Capital markets and structured investments

Pursuant to the Italian Civil Code, a company may issue debt securities for an amount not exceeding twice its share capital, the legal reserve and the available reserves of that company, as set out under its last approved balance sheet.
These constraints do not apply in the following cases:

• debt securities issued in excess of the limit set out above which are underwritten by institutional investors subject to prudential supervision;
• debt securities secured by a first-ranking mortgage;
• debt securities to be listed on a regulated market or negotiated on a multilateral trading facility (As a general remark, it is not possible to state a precise timeframe for listing which will be valid for all the issuers. Timeframes for the admission to trading may vary depending on the market (ie whether Borsa Italiana or EuroTLX), the type of issuer and/or the type of security. As a
  rule of thumb, the admission procedure can take from one week to a couple of months (or even longer if the relevant market requires more information from the issuer));
• convertible bonds which grant the right to purchase or underwrite shares;
• special authorization given by governmental authorities on national economic interest grounds; and
• application of special laws relating to particular categories of companies (eg in relation to banks by virtue of the provisions set out under the Consolidated Banking Act).

Furthermore, pursuant to the Prospectus Regulation, and relevant implementing measures in Italy, an issuer shall draft and file with CONSOB a prospectus in order to offer the debt securities to the public and/or list such debt securities on a regulated market. Such provision is valid and effective to the extent that an exemption does not apply.

Debt securities are most commonly issued by means of either a standalone prospectus or a base prospectus.

Several different types of debt securities are offered and/or listed in Italy. Among the others, some common forms include:

• plain vanilla notes (including, inter alia, fixed-rate notes, floating-rate notes, zero-coupon notes fixed to floating rate notes, step-up notes, step-down notes);
• structured notes (linked to one or more underlying assets, including, inter alia, shares, interest rates, currencies, commodities, indexes, funds, as set out under the Rules of the Markets organized and managed by Borsa Italiana S.p.A.);
• convertible bonds (notes that may be converted either in the shares of the issuer or in the shares of another company, depending on its structure);
• subordinated notes;
• covered bonds; and
• 'minibonds' (issued by unlisted companies of small or medium size (excluding micro-corporations)).

A different disclosure regime exists in the case of offers addressed to retail investors or institutional/professional investors (named 'qualified investors'). In the latter case, the Prospectus regulation clarifies that a prospectus is not necessary (unless the securities are subsequently traded on a regulated market).

The disclosure regime also depends on the denomination of the debt securities offered. To this extent, debt securities having a denomination amount that is lower than €100,000 are usually directed to retail investors and offered for subscription by means of a prospectus approved by CONSOB, whereby debt securities having a denomination that is equal to or higher than €100,000 shall be considered as a wholesale issue and a less rigid disclosure regime is applicable.

Under the Prospectus Regulation, unless an exemption applies, it is necessary to publish a prospectus where there is an offer of securities to the public or an application for the securities to be admitted to trading on a regulated market.

An offer would not be deemed to have been made to the public if it is made solely to qualified investors, addressed to fewer than 150 persons (other than qualified investors) per European Economic Area state or where the minimum denomination per unit is at least €100,000.

If the offer is deemed not to be made to the public, a Prospectus Directive compliant prospectus may still be required if an application is made for the securities to be admitted to trading on a regulated market. An exemption from both the offer to the public and the admission to trading on a regulated market is needed to avoid publishing a prospectus.

Borsa Italiana S.p.A. provides different markets where debt securities may be traded. In this respect, the primary market in Italy is the MOT (Mercato Telematico delle obbligazioni e dei titoli di Stato). Pursuant to the Rules of the Markets organized and managed by Borsa Italiana S.p.A., the financial instruments that may be traded on the MOT are bonds (excluding convertible bonds), sovereign debt, Eurobonds, asset-backed securities, structured bonds, covered bonds and other debt securities and instruments tradable in the monetary market.

The MOT consists of two segments:

• DomesticMOT, for debt securities that are settled through Monte Titoli S.p.A., according to the Instructions accompanying the Rules of the Markets organized and managed by Borsa Italiana S.p.A.; and
• EuroMOT, for debt securities that are settled through Euroclear/Clearstream, according to the Instructions accompanying the Rules of the Markets organized and managed by Borsa Italiana S.p.A..

Furthermore, there are other trading venues – in particular Multilateral Trading Facilities – where debt securities may be traded:

ExtraMOT

The ExtraMOT is a multilateral trading facility, regulated by Borsa Italiana S.p.A., for trading corporate bonds issued by Italian and foreign companies which are already listed on other regulated EU markets, as well as non-listed bonds and debt instruments issued by Italian small and medium-sized enterprises (SMEs).

ExtraMOT Pro

The ExtraMOT Pro is the professional segment of the ExtraMOT dedicated to trading, inter alia, bonds (including convertible bonds), commercial papers and project bonds, generally issued by Italian SMEs. Trading is only open to professional investors on the ExtraMOT Pro.

