Monte dei Paschi di Siena is under intense pressure to reduce its counterparty exposure to Nomura after exceeding regulatory limits on swap contracts taken out with the Japanese lender as part of a structured derivatives trade.
The troubled Italian bank, which is currently asking shareholders to ratify a planned €3bn capital increase, has already said that it has exceeded the regulatory 25% of capital limit on single counterparty exposure under Basel III. Those exposures relate to the Alexandria trade that was entered into in 2009.
The transaction represents investments in long-dated Italian government bonds funded by repo agreements entered into with Nomura, which were asset-swapped to hedge interest rate risk.
The €3.05bn-notional trade, with liabilities stretching as far out as 2034, comprises 40 asset swap transactions, one long term repo and one repo facility, according to earlier documents issued by BMPS.
According to a communication from the Italian bank this week, the exposure to Nomura has risen to 34.68% of total capital, partly due to the impact of interest rate and credit spread shifts, but also do to an overall decrease in the bank’s total capital after it recorded a €5bn loss for 2014.
“The bank is currently considering measures to reduce the value of the exposure to fall within regulatory limits,” the bank noted in a communication to shareholders this week.
Losses on the structured trade have mounted. Reuters reported that the bank stands to lose US$1bn closing out the trade, citing a letter that the bank sent to prosecutors. Those losses have grown from around €300m when details of the trades first emerged two years ago.
Closing out the swap agreement will not be easy as the two parties are involved in litigation surrounding the structured derivatives trade, which were executed without board approval.
However, a similar trade with Deutsche Bank, dubbed “Santorini”, was closed out last year as part of a settlement relating to a compensation claim that BMPS filed against the German bank in the Court of Florence in 2013.
As part of that agreement, BMPS paid €525m to exit the trade. That represented a €221m reduction from the €746m mark-to-market value of the position comprising long-term repo agreements on €2bn notional of BTPs and €1.7bn notional of interest rate swaps.
The bank’s rights issue, scheduled for the second quarter, represents its second capital raising in less than a year after shareholders plugged a gaping capital hole through a €5bn cash call last June. Proceeds from the latest share increase are intended to boost the Common Equity Tier 1 ratio to 10.2% as required by the ECB.
Nomura declined to comment on the transactions, while BMPS was unavailable for comment.