Bloomberg News

Milan Swap Fees May Not Cover Risk, Depfa Executive Tells Court

October 19, 2011

Oct. 19 (Bloomberg) -- Banks that sold swaps to Milan may lose money on the transactions because the fees charged don’t cover all the risk assumed, Marco Santarcangelo, a Depfa Bank Plc banker on trial for fraud, told a Milan court.

The city of Milan isn’t required to post collateral against a potential loss on its swaps while banks such as Depfa must do so with their counterparties, Santarcangelo said today. Margins on the swaps may be insufficient to cover the banks’ cost of funding, he said.

JPMorgan Chase & Co., UBS AG, Deutsche Bank AG and Dublin- based Depfa are on trial on charges of mis-selling swaps to Milan, derivatives that adjusted payments on a 1.7 billion-euro ($2.4 billion) bond offering in 2005. Prosecutor Alfredo Robledo said the banks misled Milan by telling the city it could save about 55 million euros with the bond sale and a series of swaps. Robledo says the banks earned 101 million euros in hidden fees. The banks deny the charges.

Depfa, a unit of Hypo Real Estate Holding AG, charged total gross margins of about 18 million euros on the 2005 swaps and subsequent restructurings, Santarcangelo told the court. The firm’s derivative traders assured Santarcangelo that the fees were in line with market practice, he said. At the end of the 30-year deal, banks may still record a loss, he said.

Depfa, which retained some of the bonds for its own investments, had been willing to buy the entire 1.7 billion-euro offering, said Santarcangelo. The firm was hired as one of four arrangers that helped sell the bonds to a larger group of investors. Depfa offered to place the bonds for a commission of 1 basis point, which covered just the costs, because it had been willing to do the transaction for free because it was seeking a return on the investment, Santarcangelo said.

As an owner of Milan’s bonds, Depfa’s interests are aligned with the city’s, he said.

The trial continues.

--Editors: Steve Bailey, Jon Menon

To contact the reporter on this story: Elisa Martinuzzi in Milan at

To contact the editor responsible for this story: Edward Evans at

The Aging of Abercrombie & Fitch
blog comments powered by Disqus