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.

Credit derivative use

Most investors who were disappointed by bankruptcies such as Norbourg in Canada or Enron in US will certainly understand the benefits of diversifying. Nonetheless the other lessons from theses disasters is that now hedging is not enough for protecting capital, it is also necessary to protect oneself against the risk of solvency of the issues of the titles they hold. Consequently mutual funds managers and Financial institutions will have the opportunity to offer new products such as credit derivatives.

Translation of the French IFRS IAS 39

I am not convinced that the translation could easily apply in Canada because of our bijural system of private law. Since Canada is a federal state where provinces have jurisdiction over private law, Quebec uses civil code while other provinces uses common law. This means that accounting and tax rules apply in provinces that use different terminology, which are not interchangeable because the underlying concepts are different. For this reason, the Department of Justice has initiated a program for bijuralism which applies among other matters to financial as well as tax laws. As a former counsellor at Justice Dept., I can confirm that overlooking these matters could generate certain critical difficulties down the road. Therefore, I would suggest to consider reviewing these very important issues with IAS 39. Besides the United States have at least 2 jurisdictions, namely Louisiana and California, which have a private law system inspired form civil code.

Finance in shape

THE MOST ADVANTAGOUS way of keeping strenghtenig your finance is in 1-2-3 steps [1st] maintaining your financial charge low and [2nd] protecting your capital as well as [3 rd] reducing tax cost. The first step could be achieve by acquiring swaps or long position on fixed interest rate the second by selling call option on stock that performed well for a strike price that insure your gain and buy put option at this same price. If the stock soars you may have to sell, but you’ll make money anyway, otherwise you’ll simply insure your profit for a fraction of the normal cost. The 3rd step is acheived by paying your personnal debt first and maintain your investment debt as low as possible.If interested in these strategies you may have more detail in a book on taxation of financial derivatives at http://www.carswell.com/law/law_book_news/LBN04October.pdf or consult at www.alphalogiques.com.

Improving After tax Profit

A SIMPLE AND EASY way of making your money work for you is maintaining your financial charge low and protecting your capital. The first could be achieve by acquiring swaps or long position on fixed interest rate the second by selling call option on stock that performed well for a strike price that insure your gain and buy put option at this same price. If the stock soars you may have to sell, but you’ll make money anyway, otherwise you’ll simply insure your profit for a fraction of the normal cost. If interested in these strategies you may have more detail in a book on taxation of financial derivatives at http://www.carswell.com/law/law_book_news/LBN04October.pdf or consult at www.alphalogiques.com.

Michel Maher, CGA, L.L.D. Lawyer (Quebec Bar)