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Italy

Legislative Decree 170 of May 21 2004 (Decree 170) has implemented the Directive 2002/47/CE of June 6 2002 on financial collateral arrangements (the Directive).

The new provisions apply to any financial collateral documented in writing (and on electronic support or similar). The documentation in writing of the financial collateral must show the date of its creation. For this purpose, it is enough to prove that the book entry securities collateral has been credited to the relevant account of the relevant financial intermediary or, in the case of cash collateral, that the cash has been credited to a designated account.

As to the enforcement of financial collateral arrangements, if an enforcement event occurs, or in the case of reorganization measures or winding-up proceedings, subject to the terms agreed in the financial collateral arrangement, the collateral taker will be able to:

  • sell the relevant financial instruments related to the financial obligation covered by the security financial collateral arrangement, applying their value in discharge of credit;
  • appropriate the financial instruments related to the financial obligation covered by the security financial collateral arrangement, other than cash, and apply their value in discharge of credit, if this is provided for in the financial collateral arrangement, which also has to determine the evaluation criteria of the financial obligation;
  • use the cash to set off the relevant financial obligation covered by the security financial collateral arrangement.

To enforce the financial collateral, Article 4 of Decree 170 says that the collateral taker must immediately give notice to the collateral provider or, as the case may be, to the receiver or other officer appointed under any reorganization or winding-up proceedings, providing details of the procedures followed for such enforcement and of the amounts raised, returning any excess amount where applicable.

To the extent provided by the security financial collateral arrangement, the collateral taker is entitled to exercise a right of use, and also of sale, in relation to financial collateral provided under the security financial collateral arrangement.

If the collateral taker exercises a right of use, they incur an obligation to transfer equivalent collateral to replace the original financial collateral, at the latest on the due date for the performance of the relevant financial obligations covered by the security financial collateral arrangement.

The equivalent collateral transferred in discharge of the obligation will not be treated as new financial collateral and will be considered to be made at the same time as the original financial collateral. If an enforcement event occurs while the obligation of replacement remains outstanding, the obligation may be the subject of a close-out netting provision. In the absence of such a provision, enforcement of the collateral will be made following the procedures under Article 4 of Decree 170 as summarized above.

The financial collateral arrangements that provide for the transfer of the title as guarantee, including the repurchase agreements, may be implemented pursuant to the terms thereof, irrespective of their qualification. Further, such arrangements are not subject to Article 2744 of the Civil Code (prohibition of foreclosure agreement) but are subject to the obligation of replacement and to the close-out netting provision.

The close-out netting provision is valid and enforceable in accordance with its terms, notwithstanding the commencement of any reorganization measures or winding-up proceedings in respect of the collateral provider and/or the collateral taker.

The conditions to realize the financial instruments and the relevant evaluation criteria have to be reasonable under a commercial profile, that is, they must be consistent with the contractual pro-forma drafted by Banca d'Italia together with Consob, in relation to collateral clauses adopted in accordance with international market practice. The lack of such reasonable criteria may be opposed before courts.

The financial collateral arrangement, also pursuant to a supplement or supersede clause, as well as the provision of financial collateral under such arrangement, may not be declared invalid nor void nor be reversed on the sole basis that the financial collateral arrangement has come into existence, or that the financial collateral has been provided: (a) on the day winding-up proceedings or reorganization measures begin and before they commence; (b) on the day winding-up proceedings or reorganization measures begin, but after the moment they commence, if the collateral taker can prove that he was not aware, nor should have been aware, that the proceedings or measures began.

In relation to the Italian bankruptcy law, and particularly to its claw-back provisions: (i) a claims assignment agreement and an agreement of transfer of the ownership as guarantee and the relevant enforcement are treated as a pledge (pegno); (ii) the enforcement of the collateral pursuant to the replacement clause cannot be treated as new financial collateral and will be considered as made at the same time as the original financial collateral; and (iii) the enforcement of the collateral pursuant to a supplement clause is considered as made concurrently with the debt covered by the collateral.

When the rights related to financial instruments are registered in an account book or in an account, or in a management or centralized deposit system, the procedures to transfer the financial instruments, as well as to establish the collateral or other liens on it, are to be governed by the law of the country in which the relevant account or management or deposit system are maintained. Any different arrangement will be void.

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