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Milan Settles Derivatives With UBS, Deutsche Bank, JPMorgan

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JPMorgan Chase & Co., UBS AG, Deutsche Bank AG and Depfa Bank Plc agreed to unwind interest-rate swaps with the city of Milan’s government in a 455 million-euro ($600 million) transaction.

Under the settlement, the banks, which are on trial for fraud, closed the swaps today at a “positive” mark-to-market for the city, according to an e-mailed statement from the Italian municipality.

The settlement isn’t for damages and doesn’t indicate any acceptance of responsibility by the banks, according to the statement. Milan agreed to drop claims for damages in the U.K. and Italy, where the banks face criminal charges. Milan agreed to forego civil claims in return for a “discount’ on the cost of closing the swaps, it said. The criminal trial will continue. Officials for the four banks declined to comment further.

The lenders charged 101 million euros in so-called hidden fees for arranging the derivatives that adjusted payments on the city’s 1.7 billion-euro bond offering in 2005 and from subsequent restructurings, according to city prosecutor Alfredo Robledo. The fees are fraudulent given that they weren’t disclosed, he said as he secured charges against the banks in March 2010.

“It’s hard to tell the net position of the settlement without the actual contracts,” which typically remain private, said Michael Dempster, founder of the University of Cambridge’s Centre for Financial Research.

The funds from the settlement will be held by the four banks as a guarantee on other derivative contracts that the city and the banks will maintain, according to the statement. Two-thirds of the settlement has been invested in Italian government bonds, according to the city.

Across Italy, cities faced with shrinking income and rising expenses bought swaps from banks to cut short-term interest costs, putting them at risk of paying more in the long run. About 300 municipalities were losing a total of 912 million euros on such derivatives as of March last year, Bank of Italy data show.

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