England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Rolls Building Fetter Lane London EC4A 1NL
		10/11/2016

The Hon Mr Justice Walker:

[Table of Contents]

A. Introduction	1
B. Dexia's alternative claims	6
B1. Dexia's alternative claims: introduction	6
B2. Restitution claim: proper law	10
B2.1 Restitution claim - proper law: introduction	10
B2.2 Restitution claim: the Italian law objection	13
B2.3 Validity of the reasoning in the Italian law objection	37
B3. Restitution claim: time bar	43
B3.1 Restitution claim – time bar: introduction	43
B3.2 Restitution claim – time bar: accrual of the cause of action	49
B3.3 Restitution claim – time bar: relief from mistake	58
B4. Restitution claim: change of position	69
B4.1 Restitution claim – change of position: introduction	68
B4.2 Restitution claim - change of position: analysis	69
C. Other financial services & civil law defences	78
C1. Italian financial services & civil law: introduction	78
C2. Did art 32 TUF apply, engaging art 30.6 and 30.7?	84
C3. Article 23.1 TUF & article 30 CR	95
C4. CC provisions dealing with "causa" and "oggetto"	111
C5. "Causa": did the swaps meet Italian law requirements?	116
C5.1 "Causa": introduction	116
C5.2 "Causa": breaches of Italian law	118
C5.3 "Causa": non-disclosure of MTM	119
C5.4 "Causa": speculative contracts	139
C5.5 "Causa": conclusions	141
C6. "Oggetto": did the swaps meet Italian law requirements?	142
C7. "Causa" & "oggetto": Article 3 non-derogable rules?	150
D. Prato's remaining defences	151
E. Prato's restitution counterclaim	155
E1. Prato's restitution counterclaim: introduction	155
E2. Restitution counterclaim: proper law	159
E3. Restitution counterclaim: change of position	173
F. Regulatory counterclaim	174
F1. Regulatory counterclaim: introduction	174
F1.1 The regulatory assertions	174
F1.2 Structure of this section & overlap with section G	176
F1.3 Regulatory counterclaim: legislative provisions	178
F1.4 Regulatory counterclaim: common ground	183
F1.5 Prato's Hidden Costs explanation	186
F1.6 Significance of initial MTM: Prato's propositions	189
F1.7 Other aspects of MTM urged by the parties	224
F2. Regulatory counterclaim: non-disclosure assertions	240
F2.1 Non-disclosure: introduction	240
F2.2 Non-disclosure: significance of 2009 changes	244
F2.3 Non-disclosure – art 28.2 CR: agreed propositions of law	251
F2.4 Non-disclosure – art 28.2 CR: Prato's cases	262
F2.5 Non-disclosure – art 28.2 CR: Dexia's cases	293
F2.6 Non-disclosure – art 28.2 CR: analysis	314
F2.7 Non-disclosure: articles 32.5, 36 and 61.1 g) CR	327
F2.8 Non-disclosure assertions: conclusion	339
F3. Regulatory counterclaim: structuring assertions	341
F4. Regulatory counterclaim: unsuitability assertions	350
F5. Regulatory counterclaim: right to withdraw assertions	352
F6. Regulatory counterclaim: conflict assertions	355
F7. Regulatory counterclaim: causation and damages	366
G. Advisory & misrepresentation counterclaims	380
G1. Advisory counterclaim	380
G1.1 Advisory counterclaim: introduction	380
G1.2 Advisory counterclaim: what does it add?	387
G1.3 Advisory counterclaim: other matters	400
G2. The misrepresentation counterclaim & defence	402
H. Concluding matters	406
Annex 1: abbreviations and short forms	Annex 1
Annex 2A: Dr Faro's evidence	Annex 2A
Annex 2B: what would Prato have done?	Annex 2B
Annex 3: extracts from Annex 3, CR	Annex 3

A. Introduction

1. My judgment dated 25 June 2015 dealt with local government law defences and financial services law defences to the main claim in these proceedings. I shall refer to it as "the main claim judgment" or "MCJ". The present judgment is concerned with issues not dealt with in the main claim judgment. Where convenient, I shall refer to the present judgment as "the judgment on remaining issues" or "JORI".
2. In the present judgment I adopt the short forms used in the main claim judgment. There is one exception. In the main claim judgment I used "Consob 11522/1998" to refer to regulation 11522 made by Consob on 1 July 1998. In the present judgment I use a shorter abbreviation: "CR". For ease of reference, Annex 1 to the present judgment sets out abbreviations and short forms used in the main claim judgment, and those used in the present judgment, along with the corresponding long form and notes.
3. An overview of the case will be found in section A1 of the main claim judgment. As to the structure of that judgment:

(1) sections A2, A3 and A4 of the main claim judgment describe the written evidence relied on by the parties, the course of the trial, market concepts concerning types of interest rate swap, the use of the expression "mark to market" or "MTM", and the use of terms "hidden" or "implicit" costs;

(2) section B describes key features of the background and history, and section C describes some general aspects of Italian law along with English law's approach to Italian law;

(3) in section D defences asserting contravention of Italian local government law are examined, and reasons are given for concluding that none of the defences in this category succeeds;

(4) in section E certain aspects of defences asserting contravention of Italian financial services and civil law are examined, and reasons are given for concluding that one such defence, relying on article 30 TUF, succeeds;

(5) section F notes that Prato, for the reasons given in section E, has succeeded in defending the main claim; it adds that while it is unnecessary to consider other defences advanced by Prato, other defences will, to the extent appropriate, be considered in a further judgment;

(6) section G explained why my conclusion in section E gave rise to a need for further submissions in relation to Prato's counterclaim and Dexia's alternative claims;

(7) section H explained that I would hear oral submissions on the directions to be given in order to take the matter forward.

4. The directions contemplated in section H of the main claim judgment were given after hearing oral submissions on 25 June 2015. They resulted in written submissions in July 2015 and a hearing on 23 October 2015. There were further written submissions in November 2015 and July 2016.
5. The matters dealt with in the present judgment (and the outcome) are these. Section B below deals with Dexia's alternative claims. (I find that the alternative claim for restitution succeeds.) Turning to Prato's other defences, section C discusses those which rely on Italian financial services law (which succeed) and Italian concepts of causa and oggetto (which do not succeed). Section D makes some observations on Prato's other defences. Turning to Prato's counterclaims, section E deals with the restitution counterclaim (which succeeds). Section F deals with the regulatory counterclaim. (I find that allegations of breach are, save in one instance, not established. The one instance concerns an established breach of article 30.6 TUF, but I conclude that this breach caused Prato no loss. Accordingly no damages are awarded to Prato.) The advisory counterclaim and the misrepresentation counterclaim are discussed in section G. (Neither of those counterclaims succeeds.) Section H deals with concluding matters, including the set-off defence. (The set-off defence succeeds: it appears likely that the amount payable by Dexia to Prato under the restitution counterclaim will be greater than the amount payable by Prato to Dexia under the restitution claim, and after set-off a net sum only will be payable by Dexia to Prato.)

B. Dexia's alternative claims

B1. Dexia's alternative claims: introduction

6. Two alternative claims were advanced by Dexia. The first alternative claim was briefly described in paragraph 14 of the main claim judgment. It was that, if swap 6 were invalid or unenforceable, then there should be declaration that Prato is bound by the terms of swaps 3, 4 and 5, because in such circumstances they would not have been terminated pursuant to swap 6. Dexia now recognises that the main claim judgment has the consequence that there is no scope for this first alternative claim. The reasoning in the main claim judgment concerning article 30 TUF is just as much applicable to the earlier swaps as it is to swap 6. Applying that reasoning, Prato has by its defence validly invoked article 30.7 TUF in relation to all the earlier swaps. It follows that Dexia cannot rely on swaps 3, 4 and 5 in the way which is envisaged in the first alternative claim.
7. Dexia advances a second alternative claim. I shall call it "the restitution claim". As noted in paragraph 254 of the main claim judgment, it arises in relation to swap 1, swap 2, swap 4 and swap 5: if those swaps are invalid, Dexia seeks to recover the net differentials paid to Prato under those swaps. The total of these net differentials is €1,252,784.
8. In the remainder of this section I analyse the arguments advanced on the restitution claim. I begin in section B2 with what I shall refer to as "the Italian law objection". The Italian law objection is a submission by Prato urging that the court should hold the proper law of the restitution claim to be Italian law, with drastic alleged consequences for Dexia. Section B3, in the event that Prato does not succeed on the submissions discussed in section B2, examines an English law time bar defence advanced by Prato. Section B4 examines the remaining English law defence advanced by Prato, which was a defence of change of position.
9. For the reasons given in sections B2 to B4, I conclude that the Italian law objection fails, as do both the time bar and change of position defences. The result is that Dexia's restitution claim succeeds.

B2. Restitution claim: proper law

B2.1 Restitution claim - proper law: introduction

10. The restitution claim as pleaded by Dexia relied solely on principles of English law. So far as the proceedings in this court are concerned, the first suggestion that there was an issue as to choice of law was in Dexia's written closing submissions filed on 21 July 2014. On 24 June 2015 Prato's skeleton argument, prepared for the purposes of oral submissions after the handing down of the main claim judgment, set out the Italian law objection.
11. The Italian law objection was summarised by Prato in broad terms in paragraph 9 of Prato's Note dated 16 November 2015:

… if Italian law governs the restitution claim and counterclaim, Dexia's restitution claim does not get off the ground because no Italian law claim has been pleaded.

12. Thus the Italian law objection depends upon a finding by the court that Italian law governs both the restitution claim and the restitution counterclaim. In section E2 below I make a finding that Italian law governs the restitution counterclaim. That being the case, I consider in section B2.2 below whether Prato is entitled to assert that Italian law governs the restitution claim. If so, I consider in section B2.3 whether the reasoning of the Italian law objection is valid.

B2.2 Restitution claim: the Italian law objection

13. Dexia introduced the restitution claim by amendment in 2014. It relied on principles of English law only. At that stage Prato had said, in its counterclaim, that Prato relied primarily on Italian law for the purposes of the restitution counterclaim. Also at that stage Dexia had said, in its defence to counterclaim, that English law governed the restitution counterclaim.
14. During the period up to the close of evidence I was not aware of any suggestion by either side that Italian law governed the restitution claim. However, that position changed. By 25 June 2015 my understanding, as set out in para 254 of the main claim judgment, had two elements:

(1) the first element was that Prato said that the restitution claim was governed by Italian law; and

(2) the second element was that if Prato were right, Dexia recognised that it must apply for permission to amend its particulars of claim.

15. My understanding arose from the following course of events:

(1) Section K of Dexia's written closing submissions began by dealing with the restitution claim and the restitution counterclaim together. When dealing with them together it stated at paras 305 and 306:

305. Three issues arise:

305.1. Are these claims governed by English law or Italian law?

305.2. If English law applies, does either party have a change of position defence?

305.3. If English law applies, does Prato have a limitation defence to the alternative restitutionary claim in relation to payments made before 7 December 2004?

…

306. Dexia contends that the restitutionary claims are governed by English law, whereas Prato contends that they are governed by Italian law.

(2) Dexia said at paragraph 310 of its written closing submissions that the same system of law must govern both the restitution claim and the restitution counterclaim, that if the court decided that the restitution counterclaim was governed by Italian law then the court should also apply Italian law to the restitution claim, and that if necessary Dexia would seek to amend to plead in the alternative that the restitution claim was governed by Italian law.

(3) The amendment proposed by Dexia was that a single sentence should be added to the part of the particulars of claim that dealt with the restitution claim. The proposed sentence was set out in footnote 620:

It is averred that this claim is governed by English law or in the alternative Italian law.

(4) In oral closing submissions Dexia sought permission to make this amendment, adding that all the relevant evidence as to Italian law had been deployed because the restitution counterclaim had been pleaded under Italian law.

(5) In answer Prato's oral closing submissions commented that no such claim had been pleaded, that it had been left very late to advance a completely new claim, and that that was all that Prato would say about it.

16. My understanding was incorrect in relation to both elements. As to the first element, despite what was said in paras 305 and 306 of Dexia's written closing, it is common ground that Prato had not at that stage either pleaded or submitted that the restitution claim was governed by Italian law. As to the second element, the position was:

(1) Dexia had said that if the court decided that the restitution counterclaim was governed by Italian law then the court should also apply Italian law to the restitution claim, and

(2) Dexia had orally sought permission to amend to plead in the alternative that the restitution claim was governed by Italian law, in answer to which Prato had commented only that no such claim had been pleaded and that it had been left very late to advance a completely new claim.

17. In a skeleton argument on 24 June 2015 Prato said it would "oppose Dexia's amendment application if made". Prato added, among other things:

25. … The rule that foreign law must be pleaded is there for a reason. It is essential that the court and the other parties have proper notice of the provisions of foreign law that are being relied on, with a fair opportunity to investigate those provisions and seek the assistance of foreign law experts. However, because it has never advanced any pleaded claim under Italian restitution law, any such claim by Dexia (as opposed to by Prato) has not been fully addressed or considered by the Italian law experts during the trial.

18. In paragraph 27 of that skeleton argument Prato advanced the Italian law objection as set out in section B1 above. When doing so, it made reference to Dicey, Morris and Collins on the Conflict of Laws ("Dicey"):

27. If Dexia is not permitted to amend its statement of case, it cannot advance a restitution claim in Italian law. It is trite law that "foreign law must be pleaded" (see e.g. [Dicey], 15th edition, at para 9-003). Accordingly, if the Court decides that Italian law governs any cause of action Dexia may have in restitution, Dexia's restitution claim must fail.

19. Dexia's oral submissions on 25 June 2015, among other things:

(1) observed that as the pleadings currently stood it was not open to the court to decide that the restitution claim was governed by Italian law;

(2) added that an application for permission to amend in that regard had been made in its oral closing submissions, and that Prato in its oral closing submissions did not expressly oppose the application;

(3) submitted that the court should decide whether to allow the amendment;

(4) in response to a query from me, acknowledged that there was an omission in the draft amendment in that it did not identify any way in which Dexia said that Italian law differed from English law; and

(5) as regards that omission, relied upon the circumstances at the time when the amendment was sought to be made, namely that in relation to the restitution counterclaim the experts had addressed "the topic of the right to obtain restitution under contracts that are invalid".

20. I responded that if an application for permission to amend were to go forward it would be necessary to formulate an amendment identifying what Dexia said were the relevant principles of Italian law and how they gave Dexia an entitlement. Dexia asked for liberty to come back. I suggested a period of 7 days for this purpose. Prato did not object to such a period, but reserved its position on other aspects of the matter. The upshot was that paragraphs 9 to 11 of my order dated 25 June 2015 stated:

9. The Claimant's application to amend its Particulars of Claim to plead in the alternative that its claim in restitution is governed by Italian law is refused.

10. If so advised, the Claimant may renew its application so to amend by issuing, filing and serving by 4pm on 2 July 2015 an application notice supported by a properly formulated draft amendment and a written skeleton argument which identifies such existing evidence of Italian law in these proceedings that the Claimant relies on.

11. If the Claimant makes an amendment application under paragraph 10 above, the Defendant may (if so advised) file and serve by 4pm on 9 July 2015 a written skeleton argument in response and any relevant evidence of Italian law on which it wishes to rely to the extent not currently addressed in the evidence before the Court.

21. In the event, no application was made under para 10 of the order: Dexia decided not to take the matter further. It informed the court of this in para 2 of its written submissions dated 17 July 2015. Para 3 of those submissions stated:

3. Accordingly no issue of choice of law arises in relation to Dexia's restitution claim, and the court must decide the claim solely by reference to English law principles.

22. However Prato, consistently with what it had said earlier, decided to take forward the Italian law objection. In supplementary written submissions for the hearing on 23 October 2015 Prato repeated the Italian law objection. Prato added, among other things, that Dexia had conceded that the same system of law must govern both the restitution claim and the restitution counterclaim. Dexia's response on this aspect, among other things, said that it had made no such concession, and that if it had made a concession then there was no legal or procedural obstacle to withdrawing it. Prato replied, among other things, that it was not open to Dexia "to renege on this concession".
23. Dexia's oral submissions on 23 October 2015, among other things:

(1) adopted submissions made in writing that:

(a) as Dexia had not renewed its application to amend, no issue of choice of law arose in relation to the restitution claim, and the court must decide the claim solely by reference to English law principles;

(b) it was for Prato to plead that Dexia's restitution claim was governed by Italian law if that was its position;

(c) as Prato had not taken this course, it was not open to Prato to contend that Dexia's restitution claim was governed by Italian law;

(2) repeated an observation made on 25 June 2015, namely that when formulating section K of its written closing submissions, Dexia had overlooked the fact that although the restitution counterclaim had relied on Italian law Prato had not pleaded that the restitution claim was governed by Italian law;

(3) denied that what was said in paragraph 310 of its written closing amounted to a "concession"; and

(4) in support of its entitlement to withdraw any such "concession", relied upon authorities cited in its written submissions.

24. Prato's oral submissions on 23 October 2015, among other things:

(1) adopted submissions made in writing that there had been a concession by Dexia;

(2) did not, however, contest Dexia's ability to resile from that concession; and

(3) added that this did not matter because it was clearly correct to say that the same system of law must govern both the restitution claim and the restitution counterclaim.

25. As to the lack of any pleaded case by Prato that Italian law governed the restitution claim, Prato:

(1) said that when introducing the restitution claim by amendment in 2014 Dexia took a deliberate decision to rely only on English law, knowing that Prato relied on Italian law for the purposes of the restitution counterclaim, and that Dexia may have done this so as not to prejudice its argument that English law governed the restitution counterclaim;

(2) repeated earlier observations that Dexia's closing submissions made a concession in para 310 that the same system of law must govern both the restitution claim and the restitution counterclaim;

(3) asserted that when Dexia took a deliberate decision not to renew its application to amend it did so without having withdrawn the concession in para 310;

(4) referred to what had been said by Dexia in paras 305 and 306 of its written closing;

(5) as to the question of the proper law of any restitutionary obligation arising from an invalid swap, submitted that no-one at the trial was in any doubt that this question was in issue;

(6) added that in any event this was a question of law for the court to decide; and

(7) submitted that there was a fundamental difference between saying that the applicable law for the relevant restitutionary obligations was in play and saying that "Dexia has only pleaded its claim under English law because it has".

26. There was a final contention on this aspect by Prato in its note dated 16 November 2015. What was said in the note was that it would be "absurd" for the court to be "forced" into:

holding both (1) that the restitution claims and counterclaims are governed by Italian law, but (2) Dexia has only opted to plead under English law, so the court will apply English law.

27. On consideration of all that has been said on this, in my view Dexia has established that it is not open to Prato to contend that Italian law governs the restitution claim. The reason is that neither side has ever pleaded that Italian law governed the restitution claim, and that in the present circumstances it is appropriate to insist on the general rule that a party seeking to advance an assertion that foreign law applies must plead that assertion in its statement of case.
28. Prato seeks to reply that it has pleaded a contention that its own restitution counterclaim under swap 6 is governed by Italian law. That is true, and in section E2 below I give a ruling which, in relation to the restitution counterclaim, upholds that contention. But it does not follow that the court is entitled to extend that ruling to the restitution claim in the absence of a pleaded assertion to that effect.
29. Prato advanced contentions that when introducing the restitution claim by amendment in 2014 Dexia took a deliberate decision to rely only on English law, knowing that Prato relied on Italian law for the purposes of the restitution counterclaim, and that Dexia may have done this so as not to prejudice its argument that English law governed the restitution counterclaim. I am willing to assume that these contentions are correct. Of themselves, they do not warrant proceeding on the basis that the same system of law must govern both the restitution claim and the restitution counterclaim.
30. Prato does not deny that in private law proceedings the general rule is that it is for the parties to define the issues by their statements of case. This rule applies with particular force if one or other party wants to say that foreign law governs an aspect of the case, for the content of foreign law is, with certain limited exceptions, a matter of fact which must be pleaded. Prato submits, in effect, that nonetheless in the present case the general rule should not apply.
31. In that regard, however, Prato does not rely on any overriding statutory provision. Nor does it rely on any overriding principle of public policy.
32. Prato points out that the assertion which Prato now wishes to make is an assertion of law. That characterisation is accurate. But in a case where the other side responds that the point ought to have been pleaded and was not pleaded, that characterisation will not automatically entitle the court to proceed as if it had been pleaded.
33. Prato advances a contention that it would be "absurd" for the court to be "forced" into "holding both (1) that the restitution claims and counterclaims are governed by Italian law, but (2) Dexia has only opted to plead under English law, so the Court will apply English law." The contention, however, is based on misconceptions. The court is not "forced" into doing anything. The position in private law cases is that in the absence of any applicable overriding legislative provision, principle of public policy, or other good reason for taking a different approach, the court simply decides the issues arising from the statements of case. In these circumstances, as it is the parties that define the issues, it is not "absurd" for an issue arising on a claim to involve a question of English law only, and for a similar issue on a counterclaim to raise a question whether foreign law applies with a particular result. The court is not "holding" that English law governs the restitution claim: it simply applies English law because neither side has pleaded that foreign law applies to the restitution claim.
34. As to Prato's "fundamental difference", if it were the case that an issue had been "in play" during the trial then that might be a good reason for departing from the general rule. Prato advanced a contention that, as to the question of the proper law of any restitutionary obligation arising from an invalid swap, no-one at the trial was in any doubt that this question was in issue. If that contention is said to apply to the restitution claim then I cannot accept it. In the present case all that happened was that when formulating section K of its written closing, Dexia overlooked the absence of a plea by Prato that Italian law governed the restitution claim. The notion that Italian law might govern the restitution claim had not been "in play" at all. What had been "in play" was Prato's contention that Italian law governed the restitution counterclaim. Save for that, not a single element of the Italian law objection had been advanced by Prato before receipt of Dexia's written closing.
35. I agree with Prato's submissions to this extent: paragraphs 305, 306 and 310 of Dexia's written closing made positive assertions that in relation to the restitution claim there was an issue as to the proper law of any restitutionary obligation arising from an invalid swap, and that the same system of law must govern both the restitution claim and the restitution counterclaim. Those assertions, however, were not concessions for the purposes of the Italian law objection. The Italian law objection had not been advanced at the time that those assertions were made. Until the Italian law objection was advanced there was nothing to concede. In any event, as Prato rightly accepted in oral submissions on 23 October 2015, Dexia was entitled to resile from any "concession". I reject the assertion by Prato in oral submissions that the "concession" was not withdrawn. The decision not to pursue para 310 of the closing submissions was notified to the court in Dexia's written submissions dated 17 July 2015. Para 3 of those submissions was manifestly inconsistent with the "concession". By that time Dexia had, in oral submissions on 25 June 2015, informed the court of the mistake that it had made.
36. In these circumstances I conclude that there is no good reason for departing from the general rule. It follows that Prato, as it failed to plead that Italian law governed the restitution claim, cannot advance the Italian law objection.

B2.3 Validity of the reasoning in the Italian law objection

37. The consequence of my ruling in section B2.2 above is that I do not need to examine the validity of the reasoning in the Italian law objection. For that reason my observations on this topic are not extensive.
38. If Prato were entitled to advance the Italian law objection, then there are two propositions that it would need to establish in order for that objection to be successful. The first is that the same system of law must govern both the restitution claim and the restitution counterclaim. I am prepared to assume for present purposes only that this is correct, that Prato is entitled to assert that it is correct, and that, consistently with my conclusion that Italian law governs the restitution counterclaim, I should hold that the restitution claim is governed by Italian law.
39. The second proposition is that because Dexia has not identified the content of relevant Italian law it follows that Dexia cannot advance the restitution claim. I do not accept this proposition. It is inconsistent with long established principles of private international law. Rule 25 of Dicey, 15^th ed., is concerned with cases to which foreign law applies. In that regard Rule 25(2) states:

(2) In the absence of satisfactory evidence of foreign law, the court will apply English law to such a case.

40. Prato maintains that its position is consistent with a passage in Dicey, 15^th ed., at para 9-002. It is true that this paragraph makes an observation, echoed in para 9-026, about "cases where it would be wholly artificial to apply rules of English law to an issue governed by foreign law". For present purposes I will assume that Rule 25(2) may not be operative in cases where it would be wholly artificial to apply it.
41. As to whether application of the rule would be wholly artificial, while I have held that Italian law governs the restitution counterclaim, Dexia's argument that English law governs that counterclaim, cannot in my view be characterised as wholly artificial. I think, too, that it is relevant that in the present case neither side has pleaded that Italian law, in so far as it affects the restitution claim, is any different from English law. Moreover, a particular feature of the present case is that the effect of Italian law on the restitution counterclaim has been considered by the parties. If Italian law applies to the restitution counterclaim, then Prato asserts, and Dexia accepts, that under Italian law the restitution counterclaim succeeds. By contrast, Prato has not pleaded that failure to apply Italian law prejudices its defence to the restitution claim. Prato's sole purpose in advancing the Italian law objection is to torpedo the restitution claim without needing to show that Italian law would reject that claim. In these circumstances it is Prato's Italian law objection, and not Dexia's reliance on English law, that is "wholly artificial".
42. For these reasons, even if Prato were entitled to advance the Italian law objection, I would have held that the Italian law objection failed. I add an observation in relation to the opening words of Rule 25(2) in Dicey, 14^th edition. It was not suggested by Prato that, in relation to the restitution claim, I already had satisfactory evidence of foreign law. Such evidence of Italian law as had been given at the trial suggested that under Italian law the restitution claim would succeed. Prato, however, made it clear for obvious reasons that it did not accept that this was the case.

B3. Restitution claim: time bar

B3.1 Restitution claim – time bar: introduction

43. For the purposes of the Limitation Act 1980 the restitution claim arising from the invalidity of the swaps is an "action founded on simple contract". It is an action under an implied contract. For present purposes that implied contract can be described using the historic terminology that money "had and received" by a defendant under a transaction will be repaid if the transaction is invalid and, by reason of the invalidity, the money in question was had and received "to the use of" the claimant.
44. Under ss 1 and 5 of the Act an ordinary time limit is imposed: such an action shall not be brought after the expiration of 6 years from the date on which the cause of action accrued. The restitution claim was introduced by amendment. It is common ground that under s 35(1)(b) of the Act it is deemed to be a separate action and to have been commenced on the same date as the original action, namely 7 December 2010. The ordinary time limit would thus bar recovery of a payment where the cause of action for restitution of that payment accrued before 7 December 2004.
45. The ordinary time limit is subject to exceptions. One such exception is found in s 32 of the Act. That section includes provisions under which, if the action is for relief from the consequences of a mistake, the period of limitation shall not begin to run until the claimant has discovered the mistake or could with reasonable diligence have discovered it.
46. Paragraph 7A of Prato's defence relied on statutory limitation as a defence to the restitution claim. It noted that the restitution claim relates to 10 payments by Dexia to Prato between 4 December 2002 and 29 June 2006. It said, in effect, that the defence of time bar applied to the entire restitution claim, or alternatively to the claim in respect of 5 payments made before 7 December 2004. But Prato's closing submissions confined the time bar defence to those 5 payments. The remainder of section B3 of this judgment accordingly applies only to those 5 payments. The other payments were made after 7 December 2004 and in relation to them there is no longer any suggestion that the time bar defence can assist Prato.
47. Throughout the trial, and during the period up to and immediately after the main claim judgment, Dexia's only answer to the time bar defence relied on the exception in s 32 for relief from the consequences of a mistake. In Dexia's supplemental written submissions dated 17 July 2015, however, it advanced a new, and logically prior, answer that in so far as the swaps were invalidated under article 30(7) TUF its cause of action for the restitution claim accrued well within the limitation period. This new answer had not been pleaded, but there was no objection by Prato to it being advanced.
48. Section B3.2 below deals with Dexia's new answer and examines when the cause of action accrued. In section B3.3 I turn to examine the pleaded answer relying on mistake.

B3.2 Restitution claim – time bar: accrual of the cause of action

49. The words of s 5 of the Act make it plain that time does not begin to run until the cause of action has accrued. As noted in section B1 above, the reasoning in the main claim judgment has the consequence that Prato by its defence validly invoked article 30.7 TUF in relation to all the earlier swaps. The defence was served on 29 June 2011. Dexia's new answer is that it was only on that date that the cause of action for the restitution claim, in so far as based upon invalidity of the swaps under article 30 TUF, accrued.
50. Dexia submitted orally on 23 October 2015 that it was easy to test the position by asking this question: could Dexia have sued to recover the payments during the period before 29 June 2011? Dexia's response to that question was that it could not have sought restitution in reliance on invalidity under article 30 TUF, because Prato had not during that period exercised its option to treat the swaps as invalid under article 30.7 TUF. In this regard Dexia relied by analogy upon the decision of the Court of Common Pleas (Sir Nicholas Tindal CJ, Park, Gaselee and Alderson JJ) in Cowper v Godmond (1833) 9 Bing 748.
51. Prato responded orally on 23 October 2015 by drawing attention to the wording of article 30.7 TUF. As set out in translation in section E2 of the main claim judgment, Dexia's failure to state the right of withdrawal in the forms:

… shall result in the related contracts being null and void, …

52. This must, Prato submitted, mean that the swaps were null and void from the moment of the transaction. The suggested consequence was that Dexia's cause of action for restitution accrued at the time of payment, for at that time the payment was made under a swap which was null and void.
53. Prato acknowledged that the words cited above did not conclude article 30.7. The words which followed were:

… with only the client having the right to enforce this provision.

54. As to that, Prato said that if time ran against the bank because a number of years passed before the client's right was exercised, then that was an aspect of the scheme under article 30 TUF. In response to an inquiry from me, however, Prato accepted that Dexia had to keep making payments due under a swap during the period prior to exercise by Prato of its article 30.7 TUF right, and that during this period Dexia could not say that the swap in question was invalid. Prato added that Cowper v Godmond was not in point because the transaction in that case was not invalidated from the outset. By contrast, submitted Prato, the language of article 30.7 TUF must mean that the transaction was null and void from the beginning.
55. Dexia observed in reply that these submissions cannot change the answer to the question it posed at the outset. I agree. Applying first principles, it cannot be right to say that a cause of action, arising because payment had been made under an invalid swap, accrued during the period before 29 June 2011 if, as Prato accepts, during that period Dexia could not say that the swap was invalid.
56. Moreover the same principles, as it seems to me, constitute the essential reason for the decision in Cowper v Godmond. The plaintiffs in that case held the rights of the grantee of an annuity. They claimed the return of money paid as part of the consideration for purchase of the annuity. The deed of annuity had been executed, and the money had been paid, more than 6 years before the action was brought. A memorial registered shortly after the deed contained an error which entitled the grantor to avoid the annuity. It was within the six year period, however, that the grantor elected to avoid. When sued, one of the answers given by the grantor was that the limitation period of 6 years began to run when the money was paid, and thus had expired when the action was brought. The judges of the Court of Common Pleas rejected that answer. It is not clear to me from the report whether Prato is right to say that the avoidance did not render the transaction null and void from the beginning. What is clear is that the reasoning did not turn on the distinction identified by Prato. The court found that the action had been brought within time because, in the words of Sir Nicolas Tindal CJ, the cause of action "was not complete" until the grantor elected to avoid. Park and Gaselee JJ agreed, with Park J pointing out that the cause of action was not complete until the grantee could sue. That reasoning is directly applicable to the present case. So also is the reasoning of Alderson J, substituting "net payment" for "consideration money", "Prato" for "the grantor", "Dexia" for "the grantee", and "swap" for "annuity":

It may be conceded that the consideration money was money had and received by the grantor at the time of payment; but it was not had and received by the grantor, to the use of the grantee, until the grantor elected to treat the annuity as void.

57. It follows from this reasoning that the restitution claim, in so far as it arises because relevant swaps were invalid under article 30 TUF, was brought within the ordinary time limit. The result is that, without needing to examine other contentions by Dexia, Prato's time bar defence fails.

B3.3 Restitution claim – time bar: relief from mistake

58. In so far as the restitution claim arises because relevant swaps were invalid under article 30 TUF, my conclusion in section B3.2 makes it unnecessary for Dexia to rely upon an exception to the ordinary time limit. In case I am wrong, I deal briefly here with Dexia's reliance on s 32 of the Act.
59. When introducing the restitution claim by amendment, Dexia pleaded that each of the net payments was made in the mistaken belief that Dexia was under a valid, binding and enforceable obligation to do so. Prato's responsive amendment to its defence did not contest this. The contention advanced by Prato was that Dexia ought, with due diligence, to have been aware of the mistake alleged at or about the time of the relevant payments. The reasons pleaded by Prato in support of this contention concerned matters which, on Prato's case, would have led a conclusion that the swaps were invalid because Prato lacked capacity to enter into them. None of the reasons pleaded by Prato advanced a contention that Dexia, by the exercise of reasonable diligence, could have discovered that the swaps were invalid under provisions in article 30 TUF concerning off-site offers. Following the conclusions in the main claim judgment, however, Dexia does not say that Prato should be barred from advancing such a contention.
60. Dexia's opening submissions at the start of the trial relied on the decision of the House of Lords in Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 ("Kleinwort"). After the conclusion of evidence, Prato's closing submissions:

(1) sought to distinguish Kleinwort;

(2) asserted that Dexia held itself out to Prato as having not only financial expertise but also legal expertise in structuring legally suitable and compliant swap operations;

(3) submitted that in such circumstances, it did not lie in Dexia's mouth to allege that it could not with reasonable diligence have discovered the legal defects in the structures it proposed; and

(4) added that there could be no suggestion that Dexia did not know the relevant facts: its employees structured the transactions, they knew full well their terms and characteristics, and Dexia was very alive to the positive values it was creating for itself by entering into the transactions.

61. There was no evidence at trial as to what, if any, steps Dexia had taken, during the relevant period or at all, to consider whether the swaps might be invalid for failure to comply with Italian financial services law. In that regard, Dexia submitted that it made the net payments on the tacit assumption that the swaps were valid and binding. As noted above, Prato did not expressly contest Dexia's plea that it had believed in the validity of the swaps. It seems to me to be a fair inference that, whether by reason of a tacit assumption or otherwise, there was such a belief. For the reasons given in the main claim judgment that belief was mistaken.
62. The parties' submissions at the close of evidence proceeded on the footing that I should consider the question whether a commercial bank such as Dexia could with reasonable diligence have discovered that it was mistaken in assuming that the swaps complied with Italian law. The focus at that stage was on Italian law concerning the powers of local authorities. In their submissions after the main claim judgment the focus was on Italian financial services law, and in particular the "off-site offer" requirements of article 30 TUF.
63. The question that I consider below is thus whether a commercial bank such as Dexia could with reasonable diligence have discovered that relevant swaps were in breach of the "off-site offer" requirements of article 30 TUF. During the relevant period there were rival views as to the extent of those requirements. Reasonable diligence would have uncovered that among the rival views there were some which would have the consequence that relevant swaps were invalid. It does not seem to me, and it was not suggested, that the entitlement to relief from the consequences of mistake would be lost merely for this reason. The question under debate for present purposes, as it seems to me, is whether with reasonable diligence Dexia could have discovered that the better view under Italian law was that relevant swaps were invalid because they were in breach of the "off-site offer" requirements of article 30 TUF.
64. As to reasonable diligence in this context, Dexia's oral submissions on 23 October 2015 noted that the Court of Cassation in Mediolanum had departed from the interpretation adopted previously in Fideuram. Dexia submitted that in those circumstances there could be no basis for saying that it could, with reasonable diligence, have discovered before 7 December 2004 that the net payments by it to Prato had been made by mistake.
65. In broad terms Prato's oral submissions on 23 October 2015 made 4 points:

(1) the text of article 30.6 TUF had been constant throughout the relevant period: this is not a case involving a change in legislation;

(2) while Dexia's case on article 30 TUF had urged an interpretation under which there was a need for surprise for that article to be engaged, article 30 itself makes no reference to a need for surprise;

(3) neither the decision in Mediolanum nor that in Fideuram were relevant: in the absence of a doctrine of precedent in Italy neither decision was a source of law, and it could not be said that the law had changed as a result of a subsequent judicial decision; and

(4) the decision in Fideuram could not justify failure to appreciate that there had been breaches of article 30.6 TUF, for that decision in 2012 was long after the relevant swaps were entered into.

66. My analysis is:

(1) Kleinwort resolves issues of principle that are not disputed in the present case; I do not gain assistance from it for the purposes of the objective assessment I must make as to whether Dexia could with reasonable diligence have discovered its mistake;

(2) I am content to assume that the factual assertions in Prato's closing submissions, as summarised earlier in this section, are correct;

(3) those factual assertions are matters that I take into account in considering what Dexia ought, with reasonable diligence, to have discovered;

(4) the mere fact that Dexia held itself out as having relevant legal expertise does not debar Dexia from asserting that it could not with reasonable diligence have discovered a mistake: even the most accomplished lawyers may reasonably be mistaken;

(5) Prato is right to point out that the present case does not involve a change in legislation, that article 30 TUF makes no reference to a need for surprise, and that Fideuram had not been decided at the time that the swaps were entered into;

(6) nevertheless, the two lines of reasoning in Fideuram reflected earlier lines of reasoning in legal writing and judicial decisions, and if those earlier lines of reasoning had been applied in the present case then the swaps would not have been invalidated for failure to comply with article 30 TUF;

(7) while article 30.6 TUF makes no express reference to a need for surprise, that does not of itself show that a need for surprise is absent from what Italian courts refer to as the ratio legis;

(8) moreover if the ratio legis did not include the wider approach eventually taken in Mediolanum, then the need for surprise relied on by Dexia could logically justify the meaning of the word "placement" propounded in the earlier lines of reasoning mentioned above;

(9) the lack of a system of precedent in Italy does not mean that Fideuram is irrelevant: the decision in that case shows that eminent judges thought in 2012 that the scope of article 30 TUF was narrower than has now been held to be the case in Mediolanum;

(10) my assessment overall of the material before me, including the approach taken by Consob, is that what became the Fideuram lines of reasoning were the dominant trend during the period prior to 2012;

(11) for all these reasons I conclude that in the period prior to 7 December 2004 the exercise of reasonable diligence could not have led Dexia to discover its mistake: on the contrary, it would have led to the conclusion that in law the better view was that the relevant swaps did not engage the "off-site offer" provisions in article 30 TUF.

67. In these circumstances I conclude that, if necessary, Dexia would be entitled to rely upon s 32 of the Act in order to say that the restitution claim was not time-barred.

B4. Restitution claim: change of position

B4.1 Restitution claim – change of position: introduction

68. In section B3 above I have rejected Prato's limitation defence to the restitution claim. The only other defence pleaded by Prato to that claim was change of position. I deal with it in section B4.2 below.

