German Federal Court of Justice passes further judgement on swap transactions
German Federal Court of Justice: No obligation to disclose an initially negative market value in tripartite swaps
With its judgement of 20 January 2015 (case no.: XI ZR 316/13), the German Federal Court of Justice (Bundesgerichtshof – BGH) ruled for the first time in four years on the liability of banks advising on swap transactions and dismissed the compensation claims brought by the plaintiff, a bank customer.
Since the Federal Court of Justice’s “swap judgement” of 22 March 2011 (case no.: XI ZR 33/10) there has been considerable legal uncertainty, particularly among credit institutions. Banks had previously assumed – on the basis of the majority view expressed in case law and the literature – that they were not required to inform customers of their (profit) margin and thus of a swap’s initially negative market value. Whilst the Court, in its judgement of 22 March 2011, confirmed the first point whereby a bank has to disclose its – obvious – interest in generating profits, it regarded the “initial negative market value” of a swap as evidence of a serious conflict of interests that was not apparent to the customer and should therefore be disclosed (in a similar way to returns).
With its judgement of 20 January 2015, the Federal Court of Justice has ruled that the advising bank was not liable to pay compensation and, at the same time, clarified numerous points and settled certain issues. Firstly, the Court set matters straight with regard to the significance of the initial negative market value. Contrary to what had been frequently assumed on the basis of “swap judgement” of 22 March 2011, this is not a – in the customer’s view – negative indication of any anticipated development of the swap. Rather, it is nothing more than the bank’s gross margin which – as it forms part of every financial product – the bank has no obligation to disclose and is thus a gap that the customer has to close before the swap becomes profitable. The Court also made clear that the initial negative market value could only result in a conflict of interests triggering an obligation to disclose if the advising bank is also a contractual party in the swap.
On 28 April 2015, the German Federal Court of Justice will rule on the appeal – which it allowed on 16 December 2014 – by a credit institution represented by Noerr LLP in further swap proceedings (case no.: XI ZR 378/13). The Court is expected to take this opportunity to clarify further unaddressed issues with regard to the liability of banks that advise on swaps:
- Obligation to disclose the initial negative market value, even in the case of plain vanilla swaps and interest rate hedging
- Extent of the disclosure obligation triggered by the initial negative market value of a swap
- Bank not at fault for unavoidable error of law
- Rebuttal of the assumption of correct conduct with regard to disclosure
- Limitation period pursuant to Section 37a of the German Securities Trading Act (WpHG) (old version) (Start of the limitation period, Intent)
- Calculation and extent of refundable loss
If you have any further questions regarding bank liability in swap transactions, please feel free to contact us.