Second FCJ swap ruling
> February 2015
The XI Civil Division of the Federal Court of Justice has looked into the question of whether a consulting bank is obliged to pay compensation in connection with the recommendation of a swap contract, in this case: a so-called cross-currency swap contract, in another court case.
The question of whether a consulting bank that is not a party to the swap contract itself is obliged to provide information on the negative market value was at the centre of the decision (FCJ, ruling of 20th January 2015 – XI CR 316/13). The Federal Court of Justice has not confirmed such a duty to provide information. The essential statements of the ruling which can be gathered from the FCJ’s press release (which is only available at present) can be summarised as follows: 1.) A consulting bank which is not a party to the swap contract itself is not obliged to provide information on the initially negative market value of the swap transaction. There is only an exception from this if the profit opportunities and, as a result, the “intrinsic value” of the swap are lastingly affected by excessive cost and profit components (which has to be shown and proven by the client).
2.) In contrast, this probably means that a bank needs to provide information on the initially negative market value if it has become a party to the contract.
3.) The initially negative market value does not reflect the probable success or failure of the swap but (only) the market value upon the conclusion of the contract which could be realised by closing out at that time. This means the client must generate the structured gross margin in order to reach the profit zone. This situation can be compared with the situation of other financial products which have a negative market value on which information also does not have to be provided.
4.) In the specific case, the advice by the savings bank was appropriate for the investor and the object.
Release by the Press Office of the German Federal Court of Justice: No. 008/2015 of 20/01/2015:
The XI Civil Division of the Federal Court of Justice, which has competence in banking law, has looked into the question of whether a consulting bank is obliged to pay compensation in connection with the recommendation of a swap contract, in this case: a so-called cross-currency swap contract (“CCS contract” hereinafter) in yet another court case. The question of whether a consulting bank which is not a party to the swap contract itself is obliged to provide information on the negative market value was at the heart of this decision. The Federal Court of Justice has rejected such an obligation to provide information.
At the beginning of 2007, the claimant, an affluent businessman with experience in foreign currency loans and simple swap transactions contacted the respondent in order to conclude a CCS contract. In this respect, he also specified the currency pair he requested, i.e. Turkish lira (TRY) and Swiss francs (CHF). On 24th June 2008, the competent account manager and an employee specialising in financial derivatives transactions from a subsidiary of the defendant presented a CCS of a state bank to the complainant with the help of presentation documents which had already been submitted to him in advance. At this meeting, the claimant signed the “Customer Information for Transactions in Financial Instruments” form in which he classified himself as a “speculative investor”. The further content of the consultation is disputed by the parties. In September 2011, the claimant concluded a framework agreement for financial derivatives transactions and a CCS contract with the currency pair of Turkish lira (TRY) and Swiss francs (CHF) with the state bank. The contract had a fixed term of three years and comprised a fixed amount of TRY 900,735 and of CHF 795,000 as reference values. In this CCS contract the state bank undertook to pay the claimant interest to the amount of 15.66% p.a. on the fixed amount in TRY at twelve specified dates during the term of the contract as well as to pay the fixed amount in TRY at the end of the term. In return, the claimant undertook to pay interest of 3.6% p.a. on the fixed amount in CHF on the twelve specified dates during the term of the contract and to pay the fixed amount in CHF at the end of the term.
In May 2010, the claimant pledged the foreign currency account which had been set up for him at the defendant’s and to which the interest payments made by the state bank were credited to the defendant by way of security. Moreover, the parties concluded a guarantee credit framework agreement regarding EUR 150,000, which was to be used as a risk line for the CCS contract. During the term of the contract, the Turkish lira was devalued as against the Swiss franc so that the cash value of the CCS contract developed to the disadvantage of the claimant. After the defendant had repeatedly requested the claimant to provide additional cash after the loan granted to him had been exceeded, it closed out the CCS contract in September 2011, used the pledged currency account of the complainant with a balance of EUR 108,848.76 (after conversion) and debited the remainder of EUR 180,151.24 from another account of the claimant.
The action which e.g. aimed at the repayment of EUR 180,151.24 plus interest was not successful at the two lower courts of law.
The claimant’s appeal was not successful. In the opinion of the Federal Court of Justice, the defendant bank was not obliged to inform the claimant of the negative market value of the recommended swap contract – which the claimant alleged to have been negative – for legal reasons. This is because this value does not reflect the probable success or failure of the transaction but the market value of the contract which might be realised at that time by closing out the contract. For the client, this means that he initially needs to generate the structured gross margin in order to reach the profit zone. At the same time, he has to assume a loss in the amount of the negative market value if the contract is terminated forthwith. As regards the client’s risk of loss, this situation is not different from other financial products which have a negative market value – as, in particular, in the case of over-the-counter derivatives transactions – on which information does not have to be provided. Therefore, in spite of an initially negative market value, the recommendation of a swap contract can be appropriate for the investment object provided the profit opportunities and, as a result, the "intrinsic value" of the swap are not lastingly impaired by excessive cost and profit components – which is something that the claimant could not substantiate. In as far as the XI Civil Division decided in 2011 in the case of a CMS spread ladder swap contract that a bank which is also a party to the swap at the same time must disclose an initially negative market value in the framework of an additional consulting contract because this reflected a serious conflict of interests which is not obvious for the client and which might jeopardise the investor’s interests (cf. ruling by the court of 22nd March 2011 - XI CR 33/10, BGHZ 189, 13 point 33 ff. with further records; see press release No. 46/2011 with regard to this), this ruling cannot be compared because the defendant was not a party to the CCS contract in this case and since, as a result, there was no serious conflict of interest right from the outset.
In as far as the appellate court furthermore assumed that the defendant had complied with its obligation to advise the claimant in line with his investment strategy apart from this, the aspects of the appeal targeting this were also unsuccessful because the relevant explanations on this by the appellate court did not disclose any legal error and since the underlying findings were made without any procedural errors. The defendant had, in particular, established the claimant’s knowledge and experience, his risk tolerance, his financial situation and his investment aim. Because of this it could assume that the claimant was aware of the foreign currency risk connected with the CCS contract and the risk of price fluctuation and that this was in line with his risk tolerance especially in view of the fact that the claimant initiated the transaction which formed the subject of the dispute and that he also specified the currency pair and the initial rate of the prices of the two currencies. Finally, the appellate court also denied the claim of a breach of the obligation to provide advice in line with the object of the investment on the part of the bank without any legal error.
Ruling of 20th January 2015 - XI CR 316/13, Nuremberg-Fürth Regional Court – ruling of 28th September 2012 - 10 O 7990/11, Nuremberg Higher Regional Court – ruling of 19th August 2013 - 4 U 2138/12
Karlsruhe, 20th January 2015
Press Office of the Federal Court of Justice
76125 Karlsruhe