EuroTLX

EuroTLX is the multilateral trading facility organized and managed by Borsa Italiana S.p.A., targeted to non-professional and professional investors trading in retail size and mainly focused on fixed income securities.

The private placement market in Italy is underdeveloped compared to, for instance, the UK or the US. According to a paper published by the Bank of Italy, there were 235 issuances of debt securities in the period 2012–2014.

Having said that, the private placement market in Italy is growing due to the introduction of so-called minibonds, ie debt securities issued by Italian non-listed companies (generally small and medium-sized enterprises (SMEs)) and usually negotiated on the ExtraMOT Pro.

Efforts have been made by the Loan Market Association and International Capital Markets Association to standardize private placement documentation.

Issuing debt securities

Under Italian law, the issuer, offeror, guarantor, or the persons responsible for the information contained in the prospectus, shall be liable, each in relation to the extent of their own duties, for damages caused to the investor placing reasonable faith in the truth and accuracy of information contained in the prospectus, unless it is proved that all due diligence was adopted for the purpose of guaranteeing that the information in question complied with the facts and that no information was omitted that could have altered the sense thereof. Investors suffering loss are entitled to bring a civil action for negligent misstatement or misrepresentation, and also criminal law sanctions may be imposed in such cases.

Investing in debt securities

Under Italian law, a noteholders' meeting may amend the terms and conditions of the debt securities provided that certain conditions regarding the constitutive/deliberative quorum are fulfilled. To this extent, an extraordinary resolution passed by a qualified majority of noteholders binds all the noteholders.

In addition, in the case that the issuer is an institution falling within the scope of the BRRD the potential investor should be aware that such institution may be subject, upon certain conditions, to resolution measures. In particular, the relevant resolution authority could apply certain resolution tools including, among others, the bail-in tool. Consequently, the potential investor may be subject to the risk that the resolution authority will exercise the write-down or conversion power in respect of the relevant institution's liabilities (including the securities purchased by the investor).

Italy selling restrictions

The offer of securities in Italy is covered under the CONSOB financial promotion regime provisions, respectively implementing Undertakings for Collective Investment in Transferable Securities Directive regime and Alternative Investment Fund Managers Directive regime.

Undertakings for Collective Investments in Transferable Securities (UCITS)

UCITS, including those established in Italy, have an EU passport which enables fund promoters to create a single product for marketing in all EU member states and, on the completion of the appropriate notification procedure, a UCITS established in one member state can be sold in any other.

A UCITS intending to market in another member state must complete and submit to its home regulator a notification including certain specified information, including copies of key investor documents. The home regulator then completes a notification file which is sent in a regulator-to-regulator transmission, following which the UCITS can be sold in the other member state.

Alternative Investment Funds (AIFs)

Under the Alternative Investment Fund Managers Directive, marketing is defined as: a direct or indirect offering or placement at the initiative of the Alternative Investment Fund Manager (AIFM) or on behalf of the AIFM of units or shares in an AIF it manages to or with investors domiciled or with a registered office in the EU.

An AIFM may only market an AIF to EU investors if it is authorized by a relevant EU regulator – registration with one EU regulator opens access, subject to certain further limited conditions, to marketing to professional investors across the EU under a EU passport or if it complies with national private placement regimes (please note that NPPR has not been yet implemented in Italy).

Reverse solicitation and the definition of 'marketing'

In general terms, reverse enquiry mechanisms refer to situations in which clients contact managers, on their own initiative, in order to subscribe for units or shares of a fund, and no placement or marketing activity are performed by the managers towards such clients.

Italian law and regulation does not contain specific provisions on the reverse solicitation scheme. The qualification of the operation as a 'genuine' reverse solicitation, in this sense, will derive from an assessment, made by the competent Italian supervisory authorities, of the procedural and documentary evidences underlying the transaction. More precisely, the Italian supervisory authorities, in order to prove the legal construction of the reverse inquiry, adopt a stringent ‘substance over form’ approach.

In relation to the definition of 'marketing', the Consolidated Financial Act defines this as 'the offer, also indirect, on the initiative or on behalf of the manager, of the AIF units and shares managed, addressed to resident investors or those with a registered head office in the EU'.

Fund management in Italy is regulated under the Consolidated Financial Act, various statutory instruments and the supervisory authorities' rules and regulations. The Bank of Italy is mainly responsible for regulating funds and fund managers, as well as the criteria for the obtainment of the relevant authorizations.

The various restrictions imposed by the aforesaid provisions (including, inter alia, structuring, management autonomy and independence, conflict of interest and remuneration issues) shall be proportionate to the managers' size, internal organization, scope and complexity of activities.

Alternative Investment Fund Managers (AIFMs) are also subject to regulation under the Alternative Investment Fund Managers Directive (as implemented in Italy) and managers of Undertakings for Collective Investments in Transferable Securities (UCITS) are subject to certain requirements under the Undertakings for Collective Investment in Transferable Securities Directive.

