The Italian regulatory regime for derivatives markets and products is currently governed by Legislative Decree No. 58/1998 (the “Consolidated Financial Act”), which, among other things, implemented in Italy Directive 2014/65/EU on markets in financial instruments (“MiFID II”).

In the context of the EU framework, derivatives markets and products are also directly subject to EU Regulation No. 600/2014 on markets in financial instruments (“MiFIR”), EU Regulation No. 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR), and the relevant delegated and implementing regulations.

Article 1(2-ter) of the Consolidated Financial Act provides for the following definitions:

“Derivative instruments” means the financial instruments listed in Annex I, Section C, points (4) to (10), of the Consolidated Financial Act as well as any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures. In this respect, it should be noted that Annex I of the Consolidated Financial Act mirrors Annex I of MiFID II and, therefore, the financial instruments considered as derivatives under Italian law are:

(4) options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivative instruments, financial indices or financial measures which may be settled physically or in cash;

(5) options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event;

(6) options, futures, swaps and any other derivative contracts relating to commodities that can be physically settled provided that they are traded on a regulated market, a multilateral trading facility (MTF) or an organised trading facility (OTF), except for wholesale energy products traded on an OTF that must be physically settled;

(7) options, futures, swaps, forwards and any other derivative contracts relating to commodities that can be physically settled not otherwise mentioned in point (6) and not being for commercial purposes, which have the characteristics of other derivative financial instruments;

(8) derivative instruments for the transfer of credit risk;

(9) financial contracts for differences; and

(10) options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event, as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in Section C, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, an OTF or an MTF.

“Commodity derivatives” means the financial instruments listed in Annex I, Section C, points (5), (6), (7) and (10), of the Consolidated Financial Act, as well as any other securities giving the right to acquire or sell commodities or the underlying assets mentioned in point (10) or giving rise to a cash settlement determined by reference to those underlying assets.

“C6 energy derivative contracts” means options, futures, swaps and any other derivative contracts relating to oil and carbon mentioned in point (6) that are traded on an OTF and are physically settled.

In view of the above, Italian law, in line with EU regulation, only provides definitions of derivatives based on lists of technical forms (eg, swaps, futures, options) and possible underlying assets.

As a result of the classification of derivatives as financial instruments, under Italian law, the provision of the following services and activities related to derivatives to the public on a professional basis is reserved to banks, investment firms and other authorised entities:

• reception and transmission of orders;
• execution of orders on behalf of clients;
• dealing on own account;
• portfolio management;
• investment advice;
• underwriting and/or placing on a firm commitment basis;
• placing without a firm commitment basis;
• operation of an MTF; and
• operation of an OTF.

When providing any of the above services or activities in relation to derivatives, authorised entities must comply with specific requirements set out in MiFIR, the Consolidated Financial Act and their implementing regulations, including CONSOB Regulation No. 20307/2018 (the “CONSOB Intermediaries Regulation”) and CONSOB Regulation No. 20249/2017 (the “CONSOB Markets Regulation”). These laws and regulations cover, among other things, the following aspects: (i) authorisation, (ii) disclosure, (iii) product governance, (iv) reporting and transparency, and (v) internal governance and conduct of business.

Notwithstanding the above, Article 4-terdecies of the Consolidated Financial Act provides for specific exemptions from the application of the above rules which apply, inter alia, to: (i) insurance and reinsurance companies; (ii) entities providing investment services to the parent company, to any controlled entity or to any other entity controlled by the same parent company; (iii) entities providing an investment service where that service is provided in an incidental manner in the course of a professional activity and that activity is regulated by legal or regulatory provisions or a code of ethics governing the profession which do not exclude the provision of that service; (iv) European central banks (including the Bank of Italy and the European Central Bank); (v) pension funds; (vi) entities dealing on own account, including market makers, in commodity derivatives or emission allowances or derivatives thereof, excluding entities which deal on own account when executing client orders; and, under certain conditions, (vii) entities providing investment services, other than dealing on own account, in commodity derivatives or emission allowances or derivatives thereof to the customers or suppliers of their main business.

In addition to the above and as further described below, under MiFIR and EMIR, derivative contracts – both exchange-traded and over-the-counter (OTC) – are generally subject to specific requirements in relation to: (i) clearing, (ii) mandatory trading and (iii) reporting.

The main historical event that has influenced the Italian derivatives market dates back to the 2008 financial crisis, when Italian local authorities filed thousands of lawsuits against banks and financial institutions, seeking compensation for the negative consequences they had suffered as a result of entering into complex derivatives transactions. Specifically, since the early 2000s, following a legislative intervention that created a specific regime for the regulation of derivatives for local authorities, the financial exposure of Italian local authorities, regardless of their size, began to grow progressively over time and uncontrollably, breaking out in the aftermath of the 2008 financial crisis and the unprecedented fall in interest rates that followed.

