New Italian legislation prohibiting local authorities from entering into derivatives contracts
The Italian Stability Law 2014 (the Stability Law),1 which entered into force on 1 January 2014, provides that Italian regions and local authorities (the Entities):
(a) are permanently prohibited from entering into contracts relating to derivative financial instruments; and
(b) have to place new limits on their recourse to indebtedness.
A temporary prohibition on local councils entering into derivative contracts had been introduced by earlier legislation.2 The Stability Law has turned this temporary ban on the execution of derivatives contracts into a permanent prohibition.
In detail, under the Stability Law the Entities are prohibited from:
(a) entering into contracts relating to derivative financial instruments;
(b) re-negotiating existing derivatives contracts; and
(c) entering into financing contracts which include derivatives components.
(d) recurring to indebtedness which has a "bullet" amortisation plan for reimbursement of principal; and
(e) recurring to indebtedness or other liabilities in foreign currency. The extension of the prohibition to currency different from euro is aimed at preventing local authorities from entering into currency swaps as an hedging instrument against the exchange rate risk.
However the Stability Law provides the following exemptions from the ban:
(a) the complete early termination of contracts relating to derivative financial instruments;
(b) the transfer of the contract to a different counterparty (the so-called "novazione soggettiva") provided that no changes are made to the terms and conditions of those contracts;
(c) the possibility of restructuring derivatives contracts following changes in liabilities to which the derivative contract refers, only in the case of a transaction which (i) does not have optional components in it; (ii) is aimed at the conversion of the fixed interest rate into a floating rate (or vice-versa); and (iii) has the express objective of ensuring that the renegotiated liabilities remain in line with the corresponding hedging transaction; and
(d) the execution of financing contracts which include for the Entities the purchase of a cap.
The exemption regime also applies where the Entities are seeking to remove from existing contracts: (i) early termination clauses; and (ii) optional components, if any, which are different from the cap option already purchased by the Entities.
1.Article 62 of Law Decree No 112 of 25 June 2008 (the Decree), as converted into law by Law No 133 of 6 August 2008 (the Conversion Law), and subsequently replaced by Law No 203 of 22 December 2008 (the Budget Law 2008).
2. Law No 147 of 27 December 2013 – Published in the Italian Official Journal No 203 of 27 December 2013. Entry into force: 1 January 2014.