B4.2 Restitution claim - change of position: analysis

69. Prato's pleaded case said that it relied on a defence of change of position. In that regard, its pleaded case was that:

(a) at the time it received the payments, [Prato] regarded the First, Second, Fourth and Fifth Swaps as valid and binding, …; and

(b) [Prato] treated the proceeds of the payments as additions to its revenues for the years in question and, having received such additional revenues, then disbursed them in various ways including the payment of interest on debt. In the premises, the receipt of the proceeds has not resulted in a net overall increase in [Prato's] wealth and it would now be inequitable to enforce restitution of the sums received.

70. Dexia's pleaded reply put Prato to strict proof of any relevant change of position. In addition, Dexia advanced an objection that ordinary expenditure (such as the payment of interest on debt) could not constitute a relevant change of position since Prato would have incurred such costs in any event. I shall refer to this as "the ordinary expenditure objection".
71. Prato's submissions at the close of evidence relied upon the analysis by Hamblen J in Bloomsbury International Ltd v Sea Fish Industry Authority [2009] EWHC 1721 (QBD), [2010] 1 CMLR 12 ("Bloomsbury"), at para 137. I set out the relevant passage with emphasis added by Prato:

.. the mere fact that the recipient has spent the money is not enough. A causal connection must be shown, on at least a "but for" basis between the receipt and any expenditure or change of position upon which the defendant wishes to rely. However, in the context of government expenditure, there is no need to demonstrate a precise link between particular receipts and particular items of expenditure and that it is reasonable to infer that planned expenditure would not have taken place at the level which it did but for the availability of the tax receipts which were taken into account in fixing departmental budgets. In such circumstances it would be inequitable to require restitution to be made for tax which was paid by mistake when the money has long ago been spent in the public interest and everybody assumed in good faith that it had been validly levied.

72. In that passage Hamblen J was summarising views expressed in paras 343 to 347 of the judgment of Henderson J in Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2008] EWHC 2893 (Ch); [2009] STC 254 ("FII 2008"). In those paragraphs Henderson J applied to a claim for restitution of tax payments the "wider" approach to the change of position defence adopted by the Court of Appeal in Scottish Equitable plc v Derby [2001] EWCA Civ 369; [2001] 3 ALL ER 818.
73. In supplemental written submissions dated 17 July 2015 Dexia:

(1) submitted that what might be a reasonable inference in the context of tax receipts would not be a reasonable inference in the context of a swap;

(2) noted that at para 147 of Bloomsbury Hamblen J had identified, as one of the tests to be satisfied in order for a change of position defence to succeed, that the recipient of the monies in question:

… has arranged its budgeting and planned its expenditure on the basis that it was entitled to receive and spend those monies …

(3) submitted that Prato's evidence, as set out in para 3 of Zenti 2, did not satisfy this test;

(4) added that the only concrete example of expenditure given by Mr Zenti was the payment of loan interest, which Prato would have been bound to pay whether or not it had received the net payments in question;

(5) cited observations by Henderson J in paragraphs 349 to 353 and 397 of a further judgment handed down on 18 December 2014, Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2014] EWHC 4302 (Ch); [2015] STC 1471 ("FII 2014"), including:

349 … my preliminary views on the factual elements of the defence at the first trial were probably premature, and should not be read as implying that the defence is likely to succeed whenever the Revenue choose to invoke it. ...

350 The basic question which I have to consider is whether I am satisfied, on the balance of probabilities, that the Revenue have changed their position as a consequence of the payments of unlawful tax by the … claimants in such a way that they would be worse off by making restitution than if the overpayments had never been received. If that question is answered in the affirmative, the defence will succeed to the extent that the Revenue would be worse off, but no further.

…

353 … it is not enough for the defendant merely to show that the money in question has been spent. The expenditure must be "extraordinary", in the sense that it would not have been incurred but for the overpayment. The expenditure need not, however, be extraordinary in the sense of being of an unusual nature, either intrinsically or for the particular defendant. Thus increased expenditure of a routine nature can qualify, provided that the causative test is satisfied.

…

397 Furthermore, even if the Revenue's methodology were otherwise reliable, I would not be satisfied on the evidence before me that it could be applied to the payments of utilised ACT. The benefit to the government in such cases is of a cash flow nature, but I have no reliable evidence of the way in which this was reflected in government forecasts. Indeed, for all I know it may be the case that all receipts of ACT were routinely left out of account when planning future government expenditure, on the footing that it could not be known in advance when, or to what extent, they would be utilised by being set off against MCT. Had that been the case, it would follow that all the overpayments of ACT should be left out of account, whether or not they were subsequently utilised, leaving only the relatively trivial overpayments of corporation tax to which the defence of change of position could in principle apply. I consider, therefore, that a full explanation of the way in which payments of ACT were in fact taken into account in government forecasts would have been a prerequisite for any successful establishment of the defence on the facts in relation to the ACT claims, and that the absence of such evidence is in itself a fatal flaw in the Revenue's case.

(6) submitted that in the present case Prato's evidence did not come close to establishing that it incurred additional expenditure as a result of the payments under the swaps, still less that if Prato were required to give restitution, then it would be worse off than if it had never received those payments.

74. Dexia's oral opening submissions on 23 October 2015 stressed the need for a defendant to establish a "but for" causal connection between the receipt and any change of position on which the defendant wished to rely. They went on to repeat and develop the points made in writing on 17 July 2015. Prato's oral answering submissions repeated what had been said in Prato's closing at the end of the evidence, and added that Prato did not propose to say anything more.
75. To my mind Dexia is right to stress the need for a defendant to establish a "but for" causal connection between the receipt and any change of position on which the defendant wished to rely. The wider approach in Scottish Equitable does not do away with this need. In this regard Dexia's ordinary expenditure objection must, as it seems to me, be limited to such ordinary expenditure as would have been incurred in any event. As so limited, it will rightly debar Prato from relying on the payments of interest cited by Mr Zenti. I do not find it to be likely, and indeed Mr Zenti does not suggest, that, in the absence of any or all of the payments, Prato would have failed to meet its obligation to pay interest. The question therefore becomes whether I can conclude that in some other way there was a change of position, causally linked to the mistaken receipt, which makes it inequitable for Prato to be required to make restitution.
76. In the present case nowhere in Prato's evidence is any such change of position identified. Thus it was not, for example, said that after receipt of any particular payment Prato spent money in a way that it would not otherwise have done. I acknowledge that in an appropriate case this can be established by inference. It is not necessary for me to embark on a consideration of the extent to which what was said in FII 2014 may detract from the views expressed in FII 2008 and in Bloomsbury. The reason is that I accept Dexia's submission that those cases can be distinguished because there is an important difference from this case on the facts. Those cases were concerned with receipts of taxes and levies, in circumstances where these were one of the main ways in which expenditure was financed. Receipts of that kind are very different from receipts, should they arise, under a swap. A local authority's budget and its planned expenditure would not ordinarily be determined by whether or not there had been net payments under a swap. I have no evidence that Prato's budgeting and planning of expenditure was affected by the fact, on those occasions when it was the fact, that net payments had been received. It was not suggested by Prato that the payments were substantial in size when compared with Prato's overall planned expenditure. Nor were any other particular features of the payments identified by Prato as features which could lead the court to conclude that the payments had caused Prato to change its position. It does not seem to me inherently likely that Prato's budgeting and planning decisions would have been affected by the presence of the net payments that were made under the swaps. The result is that I cannot make an inference to that effect.
77. Consistently with the factual allegations in Prato's pleaded case as set out above, Mr Zenti said in his second witness statement that sums received were used to finance current expenses. That of itself does not suggest that there is any injustice in requiring repayment. The last sentence of subparagraph (b) of Prato's pleaded case, as set out above, is that an obligation to repay Dexia would be unjust on the premise that Prato's receipt of the payments had not resulted in a net overall increase in Prato's wealth. My conclusion set out above has the consequence that the premise is wrong. Dexia's payments have in fact resulted in a net overall increase in Prato's wealth, because Prato financed current expenses from those payments when it would otherwise have financed those same expenses from Prato's other resources. In these circumstances there is no causal change of position and no basis on which to hold that it would be inequitable for Prato to make restitution. Prato's defence of change of position accordingly fails.

C. Other financial services & civil law defences

C1. Italian financial services & civil law: introduction

78. In the present case the parties made a choice of English law to govern their relationship under the swaps. Section E1 of the main claim judgment noted that Prato relies on particular provisions of Italian financial services law and Italian civil law. In order to be able to rely on these provisions it was necessary for Prato to show that this is a case where, in the words of article 3 of the Rome Convention, "all other elements relevant to the situation at the time of the choice are connected with one country only …". I shall refer to the country contemplated by article 3 in this way as "the sole connected country". Prato asserted that in the present case the sole connected country was Italy. In section E1 of the main claim judgment I gave my reasons for concluding that Prato was right.
79. Section E1 of the main claim judgment explained that the consequence is that Prato is entitled to rely on provisions of Italian law if they have a particular character. The provisions in question will have that character if they meet the test necessary to constitute "mandatory rules" for the purposes of article 3 of the Rome Convention. The expression "mandatory rules" is used in that article to describe "rules which cannot be derogated from by contract". The expression "mandatory rules" has, however, been used elsewhere in different senses. Accordingly in the remainder of this judgment I use the expression "Article 3 non-derogable rules" to refer to rules which, within the meaning of article 3 of the Rome Convention, "cannot be derogated from by contract".
80. The main claim judgment then set out in the remainder of section E and in section F my reasons for concluding that, even if it were Prato that solicited the swaps, they nevertheless constituted "contracts for the placement of financial instruments … executed off-site" within the meaning of article 30.6 TUF. It was accepted by Dexia that if the swaps fell within article 30.6 TUF, then they were in breach of an Article 3 non-derogable rule requiring relevant forms to state the 7 day right of withdrawal. It was also accepted by Dexia that, if there had been such a breach of article 30.6, then article 30.7 was an Article 3 non-derogable rule giving Prato a right to insist that the swaps were null and void, a right which Prato had exercised in its defence in these proceedings.
81. My conclusion in the main claim judgment made it unnecessary to examine the other grounds on which Prato said that the swaps breached Article 3 non-derogable rules. Prato asks that I nevertheless deal with those other grounds. I agree that it is desirable for me to do so. When doing so, I assume that, for the reasons given in section E1 of the main claim judgment, I am right to hold that Prato is entitled to rely upon such provisions of Italian law as constitute Article 3 non-derogable rules. Without such an assumption none of these grounds would assist Prato.
82. On that basis, in sections C2 and C3 below I discuss Prato's contentions that the swaps fell within article 32 TUF and thus engaged article 30.6 and 30.7 TUF (section C2) and fell within article 23 TUF and article 30 CR (section C3). Section C4 sets out provisions in the Civil Code dealing with causa and oggetto. Sections C5 and C6 discuss Prato's additional reliance upon the Italian civil law requirements for, respectively, a lawful causa and a determined or determinable oggetto. Dexia accepts that the rules discussed in sections C2 and C3 are Article 3 non-derogable rules. However it does not accept that the requirements discussed in sections C5 and C6 have that character. Thus, depending on my conclusions in sections C5 and C6, a question might arise as to whether, in the event of breach of these requirements, such a breach constituted a breach of an Article 3 non-derogable rule. In section C7 I explain why my conclusions in sections C5 and C6 make it unnecessary and undesirable to examine that question.
83. For the reasons given in those sections I conclude that:

(1) Prato is entitled to say that the swaps, if otherwise valid, are nonetheless null and void because they breached Article 3 non-derogable rules on distance contracts, and Prato has in the defence in these proceedings validly exercised its entitlement under articles 30 and 32 TUF to assert that this is the case;

(2) Prato is entitled to say that the swaps, if otherwise valid, are nonetheless null and void because they breached Article 3 non-derogable rules requiring adherence to the form prescribed by article 23 TUF and article 30 CR, and article 23 TUF lays down that contracts not in the prescribed form are null and void;

(3) if the swaps were otherwise valid, Prato's complaints of unlawful causa and lack of causa would not succeed as a matter of Italian law, and it is unnecessary to decide whether requirements of Italian law in this regard constitute Article 3 non-derogable rules;

(4) if the swaps were otherwise valid, Prato's complaints of lack of a determined or determinable oggetto would not succeed as a matter of Italian law, and it is unnecessary to decide whether requirements of Italian law in this regard constitute Article 3 non-derogable rules.

C2. Did art 32 TUF apply, engaging art 30.6 and 30.7?

84. Article 32 TUF is concerned with distance marketing techniques. Section E2 of the main claim judgment sets out article 32.1 TUF, along with relevant provisions in article 30 TUF. For present purposes, the only question which arises is whether the swaps fell within article 32 TUF in the way contemplated by article 30.6 TUF. If it did, then the swaps engaged the 7 day right of withdrawal conferred by article 30.6 TUF and the consequence identified in article 30.7 TUF for failure to state that right in relevant forms, with the result that, for the reasons given in the main claim judgment, Prato was entitled in its defence in these proceedings to insist that the swaps are null and void.
85. Prato's case for present purposes is that article 30.6 TUF is engaged by the swaps because both the "contract for the placement" and the "contract proposal" for the swaps came about through "distance marketing techniques" as defined in article 32.1 TUF. Applying the specific wording of article 32.1 TUF, the techniques used by Dexia in both respects included "techniques of contacting customers … which do not involve the simultaneous presence" of representatives of Prato and Dexia. For this purpose Prato's defence asserts that the documents drafted to comprise Prato's offer to enter into each swap were sent to Prato by Dexia and executed by Prato at Prato's offices. This factual contention is plainly correct.
86. In these circumstances the only question which arises concerns what is contemplated by article 30.6 TUF when it uses the italicised words below:

… contracts for the placement of financial instruments … which are … placed at a distance pursuant to Article 32 … The provisions above also apply to contract proposals made … at a distance pursuant to Article 32.

87. It is common ground that there are no relevant decisions of Italian courts on the meaning of the italicised words. As to that meaning, I must be guided by Italian principles of statutory interpretation described in section C4.2 of the main claim judgment.
88. Dexia's pleaded reply made reference to provisions using the Italian word "intermediari". The translation used at the trial was "intermediaries". In English the word "intermediaries" connotes those acting as brokers. However both TUF and CR at times use the word "intermediari" to refer not only to brokers but also, depending on the context, to those acting for their own account. On this basis, Dexia's reply was that:

Art. 30 and Art. 32 TUF only apply where an intermediary carries out an unsolicited activity of offer, promotion and/or placement of investment services. They have no application where no marketing activity and/or solicitation and/or offer is undertaken by an intermediary in relation to the provision of investment services (which include the execution of swap transactions).

89. In the context of off-site offers as defined in article 30 TUF, I have held in the main claim judgment that the assertions in this pleaded reply cannot stand in the light of the decision of the joint chambers in Mediolanum. If I am right, then the same applies when determining what is meant by the passages in article 30.6 TUF referring to article 32 TUF. But even if I am wrong, Professor Gentili agreed in cross examination that references in article 30.6 TUF to contracts "placed at a distance pursuant to article 32" were not subject to the limitation he had identified for "off site" contracts. In particular he accepted, subject to a proviso, that references in article 30.6 TUF to contracts "placed at a distance pursuant to article 32" would apply whether the initiative came from the customer or the intermediary.
90. The proviso identified by Professor Gentili thus becomes the only basis that can realistically be advanced by Dexia for contending that references in article 30.6 TUF to contracts and contract proposals "placed at a distance pursuant to article 32" are limited in scope so as not to apply to the present case. Professor Gentili's proviso is that, for a contract or contract proposal to have been "placed at a distance pursuant to article 32", there must never have been any direct contact. However in subsequent cross examination Professor Gentili accepted that nothing in the wording of article 30.6 TUF and article 32 TUF expressed his "concept of exclusivity" of distance contact.
91. Professor Gentili also agreed that Professor Sciarrone Alibrandi's interpretation, under which exclusivity of distance contact was not required, would maximise consumer protection. When agreeing, he added:

Yes, but maybe with costs on another front, for example, [investors] could not write or call. They could only deal with this in the presence [of both sides].

92. Dexia's closing submissions protested that Prato's interpretation was absurd: any occasion on which negotiation took place or documents were provided at a distance would give rise to a right of withdrawal. This characterisation of Prato's interpretation may, I suspect, be broader than that urged by Prato, for Prato recognises that article 30.6 TUF is engaged only where the placement of the contract, or the contract proposal, involves distance contact. But even if Prato's interpretation is as broad as Dexia protests, the "costs on another front" do not create difficulties for retail investors such as Prato: they gain a 7 day right of withdrawal, along with the benefit of an obligation that the financial service provider must state the right of withdrawal in relevant forms. As to potential difficulties for service providers, there was no evidence, and indeed no suggestion, from Dexia that a swap could not be structured in such a way as to allow for a 7 day right of withdrawal.
93. In these circumstances, an Italian court must have regard to the consumer protection purpose of articles 30.6 and 32 TUF. Those provisions confer benefits on "retail" investors which are not conferred on "professional" investors. I consider that the Court of Cassation would, for similar reasons to those set out in Mediolanum, reject Professor Gentili's "exclusivity of distance contact" interpretation and would instead adopt Professor Sciarrone Alibrandi's interpretation so as to maximise consumer protection.
94. It follows that even if I had not found in Prato's favour on the "off-site" provisions in article 30.6 TUF, I would have concluded that article 30.6 TUF applied to the swaps because both the placement of the contract and the contract proposal involved distance marketing techniques. For the reasons given in the main claim judgment, the consequence would have been that Prato had, by its defence in these proceedings, validly enforced its right to say that the swaps were null and void.

C3. Article 23.1 TUF & article 30 CR

95. The translation provided at the hearing for Article 23 TUF states:

1. Contracts relating to the providing of investment and accessory services shall be drawn up in writing and a copy provided to clients. The Consob, upon the advice of Banca d'Italia, may provide by regulation that, for justified technical reasons or in relation to the professional nature of the contracting parties, particular types of contracts may or must be entered into another form. Contracts which do not adhere to the prescribed form shall be null and void.

96. Article 30 CR states:

1. Authorized intermediaries may not supply investment services except on the basis of a contract in writing: a copy of the contract shall be given to the investor.

2. The contract with the investor must:

a) specify the service provided and their characteristics;

b) establish the period of validity of the contract and the procedure for renewing it, and the procedure for modifying the contract;

c) specify the procedures by means of which the investor may give orders and instructions;

d) establish the frequency, type and content of the documentation to be sent to the investor to report on the activity carried out;

e) specify and regulate, with reference to contracts for trading and the reception and transmission of orders, the procedures for providing and replenishing the means for carrying out or guaranteeing the transactions ordered, with the means provided for carrying out transactions involving derivative financial instruments and warrants indicated separately;

f) specify any other contractual conditions agreed with the investor for the supply of the service

97. It is common ground that article 30 CR is a regulation falling within article 23.1 TUF. Prato accepts that the 2002 advisory agreement complied with article 30 CR. Prato's case for present purposes is that the master agreement did not comply with subparas c), d), and e) of article 30.2 CR. I shall refer to them together as "the relevant subparas" and to each such subpara individually by its letter. Professor Gentili accepted in cross examination that, if relevant subparas applied and were not complied with, then the swaps would be null and void under article 23.1 TUF.
98. Dexia's closing submissions did not suggest that the master agreement, with the exception of clause 12, contained the specific provisions and specifications set out in all the relevant subparas. Indeed in cross-examination Professor Gentili accepted that it did not do so. Instead, Dexia advanced arguments which can conveniently be described in a series of summarised assertions:

(1) this aspect of Prato's defence appeared to be a makeweight point, as the relevant subparas were not necessary for swaps, these being the only transactions which it was ever contemplated that Prato would enter into with Dexia;

(2) it involved an absurd interpretation of article 30 CR: Prato had identified no rationale or justification for requiring intermediaries to enter into framework agreements with their customers which contain provisions that are not necessary to establish the basis for their relationship in relation to the particular types of transactions that are contemplated;

(3) the master agreement used an internationally accepted standard form, adopted in large numbers of Italian transactions, and it could not be right that it failed to satisfy formal requirements of Italian law on the basis that it did not make provision in relation to matters which are of no relevance to the relationship between a bank and a counterparty on an interest rate swap transaction;

(4) there was Italian case law, cited by Professor Gentili, holding that an ISDA master agreement was a valid framework agreement, and there was no suggestion that the decisions cited turned on the contents of the schedule rather than the ISDA master agreement itself;

(5) there was no need for any provision specifying the procedures by which the investor may give orders and instructions, as Prato was not entitled to give "orders" or "instructions" to Dexia in relation to the swaps;

(6) in any event, the master agreement contained express provision as to how the parties should give notices to each other at clause 12;

(7) there was no need for any provision establishing "the frequency, type and content" of documentation to be sent to the investor to report on the activity carried out, as Dexia did not carry out any "activity" under the swaps on which it could be expected to "report" to Prato;

(8) in any event, the 2002 advisory agreement provided for "relative reporting" and "transmission of all information which is considered to be useful" to Prato on request;

(9) there was no need for any provision dealing with the procedures for providing and replenishing the means for carrying out or guaranteeing the transactions ordered, as there was no requirement for Prato to "provide" or "replenish" the "means for carrying out or guaranteeing" the swaps;

(10) moreover, on the express terms of subpara e), this requirement only applied to "contracts for trading and the reception and transmission of orders", which was not apt to describe the master agreement or any of the swaps.

99. Prato's oral closing submissions did not go through these summarised assertions one by one. Accordingly in what follows I identify and analyse the answers that appear to me to emerge from Prato's written closing submissions and the evidence of Professor Sciarrone Alibrandi.
100. Prato's answer to summarised assertions (1), (2) and (3) above starts with a proposition that is common ground: article 30 CR provided protections for retail investors such as Prato. On that footing, Prato relies on Professor Sciarrone Alibrandi's evidence that general terms were used because the rules in article 30 CR had a wide application. Professor Sciarrone Alibrandi did not accept that in the present case the rules lacked meaning. Even if, however, they had no application to the parties' relationship under the specific agreement in question, she reasoned that "they have a sense, and they have to be adhered to …".
101. Dexia's view is that particular information stipulated in article 30 CR is information which there is no need to provide. In the context of provisions designed to protect retail investors, however, Professor Sciarrone Alibrandi's reasoning appears to me to be compelling. In such a context Dexia does not contend that its own view is determinative. Nor is there good ground to think that the ratio legis is that the stipulated information should be provided only where the provision of that information is objectively necessary on the facts of the case. On the contrary, an important purpose of article 23.1 TUF is to enable CR "for justified technical reasons or in relation to the professional nature of the contracting parties" to prescribe what must appear in particular types of contract. I add that in such a context the fact that an international standard form has been used does not of itself preclude the possibility that retail investors have not been given the protection which article 30 CR requires. These conclusions do not invalidate all Italian transactions using an ISDA master agreement: they affect only transactions with retail investors, and only those transactions where ISDA's standard terms did not comply, and were not supplemented so as to comply, with article 30 CR. Accordingly I reject the arguments of Dexia in summarised assertions (1), (2) and (3) above.
102. As to summarised assertion (4), Prato pointed out that Professor Gentili had been cross-examined about the cases he had cited. He accepted that of the 13 cases he had cited, only 3 related to swaps. He did not dispute that of those 3, only one, at most, related to an ISDA master agreement. Moreover he accepted that in that one case the judgment did not set out the terms of the ISDA master agreement or its schedule, and that "it could have been" that the schedule contained terms complying with art 30 CR. The result in my view is clear: the cases cited by Professor Gentili have not been shown to assist Dexia.
103. Summarised assertions (5) and (6) concern subpara c). Summarised assertion (5) argues, relying on an asserted proposition of law, that there was "no need" to specify procedures by which Prato could give orders and instructions. The asserted proposition of law is that Prato was not entitled to give "orders" or "instructions" to Dexia in relation to the swaps. Even if this asserted proposition of law were right, however, my conclusion on summarised assertions (1), (2) and (3) has the consequence that summarised assertion (5) does not assist Dexia. I add that in my view Dexia has not established that this asserted proposition of law is right. It must, as it seems to me, depend upon whether the words "orders" and "instructions" within the meaning of subpara c) have a narrow meaning limited to commands which Prato is entitled to give, or whether they have a wider meaning extending to things which Prato wishes to be done. No questions were asked of Professor Sciarrone Alibrandi to suggest that subpara c) had the narrow meaning only.
104. Summarised assertion (6) was that clause 12 of the master agreement contained express provision as to how the parties should give notices to each other. In cross-examination Professor Gentili asserted that merely by setting out addresses where communications could be sent, the contract "provides something with reference to [subpara c)]". No suggestion, however, was made to Professor Sciarrone Alibrandi that clause 12 would be adequate to comply with subpara c). In these circumstances I conclude that summarised assertions (5) and (6) do not assist Dexia.
105. Summarised assertions (7) and (8) concern subpara d). Summarised assertion (7) appears to me to be similar to summarised assertion (5) in that it argues, relying on an asserted proposition of law, that there was "no need" to specify matters which are the subject of subpara d). The asserted proposition of law is that Dexia did not carry out any "activity" under the swaps on which it could be expected to "report" to Prato. Even if this asserted proposition of law were right, however, my conclusion on summarised assertions (1), (2) and (3) has the consequence that summarised assertion (7) does not assist Dexia. Moreover in my view Dexia has not established that this asserted proposition of law is right. It must, as it seems to me, depend upon whether the words "documentation to be sent to the investor to report on the activity carried out" have a narrow meaning limited to such reporting as is expressly required by the contract, or whether they have a wider meaning so that the contract must expressly clarify whether there will be reporting and the frequency, type and content of that reporting. Professor Sciarrone Alibrandi's evidence in cross examination was that it was "in the spirit of the law of [article 30.2 CR] for the contract to provide for the type and content of the information on the relationship which are going to be provided to the investor by the intermediary". No questions were asked of Professor Sciarrone Alibrandi to suggest that subpara c) had a narrow meaning only.
106. Summarised assertion (8) was that the 2002 advisory agreement provided for "relative reporting" and "transmission of all information which is considered to be useful" to Prato on request. In cross examination, however, Professor Sciarrone Alibrandi rejected the suggestion that this sufficed to fulfil the requirements of subpara d). Professor Sciarrone Alibrandi noted that the 2002 advisory agreement is dealing with what she called a "consultancy service". She pointed out that this does not cover such documentation, and the frequency of such documentation, as is to be used to report about the activity carried out in execution of the swaps.
107. To my mind Professor Sciarrone Alibrandi's evidence on all aspects of subpara d) was compelling. In these circumstances I conclude that summarised assertions (7) and (8) do not assist Dexia.
108. Summarised assertions (9) and (10) concern subpara e). Summarised assertion (9) appears to me to be similar to summarised assertions (5) and (7) in that it argues, relying on an asserted proposition of law, that there was "no need" to specify matters which are the subject of subpara e). The asserted proposition of law is that there was no requirement for Prato to "provide" or to "replenish" the "means for carrying out or guaranteeing" the swaps. Even if this asserted proposition of law were right, however, my conclusion on summarised assertions (1), (2) and (3) has the consequence that summarised assertion (9) does not assist Dexia. Moreover in my view Dexia has not established that this asserted proposition of law is right. It must, as it seems to me, depend upon whether the words "procedures for providing and replenishing the means for carrying out or guaranteeing the transactions ordered" have a narrow meaning limited to such "providing and replenishing" as is expressly required by the contract, or whether they have a wider meaning so that the contract must in any event expressly specify and regulate procedures for providing and replenishing the means for carrying out or guaranteeing the transactions ordered. No questions were asked of Professor Sciarrone Alibrandi to suggest that subpara e) had a narrow meaning only. In these circumstances summarised assertion (9) does not assist Dexia.
109. Summarised assertion (10) begins with a proposition that subpara e) is limited to contracts for trading and the transmission of orders. No such proposition was put to Professor Sciarrone Alibrandi. Assuming it to be correct, however, summarised assertion (10) goes on to claim that neither the master agreement nor the swaps fall within this description. If such a claim were to be relied upon it ought to have been put specifically to Professor Sciarrone Alibrandi. It was not. In any event it is difficult to see why the master agreement did not fall squarely within this wording: it was a contract for trading, concerned to make provision under which future interest rate swaps could be readily agreed upon through the use of confirmations under the master agreement. Similarly the confirmations used to create the swaps might appropriately be described as the transmission of orders. Moreover the final clause in subpara e) specifically envisaged that derivatives would be contracts to which subpara e) would apply. The result is that there is no merit in summarised assertion (10).
110. For all these reasons I conclude that Prato is right to say that the swaps did not comply with article 30 CR, and for that reason were null and void under art 23.1 TUF.

C4. CC provisions dealing with "causa" and "oggetto"

111. In relation to causa and oggetto the parties placed reliance on provisions in the Civil Code, Book IV (Obligations), Title II (Contracts in general), Chapters II and XI. For ease of reference in this section I set out the principal provisions relied upon, with additional numbering in square brackets. In doing so I have, with exceptions, adopted translations found in the trial bundles. The exceptions include causa and oggetto. In relation to each of these terms, rather than using any of the translations, I have simply set out the Italian word in italics.
112. Article 1325, in Chapter II dealing with "Requisites of Contract", states:

1325. Indication of requisites. The requisites of the contract are:

[1325.1] Agreement of the parties …;

[1325.2] Causa …;

[1325.3] Oggetto …;

[1325.4] Form, when prescribed by law, under penalty of nullity...

113. Article 1343, in section II of Chaper II dealing with causa, states:

1343. Unlawful causa. The causa (1325 No. 2) is unlawful when it is contrary to mandatory rules, public policy, or morals (1418²).

114. Article 1346, in section III of Chapter II dealing with oggetto, states:

1346. Requisites. The oggetto of the contract (1325 No. 3) must be possible, lawful, determined, or determinable (1418²).

115. Article 1418, in Chapter XI dealing with "Nullity of Contract", states:

1418. Causes of nullity of contract. [1418.1] A contract that is contrary to mandatory rules is void, unless the law provides otherwise.

[1418.2] A contract is rendered void by the lack of one of the requisites indicated in Article 1325, unlawfulness (1343) of causa, unlawfulness of the motives in the case indicated in Article 1345, and lack in the oggetto of the requisites set forth in Article 1346 …

[1418.3] A contract is also void in the other cases established by law …

C5. "Causa": did the swaps meet Italian law requirements?

C5.1 "Causa": introduction

116. The Civil Joint Memorandum recorded agreement on certain features of principles concerning causa and concerning the consequences when there is a breach of rules relating to contracts for the provision of investment services. Additional features of these principles were effectively agreed in the oral evidence of Professor Gentili and Professor Sciarrone Alibrandi. The agreed features included those which I have numbered and listed below:

(1) with specific reference to a contract relating to the provision of investment services:

(a) when the rules relating to the content of such contracts are breached, that contract is null and void, and then not binding;

(b) on the other hand, when the rules relate to the conduct of the intermediary, the consequence of their breach is liability in damages of the intermediary, unless the contract has to be terminated or is null and void due to the application of other rules;

(2) the concept of causa in Art. 1325 refers to the economic and social function of the agreement, distinct from the individual aims of each party to the contract;

(3) in modern doctrine and case law the function of an agreement is to be established by reference to the facts;

(4) as a consequence, under Italian law, a contract will lack a causa when it has no function, or when its function is possible only in the abstract;

(5) taking features (3) and (4) together, in order to establish whether there is a lack of causa, the court may examine the facts in order to determine whether there was a concrete causa, for only then will article 1325.2 CC be complied with;

(6) generally speaking, hedging derivative contracts which actually have the function of containing interest rate risk and limiting the cost of debt can have a valid causa;

(7) article 1418 CC is a mandatory rule of Italian law; and

(8) under article 1418.2 CC a contract will be void where there is either:

(a) a lack of causa; or

(b) unlawfulness of causa.

117. On certain other suggested features, however, there was disagreement. I discuss relevant disputed matters in sections C5.2 to C5.4 below, where I deal with the various ways in which Prato's closing submissions said that Italian law on causa provided a defence upon which it could rely. I set out my conclusions in section C5.5.

C5.2 "Causa": breaches of Italian law

118. Prato submitted that the causa of the swaps was unlawful because the swaps contravened provisions of Italian law. At the outset of the trial Prato made it clear that the provisions of Italian law that it relied on for this purpose were the provisions of local government law discussed in section D of the main claim judgment. For the reasons given in that section of the main claim judgment I have concluded that the swaps did not contravene these provisions. Accordingly Italian law on causa, in this respect, does not provide a defence to the claim. In any event Prato accepted that reliance upon causa in this regard would not take the case any further than the arguments relied upon in support of Prato's local government law defences.

C5.3 "Causa": non-disclosure of MTM

119. Prato advances an assertion that the causa of the swaps was lacking because of Dexia's failure to disclose to Prato the negative initial MTM, with the result that Prato was never able to take a rational decision to enter into them. This assertion relies upon a line of cases exemplified by a judgment of the Court of Appeal of Milan dated 18 September 2013. I shall refer to this judgment as "Gommeservice", as it concerned a company of that name which had entered into swaps with a bank.
120. In its written closing submissions Prato relied on particular passages in Gommeservice. With agreed corrections to the translation, and the addition of paragraph numbers in square brackets for ease of reference, they were as follows:

[3.15] In the case of over the counter derivatives the purpose is an exchange of differential with specified expiry terms. But their causa is a gamble which both parties assume.

[3.16] In the legally authorised gamble…the risk cannot help but be (and must be!) rational for both parties to the gamble: regardless of the intended purpose for entering into the contract, be it for hedging purposes or for speculation.

…

[3.20] Therefore the contract must explicitly state the value of the derivatives, any implicit costs, and the criteria to be used for determining withdrawal penalties. All these elements have an effect on the risk assumed by the contracting party.

[3.21] Only under these circumstances can there be a rational risk.

[3.22] In other words all the risk elements and the scenarios derived therefrom go to make up the causa of the contract …

[3.23 In the absence of these elements the contract must be regarded as invalid due to the absence of causa, because in the judgment of this Court legislative recognition resides in the rationality of the risk, and therefore in its 'measurability'.

…

[4.4] The mere fact … that at the time of entering into the contract … the defendants…did not know the…mark to market … and the fact … that the mark to market was not included in the content of the contracts … must result in the invalidity of the interest rate swap contracts because, in the present case, it rules out the possibility that the defendants could have accepted the gamble present in the contract aware of the risk they were assuming, whereas the Bank, on the other hand, had full knowledge of its own risk – and even a precise scientific measurement of that risk since it had drawn up the instrument.

121. Prato noted that the approach of the Court of Appeal of Milan in Gommeservice was followed by the Tribunal of Turin in a decision dated 17 January 2014. The judgment of the tribunal, as reported, did not reveal the names of the parties. I shall refer to this judgment as "Turin mortgage swap", as it concerned a 30 year variable rate mortgage for the purchase of a first home. At the request of the bank which lent the money under the mortgage, there was an interest rate swap under which the bank was to receive a fixed rate of 4.72% in exchange for paying 6M Euribor. In Turin mortgage swap the tribunal cited extensively from Gommeservice and commented:

…what this reveals for the purpose of the lack of existence of a concrete causa is the absence of adequate information provided by the bank to the client with regard to the risks effectively assumed, information which required at least the indication of the respective mark to markets.

122. Moreover, submits Prato, in Municipality of C (discussed in section D2.2 and section E2 of the main claim judgment) the Court of Appeal of Bologna cited Gommeservice. At page 12 of its judgment the Court of Appeal noted that none of the contracts in that case "include the determination of their current value at the time of execution (the so-called "mark to market")." In relation to the MTM, the Court of Appeal of Bologna added, citing Gommeservice for this purpose:

A thorough and compatible case-law guideline (see [Gommeservice]) considers this to be an essential element of the contracts and integral to its typical causa (a logical, and therefore measurable, risk), which must necessarily be specified …

123. Dexia responded by drawing attention to two decisions handed down on 19 December 2007 by the joint civil chambers of the Court of Cassation. Both decisions involved appeals from orders of the Court of Appeal of Turin on 10 November 2001. Both cases involved, among other things, a failure by a financial intermediary to supply information to its customer. The obligation to do this arose under article 6 of law 1 of 1991. The transactions involved were described as "foreign currency transactions and transactions on derivatives".
124. The appellant in the first case, number 26724, was described as "Fincom Valori", and I shall refer to the judgment in the Court of Cassation in that case as "Fincom Valori". The judgment in the second case, number 26725, involved an appellant described as "GL", and I shall refer to the judgment in the Court of Cassation in this second case as "GL". Dexia relied upon Fincom Valori as holding that the transactions were not to be treated as "gaming or betting". The reason was that there had been a finding below that the bank was persuaded that the transactions could constitute "simple re-hedging of cross-entries maintained with another operator and therefore not purely for purposes of chance".
125. In section C5.1 above I have noted at subparagraph (1) that the experts for the parties agree on an important distinction. Where there is a breach of a rule relating to the content of contracts for the provision of investment services, such a breach has the consequence that the contract is null and void. By contrast, if the breach is of a rule relating to the conduct of the financial intermediary, the consequence is a liability in damages on the part of the intermediary, unless the contract has to be terminated or is null and void due to the application of other rules. In both Fincom Valori and GL the Court of Cassation reaffirmed this important distinction.
126. Dexia relies upon a discussion by the Court of Cassation in GL of the applicability of article 1418 in financial services cases. In section 1.4 of its judgment in GL the Court of Cassation stated, with the addition of paragraph numbers in square brackets:

[1.4.1] … the rules [requiring the supply of information under article 6 of law number 1 of 1991] are imperative in nature …

[1.4.2] This remark is not sufficient by itself, however, to prove that the breach of one or more of said rules leads to the invalidity of the contracts agreed by the broker with the client. It is obvious that their breach cannot be, from a legal point of view, without consequences – and this will always be the case – but it is not a given that the consequence is automatically the invalidity of the contract.

[1.4.3] Above all it is obvious that the legislator – who certainly would have been able to do so and who, under the same law, did not hesitate, what is more, to do so – did not clearly establish that the failure to comply with the aforementioned provisions interferes with the genetic phase of the contract and causes the radical effect of the invalidity which has been claimed by the appellants. Therefore it is certainly not a matter of one of those cases of invalidity established by the law to which Article 1418 of the Civil Code, paragraph 3 refers.