The derivatives mis-selling claims by Italian local authorities were based on both contractual and tortious liability and generally included, inter alia, allegations relating to: (i) the local authority’s lack of capacity to enter into derivatives transactions and lack of expertise in respect of financial instruments, and (ii) the existence of undisclosed costs applied by the banks. Banks involved in litigation pending before Italian courts have suffered reputational damage, following some initial unfavourable rulings on derivatives transactions. In some cases, Italian courts have adopted a highly formalistic interpretation of Italian financial services regulation, which can be disadvantageous to banks. In other cases, however, banks have successfully challenged the jurisdiction of the courts after years of litigation.

In view of the above and taking into account the volume of derivatives trading, its impact on Italian local finance, and the uncertainty of case law on many key issues, derivatives litigation involving public authorities is an ongoing source of risk and liability for financial institutions.

In terms of recent developments over the past 12 months, the Italian market has seen an increase in transactions involving environmental, social and governance (ESG) derivatives, and for the first time, securitised derivatives based on cryptocurrencies have been admitted to trading on the Italian market as of 27 May 2024. However, “traditional” derivative contracts, including interest rate swaps, credit default swaps, futures and options, continue to be the derivatives predominantly traded in Italy.

Moreover, in the context of the recent acquisition by Euronext, the pan-European stock exchange, of Borsa Italiana S.p.A. (the Italian stock exchange – “Borsa Italiana”), Euronext Clearing (the Italian clearing house) is expected to become the clearing house of choice for Euronext’s cash, financial and commodity derivatives markets across the whole of Europe.

In Italy, futures and options on futures are traded on the Euronext Derivatives Milan market, which is a regulated market managed by Borsa Italiana.

There are different types of futures depending on the nature of the underlying asset. For example:

• In the case of commodity futures, the underlying is a fungible physical commodity, eg, an agricultural product such as wheat or coffee, a metal such as gold or copper, or an energy resource such as oil or gas.
• Financial futures, on the other hand, may have the following financial assets or metrics as the underlying: (i) currency at a fixed exchange rate for currency futures, (ii) stocks listed on a stock exchange for single-stock futures, (iii) bonds, such as government bonds for government bond futures, (iv) stock indices for stock index futures, such as the FTSE MIB, which is the main benchmark index for the Italian stock markets, and therefore for futures traded on the Euronext Derivatives Milan market, and (v) short-term interest rates or government bonds for interest rate futures.

The most important types of futures, also in terms of market performance indicators, are the futures on the main stock indices. In particular, the “king of futures” in Italy is the FTSE MIB Future, also known as FIB, a future on the Italian FTSE MIB stock index, which includes the 40 most highly capitalised stocks on the main market (Euronext Milan) (weighted on the basis of free float) and represents around 80% of the total capitalisation of the same market. In order to make trading easier for retail investors, the Mini-FIB has been introduced, where the contract costs EUR1 per index point (instead of EUR5 for the classic FIB).

Also available on Euronext Derivatives Milan are stock futures, ie, futures on individual stocks, which can be traded for defined mandatory quantities, the so-called “minimum lots” (eg, the minimum lot for the Enel future is 500 shares; for Generali it is 100 shares, etc).

In Italy, swaps, which are derivative contracts that allow two parties to enter into a contract to exchange cash flows or liabilities in an attempt to either reduce their costs or generate profits, are traded OTC and not on an exchange.

In line with market practice, swaps are generally divided into the following different types based on the underlying assets:

• interest rate swaps, which are forward contracts that exchange one stream of future interest payments for another based on a specified principal amount. The most common type of interest rate swap is the plain vanilla swap, which exchanges a floating interest rate for a fixed rate or vice versa;
• currency swaps, which are foreign exchange transactions in which principal and interest in one currency are exchanged for the same in another currency;
• asset swaps, where two parties exchange fixed and floating assets; and
• credit default swaps, which are a specific type of swap designed to transfer the credit risk of fixed-income products to another party.

It should be noted that, with regard to interest rate swaps, which are widely traded in Italy, the Italian Supreme Court (Corte di Cassazione) has intervened in the identification of the characteristics and essential elements of these derivatives, defining an interest rate swap as a derivative contract whose characteristics are: (a) OTC, (b) non-standardised and therefore not meeting the requirement of negotiability and (c) the natural conflict of interest of the intermediary, since it combines the roles of offeror and adviser and tends to be the counterparty of its client. Thus, the essential elements of an interest rate swap will be: (1) the dates on which (i) it is entered into, (ii) interest begins to accrue, and (iii) it matures and is paid out, (2) the notional principal and (3) the various interest rates applicable to it (see Cass. civ., Sez. Unite, judgment of 12/05/2020, n. 8770).

