This content is from: Local Insights


Italian legislation authorizes local authorities to use derivative transactions only to hedge against interest rate, exchange and currency risks connected to their financing transactions.

Article 119 of the recently revised Italian Constitution says clearly that local authorities are authorized to enter into financing transactions exclusively for investments purposes and only in the forms permitted by law: that is, through loans and bonds.

As recently clarified by a Circular of Cassa Depositi and Prestiti, which is the entity in charge of granting financing to public entities, investments means capital expenditures, implying that an investment qualifies as such if there is an increase in the assets of the relevant local authority.

Hence, a derivative transaction that is not related to an underlying debt of a local authority and is not entered into for hedging purposes conflicts with the targets of public finance and its validity may be questioned.

Article 29, paragraph 35 of Law Number 289 of December 27 2002 (the 2003 Financial Law) has now expressly stated that transactions contravene Article 119 of the Constitution and will be considered null and void if they are entered into by territorial entities to create debt to finance expenditures other than investments. The Court of Accounts may apply severe penalties to those officers responsible for adopting the relevant resolutions to authorize such transactions.

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