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Monte Paschi puts up $3.6 billion collateral for derivative trades

The entrance of Monte Dei Paschi bank headquarters is pictured in Siena January 24, 2013. REUTERS/Stefano Rellandini
The entrance of Monte Dei Paschi bank headquarters is pictured in Siena January 24, 2013. REUTERS/Stefano Rellandini

MILAN (Reuters) - Monte dei Paschi had to put up more than 2.8 billion euros ($3.65 billion) by way of collateral for two loss-making derivatives trades at the center of an investigation of alleged fraud at Italy's third-biggest lender.

The Tuscan bank said in a statement on Wednesday that it had provided collateral of 1.871 billion euros at the end of March for the derivative deal known as "Alexandria" with Japanese bank Nomura <8604.T>.

The bank also said it had put up a collateral of 939.1 million euros linked to the "Santorini" deal signed in 2008 with Deutsche Bank .

Under the risky deals at the heart of the probe, Monte dei Paschi funded its investment in long-term Italian government bonds through long-term repurchase agreements with Nomura and Deutsche Bank.

In a repurchase, or repo, agreement, a company uses assets as collateral to raise funds and pledges to buy the assets back for a pre-agreed price at a later date.

But as the value of the bonds guaranteeing the loans fell because of the euro zone crisis, the bets backfired and Monte dei Paschi was forced to put up more collateral with both banks.

Monte dei Paschi received state aid of 4 billion euros in February to plug a capital shortfall exacerbated by the derivative deals.

Prosecutors in Siena last week ordered the seizure of up to 1.95 billion euros from Nomura as part of the investigation of the risky derivative trades, which they believe were used to conceal losses at the bank.

Deutsche Bank and Nomura have denied any suggestion of wrongdoing in their dealings with Monte dei Paschi.

In the statement, Monte dei Paschi said the Santorini and Alexandria contracts had a negative impact of around 117 million euros on its interest margin in 2012. It also said the two operations will have a negative impact of 16 million euros on its interest margin target for 2015.

($1 = 0.7695 euros)

(Reporting by Antonella Ciancio and Silvia Aloisi; Editing by Dan Grebler)

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