The Ministry of Economy and Finance recently enacted
Circular 63013 of June 22 2007 addressed, inter alia,
to regions, cities and provinces pursuant to which such
entities should not issue delegations of payment in connection
with their derivative transactions.
The Circular when making reference to delegations of payment
expressly refers to Article 206 of the Local Authorities Act
(Testo Unico degli Enti Locali, TUEL) which, on the
contrary, regulates the issue by cities, provinces and
metropolitan cities (Local Authorities) of delegations of
payment for the payment of the amortizing instalments of loans
and issues of notes (Delegation under TUEL).
Local Authorities when issuing notes or entering into loans
instruct their treasury banks through Delegations under TUEL to
make payments at specified maturities of specified amounts on
behalf of the Local Authority.
The Delegation under TUEL does not need to be accepted by
the relevant treasury bank and becomes binding on it upon
receipt by the treasury bank of service of the Delegation under
TUEL assuring to the creditor that the treasury bank will
allocate funds for the payment due to the extent of funds
available of the Local Authority.
The Delegation under TUEL constitutes title for enforcement
and the beneficiary may, therefore, in the event of failure to
pay by the Local Authority, initiate directly enforcement
procedures skipping the injunction procedure.
The assumption made by the Ministry through the Circular is
that derivative transactions do not constitute debt, unlike
issues of notes and loans, but rather instruments for the
management of the debt for the purpose of reducing the final
cost of the debt as well as the exposure to market risks.
Given that derivative instruments are not considered debt,
the Ministry indicates in the Circular that Local Authorities
and regions should not issue Delegations under TUEL for
The Circular is not an autonomous source of law but rather
an instrument offered for the interpretation of laws.
As a general market practice those Local Authorities which
were issuing delegations of payment in connection with
derivative transactions were not issuing Delegations under TUEL
but rather delegations of payment under the Italian Civil Code
(Delegation under Civil Code).
A Delegation under Civil Code is quite different from a
Delegation under TUEL.
When a Delegation under Civil Code is drafted in connection
with a swap transaction, the treasury bank of the Local
Authority is usually requested to accept it and the treasury
bank conditions its obligation of payment on the availability
of funds of the Local Authority in order to make the payments
of the amounts due thereunder.
The treasury bank does not consequently undertake any
autonomous obligation towards the beneficiary of the Delegation
under Civil Code, save for the obligation to allocate the
necessary funds prior to each date of payment of the relevant
funds, if available, required under derivative
In addition, regions do not fall within TUEL and in general
regions issue payment mandates rather than delegations of
payment in connection with their swaps.
The Ministry may have thought, however, that use of
delegations of payment for swap transactions could have
generated confusion in counterparties that may have assumed
that the delegation of payment received was indeed a Delegation
under TUEL. For this reason the Circular should not be
considered as an impediment for Local Authorities or Regions to
issue Delegations under Civil Code or payment mandates in
connection with derivative transactions but rather as an
invitation by the Ministry to Local Authorities and Regions not
to use delegations of payment for derivatives transaction so to
give better clarity to the market.