T+1, ESG, and Swiss Fund Moves: Challenges or Opportunities in Luxembourg?

Fast-tracked settlements, tougher ESG standards, and Luxembourg’s growing dominance in global fund management. The year 2025 is shaping up to be a big year for investment professionals operating in Luxembourg.

The latest EY Luxembourg Market Pulse highlights how the above changes are impacting fund management.

From adapting to T+1 settlement changes to navigating Luxembourg’s ever-expanding role in cross-border funds, I believe investment firms must find ways to turn these developments into competitive advantages.

The T+1 settlement shift is pushing fund managers operating in multiple jurisdictions toward different trading processes (see the benefits of T+! highlighted by J.P. Morgan here.)

ESG rules are making sustainability claims more credible, and Swiss asset managers are doubling down on Luxembourg as the go-to hub for cross-border funds, reinforcing its role as a key player in capital markets.

Meanwhile, liquidity management strategies are evolving, AML regulations are strengthening, and tax changes are creating new incentives for fund structures.

For those ready to embrace these changes, there’s probably never been a better time to scale, streamline, and future-proof operations.

At Vestlane, we’re at the forefront of simplifying fund administration, compliance, and regulatory reporting.

The insights from this EY Luxembourg Market Pulse confirm that operational resilience and strategic adaptation will be key to success in the year ahead.

T+1 Settlement: A New Reality for Fund Managers

The transition to T+1 settlement in the US, which took effect in May 2024, is now creating ripple effects across European capital markets.

The shortened settlement cycle has introduced liquidity and compliance challenges, particularly for funds structured in Luxembourg and other jurisdictions that still operate on a T+2 basis.

With less time to process transactions, fund managers are facing operational risks, increased costs, and potential breaches of investment restrictions.

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has already recommended that the EU adopt T+1 by October 2027.

The CSSF has issued guidance to help funds adapt, recommending strategies such as shortening settlement cycles, using cash sweep programs to optimize liquidity, and diversifying banking relationships to mitigate counterparty risk.

Some funds may also need to adjust their operating hours or introduce temporary borrowing measures to bridge the gap between incoming and outgoing cash flows.

For fund administrators, this shift underscores the urgent need for automation and real-time settlement tracking.

At Vestlane, we are already working with investment professionals to digitize fund workflows and enhance compliance automation, ensuring they remain agile in this evolving landscape.

Fund Naming and ESG Compliance Rules Tightening

Sustainable finance is now a central regulatory priority. The ESMA ESG Fund Naming Guidelines, which took effect last year, are now being fully enforced, and the latest EY Luxembourg Market Pulse confirms that compliance deadlines are fast approaching.

Fund managers using terms such as "sustainable" or "green" must now meet stricter investment thresholds, with at least 80% of a fund’s assets aligning with its stated ESG objectives.

Additionally, funds must exclude investments in controversial industries such as fossil fuels, tobacco, and weapons.

While new funds must comply immediately, existing funds have until May 2025 to align with the new standards.

These changes suggest a shift in how ESG is integrated into investment strategies.

Investors and regulators are demanding greater transparency, and investment professionals must now prove their sustainability claims with verifiable data.

Luxembourg’s Growing Role as a Hub for Swiss Asset Managers

The Market Pulse report highlights a significant trend: Swiss asset managers are increasingly choosing Luxembourg as a gateway to access international capital markets.

Switzerland’s asset management industry has made a strong recovery, with total assets under management (AUM) surpassing 3.1 trillion Swiss francs (CHF) in 2023.

However, navigating Switzerland’s regulatory complexities remains a challenge, prompting many Swiss managers to structure their investment funds in Luxembourg.

This shift is largely driven by the benefits of two key regulatory frameworks: the Undertakings for Collective Investment in Transferable Securities (UCITS) directive and the Alternative Investment Fund Managers Directive (AIFMD).

These frameworks enable funds to be "passported," meaning they can be marketed and sold across the European Union (EU) without requiring separate regulatory approval in each member state.