[1.4.4] Not even the cases of invalidity which were considered under paragraph 2 of the recently cited article can be invoked in the situation in question. It is true that the instance of a lack of one of the requirements indicated by Article 1325 appears amongst these cases, and that the first of these requirements is the agreement of the parties. But, even where there is a desire to admit that in the pre-transactional stage the breach of the broker's behavioural obligations referred to above are suited to influencing the consent of the contractual counterparty, by corrupting it, it seems difficult to claim that based on this breach alone the consent is entirely missing; and the vices of consent – if we can also mention these – do not determine the invalidity of the contract, but only its chances of being annulled, when the conditions provided for by Article 1427 of the Civil Code et seq. recur.

127. The Court of Cassation went on to consider whether breach of article 6 of law number 1 of 1991 might give rise to nullity under article 1418.1, and concluded that it did not.
128. Dexia also relied on, among other decisions, a judgment of the tribunal of Turin dated 24 April 2014. The published version of the judgment does not name the claimant, but it refers to the defendant bank as "I SPA". I shall accordingly refer to the judgment as "I SPA". Among other claims rejected by the tribunal was a claim that an interest rate swap between the parties was invalid because of lack of causa. In that regard the tribunal stated in section 2.4, with emphasis as in the original and with paragraph numbering added for ease of reference:

[2.4.1] Finally the objection for invalidity of the IRS contract for lack of causa must also be rejected.

[2.4.2] It is noted that the Interest Rate Swap contract is atypical and of a hazardous nature, characterised by swapping at fixed maturities the cash flows produced from the application of various criteria to the same notional principal (notional amount).

[2.4.3] This agreement, if entered into (as in this case) by an entrepreneur who intends to protect himself from fluctuation in the reference rates on a loan with a variable rate has a precise logic that makes it impossible to consider it without causa, and it is irrelevant whether the reference rates established, in particular, proved to be far from those of the market, as it falls within the hazardous nature of the contract (see in this sense: Court of Lanciano, 06/12/2005).

[2.4.4] Only if the IRS contract were concluded merely for a speculative purpose, outside a function linked to entrepreneurial activities, could it be comparable to gambling.

[2.4.5] It is, therefore, deemed necessary to not adhere to the decisions on the evaluation of the causa of the IRS contact expressed recently by the Court of Appeal of Milan (ruling 18/9/2013) and by the Court of Turin (17/1/2014)

[2.4.6] According to these decisions:

- [2.4.6(1)] the IRS contract falls within the category of legally authorised gambling, whose causa of financial intermediation, deemed worthy by the legislature, resides in the cognizant and rational creation of risks, which, in the so-called symmetrical derivative are reciprocal and bilateral;

- [2.4.6(2)] because the risk is rational, it is necessary for the probabilistic scenarios and the consequences of the events to be defined and known ex ante with certainty, including the knowledge of any implicit costs;

- [2.4.6(3)] the lack of knowledge by the customer, at the time of entering into the contract, of the so-called mark-to-market (understood as the market value of the contract estimated by discounting the expected cash flows) involves the essential invalidity of the IRS, as excluding the possibility that the investor was able to make the bet knowing the degree of risk assumed (while the Bank had perfect knowledge of its own risk).

[2.4.7] However the IRS contract pure and simple, which had the function of risk coverage (and is not merely speculative), finds its causa in the exchange of amounts corresponding to the differential that, over the time of the execution of the contract, is created between two different and pre-determined interest rates, applied to a notional reference amount and that aims to balance the fluctuation of floating rates relating to the associated loan agreement.

[2.4.8] Naturally the variation over time of interest rates that are unfavourable to the customer does not exclude the original causa of the contract, all of which falls within the hazardous nature thereof.

129. A similar assertion of lack of concrete causa was rejected in a decision of the Tribunal of Milan dated 8 May 2014. It concerned a claim bought by Novital Ad Altiora SRL against Banca Popolare Commercio e Industria SPA. I shall refer to the case as Novital.
130. Prato's response relied, first, not only on Turin mortgage swap and Municipality of C, but also on decisions prior to Gommeservice adopting a similar approach to that of the Court of Appeal of Milan in that case, and on academic writing supporting that approach. Professor Sciarrone Alibrandi's evidence was that the approach adopted in Gommeservice gains strong support from the decisions relied on by Prato, and from academic writing. I agree. Nevertheless, while such support is a feature in Prato's favour, this is not an area where the courts and the academy speak with one voice. As Prato recognises, I must examine the experts' explanations in support of their reasoning.
131. Second, Professor Sciarrone Alibrandi noted that under article 1933 CC no action can be brought to collect claims deriving from gambling or wagers. She added that, when disapplying this for derivatives in the context of providing investment services, article 23.5 TUF had not confined the disapplication to "speculative swaps". Article 23.5 TUF, concluded Professor Sciarrone Alibrandi, thus treated all swaps, not just speculative swaps, as gambling/wagers. However this conclusion does not, in my view, follow from the premise. It makes sense for article 23.5 TUF to give protection to derivatives, in the context of the provision of investment services, by referring to derivatives generally. By doing so article 23.5 TUF avoids the risk that, rightly or wrongly, such derivatives will be said to fall within article 1933 CC.
132. Nevertheless on this basis Prato sought to dismiss Professor Gentili's view that Fincom Valori showed that the Court of Appeal of Milan was wrong to describe all swaps as gambles. An assertion was made in Prato's closing submissions that Professor Gentili accepted in cross examination that he had not identified any Italian case supporting his view. As to that, the case law Professor Gentili relied on, including Fincom Valori, was set out in Gentili 2. In cross examination Professor Gentili was being asked about the Court of Appeal of Milan's characterisation of "rational wager". He accepted that some swaps were wagers, but said that while others depended on risk to a certain extent, they were not bets. He made the point that in insurance contracts the risk could be high or low, but no-one categorised these as bets. It was on this point that Professor Gentili accepted that there was a lack of case law. Thus Prato's assertion is misguided.
133. Moreover, as it seems to me, Professor Gentili's point is a strong one. The Court of Appeal of Milan reasons that a swap, including a hedging swap, is "a legally authorised gamble" which will lack a "rational risk", and therefore lack causa, if the contract does not explicitly state "the value of the derivatives" and other elements which "have an effect on the risk assumed by the contracting party". It is difficult to see how that reasoning would not apply equally to insurance contracts. Thus it was that Professor Gentili went on to add an observation ("the vital interest observation") that while a party entering into a swap has a vital interest in doing so on a rational and informed basis, that vital interest is not part of the causa of the contract.
134. In support of Prato's position, Professor Sciarrone Alibrandi drew attention to passages in Gommeservice making express reference to Fincom Valori. Those passages described the view expressed on this point in Fincom Valori as an obiter dictum on facts which were "clearly quite different" from those in Gommeservice. Even if this were right, it is nevertheless a view expressed not just by a single chamber, but by the joint civil chambers, of the Court of Cassation. Moreover to my mind it is not right to say that the facts were clearly quite different. Fincom Valori does not appear to have involved an argument about causa, but it did involve examination of whether transactions, including derivatives, constituted gambling or wagers.
135. Turning to what was said in paragraph [1.4.4] of GL about the inapplicability of article 1418.2, Professor Sciarrone Alibrandi rightly observed that in paragraph [1.4.4] the second sentence and subsequent sentences are concerned with nullity on account of lack of the agreement that is required under article 1325. But in the opening sentence of that paragraph the joint civil chambers of the Court of Cassation ruled out, in general terms, invocation of "the cases of invalidity" under article 1418.2. One of those "cases of invalidity" is lack of causa. Moreover the joint civil chambers were concerned with a duty to provide information, and they clearly explained that because it was a duty of conduct, breach of this duty did not entail nullity of the contract. Yet on the Gommeservice analysis failure to include similar information in the terms of the contract had the consequence of nullity for lack of causa. If Gommeservice were right, those involved in GL had overlooked a point of vital importance.
136. Prato also made reference to two articles by Professor Gentili that were published in 2008. Those articles suggested that the decisions of the joint civil chambers had not given enough scope to the possibility of nullity on account of lack of the agreement that is required under article 1325. I did not detect anything in those articles which detracted from Professor Gentili's evidence concerning relevant criticisms of the reasoning in Gommeservice.
137. In this section I have omitted some of the points taken by Dexia, and therefore have not included Prato's answers on those points. It suffices for present purposes to say that in relation to the remaining case cited above, I SPA, it does not seem to me that Prato provided any satisfactory answer to the points made by the Tribunal of Turin at paragraphs [2.4.2] to [2.4.4], [2.4.7] and [2.4.8].
138. For all these reasons, despite the strong support in decisions and in academic writing for Professor Sciarrone Alibrandi's view, I am persuaded by the reasoning of Professor Gentili. I conclude, on the evidence before me, that if the matter were to come before the Court of Cassation then that court would not adopt the approach in Gommeservice. Prato criticised Professor Gentili's vital interest observation, but to my mind the criticisms are inconsistent with my analysis above. In my view the vital interest observation is right. Accordingly Prato fails in its assertion of lack of causa arising from non-disclosure of the initial MTM.

C5.4 "Causa": speculative contracts

139. Prato advances an assertion that the swaps lacked causa because they were speculative contracts. In this regard the "Irrevocable Proposal" forming part of the swaps stated that Prato had taken the decision to proceed with the transaction not for speculative purposes but solely for hedging against interest rate risks and the management of its liabilities resulting from forms of recourse to the financial market permitted in law. Prato observes that Professor Gentili and Professor Sciarrone Alibrandi agree that the task of an Italian court under this head would be to consider whether a derivative entered into for a contractually declared hedging purpose is capable, or suitable, to deliver that purpose.
140. For the reasons given in section F4 below, however, Prato's assertions as to lack of suitability are unfounded. It follows that the swaps were all capable of, and suitable for, achieving their stated aims. Accordingly Prato fails in its assertion of lack of causa arising from the alleged speculative nature of the contracts.

C5.5 "Causa": conclusions

141. In sections C5.2 to C 5.4 above I have rejected Prato's assertions of unlawful causa and lack of causa. It follows that Prato's defences in relation to causa do not succeed.

C6. "Oggetto": did the swaps meet Italian law requirements?

142. Paragraph 45(2) of the defence relied on an assertion that each swap:

… lacked a 'determined [oggetto]' within the meaning of that concept in Article 1346 of the Italian Civil Code in that the [oggetto] … (viz the money flows to be exchanged thereunder) was to be determined by [Dexia] unilaterally and in the exercise of discretions apparently afforded to it … .

143. Dexia, in my view rightly, understood this assertion to be founded on a premise that each swap gave Dexia a discretion to determine what amounts were to be exchanged under the swap. Dexia's opening submissions set out extensive reasons for rebutting that premise. They also noted that Sciarrone Alibrandi 1 advanced two additional reasons for saying that the relevant oggetto was not "determined" or "determinable". The first additional reason said that the sums due upon early termination were to be calculated by Dexia in the exercise of its discretion. The second said that the swaps contained "hidden costs" at inception. Dexia protested that these additional reasons were not part of Prato's pleaded case.
144. Neither side asked for this protest to be resolved prior to evidence. After the evidence, only one asserted "defence" concerning oggetto was relied on in Prato's closing submissions. This sole "defence" concerned Professor Sciarrone Alibrandi's first additional reason. The complaint about Dexia having a discretion was said to be justified by an express provision for "extinguishment costs" to be:

… calculated by Dexia in accordance with the practice adopted in the international market of derivatives.

145. This was not a satisfactory way of proceeding. It was suggested by Prato that the first additional reason fell within paragraph 45(2) of the defence. The suggestion is plainly unfounded. The amount payable on early termination was not a "money flow" to be "exchanged" under the swap. If the point were to be relied on then permission to amend should have been sought.
146. Prato argued that the failure to seek permission to amend did not matter because both Professor Gentili and Professor Sciarrone Alibrandi had given evidence on the topic. It is true that Professor Gentili was asked questions on the topic. Those questions, however, failed to recognise that, as Dexia had pointed out, the meaning of the provisions on early termination was a question of English law. Applying English law the provisions enabling Dexia to calculate extinguishment costs did not give Dexia any discretion. Dexia was required, as I observed in the course of Professor Gentili's cross examination, to adopt "the practice" of the international market. If necessary the court would decide what that practice was. The wording in question makes no reference to there being a number of practices from which Dexia can choose. Accordingly, had there been an application to amend I would have refused it because it was based upon a false premise.
147. During the course of Professor Gentili's evidence it was suggested to him that reference to the practice of the international market was contrary to article 23.2 TUF. He did not accept this. If it were contrary to article 23.2 TUF, I am at a loss to understand how this would lead to a lack of oggetto. Under article 23.2 TUF, as regards amounts "to be borne by the client", any provision which makes reference to the usage of trade for the determination of such amounts is null and void. Article 23.2 TUF adds:

In such a case no amount shall be due.

148. There was no pleaded case that the early termination provisions contravened article 23.2 TUF. Nor was there any pleaded case that article 23.2 TUF was an Article 3 non-derogable rule. As it seems to me, even if it applied to the early termination provisions, and even if it were an Article 3 non-derogable rule, it would simply have the consequence that Dexia could not claim extinguishment costs. As I cannot understand how that would lead to a lack of oggetto, I would have refused permission to amend in that regard as well.
149. Accordingly Prato fails in its assertion of lack of oggetto.

C7. "Causa" & "oggetto": Article 3 non-derogable rules?

150. In sections C5 and C6 I have rejected Prato's assertions that the swaps breached requirements of Italian law concerning causa and oggetto. It is thus not necessary for me to consider questions as to whether any, and if so which, of those requirements constituted Article 3 non-derogable rules. It seems to me that answers to those questions might depend upon which requirement was breached. Moreover, while Dexia asserted that Article 3 was not concerned with requirements which can be categorised as concerning the topics of formation and material validity of contracts, I was not taken to decisions and academic writing on Article 3 generally or on those topics in particular. In those circumstances I do not think it desirable for me to attempt to consider such questions.

D. Prato's remaining defences

151. As noted in the main claim judgment, my conclusions on Italian local government finance law had the consequence that the capacity defence failed. The same is true of a variation of the capacity defence which said that by purporting to enter into the swaps Prato acted in excess of, or in abuse of, its powers.
152. The remaining defences relied on by Prato at trial are the illegality defence, the misrepresentation defence, and the set-off defence.
153. The illegality defence is, like the capacity defence, based on an assertion that the swaps involved a violation of local government finance law. My findings in section D of the main claim judgment have the consequence that it cannot succeed.
154. I deal with the misrepresentation defence when considering Prato's misrepresentation counterclaim in section G below. It is preferable to give consideration to the set-off defence after considering Prato's counterclaims, and accordingly I deal with this in section H below.

E. Prato's restitution counterclaim

E1. Prato's restitution counterclaim: introduction

155. The parties agree that under swap 6 net sums totalling €1,580,465 were paid by Prato to Dexia. The main basis for the restitution counterclaim seeks repayment of these sums on the premise that swap 6 is "null and void". The conclusions in sections E and F of the main claim judgment have the consequence that this premise is established by breach of Italian law requirements in cases of off-site offers. The premise is also established by breaches of Italian law requirements in cases of contracts made at a distance, and by breaches of Italian law requirements as to the contents of contracts relating to the provision of investment and accessory services: see sections C2 and C3 of the present judgment.
156. Prato's primary case relies on Italian law, and says that article 2033 CC entitles it to the return of all sums paid. Prato's alternative case relies on English law entitlements to return of payments made on a total failure of consideration and return of payments made pursuant to a mistake of fact or law.
157. The first main question arising concerns the proper law of the obligation to repay. If the proper law is Italian law, then Dexia accepts that the restitution counterclaim succeeds in the amount of €1,580,465. I deal with this first main question in section E2 below.
158. If Italian law is not the proper law, then it is common ground that the proper law would be English law. The second main question arising concerns an English law defence advanced by Dexia to the restitution counterclaim. That defence asserts that change of position by Dexia justifies a refusal to repay. I comment on this second main question in section E3 below.

E2. Restitution counterclaim: proper law

159. It is common ground that:

(1) the Rome II Regulation does not apply to unjust enrichment claims arising as a consequence of nullity of contract;

(2) if the restitution counterclaim fell within either the Rome I Regulation or the Rome Convention, then the law of the putative contract would govern "the consequences of nullity of the contract": see article 12(1)(e) of the Rome I Regulation and article 10(1)(e) of the Rome Convention;

(3) however:

(a) the Rome I Regulation, by article 28, only applies in respect of "contracts concluded after 17 December 2009", whereas swap 6 was purportedly entered into in 2006; and

(b) article 10(1)(e) of the Rome Convention does not carry the force of law in England: see the Contracts (Applicable Law) Act 1990, section 2(2);

(4) the result is that neither the Rome I Regulation nor the Rome Convention applies to the restitution counterclaim;

(5) accordingly the court must apply common law principles of choice of law in order to determine the proper law of the restitution counterclaim.

160. As to the common law principles, Dexia said that a clear statement of them was set out in Rule 230(2)(a) of Dicey, 14^th ed.:

(1) The obligation to restore the benefit of an enrichment obtained at another person's expense is governed by the proper law of the obligation.

(2) The proper law of the obligation is (semble) determined as follows:

(a) If the obligation arises in connection with a contract, its proper law is the law applicable to the contract; …

(b) If it arises in connection with a transaction concerning an immovable (land), …

(c) If it arises in any other circumstances, its proper law is the law of the country where the enrichment occurs.

161. I do not accept that Rule 230(2), as it appears in the 14^th edition, gives a clear statement applicable to the restitution counterclaim. The subparagraphs of paragraph (2) of Rule 230 are introduced by the term "(semble)". In the 15^th edition there is no equivalent to Rule 230, as the common law has been overtaken by EU developments. When summarising the common law position, para 36-008 of the 15^th edition described the principles that had been set out in Rule 230 of the 14^th edition as:

… guidance intended to be applied flexibly …

162. There is, however, clear guidance to be found in the decision of Christopher Clarke J in OJSC Oil Company Yugraneft v Abramovich [2008] EWHC 2613 (Comm). In paragraphs 239 to 245 of his judgment he reviewed relevant authorities and text books. In paragraph 246 he recorded his agreement with the Court of Appeal of the Eastern Caribbean in adopting the view taken both in the commentary to Rule 230 in Dicey, 14^th ed., and in Cheshire & North's Private International Law, 13^th ed., that:

The proper law of the obligation refers to the law of the country with which the obligation has its closest and most real connection.

163. Returning to Dexia's reliance on subparagraph (2)(a) of Rule 230, the first case cited in the 14^th edition in support of subparagraph (2)(a) is the well known decision of the House of Lords in Fibrosa Spolka Akeyjina v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32. There a contract governed by English law was made in 1936 for the delivery of machinery in Gdynia. That contract was frustrated by the German occupation of Gdynia in 1939. English law was applied to the claim by the Polish company for return of money paid, no foreign law having been pleaded. Thus the parties proceeded on the basis that the law of a frustrated contract governed a claim to recover money paid under that contract. The Law Reform (Frustrated Contracts) Act 1943 proceeds on the same basis. This plainly makes sense when a contract is frustrated, as the frustrating event does not in itself cast doubt on the validity of the parties' agreement as to the law governing their relationship.
164. Where, however, a restitutionary claim arises because of invalidity of the parties' agreement at the time that it was made, the position seems to me to be inherently different. The mere fact that the agreement identified a governing law is unlikely in these circumstances to give a close or real connection to that governing law. On the contrary, in my view the invalidity of the parties' agreement at the time that it was made will ordinarily have the consequence that the suggested connection is unreal. The position seems to me in principle the same where a restitutionary claim arises because a party has a continuing right to assert the invalidity of the parties' agreement at the time that it was made, and exercises that right. The upshot is that ordinarily a suggestion of a connection with England, if solely based on what was said in the agreement, cannot be made good. The reason is that the party objecting to that suggestion is entitled to say that the suggestion depends upon a link which was invalid from the outset.
165. I am fortified in this view by the reasoning of Lord Penrose in Baring Bros & Co Ltd v Cunninghame DC [1997] CLC 108 (Court of Session). That case concerned an agreement that was invalid for lack of capacity. In the present case, the invalidity arises by application of a rule that is compulsory for purposes of consumer protection. It seems to me that in deciding upon the proper law of a related restitutionary obligation it will ordinarily be equally compulsory to put out of account the fact that the invalid agreement introduced connections with a particular country.
166. It was submitted by Dexia that even if such an approach were adopted, it should be subject to a qualification where the contract in question was merely voidable rather than void. Dexia did not suggest, however, that this qualification would apply where, as in the present case, Prato exercised a right to say that the contract was void from the outset. Accordingly I do not need to consider Dexia's suggested qualification, and I express no view on it.
167. I recognise that international agreements have not adopted the approach set out above. They have opted for "bright line" rules. The common law, however, is able to look at the matter with more flexibility. For the reasons given above it seems to me that there are compelling reasons for the common law to use that flexibility in the way that I have described.
168. My conclusion is thus that I should have no regard to provisions in the master agreement and schedule identifying English law as the governing law and recording an irrevocable submission to the jurisdiction of the English courts. In these circumstances, subject to a proviso advanced by Dexia, there can be no contest that the obligation to give restitution to Prato has its closest and most real connection to Italy.
169. The proviso identified by Dexia involves an assertion that an Italian court would, if Prato sought restitution in that court, be required by article 10(1)(e) of the Rome Convention to conclude that English law was the proper law of the obligation to give restitution. This, however, would require me to have regard not to Italian substantive law, but to Italian principles of the conflict of laws.
170. Dexia rightly disclaimed any attempt at renvoi, saying that it was not urging the English court to adopt a conflicts rule under which the English court would apply the conflict of law principles of the country with which the obligation had its closest and most real connection. Instead, the assertion advanced by Dexia was, as it seems to me, that in circumstances where Prato said that Italy was the country with which the obligation had its closest and most real connection, reasons which would otherwise lead me to agree with Prato should be discounted because I should pay regard to Italian principles of conflict of laws under which courts in Italy would be required to apply English law to that obligation.
171. Prato objected to this assertion because there is no evidence that an Italian court would be required to do this, and because the English court is concerned to identify the country whose substantive law will be the proper law without regard to that country's principles of conflict of laws. I agree with both objections. As to the first, it seems to me that Dexia is asking me to make a finding about Italian law in circumstances where I do not have the wherewithal to do so. As to the second, it is common ground that I cannot apply the doctrine of renvoi because sound reasons of policy prevent me from applying Italian principles of conflict of laws. To my mind Dexia's assertion that I should pay regard to Italian principles of conflict of laws runs counter to the same reasons of policy. It follows that Dexia's assertion cannot be accepted.
172. For the reasons given above I reject Dexia's assertions. I am persuaded by Prato that its restitution counterclaim is governed by Italian law. The undisputed consequence is that Prato's restitution counterclaim succeeds.

E3. Restitution counterclaim: change of position

173. Dexia's change of position defence would only arise if the restitution counterclaim were governed by English law. For reasons given in section E2 above, however, I have held that English law does not govern the restitution counterclaim. It is accordingly not necessary for me to rule on Dexia's change of position defence. As this is an area of developing law I consider that it is undesirable for me to attempt to deal with it in the present judgment.

F. Regulatory counterclaim

F1. Regulatory counterclaim: introduction

F1.1 The regulatory assertions

174. Paragraphs 60 to 65 of Prato's counterclaim set out assertions ("the regulatory assertions") which were listed in paragraph 63 under 5 heads. Each head specified one or more particular features of Dexia's conduct, and alleged that the feature(s) thus specified constituted a breach of one or more requirements of Italian financial services regulatory legislation. One thing that all the regulatory assertions had in common was that Prato said the applicable law governing those claims was Italian law. This was initially disputed by Dexia, but was conceded in Dexia's opening submissions. Dexia did not dispute that if under Italian law it was in breach of the regulatory legislation, and Prato suffered damage which under Italian law was caused by the breach, then under Italian law this would give rise to a tortious liability in damages.
175. The 5 heads concerned:

(1) failure by Dexia prior to each swap to disclose to Prato "the existence of the Hidden Costs or their implications for 'economic convenience' in Art. 41 [of law 448/2001] and/or (in the case of the Fourth-Sixth Swaps) for compliance with Art. 3 [of ministerial decree 389/2003]" ("the non-disclosure assertions");

(2) conduct on the part of Dexia which "structured the [swaps] to embody the Hidden Costs and/or failed to structure the [swaps] so as to provide the best rates for [Prato]" ("the structuring assertions");

(3) conduct on the part of Dexia which "failed to inform the Defendant that each [swap] was unsuitable [because of the existence of the Hidden Costs in respect of that swap] and/or to obtain written consent from the Defendant to proceed" ("the unsuitability assertions");

(4) conduct on the part of Dexia which "failed to include reference to a 7 day right of withdrawal" in each swap ("the right of withdrawal assertions");

(5) conduct on the part of Dexia which, in acting in each of the ways set out in sub-paragraphs (1)-(4) above, "failed to act in the best interests of [Prato] and, as a result, alternatively in any event, … put itself in a position of conflict with [Prato] and failed to inform [Prato] of that in writing or to obtain its written consent" ("the conflict assertions").

F1.2 Structure of this section & overlap with section G

176. There is potential for overlap between the regulatory counterclaim, the misrepresentation counterclaim and the advisory counterclaim. In the present section of this judgment I examine the regulatory counterclaim independently of the 2002 advisory agreement. The effect of that agreement, including its impact on the legislative provisions discussed below, is dealt with in section G below.
177. In section F1.3 I set out the legislative provisions relied on by Prato. Section F1.4 identifies certain matters which were common ground. Section F1.5 sets out an explanation of "Hidden Costs" in Prato's statement of case. Sections F1.6 and F1.7 analyse, respectively, Prato's four propositions as to the significance of MTM and the parties' observations on other aspects of MTM. In section F2 I discuss the non-disclosure assertions. In sections F3 to F6 I deal with the structuring assertions, the unsuitability assertions, the right of withdrawal assertions, and the conflict assertions. Section F7 examines the extent to which Dexia was in breach of regulatory obligations. Section F8 deals with causation and damages.

F1.3 Regulatory counterclaim: legislative provisions

178. I set out below the legislative provisions relied on by Prato in the regulatory counterclaim. Most, but not all, of these provisions were compulsorily applicable irrespective of the status of the investor. Certain of the provisions were not applicable to "qualified" investors. I have indentified those provisions by adding "[retail investors only]".
179. The fundamental legislative provision for the regulatory counterclaim is article 21 TUF, and in particular article 21.1:

CHAPTER II

Performance of services

Art. 21

(General criteria)

[21.1] In providing investment and non-core services, authorised persons must:

a) act diligently, correctly and transparently in the interests of clients and the integrity of the market;

b) acquire the necessary information from clients and operate in a way that they are always adequately informed;

c) organise themselves in such a way as to minimise the risk of conflicts of interest and, where such conflicts arise, act in such a way as to ensure transparency and the fair treatment of clients;

d) have resources and procedures, including internal control mechanisms, likely to ensure the efficient provision of services;

e) carry out independent, sound and prudent management and make appropriate arrangements for safeguarding the rights of clients in respect of assets entrusted to them.

180. In addition CR included detailed provisions relied upon by Prato for the purposes of the regulatory counterclaim. Prato relies on articles 26.1 f), 28, 29, 32.3, 32.5, 36.1 c) and 61.1 g) CR as follows:

PART II REGULATION OF THE PROVISION OF INVESTMENT AND NON-CORE SERVICES AND OF COLLECTIVE ASSET MANAGEMENT SERVICES

Title I

Investment and non-core services

Chapter I

General Provisions

Article 26

General rules of conduct

[26.1] Authorized intermediaries, in the interest of investors and the integrity of the securities market, shall:

…

f) operate so as to keep down the costs borne by investors and to obtain the best possible result from each investment service, taking into account the level of risk chosen by the investor.

Article 27 [retail investors only]

Conflicts of interest

[27.1] Authorized intermediaries shall be on the alert for conflicts of interest.

[27.2] Authorized intermediaries may not carry out transactions with or on behalf of their clients where they have directly or indirectly a conflicting interest, including any such interest arising from intragroup dealings, the joint provision of more than one service or other business dealings of their own or of group companies, unless they have previously informed the investor in writing of the nature and extent of their interest in the transaction and the investor has expressly agreed in writing to the carrying out thereof. Where the transaction is concluded by telephone, compliance with the foregoing information requirements and the issue of the related authorization by the investor must be evidence by a recording on magnetic tape or an equivalent medium.

[27.3] Where, for the purpose of complying with the requirements referred to in paragraph 2, authorized intermediaries use printed forms, these must indicate in a graphically highlighted manner that the transaction involves a conflict of interest.

Article 28 [retail investors only]

Communication of information between intermediaries and investors

[28.1] Before concluding contracts for asset management or investment advice services and starting to supply investment services or related non-core services, authorized intermediaries must:

a) ask investors for information about their experience in investing in financial instruments, financial situation, investments objectives and propensity to incur risks. In the event of refusal to provide the information requested, this must be stated in the contract referred to in Article 30 or in a declaration signed by the investor;

b) give investors a copy of the document on the general risks of investments in financial instruments referred to in Annex 3.

[28.2] Authorised intermediaries may not carry out or recommend transactions or supply management services until they have provided investors with adequate information on the nature, risks and implications of the transaction or service in question, knowledge of which is needed to make informed investment and disinvestment decisions.

Article 29 [retail investors only]

Unsuitable transactions

[29.1] Authorized intermediaries shall refrain from carrying out transactions on behalf of investors that are not suitable in terms of type, oggetto, frequency or size.

[29.2] For the purposes of paragraph 1, authorized intermediaries shall take into account the information referred to in Article 28 and any other information available in relation to the service supplied.

[29.3] Where an authorized intermediary receives instructions from an investor relative to an unsuitable transaction, it shall inform the investor of the fact and state the reasons why it is not advisable to carry out the transaction. Where the investor nonetheless intends to proceed with the transaction, the authorized intermediary may carry it out only on the basis of an order given in writing or, in the case of orders given by telephone, recorded on magnetic tape or an equivalent medium in which explicit reference is made to the warning received.

...

Chapter II

Rules for the supply of individual services

Section I

Dealing

Article 32

Dealing

…

[32.3] … authorized intermediaries shall carry out transactions for own or customer account at the best possible conditions with reference to the time, size and nature of the transactions. In determining the best possible conditions consideration shall be given to the price paid or received and the other costs borne directly or indirectly by the investor.

…

[32.5] In supplying the service of dealing for own account, authorized intermediaries shall inform the investor at the time of receiving the order of the price at which they are prepared to buy or sell the financial instruments and execute the trade upon receiving the investor's consent; they may not charge any commission on the price agreed.

…

Section III

Placement and off-site offers

…

Article 36

Off-site offers

[36.1] In the offering off-site of financial instruments, investment services and financial products governed by article 30 TUF, authorized intermediaries shall use financial salesmen to:

…

c) explain to investors:

- before they sign an order form for the purchase or subscription of financial instruments or other financial products or a contract for the supply of investment services, the essential elements of the transaction, service or product, with special reference to the related costs and capital risks;

- the right provided for in article 30.6 TUF.

…

PART IV

OBLIGATIONS OF CERTIFICATION, REPORTING AND REGISTRATION

…

Article 61 [retail investors only]

Information on transactions

[61.1] In supplying dealing services, authorized intermediaries shall send to investors' domiciles, for each transaction carried out and within seven working days from the execution date, a transaction confirmation notice showing separately the following information:

…

g) the commissions and expenses charged;

…

181. Annex 3, referred to in article 28.1 b), comprised 11 pages in small type in the Italian printed version of CR. Passages of particular relevance are set out in Annex 3 to the present judgment.
182. The legislative provisions above have been set out in the form that they took during the period 2002 to 2006 inclusive. They all applied to the swaps, either because they were applicable to relations between intermediaries and investors generally, or because they applied to relations between intermediaries and retail investors.

F1.4 Regulatory counterclaim: common ground

183. In relation to relevant provisions of Italian financial services legislation, the Civil Joint Memorandum recorded in paragraph 6:

6. … We … agree that under these provisions the intermediary must, amongst other things, act diligently, correctly, transparently and fairly, must operate so as to keep down the costs borne by investors and obtain the best possible result from each investment service, assess the client's profile as an investor, evaluate the suitability of the transaction, and operate in such a way that the investor is always adequately informed. Whilst Professor Gentili agrees in the abstract that the relevant articles of TUF and [CR] provide for the above, he wishes to note that the facts of each individual case have to be applied to these provisions and this will have a bearing on how the provisions of TUF and [CR] are applied to each individual case.

184. Aspects that are either agreed or unchallenged in the course of evidence are:

(1) there is no express obligation on a bank to disclose an initial negative MTM value under relevant legislative provisions;

(2) in the present case, the obligation of transparency under article 21.1 TUF and the obligation to disclose adequate information under article 28.2 CR come to the same thing;

(3) the duty in article 21.1 moulds itself "to the characteristics of the particular client" along with ancillary legislative provisions;

(4) more detailed information must be provided to a retail investor, such as Prato, than would be the case with a qualified investor;

(5) the information must be provided in such a way that it can be comprehended by "a retail investor that declares that it doesn't have a large knowledge of the financial market and of the law that governs this";

(6) the obligation to provide information to a client incorporates an obligation to verify that the client has fully understood the information provided, recognising however that investors also have a duty to ensure that they understand and that there are limitations on what an intermediary can do to ensure that the investor has understood.

185. It is not disputed that prior to the swaps Mr Sommavilla provided Dexia with a copy of Annex 3 CR. Dexia's opening submissions relied on a number of other general assertions that were either common ground or not contested in evidence:

(1) prior to each swap Dexia provided Prato with a presentation including, in particular, an explanation of the circumstances in which Prato would be the net payer and information about projected 6M Euribor forward rates for the relevant period;

(2) As a general rule, under Italian law:

(a) each contracting party is responsible for determining whether it wishes to enter into a contract and if so on what terms; and

(b) contracting parties generally owe each other no duty of disclosure;

(3) in practice, the initial MTM of a derivative will always be negative to the counterparty since the bank must price the transaction so as to cover the risk that it takes on, to cover the costs it will incur and to earn a margin;

(4) during the period 2002 to 2006, if a bank and a counterparty entered into a swap then, unless there was a specific agreement that the bank would disclose the initial MTM, banks did not disclose that initial MTM at the start of or immediately prior to a swap; this was accepted by Dr Faro at T16, p. 30, line 15 to p. 31 line 2, where Dr Faro added that "municipalities didn't even understand the significance of the term, and virtually all municipalities had been qualified as qualified players."

F1.5 Prato's Hidden Costs explanation

186. Section A4.4 of the main claim judgment set out the definition of "Hidden Cost" and "Implicit Cost" given in paragraph 21 of Faro 1. The quotations in the 5 heads set out in section F1.1 above, however, are taken from Prato's statement of case, which contained a general explanation concerning "Hidden Costs". I shall refer to it as "Prato's Hidden Costs explanation". In their final form, paragraphs 10, 11 and 11A of Prato's Hidden Costs explanation stated:

2. The Hidden Costs of the Transactions

10. As at the date of their purported entry, each of the Transactions had a negative initial MTM value to the Defendant and a positive initial MTM value to the Claimant as follows in the following amounts (alternatively such other amounts as the Court shall determine following the exchange of expert evidence):

(1) The First Swap (4 December 2002): €817,005.66;

(2) The Second Swap (6 August 2003): €1,380,227.39;

(3) The Third Swap (6 August 2003): €65,659.58;

(4) The Fourth and Fifth Swaps (30 December 2004):
€947,848.26;

(5) [deleted];

(6) The Sixth Swap (26 June 2006): €1,266,507.05.

11. The above negative/positive values in respect of each Transaction represented implicit costs of the Transactions to the Defendant and implicit profits or fees or commissions to the Claimant all of which were undisclosed by the Claimant to the Defendant and of which at all material times the Defendant was unaware. The term "Hidden Costs" is used below as shorthand for the undisclosed negative values and/or implicit costs of the Transactions to the Defendant particularised above.

11A. For the avoidance of doubt:

(1) The characterisation of the Transactions' negative values as "costs" is a matter of labelling only and is not essential to the defences or causes of action advanced by the Defendant below. The matters alleged below are alleged whether or not the negative values are properly so to be characterised; and

(2) Without prejudice to all expert evidence to be adduced at trial, the quantification of the Transactions' negative values to the Defendant is not affected by the fact that the Claimant carried credit risk and interest rate risk, and (it contends) other transaction costs in entering into the Transactions and would have sought to price those into the terms agreed. Howsoever the existence of the negative values came about or is now sought to be justified by the Claimant, the Transactions remained negative value transactions for the Defendant as particularised.

187. It is apparent from paragraph 11 of this explanation that "Hidden Costs" refers to the negative initial MTM amounts of the swaps, either as specified in paragraph 10 or as determined by the court. Those same amounts are said in paragraph 11:

(1) to be positive initial MTM values for Dexia;

(2) insofar as they are negative initial MTM values to Prato, to represent "implicit costs" of the swaps to Prato; and

(3) insofar as they are positive initial MTM values to Dexia, to represent "implicit profits or fees or commissions" to Dexia.

188. It is also made clear by Prato in this explanation:

(1) in paragraph 11A(1):

(a) that it is the negative values that are said to matter for Prato's purposes, and

(b) that whether those negative values are properly characterised as costs is said to be "a matter of labelling only" which "is not essential for Prato's purposes";

(2) in paragraph 11A(2):

(a) that "without prejudice to all expert evidence to be adduced at trial", when quantifying the negative values it does not matter that Dexia carried transaction costs in entering into the swaps which it "would have sought to price … into the terms agreed", and

(b) that what matters is that there were negative values, and it matters neither how they came about nor how they are now sought to be justified by Dexia.

F1.6 Significance of initial MTM: Prato's propositions

189. Prato's oral closing identified four propositions about the significance of the initial MTM. I deal with them in turn.
190. The first proposition was expressed in various ways. At its heart it identified common ground between Prato and Mr Malik as to what initial MTM represents. In this regard I begin with some observations about Mr Malik's terminology:

(1) The term "mark to market" or "MTM" is discussed in section A4.3 of the main claim judgment. Mr Malik said that he used the term "MTM" to mean valuations made using mid-market interbank rates.

(2) Mr Malik said that market participants commonly referred to the term "day one present value" or "day 1 PV" instead of "MTM" for the day 1 value of the derivative calculated at mid-market rates. By contrast, he commented that MTM was generally understood to be a subsequent recalculation of the value of the derivative using prevailing mid-market rates.

(3) Mr Malik used the term "traded value" to mean the actual trading price of the derivative. This was the price at which a bank would be willing to transact, and included adjustments for dealer costs and a reasonable margin. Mr Malik added that the term "traded value" applied to a derivative valuation at all times – at inception, on an unwind/close-out, restructuring or default.

