June 15, 2017 / 3:01 PM / 3 months ago

DERIVATIVES-Appeal court rules for Dexia in swaps dispute

LONDON, June 15 (IFR) - London’s Court of Appeal has ruled that interest rate swaps entered into between Dexia Crediop and Italian local authority Comune di Prato between 2002 and 2006 were valid and binding, enabling Dexia to recover missed payments associated with the trade.

The decision overturns a 2015 High Court ruling that allowed local Italian laws to invalidate the English law swap agreement, deeming the swaps to be null and void.

The ruling will also strengthen the international recognition of the ISDA Master Agreement as a derivatives governance tool, possibly setting a precedent for similar cases that have used local laws to invalidate the governing law of swaps contracts.

The original ruling said that Dexia failed to inform the municipality of its right to cancel the transactions during a seven-day cooling off period - a mandatory provision under the Rome Convention.

The Court of Appeal found in favour of Dexia, ruling that Article 3(3) of the Rome Convention, which states that the choice of governing law of a contract should not prejudice the application of mandatory local laws, did not apply given the ISDA Master Agreement underpinning the trades.

Dexia also said that it entered into back-to-back hedges with banks outside of Italy in connection with the swaps, using the same documentation.

According to lawyers at Allen & Overy and Italian law firm BonelliErede, representing Dexia, the landmark ruling could be significant for similar litigations involving Italian local authorities and financial institutions that used “lack of capacity” arguments to void swaps obligations.

“The decision is of significance to any financial institution facing allegations of lack of capacity or defences based on local mandatory laws,” Allen & Overy partner James Partridge said in a statement.

”This decision further confirms the court’s approach to the scope of Article 3(3), emphasising that swaps entered into on ISDA form documentation as part of a wider chain of back-to-back transactions are to be regarded as taking place in a market which is inherently international.”

The case refers to the last of six swaps that Prato entered into with Dexia between 2002 and 2006 as part of a wider debt restructuring. Prato defaulted on the final swap - an interest rate collar - in 2010. As interest rates fell to historic lows in the wake of the global financial crisis, the floor payable by Prato exceeded prevailing market rates.

Following the payment default, Dexia brought a claim against the local authority, seeking to recover €6.5m that was due to be paid on the swap up to the 2013 maturity.

The ruling follows the acquittal of Dexia Crediop and its executive Riccardo Sommavilla in the criminal dispute over the same matter before the Court of Prato that concluded on May 31. (Reporting by Helen Bartholomew)

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