This content is from: Local Insights

Derivatives

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 derivative transactions.

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 transactions.

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.

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