191. Mr Malik in his oral evidence gave an explanation of the calculation of day 1 PV. It started with the expected cash flows under the swap. These were then discounted at market interest rates. Those expected cash flows and interest rates were themselves arrived at from the prices in the market that day of market trading instruments. In summary, Mr Malik said that the day 1 PV is the present value of what that day's market rates suggested would be the expected cash flows and the appropriate discount rate.
192. So much was, indeed, common ground. Prato sought to build on that by suggesting to Mr Malik that if the day 1 PV was plus 100 for the bank, and correspondingly minus 100 for the client, this reflected an expectation on that day that the client would be the net payer to the tune of 100. Mr Malik refused to accept this. His response was that in the example that had been given the client was the net payer on that day. Later in his evidence he added:

… it is the present value of the expected cash flows discounted at today's market rates. That's all it tells you. It's today's price. Today's price does not give you any indication of what the expected outcome would be. … a present value of the cash flows at today's rate, in my view does not indicate an outcome.

193. I accept that evidence. It was common ground that the amount of the day 1 PV is constituted by and reflects the spread from notional mid-market interbank rates. The bank builds that spread into its pricing to cover its costs and to give it a reasonable margin. In that regard Prato placed reliance on what was said by Mr David Mengle in issue 3, 2010 of ISDA Research Notes. In my view what Mr Mengle said is consistent with, and supports, Mr Malik's evidence. It is convenient to include here an extract ("the Mengle extract") from this article, in which I have numbered the paragraphs in square brackets. These paragraphs form part of, among other things, an explanation of how the fixed rate on a notional par swap is effectively a weighted average of estimated floating rates:

[1] A central concept of financial instrument pricing is that of zero net present value at inception; the concept is also known as mid-market pricing. Applied to a derivatives transaction, the concept means that the terms of the transaction are set so that the present value of expected cash flows to be paid by one party is equal to the present value of expected cash flows to be paid by the other. For an interest rate swap, for example, zero net present value means that the swap fixed rate is set so the present value of fixed rate cash flows equals the present value of expected floating rate cash flows. For a credit default swap, it means that the credit spread is set so the present value of expected spread payments equals the present value of expected default payments. And for an option it means that the option premium paid at inception is equal to the present value of expected in-the-money cash flows. In all cases, once the market moves, net present value is no longer zero.

[2] But in practice, originating and executing a transaction involves costs that must be covered by the dealer that arranges it. If the actual price of a transaction were set so net present value was zero, the dealer would not cover its costs of transacting and of serving more generally as a market maker, nor would it be compensated for the credit risk it takes in a bilateral transaction. It is therefore necessary to adjust the mid-market price to cover various costs and risks of transacting as well as provide a return to the dealer that makes a market; this is true not only of derivatives but of market making for all financial instruments. The result is that the actual price agreed for the transaction is not the mid-market price, but typically either a bid price if the dealer is paying the fixed rate or an offer price if the dealer is receiving the fixed rate. And because the actual price is the bid or offer price, the net present value to the dealer will be a positive amount and not zero.

….

[4] Pricing and valuation, as the terms are used in financial markets, refer to two different aspects of the same process. Pricing refers to the process of setting the initial terms of a transaction, for example, the fixed rate on a plain vanilla interest rate swap. Valuation refers to determining the net present value of expected cash flows after the initial terms have been agreed and set. The following discussion will focus on pricing a swap transaction.

[5] A plain vanilla interest rate swap involves one party paying a fixed rate to and receiving a floating rate, usually Euribor or Libor, from the other party. Pricing a vanilla swap begins with determining a benchmark fixed rate for a par swap, which is defined as an interest rate swap with a net present value of zero. This benchmark fixed rate is neither a bid price nor an offer price, but instead a mid-market price based on prices currently quoted in the market. This mid-market price is not itself a market price at which a transaction would be dealt.

[6] Determination of the mid-market price involves calculating three interrelated yield curves. The first yield curve is the par curve, which is the set of fixed rates currently quoted for par swaps of various maturities. The par yield curve for interest rate swaps is also called the mid-market swap curve because, in practice, it is derived by averaging the bid and offer rates for each quoted maturity. A market participant considering entering into an interest rate swap would consult the par swap curve to determine the fixed rates currently being quoted for various maturities.

[7] The second yield curve is known as the zero coupon curve, and is related through arbitrage to the par yield curve. The zero coupon yield curve is a set of rates paid on instruments that accumulate interest until maturity, with no immediate cash flows. For interest rate swaps, zero coupon rates have traditionally been used to discount expected cash flows.

[8] The third yield curve is the forward curve, and is derived from the zero coupon yield curve. The forward yield curve consists of the future values of zero coupon rates that are implied by current zero coupon rates. For interest rate swaps, forward rates are used as proxies to estimate expected floating rate cash flows for the future dates. This calculation is based on the unbiased expectations hypothesis, an economic theory that asserts that forward prices are unbiased predictors of future spot prices.

194. It can be seen from paragraph [5] of the Mengle extract that, when pricing a swap, market participants use a "benchmark fixed rate for a par swap", being a "mid-market price [which] is not itself a market price at which a transaction would be dealt." Thus, it is in relation to a notional bench mark, which is not "a market price at which a transaction would be dealt", that the forward curve is used to predict future cash flows: see the Mengle extract at paragraph [8]. Paragraph [2] of the Mengle extract makes it plain that, far from being a predictor of cash flows, the MTM is the present value of an adjustment made to this notional bench mark. It seems to me plain from the Mengle extract that:

(1) the MTM is not dependant on the notional benchmark: the MTM represents an adjustment to that notional benchmark reflecting the provision that the bank has made for costs and risks and a return;

(2) the notional benchmark does not seek to predict an outcome: it has been arrived at by using the forward curve to determine a mid-market rate which is not itself a rate at which a transaction would be dealt;

(3) the forward curve has been derived by using forward rates as a predictor of future spot prices, and thus arrive at expected floating rate cash flows; and

(4) to the extent that anything is used as a predictor of cash flows, it is the forward curve and not the MTM.

195. In the language of the market, as expressed by Mr Malik in cross examination, "today's price" depends on "today's market rates". Nobody offering "today's price" is saying that in reality "this is the expected outcome". Market practitioners know that the calculations have been done using a benchmark which is only notional, that the eventual outcome will and must depend on market movements, and that predictions (embodied in the forward curve) as to movements will change on a daily basis and often within the day.
196. Prato's second proposition was that if, on day one, the counterparty was the expected net payer in the light of the expected cash flows, then the initial MTM must reflect "the risk or probability of that". Prato asserted that Professor Gentili had accepted this proposition. I disagree. What the initial MTM, or day 1 PV, reflects is that the bank, when entering into the swap with the counterparty, has secured for itself a spread over notional mid-market interbank rates. That spread has a present value (see the Mengle extract at paragraph [2]), and the greater the spread, the higher its present value will be.
197. As to Professor Gentili's evidence, he was asked about what had been said by the Court of Appeal of Milan, civil section, in Gommeservice (see section C5.3 above). In his evidence Professor Gentili accepted that Prato's second proposition was something which had been said in the judgment in that case. Professor Gentili did not say that he agreed with it.
198. Prato's third proposition was that because initial MTM is an expression of the expected net cash flows on day one in present value terms, it is necessarily an expression of the then expected cash flow outcome. This, however, to my mind is meaningless. The outcome of the swap is going to depend on market rates over time. The bank, in order to recover its costs and to achieve a margin, has secured a spread over the mid-market interbank rate. The initial MTM simply gives the present value of that spread. All that it indicates is that on each payment date the difference between what the bank pays and what the counterparty pays will be better for the bank than if it had entered into the swap at day 1 mid-market interbank rates. Those rates are notional only: see the last sentence of paragraph [5] of the Mengle extract. Thus the initial MTM gives no information at all about the expected outcome of the swap.
199. Prato's fourth proposition was put in two different ways. First, it was said that where the initial MTM is negative for a counterparty, that represents the cost of entering into the swap for that counterparty. The second way in which the fourth proposition was put was to say that, at the very least, it represented the expected cost on day one.
200. An assertion by Prato in support of this proposition was that initial MTM had only come into existence as a vehicle for recovering cost by the bank. This assertion confuses the MTM and the choice of the fixed rate. The proposed fixed rate undoubtedly has been chosen in order to ensure that the bank can recover its costs along with a profit element. The MTM is no more than the present value of the spread between the fixed rate and the notional mid-market interbank rate.
201. Three sub-points were relied upon by Prato. As will be seen, in these sub-points Prato sought to show that a negative MTM at inception was indeed a "cost". This reflected the approach to cross-examination taken by Prato in the course of oral evidence. There was thus a departure from the assertion in paragraph 11A(1) of Prato's Hidden Costs explanation that characterisation as "costs" was immaterial.
202. The first sub-point was an assertion that the cost of the swap resides in the present value of the net cash flows. Mr Malik's answer to this was to give an analogy of buying a pint of milk. The cost to the consumer is the price that the consumer pays. The fact that the shop was able to buy the milk at a lower price from a wholesaler did not mean that the shop's mark up represented a "cost" to the consumer.
203. Prato said that this was a false analogy. The reason was that under the swaps in the present case the parties agreed to exchange cash flows and for there only to be physical settlement of the net differential. Prato then said this:

The right analogy would be … an arrangement under which X binds itself to pay Y £100 in six months, Y binds itself to pay X £70 on the same date and both agree that only the net sum need be physically settled. The cost of the arrangement for X is plainly £30 not £100.

204. The computation of cost in this example is a computation of profit or loss, in this case a loss. As a computation of eventual loss, it is plainly right, on the assumptions that the agreement comes to an end at the six month stage, and that the profit/loss is measured at that stage. The example, however, needs refinement in order to be a true analogy. In refining it, I apply principles of market practice described by Mr Malik and not contested by Dr Faro. Assume that the figures given in Prato's example arise because the amount that X has to pay at the end of six months is derived from a floating rate. Assume also that Y is a bank which pays a fixed rate of 14% per annum on a notional principal sum of £1000, and that Y's fixed rate gives it a spread by comparison with the notional mid-market rate because Y pays 100 basis points (1%) per annum less than the notional mid-market rate. If Y's payments were at the notional mid-market rate, then at the six month stage it would have paid 15% per annum rather than 14% per annum, which over a six month period would come to £75 rather than £70. In these circumstances it can be said that X is notionally £5 worse off as a result of the spread. However the "cost" to X at the six month stage is not £5. Insofar as "cost" is used to mean the eventual loss, then the "cost" is, as Prato rightly says in the example, the £30 difference between the amount X pays to Y and the lower amount that, on this example, X receives from Y.
205. Prato cited an explanation given by Dr Faro in a passage of cross examination. To my mind, if I insert in square brackets the sums given in Prato's example, then the passage makes precisely the point which is stressed by Dexia:

… in terms of the payment that Prato is making [£100], there is a component [£70] which is offset by the other part of the swap and a component which represents cost [£30]… there is a part that they pay out [£100] and they receive another part [£70] which compensates for it, and there is another part [£30] which is the cost component, and that for me is what I call cost.

206. If, however, Dr Faro intended by "cost" to refer to the spread represented by the initial MTM, then the result is inconsistent with his explanation. His explanation identifies the whole of the difference between what Prato receives and what Prato pays as the cost. In the example given, it is £30 at the six month stage. Looking at the position at the six month stage, a notional value can be attributed to the spread. As explained above, a spread of 100 basis points per annum would equate to a notional £5 out of the £30. But at the six month stage the cost is not the notional £5 but the actual £30.
207. The reason for the £30 "cost" is that the market floating rate on the relevant day has moved to a rate which requires X to pay £100. Sometimes the market may move in a way which means that X has a net obligation to pay. The "cost" to X has turned out to be the amount of that obligation. Other times it may move in a way which means that X has a net entitlement to receive. The "cost" to X has turned out to be nil, and X has made a gain. It is conceivable that after six months the market will arrive at a point where X's obligation to make payment to Y equates to Y's obligation to make payment to X. In that event there is neither a loss to X nor a profit for X: at the end of the six month period the "cost" to X has turned out to be nil. What all this has in common is that it looks at the position at the six month stage and compares it with the position at the outset, where, in this example, neither side pays anything to the other.
208. A calculation of what the position would have been if Y had agreed to pay a higher fixed rate has no bearing on the presence or absence of "cost". A calculation of that kind would simply constitute a calculation of what might have been. But what might have been did not happen.
209. Moreover, the present case arises in a context where Y is a bank entering into the swap as part of its normal commercial activity, and X is its customer. In such a context it is fanciful to suggest that Y might agree upon a fixed rate equal to the notional mid-market interbank rate. Such a rate would deprive Y of a positive initial MTM. As Mr Malik has demonstrated, and Dr Faro accepts, a positive MTM to the bank, with a corresponding negative MTM to the customer, is necessary to cover the bank's own exposure to various types of risk and to give it a margin. In commercial terms, a comparison with the notional mid-market interbank rate is not a comparison with something that might have been. It is, rather, a comparison with something which never might have been.
210. What this analysis demonstrates is that Mr Malik's analogy is sound. At the supermarket checkout the customer enters into a transaction with the supermarket under which the customer buys a pint of milk. It is a nonsense to suggest that the cost of the pint of milk is the difference between the amount the customer actually pays and a notional mid-market rate at which supermarkets would buy and sell milk to each other. The cost to the customer is the amount by which the customer is out of pocket once the transaction has taken place. It might be that there was a loyalty scheme or something similar under which the customer received points that could be exchanged for cash. If the points gained for buying the milk could be swapped at the checkout for, say, a penny, then the cost to the customer of the milk will be the price less a penny. The notional mid-market rate at which supermarkets would trade milk between themselves has nothing to do with it, and nor does the difference between that rate when applied to a single pint of milk and the net amount by which the customer is out of pocket.
211. The second sub-point was an assertion that "the cost of the swap is not theoretical". If "cost" is used to refer to the £30 differential in Prato's example then this is plainly right. But that is not what this second sub-point is seeking to assert. It is seeking to assert that the initial MTM is not a merely theoretical element in the cost. Prato cited passages from the evidence of Professor Sciarrone Alibrandi and from the evidence of Dr Faro. In this regard Prato said that the essential point was that once the spread is brought into the prices that the counterparty pays, the cash flow performance will always reflect that. It did not matter whether on a particular payment day the counterparty may be a net payer or may be a net recipient.
212. This "essential point" is misleading. On each payment date Prato would have been better off if the swap had been entered into at notional mid-market interbank rates. This will be the case throughout the life of the swap. If, on a particular payment date, the cash flow due from Prato is equal to the cash flow due from Dexia, then no net payment will arise. Prato can, if it were so minded, say to itself that if only the swap had been entered into at day 1 notional mid-market interbank rates, then the amount that Dexia would have had to pay would have been more, and on the particular payment date in question Prato would have been a net recipient. The amount by which it would, on this notional basis, have been a net recipient will be determined by the amount of the spread on day 1. Similar calculations can be done under which Prato is a net payer under the swap, but at day 1 notional mid-market interbank rates would have been a net recipient. Or the position may be that Prato is a net recipient but would have received more on the occasion in question if the swap had been at day 1 notional mid-market interbank rates. Alternatively the position may be that on a particular occasion Prato is a net payer, but the amount of the net payment would have been reduced if the swap had been at day 1 notional mid-market interbank rates. At all stages, however, the comparison that is being made is with something which never might have been.
213. Thus I do not accept that this "essential point" has the consequence that the "cost" thus identified is anything other than theoretical. Evidence was cited from Dr Faro which to my mind took the matter no further. He added that it was necessary "to separate out the concept of cost from the concept of outcome". In that context, he said:

… the cost of the transaction can be seen as an additional value … which has an effect on the rate that [Prato] is paying. This is a spread, as we call it, and that has an effect in the transaction …

214. I do not accept this analysis. A swap is a transaction under which parties agree that they will make payments to each other in the future, and that these payments may be netted off. I accept that, because the payments may be netted off, the future cost to any one party on each payment date will be the net amount, if any, that the party in question will have to pay. In a swap between a bank and a retail customer this has nothing to do with the notional mid-market interbank rate at the time that the transaction is entered into.
215. Professor Sciarrone Alibrandi explained that, by comparison with an initial MTM of zero, a swap which has a negative MTM at inception for the customer will mean that the customer, on each payment date, will be worse off in an amount determined by the spread. She then asserted:

So in any case, either there will be an actual cost, an actual payment, or a lower gain. But in neither case is this a virtual value.

216. Professor Sciarrone Alibrandi's expertise is, of course, in the field of Italian civil law. It may be that in the passage cited above she was seeking only to reflect the views espoused by Dr Faro. So far as the practical realities of the relationship between a bank and a retail customer are concerned, however, it seems to me that for reasons similar to those identified above these propositions cannot be accepted. I add that Professor Sciarrone Alibrandi's own analysis starts by taking something which is entirely theoretical, namely a swap in which the initial MTM is zero. By definition, no such swap occurs: the definition takes a notional mid-market interbank rate. That notional value is something derived from actual transactions, looking at bids and offers in order to arrive at a value which is at "mid-market". It is commercially absurd to think that a retail customer could obtain a swap at mid-market rates in the absence of some particular reason on the part of the bank to trade in a way which gave it nothing for the credit and other risks which it was incurring, and which gave it no profit element. Thus Professor Sciarrone Alibrandi's own analysis gives no basis for departing from the analysis above under which the cost to the retail customer will be the net amounts, if any, that it has to pay during the life of the swap.
217. Prato's submissions on its first and second sub-points cited passages in Mr Malik's evidence in which he spoke of the "cost" of the back to back swaps by which Dexia hedged against the interest rate risk element in the swaps that it entered into with Prato. Those back to back swaps are described at paragraphs 62, 75, 76, 95 and 111 of the main claim judgment. I have not referred to these citations by Prato in my discussion above, because it seems to me that whether they have value depends upon Prato's third sub-point, to which I now turn. In the third sub-point Prato suggested that there was "a stark inconsistency between Mr Malik's approach between the hedge swaps on the one hand and to the underlying Prato swaps on the other."
218. In Mr Malik's written evidence, he calculated figures for the day 1 PV of the back to back swaps. He confirmed in his oral evidence that he took this as the cost to Dexia of entering into the back to back swap. He described it as "the cost of the hedge to Dexia … [on] day one."
219. Prato suggested to Mr Malik that, just as the initial MTM of the back to back swaps was a cost to Dexia, so the initial MTM of swaps 1 to 6 was a cost to Prato on swaps 1 to 6. Mr Malik refused to accept this. In its closing submissions Prato criticised the reasons given by Mr Malik for distinguishing the two. To my mind the criticisms do not do justice to Mr Malik's answers when the point was put to him:

A. … when a bank enters into a swap with a counterparty such as Prato, it has to hedge its market risk because it is not in the business of taking the opposite view to what the client is taking. It has two choices: it can go to a bank … and lay off the market risk, for which it pays a certain amount – this is what they have done – or they could go out into the market and unbundle the risks and dynamically hedge it themselves …

… Q. It's perfectly accurate to describe [the day 1 PV of the back to back swap] as the cost to Dexia of entering into the hedge …?

A. Well, that's because as a market maker or as a bank they have to go out and replicate this swap in the market and lay off all their risks, because they are not in the business of taking a market view like the counterparty is taking.

220. In this passage Mr Malik is explaining the practical context. The terms which Dexia offers to Prato are not offered in a vacuum. To the extent that those terms would require payments by Dexia to Prato, it is common ground that Dexia will be looking to the interbank market to see how much more another bank would be willing to pay Dexia in exchange for the cash flows which are to be paid by Prato to Dexia. Thus there are two transactions in the offing, and in order to decide whether to enter into them both Dexia must compare the two. This can be done by comparing the extent to which the fixed payments it would receive under the back to back swap exceeded the fixed payments it would make under swap with Prato. A more sophisticated approach is to compare the day 1 PV of the two transactions. If a comparison using day 1 PV is made, one comparator is a present value for the spread above notional mid-market interbank rates as regards the swap between Dexia and Prato. In that swap Dexia assumes the risk that rates will change adversely to Dexia, which is what Mr Malik refers to as "the market risk". Dexia has chosen to lay off that market risk. Mr Malik speaks of this being something "for which [Dexia] pays a certain amount". The comparison that is done is thus looking, on the one hand, at the extent to which, in present value terms, the swap contemplated with Prato will give Dexia a spread over and above a notional mid-market interbank rate, and how much in its turn Dexia will have to "pay" in present value terms, again over and above a notional mid-market interbank rate, to a hedge bank in order to be covered against the market risk element of the proposed swap with Prato. In these circumstances, far from being meaningless, the notional mid-market interbank rate is a crucial feature of Dexia's commercial assessment. It forms a common benchmark used in both comparators. The commercial assessment can be made by a calculation comparing the day 1 PV for each of the two proposed swaps. Assuming that they were both entered into at the time of the calculation, the cash flows that form part of the notional mid-market interbank rate drop out of the equation, because they are common to both sides.
221. As Dexia pointed out, Mr Malik recognised that in this context he was using the word "cost" in a loose sense. In response to questions from me towards the end of day 15, Mr Malik recognised that the actual cost was the traded value. Nevertheless, for the reasons explained above, in the context of the back to back swaps it makes commercial sense to speak of the day 1 PV to Dexia of the back to back swap as a "cost". There is simply no scope for any similar type of exercise from Prato's point of view. As Mr Malik points out, when entering into the swap with Dexia Prato is taking a market view. Prato seems to suggest that when entering into the swaps with Dexia it is hedging in the same way as Dexia is hedging when it enters into the back to back swaps. I do not accept this. I agree that Prato is entering into the swaps with Dexia so as to gain a measure of protection against market risks which are features of transactions between Prato and certain groups of creditors. Those features, however, have nothing to do with any notional mid-market interbank swap rate. It makes no commercial sense at all to speak of Prato incurring a cost referable to the difference between the cash flows under its swaps with Dexia and the cash flows if the swaps had been made at a notional mid-market interbank rate.
222. For these reasons I accept neither Prato's fourth proposition nor any of the sub-points relied on by Prato. Before leaving the fourth proposition it is convenient to note some observations of Professor Sciarrone Alibrandi in Sciarrone Alibrandi 3. Paragraph 27 of Sciarrone Alibrandi 3 drew attention to three provisions concerning financial accounting which were mentioned in Arosio. Paragraphs 28 to 30 drew attention to something not cited in Arosio, namely Eurostat Guidance on accounts rules for Excessive Deficit Procedure (EDP) concerning financial derivatives issued on 13 March 2008. It does not appear to me that these matters fall within Professor Sciarrone Alibrandi's area of expertise.
223. After dealing with these four propositions Prato's oral closing submissions touched on a number of other aspects of MTM. I deal with those other aspects in section F1.7 below.

F1.7 Other aspects of MTM urged by the parties

224. Prato's closing submissions, after advancing the four propositions on the significance of initial MTM, moved on to deal with a number of points urged by Dexia. In part these points, or Prato's answer, involved assertions of Italian law. To the extent that those assertions are relevant I deal with them, as developed by Prato when making submissions on Italian law, in later sections of this judgment. On aspects other than Italian law it is convenient to discuss these points here.
225. The points in question appeared in paragraph 5 of Dexia's written closing submissions. That paragraph began by noting that it was not market practice at the relevant time for the initial MTM of a derivative transaction to be disclosed by a bank to a counterparty. The comment was then made by Dexia that this was "unsurprising". The justification for this comment was said to lie in a proposition that "a counterparty such as Prato entering into interest rate swaps such as those in issue in this case did not need to know the initial MTM of the swap in order to make an informed investment decision". I shall call this "the no need to know factual proposition".
226. Paragraph 5 of Dexia's written closing submissions made a number of points in support of the no need to know factual proposition. Before turning to them, I note that there was, rightly, no suggestion that market practice of itself provided an answer to the regulatory counterclaim. Market practice is neutral in this context. Whether any particular practice met legal requirements depends upon what the law actually required, and what the practice actually involved, on the occasion in question. There were occasions when Dexia gave warning that a submission by Prato, if right, would have an adverse impact on numerous swaps already in existence. As with market practice, however, it seems to me that this cannot be a determinative feature.
227. Paragraph 5.1 asserted, among other things, that the initial MTM of a swap is neither economically, nor as a matter of ordinary language, a "cost" borne by the counterparty. Prato disputed this, relying on what Mr Malik had said about the back to back swaps. I have noted in section F1.6, when dealing with Prato's third sub-point, that in relation to the back to back swaps Mr Malik used the word "costs" in a loose way. For the reasons given in that section Mr Malik's evidence demonstrates that in the swaps between Dexia and Prato the initial MTM is not a true economic cost. It is a calculation of the present value of a notional difference between the actual swap rates and rates that were, by definition, not on offer to anyone at the time that the calculation was made.
228. In responding to paragraph 5.1 Prato noted a reference in an Italian decision to a document from the Bank of Italy describing "market values at the start of the transaction, reflecting implicit commissions …". This document was not put to Mr Malik. It appears to me to be no more than a loose way of describing how the spread from a notional mid-market inter-bank rate can be seen in economic terms as giving the bank cover for risks and a margin.
229. A submission was also made by Prato that paragraph 5.1 ignored Professor Sciarrone Alibrandi's evidence, along with a suggested concession by Professor Gentili. This submission misunderstands their roles. They gave evidence to assist the court on Italian law. To the extent that their evidence concerned Italian law, I deal with it in later sections of this judgment. To the extent that their evidence did not concern Italian law it is irrelevant.
230. Paragraph 5.2 of Dexia's written closing submissions stated:

The only payments which the counterparty is required to make under a swap are the differentials calculated by reference to the rates and thresholds set out in the swap contract and future interest rates. A swap with a negative initial MTM may result in the counterparty being a net recipient of positive cashflows over its term (and vice versa).

231. Here Prato complained that Dexia had asserted that "the cost may never materialise". That is a misconception. Dexia did not identify any particular cost as being one which may never materialise. Its point was that, irrespective of the initial MTM, whether a swap results in a profit or a loss to the counterparty depends on the rates and thresholds set out in the swap contract, on the one hand, and future interest rates on the other.
232. Prato then referred to passages in the evidence of Professor Sciarrone Alibrandi and Dr Faro. As explained above, the evidence of Professor Sciarrone Alibrandi is irrelevant for present purposes. The evidence from Dr Faro concerned the spread "having an effect in the transaction ex post at any event". This evidence, however, does not detract from Dexia's paragraph 5.2. The passage cited from Dr Faro's evidence is, in essence, saying merely that things would have been better for Prato on each payment date if only Dexia had been willing to agree to pay fixed interest at a higher rate. Moreover, the spread referred to by Dr Faro is determined by reference to a higher fixed rate which was not, by definition, on offer in the market when the spread was calculated: see section F1.6 above.
233. Paragraphs 5.3 and 5.4 of Dexia's written closing submissions concerned the initial MTM (in paragraph 5.3) and the back to back swaps (in paragraph 5.4). They distinguished between Dexia hoping to cover its costs/risks, on the one hand, and the fact that this would not be a cost to Prato, on the other. Prato's comments in response failed to take account of this distinction.
234. Paragraph 5.5 of Dexia's written closing submissions made criticisms of assertions which would later become part of Prato's propositions concerning the significance of initial MTM. When responding to paragraph 5.5 Prato observed that its points on these criticisms had been made already. As explained in section F1.6 above, however, the points relied on by Prato were, to the extent indicated in that section, unsound.
235. Paragraph 5.6 of Dexia's written closing submissions made a point which is common ground: there can be significant fluctuations in MTM during the course of a day. Paragraph 5.7 noted that differing calculations of MTM had been made by experts, and asserted that further uncertainty would be introduced by adjustments to determine implicit costs.
236. Prato criticised Dexia for relying on these paragraphs in the way that it did. In particular Dexia relied on them to make an assertion, in effect, that it would have been unreasonable to expect disclosure of these matters. I am not persuaded of this assertion. I agree with Prato's first criticism, namely that since March 2009 banks have "unbundled" and disclosed various notional elements at the time when they propose a derivative transaction. Of course that may not tell the investor what the position will be at the time when the transaction is agreed upon. Nonetheless it is something which it is clearly possible for banks to do. In these circumstances I do not need to comment on Prato's other criticisms.
237. Paragraph 5.8 of Dexia's written closing submissions said that Dexia's presentations gave Prato clear information which was easy for Prato to understand. Taking the examples of Swap 4, Swap 5 and Swap 6, it was obvious that, all other things being equal, the lower the caps and floors, Prato stood to be better off, since this would reduce both the maximum and minimum rates payable by Prato. It was not necessary for Dexia to disclose the initial MTM of the Swaps to Prato for it to appreciate that basic point. Paragraph 5.10 added that Dexia had provided forward rate information.
238. Prato criticised Dexia for relying on these paragraphs in the way that it did. The essential criticism was that Dexia's presentations did not tell the customer the likelihood that the thresholds would be triggered, they did not quantify the value of expected payments, and they did not "reveal the net cost". Prato made a claim that the initial MTM did all these things. However, as regards "net cost" this claim is misconceived for the reasons given above. As regards the triggering of thresholds and the value of expected payments, the claim has no foundation. Those matters depend on future movements in interest rates, as compared with the rates and thresholds in the swap: see section F1.6 above.
239. Paragraph 5.9 of Dexia's written closing submissions made the point that it was open to Prato to obtain proposals from other banks, and Prato would not have needed to know the initial MTM of the proposed swaps to compare the rates and thresholds proposed by Dexia with those proposed by others. Prato's response was that if Dexia had provided the initial MTM of its proposed swap this would have enabled Prato to consider whether or not to seek better terms or to seek competitive quotes. When I queried this, Prato's first response was that provision by Dexia of the initial MTM might have prompted it to do these things. That, as it seems to me, would be a matter for evidence. There was no evidence that merely disclosing the negative MTM might reasonably have been expected to lead Prato to consider seeking better terms from Dexia or anyone else. Prato's second response was that if Dexia had told it the size of the initial MTM, and that the initial MTM represented the expected cost on day 1, this might have caused Prato to say it would walk away or would seek competitive quotes. This second response is inherently flawed. It would have been quite wrong to say that the initial MTM represented the expected cost on day 1: see section F1.6 above.

F2. Regulatory counterclaim: non-disclosure assertions

F2.1 Non-disclosure: introduction

240. The primary feature relied on in the non-disclosure assertions is the failure by Dexia prior to each swap to disclose to Prato "the existence of the Hidden Costs …". An alternative feature is added: failure by Dexia, as regards the Hidden Costs, "to disclose their implications for 'economic convenience' in Art. 41 [of law 448/2001] and/or (in the case of the Fourth-Sixth Swaps) for compliance with Art. 3 [of ministerial decree 389/2003]". As to this alternative feature, however, I have concluded in sections D2.3 and D2.4 of the main claim judgment that none of the swaps had "implications" under either article 41 of law 448/2001 or article 3 of ministerial decree 389/2003. Accordingly in the present judgment I shall examine the primary feature of non-disclosure of "the existence of the Hidden Costs".
241. The main legislative provisions relied on by Prato in this regard comprise article 28.2 CR, along with the fundamental provision found in article 21 TUF. It must be borne in mind, however, that article 28.2 CR applies only to dealings between service providers and retail investors. Thus while article 28.2 CR is relevant to dealings between Dexia and Prato, it has no application to cases involving dealings between service providers and qualified investors.
242. As noted in section F1.4 above, it is common ground that, in the present case, the obligation of transparency under article 21.1 TUF and the obligation to disclose adequate information under article 28.2 CR come to the same thing. Subject to one general question, it is accordingly convenient to begin in sections F2.3 to F2.6 below by examining article 28.2 CR before turning to other legal obligations concerning disclosure. Turning to those other obligations, the non-disclosure assertions specifically rely upon article 32.5 CR, a particular aspect of article 36.1 CR, and article 61.1 g) CR, as set out in section F1.3 above. They are discussed in section F2.7 below. Section F2.8 below sets out my conclusions in relation to Prato's non-disclosure assertions.
243. I now turn in section F2.2 to the general question mentioned in the preceding paragraph. The general question concerns the significance of a later regulatory development.

F2.2 Non-disclosure: significance of 2009 changes

244. In relation to the non-disclosure assertions, each side said it gained support from a later regulatory development. This was Consob Communication n.9019104 of 2 March 2009 ("the Consob March 2009 communication"). The Consob March 2009 communication was published two years and eight months after swap 6 came into being. It made recommendations for illiquid securities, such as swaps. In that regard footnote (ii) defined "fair value" to mean:

"Correct value" of a position determined using mark to market quotations …

245. Recommendation 1.2 envisaged (with the addition of sub paragraph numbers in square brackets for ease of reference):

[1] "the so called unbundling of the different components of the aggregate financial cost borne by the client for the taking of the position in the illiquid product",

[2] "distinguishing fair value (with separate indication of the derivative component, if any) and costs – also to be borne at a later stage – to be borne, implicitly or explicitly, by the client."

[3] "The latter is provided with the indication of the disinvestment value of the investment in the moment immediately subsequent the transaction, assuming stable market conditions."

246. I am not in a position to decide what this means, as it was not examined in evidence. Mr Belarbi accepted that initial MTM is now disclosed, but he was not asked about the details. Prato submitted that the recommendation at 1.2 [2] above envisaged that the initial MTM should be disclosed. If so, what it envisages cannot, however, be the actual initial MTM, which will not be known until the transaction is agreed. Recommendation 1.1 made it clear that the relevant time for disclosure under recommendation 1.2 is "in the phase of proposal of investment transactions over illiquid products".
247. This, as it seems to me, is also made clear by the recommendation at 1.2 [3] above. It indicates that when an investment is at the proposal stage, in addition to the "fair value" as defined in footnote (ii), there is to be an additional indication. The additional indication concerns the financial consequences if the client were to change its mind immediately after the transaction had been executed. Recommendation 1.2 [3] recognises that, as was acknowledged by Dr Faro, the MTM can change substantially within a matter of hours. For this reason the "indication of the disinvestment value" is to be given "assuming stable market conditions" between the time that the calculation is done for the purposes of the proposal and the "moment immediately subsequent the transaction".
248. By contrast, as regards information falling within recommendation 1.2 [2], no reference time is specified. Without seeking to decide the point, I comment that this appears to me to leave it up to the service provider whether to indicate the time at which calculations were made in order to arrive at the envisaged initial MTM. The service provider might also consider whether to warn that the actual values may change substantially from those calculated in advance.
249. Prato made a further submission about the provision in recommendation 1.2 [2] for disclosure of the initial MTM. It was submitted that such provision was "fatal for any argument that initial MTM is irrelevant for a counterparty or its disclosure in some way impractical." I cannot accept this submission. As to impracticality, I have noted above that it is impractical to specify the eventual initial MTM in a proposal. All that can be done is to indicate when the MTM was calculated for the purposes of the proposal, with a warning that this may well change substantially by the time the transaction is executed. As to the relevance of the MTM, the Consob March 2009 communication takes the view that "unbundling" is desirable, and that this should include a "mark to market quotation" calculated for the purposes of the proposal. It does not follow that such a procedure is necessary to provide investors with "adequate information on the nature, risks and implications of the transaction" within the meaning of article 28.2 CR. The meaning of that expression is a matter of law, and its application to the case in question is to be decided on the facts.
250. On behalf of Dexia Professor Gentili noted that the Consob March 2009 communication set out "level 3" provisions under 2004/39/EC Parliament & Council Directive of 21 April 2004 (the "Markets in Financial Instruments Directive" or "MiFID"). MiFID replaced 93/22/EEC Council Directive 10 May 1993 (the "Investment Services Directive" or "ISD") with effect from 1 November 2007. Professor Gentili noted in his first report that TUF was partially modified in compliance with MiFID by delegated decree number 164 of 17 September 2007, which came into force on 1 November 2007. Thus these partial modifications came into force on the date that MiFID took effect. It is not suggested by either side that any of these partial modifications are relevant to the present case. Nevertheless Professor Gentili in the same report identified two features as indicating that no duty to declare "implicit costs" to counterparties existed under Italian law prior to MiFID. The first feature was that MiFID expressly provided for such a duty. To my mind, however, this sheds no light at all on what duties did or did not exist under Italian law prior to MiFID. The purpose of MiFID was to make provision for EU and EEA member states. The nature of the provision decided upon generally for EU and EEA member states does not, in itself, indicate anything about the provision in Italy prior to MiFID. The second feature was that it was only in 2009 that the March 2009 Consob communication made recommendations for "unbundling". As to that, however, Consob's decision that it was desirable to issue such a communication in 2009 does not of itself give any basis for saying that on a proper understanding of Italian law there was no such obligation at times relevant to the present case.

F2.3 Non-disclosure – art 28.2 CR: agreed propositions of law

251. Prato's Hidden Costs explanation equates non-disclosure of the existence of "Hidden Costs" with non-disclosure of the existence of an initial MTM which is negative to Prato, and/or of the existence of "implicit costs" in the same amount, at the start of the swap. I have already considered certain aspects of non-disclosure of the initial MTM and so-called "implicit costs". In section D2.3 of the main claim judgment I have explained why, if it were necessary to do so, I would have held that the initial MTM and so-called "implicit costs" were not actual costs for the purposes of article 41 of law 448/2001. In section C5 of the present judgment I have rejected the contention that a swap, for the purposes of Italian civil law, is "a legally authorised gamble" which will lack a "rational risk", and therefore lack causa, if the contract does not explicitly state "the value of the derivatives" and other elements which "have an effect on the risk assumed by the contracting party". I have also in that section noted the observation of Professor Gentili, which appears to me to be right, that while a party entering into a swap has a vital interest in doing so on a rational and informed basis, that vital interest is not part of the causa of the contract.
252. The questions which now arise overlap with, but are not in all respects the same as, the questions which are discussed in section D2.3 of the main claim judgment and in section C5 in the present judgment. In principle, there is a legal question as to the test under article 28.2 CR for identifying whether something falls within the category of what has to be disclosed, followed by a factual question as to whether in the present case the initial MTM and/or "implicit costs" fell within that category. Also in principle, expert evidence of Italian law is relevant to the first of those questions and not to the second.
253. Italian courts have, on occasion, sought the assistance of a court appointed expert in relation to MTM and "implicit costs". One of those occasions is mentioned in section D2.3 of the main claim judgment. As noted there, the Council of State in Pisa I appointed Dr Angeletti to report on relevant matters "according to criteria of economic-financial science". As also noted in that section, the Council of State in Pisa II reached a conclusion that "implicit costs" of a derivative "do not by any means constitute an effective cost … but merely stand for the value that the swap could have had in an abstract and hypothetical (but utterly unrealistic and untrue) negotiation". In that regard the Council of State indicated that the approach which it considered correct for the purposes of article 41 of law 448/2001 differed from the approach taken by Professor Angeletti, who had given negative weight to certain "implicit costs". Another case in which the Italian court appointed an expert was Arosio, where the first instance court, the Tribunal of Milan (criminal section), appointed Professor Corielli. Both these cases demonstrate that the expert's role is factual, not legal.
254. Many features of the legal framework relevant to disclosure obligations under article 21 TUF and article 28.2 CR give rise to no dispute. Section F1.4 above records matters which are common ground. Taking those which are relevant for present purposes, and renumbering them accordingly:

(1) contracting parties generally owe each other no duty of disclosure;

(2) the intermediary must, among other things, act diligently, correctly, transparently and fairly … and operate in such a way that the investor is always adequately informed;

(3) there is no express obligation on a bank to disclose an initial negative MTM value under relevant legislative provisions;

(4) in the present case, the obligation of transparency under article 21.1 TUF and the obligation to disclose adequate information under article 28.2 CR come to the same thing;

(5) the duty in article 21.1 moulds itself "to the characteristics of the particular client";

(6) more detailed information must be provided to a retail investor, such as Prato, than would be the case with a qualified investor;

(7) the information must be provided in such a way that it can be comprehended by "a retail investor that declares that it doesn't have a large knowledge of the financial market and of the law that governs this";

(8) the obligation to provide information to a client incorporates an obligation to verify that the client has fully understood the information provided, recognising however that investors also have a duty to ensure that they understand and that there are limitations on what an intermediary can do to ensure that the investor has understood.

