The Italian swaps litigation: Torino at trial

When Italian local authorities entered into interest rate swaps in the early 2000s, the transactions were fairly unremarkable: hedging agreements, documented under ISDA Master Agreements and governed by English law. They have since become one of the most hard-fought battlegrounds in derivatives litigation, as authority after authority has sought to unwind the swaps on grounds of incapacity, invalidity and Italian regulatory breach.

The latest decision in that line is Dexia SA v Comune di Torino [2026] EWHC 1401 (Comm), in which Andrew Baker J delivered a comprehensive judgment following trial, granting Dexia extensive declaratory relief. Torino chose not to participate in the English proceedings, but the court considered arguments it had raised in parallel Italian litigation and rejected them.
 

BACKGROUND

In the early 2000s, Italian local authorities entered into interest rate swaps with international banks, typically to hedge the interest rate risk on their variable-rate borrowing. The swaps were documented under English law governed ISDA Master Agreements. After the 2007-08 financial crisis, interest rates fell sharply and remained low for an extended period, so many of the swaps developed a substantial negative value for the authorities.

The catalyst for the present wave of litigation came in 2020, with the decision of the Italian Supreme Court in Banca Nazionale del Lavoro SpA v Comune di Cattolica¹. The English courts have treated that decision as establishing that Italian local authorities lack the capacity to enter into speculative derivatives (an issue governed by Italian law). The Italian Supreme Court also held that certain swaps could amount to "indebtedness" within the meaning of Article 119(6) of the Italian Constitution: namely those that provide for an upfront payment, extinguish pre-existing loans, or significantly modify existing loans.

With one exception (the High Court's first-instance decision in Venezia, later reversed on appeal), the English court has rejected the authorities’ challenges and upheld the validity of the transactions.
 

TORINO

Between 2001 and 2006, Dexia (through its former Italian subsidiary, Crediop) and Torino, one of Italy's wealthiest municipal authorities, entered into interest rate swap transactions under a 1992 multicurrency cross-border ISDA Master Agreement, governed by English law. Torino's total debt at the time was approximately €5 billion, of which around 75% was at variable rates. The swaps hedged Torino's exposure on approximately €400 million of variable-rate bonds (the "BOCs") issued in 1998 and 1999 to fund infrastructure investment, including the 2006 Winter Olympics.

The interest rate swaps substituted the variable rate payable under the BOCs for a semi-fixed rate (bounded by a collar) until the end of 2009 and thereafter a fully fixed rate until maturity initially in 2018, extended to 2030. Andrew Baker J described them as "functionally indistinguishably from a mortgagor moving from a variable rate to a fixed rate" and found that they involved no upfront payment, no modification of the underlying indebtedness and no material uncertainty of outcome.

The court found that Torino entered into the transactions following a formal tender process in which multiple banks participated. It was advised throughout by independent financial advisors. The transactions were approved at every stage by resolutions of Torino's Municipal Board and Municipal Council.

In June 2024, Torino issued proceedings in the Court of Turin. It sought damages equal to the aggregate net payments it had made under the 2006 transactions or, in the alternative, declarations that the transactions were void under Italian law. Dexia commenced English proceedings in October 2024 seeking declaratory relief.

On 25 July 2025, Butcher J granted Dexia partial summary judgment, declaring that the 1992 ISDA jurisdiction clause conferred exclusive English jurisdiction and that Torino's Italian proceedings had been brought in breach of it. That decision is of significant interest in itself and is the subject of a separate article.

Dexia's remaining claims for declaratory relief on the validity of the transactions came to trial before Andrew Baker J in early June 2026. Torino did not appear and was not represented. The judge found that Torino had made a "conscious tactical choice" not to litigate in England, in the hope that it could persuade the Italian Supreme Court that the Italian proceedings were jurisdictionally competent. He considered that it was a “plain and obvious case of deliberate waiver” and proceeded in Torino's absence, identifying and explaining the case Torino would have put forward from its written arguments in the Italian proceedings.
 

