Wednesday, February 21, 2007

Italy new derivative legislation has lacunas: Who wants an ultra vires counterpart ?

With its 2007 Financial Law (Law 296 of December 27 2006) Italy lawmakers establish new guidelines for regions and local authorities when entering into derivative transactions, namely that Hedging transactions must be carried out with the aim of reducing the final costs of the debt and exposure to market risks. , Even though it was already clear in the existing legislation the legislator felt the need to stress this principle that Hedging transactions must be entered into exclusively in relation to underlying liabilities effectively due, and with the sole aim of reducing credit risks. The problems with the 2007 Financial Law are numeral and temporal . Temporal in that, it will be complex to be implemented when regions and local authorities must send the final drafts of the agreements they intend to execute to the Ministry for the Economy and Finance (Treasury Department), so that the Ministry can document derivatives including amortization swaps and similar transactions. Numeral in that there is no definition of what a reduced liability means. Although the absence of this filing makes the transactions ultra vires, the (Corte dei Conti) must declare and sanction it; the result is that counterpart may hesitate before making a hedging transaction with an Italian local authority.



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