255. Dexia's no need to know factual proposition necessarily implies a legal proposition. It identifies a category of things which, as a matter of law, article 28.2 CR does not require to be disclosed. Dexia's submissions proceeded on the implicit, if not explicit, basis that, as a matter of law, this category comprised matters which there is no need to know when considering the nature, risks and implications of a proposed transaction in order to make an informed decision on whether to invest. I shall refer to this proposition as "the no need to know legal proposition". As it seems to me, the proposition does no more than to particularise, by reference to article 28.2 CR, the agreed proposition which I have numbered (4) at the start of this section.
256. Prato advanced certain propositions which were not accepted by Dexia. For present purposes there are two main propositions which call for discussion.
257. In her first report, after referring to article 21 TUF and article 28.2 CR, Professor Sciarrone Alibrandi advanced what I shall call "Prato's first main disclosure proposition":

… financial institutions are obliged to disclose all the relevant elements of the relevant investment services and instruments.

258. I have concerns about this suggested proposition. As regards a case such as the present, which is concerned with retail investors, the proposition appears plainly to be broader than article 28.2 CR. As noted above, it is common ground that in the present case the obligation of transparency under article 21.1 TUF and the obligation to disclose adequate information under article 28.2 CR come to the same thing. What is required by article 28.2 CR is the provision to investors of adequate information on the nature, risks and implications of the transaction, knowledge of which is needed to make informed investment and disinvestment decisions.
259. As to the approach to be taken by an Italian civil court, there is a helpful passage in a decision cited by Professor Sciarrone Alibrandi. I have in mind the decision of the Court of Appeal of Milan dated 28 February 2011. The case involved two claimants, the first of whom is referred to in the judgment by using the initials "CT". I shall accordingly refer to the case as CT. The claimants were retail investors and had been given the document on the general risks of financial instruments set out in Annex 3 CR. The Court of Appeal agreed with the claimants that this was insufficient disclosure in relation to a transaction for the purchase of Argentine bonds. In its reasons the Court of Appeal said this, with emphasis added by me:

Moreover, since the essential purpose that inspires the legislation in question is to balance the so-called "information asymmetry" – that distinguishes the relationship between the intermediary and the non-qualified investor, it appears clear that the required compliance can only be evaluated with special rigor in relation to specific purposes that it is called upon to fulfil, otherwise being able to dissolve into mere statements of only a formal observance with the provisions required.

260. What I shall call "Prato's second main disclosure proposition" was more specific. It was in these terms:

With regard to derivative transactions, the prevailing Italian case law has clarified that a financial institution must inform the client of the existence of any hidden costs because this information is essential for the client to take fully informed investment decisions.

261. I do not accept that this is a proposition of law. To my mind, the question whether any particular piece of information is "essential for the client to take fully informed investment decisions" is a question of fact. That question of fact is to be decided, in any particular case, on the basis of the evidence in that case. In section F2.4 I consider the cases that were relied upon by Prato, while in section F2.5 I consider the cases that have been relied upon by Dexia. My analysis in relation to article 28.2 CR is set out in section F2.6.

F2.4 Non-disclosure – art 28.2 CR: Prato's cases

262. The first decision relied on in Prato's closing submissions in this regard was a decision of the Tribunal of Orvieto on 13 April 2012. It concerned protective measures that were sought by an unnamed city against an unnamed bank in respect of 16 derivatives that had been entered into between the parties from 2001 onwards. I shall refer to it as Orvieto grant of protection. The decision on 13 April 2012 concerned a challenge by the bank to an earlier decision of the tribunal granting protective measures. The conclusion reached by the tribunal on 13 April 2012 was that the earlier decision should be fully confirmed. As I understand it, this was an interim order providing for suspension of obligations on the part of the city to make payment until the final determination of the case in question. The city had signed various documents describing itself as a qualified investor, but the bank admitted that, after reviewing assessments it had made at the time, the true position was that the city was a retail investor. Consistently with this, the tribunal made a finding under article 61.1 g) CR (which only applies to retail investors). I deal with this in section F2.7 below. As regards disclosure of information prior to the making of the contract, the passage cited by Prato did not specifically refer to the provisions applicable to retail investors in article 28.2 CR. Instead, a more general observation was made concerning article 21 TUF:

… it is necessary to identify in this initial market imbalance a cost … the same would have to be adequately illustrated because it remunerates the business activity of the bank … while they have limited themselves to showing the true cost of the contract, without constituting, or only constituting in part, the lucrative margin of the bank, and this must be paid by the party to the contract who suffers an alteration from the natural conditions of the contract, moving an entire series of duties to provide information to the broker who is acting in accordance with the regulations in the sector (article 21 of the TUF) …

263. It is difficult to identify the proposition of law which gave rise to the tribunal's observations regarding article 21 TUF. The concern appears to be that the bank had not adequately illustrated the remuneration that it was to receive, with the result that there had been "an alteration from the natural conditions of the contract". If that was indeed the tribunal's reasoning, then it seems to me that it proceeds upon a misconception. For the reasons given in section F1.6 above, as explained in the Mengle extract, there is nothing unnatural about the inclusion of a spread with a resultant negative MTM to the customer. On the contrary, this is the normal commercial way of providing for the bank's remuneration.
264. An alternative reading may be that the tribunal concluded that the initial MTM was an actual cost, or reflected actual costs, which would be incurred by the city if it entered into the swaps in question. If so, then this is also a misconception: see section F1.6 above.
265. The next case relied upon in Prato's closing submissions was a decision of the Tribunal of Pescara on 20 June 2012 in proceedings between the Comune di Penne and Banca Nazionale del Lavoro. I shall refer to it as Penne. This was a case where, in relation to each of two swaps between Penne and the bank, the contract provided for very substantial payments at the outset of the swap by the bank to Penne. These payments were known as "upfronts". The contracts also provided that Penne undertook to pay the bank "the fees stated in attachment A." Each swap included an attachment A in which the amount of the upfront was specified, but no costs or expenses to be paid by Penne were specified. Each swap also had a very substantial initial MTM which was negative for Penne. An expert appointed by the tribunal had calculated that in large part this negative differential accounted for the cost of the upfront in each case. However there remained a substantial part of the initial MTM, in broad terms somewhere between a quarter and a third, which was not accounted for in this way. The tribunal upheld Penne's claim to recover the amount of the MTM which was not attributable to the upfronts. The tribunal's judgment, at an early stage, cited Annex 3 CR for the proposition that "the contracting parties shall agree on the fact that he discounted-back algebraic sum of the positive and negative flows of the exchanged options shall be equal to zero". The tribunal stated, at a later stage in its judgment:

… the upfront composes an immediate payment in favour of the other party. The agreement value for the counterparty is negative the higher it is and it is clearly due to the acceptance of a greater risk.

It is clear that as the upfront composes a valid indicator of the existence of a financial risk concerning the related contractual structure, it firstly concerns an issue of the trustworthy advice of the finance broker. Given "the duty to conduct oneself with care, accuracy and transparency in the client's interest" (article 21, paragraph 1, letter a of the TUF) related to the finance brokerage agreement, this generally means (where the Bank is not acting as financial broker; however, as direct counterparty to the transaction as in the matter at hand) that the Bank is under a duty to act with good faith (or conforming to the duty regarding cooperation and the provision of information) in the developments of the negotiation and contract drafting (article 1337 of the Italian civil code).

Therefore, the Bank's duty regarding information and transparency toward the client is also relevant in relation to the so-called implied fees, that is, the fees encashed by the Bank, able to be calculated by the difference between the mark to market (mtm means the estimated market value of the agreement that is discounting-back the expected cash flows) of the Authorities payments and the mark to market of the payments for which the Bank is liable. The financial broker's omitted or part payment of the upfront illustrates the implied fee encashed by the Bank.

It follows that, if it is true that the Bank (both in its role as finance broker and direct contracting party) is under a duty in relation to information regarding the nature, risks and implication of the transaction that the parties shall draw up, such duties (concerning the negotiation of derivatives) shall firstly concern the accurate illustration of the derivative mechanisms to the client. The latter shall be in such a way that the client is properly informed regarding the suitability of the financial instrument to attain the hedging purpose theoretically required prior to agreement execution. Furthermore, the same agreement shall clearly state the true costs of the structure, therein expressly including the derivative production costs charged to the client and the actual margin earned by the bank counterparty.

266. It is not clear from the report whether Penne was a qualified investor. For the reasons given in section F2.6 below it seems to me that the reasoning of the tribunal has proceeded upon an inaccurate understanding of Annex 3 CR. Putting that on one side, however, the reasoning of the tribunal starts with the proposition that the duty in article 21 TUF to act with care, accuracy and transparency also entails good faith in "conforming to the duty regarding cooperation and the provision of information", and that whether the bank is a finance broker or is a direct contracting party, it has a duty as regards information concerning the nature, risks and implications of the transaction. The tribunal here tracks the wording of article 28.2 CR, which is applicable to retail investors only. On the assumption that Penne was a retail investor, it seems to me that there is nothing controversial about these propositions if they are confined, as set out in article 28.2 CR, to those matters of which knowledge "is needed to make informed investment … decisions". Nor in my view is there anything controversial about the propositions that in accurately illustrating the derivative mechanisms the client must be properly informed regarding the suitability of the swap to attain the hedging purpose of the client. The tribunal however, moves straight from these propositions to an assertion that there must be a statement of "the true costs of the structure … including the derivative production costs charged to the client and the actual margin earned by the bank …". No explanation is given for this assertion. The assertion involves a factual conclusion which is inconsistent with the evidence in the present case.
267. The third decision relied upon in Prato's closing submissions was also a decision of the Tribunal of Pescara, on this occasion dated 24 October 2012. It is one of a number of decisions arising in proceedings between the Comune of Pescara and a bank, which is not identified in the judgment. In order to distinguish the decision of 24 October 2012 from other decisions involving Pescara I shall refer to it as Pescara reimbursement. There was a series of swap contracts between the parties. Those relevant for present purposes were described as the first and second contracts. The part of the decision of 24 October 2012 which arises for consideration related to a request by Pescara for "reimbursement of the so-called implicit commissions that were allegedly applied to the first and second contracts". As to what these "implicit commissions" were, the tribunal explained that they:

… are attributable to the difference between the Fair Value of the swap contract and the amount effectively paid out by the Bank as upfront.

268. At an early stage in its judgment the tribunal noted that an expert witness had been appointed. It commented that there was no reason to discard the "technical reconstruction of the implicit commissions drawn up by the expert …". However, the tribunal added that it could not agree with the expert's evaluations "regarding the 'adequacy' of these same implicit commissions". In particular, the tribunal stated:

… we cannot … accept the justification of the implicit commissions, recognised in the bank's right to compensation for the service offered (the funding of or hedging for the exchange of financial flows) supplied by the bank …

269. The first reason given by the tribunal was that there were no contractual provisions regarding the application of commissions. Moreover, said the tribunal, no agreement had been reached in that regard.
270. The second reason given by the tribunal concerned provisions of local government law which I have dealt with in section D of the main claim judgment, and do not call for further comment here. It was after elaborating that second reason that the tribunal added:

The rejection of the application of implicit commissions also appears to comply with the requirement of compliance, on the part of the Bank, with known obligations of honesty and transparency.

271. I am prepared to assume that the tribunal had in mind article 21 TUF, and perhaps article 28.2 CR as well. There is no express explanation by the tribunal as to why those obligations call for disclosure of "implicit commissions". This is a factual conclusion which is inconsistent with the evidence in the present case.
272. Prato's oral closing then turned to cases which I have discussed in section C5 above: Gommeservice, Municipality of C, and Turin Mortgage Swap. For the reasons given in section C5, I am persuaded by Professor Gentili that the approach taken to the question of causa in Gommeservice does not represent Italian law. The causa in a swap is to be found in the exchange of amounts of the relevant cash flows. It is not, as was held in Gommeservice, to be found by asking whether there has, in concrete terms, been a "rational wager". It was not necessary in that context for me to examine the reasons why it was said that a lack of information led to the absence of a "rational wager".
273. Reasons why that conclusion was reached in Gommeservice were put to Professor Gentili. Professor Gentili agreed that the reasons in question were indeed those found in the judgment in Gommeservice. As to those reasons:

(1) "Implicit costs" need to be disclosed to inform the investor of the magnitude of the risk that it will be a net payer under the swap: for the reasons given in section F1.6 above, however, this is a misunderstanding. All that the "implicit costs" will disclose is the extent to which the rates will give Prato a spread designed to cover its costs and a margin. The magnitude of the risk for Prato is entirely different: the spread will not change but the risk is open to market fluctuations.

(2) If the investor is to make an informed decision to enter into the swap "that is a risk it needs to know about": there can be no doubt that the risk that the investor will be a net payer under the swap is a risk that the investor needs to know about. That involves a judgment as to how market conditions may change over the life of the swap. Such a comparison is made against the terms in the swap. It does not depend upon the initial notional mid-market interbank rate at inception, nor does it depend upon the amount of the bank's spread from that initial notional rate.

(3) It is essential that the initial mark to market value be explicitly disclosed: on the evidence in the present case, this does not appear to me to be essential at all.

(4) In addition to disclosing the initial mark to market, the criteria for determining withdrawal penalties ought also to be disclosed: Prato's statement of case in the present proceedings is confined to failure to disclose the "Hidden Costs" as described in Prato's Hidden Costs explanation. This includes the existence of a negative initial mark to market, and the existence of implicit costs, but Prato does not complain about any lack of information concerning the criteria for determining withdrawal penalties.

(5) Anything less than this would deprive the investor of the ability to make a rational decision: for the reasons set out above I disagree.

(6) Disclosure of the initial MTM gives "a firm anchorage point" at the time of entering into the contract for the quantity and the quality of the risks being assumed: for the reasons given above, this conclusion is not established by the evidence in the present case.

274. The judgment in Gommeservice begins by setting out facts which "provide an initial picture of negligence on the part of the bank which treated as a qualified operator a client that it knew did not have that status …". It observed that accordingly provisions contained in articles 27, 28 and 29 CR and "the reporting obligations contemplated therein for protection of the investor" applied in full. It observed that whatever the status of the investor, the bank remained answerable for obligations in article 21 TUF. It added that in the negotiation of interest rate swaps the obligations found in article 21 TUF were of particular significance. It continued:

When negotiating an interest rate swap the broker must provide the client with specific advice, regardless of whether or not a consultancy contract has been entered into for that purpose, based solely on the assumption that the very nature of the financial instrument requires that in the definition of its contents – and thus the conditions relating to risk – the broker takes the client's best interests into account, …

275. The court then observed that the bank was dealing on its own account, and in that regard was subject to provisions that preceded MiFID, adding:

… the contracting of over the counter derivative contracts brings with it a natural state of conflict between the broker and the client because the same party has the status of both offeror and consultant.

276. The judgment then set out relevant principles of article 11 ISD, and noted that they were fully incorporated into article 21 TUF in the version that applied at the time of the events in question. The court then added:

It has become a well recognised principle that the [service provider] must act taking the investor's best interests into account, essentially as a party working together with the latter, protecting the integrity of the market, as a principle of economic public order (art. 21 of the TUF) …

277. After some further preliminary observations the judgment then turned to set out the reasoning in relation to causa which is summarised section C5 above. In the course of those observations the judgment noted that the reporting obligation under TUF and CR did not, if breached, constitute a ground for invalidity, and that certain aspects of those obligations were "translated into the broker's (active and passive) obligations to provide information". At a later stage the judgment observed that the bank had not offered a reasonable justification in support of supposed suitability of the financial product for satisfying its client's requirements, thereby violating the fundamental rule of conduct laid down in article 21 TUF.
278. No further mention is made in the judgment of TUF or CR. As it seems to me, the observation made about TUF and CR do not involve any proposition of law going beyond the common ground indentified earlier. Moreover, as is acknowledged by Prato, the court in Gommeservice does not specifically address the question whether requirements for disclosure found in TUF and CR were actually breached on the facts. Prato noted, however, that the court had identified elements necessary for there to be a rational risk, and one of those elements was disclosure of any implicit costs. In those circumstances Prato submitted that it must follow that a bank which had failed to disclose implicit costs will not have acted "diligently, correctly and transparently in the interests of customers" (article 21 TUF). Nor would it have provided the investor with "adequate information on the nature, risks and implications of the transaction … knowledge of which is needed to make informed investment and disinvestment decisions" (article 28.2 CR). In this regard, as it seems to me, Prato is advancing a proposition of fact rather than a proposition of law. For the reasons given earlier, the evidence before me does not establish that either the initial MTM or the "implicit costs" have an effect on the risk assumed by the investor. For these reasons I conclude that Gommeservice does not assist Prato.
279. The next decision relied upon by Prato was Turin Mortgage Swap. The judgment in that case made the same link as Prato between the disclosure needed to ensure a concrete causa pursuant to Gommeservice and the bank's obligation of transparency under TUF. For the reasons given when discussing the link made by Prato, the link made in Turin Mortgage Swap does not assist Prato in the present case.
280. Prato also relied upon Municipality of C. In that case, however, the judgment involved no discussion of obligations of disclosure under TUF or CR. The result is that the judgment does not assist Prato in the present context.
281. The final decision relied upon by Prato for present purposes was Novital (see section C5.3 above). The parties had entered into an interest rate swap on 4 August 2008. At that stage (see section F2.2 above) TUF had been partially modified in compliance with MiFID. Neither of the parties in the present case suggests that those partial modifications had any effect on the aspects of the decision now relied upon by Prato. Also in compliance with MiFID CR had been replaced by a new regulation. The Novital decision, however, makes no reference to any Consob regulation. Again, the parties in the present case do not suggest that there is any feature of the replacement Consob regulation which has relevance to the aspects of Novital which are relied upon by Prato. It may also be noted that the Consob March 2009 communication had no application to the contract, it having been made a little over six months before that communication.
282. In Novital the tribunal rejected certain aspects of the claim. As noted in section C5.3 above, among the aspects rejected was an assertion that there was a lack of concrete causa. The claim succeeded, however, in relation to assertions that there had been a breach by the bank of article 21 TUF, that this breach was so serious as to entitle the claimant to terminate the contract, and that in consequence the bank was liable to return to the claimant "all the amounts paid for the swap's negative differentials".
283. The conclusion arrived at by the tribunal seems difficult to reconcile with the decisions of the joint chambers of the Court of Cassation in Fincom Valori and GL. Neither of those cases is mentioned in the tribunal's judgment. For present purposes, however, the principal question arising concerns whether the tribunal proceeded on the footing that article 21 TUF had a meaning going beyond the common ground identified earlier.
284. For this purpose I set out below, with the addition of paragraph numbers in square brackets, the passage in the tribunal's judgment that Prato relies upon:

[23] Basically, if the fact that the transaction can establish, since the beginning, an imbalanced risk distribution between the parties does not affect the lawfulness of the transaction, it is in any case necessary that the parties are fully aware of it and, therefore, that an assessment on whether or not enter into the contract pursuant to certain parameters is made consciously and rationally by both the contractors.

[24] Therefore, each of them can assume the risks involved in this type of contract to the extent they prefer, unless, of course, they are in a position to understand the accepted risk.

[25] These considerations on the risk accepted by entering into the derivative are particularly important if we consider the financial intermediary's obligation of information provided by Article 21 of the TUF, which, after having stated that the intermediary must act in the client's interest, establishes something that goes beyond the good faith principle which must characterise the contractual and pre-contractual relationships between the parties (see Articles 1337, 1358, 1366, 1370, 1375 of the Italian Civil Code), this principle implies that the parties are on the same level and that both understand that they are entering into a contract aimed to reach their own interest worthy of protection (Article 1322, paragraph 1, of the Italian Civil Code); as far as the relationship between the intermediary and the investor is concerned, the bank should act taking into account the best client's interest, which is a principle deriving from the obligation of information and maximum transparency, that requires the intermediary to disclose to the clients both the risk to which they are exposed in dealing with the investment – investment that, therefore, could not be in line with the client's interest – and their own interest which, in that transaction, is opposed to the client's one.

[26] This implies that the intermediary shall provide to the counterparty correct information on all the contractual elements which may affect the same and the risk that it is inevitably going to take.

[27] Well, in the present case, the expert advice asked by the judge confirmed the claimant's allegations, highlighting, when decomposing the contract, that it contained implicit fees, i.e. unrevealed charges to be borne by the claimant.

[28] This aspect was not disputed by the defendant which, making reference to the expert's considerations on this aspect, stated that this charges were completely balanced with the need to ensure the bank an adequate consideration for both credit risks and costs incurred.

[29] So it has to be noted that such profitable charge for the bank had to be disclosed when the contract was entered into, in order to allow the counterparty to assess the opportunity and convenience of the same.

[30] Then, regardless the fact that, with reference to this contractual element, the claimant did not provide an aware approval, the hidden insertions of it not only led to a benefit for the defendant, but even before and in particular it made the contract imbalanced during the time, causing an initial swap's negative value (Mark to Market) which was not known by the counterparty. The incidence of such initial data, in fact, is important not only as it consists of an expense incurred at the moment the contract was entered into, but also as it is an element that altered the apparent balance of the different risks, modifying the mechanism for the cash flows' exchange under the terms agreed by the parties."

285. As it seems to me, it is clear from the opening words of paragraph [25] that paragraphs [23] and [24] describe "considerations on the risk accepted by entering into the derivative". It seems that those considerations are that, while it is lawful for the swap to have "an imbalanced risk distribution between the parties", it is "in any case necessary that the parties are fully aware of it" so that "an assessment on whether or not [to] enter into the contract pursuant to certain parameters is made consciously and rationally" by both parties.
286. The relevance of these considerations is explained in paragraph [25] by reference to article 21 TUF. The tribunal first makes the point that even without article 21 TUF the good faith principle under the civil code implies that the parties are on the same level and understand that they are entering into a contract in which each aims to reach its own interest worthy of protection. The tribunal notes that article 21 TUF goes beyond this, for it requires the bank to act, in the words of article 21, "transparently in the interests of clients".
287. Thus far, as it seems to me, the legal principles identified by the tribunal do not identify any duty on the bank greater than is common ground in the present case.
288. Putting on one side for the moment the final passage in paragraph [25], the tribunal's discussion of the law ends at paragraph [26]. That paragraph identifies (with emphasis added by me) an obligation on the bank to provide "correct information on all the contractual elements which may affect [the investor] and the risk that [the investor] is inevitably going to take". Here it seems to me that the tribunal has expressed too broad a proposition of law. The reasons given above when rejecting Prato's first main disclosure proposition, apply equally to paragraph [26].
289. In the passage at the end of paragraph [25], there appear to me to be three elements:

(1) The bank is required to disclose to the investor the risk to which the investor is exposed by reason of the proposed investment;

(2) The proposed investment is one "that, therefore, could not be in line with the client's interests"; and

(3) The bank is required to disclose to the investor the bank's own interest which, in that transaction, is opposed to the investor's interest.

290. I shall defer, for the time being, any discussion of element (3). It raises questions which I discuss in sections F4 and F6 below.
291. As to element (1), this is a proposition of law which imposes no greater duty upon the bank than is common ground in the present case. Element (2) appears to me to be a proposition of fact. For the reasons given in section F1.6 it appears to me to be based upon a misconception.
292. Prato's closing submissions referred to a passage in Professor Gentili's cross examination. As I understood Professor Gentili, he was accepting that the tribunal considered the initial negative MTM to be "a risk for the investor" and that the tribunal considered that "the investor must know it in all its details". Those matters involve conclusions of fact which are not borne out by the evidence in the present case.

F2.5 Non-disclosure – art 28.2 CR: Dexia's cases

293. In the present context Dexia relies primarily on three decisions. The first of the three is Pisa II. In section D2.3 of the main claim judgment I hold, in reliance upon Pisa II, that "implicit costs" do not constitute an effective cost for the purposes of article 41 of law 448/2001. Dexia suggests that Pisa II also supports its contention that article 21 TUF and article 28.2 CR imposed no obligation to disclose "implicit costs" or the initial MTM of a swap. In this context it is necessary to give a short account of the judgment in Pisa II.
294. On 4 July 2007 the Province of Pisa entered into two identical interest rate swap transactions. One was with Dexia. The other was with Depfa Bank Plc ("Depfa"). However a subsequent report criticised the swaps. A resolution dated 29 June 2009 purported to annul the resolutions by which Pisa had entered into the swaps. Dexia and Depfa challenged the annulment. The Regional Administrative Court of Tuscany accepted part only of the assertions made by Dexia and Depfa. Assertions which were not accepted included the assertions about article 41 of law 448/2001 discussed in section D2.3 of the main claim judgment. Dexia and Depfa appealed to the Council of State. In Pisa I the Council of State ordered a report to be drawn up by an official technical consultant to the Council of State to ascertain whether these swaps complied with article 41, and specifically whether the swaps entailed implicit costs which had not been declared or of which no knowledge could be obtained. Sections 1 to 12 of the judgment in Pisa II dealt with this course of events, noted that the court had appointed Dr Angeletti as the technical consultant, and dealt with various procedural matters.
295. Section 13 of the judgment gave an account of the conclusions and reasoning of Dr Angeletti. Dr Angeletti used the term "implicit costs" in a special sense. Prato's Hidden Costs explanation said that the initial negative MTM value of each swap represented "implicit costs of the [swap] to [Prato]". Dr Angeletti, however, used "implicit costs" to mean such part of the initial value of the MTM as was not accounted for by fair value adjustments. These adjustments formed a component, referred to as "DFV", which in broad terms allowed for the extent to which risks that the banks undertook in relation to Pisa were greater than they would have been if the banks' counterparty had been another bank. The judgment used the term "implicit costs" in a similar way.
296. On this basis, paragraph 13.1.9.2 of the judgment recorded, among other things, that Dr Angeletti stated that there was no definition of implicit costs in the regulations, and that this meant that the banks were under no corresponding obligation to supply information in this respect. Paragraph 13.4.5.2 recorded, among other things, Dr Angeletti's explanation that the banks were under no obligation to declare "implicit costs" to Pisa, as no such notion could be derived to article 21 TUF, nor could it be derived from CR as in force at the relevant time.
297. In addition, paragraph 13.4.6 of the judgment noted that Dr Angeletti had described the nature of the DFV component. It added that:

… these are only virtual cost components, because … a local authority does not possess the requirements necessary to gain direct access to [the swaps] market. …

298. The judgment also noted in paragraph 13.4.6 that Dr Angeletti had emphasised:

… the merely hypothetical nature of the initial estimates of the single components, which, while supported by mathematical and statistical processes, determine the virtual rather than the effective characteristics.

299. In sections 14 and 15 the judgment dealt with an objection made by Pisa to Dr Angeletti's observations. It rejected that objection, commenting that the role of Dr Angeletti was:

… to verify (and procure) all the evidence, both technical and otherwise, which existed and was known or could have become known, at the time … not to pass judgment on the decisions taken by the authority, but solely with a view to carrying out a precise assessment of the underlying facts on which the administrative power was exercised (and therefore to establish whether this was exercised correctly, in the full and due knowledge of all the factors necessary for that purpose.

300. Section 16 of the judgment held, among other things, that in evaluating "financial advantage" for the purposes of article 41 of law 448/2001 the entire transaction, and not the swap agreements alone, must be examined. In paragraph 16.3.2.1 the judgment included the following:

… on the basis of the lucid, detailed and consistent clarifications provided by [Dr Angeletti], it has to be noted that the so-called "implicit costs" of the swap … do not by any means constitute an effective cost, that is, a sum effectively paid out by the Province, but merely stand for the value that the swap could have had in an abstract and hypothetical (but utterly unrealistic and untrue) negotiation …

301. The judgment noted that the implicit costs in question, even if they had been of significance, would not in themselves have been sufficient to lead to a negative evaluation of the "financial advantage" of the overall transaction.
302. At paragraph 16.3.2.2 the judgment referred to a question as to whether any implicit costs involved had to be made known to Pisa by the banks or whether Pisa could have obtained knowledge of them directly. The judgment stressed that, in relation to the matter before the Council of State, this did not concern possible violation of pre-contractual disclosure obligations but rather:

… the more general full and precise knowledge of the underlying facts in respect of which the administrative power was exercised.

303. Having said this, the judgment went on to observe that:

… there is no evidence, not even circumstantial, of any incorrect, unprofessional and non-transparent conduct aimed at not serving the best interests of the customer (pursuant to the terms of article 21 [TUF] …), nor can we assume that the appellant banks acted without procuring the necessary information from the customer and without ensuring that it was adequately informed at all times, as such assumptions are denied by the very characteristics of the swaps stipulated … which were clearly adapted to the specific requirements of the provincial authority.

304. Dexia placed reliance about what was said in Pisa II concerning article 21 TUF. In that regard I do not attach significance to what was said in paragraphs 13.1.9.2 and 13.4.5.2 of the judgment. They simply record the view of Dr Angeletti.
305. More significant, to my mind, is what is said in paragraph 16.3.2.2 of the judgment. As noted above, it began by recognising that the Council of State's role was to consider an administrative law question, and that this was different from the civil law question of pre-contractual disclosure. Nonetheless, the judgment went out of its way to acquit the banks of any breach of article 21 TUF. In that regard the Council of State specifically found that there had been no failure by the banks to ensure that Pisa was adequately informed at all times. In the second passage quoted above the Council of State does not expressly identify what it understood to be the extent of the obligations under article 21. There can be no doubt that the Council of State was unconcerned about the failure on the part of the banks to advise Pisa of the initial MTM, the DVF forming part of the initial MTM, or the "implicit costs" forming the remainder of the initial MTM. It seems to me that the obvious reason for this is that the Council of State had already, in preceding paragraphs of its judgment, noted what Dr Angeletti had said about the "virtual" and "hypothetical" nature of the DVF, and the Council of State's own conclusion, founded upon the observations of Dr Angeletti, that the "implicit costs" did not constitute an effective cost but represented a value which was abstract, hypothetical, utterly unrealistic, and untrue. These are, to my mind, all findings of fact which are consistent with the evidence in the present case.
306. Prato points out that Pisa was classified as a qualified investor. That is true. It is also true that Dr Angeletti thought that Pisa would have been able to work out the MTM for itself. These may be additional reasons why the Council of State was unconcerned by the failure to disclose the MTM or its components. Nevertheless, it seems to me that they do not detract from the obvious reason identified above. It is, of course, common ground that the duty of disclosure under article 21 TUF moulds itself to the characteristics of the client, and that article 28.2 CR applies only in the case of retail clients. Nevertheless it can fairly be said that the Council of State stressed in emphatic terms that the "implicit costs" were "utterly unrealistic and untrue". The fact that an investor was classified as a retail investor only would not render the "implicit costs" any less unreal and untrue.
307. Prato added that there had been no advisory agreement between Pisa and the banks. I deal with this in section G below.
308. Prato asserts that neither the Court of Appeal of Milan in Gommeservice, nor the Court of Appeal of Bologna in Municipality of C, considered that the approach taken in Pisa II to the nature of "implicit costs" should be adopted. As to that, however, there is no indication in either of these decisions that the court in question had been referred to what was said in Pisa II. In any event, the analysis of whether "implicit costs" fall within relevant disclosure obligations is, as explained earlier, a question of fact rather than law.
309. The second case relied on by Dexia was the decision on 18 April 2014 in I SPA. As noted in section C5 above, the civil section of the Tribunal of Turin in this case declined to follow the approach to causa taken in Gommeservice. An initial argument raised by the claimant concerned an alleged failure to give due disclosure. The tribunal concluded that the claimant had been well apprised of the hazardous nature of an IRS and the financial risk of the product, which could (as happened to Prato in the case of swap 6) be resolved to the disadvantage of the client in the event of lower interest rates. The tribunal was plainly unconcerned by the failure on the part of the bank to disclose the initial MTM or any "implicit costs" (whether in the sense used by Prato in the present case or in the sense used by Dr Angeletti). As it seems to me the obvious reason for this conclusion is found in paragraphs [2.4.7] and [2.4.8], quoted in section C5 above. There the tribunal identifies the hazard to the investor as arising from the variation of interest rates over time in the light of the terms of the contract. It is true that the tribunal, in a separate part of its judgment, identified matters which entitled the bank to proceed upon the basis that the claimant's representatives were professionally qualified and perfectly able to understand and manage the financial products involved in the case. Again, this does not seem to me to detract from the obvious reason why, in the light of its findings, the tribunal was unconcerned by the failure to disclose initial MTM or "implicit costs".
310. The third main case relied upon by Dexia in this context was Arosio. This is another case which is mentioned in section D2.3 of the main claim judgement. I noted in paragraph 167 of that judgment that the decision in that case was made by the criminal division of the Court of Appeal of Milan. At paragraph 171(3) I noted that the decision in Arosio gave support to the way in which the Council of State had approached the requirements of article 41 of law 448/2001. In addition, in paragraph 180 I set out a citation from Arosio where the court commented on Pisa II. The first comment in that passage noted that the Council of State had felt that on no account did "implicit costs" represent an actual cost, that is to say an amount actually sustained by the investor. The second comment noted in the same passage was that the Council of State had concluded that the "implicit costs" represented a theoretical value in a context which was "abstract and hypothetical" (albeit unrealistic and untrue). I dealt in paragraph 181 with two points made by Prato when responding on this aspect of Arosio. At paragraph 181(1) and (2) I explained why it did not seem to me that these points detracted from the force of what was said in the passage that I have cited.
311. As to the relevance of Arosio in the present context: there is a clear conclusion by the court that the banks in that case were under no duty to disclose the initial MTM. Nor were they under duty to disclose any "implicit costs". Nor were they under duty to disclose "margin". As noted in paragraph 14 of Gentili 4, the court considered that Italian law imposed no duty on banks to disclose the profit that they expect to make on a transaction. Moreover, paragraph 16 of Gentili 4 noted that transparency requirements under article 21 TUF were satisfied if the rates and thresholds in the swap confirmation were disclosed by the bank to the customer. All of these conclusions arose, in my view, by making findings of fact when applying propositions of law essentially similar to those which are common ground in the present case.
312. Prato commented that the case was about the offence of contractual fraud, and that much was said in the judgment which was not strictly necessary for disposing of that criminal charge. That is true. However, one of the criminal charges asserted that the banks were under a duty to disclose the margin and the implicit costs of the swap and the initial MTM to the customer. Thus, to my mind, the passages that I have drawn attention to above were passages which properly formed part of the court's reasoning for concluding that the defendants had not been guilty of any offence.
313. Prato rightly points out that a civil court would not be bound by the decision in Arosio. However, Prato then goes on to assert that Professor Gentili accepted that the judgment in Arosio did not adopt the reasoning set out in the passage cited at paragraph 180 of main claim judgment. There was no acceptance of this by Professor Gentili. His only comment when the point was put to him was that he would have to read the judgment again. Reading the judgment, it appears clear to me that it proceeds upon the footing that what was said in Pisa II in this regard was right. As with earlier cases, Prato stresses that this is a judgment concerning the relationship between banks and a "qualified" investor. My analysis in relation to this point is the same as in relation to those earlier cases.