Notwithstanding the above, despite the fact that swaps are included in the definition of financial instruments in Article 1(2) and (2-ter) of the Consolidated Financial Act, no specific regulatory regime applies to the trading of swaps under Italian law.

According to market practice, forwards are derivative contracts very similar to futures, except that they are established as OTC derivatives and therefore traded outside regulated markets.

Although forwards are included in the definition of financial instruments in Article 1(2) and (2-ter) of the Consolidated Financial Act, no specific regulatory regime applies to the trading of forwards under Italian law.

Derivatives traded on regulated markets are represented by contracts whose characteristics are standardised and defined by the competent authority of the market on which they are traded. These characteristics concern, among other things, the underlying asset, the duration, the minimum trading size, the settlement procedures and the trading rules, leaving only the determination of the purchase and sale price to the parties of the contract. Derivatives traded on the Euronext Derivatives Milan market are mainly futures contracts and options contracts based on financial instruments, interest rates, yields, currencies, commodities, financial measures and related indices. The Italian regulated derivatives market, managed by Borsa Italiana, trades futures and options contracts based on indices and individual stocks (there is also the SeDeX market, which trades securitised derivatives).

OTC derivatives, on the other hand, are traded bilaterally – directly between the two parties – outside regulated markets; in this case, the contracting parties are free to determine all the characteristics of the contract.

While from a contractual point of view the two types are not dissimilar, both being based on the model of a financial contract whose value is linked to the value of an underlying asset, the regulation of the standardised derivative has a significant impact on the configuration of the transaction. In addition, although standardised OTC contracts are now subject to clearing and other obligations under EMIR, OTC derivatives are less regulated than exchange-traded derivatives and therefore more risky. In this respect, EMIR was introduced at EU level for the purpose of reducing systemic risks in the European derivatives market, increasing transparency in the OTC derivatives market and making it safer by reducing counterparty credit risk and operational risk.

In this regard, it should be noted that in 2009 and 2014, the Commissione Nazionale per le Società e la Borsa (CONSOB), which is the Italian public authority responsible for regulating the Italian financial markets, issued two different communications in which it recommended against advising on or distributing to retail clients derivative financial instruments that are not exchanged in trading venues and are not entered into for hedging purposes. However, following MiFID II and the consequent strengthening of investor protection safeguards, the guidance provided by CONSOB in the aforementioned communications was considered by CONSOB to be directly or indirectly absorbed by the broader and more detailed rules provided by the current regulatory framework, and therefore the communications were formally withdrawn in 2022.

Traditionally, derivative contracts entered into in Italy have had the following as underlying assets: financial instruments, interest rates, currencies, commodities and/or indices.

However, it should be noted that the Italian market is experiencing an increase in transactions involving ESG derivatives. These include:

• ESG-linked credit default swap indices, which are highly standardised derivatives that use specific performance indicators to determine sustainability targets;
• OTC derivatives on equity indices also linked to ESG;
• renewable energy and renewable fuel derivatives, which are closely linked to contracts for the purchase of energy sources; and
• catastrophe derivatives and weather derivatives that transfer the risk of natural disasters to the counterparty.

In addition, Borsa Italiana has authorised for the first time, as of 27 May 2024, the admission to trading on SeDeX of securitised derivatives with cryptocurrencies as underlying, intended exclusively for professional clients.

Commission Delegated Regulation (EU) No. 565/2017 supplementing MiFID II provides for certain clarifications on the definition of financial instruments and, among other things, of certain derivatives.

More specifically:

• According to Article 7, commodities derivatives are considered as financial instruments only if their main function is of a financial nature and does not refer to the exchange of the underlying asset. Therefore, commodities derivatives are not considered as financial instruments if:
1. they qualify as spot contracts, meaning contracts for the sale of a commodity, asset or right, under the terms of which delivery is scheduled to be made within the longer of the following periods: (i) two trading days, and (ii) the period generally accepted in the market for that commodity, asset or right as the standard delivery period; or
2. they have a commercial purpose, meaning that the following conditions are both met: (i) they are entered into with or by an operator or administrator of an energy transmission grid, energy balancing mechanism or pipeline network, and (ii) they are necessary to keep in balance the supplies and uses of energy at a given time.
• According to Article 10, derivative contracts relating to currencies shall not qualify as financial instruments where they are: (a) spot contracts, or (b) means of payment that: (i) must be settled physically otherwise than by reason of a default or other termination event, (ii) are entered into by at least one person which is not a financial counterparty, (iii) are entered into in order to facilitate payment for identifiable goods, services or direct investment, and (iv) are not traded on a trading venue.

