For the first time after its 2011 Spread Ladder Swap Judgment (BGH 22.3.2011- XI ZR 316/13), the banking division of the German Supreme Court has recently (BGH 20.1.2015 – XI ZR 316/13) dealt with the disclosure duties of banks in connection with derivative products. The initial negative market value is the core issue of the judgment, which clarifies important questions that had been left open by the Spread Ladder Swap Judgment.
Since the 2011 Spread Ladder Swap Judgment, German and Austrian banks have faced considerable legal uncertainty as to their disclosure duties. In this judgment, the Supreme Court surprisingly enacted a duty on the part of banks to disclose a derivative product's initial negative market value as an indicator of a significant conflict of interest on the bank's side. That judgement left many urgent questions unanswered and was heavily debated among legal scholars and practitioners.
The facts of the case addressed in the Court's new judgment are as follows: The claimant was a business man who was experienced in foreign currency loans and simple swap transactions and sought consultation with Sparkasse Nürnberg, the eventual defendant in the litigation proceedings. Upon advice of Sparkasse Nürnberg, the claimant concluded a cross currency swap transaction (Turkish lira vs Swiss franc) with Landesbank Baden-Württemberg.
The Turkish Lira depreciated against the strengthening Swiss franc, resulting in a loss for the claimant and leading him to seek compensation from Sparkasse Nürnberg, alleging wrongful advice.
The Court held that the Sparkasse Nürnberg was not obliged to disclose to the claimant a negative initial market value of the swap. The Court stated that the present case was not comparable to its Spread Ladder Swap Judgment as in the present case the Sparkasse Nürnberg was not a party to the swap transaction. On that basis, the Court denied the existence of any conflict of interests on the part of Sparkasse Nürnberg.
Further, amongst other clarifications, the Court made substantive remarks on the initial negative market value of a swap. Most importantly, it explicitly rejected the scholarly opinion that one could deduce from the initial negative market value the future development (i.e. success or failure) of the swap. From the Court’s point of view, there are circumstances in which a bank may recommend entering into a swap transaction without disclosing a negative initial market value, provided that the value of the transaction for the client is not permanently impaired by extensive cost and profit elements.