F2.6 Non-disclosure – art 28.2 CR: analysis

314. My analysis is that in the absence of special circumstances, no good reason has been identified for going beyond the no need to know legal proposition. In particular, as regards "costs", factors said to constitute "costs" fall within article 28.2 only to the extent that the investor needs to know about them in order to understand about the nature, risks and implications of the transaction. There are three broad reasons for this conclusion. The first reason is that this conclusion is consistent with the approach taken by the Court of Appeal of Milan on 28 February 2011 in the case of CT. In my citation from the judgment in that case (see the start of section F2.4 above), the court discussed the essential purpose of legislation imposing a regulatory duty of disclosure. It is to redress the balance, and thus compensate for "information asymmetry". The Court of Appeal of Milan notes that the service provider's compliance with the obligation of disclosure must be evaluated with special rigour. That rigour is to be used in relation to the "specific purposes that [disclosure] is called upon to fulfil". As regards article 28.2 CR those specific purposes have been spelt out. They are to provide adequate information on "the nature, risks and implications" of the transaction, knowledge of which is needed to make informed investment decisions.
315. The second main reason concerns the Italian decisions relied upon by Prato. As discussed in section F2.4 above, the observations in Orvieto grant of protection, relied upon by Prato, were based upon misconceptions. The propositions of law found in Penne assumed that the MTM represents "derivative production costs charged to the client". For the reasons given in sections F1.6 and F1.7 above, this is a misconception. The tribunal added that there must be a statement of "the actual margin earned by the bank": this aspect is discussed in section F2.8 below. The decision in Pescara reimbursement gives no reason for saying that "known obligations of honesty and transparency" required disclosure of "implicit commissions". Moreover, for the reasons given in sections F1.6 and F1.7 above, the tribunal's assumption that initial MTM represented amounts received by the bank was incorrect. The trio of cases about causa do not, as regards duties of disclosure, involve any proposition of law going beyond what is common ground in the present case. The analysis in those cases of the impact of the initial MTM is, for the reasons given in sections F1.6 and F1.7 above, not borne out by the evidence in the present case. In Novital the tribunal's discussion of the law involves the flaw identified in section F2.3 above when discussing Prato's first main disclosure proposition.
316. My third reason concerns the cases relied upon by Dexia. As explained in section F2.5 above, the courts in those cases have applied propositions of law which are essentially similar to those which are common ground in the present case. On the basis of those propositions of law, conclusions had been reached which are consistent with the conclusions that I reach on the basis of the evidence before me.
317. Prato observed that in a civil case like the present, the question which I must consider is what the civil division of the Court of Cassation would conclude to be the true position under Italian law. Thus, said Prato, decisions of the civil will have much greater weight than decisions of administrative and criminal courts. I accept that that will generally be the case. But in the present context I am concerned with a decision of the highest court, of comparable standing with the Court of Cassation itself, in the field of administrative law. In the field of criminal law, I am concerned with a decision of the criminal section of the same court, the Court of Appeal of Milan, as is relied upon Prato. Moreover, and to my mind particularly importantly, Pisa II and Arosio are decisions which involve a detailed and careful examination both of the law and of the facts. These matters are inherently more likely to influence the civil section of the Court of Cassation than the fact that the decisions are not decisions of civil tribunals.
318. I turn to consider whether there are special circumstances affecting the present case. It is convenient here to consider a passage in Annex 3 CR to which Prato attaches particular importance.
319. Under article 28.1 b) CR Dexia was required to provide Prato with a copy of Annex 3 CR. As can be seen from Annex 2 to the present judgment, the document began by stressing that it did not describe all the risks and other important aspects of investments in financial instruments. It stated that its purpose was to provide "some basic information on the risks connected with such investments …". It can also be seen that the introductory section of Part "B" stressed that derivative financial instruments were characterised by a very high degree of risk, which it was difficult for investors to assess because of the instruments' complexity. Section 4 of Part "B" also stressed that before engaging in such activities investors should collect all relevant information about the transaction, the applicable rules and the consequent risks.
320. The passage in Part "B" to which Prato attaches significance is found in section 4.1) of that Part. This contains a sentence which begins with an introduction containing a statement that the value of a swap is always nil at the time the contract is signed. That introduction is followed by the remainder of the sentence, giving a warning that the swap can rapidly assume a negative (or positive) value depending on the behaviour of the parameter to which the contract is linked.
321. Prato relies on this for two purposes. First, it says that this passage demonstrates that Consob considered the MTM of a swap to be significant information for an investor. That does not seem to me to be the case. There is no express reference to MTM. What is stated, immediately after passage cited by Prato, is that before signing contracts, investors should be certain they understand how and how quickly variations in the reference parameter are reflected in the calculation of the differences they are to pay or receive. That is not a calculation which requires any consideration of MTM.
322. Second, Prato pointed out that the statement was correct only in relation to a notional par swap. Mr Sommavilla said in cross-examination that he read Annex 3 to Ms De Castelli. He was asked whether, after reading the sentence now relied upon by Prato, he had said to her, "but actually you must know that that's not correct". He accepted that he did not say this. When asked why, he gave two reasons. Prato rightly says that neither of those two reasons made sense, and that the value to Prato of each swap was negative at the time that it was signed. It is nonetheless difficult to see how this evidence assists Prato, for there was no evidence from Ms De Castelli that she relied upon what was said in this particular passage of Annex 3.
323. To my mind, Prato's approach reads too much into a single remark. The concern of Consob in Annex 3 is to warn investors about the dangers of rapid changes in market rates. The statement which is asserted to be incorrect is no more than a starting point from which to set out this warning.
324. Observations were made about this passage in Annex 3 in each of CT, Penne and Arosio. The proposition derived in Penne (see section F2.4 above) goes far beyond anything said in Annex 3 CR. Prato observes that in Arosio the Court of Appeal of Milan, criminal division, noted that the passage relied upon by Prato could lead to misunderstanding for a retail investor. In Prato's written closing it was suggested that Professor Gentili had agreed that in order to cure such a misunderstanding it will be necessary to explain to the investor "about the existence of the implicit costs". Prato has, in my view, taken Professor Gentili's response out of context: when read as a whole, he was not accepting that there was any such obligation. Nor, indeed, did the judgment in Arosio suggest that there was any such obligation.
325. There is a separate feature of the facts in the present case that has been stressed by Prato. This concerned the internal email quoted at paragraph 103 of the main claim judgment. It can fairly be said that in this email Mr Poddighe disparaged Prato's understanding of interest rates. It does not, to my mind, have the significance which Prato sought to derive from it. It was no more than a dismissive comment by an expert practitioner about a lay client.
326. This is borne out, in my view, by two features of the facts in the present case. Prato was treated as a retail customer by Dexia. Suggestions that it should be treated as less qualified than other retail customers seem to me to be wide of the mark when consideration is given to these two features. The first is that at the outset Prato were advised by an expert technical committee. That committee did not consider that initial MTM was something that called for disclosure either before or immediately after entry into a swap. The view taken by the committee was simply that MTM should be supplied by the bank if it were requested by Prato. Second, Ms De Castelli could by no means be described as naive. She was the holder of a doctorate. Having heard her evidence, I have no doubt that in Ms De Castelli Prato had the benefit of an astute and careful senior financial officer. My reasons for this conclusion are set out in Annex 2B.

F2.7 Non-disclosure: articles 32.5, 36 and 61.1 g) CR

327. Article 32.5 CR, set out in section F1.3 above, applied to all investors. It stated that when receiving an order service providers must:

… inform the investor … of the price at which they are prepared to buy or sell the financial instruments … ; they may not charge any commission on the price agreed.

328. Prato's counterclaim asserts that by failing to disclose the initial MTM Dexia acted in breach of article 32.5 CR:

… because in so acting [Dexia] charged commissions without obtaining the investor's consent.

329. Gentili 1 dealt with this assertion at paragraphs 90 to 92. Reliance was placed upon a communication released by Consob dated 20 August 1997. The communication quoted article 32.5 CR and commented that the intention was:

… that the price applied to the client (and previously notified …) must be presumed to be inclusive of the broker's remuneration for the service rendered.

330. Gentili 1 noted that Consob added to this in a further communication dated 1 March 1999:

There is a different economic function between the services rendered as intermediary and the services rendered as counterparty. This difference is reflected in the structure of the price. The counterparty [the dealer] makes its profits on the spread applied between the bid and the ask price and such spread must remunerate in addition to the cost of the transaction the market risk that instead the broker or the intermediary does not face… in the case of the counterparty transparency is achieved imposing on the bank to disclose the final price that the bank is willing to charge.

331. Professor Gentili's comment was that the prohibition on adding commissions in article 32.5 CR has the purpose of protecting the investor. That purpose is achieved by requiring the bank to disclose the final price, not the individual components which make up that price. He added at paragraph 93 of Gentili 1 that when a bank was acting as a counterparty, a reference to the concept of commissions was inappropriate. Commissions would be charged when acting as an intermediary charging a fee for its services.
332. Sciarrone Alibrandi 1 made no mention of these Consob communications. In paragraphs 142 to 145 Professor Sciarrone Alibrandi cited Turin Mortgage Swap as requiring disclosure of margin.
333. Professor Sciarrone Alibrandi's oral evidence was that the communications had been written in response to questions about practice in respect of the sale of bonds. Prato submitted that there was an important distinction, namely that the bonds in question were instruments where there was no difficulty in identifying what the price was. There was, submitted Prato, nothing to suggest that the communications had been written with derivatives in mind, and Professor Sciarrone Alibrandi had pointed out that there were difficulties in identifying a statement of price. She asserted that a mere description of the parameters on the basis of which the parties would pay money periodically was not a statement of a price. It does not seems to me that this response can assist Prato to make good the assertion advanced in the counterclaim in relation to article 32.5 CR. The complaint is not about a failure to state the price, but about charging commissions contrary to article 32.5 CR. That must mean requiring the investor to pay more than the notified price. Unless there was indeed a notified price, there is no basis upon which Prato's assertion of breach of article 32.5 CR can be made good.
334. In any event, it seems to me that there is no reason to doubt that the terms of the swap disclose the price that is to be paid by Prato for the promises given by Dexia. That price is found in the promises given by Prato. This accords with what was said in Pisa II and Arosio. The notional existence of a negative initial MTM does not connote that there is anything more that will have to be paid by Prato in this regard. It seems to me that this conclusion is supported by the Consob communications, which reflect the natural meaning of the words used in article 32.5 CR. Prato's written closing submissions cited a passage from Professor Sciarrone Alibrandi's evidence which in my view began by confusing the notion of price and the notion of value. The assertion was then made that the "concrete concept of price" couldn't be defined by linking it to the flows of money under the swap. The reason given was that "from an information point of view" this "cannot say anything clear to the investor". I disagree. Under each swap Prato purchased an entitlement to receive cash flows from Dexia, subject to netting, at defined intervals over a defined period. The price that Prato paid was its own promise, on the same defined dates and over the same period, to pay to Dexia cash flows which were determined by a floating rate. There was nothing unclear about how those payments were to be calculated.
335. Turning to article 36 CR, as can be seen from section F1.3 above, this concerned the offering off-site of financial instruments. Article 36.1 c) CR required that, when doing this, financial salesmen were to explain certain things to investors. One of them concerned the right provided for in article 30.6 TUF. I have held in section E2 of the main claim judgment that this right applied in the present case, with the consequences set out in article 30.6 and 30.7 TUF. I will deal later in this judgment with Prato's separate claim for breach of article 30.6 TUF in this regard.
336. For present purposes the relevant part of article 36.1 c) CR is a requirement that the financial salesman must explain:

… the essential elements of the transaction … with special reference to the related costs and capital risks …

337. There is no suggestion by Prato that this part of article 36.1 c) CR imposes on Dexia any greater obligation than is already imposed by article 28.2 CR. It is an obligation which applies more widely than article 28.2 CR, for article 36 CR is not confined to retail investors. The result is that in the present case Prato secures the benefit of similar obligations placed upon Dexia by virtue of Prato's status as a retail investor, engaging article 28.2 CR, and by virtue of my finding that the present case involved an off-site offer, engaging article 36 CR. No useful purpose is served, as it seems to me, by a separate examination of the particular obligation which arises under article 36.1 CR. The reason is that if Dexia complied with what was required by article 28.2 CR, then there is no reason to think that it would have failed to comply with what is required by article 36.1 c) CR in this respect.
338. As to article 61.1 g) CR, as can be seen from section F1.3 it applies to transactions with retail investors only, and concerns information that must be supplied after the transaction. Professor Gentili asserted that article 61.1 CR had no relevance to swaps in which the "intermediary" acted as the counterparty. I do not need to decide whether this is right. The reason is that Prato's only complaint under article 61.1 CR is that the initial negative MTM of each swap should have been included in a transaction confirmation notice because it constituted a commission or expense. For the reasons given in relation to article 32.5, the MTM constituted no such thing. In Orvieto grant of protection there was a finding that article 61.1 g) CR had been breached. That finding, however, was based on misconceptions: see section F2.4 above.

F2.8 Non-disclosure assertions: conclusion

339. In sections F2.1 to F2.7 above I have examined the non-disclosure assertions pleaded by Prato. For the reasons given in those sections, I conclude that those assertions are not made out.
340. I note at this point, however, that there is an aspect of non-disclosure relied upon by Prato later in its regulatory counterclaim. It concerned the failure to inform Prato of the right of withdrawal, something which both article 30.6 TUF and article 36.1 CR made compulsory in relation to off-site offers. This aspect forms the subject matter of the right of withdrawal assertions. I deal with them in section F5 below. Before doing so, I deal in section F3 and F4 with the structuring assertions and the unsuitability assertions.

F3. Regulatory counterclaim: structuring assertions

341. The structuring assertions were set out in paragraph 63(2) of Prato's counterclaim. That paragraph used the term "Hidden Costs". As noted in section F1.5 above, Prato's Hidden Costs explanation made it clear that the "Hidden Costs" for each swap, also referred to by Prato as "implicit costs", comprised the specific negative initial MTM pleaded in paragraph 10 of the counterclaim, or such amount as the court determined to be the negative initial MTM.
342. On this basis, the structuring assertions were as follows:

The Claimant structured the Transactions to embody the Hidden Costs and/or failed to structure the Transactions so as to provide the best rates for the Defendant. In doing so, it acted:

(a) In breach of Art. 21 TUF, because in so acting it was not acting diligently, fairly or transparently in the interests of the Defendant.

(b) In breach of Art. 26 para 1 f) of the Consob Regulations, because in so acting the Claimant was not operating so as to keep down the costs borne by the Defendant or to obtain the best possible result for the Defendant.

(c) In breach of Art. 32 para 3 of the Consob Regulations, because in so acting the Claimant did not transact at best possible conditions for the Defendant.

(d) In breach of the guidelines in Annex 3 of the Consob Regulations that the value of a swap at inception should be nil (i.e. having neither negative nor positive value).

343. Each of these four assertions about the "Hidden Costs", and thus about the negative initial MTM to Prato, is inconsistent with the findings that I have made earlier in this judgment. Beginning with sub-paragraph (a), for the reasons given in section F2 above, the presence of a negative MTM was perfectly normal and involved no failure to act diligently, fairly or transparently.
344. As to sub-paragraphs (b) and (c), the presence of the negative initial MTM did not show any failure to keep down the costs borne by Prato. Nor did it show any failure to obtain the best possible result, or the best possible conditions, for Prato. For the reasons given in sections F1.6 and F2 above, those figures involve a comparison with something which never might have been. It is utterly unrealistic to suppose that Prato could have obtained terms for any of the swaps under which there would be anything other than a negative MTM to Prato.
345. Turning to sub-paragraph (d), Annex 3 CR did not constitute "guidelines". Its stated purpose was "to provide some basic information on the risks connected with [investments in financial instruments]". It did not prescribe that the value of a swap at inception must be neither negative nor positive. As noted in section F2.6 above, the purpose of the passage relied upon by Prato was to warn of the danger that swaps can rapidly assume a negative value depending on the behaviour of the parameter to which the contract is linked. In that regard investors are specifically warned that they should be certain that they understand how and how quickly variations in the reference parameter are reflected in the calculation of the differences that investors are to pay or receive. Dr Faro acknowledges that if banks are to enter into swaps on a commercial basis then there must be a negative initial MTM to the counterparty. It cannot seriously be suggested that Annex 3 was instructing banks to behave in an un-commercial way.
346. The reasons I have given above for rejecting each of the structuring assertions are, in essence, reasons given at greater length in Dexia's written opening submissions. Prato's written opening submissions did not seek to meet any of those assertions. Instead, it was said that Dexia had wrongly assumed that the complaint made in the structuring assertions was that an initial negative MTM was not permitted in principle. On that footing, Prato's written opening submissions asserted that the swaps were self-evidently not the best possible result that could have been obtained for Prato. In that regard, Prato said that Dexia's actual margin on the swaps greatly exceeded the minimum margin it required.
347. I cannot accept that Dexia made any wrong assumption in this regard. The only way in which Dexia was specifically said to have done anything impermissible was by the inclusion of a negative MTM. If Prato wanted to say that there was something else which was impermissible, then it was up to Prato to seek permission for an amendment to its counterclaim in that regard. The need for such an amendment is obvious in relation to the new assertion made by Prato for the first time in its written opening submissions. That assertion contended that a failure to achieve "the best possible result" was demonstrated by an alleged excess of margin over the minimum that Dexia itself required. It would be grossly unfair to Dexia to make a finding as to the amount of such minimum, let alone as to whether a transaction involving margin greater than the minimum was impermissible, without advance notice of the assertion and an opportunity to meet it.
348. The unfairness was made all the more apparent in Prato's written closing submissions. It was noted that Mr Belarbi in his oral evidence had not accepted that Dexia could have traded at the suggested minimum. Reference was made to a statement in Belarbi 1 that the bank's pricing team had "an obligation not to go below the minimum set by the committee". Prior to Prato's written opening submissions, there was no warning, either before or after service of Belarbi 1, that Prato would seek to assert that Dexia could have traded at the suggested minimum. Any such assertion would need to be properly particularised so that the issues arising were identified in the pleadings, and could be focused upon in factual witness statements and expert reports. It was then said by Prato that when entering into the back to back swaps Dexia would have had the benefit of comparative pricing. There was, however, no evidence about the circumstances in which the back to back swaps came about. More generally, there was no evidence as to market movements between the time when Dexia proposed the swap in question at particular rates which it specified, the time at which Dexia accepted Prato's irrevocable proposal, and the time at which Dexia entered into the relevant back to back swap. Prato then went on to criticise the difference between the margin obtained by Dexia on its swap with Prato and the margin which had been obtained by the "hedge bank" that had been Dexia's counterparty on the back to back swap. When this was raised with Mr Malik in cross-examination he responded with the common sense point that Dexia incurred substantial costs in employing a team providing client services to customers such as Prato. Prato's written closing sought to say that such costs could not justify the amount of the difference in margin, and that to charge for such costs would run counter to the 2002 advisory agreement. All of these assertions came without any notice being given to Dexia prior to the trial.
349. In these circumstances I have no hesitation in upholding Dexia's objection that Prato's new ways of seeking to put its case cannot properly be advanced under the guise of saying that they formed part of the structuring assertions. They did not. Accordingly I conclude that Prato's proposed assertions in this regard are inadmissible.

F4. Regulatory counterclaim: unsuitability assertions

350. Paragraph 63(3) of the counterclaim asserted that each swap was unsuitable for Prato "because of the existence of the Hidden Costs in respect of that [swap] …". This was said to have been a breach of article 21 TUF and article 29 CR. It is unnecessary, however, to examine those provisions in this context. The reason is that Prato's grounds for asserting unsuitability, as set out in closing submissions, relied on three specific complaints, each of which I have already rejected. The first was that the negative MTM "reflected the fact that Prato's payments under the swap were expected to be greater in present value terms than its receipts." For the reasons given in sections F2 above, whether cash flows in future would be positive or negative depended on movements in market rates, not on the existence of the negative MTM at inception. The second reason was that the initial negative MTM values had the consequence that the swaps violated local government finance legislation and a prohibition on speculative transactions. The main claim judgment rejects those complaints: see section D of that judgment.
351. The third matter of complaint says that "this information was necessary to enable [Prato] properly to assess whether or not to proceed with the [swaps]." It is not clear whether "this information" refers to the first complaint, the second complaint, or simply the fact that there was a negative initial MTM. However for the reasons given earlier no complaint in any of these respects is justified.

F5. Regulatory counterclaim: right to withdraw assertions

352. I noted in section F2 above, that Prato makes a complaint about failure to advise of the right to withdraw. As noted in that section, article 30.6 TUF imposes obligations on service providers in relation to off-site offers. The relevant obligation for present purposes is an obligation to inform the investor of the 7 day right of withdrawal arising under article 30 TUF.
353. In section E of the main claim judgment I have held that dealings between Dexia and Prato in relation to the swaps were such as to engage the special rules applying to off-site offers. The 7 day "cooling off period", with its associated right of withdrawal, form part of those special rules. My conclusion in the main claim judgment inevitably means that, by failing to inform Prato of the 7 day right of withdrawal, Dexia was in breach of this aspect of article 30.6 TUF.
354. I deal in section F7 with Prato's claim for damages in this regard.

F6. Regulatory counterclaim: conflict assertions

355. As indicated in section F1.2 above, in this section I consider Prato's conflict assertions without regard to the 2002 advisory agreement. Separate consideration of the position in the light of that agreement will be found in section G below.
356. The first relevant legislative provision is article 21 TUF, a provision applicable to dealings with all types of investor. It states in article 21.1 c) that authorised service providers must:

Organise themselves in such a way as to minimise the risk of conflicts of interest and, where such conflicts arise, act in such a way as to ensure transparency and the fair treatment of clients …

357. The second relevant legislative provision is article 27 CR, which applies only to dealings with retail investors. Article 27.1 CR states that authorised service providers must be on the alert for conflicts of interest. Article 27.2 CR will be engaged if the service provider has "directly or indirectly a conflicting interest, including any such interest arising from intragroup dealings, the joint provisions of more that one service or other business dealings of their own or of group companies" . If article 27.2 is engaged, then the service provider may only carry out the relevant transaction if it has previously informed the investor in writing of the nature and extent of its interest in the transaction and the investor has expressly agreed in writing to it being carried out. Separate provision is made for transactions by telephone.
358. Dexia observes that in a transaction between a buyer and a seller it does not make sense to speak of a conflict of interest. Each side has its own interest.
359. On behalf of Prato, Professor Sciarrone Alibrandi's oral evidence included:

To act as a counterparty of the investor implies a potential conflict of interest, and that is undoubtedly so…I have to inform my counterparty of a potential conflict of interest, and this is so in every transaction where the bank is a direct counterparty.

…In the case of a derivative, I am the one who constructs the product, because these are all over-the-counter derivatives, they are built and constructed according to the client's features or characteristics.

Now, I think it is rather clear why there is a potential conflict of interest, because I build a product which I am offering to my counterparty, I am supposed to build it in the interest of my client, and at the same time, however, I must configure the product and decide the profit, my profit, and all the features of the product itself. So I think that this situation is a typical situation of conflict of interests. So much so that some judgments…mention an intrinsic conflict of interest in these kind of derivatives contracts, because these contracts are built in the interest of the customer, but the intermediary is his counterparty.

…this is not so clear to the retail investor. I think that for a retail investor it is not easy at all to understand that, in the rate, in the rate to which the flow that he will have to pay is anchored, there are implicit commissions, there is a profit margin, there are other remunerations for other risks run by the intermediary.

360. This evidence proceeds on the footing that the bank is "supposed to build [the swap] in the interest of [its] client." It is plain that Professor Sciarrone Alibrandi has in mind the obligation on service providers, whether the counterparty is a retail investor or a qualified investor, to keep down the costs borne by investors and to obtain the best possible result from each investment service, taking into account the level of risk chosen by the investor. To my mind Dexia is right to say that this is not an obligation which envisages an objective appraisal of what could have been obtained in the market. There is no suggestion by Prato that the obligation required, for example, an investigation by Dexia as to what other banks would be willing to offer. As will be seen below, the approach taken by Consob is that what a service provider must do is to operate in accordance with the aim of realising the client's interests as best possible. That does not require a bank to do other than act commercially, so long as it has, in the interests of investors and the integrity of the securities market, identified the best possible result that can be achieved for the investor consistent with the bank's own commercial needs.
361. If the customer believes that the bank has not done this, one option is to bring proceedings asserting that there has been a breach of article 26 CR. However, that may not be necessary. There is an alternative remedy available to the customer if the bank did not comply with the requirements of article 21 TUF as to conflict of interest. If the customer is a retail investor, an alternative remedy may be available under article 27.2 CR in the event that the bank had directly or indirectly a conflicting interest. A question which arises is how this dovetails with the obligation under article 26 CR, which applies to dealings between service providers and all investors.
362. The decisions cited by the parties in this context were largely concerned with the position where a conflict arose under an advisory relationship. I consider the position in that regard in section G. In the absence of such a relationship, but in circumstances where the making of the investment has been solicited by the bank, the correct approach appears to me to have been explained by Consob.
363. The explanation that I have in mind is found in Consob Communication no. DAL/97006042 of 9 July 1997. A bank proposed to purchase from a municipality an entire issue of municipal bonds. It envisaged that it would then include the bonds in a "basket" of securities that it offered to clientele visiting the bank. In response to an enquiry from an officer of the bank, Consob sent a reply. I set out below, with paragraph numbers added in square brackets for ease of reference, relevant parts of that reply:

[12] With regard to the aforementioned transactions on its own behalf, with the clientele as the counterparty, your bank has asked, as stated above, whether there is a conflict of interest.

[13] In this regard, firstly it is necessary to specify that a conflict of interest hypothesis cannot be indentified – a priori – in all cases in which the intermediary trades financial instrument, as the direct counterparty, with its own clientele, but, conversely, it must be assessed with regard to the peculiarities of the specific case.

[14] Transactions of this kind can be carried out, on [two hypotheses]:

…

[15] In said hypotheses the transaction is … formally preceded by an order from the client, but said order was to some extent "solicited" by the intermediary.

[16] It is therefore necessary to assess whether the "suggestion" is not only aimed at realising the client's interest as best possible, but also (or only) at the realisation of ulterior and different goals for the intermediary itself.

[17] Given the above, we are of the opinion that in cases such as the one proposed, as a rule, the conflict of interest could easily and effectively arise, given the declared intention, and therefore the presumable need for the intermediary to quickly remove from its portfolio securities of which there is an overabundance following the full subscription of the issue. The conflict could be deemed to be non-existent only in cases in which the conditions of the individual transaction are – compared to other transactions with similar characteristics that could be proposed as alternatives – so favourable for the client that they rule out any concrete prejudice for it, even in comparative terms in relation to the inability to take a more favourable investment opportunity; and this is taking particular account of the quality of the issue and the liquidity if the investment.

364. Each side relied upon what was said by Consob in this communication. To my mind it assists Dexia, for it makes plain that not all cases in which a bank trades as the direct counterparty of its client will involve a conflict of interest. It is clear from paragraph [16] that there would be no conflict of interest if the bank's goal was simply to enter into a financial transaction in which, in accordance with article 26 CR, it would seek to meet its client's interests as best possible. In such circumstances, Consob explains that there would be no conflict of interest, and it must follow that there would be no need to disclose the profit or margin which the bank envisaged would accrue to it as a result of the trade.
365. What gave rise to a conflict of interest was an ulterior and different ground for the transaction. This was, as explained in paragraph [17], that the bank would be dealing with its customer while at the same time being under commercial pressure as a result of holding an overabundance of bonds with a consequent need to dispose of them as quickly as possible. This plainly had to be disclosed. Applying this to the present case, Dexia had no such ulterior or different goal. Accordingly, I conclude that no conflict of interest arose within the meaning of article 21 TUF and article 27 CR.

F7. Regulatory counterclaim: causation and damages

366. For the reasons given above, I conclude that Prato's regulatory counterclaim succeeds in one respect only. On or before entering into each swap Dexia should, as required by article 30.6 TUF, have explained that Prato had the benefit of a 7 day period within which it could, if it wishes, withdraw: see section F5 above. There was a failure by Dexia to do this. The question now arising is what, if any, damages Prato can recover in respect of that failure.
367. The parties' closing submissions had not addressed this specific question. Accordingly submissions on it formed part of the written and oral procedures after the main claim judgment was handed down.
368. Prato's starting point in written submissions was that the regulatory counterclaim offered Prato a fall back position if its restitution claim were unsuccessful. If, for example the counterclaim for restitution of sums paid under swap 6 were to fail, Prato would be left in a position where it had lost €1,580,465. In relation to the failure to comply with the mandatory provisions of article 30 TUF, Prato made reference both to the counterclaim at paragraph 63(4) and to evidence from Professor Sciarrone Alibrandi at paragraph 85 of Sciarrone Alibrandi 1 that:

In addition to the nullity of the related contract [under Art 30(7) TUF], the conduct of the bank which caused the entry into of contracts which did not set out the right of withdrawal [as required by Art 30 TUF] is regarded as bad faith conduct which also gives rise to a liability for damages.

369. A further point was made by Prato at this stage. This was that Professor Sciarrone Alibrandi and Professor Gentili had agreed in paragraph 7 of the Civil Joint Memorandum that the measure of damages was simply:

The loss deriving from the derivative financial instrument concern.

370. Dexia filed written submissions in response. So far as material, Dexia said, first, that it was entitled to set off, against any liability to Prato, its entitlement to restitution in relation to sums received by Prato under swaps 1, 2, 4 and 5. If, however, Dexia's restitution claim were unsuccessful, then it was said that the true measure of Prato's loss caused by Dexia's breach of article 30 TUF would be the net amount paid by Prato under all of the swaps, giving credit for the sums that Prato received from Dexia under swaps 1, 2, 4 and 5. At the same time, Prato lodged further submissions stating that its claim to damages arose not only in relation to swap 6 but also in relation to swap 3.
371. A note by Dexia two days before the oral hearing involved a new assertion. This was that, in relation to the regulatory breach now under consideration Prato would need to prove that it would not have entered into (or would have exercised its right to withdraw from) the swaps if Dexia had complied with its obligations under article 30 TUF by giving written notice of the 7 day right of withdrawal. Dexia added that there was no evidence that compliance with article 30 TUF would have made any difference to Prato. Indeed, said Dexia, the overwhelming likelihood was that Prato would have entered into the swaps regardless and would not have exercised the 7 day right of withdrawal. This was said to be Dexia's "primary position". The submissions previously made by Dexia were described as "alternative positions".
372. Prato filed a responsive note the following day. In that note Prato said that Dexia's submissions ran counter to the unchallenged evidence from Professor Sciarrone Alibrandi.
373. To my mind Dexia's oral submissions made a powerful case that its newly adopted primary position was right:

(1) The causation hurdle identified in the new primary position had been identified as arising generally in Dexia's written closing submissions;

(2) Prato's own written closing submissions had acknowledged that assessment of quantum would depend upon an examination of what Prato would have done if Dexia had properly complied with its duties;

(3) Gentili 2 had stated at paragraph 44 that causation was an essential requirement of liability, that damages could only be awarded if shown to be a direct consequence of an unlawful act or omission, and that in order to recover damages for breach of TUF or CR a claimant must prove losses coming directly and exclusively from the unlawful act or omission, and that the whole amount can be derived from that unlawful act or omission;

(4) Paragraph 44 had not been challenged in cross-examination when Professor Gentili gave evidence;

(5) When the propositions in paragraph 44 were put to Professor Sciarrone Alibrandi in cross-examination she conceded that they were correct;

(6) Paragraph 85 of Sciarrone Alibrandi 1 did not deal with the quantum of any liability in damages.

374. Dexia's oral submissions also responded to an assertion by Prato that because the breach consisted of "entry into contracts which did not set out the right of withdrawal" it followed that, in the absence of the breach, there would have been no contract at all and Prato would have not suffered the net losses it claimed. Dexia's oral submissions pointed out that the breach under article 30 TUF consisted of a failure to state the right of withdrawal on relevant forms. I add that a similar point can be made in relation to the breach of article 36.1 CR.
375. An assertion was made by Prato that if retail clients had to prove causation, then the availability of a damages claim under article 30 TUF would be "purely academic". Dexia rightly refuted this, observing that there might be some investors who would have utilised the right of withdrawal, because within a few days of entering into the transaction they had realised that it was undesirable to have done so.
376. Prato said that paragraph 85 of Sciarrone Alibrandi 1 had given examples of cases in which claims for damages under article 30 TUF had succeeded. As to that:

(1) Dexia rightly pointed out, in fairness to Professor Sciarrone Alibrandi, that she had not cited the cases for a proposition that there was no need to prove causation.

(2) The first case cited was a decision of the Court of Cassation, civil section, dated 3 October 2003. The claimant in the case was Ruberto Dante, and I shall refer to the decision as Dante. It was not in fact concerned with article 30 TUF, but it concerned a similar provision in relation to consumer contracts. It showed that in the context of such a provision there was a right to damages for failure to indicate, in the manner required, the right of withdrawal. Quantum, however, was referred back to the court below.

(3) The second case cited by Professor Sciarrone Alibrandi was a decision of the Tribunal of Mantova dated 10 December 2004. This decision involved claimants who were anonymised by using the initials F and C: I shall refer to it as F and C. Dexia submitted that F and C was not concerned with damages at all, but with a claim to restitution.

377. In answer to these observations Prato relied upon the points that it had made in earlier submissions. It asserted that paragraph 85 of Sciarrone Alibrandi 1 demonstrated that it was no part of a claim to damages that the claimant must show that the right of withdrawal would have been exercised. In relation to F and C Prato sought to make further submissions once it had had an opportunity to review the assertions made by Dexia. In my ruling at the end of oral submissions I gave permission to either side to make any further submissions which might appropriately be advanced in writing within 7 days of receipt of a transcript of the hearing. When taking advantage of that opportunity Prato did not return to the decision in F and C.
378. In my view the propositions advanced in Gentili 2 at paragraph 44 are clearly established. They were not overtaken by the Civil Joint Memorandum; on the contrary, they were advanced at a stage when the Civil Joint Memorandum had already been prepared and signed. There was no objection to those propositions being put to Professor Sciarrone Alibrandi in cross-examination. When they were put to her she agreed with them. There is nothing inconsistent with those propositions in paragraph 85 of Sciarrone Alibrandi 1 or in the two cases cited in that paragraph. This is not a case in which Prato had "cold feet" within the period when a right of withdrawal would have been available. There is no reason to think that if Prato had been informed of that right it would have made use of it. In these circumstances I conclude that the only breach shown to have occurred of relevant regulatory provisions caused no loss and gives rise to no claim in damages.
379. As to Dexia's alternative contention, I make one comment only. It is this. If Prato withdrew from any particular swap, it would be necessary to consider consequences that would have arisen under earlier swaps terminated by the swap in question. Neither side adverted to this. The result was that I did not have submissions on whether, for example, the matter could appropriately be dealt with by an order for an inquiry.

G. Advisory & misrepresentation counterclaims

G1. Advisory counterclaim

G1.1 Advisory counterclaim: introduction

380. As noted in sections A1 and B of the main claim judgment, the 2002 advisory agreement came into being at the end of November 2002. It was created by two letters. The first was from Prato to Dexia on 25 November 2002, formally appointing it to act as Prato's advisor. The second was from Dexia to Prato formally accepting the appointment. Dexia's acceptance referred to the mandate given to it as:

… a mandate to act as advisor for definition of the strategies for debt restructuring and for assistance, consultancy and the management of an interest rate swap transaction …

381. Both Prato's letter to Dexia and Dexia's letter to Prato cited executive resolutions by Prato on 29 July 2002 and 20 November 2002. Prato's letter referred to them as numbers 2331 and 3622 respectively. Dexia's letter referred to them as numbers 524 and 745. The difference in numbering is immaterial: it seems that Dexia quoted the numbers of executive committee decisions which preceded the executive resolutions identified in Prato's letter.
382. Prato's executive resolution number 2331 of 29 July 2002, and the executive committee decision which preceded it, came about as a result of the technical committee recommendation of 10 July 2002: see section B2 of the main claim judgment. The executive resolution recorded the technical committee's conclusion that, of the seven banks which had submitted proposals, the "appointment … for defining the strategies for restructuring of the debt and providing assistance, consultancy and the management of an Interest Rate Swap operation" should go to Dexia. It also recorded that before making this recommendation, the technical committee had asked institutions to submit further proposals drawn up in accordance with specified parameters. One of those parameters was described in this way:

… the Interest Rate Swap transaction, limited to a period of three, four and five years, taking into account all the fixed rate loans …

383. Resolution 3662 of 20 November 2002 stated that it was intended as a supplement to executive resolution number 2331/2002. Resolution 3622 of 2002 then proceeded to set out what it described as "the definition of the conditions governing relations between the advisor and [Prato] during the management of the interest rate transaction":

1) assistance and consulting in relation to the Interest Rate Swap operation proposal, accepted by the City Council Board with Decision no. 745 of 20/11/2002;

2) assistance within the area of the standards and regulations applicable in relation to the completion of the operation;

3) financial analysis and monitoring of the operation throughout the entire operation, with relative reporting to the City Council's Financial Service, and transmission of all information which is considered to be useful, at the request of that Financial Service;

4) the City Council acknowledges that the granting of the engagement in relation to the Interest Rate Swap operation proposal, authorised by the City Council Board no. 745/02, represents for [Dexia] an obligation of means and not of results, releasing [Dexia] from all liability, both in relation to the proposal authorised by the City Council with the decision referred to above and the completion of the consequent swap operation following signing of the ISDA Master Agreement and in relation to the execution of the engagement as Advisor;

5) the City Council acknowledges that the engagement specified in points 1), 2) and 3) above is carried out by [Dexia] without any fee from the City Council;

6) this engagement has a maximum duration of five years starting on the date of receipt of the letter of acceptance of the engagement from [Dexia], with annual renewal, unless cancelled by one of the parties, which must be sent within thirty days, and is entrusted to [Dexia] on an exclusive basis;

…

384. At one stage it appeared to be suggested that references in these documents to "an" or "the" interest rate transaction had the consequence that the advisory agreement applied only during the period of swap 1. No such case, however, was pleaded. Nor, as it seems to me, would it be a correct analysis. Dexia advised Prato on the termination of swap 1 and continued to advise Prato in exactly the same way until relations broke down between the parties during the course of the swaps.
385. It is now common ground that the advisory agreement was governed by Italian law. On that basis, paragraph 69 of the counterclaim described the obligations which Prato said were owed to it by Dexia under the 2002 advisory agreement:

Pursuant to Art 1176, 2 of the Italian Civil Code it was a term of the contract to advise, alternatively in any event, that the Claimant, as the Defendant's Advisor, was required to pursue the best interests of its client and to act fairly and in good faith towards its client. Further or alternatively, pursuant to Art. 21 TUF it was a term of the contract to advise, alternatively in any event, that the Claimant was obliged to act diligently, fairly and transparently in the interests of its clients.

386. The main question in relation to the advisory agreement was whether those obligations, in the context of the advisory agreement, added in any material way to the obligations arising under article 21 TUF and the articles in CR discussed in section F above. I discuss that question in section G1.2 below.

G1.2 Advisory counterclaim: what does it add?

387. Article 1176 CC is found in chapter II of book IV. Chapter II is concerned with performance of obligations, and article 1176 is the first article in section I, concerned with performance in general. With the addition of paragraph numbers in square brackets, article 1176 states:

1176. Diligence in performance.

1176.[1] In performing the obligation the debtor shall observe the diligence of a good pater familias …

1176.[2] In the performance of obligations inherent in the exercise of a professional activity, diligence shall be evaluated with respect to the nature of that activity …

388. The Civil Joint Memorandum recorded that Professor Gentili and Professor Sciarrone Alibrandi agreed that:

… in the context of an advisory relationship between a client and a financial institution, art. 1176 para 2 had been made specific by art. 21 TUF and the implementing [CR].

389. However, there was an aspect of this which was not agreed, as explained in paragraphs 33, 42 and 43 of the Civil Joint Memorandum:

33. Professor Sciarrone Alibrandi … believes that a more rigorous interpretation of the rules of conduct set forth in the TUF and in the Consob Regulation is required where the intermediary is expressly appointed as an advisor. Professor Gentili believes that at the material time the law did not distinguish between an intermediary's and an advisor's diligence and liability, and the same rules applied to both.

…

42. We are unable to reach agreement as to how in the context of an advisory relationship has Italian law interpreted and applied Art 1176 para 2 Civil Code and Art 21 TUF.

43. As noted above, Professor Sciarrone Alibrandi believes that a more rigorous interpretation of these rules of conduct is required in any case – such as the present – where the intermediary is expressly appointed as an advisor. Professor Gentili points out that at the material time the law did not distinguish between an intermediary's and an advisor's diligence and liability, and the same rules applied to both. In Professor Gentili's opinion, there was no difference between the duties of an intermediary and the duties of an advisor as regards any so called Hidden Costs.