KEY FINDINGS

Governing law and Article 3(3)

The court confirmed that Torino's capacity to enter into the transactions was governed by Italian law, but found that the material validity of the transactions was governed by English law under Article 3(1) of the Rome Convention. Article 3(3) of the Rome Convention provides that, where all elements relevant to a situation are connected with a single country, the parties’ choice of a foreign governing law cannot deprive that country’s mandatory rules of their effect. Had the transactions been treated as wholly domestic Italian arrangements, Article 3(3) could have been invoked to apply Italian mandatory rules notwithstanding the express English law choice. In Dexia Crediop SpA v Provincia di Pesaro e Urbino [2022] EWHC 2410 (Comm) and subsequent cases, the English courts have held that the use of the multicurrency-cross border form of ISDA Master Agreement, which by its nature contemplates more than one currency and more than one jurisdiction, establishes an international element sufficient to defeat that argument. Andrew Baker J reached the same conclusion here, also noting the involvement of foreign banks in back-to-back hedges as a further international element. Italian mandatory rules therefore had no application to the transactions.
 

The transactions were not speculative

Torino argued in the Italian proceedings that the transactions were speculative rather than hedging, primarily because they had a negative mark-to-market value at inception. Had that argument succeeded, the transactions would have been outside the capacity of an Italian local authority and therefore void. The speculation argument has been raised in prior Italian swaps cases to come before the English courts. Most significantly, in Banca Intesa Sanpaolo SpA v Comune di Venezia [2023] EWCA Civ 1482, the Court of Appeal reversed the only first-instance judgment to have held swaps void, holding that transactions structured to absorb an existing negative mark-to-market exposure were hedging, not speculative. The court in Torino reached the same conclusion. Andrew Baker J found that both limbs of the CONSOB test (which distinguishes hedging from speculation by reference to the purpose of the transaction and its correlation with the underlying borrowing) were satisfied: the transactions were entered into expressly for the purpose of reducing risk and there was a perfect financial and technical correlation between the swaps and the underlying borrowing. As to the negative mark-to-market, the court held that a negative opening MTM is simply a reflection of the bank’s margin built into the transaction terms and is irrelevant to whether a derivative is speculative.
 

The transactions did not constitute impermissible indebtedness

Torino also contended that the transactions constituted impermissible indebtedness under Article 119(6) of the Italian Constitution, which restricts local authorities from resorting to indebtedness other than to finance investment expenditure. Had that argument succeeded, it would have provided a further basis for holding the transactions void for want of capacity. This argument has also been raised in prior cases but has not been sustained in any case to date. The court rejected it again here. Andrew Baker J found that the transactions did not involve any upfront payment, did not extinguish or modify the BOCs and were not of a type that constituted indebtedness within the statutory definition. A plain vanilla interest rate swap with a collar does not involve any significant modification to the underlying borrowing being hedged. The rolling over of a negative MTM from prior transactions did not amount to an implicit upfront payment, consistent with the Court of Appeal's finding in Venezia.
 

Authority and ratification

Torino argued that the transactions had not been properly authorised under Italian law, on the basis that they constituted indebtedness requiring approval by its Municipal Council. Had that argument succeeded, it would have meant that the officials who executed the transaction documents lacked the necessary authority to bind Torino. The court rejected the argument on three grounds. First, each set of transactions was in fact covered by a specific Municipal Council Resolution giving approval and authority. Second, the officials who executed the transaction documents had been held out by Torino as properly authorised and had ostensible authority to bind Torino as a matter of English law. Third, Torino had ratified the transactions over a period of more than two decades through continued performance without objection and through the annual approval by its Municipal Council of budgets and financial statements that included the cashflows from the transactions.
 

No advisory duty

In the Italian proceedings, Torino contended that Crediop's tender presentation and Torino's acceptance letter gave rise to an advisory contract, under which Crediop owed Torino duties of care in connection with the transactions. Had that argument succeeded, it could have grounded a claim for damages based on the net payments Torino had made under the swaps. The court did not accept this argument. It found that the entire agreement clause in the Master Agreement precluded it and the Schedule expressly provided that Crediop was not acting as an advisor and that Torino was not relying on any investment advice. Torino had sought and received its advice from independent advisors, not from Crediop.
 

