and transfer of the fund interest, determine who is authorised to block or effect a transfer and establish a legally and operationally effective route to appropriation, transfer to an eligible transferee or redemption following an enforcement event, without requiring further action by the chargor. The transaction must also address the payment of enforcement proceeds and any dependency on an account keeper, control agent, registrar, custodian or technology provider. Control of a private key may enable transactions to be initiated, but legal ownership and the effectiveness of any security depend on the relevant account or register and the applicable legal framework.

How might tokenisation affect subscription facilities?

Ariane: The relevant credit exposure remains the investors’ obligations to fund their uncalled commitments, which tokenisation of the fund interests does not, in itself, alter. The lender must nevertheless identify the legally operative investor register, determine when a transfer of a tokenised interest becomes effective and establish whether the related commitment obligations are transferred or remain with the existing investor. The facility documentation should also address unauthorised transfers, inconsistencies between the DLT record and the operative register, loss of system access and the replacement or failure of relevant service providers.

What about NAV and hybrid facilities?

Ariane: In a NAV facility, tokenisation may be relevant either to the collateral structure itself or to assets within the underlying portfolio. The lender must identify the legal nature of the relevant asset, the account or register governing ownership and transfer, and the arrangements applicable to valuation and enforcement.

Dependencies on registrars, account keepers, custodians or technology providers may affect asset eligibility, advance rates and concentration limits. Particular attention may also be required where a token represents contractual or intermediated rights rather than the underlying asset itself.

In a hybrid facility, the same considerations apply alongside the investor-commitment analysis, requiring the lender to assess both components of the collateral package.

Will tokenised collateral become mainstream?

Ariane: The more relevant question is whether tokenised fund units become mainstream. As fund markets evolve, lenders will increasingly encounter tokenised fund interests within collateral packages.

The key considerations remain familiar: what is the asset, who owns it, how is security taken over it and how can value be realised on enforcement?

Luxembourg's legal framework is well positioned to accommodate these developments, but adoption will depend as much on custody, valuation and operational infrastructure as on the legislation itself.

Key Takeaways for Fund Finance Lenders

• Identify the legal asset: Determine whether the token is the fund interest, evidence of the interest, a beneficial entitlement or an intermediary claim.
• Establish register primacy: Confirm which account or register proves ownership and what steps make transfers and security effective.
• Take security at the operative level: Cover the underlying interest, related proceeds, relevant accounts and material intermediary claims, not merely the wallet.
• Build digital risks into the facility: Address ledger migration, platform outages, reconciliation failures, wallet changes and replacement of critical service providers.
• Test enforcement before closing: Confirm that the lender can block, transfer, redeem or realise the collateral without relying on borrower cooperation.