Italian Court Orders Disclosure of Swap Settlement


In a ruling published on September 26th, an Italian court ordered the disclosure of the terms of a settlement between the city of Cassino and J.P. Morgan Chase & Co. (“JPM”), notwithstanding a confidentiality provision in the settlement agreement between the parties. According to reports, the city had entered into an interest rate swap in 2003 with a Bear Stearns entity (which JPM purchased in 2008) under which the city paid a LIBOR-based floating rate and received a fixed rate in connection with some €22 million of debt. As interest rates increased, the city found itself owing a large termination payment to JPM.

It is not clear whether governmental officials fully understood the implications of the transaction at the time of its execution. Indeed, the sophistication of— and risk disclosure and representations made by dealers to—government decision-makers in connection with swaps has been a global concern in the wake of the financial crisis and has led to calls for additional protection of public entities.[1] (In Italy alone, according to Bank of Italy data, some 300 municipalities reportedly had negative marks-to-market on swaps totaling close to €1 billion as of March 2011.) As a result, legislators have engaged in efforts to reform the governmental swap market both in the United States and in Europe, including through the implementation of financial reforms such as the Dodd-Frank Act.[2]

[1] As we have previously reported (see DMIR March 2010 and DMIR May 2009), in March 2011, four banks, eleven bankers and two former city officials were charged with fraud in connection with derivatives transactions entered into by the city of Milan, Italy.

[2] For example, in March 2010, the Italian Senate Finance Committee unanimously approved a proposal that would restrict the use of derivatives by municipalities (see DMIR March 2010). For additional information on the protections afforded to governmental entities and other “special entities” entering into swaps under the Dodd-Frank Act, please see DMIR July 2010 and Orrick Alert: Derivatives Regulation Reform and Provisions Affecting Governmental Entities in the Dodd-Frank Act.