No recoverable loss

Even if an advisory duty had been found to exist and breach established, Torino would have needed to show that it suffered loss as a result. Torino claimed damages equal to the aggregate net payments it had made under the 2006 transactions. The court held that no recoverable loss had been established. The evidence demonstrated that Torino decided, prior to the tender process, to substitute the variable rate on its debt for a fixed or semi-fixed rate and took that decision independently. The court found that it was "a fanciful notion" to suppose that Torino would have left itself exposed to variable rates. Moreover, the expert evidence showed that Torino could not have done better than it did: the transactions it entered into with Crediop were the best deal available in the market.
 

Compliance with Italian regulations

The court also granted declarations confirming that the transactions complied with the specific Italian laws and regulations relied upon by Torino in the Italian proceedings. Among the most significant arguments was Torino's contention that the alleged failure to disclose the initial mark-to-market value, implicit costs and probabilistic scenarios meant that the contracts lacked the elements required for a valid agreement under Italian law: that they served a purpose worthy of legal protection, had a lawful economic function and had content that was sufficiently certain to be capable of enforcement. Had those arguments succeeded, the transactions would have been void. The court held that these requirements were satisfied even if Italian law applied, because the transactions pursued an expressly permitted straightforward hedging function. Significantly, the court relied on two recent Italian Supreme Court decisions, which confirm that the validity of a derivative under the Italian Civil Code does not depend on the formal disclosure of mark-to-market values, implicit costs or probabilistic scenarios. Disclosure of that kind is only required where the structure and complexity of the contract prevent the counterparty from understanding the risk from the contract itself. For transactions with the profile of the Torino swaps, no additional disclosure was needed. A similar approach to this issue has now been taken by both the English courts and, by analogy, the Italian Supreme Court, although those decisions did not directly concern public authorities.
 

Torino was a professional investor

The court declared that Torino was at all material times a professional investor under Article 31 of the Consob Regulation. The significance of that status is that it disapplies certain investor-protection rules that would otherwise require enhanced disclosure by the bank. A written declaration to that effect made by Torino to another bank was sufficient, as there is no requirement for the declaration to be made to a particular person. Torino also qualified as a professional investor by virtue of having issued financial instruments traded on regulated markets through a subsidiary.
 

Contractual indemnity

Dexia sought a declaration that it was entitled to a contractual indemnity from Torino on demand under the Master Agreement. The basis was that Torino’s commencement and pursuit of the Italian proceedings constituted a breach of the exclusive jurisdiction clause (as Butcher J had already found in granting partial summary judgment, as discussed above), triggering an obligation to indemnify Dexia in respect of expenses, including the substantial legal fees incurred in the proceedings. The court granted the declaration. It declined, however, to grant a separate declaration as to entitlement to damages, on the basis that Dexia had not brought a damages claim.
 

CONCLUSION

Torino continues the line of English authority upholding the validity of ISDA-documented interest rate swaps entered into by Italian local authorities. The court also drew on two Italian Supreme Court decisions handed down in February 2026, which explain and limit the effect of Cattolica, confirming that the validity of a derivative does not depend on formal disclosure of mark-to-market values or probabilistic scenarios. Those decisions did not directly concern public authorities, so their application to local authority swaps is by analogy. However, the principal Civil Code arguments deployed by Italian local authorities now face additional challenges and authorities from other civil law countries involved in swaps litigation in this jurisdiction may face similar arguments.

The scope of the declaratory relief granted is also notable. Beyond confirming the validity of the transactions, the court declared compliance with the specific Italian laws Torino had relied upon, that no advisory duty existed, that Torino suffered no recoverable loss and that Dexia is entitled to a contractual indemnity on demand.

Following Torino’s tactical decision to contest jurisdiction in Italy, rather than defend on the merits in England, the English Court has handed down a comprehensive adverse judgment, including an obligation to indemnify Dexia for the costs of obtaining it. While the Italian proceedings remain stayed pending the Supreme Court's ruling on jurisdiction, Dexia now holds a fully reasoned English judgment rejecting the arguments Torino has advanced. Despite the procedural protections put in place by the English Court to ensure that Dexia’s Counsel were required to “present fairly to the court points, factual or legal, that might be to the benefit of the absent party” it remains to be seen whether a different approach on any of the issues might be taken in a fully contested case or on different facts.
 

¹ Decision No 8770/2020