More precisely, the authorization procedure with the Bank of Italy to perform collective asset management activities, is granted upon positive evaluation of, inter alia, the business plan, activities plan and organizational structure of the manager, integrity, professionalism and independence of its directors and controllers’ integrity, and professional competence of its shareholders and their representatives.

The entity willing to exercise the collective portfolio management activity must submit to Bank of Italy certain documentation confirming the above prerequisites, and the Bank of Italy will have 90 days from the filing to grant or deny authorization (this term may be suspended in case the Bank of Italy requires clarifications or additional information).

In terms of incorporation costs, the Bank of Italy usually requires the Società di Gestione del Risparmio (SGR) to be provided with excess cash in order to cover incorporation costs without reducing the minimum corporate capital.

Special provisions are set forth for SGR managing assets below predefined thresholds (so called SGR sotto soglia), which are subject, inter alia, to simplified capital and authorization requirements, assets evaluation criteria, control functions, outsourcing, conflict of interest and portfolio and management regimes, as well as to simplified guidelines on remuneration.

An Italian client entering into derivative contracts in Italy might be a private or corporate client or a public client (such as central and local authorities).

Italian private and corporate clients

There are no restrictions on private or corporate clients entering into derivatives contracts.

Nevertheless, when entering into a derivative contract with a corporate client it is advisable to check whether the relevant constituting documents and by-laws of such client:

• Encompass any provision evidencing the authority of the party entering into this type of agreement and the performance of its obligations under such agreement; or
• Encompass any limit in relation to entering into derivatives contracts (in particular, it may be possible that only derivatives contracts with hedging – and not speculative – purposes may be permitted).

Italian public clients

As of June 2008, all Italian public authorities (including local entities, regions, metropolitan cities etc) are prohibited from entering into any type of new derivative contract.

Banks authorized in Italy and/or authorized to carry out in Italy financial services on a cross-border basis

Entering into derivative contracts entail the provision of financial services. Therefore, in order to provide such service, banks and/or financial intermediaries selling a derivative product must be duly authorized to carry out this service (on its own account) in Italy, whether on a cross-border basis or by establishing a branch.

In the event that the bank/financial intermediary is at the same time advisor and counterparty to the client of the derivative contract, Italian law provides a wide range of further information to be disclosed to the client (in order to comply with both appropriateness and suitability rules in favour of the client).

In Italy, derivative contracts are entered into for the following purposes:

• hedging; and
• trading (including trading for speculation purposes).

Derivatives may be traded over-the-counter (OTC) or on an organized exchange (ETD, Exchange Traded Derivatives).

The most common types of derivative contract in Italy entered into for hedging purposes are:

• swaps (in particular interest rate swap or currency swap), as OTC derivative; and
• forwards (to hedge foreign exchange rate risk).

The underlying asset is often constituted by a loan (denominated in euro), linked to the fluctuation of Euribor (or other similar reference rates).

The most common types of derivative contract in Italy entered into for trading purposes are:

• futures;
• swaps; and
• options (call options and put options).

The value of the derivative contract is based on the value of the underlying assets and on other market factors. The most common underlying assets considered in the Italian market are:

• equity;
• fixed income instruments;
• commodities;
• foreign currency; and
• credit events.

Derivative contracts (in particular OTC derivative contracts) are also regulated by the European Market Infrastructure Regulation (EMIR) and the implementing regulation of Regulatory Technical Standards (RTS) which attempts to ensure the same degree of protection to clients within all EU countries by providing comprehensive information and transparency on over-the-counter derivative position, and reduce counterparty risk by increasing the use of central counterparty clearing.

It is worth noting that the derivatives market hassignificantly changed in light of the implementation of the MiFID II starting from January 2018, as summarised above.

Due to a recent increase in disputes over OTC derivatives in Italy, a specific focus is attributed to the following items:

• complete disclosure of all costs related to the initial mark-to-market of the OTC derivative contract (distinguishing each line item such as hedging cost and bank remuneration); and
• comprehensive information to be provided to the client before the entering into the derivative contract with particular reference to the appropriateness and suitability of the derivative.

The level of information required by law depends on the MiFID II classification of the client (retail or professional).

The risk related to the non-disclosure of the above information to the client is that the derivative contract might be declared null and void by an Italian court. Pursuant to current case law in Italy a client (professional or retail) shall explicitly receive detailed information and give its consent on the value of the hedging costs and any further charge applied to the derivative transaction to be concluded by it.

According to the provisions of EMIR the counterparties to derivatives transactions must verify the need to enter into specific arrangements for risk reducing. More particularly, for those transactions entered into between clients classified as FC (Financial Counterparties) or as NFC+ (Non-Financial Counterparties above a certain threshold) it will be necessary to establish security arrangements for the calculation and exchange, on a daily basis, of the “variation margin” to be exchanged between the parties to cover the relevant exposure under the master agreement governing the entire set of derivatives transactions.