390. Prato's closing submissions made two observations about the disagreement between Professor Gentili and Professor Sciarrone Alibrandi set out in the Civil Joint Memorandum. I shall take them in turn.
391. Prato's first observation summarised Professor Sciarrone Alibrandi's evidence as being that the appointment of an advisor itself raised the level of the duty owed to the customer. It would, said Prato, be counterintuitive if Dexia's duties to Prato as advisor meant nothing more than Dexia's duties to Prato as counterparty. Instead, submitted Prato, article 21 TUF should be recognised as a duty which moulded itself to the circumstances, depending on the service being provided. This would recognise that the advisory service is different from the purely dealing service.
392. As to that, however, Professor Sciarrone Alibrandi identified no proposition of law to justify a suggestion of a raised level of duty or, as she put it in para 136 of Sciarrone Alibrandi 2, a position under which the duty would "be interpreted and applied even more strictly than it would normally be". The justification which she gave in paragraph 138 (i) of Sciarrone Alibrandi 2 was a heightened version of the remaining part of this first observation in Prato's closing submissions. The notion that, as regards duties of disclosure, the advisor was under the same duty as a counterparty who was not an advisor was described by Professor Sciarrone Alibrandi as "incomprehensible … on this basis the advisory would be totally useless for the client." As Dexia observed, whichever way it is put, the point is a false one. The advisory agreement can itself impose higher obligations on the advisor. Once it is appreciated that legislative provisions have imposed duties on service providers when dealing which are akin to those imposed upon an advisor, Prato's point falls away.
393. The second observation was that the debate was probably academic. The reason was said to be that Professor Gentili had accepted in cross-examination that he did not mean that the duties of an advisor were cut down to those of a dealer. Rather, his point was that the duties of a dealer were raised to those of an advisor. Dexia suggested that this misrepresented Professor Gentili's evidence. Even if what is said by Prato is accurate, however, the point does not in my view assist Prato. I have examined in section F the duties which arise on the footing that, even though there is no advisory agreement, Dexia in its capacity as counterparty owes special obligations set out in article 21 TUF and the relevant provisions of CR. I have concluded that in all respects save one there was no breach of those obligations. The exception concerns Dexia's failure to comply with article 30.6 TUF. That failure, which is pleaded at paragraph 63(4) of the counterclaim, is not said to constitute a breach of the advisory agreement: see paragraph 70 of the counterclaim.
394. The stance taken by Professor Sciarrone Alibrandi resulted in the identification by her in paragraph 234 of Sciarrone Alibrandi 1 of four obligations:

Therefore, the Claimant, as the Defendant's advisor, was compelled to:

(i) diligently pursue the best interests of the client;

(ii) adequately disclose to the Defendant the existence and the amount of any hidden costs;

(iii) refrain from offering to the client derivative financial instruments which were not suitable or adequate in relation to the interest/need of the Defendant;

(iv) refrain from pursuing the firm's own interests to the detriment of those of the Defendant.

395. Professor Gentili was content to accept the existence of the obligations set out at (i) and at (iii) above. For the reasons that I have given in section F above, Prato's suggestion that those obligations were breached is unfounded. As to (iv), for the reasons given in section F above the obligation on Dexia concerning conflict of interest is an obligation which arises not from Dexia's commercial role in the ordinary course, of which Prato is well aware, but from any ulterior or different motive that it may have for entering into a transaction.
396. That leaves the suggested obligation at (ii) above. Here it seems to me that Professor Sciarrone Alibrandi has elevated a question of fact into a proposition of law. For the reasons given in section F above, on the evidence before me in the present case, performance of Dexia's duties as advisor did not require disclosure of the "Hidden Costs", as Prato was fully able to take an informed decision on the proposed investment by reference to the rates and thresholds that were identified in the proposal for each swap.
397. Prato sought to place reliance on observations in Arosio in relation to the duty of an advisor. It seems to me that Dexia is right to say that the relevant passages in Arosio are contemplating a very different type of advisory agreement from the 2002 advisory agreement. Moreover, there may have been features about the facts of that case which led to those observations. In any event, the question appears to me to be a question of fact which must depend upon the circumstances of each case.
398. It was not pleaded by Prato that the 2002 advisory agreement required Dexia to provide information about the fixed rates at which other banks might be willing to enter into a swap which contained the thresholds and floating rates proposed by Dexia. Prato's opening submissions included a suggestion which would have had that effect. The suggestion, however, was modified in Prato's closing submissions. The result of the modification amounted to an allegation that Dexia would have to seek a product in which the counterparty would offer "a neutral MTM value at inception to the client". For the reasons given in section F above, this notion is simply unreal. Prato then suggested that Dexia should disclose any negative initial MTM to Prato "and make sure that [Prato] understood what that meant". However, for the reasons given in section F above, "what that meant" was that it had no bearing in itself on the decision whether to invest.
399. For all these reasons I accept Dexia's submission that the advisory agreement did not, as regards the specific duties which are relied upon in the counterclaim, add in any material way to the obligations which I have already considered in section F.

G1.3 Advisory counterclaim: other matters

400. In these circumstances it is not necessary for me to consider matters which would otherwise arise in relation to the advisory counterclaim. Certain of those matters, for example a question which might arise as to whether a breach by Dexia involved "slight negligence", which Italian law permits to be the subject of an exemption clause, are best considered in the context of a finding of actual breach.
401. It is common ground that, to the extent there were breaches of the regulatory provisions discussed in section F above, the release in paragraph 4 of resolution 3622 of 2002 would not apply. In those circumstances I do not consider it desirable to seek to resolve in the present judgment other matters which would, but for my conclusion in section G1.2, have arisen for consideration.

G2. The misrepresentation counterclaim & defence

402. The misrepresentation defence said that Prato was entitled to rescind, and had rescinded, the swaps on the grounds of misrepresentation. In that regard it relied on the obligations identified in section F2 above, arising both under the 2002 advisory agreement and independently of that agreement. It asserted that:

Prior to and in respect of each Transaction, in failing to disclose the Hidden Costs of that Transaction or the implications of those Hidden Costs to the Defendant, in circumstances where it was obliged by the TUF and Consob Regulations and/or by its retainer as the Defendant's Advisor¹ to do so if there were any, the Claimant impliedly represented that there were none.

403. My findings earlier in this judgment are that Dexia complied with the obligations of disclosure relied on in section F2. The inevitable result is that this defence cannot succeed.
404. The misrepresentation counterclaim sought damages for the misrepresentations alleged in the misrepresentation defence. It follows from what is said above that the misrepresentation counterclaim cannot succeed.
405. In these circumstances it is not necessary for me to address other aspects of the misrepresentation defence. Nor is it necessary to do so in relation to other aspects of the misrepresentation counterclaim. Such aspects, in my view, are best left for consideration in the specific context of such breaches of disclosure obligations as are actually found to have occurred.

H. Concluding matters

406. For the reasons given above I have concluded that Dexia is entitled to succeed on its alternative restitution claim, and that Prato is entitled to succeed on its restitution counterclaim. The restitution claim and restitution counterclaim plainly arise out of the same transactions. In those circumstances they can in my view be set off against each other. Subject to any submissions that may be made in relation to consequential orders, it appears that the amount of Prato's restitution counterclaim will exceed the amount of Dexia's restitution claim. If so, the position will be that a net sum will be payable by Dexia to Prato.
407. My analysis above has not made it necessary to make observations on a number of aspects of Dr Faro's evidence. I deal with certain of those aspects in Annex 2A to the present judgment. Nor has it been necessary for me to comment on Ms De Castelli's evidence as to what Prato would have done if Dexia had done what Prato says it should have done. Comments on those matters are set out in Annex 2B to the present judgment.
408. I ask the parties to seek to agree upon consequential orders.

Annex 1: abbreviations and short forms

Unless the context otherwise requires, the abbreviation and short forms listed in the first column below have the meaning set out in the second column. Notes in the third column are provided for ease of reference only.

Abbreviation/ short form	Long form	Notes
1990 Act	Contracts (Applicable Law) Act 1990	MCJ para 208
1998 ISDA FX and Currency Option Definitions	definitions incorporated in the master agreement	MCJ para 5.
2000 ISDA Definitions	definitions incorporated in the master agreement	MCJ para 5.
2002 advisory agreement	advisory agreement made by Prato's letter of appointment dated 25 Nov 2002, accepted by Dexia's letter dated 28 Nov 2002	MCJ para 4.
2004 bond restructuring	restructuring of Prato's public debt in 2004	MCJ para 8. Under the 2004 bond restructuring fixed interest loans initially denominated in lire, which by that time had become denominated in euros, were repaid, and the 2004 bonds were issued.
2004 bonds	the November 2004 bonds and the December 2004 bonds	MCJ para 8.
2006 bond restructuring	restructuring of Prato's public debt in 2006	MCJ para 8. The 2006 bond restructuring extended the maturity of the 2004 bonds.
Administrative Joint Memorandum	joint memorandum by Professor Napolitano and Professor Dettori	MCJ para 25(3). The Administrative Joint Memorandum is dated 17 April 2014.
advisory counterclaim	counterclaim advanced by Prato in the present case	MCJ para 16(3). In the advisory counterclaim Prato claims damages in respect of Dexia's alleged breaches of the 2002 advisory agreement under Italian law.
advisory release	assertion advanced by Dexia in the present case	MCJ para 17(2). The advisory release is said by Dexia to be a release from any liability relating to its performance as Prato's adviser.
Agreement	agreement constituted by the master agreement and each confirmation together	MCJ para 6.
Alibrandi, Professor	Professor Sciarrone Alibrandi	See entry under "Sciarrone Alibrandi".
Angeletti, Dr	Dr Roberto Angeletti	Dr Angeletti, an inspector of the Bank of Italy, was appointed as expert by the Consiglio di Stato in Pisa I; his report is discussed by the Consiglio di Stato in Pisa II.
App.	Corte d'Appello Court of Appeal (Italian Civil or Criminal Appeal Court)	MCJ para 132, citing para 4.3(b) of Napolitano 1: second instance appellate courts based in certain cities in Italy, also [have] local jurisdiction. The local appellate court for Prato is the Corte d'Appello di Firenze, which is the second instance civil court for the whole Region of Tuscany.
Arosio	App. Milano 3 Jun 2014, 1937/2014	MCJ paras 167, 171, 180, 181. App. Milano Sez. Pen. 3 Jun 2014, 1937/2014
Article 3 non-derogable rules	rules which, within the meaning of article 3 of the Rome Convention, "cannot be derogated from by contract".	JORI, section C1
barrier rate	cap rate in an interest rate cap; floor rate in an interest rate floor	See "cap rate" and "floor rate".
Belarbi, Mr	Mr Samir Belarbi	MCJ para 22. Mr Belarbi was Head of Hedging Solutions (based in Rome) during Prato's entry into swaps 2 and 3, and then Head of the Debt Management Desk in Dexia's public finance division (also based in Rome), in which role he was involved in Prato's entry into swaps 4, 5 and 6.
Belarbi 1 to 4	Mr Belarbi's first to fourth witness statements	MCJ para 22. The statements are dated 25 November 2013 ("Belarbi 1"), 21 March 2014 ("Belarbi 2"), 13 May 2014 ("Belarbi 3") and 29 May 2014 ("Belarbi 4").
Bompani, Professor	Professsor Aldo Bompani	A tenured professor in the Department of Economics of the University of Florence. Expert member of the technical committee. See under "technical committee".
buyer	party which is to receive a particular advantage from the seller	MCJ para 35. The consideration provided by the buyer to the seller in return for the seller's promise may take various forms, but is commonly described as "the premium".
cap	interest rate cap	See "cap rate" and "interest rate cap".
cap rate	cap rate agreed between a buyer and a seller	MCJ para 35(1). In an interest rate cap if the floating rate exceeds the cap rate for a particular period the seller makes a payment to the buyer, usually calculated by applying the amount of the excess to the notional sum, thereby protecting the buyer from the danger that the buyer in relation to that sum may have to pay to its own counterparty a floating rate going beyond the cap rate.
capacity defence	defence advanced by Prato in the present case	MCJ para 15(1). The capacity defence is that the swaps were null and void in English law by reason of Prato's lack of capacity to enter them under Italian law.
Cass.	Corte Suprema di Cassazione	MCJ para 132, citing para 4.4(c) of Napolitano 1: the Corte Suprema di Cassazione (the Court of Cassation or Italian Supreme Court) based in Rome. This is the highest instance court in the Italian civil and criminal court system. It hears appeals from the regional Courts of Appeal and other courts in some instances.
Cass. civ.	Cassazione civile	Civil chamber of Cass.
Cass. pen.	Cassazione penale	Criminal chamber of Cass.
Cass. sez. un.	Cassazione, sezioni unite	Joint chambers of Cass.
causa	Italian law requirement that a contract must have a lawful causa	MCJ para 214. CC, article 1418, paragraph 2, requires that a contract must have a lawful "causa".
CC	Italian Civil Code	MCJ para 214.
CdC	Corte dei Conti	Court of Auditors.
CDP	Cassa Depositi e Prestiti	MCJ para 49. As at 31 December 2001, the majority of Prato's fixed rate borrowing was with CDP.
CdS	Consiglio di Stato	MCJ para 132, citing para 4.4(b) of Napolitano 1: the Consiglio di Stato (Council of State) is the administrative court of second instance, located in Rome, before which TAR decisions may be appealed within the deadline of 6 months from the publication of the judgment or sixty days from notification to the parties. Decisions of the CdS can only be appealed to the Court of Cassation, within the deadline of 6 months from their publication or sixty days from their notification and such an appeal is only permitted on limited grounds concerning the CdS's jurisdiction and not on any point of law or concerning the merits of the earlier decision.
ceiling	cap rate	See "cap rate".
Civil Joint Memorandum	joint memorandum by Professor Gentili and Professor Sciarrone Alibrandi	MCJ para 26(3). The Civil Joint Memorandum was dated 21 March 2014.
Co. Cost.	Corte Costituzionale della Repubblica Italiana	MCJ para 132, citing para 4.5 of Napolitano 1: the Corte Costituzionale della Repubblica Italiana (the Constitutional Court), based in Rome, is responsible for upholding the Italian Constitution and, among other things, may strike down laws which are inconsistent with the Constitution.
collar	interest rate collar	See "interest rate collar".
conflict assertions	conflict of interest assertions	Head (5) of the regulatory assertions. See entry under "regulatory assertions".
Consob	Commissione Nazionale per le Società e la Borsa	MCJ para 213. Italian Securities and Exchange Commission.
Consob 11522/1988	Consob Regulation 11522 of 1 July 1998	Regulation implementing the TUF on providers of investment services in force at the material time. See also entry under "CR".
Consob February 1999 communication	Consob Communication n.DI/99013791 of 26 February 1999	JORI, Annex 2A
Consob March 2009 communication	Consob Communication n.9019104 of 2 March 2009	JORI section F2.2
convenienza economica	financial advantage	MCJ para 168.
Corielli, Professor	Professor Francesco Corielli	Professor Corielli, Associate Professor of Mathematics and Financial Mathematics at the Department of Finance at Bocconi University, was appointed as expert in Arosio.
corridor	corridor (in an interest rate collar)	corridor comprising floating rates lower than the cap rate and higher than the floor rate.
Cost.	La Costituzione della Repubblica Italiana	Constitution of the Republic of Italy.
Council	Consiglio Comunale of Prato	MCJ para 48. The constitutional structure of Prato is that it consists of a body of elected representatives, the elected Consiglio Comunale. Responsibility for executive functions lies with the Giunta ("the Executive").
CR	Consob Regulation 11522 of 1 July 1998	Regulation implementing the TUF on providers of investment services in force at the material time. See also entry under "Consob 11522/1998".
CT	App. Milano 28 Feb 2011	Decision of the Court of Appeal of Milan dated 28 February 2011.
D'Agliana, Mr	Mr Giancarlo D'Agliana	An accountant and banker who had been Managing Director of Banca Steinhauslin of Florence, General Manager of Banca Popolare of Marsica and Managing Director of Market Risk and Studies at Banca Agricola Mantovana. See under "technical committee".
Dante	Cass. civ. 3 Oct 2003	Decision of the Court of Cassation, civil section, dated 3 October 2003
De Castelli, Ms	Ms Graziella De Castelli	MCJ para 24. Ms De Castelli was Prato's Manager of Financial Resources between 1996 and 2007. She was Prato's primary point of contact with Dexia.
De Castelli 1	Ms De Castelli's first witness statement dated 25 November 2013.	MCJ para 24.
December 2004 bonds	second tranche of floating rate notes issued on 29 December 2004 in the sum of €37,553,000	MCJ para 8.
derivative	derivative contract	MCJ para 2. Contract that derives its value from the performance of an underlying entity.
Dettori, Professor	Professor Salvatore Dettori	MCJ para 25(2). Italian administrative law expert for Prato. Professor Dettori is Professor of Administrative Law at the University of Teramo.
Dettori 1 to 3	Professor Dettori's first to third reports	MCJ para 25(2). The reports are dated 21 March 2014 ("Dettori 1"), 12 May 2014 ("Dettori 2") and 16 June 2014 ("Dettori 3").
Dexia	Dexia Crediop SpA	The claimant in the present proceedings. (MCJ para 1)
Dicey	Dicey, Morris and Collins on the Conflict of Laws
end user	party seeking an interest rate collar	MCJ para 35(3). See "interest rate collar".
estoppel reply	estoppel reply assertion advanced by Dexia in the present case	MCJ para 17(1). The estoppel reply is that a contractual estoppel bars Prato from raising certain points.
Euribor	Euro Interbank Offered Rate	MCJ para 33. Rate of interest determined daily for loans made between banks and denominated in euros. Euribor is determined for loans of particular durations. A shorthand is commonly used under which rates for loans with a maturity of n months are known as "nM Euribor" or "EURnM"
EURnM	Euro Interbank Offered Rate for loans with a maturity of n months	MCJ para 33. Also known as "nM Euribor".
Executive	Giunta of Prato	MCJ para 48. The constitutional structure of Prato is that it consists of a body of elected representatives, the elected Consiglio Comunale ("the Council"). Responsibility for executive functions lies with the Giunta.
F and C	Trib Mantova	Tribunal of Mantova dated 10 December 2004
Faro, Dr	Dr Enzo Faro	MCJ para 27(2). Derivative pricing expert for Prato. Dr Faro is a Senior Financial Consultant at Finance Active Italia Srl;
Faro 1 and 2	Dr Faro's first and second reports	MCJ para 27(2). The reports are dated 20 March 2014 ("Faro 1") and 12 May 2014 ("Faro 2").
Fideuram	Cass. civ., sez. 1, 14 February 2012, no. 2065	MCJ paras 220 to 238. Decision 2065/2012 of the Court of Cassation dated 14 February 2012.

Fideuram primary interpretation	Interpretation in Fideuram of the reference to "placement" in article 30.6 TUF as being characterised by an agreement by an issuer or offeror and the intermediary in charge of the placement, aimed at an offer of financial instruments to an undetermined public, issued subject to predetermined time and price conditions.	MCJ para 220.
Finance Active	Finance Active Italia Srl	Dr Faro's employer (see MCJ para 27(2)).
Fincom Valori	Cass. civ., sez. uni. n.26724, 19 Dec 2007	JORI section C5.3. One of two decisions handed down on 19 December 2007 by the joint civil chambers of the Court of Cassation. Both decisions involved appeals from orders of the Court of Appeal of Turin on 10 November 2001.
fixed leg	fixed leg side of a simple IRS.	MCJ para 34. The fixed leg promises to pay a fixed rate of interest on a notional sum.
floating leg	floating leg side of a simple IRS.	MCJ para 34. The floating leg promises to pay a floating rate of interest on a notional sum.
floor	interest rate floor	See "floor rate" and "interest rate floor".
floor rate	floor rate agreed between a buyer and a seller	MCJ para 35(2). In an interest rate floor if the floor rate exceeds the floating rate for a particular period the seller makes a payment to the buyer, usually calculated by applying the amount of the excess to the notional sum, thereby protecting the buyer from the danger that the buyer in relation to that sum may receive from its own counterparty a floating rate lower than the floor rate.
general prohibition contravention	alleged contravention of a suggested general prohibition a general prohibition on speculative transactions by the State, said by Prato to give rise to a defence	MCJ para 140.
Gentili, Professor	Professor Aurelio Gentili	MCJ para 26(1). Italian civil law expert for Dexia. Professor Gentili is a professor of Italian private law at the University of Rome III.
Gentili 1 to 4	Professor Gentili's first to fourth reports	MCJ para 26(1). The reports were dated 21 March 2014 ("Gentili 1"), 13 May 2014 ("Gentili 2"), 20 May 2014 ("Gentili 3") and 13 June 2014 ("Gentili 4").
GL	Cass. civ., sez. uni. n.26725, 19 Dec 2007	JORI section C5.3. One of two decisions handed down on 19 December 2007 by the joint civil chambers of the Court of Cassation. Both decisions involved appeals from orders of the Court of Appeal of Turin on 10 November 2001.
Gommeservice	App. Milano 18 Sep 2013	Decision of the Court of Appeal of Milan dated 18 September 2013
hidden cost	Hidden Cost as defined by Dr Faro	MCJ para 41. Dr Faro states in para 21 of Faro 1 that a "Hidden Cost" (or "Implicit Cost") is "the Cost of a Swap Transaction when it is not disclosed at inception by the Bank to the End User".
I SPA	Trib Torino H2976 24 Apr 2014	Decision of the Tribunal of Turin dated 24 April 2014
illegality defence	defence advanced by Prato in the present case	MCJ para 15(2). The illegality defence is that Prato's alleged obligations under the swaps are unenforceable in English law in circumstances where enforcing them would require Prato to act illegally under Italian law in Italy.
implicit cost	Implicit Cost as defined by Dr Faro	MCJ para 41. See "Hidden Cost".
initial MTM		See entry under "MTM".
interest rate cap	agreement between a buyer and a seller on a cap rate	MCJ para 35(1). See "cap rate".
interest rate collar	agreement between an end user and a counterparty involving an interest rate cap and an interest rate floor	MCJ para 35(3). An end user may, when seeking an interest rate cap, reduce the premium otherwise payable by selling an interest rate floor to the same counterparty, giving up profits it would otherwise gain when the floating rate goes below the floor rate. Alternatively, an end user may, when seeking an interest rate floor, reduce the premium otherwise payable by selling an interest rate cap to the same counterparty, giving up profits it would otherwise gain when the floating rate rises above the cap rate.
investment provider initiative interpretation	Interpretation in Fideuram of the reference to "placement" in article 30.6 TUF as indicating that there will not be "placement" within the meaning of article 30.6 if the purchase does not take place out of the investment provider's initiative	MCJ para 223.
IRS	interest rate swap	MCJ para 2.
ISD	Investment Services Directive	93/22/EEC Council Directive 10 May 1993: see JORI, section F2.2.
ISDA	International Swap Dealers Association, Inc., subsequently named International Swaps and Derivatives Association, Inc.	MCJ para 3.
ISDA 1992 Multicurrency–Cross Border form	form used for the master agreement	MCJ para 5.
Italian law objection	submission by Prato urging that the court should hold the proper law of the restitution claim to be Italian law, with drastic alleged consequences for Dexia	JORI section B1
JORI	judgment on remaining issues (or if the context so requires, the judgment on remaining issues)	Judgment on Remaining Issues: judgment in the present case handed down on 10 November 2016.
Law 448/2001	Italian Law 448 of 28 December 2001 (Budget Law for 2002)
local government legislation contraventions	alleged contraventions of local government legislation said by Prato to give rise to defences	MCJ para 139.
Malik, Mr	Mr Pawan Malik	MCJ para 27(1). Derivative pricing expert for Dexia. Mr Malik currently works for Navigant Consulting (Europe) Ltd.
Malik 1 to 3	Mr Malik's first to third reports	MCJ para 27(1). The reports are dated 21 March 2014 ("Malik 1"), 13 May 2014 ("Malik 2") and 20 May 2014 ("Malik 3").
mandatory rules		See "mandatory rules defence".
mandatory rules defence	defence advanced by Prato in the present case	MCJ para 15(3) and section E. The mandatory rules defence is that Prato's alleged obligations under the swaps are unenforceable by reason of mandatory rules of Italian law, which must be given effect under the Rome Convention, Article 3(3), and the 1990 Act.
mark to market	mark to market value	See "MTM".
master agreement	agreement signed and sealed by Prato on 25 Nov 2002 and signed by Dexia on 29 Nov 2002	MCJ para 5. The master agreement was based on the ISDA 1992 Multicurrency – Cross Border form, and included a schedule supplementing and amending the form, among other things by incorporating the 2000 ISDA Definitions and the 1998 ISDA FX and Currency Option Definitions
MCJ	main claim judgment (or if the context so requires, the main claim judgment)	Judgment on Local Government & Financial Services Defences: judgment in the present case handed down on 25 June 2016 as approved on 29 June 2016.
Mediolanum	decision 13905/2013 of the Joint Chambers of the Court of Cassation of 3 June 2013	MCJ paras 224 to 248. Cass. civ., sez. un. civ., 3 June 2013, no. 13905.
MEF	Ministry of Economics and Finance	MCJ para 145
MEF Circular	Ministry of Economics and Finance Circular letter dated 27 May 2004
MEF Decree	Decree of the Italian Ministry of Economics and Finance 389 of 1 December 2003 (Regulation concerning access of local administrations to capital markets, pursuant to Art. 41, para. 1, of Law 448/2001)
Mengle extract	extract from am article by Mr David Mengle in issue 3, 2010 of ISDA Research Notes	JORI, section F1.6.
MiFID	Markets in Financial Instruments Directive	2004/39/EC Parliament & Council Directive of 21 April 2004
misrepresenta-tion counterclaim	counterclaim advanced by Prato in the present case	MCJ para 16(4). In the misrepresentation counterclaim Prato claims damages in respect of Dexia's alleged misrepresentations under Italian law.
misrepresenta-tion defence	defence advanced by Prato in the present case	MCJ para 15(4). The misrepresentation defence is that Prato has under English law rescinded the swaps by reason of Dexia's actionable misrepresentation, or alternatively is entitled to rescind the swaps for this reason.
MTM	Mark to market value	MCJ para 36. Dr Faro and Mr Malik agree that the MTM of a transaction is generally understood in its simplest form to mean the present value of the expected cash-flows under that transaction, calculated according to a series of generally accepted conventions.
Municipality of C	App. Bologna 734/2014, 11 March 2014	MCJ para 157, 227 to 246. Corte d'Appello di Bologna, Sezione Terza Civile, 734/2014
Napolitano, Professor	Professor Giulio Napolitano	MCJ para 25(1). Italian administrative law expert for Dexia. Professor Napolitano is Professor of Administrative Law at the University of Roma Tre.
Napolitano 1 to 3	Professor Napolitano's first to third reports.	MCJ para 25(1). The reports are dated 21 March 2014 ("Napolitano 1"), 13 May 2014 ("Napolitano 2") and 13 June 2014 ("Napolitano 3").
Navigant	Navigant Consulting (Europe) Ltd	Mr Malik's employer (see MCJ para 27(1)).
Nigro, Professor	Professsor Giampiero Nigro	A tenured professor in the Department of Economics of the University of Florence. Expert member of the technical committee. See under "technical committee".
nM Euribor	Euribor for loans with a maturity of n months	MCJ para 33. Also known as "EURnM"
no need to know factual proposition	Dexia's proposition that "a counterparty such as Prato entering into interest rate swaps such as those in issue in this case did not need to know the initial MTM of the swap in order to make an informed investment decision".	JORI section F1.7
no need to know legal proposition	Dexia's proposition that article 28.2 CR does not require disclosure of matters which there is no need to know when considering the nature, risks and implications of a proposed transaction in order to make an informed decision on whether to invest.	JORI section F2.3
non-disclosure assertions	non-disclosure assertions	Head (1) of the regulatory assertions. See entry under "regulatory assertions".
November 2004 bonds	first tranche of floating rate notes issued by Prato on 30 November 2004 in the sum of €27,870,000	MCJ para 8.
Novital	Trib. Milan 8 May 2014	Decision of the Tribunal of Milan dated 8 May 2014.
oggetto	Italian law requirement that a contract must have a determinable oggetto	MCJ para 214. CC, article 1418, paragraph 2, requires that a contract must have a determinable "oggetto".
ordinary expenditure objection	Dexia's objection that ordinary expenditure (such as the payment of interest on debt) could not constitute a relevant change of position since Prato would have incurred such costs in any event.	JORI section B4.2

Orvieto grant of protection.	Trib. Orvieto 13 Apr 2012.	Decision of the Tribunal of Orvieto on 13 April 2012.
para(s)	paragraph(s)
Pisa I	CdS 5032/2011	MCJ paras 167, 171.
Pisa II	CdS 5962/2012	MCJ paras 167, 171, 178 to 180.
Prato	Comune di Prato	MCJ para 1. The defendant in the present proceedings.
Prato's first main disclosure proposition	Proposition by Professor Sciarrone Alibrandi that financial institutions are obliged to disclose all the relevant elements of the relevant investment services and instruments.	JORI section F2.3
Prato's Hidden Costs explanation	Prato's general explanation concerning "Hidden Costs", including paragraphs 10, 11 and 11A of the defence	JORI section F1.5
Prato's second main disclosure proposition	Prato's proposition that: "With regard to derivative transactions, the prevailing Italian case law has clarified that a financial institution must inform the client of the existence of any hidden costs because this information is essential for the client to take fully informed investment decisions."	JORI section F2.3
premium	consideration provided by the buyer to the seller in return for the seller's promise	MCJ para 35. Where a seller makes a promise to provide a buyer with a particular advantage, the consideration provided by the buyer to the seller in return for the seller's promise may take various forms, but is commonly described as "the premium".
regulatory assertions	regulatory counterclaim assertions as to duties owed and broken by Dexia	See under "non-disclosure assertions", "structuring assertions", "unsuitability assertions", "right of withdrawal assertions", and "conflict assertions".
regulatory counterclaim	counterclaim advanced by Prato in the present case	MCJ para 16(2). In the regulatory counterclaim Prato claims damages in respect of Dexia's alleged breaches of the Italian financial services regulatory regime.
relevant subparas	subparas c) d) and e) of article 30.2 CR	JORI section C3
restitution claim	second alternative claim advanced by Dexia in the present case	JORI section B
restitution counterclaim	counterclaim advanced by Prato in the present case	MCJ para 16(1). JORI section E. In the restitution counterclaim Prato asserts, as regards sums it paid on and after 30 June 2009, that it is entitled to restitution under Italian law, alternatively English law, on the basis that swap 6 is invalid and/or unenforceable.
right of withdrawal assertions	right of withdrawal assertions	Head (4) of the regulatory assertions. See entry under "regulatory assertions".
Rome Convention	Convention on the law applicable to contractual obligations, open for signature in Rome on 19 June 1980 (80/934/ECC).	MCJ para 208. See "article 3 non-derogable rule".
Sciarrone Alibrandi, Professor	Professor Antonella Sciarrone Alibrandi	MCJ para 26(2). Italian civil and financial law expert for Prato. Professor Sciarrone Alibrandi is Vice-Rector and Professor of Banking Law and Financial Markets Law and Professor of Italian Private Law at the Università Cattolica del Sacro Cuore, Milan.
Sciarrone Alibrandi 1 to 4	Professor Sciarrone Alibrandi's first to fourth reports	MCJ para 26(2). The reports are dated 20 March 2014 ("Sciarrone Alibrandi 1"), 12 May 2014 ("Sciarrone Alibrandi 2"), 16 June 2014 ("Sciarrone Alibrandi 3") and 25 June 2014 ("Sciarrone Alibrandi 4").
seller	party which is to receive a particular advantage as "the buyer" and the party making a promise to provide that advantage as "the seller". The consideration provided by the buyer to the seller in return for the seller's promise may take various forms, but is commonly described as "the premium"	MCJ para 35. party which is to receive a particular advantage as "the buyer" and the party making a promise to provide that advantage as "the seller". The consideration provided by the buyer to the seller in return for the seller's promise may take various forms, but is commonly described as "the premium"
set off defence	defence advanced by Prato in the present case	MCJ para 15(5). The set off defence states that if found liable to pay any sum to Dexia, Prato will seek to set off that liability against the sums it counterclaims.
simple IRS	simple interest rate swap.	MCJ para 34. In a simple IRS the fixed leg and the floating leg exchange promises under which the fix leg will pay a fixed rate of interest on a notional sum and the floating leg will pay a floating rate of interest on the same notional sum.
sole connected county	country contemplated by article 3 of the Rome Convention	JORI section C1. The relevant passage in article 3 is: "all other elements relevant to the situation at the time of the choice are connected with one country only …".
Sommavilla, Mr	Mr Riccardo Sommavilla	MCJ para 21. Mr Sommavilla was Dexia's Client Relationship Manager with Prato throughout the duration of the 2002 advisory agreement, and thus at the time when the swaps were entered into.
Sommavilla 1	Mr Sommavilla's first witness statement dated 28 Nov 2013	MCJ para 21.
strike price	cap rate in an interest rate cap; floor rate in an interest rate floor	See "cap rate" and "floor rate".
structuring assertions	structuring assertions	Head (2) of the regulatory assertions. See entry under "regulatory assertions".
swap 1	swap with an initial notional sum of €83,824,626.884 evidenced by a confirmation dated 4 December 2002	MCJ para 10. Details are set out in MCJ paras 59 to 61. See "swaps, the".
swap 2	swap with an initial notional sum of €113,105,592.42 evidenced by a confirmation dated 6 August 2003	MCJ para 10. Details are set out in MCJ paras 67 to 71. See "swaps, the". Swap 2 terminated swap 1, and was entered into at the same time as swap 3.
swap 3	swap with an initial notional sum of €13,055,932.44 evidenced by a confirmation dated 6 August 2003	MCJ para 10. Details are set out in MCJ paras 72 to 74. See "swaps, the". Swap 3 was entered into at the same time as swap 2.
swap 4	swap with an initial notional sum of €27,870,000 ("swap 4") evidenced by a confirmation dated 30 December 2004	MCJ para 10. Details are set out in MCJ paras 90 to 94. See "swaps, the". Swaps 4 and 5 together terminated swap 2.
swap 5	swap with an initial notional sum of €37,553,000 evidenced by a confirmation dated 30 December 2004	MCJ para 10. Details are set out in MCJ paras 90 to 94. See "swaps, the". Swaps 4 and 5 together terminated swap 2.
swap 6	swap with an initial notional sum of €67,524,044.17evidenced by a confirmation dated 29 June 2006	MCJ para 10. Details are set out in MCJ paras 107 to 110. See "swaps, the". Swap 6 terminated swaps 3, 4 and 5.
swaps, the	IRS transactions entered into between Dexia and Prato evidenced by confirmations and said to form part of the Agreement contemplated by the master agreement	MCJ para 7. See swaps 1 to 6.
TAR	Tribunale Amministrativo Regionale	MCJ para 132, citing para 4.4(a) of Napolitano 1: Tribunali Amministrativi Regionali are the administrative courts of first instance, located in each of Italy's administrative regions. The local TAR for Prato is the TAR of Tuscany.
technical committee	technical committee set up by Prato's decision 1453 of 22 May 2002	MCJ para 51. The technical committee comprised Ms De Castelli (chair) and Ms Belli from Prato, and 3 external expert members, Professor Nigro, Professor Bompani, and Mr D'Agliana. Ms Rappuoli of Prato acted as secretary to the technical committee.
tender notice	tender notice dated 24 April 2002	MCJ para 50. The tender notice was issued by Prato for the appointment of an adviser in relation to Prato's intention to optimise the cost of its debt.
threshold rate	cap rate in an interest rate cap; floor rate in an interest rate floor	See "cap rate" and "floor rate".
Trib.	Tribunale	MCJ para 132, citing para 4.3(a) of Napolitano 1: first instance tribunals based in various towns and cities in Italy [have] jurisdiction over local civil and criminal matters. The local court in Prato is the Tribunale di Prato.
TUF	Italian Legislative Decree 58 of 24 February 1998 (Consolidated law on financial markets and investment services)	MCJ para 213.
unsuitability assertions	unsuitability assertions	Head (3) of the regulatory assertions. See entry under "regulatory assertions".
Turin mortgage swap	Trib. Torino 17 Jan 2014	Decision of the Tribunal of Turin dated 17 January 2014.
Valuation Joint Memorandum	joint memorandum by Mr Malik and Dr Faro	MCJ para 27(3). The Valuation Joint Memorandum is dated 16 April 2014.
vital interest observation	observation by Professor Gentili that while a party entering into a swap has a vital interest in doing so on a rational and informed basis, that vital interest is not part of the causa of the contract	JORI section C5.3.
Zenti, Mr	Mr Davide Zenti	MCJ para 23. Mr Zenti has been Prato's Manager of Financial Resources since 1 January 2011.
Zenti 1 to 4	Mr Zenti's first and second witness statements	MCJ para 23. The statements are dated 22 November 2013 ("Zenti 1") and 9 May 2014 ("Zenti 2").

Annex 2A: Dr Faro's evidence

A2A/ 1. Faro 1 made references to the criminal proceedings described in section B6 of the main claim judgement. It also made reference to what it called the "Autotutela proceedings". These were the administrative redress proceedings described in section B6 of the main claim judgment.

A2A/ 2. Paragraph 8 of Faro 1 stated, among other things, that:

(1) from November 2001 to April 2012 Dr Faro worked for Brady Italia Srl ("Brady Italia");

(2) in April 2012 Brady Italia became part of the Finance active Group, an international financial advisory organisation;

(3) Dr Faro is now a senior financial consultant at Finance active Italia Srl ("Finance Active");

(4) in 2010:

Prato asked Brady Italia to analyse the Swap Transactions which are the subject of this dispute. Brady Italia evaluated, from a financial view, whether or not the financial conditions of Article 41 law 448/01 ("Art. 41") and the conditions of Decree 389/03 ("Decree 389") were met by the Swap Transactions.

(5) since that evaluation:

Brady Italia, and subsequently Finance Active, have acted for Prato in connection with the autotutela proceedings and with the criminal proceedings which have been taking place in Italy.

A2A/ 3. The first two sentence of paragraph 9 of Faro 1 stated, with the addition of sentence numbers for ease of reference:

[9.1] I have been asked to provide expert evidence on the characteristics, valuation and pricing of, and market practice in relation to, derivatives contracts of the types entered into by the parties and to provide calculations for the purpose of assisting the Court. [9.2] I also give my opinion, based on my experience of market practice in Italy in this field, as to the disclosure that would be expected of a bank on entering into a swap with a Municipality and as to what advice would be expected from a bank when acting as adviser to a Municipality on such transactions.