By late 2024, more than 79% of Swiss investors were allocating their assets through Luxembourg-based fund structures.

This growing trend underscores the broader need for fund managers to enhance operational efficiency while ensuring compliance with evolving regulations across jurisdictions.

At Vestlane, we facilitate this transition by simplifying fund setup, regulatory reporting, and investor onboarding, helping asset managers navigate Luxembourg’s financial ecosystem with ease.

Liquidity Management, AML, and Tax Updates: What’s Changing?

Liquidity risk remains a key concern for regulators, and new rules under AIFMD and UCITS are tightening controls on liquidity management tools.

Fund managers must now implement more robust strategies for redemption gates, swing pricing, and side pockets, ensuring that liquidity risks are properly mitigated.

The latest Market Pulse emphasizes the importance of clear investor disclosures and real-time liquidity monitoring, both of which are becoming standard expectations in the industry.

On the compliance front, the AML framework is undergoing a major overhaul, with the EU’s new AML Authority (AMLA) set to take effect in 2027.

Crypto firms and high-net-worth individuals are facing increased scrutiny, and Luxembourg’s CSSF has updated its AML reporting rules to ensure greater transparency.

For fund administrators, this means stronger KYC processes and enhanced due diligence measures are now required.

Meanwhile, there is good news on the tax front for fund managers.

UCITS ETFs in Luxembourg are now exempt from subscription tax, a change that could significantly reduce costs and enhance Luxembourg’s appeal as a fund domicile.

Luxembourg’s ETF Push: Strengthening Its Position as a Leading Fund Hub

While not specifically mentioned in the EY Luxembourg Market Pulse. News elsewhere shows that Luxembourg is doubling down on its role as a premier fund domicile with new measures aimed at attracting more investment funds, particularly in the rapidly growing ETF market.

Among the headline moves: the Luxembourg government has scrapped the subscription tax on UCITS (Undertakings for Collective Investment in Transferable Securities) ETFs and introduced semi-transparent portfolio structures for actively managed ETFs.

It’s a calculated play to make the jurisdiction more appealing, particularly as Ireland currently holds the lion’s share of the European ETF market with a hefty €1.6 trillion in assets, dwarfing Luxembourg’s relatively modest €266 billion.

The logic here seems to be: If you can’t beat them, out-legislate them.

By cutting costs and offering fund managers a more flexible regulatory environment, Luxembourg is angling to reclaim its leadership in the European fund industry.

The country already boasts longstanding advantages, notably the UCITS and Alternative Investment Fund Managers Directive (AIFMD) frameworks, which allow funds domiciled in Luxembourg to be marketed across the European Union with minimal bureaucratic friction.

But will it work? As fund managers weigh their domicile options in 2025, Luxembourg’s latest policy tweaks could be a game-changer, or, just another footnote in the ongoing battle for European fund dominance.

Either way, the Grand Duchy is making its intentions clear: it wants a bigger slice of the ETF pie, and it’s not afraid to shake things up to get it.

How Fund Managers Can Stay Ahead in 2025

It’s clear the financial industry is going through regulatory transformation (when is it ever not, right?).

But it’s important investment professionals act to ensure compliance and operational efficiency.

From the shift to T+1 settlement and ESG disclosure mandates to AML tightening and evolving tax rules, the complexity of fund administration is only going to increase I feel.

At Vestlane, we believe that automation is the key to staying ahead while also making things easier.

By digitizing fund setup, compliance, and investor onboarding, managers can reduce manual processes, enhance accuracy, and scale their operations in a highly efficient manner.

The latest Market Pulse confirms what we’ve been seeing across capital markets: the future belongs to investment professionals who embrace digital transformation.

As we move through 2025, our focus at Vestlane remains on helping investment professionals navigate these changes with confidence, efficiency, and regulatory clarity.

If you’re looking for smarter, automated solutions to streamline your fund operations across various different jurisdictions, get in touch with our team today.