By Silvia Aloisi and Stefano Bernabei
MILAN/ROME (Reuters) - Monte dei Paschi di Siena (MI:BMPS) and Japanese broker Nomura (T:8604) are sounding each other out over a possible settlement to close a derivative trade that is bleeding money at the Italian bank, two sources with knowledge of the matter said.
The 2009 trade, known as Alexandria, is at the heart of a scandal that rocked Monte dei Paschi in 2012 just as it was being hit hard by the euro zone debt crisis. The trade is also at the centre of legal proceedings in Italy and Britain.
Monte dei Paschi emerged as the weakest lender in a Europe-wide review of banks last year and has been told by the European Central Bank (ECB) to close the Alexandria trade by July 26 because its exposure to Nomura breaches regulatory limits.
At around 3.4 billion euros (£2.48 billion), the exposure accounted for nearly 35 percent of Monte dei Paschi's regulatory capital at the end of 2014 - or 10 percentage points above the level allowed.
The Tuscan bank must also carry out a 3-billion euro rights issue by end-July to plug a capital shortfall exposed by the ECB checks in 2014. The share sale is expected to start in late May.
One of the sources said Monte dei Paschi, which at the end of January estimated that terminating Alexandria unilaterally would cost it 1 billion euros before taxes, would prefer to close Alexandria before the launch of the capital increase.
The source said the two sides were in contact to see whether they could reach an accord but their positions remained distant.
The source, calling Alexandria a "time bomb", said the capital increase and other measures would allow Monte dei Paschi to reduce its exposure to Nomura but closing the complex trade once and for all was the best option because of its sensitivity to falling interest rates and rising credit spreads.
Given that Monte dei Paschi has also been told by the ECB to find a buyer quickly, getting rid of Alexandria could help any negotiations with potential bidders.
Italian prosecutors have said Monte dei Paschi's former management entered Alexandria and other derivative trades to conceal losses after stretching its finances to buy rival Antonveneta in 2007 for 9 billion euros.
The bank was forced to restate its 2012 accounts to reflect around 730 million euros of losses linked to those trades.
COLLATERAL
In its 2014 accounts, Monte dei Paschi said it had put up 2.2 billion euros as collateral for the trade to Nomura's benefit, up from 1.6 billion euros a year earlier.
A second source said no formal negotiations as such were under way between the two banks but that they were feeling each other out. Monte dei Paschi and Nomura declined to comment.
Milan prosecutors want both banks, and five individuals who were involved in the trade back in 2009, to be put on trial in Italy for alleged false accounting and market manipulation over the trade, judicial sources said last week.
Separately, Monte dei Paschi is suing Nomura for 1 billion euros in damages in a civil lawsuit in Florence.
The bank is recalculating the claims it is seeking from Nomura after prosecutors alleged a Nomura manager involved in the structuring of Alexandria received a big bonus from the Japanese bank and gave some of it to his Monte dei Paschi counterpart, the Italian bank's chairman told an annual shareholder meeting on April 16.
The trade is also at the centre of a claim started by Nomura in London in 2013 where the Japanese bank is seeking to have the transaction declared valid and contractually binding. In its counterclaim, Monte dei Paschi said Nomura should pay it 1.5 billion euros, Nomura said in a regulatory filing this year.
On Thursday, presenting its 2015 accounts, Nomura said it had made provisions for overseas lawsuits, without elaborating.
Monte dei Paschi managed to reach a settlement with Deutsche Bank (XETRA:DBKGn) over a trade similar to Alexandria in 2013, paying the German bank 525 million euros.
(additional reporting by Emilio Parodi; editing by Susan Thomas)