For the purposes of the above, spot contracts are contracts for the exchange of one currency against another currency, under the terms of which delivery is scheduled to be made within the following periods: (a) two trading days in respect of any pair of the major currencies (ie, US dollar, euro, Japanese yen, UK pound sterling, Australian dollar, Swiss franc, Canadian dollar, Hong Kong dollar, Swedish krona, New Zealand dollar, Singapore dollar, Norwegian krone, Mexican peso, Croatian kuna, Bulgarian lev, Czech koruna, Danish krone, Hungarian forint, Polish złoty and Romanian leu), (b) for any pair of currencies where at least one currency is not a major currency, two trading days or the period generally accepted in the market for that currency pair as the standard delivery period, whichever is longer, and (c) where the contracts for the exchange of those currencies are used for the main purpose of the sale or purchase of a transferable security or a unit in a collective investment undertaking, the period generally accepted in the market for the settlement of that transferable security or a unit in a collective investment undertaking as the standard delivery period or five trading days, whichever is shorter.

Under Italian law, financial instruments, including derivatives, can only be regulated at national level. Indeed, Article 117(e) of the Italian Constitution expressly provides that the Italian State has exclusive competence for, inter alia, the regulation of financial markets.

In addition to CONSOB and the Bank of Italy, in their capacity as the national regulatory authorities responsible for the supervision of the financial markets, an important role in Italy is played by Borsa Italiana, which has been operating as the Italian stock exchange since 1998, managing and organising the domestic market, regulating the admission and listing procedures for companies and intermediaries, and supervising the disclosures of listed companies.

With specific reference to derivatives, Borsa Italiana is responsible for the management of the Euronext Derivatives Milan market, the Italian regulated market for the trading of futures and options contracts based on indices and individual stocks.

As a trading venue, Borsa Italiana is subject to the regulatory supervision of CONSOB and the Bank of Italy, in accordance with Article 62 of the Consolidated Financial Act.

In Italy, clearing brokers typically rely on several types of documents that can vary depending on the type of cleared derivatives. For exchange-traded derivatives, the documents tend to be more standardised, while for OTC derivatives, the documents tend to be more complex due to the bespoke nature of the contracts and the need for bilateral arrangements.

Examples of documents on which clearing brokers rely include: (i) clearing agreements, (ii) risk disclosures, (iii) legal opinions, (iv) collateral agreements and (v) operational documents.

In negotiating the aforementioned documents, the key concerns to clearing brokers and their relevant customers pertain to the following issues:

• legal enforceability of the documents;
• credit risk management;
• default and termination provisions; and
• regulatory compliance under the MiFID/MiFIR and EMIR frameworks.

As a general rule, whenever trades are documented under an ISDA master agreement, credit institutions and financial intermediaries rely on ISDA industry market opinions. Such opinions are used to assess and confirm for regulatory purposes the legal effectiveness and enforceability in all relevant jurisdictions of their (i) credit protection arrangements (including derivatives, when used as credit risk mitigation technique) and (ii) netting arrangements.

The parties seek more detailed, ad hoc opinions in more exotic situations, eg, where peculiar counterparties or structures are concerned, or in specific enforcement scenarios which are not addressed directly in the industry opinions. In addition, banks often require market-standard capacity opinions to confirm the status, capacity and signatory authority of their corporate counterparties.

Specific opinions on collateral arrangements are also commonly envisaged in the most complex trades.

When trades are documented under a domestic master agreement instead, then the parties rely on bespoke opinions (which largely mirror the structure, contents and caveats of the ISDA industry opinions).

Several trends have emerged recently in enforcement and litigation over derivatives with Italian counterparties. Notwithstanding the widespread use of the ISDA standard documentation, several prominent cases gave rise to procedural disputes over jurisdiction and somehow questioned the prevalence of English law. At the same time, English courts adjudicated several cases involving derivatives with Italian counterparties – and the outcome of those decisions also had an impact in the Italian market.

The non-regulated Italian counterparties often seek to avoid litigating in a foreign forum and therefore challenge strategically the jurisdiction of the English court. The result is normally pursued by focusing on the preliminary contractual dealings between the parties (ie, well before the execution of the derivatives arrangements under English law) and alleging a breach of pre-contractual obligation or a liability in tort by the bank/financial counterparty. The latter aspects may well be governed by Italian law, either as the forum commissi delicti or due to the mandate letters being subject to Italian law. This approach has been upheld by the Italian Supreme Court, with the risk of parallel proceedings in Italy and in England.

CONSOB and the Bank of Italy typically outline examination priorities and provide insights into compliance and surveillance issues concerning the derivatives markets through the following activities:

• publication of annual reports and strategic plans, where each of the authorities outlines its regulatory and supervisory activities, as well as its priorities for the upcoming years, covering various aspects of the financial markets (including derivatives), including market transparency, investor protection, and clearing and settlement systems;
• publication of regulatory bulletins, providing updates on regulatory changes, compliance requirements and enforcement actions; and
• public consultations on proposed regulatory changes.