A2A/ 4. The third sentence of paragraph 9 stated:

[9.3] For the purpose of fulfilling these instructions, I understand that I am appointed as expert personally and the opinions in this report constitute my own opinions and my own independent expert evidence, not that of Finance active or Brady Italia.

A2A/ 5. A section at the end of Faro 1 was headed, "Expert Declaration". So far as material for present purposes, it stated in paragraphs 150, 151 and 154:

150. I confirm that I fully understand my overriding duty to the Court and that I must help the Court on matters within my expertise. I believe that I have complied with this duty, and I will continue to comply with this duty.

151. I am aware of the requirements of Part 35, the practice direction to Part 35 and the Protocol for Instruction of Experts to give Evidence in Civil Claims. I have complied and will continue to comply with Part 35 of the Civil Procedure Rules, the Civil Justice Council's Protocol for the Instruction of Experts to Give Evidence in Civil Claims and paragraph H2 of the Admiralty and Commercial Court Guide.

…

154. This report must not be construed as expressing opinions on matters of law, which are for the Court to determine, although it necessarily reflects my understanding thereof in my capacity as a financial expert operating in the specialised field of swap transactions between local authorities and banks.

A2A/ 6. Faro 1 did not explain to what extent, if any, Dr Faro personally had advised Prato in relation to the administrative redress proceedings and the criminal proceedings. Dr Faro was asked about those proceedings at an early stage in cross-examination. He was initially asked to confirm that Brady Italia and subsequently Finance Active had acted for Prato in connection with those proceedings. He replied:

… Finance Active … intervened with the reports that we have provided for the court. In these documents, there is my contribution. In other cases, sometimes there is my signature, which means that that represents my opinion.

A2A/ 7. It was apparent from later answers that Dr Faro intended, in the answer quoted above, to refer not only to Finance Active but also to Brady Italia. Dr Faro chose in that answer, although he had not been asked about it at that stage, to give evidence about his personal involvement. As I understand it, he said that in some reports provided for an Italian court or courts there had been a contribution from him, and that sometimes a report was signed by him, and that when he signed a report then the report represented his opinion.

A2A/ 8. The next question asked Dr Faro to confirm that he was the person within Brady Italia and Finance Active who had been acting for Prato in those respects. Dr Faro's answer dealt first with his role in relation to the administrative redress proceedings and criminal proceedings, and contrasted that with his reports in the present case. As to his reports in the present case, he said that they were the expression of his personal opinion. By contrast, in relation to the administrative redress proceedings and criminal proceedings, Dr Faro said that it was not right to say that he was the person within Brady Italia and Finance Active who had been acting for Prato:

… because I worked with a team, and within the team, the team issued various reports, I can say that from 2010 my involvement became greater …

A2A/ 9. Dr Faro was then asked to agree that Prato's aim in commencing the first set of administrative redress proceedings was to cancel swap 6. Dr Faro's answer was:

I can't confirm what Prato's aim was in 2006. All I can say is that Prato asked me to carry out an assessment, and that was on the basis of that assessment that Prato's lawyer decided to launch proceedings. That's all I can say.

A2A/ 10. Dr Faro was pressed with the suggestion that in late 2010 he was assisting Prato in its attempt to cancel swap 6. His reply was:

No, that's not true at all. In 2010 I carried out an analysis on specific issues and on the basis of that analysis [Prato] and their lawyer decided to bring a suit.

A2A/ 11. Dr Faro was then asked about a letter which Prato had sent to Dexia on 17 December 2010. The letter concerned the administrative redress procedure in relation to swap 6. Dr Faro was shown a copy of the transcript of evidence of Mr Zenti. In that evidence Mr Zenti confirmed that Prato indicated in the letter of 17 December 2010 that "the hearing" would take place on Tuesday 21 December, and that a lawyer, Mr Vulcano, and Dr Faro would attend on behalf of Prato. As I understand it "the hearing" formed part of administrative redress procedures conducted at Prato's municipal building. When asked to confirm that he and Mr Vulcano represented Prato as described in the letter, Dr Faro replied:

On that day, I was summoned to Prato, as far as I remember, to hand over my report, and that's what happed that day. So I was present, yes.

A2A/ 12. As to whether the letter gave an accurate characterisation of Dr Faro's role, Dr Faro stated:

Well, the first thing is Davide Zenti was not present at that time, so I assume that Davide Zenti is just expressing an opinion, because he was not there. What I can say is that the Autotutela procedure started with some technical questions which I dealt with, and then the purely interpretations were conducted by the lawyer, Pasquale Vulcano, who is the only person who is an expert at law and who could say what should be done and what shouldn't be done. What I pointed out in the report, is that if there are certain conditions laid down at law, whether from a technical point of view those had been complied with or not. That was my role. … all I can say is that my role is strictly technical. I carried out a technical assessment and, over time, I confirmed my conclusions and I commented on my reactions to Prato and to Vulcano, the lawyer. That was the extent of my involvement.

A2A/ 13. It was then suggested to Dr Faro that he had continued to assist Prato in its attempt to cancel not only swap 6 but all the swaps. Dr Faro replied:

That's your opinion. What I did was merely to issue technical assessments. The outcome and legal interpretation of my technical representations was not my role. My role is just to assess the technical points associated with the regulations and then the management and the lawyer took it further. That's all I can say.

A2A/ 14. It was then suggested to Dr Faro that he was not independent of Prato. The first part of his answer was this:

I repeat, that's your opinion. Our work for Prato and other bodies is to produce technical expert opinions, and after that the client assesses the technical aspects and, with the support of the lawyer, they then decide what type of action to take. Our activity that we are carrying out in Italy very often, in the vast majority of cases, has not led to litigation. So our role is that of providing opinion.

A2A/ 15. Dr Faro continued by giving an example:

… we are like an analyst. Say you break a leg, the first thing you do is have an x-ray. We … provide the x-ray, … after that you go to the doctor and the doctor tells you what type of activity should happen, not me. I can just provide an expert opinion and all I can do is describe what I see from a technical point of view, but that doesn't mean what I see will lead to treatment.

A2A/ 16. It was then suggested to Dr Faro that he had been willing to advance points or arguments in his expert reports that fell outside the scope of his expertise. Dr Faro replied:

… it's not true at all … my role is to assist in a technical assessment of the number, the quantification, and after that it is … Prato and [its] lawyer who is in the doctor role in this situation, they then decide what treatment to carry out. …

A2A/ 17. There was then a series of questions asking Dr Faro about passages in his report where it was suggested that he had given opinions on questions of law. After Dr Faro had dealt with those questions I pointed out to him that the question of his independence was an important question. I explained that there had been two aspects to the cross-examination. The second concerned the overlap between Dr Faro's technical expertise and questions of law. I asked Dr Faro to put that on one side.

A2A/ 18. At that stage Dr Faro intervened:

If I might speak, my lord. My experience is not linked just to matters of numbers, but also to act as an advisor, a consultant. So in my activity, one can verify that I've helped the Comune for other aspects, I or my company. But what I base this on is my experience and my assessment of the facts as an independent expert. …

A2A/ 19. I explained to Dr Faro that I needed to raise with him a feature of the first aspect of the cross-examination. This was that Dr Faro and his employers had worked for Prato. Dr Faro replied:

Yes, that's a fact … but our company doesn't just work as consultants, but also as distributors of financial software. So the fact that we worked for Prato on technological platforms, on information technology or an analysis of that, doesn't I think in any way suggest a conflict of interest. … at any rate, I wanted to specify in my report that in this trial it's not Brady Italia or Finance Active bearing witness now, it is Dr Enzo Faro who is testifying.

A2A/ 20. Referring to Dr Faro's example, I pointed out that if there was an issue about the approach that had been taken by the radiographer immediately after an accident, I would commonly hear expert evidence from different radiographers on each side. I asked Dr Faro whether he had thought about the fact that, when giving expert evidence in the present case, he had to put on a completely different hat from the hat of the person who was advising Prato. Dr Faro's response began by developing his earlier example:

… My experience is that often you go to the doctor and the doctor has two different approaches. One is to send you off to have an x-ray, and then after that he decides what to do with regard to the treatment. The second approach is that he starts treatment without actually knowing what the problem is, what the damage is. And this is my experience as a footballer.

A2A/ 21. Dr Faro then said that Prato had drawn on opinions not only from Brady Italia and Finance Active, but also from others:

So in this case, I think Prato drew on three or four opinions. So I would presume … the municipality looked at the figures, the assessments of several analysts, where upon after that they decided what to do. So probably, when it comes to this case … I am acting in an individual personal capacity …

So I am an independent consultant … I look at the numbers, I propose numbers and I provide assessments on the basis of my experience. … I wouldn't go so far as to say myself whether or not this corresponds to the law. I am saying that certain components need a technical key to interpret them, and then it's up to others to give a legal interpretation of this, and that was my job. …

A2A/ 22. Dexia's closing submissions suggested that Dr Faro's evidence on the meaning of "speculation" was indicative of his lack of independence and of his willingness to act as an advocate for Prato. My conclusions on the law made it unnecessary for me to examine that evidence. It is appropriate, however, to comment upon it here.

A2A/ 23. Paragraph 64 of Faro 1 identified four conditions which, in Dr Faro's "experience and opinion", had to be met if a swap were to be classified as a hedging transaction for a municipality. The first condition was this:

i. The swap transaction must be put in place explicitly to reduce the cash flow risk of an underlying debt instrument (Hedge Item);

A2A/ 24. Faro 1 said that this came from Consob Communication n.DI/99013791 of 26 February 1999 ("the February 1999 communication"). In cross-examination, however, Dr Faro accepted that the February 1999 communication did not use this terminology. He explained orally that what he had done was to adapt advice given by Consob to a company so that it reflected the special circumstances applying to municipalities. This had not been explained in Faro 1.

A2A/ 25. The second condition was:

ii. There should be a complete or very high correlation between the Hedge Item and the financial instrument (Hedging Instrument) used for this purpose. Such a correlation will ensure that interest rate movements will be cash flow neutral on a net basis because their effect on cash flow for the Hedged Item will be offset by an equal and opposite effect on cash flow for the Hedging Instrument;

A2A/ 26. This also was said to be derived from the February 1999 communication. In cross examination Dr Faro accepted that the words used in the February 1999 communication were not "a complete or very high correlation". That communication had referred to "a high correlation". Again, Dr Faro sought to explain this by saying that he had taken account of the special position of municipalities. Again, that had not been said in Faro 1. Moreover, when Dr Faro sought to explain the special position of municipalities he asserted that the correlation had to be "perfect, in that the underlying debt must be equal". I am left unsure as to what Dr Faro meant by this, but it seems rather different from what he said in Faro 1. Faro 1 made no reference to a "perfect correlation", but instead suggested that a "very high correlation" would suffice.

A2A/ 27. The third condition was:

iii. The Hedging Instrument should limit the Municipality's exposure to cash flow risks resulting from increases in interest rates (Cash Flow Hedging).

A2A/ 28. Faro 1 stated that this third condition came from the ministerial circular of 27 May 2004. I discussed this circular in section D2.4 of the main claim judgment. In cross-examination Dr Faro was taken to the passage in the circular that he relied upon. It was rightly pointed out to him that it did not say what was said in Dr Faro's third condition. Dr Faro's reply was:

Well, what I understand from this text, since the aim of the local authority is to contain the exposure of the local authority to financial risk, in a particular circumstance, when the rates go up. So far as I am concerned, the only criterion to say whether a derivative is a hedging derivative or not is to verify the effects where the rates go up.

A2A/ 29. Here, too, Dr Faro's condition did not reflect the text that he cited. Again, this was not explained in Faro 1. On this occasion Dr Faro developed a point he had advanced earlier, namely that if a local authority were to take on a floating rate of interest then it will be entering into a risk. He said the consequence was that it could not be seen as a hedging derivative "because it's a trade-off".

A2A/ 30. Dr Faro's fourth condition was:

iv. The Hedging Instrument is put in place only to hedge the cash flow risk of the underlying debt instrument (Hedge Item), not to receive a net premium (or Up front) at inception or to net (i.e. fund) the Unwind Cost of previous swap transactions.

A2A/ 31. This was said to come from International Accounting Standard 39. In cross-examination Dr Faro said that he was not an expert on accountancy but some terms and values were very familiar to him because he had studied accountancy and he worked to support accountants. In cross-examination he was shown a commentary on IAS 39, in which it was said that valid economic hedging strategies might not comply with IAS 39. His reply was:

I don't have the accounting knowledge, but … when a transaction in a company doesn't comply with these criteria, mini alarm bells are triggered, … evaluating these tests is a very important thing in a company and its something that they really focus on.

A2A/ 32. Thus in relation to each of Dr Faro's 4 suggested conditions, there were important qualifications and explanations that needed to be considered. Not one of them was mentioned in Faro 1. As regards the qualifications and explanations that were required in relation to the first 3 conditions, Dr Faro was well aware of them. As regards the fourth condition, if Dr Faro were to rely upon an accounting standard, then he needed to consider whether there might nonetheless be valid economic hedging transactions which did not fall within that accounting standard.

A2A/ 33. I add that a full analysis of Dr Faro's four conditions was set out in Malik 2. That analysis gave clear and convincing reasons for rejecting Dr Faro's four conditions.

A2A/ 34. Prato identified a number of points which should, it submitted, lead me to conclude that Dr Faro had given proper consideration to the important distinction between his consultancy role for Prato and his role as an expert witness. The points were drawn together in Prato's oral Closing Submissions.

A2A/ 35. Prato asserts that the present case does not involve a dispute as to the competence of advice previously given by Dr Faro, and that he had consistently given "the technical input which he gives in his report". However, on major issues Dr Faro's reports in the present case are seeking to support advice which Prato relied upon in the administrative self-redress proceedings.

A2A/ 36. Prato also asserts that Dr Faro viewed his role as that of a technician giving technical help and numbers. That observation, however, was immediately qualified by recognition that Dr Faro additionally expressed opinions. I do not accept that Dr Faro saw himself as no more than a technician. He sought to give that impression from the example that he chose concerning the work of a radiographer after an accident. It was not an accurate reflection of his role.

A2A/ 37. As to the discharge of that role, Prato noted that it had not been suggested by Dexia that Dr Faro signed the expert declaration in bad faith, or that Dr Faro had misunderstood the declaration. It seems to me, however, that a clear inference from Dexia's closing submissions was that one or other of these things must have happened. It is right that Dexia did not accuse Dr Faro of bad faith. Nor do I. The matters discussed above in relation to Dr Faro's four conditions, however, clearly demonstrate that there was a failure by Dr Faro to give proper consideration to the true nature of his role.

A2A/ 38. It was said that Dr Faro had not hesitated to give what he thought was the right answer, without regard to Prato's interests. Reliance was placed on paras 50 and 51 of Faro 1, discussing the approaches to what I have called "financial advantage". He said that, from the perspective of a financial expert, the approach taken by Professor Corielli was preferable to that taken by Dr Angeletti. There were aspects of subsequent calculations where Dr Faro's approach was not as beneficial to Prato as other approaches would have been. It was also said in this regard that in Faro 2 Dr Faro had adopted data identified in Malik 1 in the interests of narrowing the differences between the parties.

A2A/ 39. Prato added that there were occasions when Dexia relied on Dr Faro's evidence. First, Dexia, when noting that the market practice of banks at the relevant time was not to disclose the initial MTM to a counterparty, observed that this was accepted by Dr Faro. It was indeed accepted by Dr Faro – but only in cross-examination. The court was, in my view, entitled to expect that an independent expert would have drawn attention to this when producing a report for the court. Second, Dexia had pointed out that Dr Faro's oral evidence contradicted Prato's assertion that the initial MTM was the best estimate of the most likely outcome of a swap. I acknowledge that this is true.

A2A/ 40. I have carefully reconsidered Dr Faro's evidence concerning "speculation" and the evidence he gave as to his independence. As noted earlier, Faro 1 at paragraph 150 contained an express statement that Dr Faro fully understood his overriding duty to the court. The passages in Dr Faro's oral evidence set out above gave real cause for concern that he did appreciate that he had in fact misunderstood the nature of that duty. He had been closely involved, on behalf of his employers, in events which were highly relevant to the present litigation. Much of his involvement was at a stage when the present litigation was underway. The letter of 17 December 2010 may or may not have been right in describing Dr Faro as a person who would attend the self redress hearing on behalf of Prato. But it was undoubtedly the case that Dr Faro was assisting Prato. Faro 1 made no attempt whatever to disclose the fact that Dr Faro had done so, let alone the extent to which he had done so. Dr Faro's answers in cross-examination on the point were evasive.

A2A/ 41. Someone who had advised a party would not normally be put forward to the court as a person who could give independent evidence. The reason is that there is a fundamental difference between duties that are owed to a client and duties that are owed to the court. It is not as simple as merely saying, "I gave my own opinion to both". Dr Faro chose to liken his role to that of a radiographer after an injury has occurred. That example, however, did not give any indication of an appreciation that the duty to the court was very different from the duty to a client.

A2A/ 42. Despite what was said in the Expert Declaration, the oral evidence quoted above leads me to conclude that Dr Faro had not given any thought at all as to how, in order to give evidence as an expert witness in these proceedings, he needed to take a very different approach from the approach that he had taken to Prato as a client.

A2A/ 43. Turning to the second aspect of the cross-examination on independence, on numerous occasions Dr Faro expressed himself in a way which might have been thought to be expressing a view on the law. As noted above, paragraph 154 of Faro 1 made it clear that Dr Faro did not intend to express opinions on matters of law. In my view it was not difficult to identify, in relation to any particular aspect of law, the part of Dr Faro's evidence which was relevant to the issues arising in the present proceedings. It is right to add, however, that Mr Malik in his reports, and in his oral evidence, took great care to avoid saying anything which might be misconstrued as expressing a view upon the law.

A2A/ 44. I readily accept that there were occasions when Dr Faro gave evidence which did not assist Prato, where a determined advocate for Prato might cynically have taken a less responsible stance. My criticisms, however, are not of bad faith. They are criticisms of an understandable inability on the part of Dr Faro to separate out his role as independent expert assisting the court from the role that he had previously adopted of giving assistance to Prato.

A2A/ 45. In these circumstances, I cannot have confidence in Dr Faro's evidence on any occasion when it differed from that of Mr Malik. I have no hesitation in concluding that wherever such differences occurred, I should prefer the evidence of Mr Malik.

Annex 2B: what would Prato have done?

A2B/ 1. Prato's regulatory counterclaim asserted at paragraph 64, in effect, that each of the alleged regulatory breaches caused it to enter into the swaps. I have held in section F of JORI that the only breach that occurred involved the failure to state the right of withdrawal on relevant forms. In that section I have also held that if Prato had been told of the right of withdrawal it would not have exercised it. Accordingly I concluded that this breach did not cause Prato to enter into any of the swaps, and thus resulted in no loss to Prato.

A2B/ 2. In the present annex I consider what the position would have been if other regulatory breaches had occurred as alleged. My reasoning applies equally to allegations in the counterclaim at paragraphs 71 and 75 in relation to alleged breaches of advisory duties and alleged misrepresentations.

A2B/ 3. It was said by Prato that precise calculation of quantum would be very sensitive to the findings that the court made on other aspects of the case. This is likely to be true as regards precise calculations. The question I am examining is a broader question of whether particular types of alleged breach would, if proven, have caused Prato to enter into the swaps in circumstances where it would not otherwise have done. This is necessarily a hypothetical question. However it is an important question as regards causation. Both sides approached it on the footing that, at least as regards swaps 2 to 6, Ms De Castelli's assessment of whether to proceed with a proposed swap would have been determinative.

A2B/ 4. For reasons given below, it seems to me that, under the hypotheses advanced in closing submissions, there are certain extreme circumstances where Ms De Castelli would have decided not to proceed with a particular swap. In the absence of those extreme circumstances, I conclude that alleged breaches would not have led Prato to do things differently. At the outset, I rule out the submission in Prato's closing that the court might conclude that Prato would have entered into the swaps at more beneficial rates: no such assertion was pleaded.

A2B/ 5. Paragraphs 262.2 to 262.8 of Dexia's written closing submissions formed part of a series of reasons why Prato would not have done things differently:

262.2. Dr De Castelli accepted in cross-examination that Prato had already decided to pursue a policy of active debt management using interest rate derivatives in April 2002 when the tender notice was issued by Prato. Many other local authorities in Italy were entering into derivatives transactions for this purpose at around this time.

262.3. Dr De Castelli gave evidence that Prato had been under severe financial pressure since 1996 and that it needed to make savings on the cost of its debt and that it was "constantly looking" to make savings on its debt.

262.4. Swap 2 and Swap 3 were entered into against the background of the savings that Prato had already made on its fixed rate debt using Swap 1. The disclosure of the initial MTM would not have made any difference to Prato because it wished to make further savings on more of its borrowing.

262.5. The 2004 Bond Issue made obvious economic sense to Prato. It enabled Prato to refinance its existing fixed rate debt and to replace it with floating rate bonds at a significantly lower interest rate. However, in order to proceed with the 2004 Bond Issue, it was necessary in practice for Prato to enter into an interest rate collar to protect it against the risk of rising rates.

262.6. Prato would not have given up the very substantial economic benefits of the 2004 Bond Issue if it had known that the initial MTM of Swap 4 and Swap 5 was negative. Prato also needed to make substantial short term savings.

262.7. Indeed, when it decided to enter into Swap 4 and Swap 5, Prato had already issued the First Tranche of the 2004 Bonds so Prato had no option but to put in place Swap 4. In any event, the initial MTM of Swap 4 and Swap 5 was not significant to Prato because the purpose of these transactions was to fix Prato's borrowing costs within the range of the cap and the floor. What mattered therefore was the level of the rates and thresholds in the contract.

262.8. Prato needed to enter into Swap 6 because it was incurring negative differentials under Swap 3 which it could not afford and because it needed to restructure the 2004 Bonds to make savings in the short to medium term. It is therefore unrealistic to suggest that Prato would not have entered into Swap 6 just because the initial MTM was negative.

A2B/ 6. The points in paragraphs 262.2 to 262.8 were not specifically contested by Prato. In my view each of them is sound.

A2B/ 7. Prato's closing submissions relied on what had been said in De Castelli 1 at paragraphs 39, 42-43, 52-53. As to the first of these citations, the relevant part of paragraph 39 stated:

[Prato] and I relied on the advice of our financial advisor and, as a result, between 2002 and the end of 2006 a number of resolutions were passed to enter further swaps…

A2B/ 8. This says that if Dexia had not advised entering into the swaps then Prato would not have become party to them. It might be relevant if Prato were to succeed in an allegation that Dexia should have advised Prato not to enter into the swaps. It might also be relevant if Prato were to succeed in an allegation that Dexia should not have proposed the swaps. It does not seem to me to address the main point debated in closing submissions. This was: if Dexia had disclosed that the proposed swap would have an initial MTM that was negative to Prato, would Prato have decided not to agree to that proposal?

A2B/ 9. As to Prato's reliance on De Castelli 1 at paragraphs 42-43, the passages cited by Prato were:

42. At the time these 6 Swap transactions were entered into we had no idea that they had negative mark-to-market values or, as a result, implicit costs and [Dexia] should have made that clear if it was so. We were certainly not in a position to work that out, as [Dexia] was well aware. I relied on [Dexia] to tell us that…and [Dexia's] silence confirmed to me that there were no negative values or implicit costs…

43. I trusted [Dexia] because it was our financial advisor, and therefore, as far as I thought, a reliable party. …

A2B/ 10. These passages, however, do not deal with causation. They do not address the question of what Prato would have done if it had been told that the proposed swap would have an initial MTM that was negative to Prato.

A2B/ 11. Prato's remaining citations from what was said in De Castelli 1 are found in paragraphs 52-53. Those paragraphs began with a reference to the technical committee described in section B2 of the MCJ. They stated:

52. Had the Committee known, at the time of their decision in July 2002, that [swap 1] had or was going to have a negative value and implicit costs to [Prato] at the date of entry, I believe that they would not have accepted [Dexia's] proposal for the restructuring, as they (and I) would have considered it to breach provisions of Italian law. [Dexia] presented Swap 1 as resulting in a saving to [Prato] but gave no indication that it had a significant negative mark to market value for [Prato].

53. Similarly, in respect of each of the [swaps] which followed, had [Prato] known that the [swap] had a negative value and implicit costs to [Prato] at the date of entry they would not have been entered into.

A2B/ 12. In my view paragraph 52 begins with a false premise. Three of the five members of the technical committee were experts: Professor Giampiero Nigro, tenured professor in the Department of Economics of the University of Florence, Professor Aldo Bompani, also a tenured professor in the Department of Economics of the University of Florence, and Mr Giancarlo D'Agliana, an accountant and banker who had been Managing Director of Banca Steinhauslin of Florence, General Manager of Banca Popolare of Marsica and Managing Director of Market Risk and Studies at Banca Agricola Mantovana. There is no reason to doubt that they knew, in relation to each of the bids under consideration, that the proposed swap would have an initial MTM that was negative to Prato. Ms De Castelli was chairwoman of the technical committee. Her oral evidence was that she lacked an understanding of the concept of MTM. She did not say that the expert members of the committee lacked an understanding of this concept. On the contrary, when asked whether she was suggesting this, she replied that they:

… were chosen because they knew about these aspects. …

A2B/ 13. Paragraph 52 of De Castelli 1 identified a reason why, had it known that the proposed swap would have an initial MTM that was negative to Prato, Prato would not have entered into swap 1. This was that she and the technical committee would have considered it to breach provisions of Italian law.

A2B/ 14. De Castelli 1 did not identify the precise feature of Italian law that she had in mind. I accept that if Prato had been advised that a proposed swap was beyond its capacity then it would not have proceeded unless and until satisfied that such advice was wrong. By contrast, however, it is easy to think of possible breaches of Italian law which would have had no bearing on the decision whether to proceed. An example is the unlawful failure to ensure that relevant forms gave notice of the right of withdrawal: see section F7 of JORI.

A2B/ 15. Thus, on the question whether swap 1 would have been entered into if Prato had known that it would have an initial MTM that was negative to Prato, the sole reason given in paragraph 52 would, it seems to me, clearly apply if that knowledge was accompanied by advice that the proposed swap was beyond Prato's capacity. In the absence of such advice, however, the position seems to me essentially different.

A2B/ 16. As to paragraph 53 of De Castelli 1, this addresses swaps 2 to 6. It begins with the word "Similarly". In so far as it applies the same reasoning as is advanced in paragraph 52, my comments above will be equally applicable.

A2B/ 17. Turning to Ms De Castelli's oral evidence, Prato relied on passages from day 8 at pp. 72-73 and day 9 pp. 75-77. As to the passages from day 8, Prato cited the following:

Q. …if you or anybody else at Prato had ever thought that the mark to market value of any of the swaps was of any interest or relevant to any decision Prato proposed to take, you or somebody else at Prato would have asked Dexia to provide that mark to market value, wouldn't you?

A. Of course, because this would have meant not to enter these transactions because they were not considered to be advantageous for the municipality and the municipality would have not entered into these transactions.

A2B/ 18. I think it likely that when using the word translated as "advantageous" Ms De Castelli had in mind her belief, at the time of giving her evidence, that a swap with an initial negative MTM to Prato would be beyond Prato's capacity. Her belief was that such a swap would fail the "financial advantage" test in article 41 of law 448/2001: see section D2.3 of the MCJ. If so, this oral evidence takes matters no further. The reason is that I have already concluded that if Prato were advised that it lacked capacity, then it would not have proceeded: see above.

A2B/ 19. If I am wrong, then Ms De Castelli must have been using the expression "not considered to be advantageous" simply in the sense of being no better off. I have explained in section F of JORI why I consider that the negative initial MTM had no impact on the commercial outcomes of the swaps. That commercial outcome was determined by movements in market floating rates as they impact upon the rates and thresholds in the swap. If my reasoning in section F of JORI were wrong then there would be a theoretical possibility that Prato might have been better off, or at least no worse off, if it had entered into an alternative transaction on the market, or if it had done nothing. I refer to this as a theoretical possibility because no specific assertion of this kind was advanced in Prato's statement of case, nor was there any evidence to support it.

A2B/ 20. The passage cited by Prato from day 9 was:

Q. I also suggest to you that the day one mark to market of the swaps was of no concern to you or Prato, and that you were content to assess all of the swaps on the basis of the forward curve, as indeed had the technical committee in 2002?

A. This is what you say. I can confirm that Dexia, as an adviser, should have provided all the information, all the elements and clarified the value of the mark to market in the different periods. I do not accept what you are saying…This is not a joke. We are talking about clear and transparent elements and information, such as direct and indirect costs and as chief accountant, I could not allow, I could not have uncovered elements or additional charges with no financial coverage. I had criminal responsibilities, I had to perform my job correctly…

Q. You assert in paragraphs 52 to 53 of your statement that, had Prato known of the existence of implicit costs, it would not have entered into any of the swaps. I suggest to you that that's not correct, that you knew the rates that Prato had to pay under each of the swaps, and you were content to agree to pay those rates having regard to the forward curve?

A. Well, if Prato had [known] or was put in a position by Dexia to know these elements, these details, to know these details and the quantity or to quantify these elements, so the quantification of these elements certainly will not have entered into such a risky transaction, because these are bets and these have been prohibited by the legislator. So if Prato had been aware of these transactions, Prato would have never entered into such transactions because these were risky transactions.

A2B/ 21. As it seems to me, the reasoning here described by Ms De Castelli turns on it becoming apparent to Prato that a particular swap was prohibited by law or would leave Prato worse off than was envisaged in Prato's budget. If either or both of those things had become apparent in relation to a proposed swap then I accept that Prato would not have proceeded with that swap. I record, however, that for reasons given elsewhere, in so far as Prato has in these proceedings alleged any of the elements needed to make good those assertions, those allegations have not succeeded.

A2B/ 22. In the result it does not seem to me that, on a careful analysis, Ms De Castelli's evidence provided a sound basis for Prato's submissions on causation. Lest it might be thought to offer some wider basis for a conclusion on causation, however, I need to add that I would not regard Ms De Castelli's evidence as affording a reliable basis on which to reach any conclusion:

(1) De Castelli 1 stated at paragraph 24:

At that time [when recommending acceptance of Dexia's tender], the [technical] committee assumed that the interest rate swap would be structured so that, on the basis of forecasts at the time, the cashflows under it would be economically neutral over the life of the swaps i.e. the expected payments from each party to the other would cancel each other out. The Swap Transaction was therefore seen as merely a risk management tool … .

(2) For reasons given in section F of JORI, no commercial bank would have entered into a swap on the basis described in paragraph 24. The experts on the technical committee would have been well aware of this.

(3) I am satisfied that paragraph 24 was pure invention. It can only have been invented in order to assist Prato.

(4) As Dexia pointed out, swap 1 was entered into in the hope that Prato would receive net differentials from Dexia to reduce the effective cost of its fixed rate borrowing.

(5) As Dexia also pointed out, when this was put to Ms De Castelli in cross-examination she was unable to provide any justification for paragraph 24. Ms De Castelli was an astute and careful senior financial officer. I have no doubt that she was well aware that each of the swaps was proposed and entered into by Dexia on a commercial basis. Her protestations to the contrary were inherently incredible.

(6) As set out above and below, in her oral evidence Ms De Castelli made assertions which were inconsistent and incredible.

(7) At an early stage in her evidence she denied that her role at Prato had included the assessment and in-depth analysis of swaps. She was then shown a CV saying exactly that – a CV that she herself had prepared. Her response was bluster. The reality was that each swap was a very important financial transaction for Prato. I have no doubt that Ms De Castelli assessed each swap proposal and analysed it in depth.

(8) I have no difficulty in accepting Ms De Castelli's evidence that she was not an expert on swaps, that Dexia was appointed to advise Prato because neither she nor her staff had expertise on swaps, and that she looked to Dexia for advice. However she was well able to understand the advice Dexia gave. She fully appreciated the crucial importance of the rates and thresholds in each proposed swap. She learnt about MTM in her role as chairwoman of the technical committee, charged with assessing tenderers which were required to undertake to provide MTM on request. She also learnt about MTM in the context of Dexia's explanations of payments arising on early termination of proposed swaps. In that regard Prato's resolution 745 of 20 November 2002 contained a passage referring to "a compensation to be paid to the Municipality or to be received by the same Municipality". This was an obvious error: it only made sense if "received by" were read as either "paid by" or "received from". Dexia's consistent explanations both before and after this resolution made it quite clear that, depending upon the MTM at the time of termination, payments could go one way or the other. Ms De Castelli's suggestion that she understood that such payments would always be in favour of Prato was absurd.

(9) On the first day of her evidence, when taken through Dexia's first proposal, she accepted that, if she had read it, she would have understood the explanations that it gave. Later that day, however, when taken through a later proposal with similar explanations that she must have read both then and in proposals for later swaps, she disingenuously suggested that she was pleased to learn things that would be useful to her in future.

(10) In these circumstances where Ms De Castelli's evidence was not confirmed by contemporaneous documents or other witness evidence I cannot rely on it.

A2B/ 23. Thus I conclude that in the extreme circumstances identified above Prato would have behaved differently. For the reasons given above, however, if those extreme circumstances did not apply then in my view Prato's course of action would have been unchanged.

Annex 3: extracts from Annex 3, CR

A3/ 1. The initial section of Annex 3 to Consob Regulation n.11522 of 1 July 1998 included the following:

The general risks of investments in financial instruments

This document does not describe all the risks and other important aspects of investments in financial instruments or individual portfolio management services. Its purpose is to provide some basic information on the risks connected with such investments and services.

General advice

Before investing in financial instruments prospective investors should ask their intermediary about the nature and risks of the transactions they are preparing to carry out.

Investors should conclude a transaction only if they understand its nature and the degree of exposure to risk it involves.

Once the risk associated with a transaction has been assessed, before concluding the contract the investor and the intermediary must determine whether the investment is appropriate, with special reference to the investor's net assets, investment goals and experience in investing in financial instruments.

A3/ 2. This was followed by Part "A". Part "A" was headed "Measuring the risk of an investment in financial instruments". Under this heading it discussed relevant factors under four heads: variability of price of the financial instrument, its liquidity, the currency in which it is denominated, and other factors.

A3/ 3. What was set out under the first head included the following:

1) Price variability

The price of a financial instrument depends on numerous factors and can vary more or less markedly according to its nature.

…

1.4) Interest rate risk

With reference to debt securities, investors need to consider that the effective rate of interest adjusts continuously to market conditions as a result of movements in the prices of the securities. The yield of debt securities will approach that incorporated in the security at the time of purchase only if investors hold them to maturity.

If investors should have to dispose of their investments before the security matures, the effective yield may be different from that offered by the security at the time it was purchased.

In particular, for securities for which the interest to be paid is predetermined and not modifiable during the life of the loan (fixed-rate securities), the longer the residual maturity, the greater the variability of the security's price with respect to changes in market interest rates. For example, in the case of a zero-coupon security – a fixed-rate security that provides for payment of interest in a lump sum at the end of the period – with a residual maturity of 10 years and a yield of 10% per annum, an increase of 1 percentage point in market rates will cause the price of the security to fall by 8.6%.

Thus, in order to assess the appropriateness of an investment in debt securities, it is important for investors to consider whether, and at what stage, they may need to disinvest.

...

A3/ 4. What was set out under the second head included the following:

2) Liquidity

The liquidity of a financial instrument consists in the possibility of converting it promptly into cash without losing value.

A security's liquidity depends in the first place on the characteristics of the market in which it is traded. As a rule, other things being equal, securities traded in organized markets are more liquid than securities not traded in such markets. This is because the demand for and supply of securities is largely channelled into such markets, so that the prices recorded in them are more reliable indicators of financial instruments' effective value.

...

A3/ 5. What was set out under the fourth head included the following:

4) Other factors of general risk

…

4.2) Commissions and other charges

Before starting to invest, investors should obtain detailed information regarding all the commissions, expenses and other charges that will be payable to the intermediary. Such information must in any case be stated in the investment service contract. Investors must always remember that such charges will be subtracted from any gains on transactions whereas they will be added to any losses.

…

4.6) Transactions executed outside organized markets

Intermediaries may execute transactions outside organized markets. The intermediary investors choose may also act the direct counterparty to the customer (i.e. act for own account). In transactions for execution outside organized markets it may prove difficult or impossible to liquidate a financial instrument or measure its effective value and the effective exposure to risk, especially if the instrument it not traded in any organized market.

For these reasons such transactions involve higher risks.

Before engaging in such activities investors should collect all the relevant information about the transactions, the applicable rules and the consequent risks.

A3/ 6. The introductory section of Part "B" was as follows:

THE RISKINESS OF INVESTMENTS IN DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are characterized by a very high degree of risk which it is difficult for investors to assess because of the instruments' complexity.

Investors should therefore conclude transactions in derivative instruments only if they understand the nature and extent of the exposure to risk they entail. Investors must bear in mind that the complexity of these instruments can more easily result in unsuitable transaction being carried out.

As a rule, trading in derivatives instruments is not suitable for many investors.

Once the risk associated with a transaction has been assessed, the investor and the intermediary must determine whether the investment is appropriate, with special reference to the investor's net assets, investment goals and experience in investing in derivative instruments.

Some risk characteristics of the most widespread derivative instruments are described below.

A3/ 7. Section 4 of Part "B" included the following:

4) Transactions in derivative instruments executed outside organized markets. Swaps

Intermediaries may execute transactions in derivative instruments outside organized markets. The intermediary to which investors give orders may also act as the direct counterparty to the customer (i.e. for own account). In transactions executed outside organized markets it may prove difficult or impossible to liquidate a position or measure its effective value and the effective exposure to risk.

For these reasons such transactions involve higher risk.

Furthermore, the rules applicable to such transactions may be different and offer investors less protection.

Before engaging in such activities investors should collect all the relevant information about the transactions, the applicable rules and the consequent risks.

4.1) Swaps

Swaps involve a high degree of risk. There is no secondary market for these contracts, nor is there a standard form. At the most there are standardized model contracts, the details of which are usually adapted case by case. For these reasons it may prove impossible to terminate the contract before the agreed maturity without incurring high costs.

The value of a swap is always nil at the time the contract is signed, but the swap can rapidly assume a negative (or positive) value depending on the behaviour of the parameter to which the contract is linked.

Before signing contracts investors should be certain they understand how and how quickly variations in the reference parameter are reflected in the calculation of the differences they are to pay or receive.

…