SWAP transactions: advisory duties of a bank

How the Federal Court of Justice strengthens the rights of local authorities, small and medium-sized enterprises and private investors?

Major German bank ordered to pay damages

In its ruling of 22 March 2011, the X I Civil Senate of the Federal Court of Justice (BGH), which is responsible for banking law, for the first time ordered a bank to pay damages for breach of advisory duties in spread ladder swap transactions. In contrast to the previous instances, the BGH thus ruled in favour of a medium-sized company to which speculative interest rate swaps were recommended for alleged “interest rate optimisation”. Contrary to the line of weakened advisory duties discernible from the previous instances, the BGH ruled in its judgment of 22 March 2011 (Case No. XIZR 33/11 ) that the plaintiff, consisting of a medium-sized company, was entitled to a claim for damages against the defendant bank, as the latter had breached advisory duties in connection with the conclusion of a so-called spread ladder swap transaction. According to the plaintiff, the interest rate swap recommended by the bank for interest rate optimization turned out to be a highly risky and speculative product, which is why the company claimed against the bank for the resulting losses.

BGH: Information also in case of (prior) knowledge

The BGH found that the major bank had breached its advisory duties and could therefore be held liable for damages. In the opinion of the XI Civil Senate, contrary to the view of the lower courts, the bank was obliged to inform the plaintiff company of the negative market value of the spread ladder swap that already existed at the outset as part of the investment advice given. This obligation already results from the fact that the negative market value was deliberately structured by the bank and is thus an expression of a serious conflict of interest.

Duty of disclosure to the detriment of the investor

However, it remains to be clarified that the negative initial value or the obligation to provide information on this does not preclude the fact that the bank recommending its own investment products does not in itself have to provide information on its associated intention to make a profit. According to the BGH, the associated conflict of interest is “obvious”. According to the Federal Court of Justice, however, a duty to inform arises “if special circumstances arise in addition to the pure interest in making a profit”, such as the deliberate shaping of the risk to the detriment of the investor with the effect of a negative initial market value in itself. Furthermore, the Karlsruhe judges considered that in the present case the criterion of investor-friendly advice had not been met either: The bank would have had to inquire about the investor’s general willingness to take risks in the context of the advice. This duty to inquire is also not dispensed with simply because a graduate economist attended the consultation on the plaintiff’s side. In the view of the Senate, it is therefore not possible to draw any conclusions as to the willingness to take risks from the prior knowledge or professional qualifications of the persons present. Municipalities are subject to a statutory ban on speculation – the sales argument of the bank advisors that there will be a reduction in the interest rate therefore also requires information about the risk that, on balance, there may be highly speculative losses. With this, the BGH once again emphasises the scope of the advisory duties, which had already been formed before. The more complicated and risky the products offered, the more stringent the requirements are to be imposed on the banks in terms of the advice they are required to give. The spread ladder swap transaction in question is undoubtedly to be regarded as a particularly risky financial product, so that an infringement was affirmed on the grounds set out above. For this purpose, it is also irrelevant whether the high risk was then again designed to generate a profit to the disadvantage of the investor, with the effect of a negative initial market value, or is to be regarded as balanced between the investor and the bank at the outset, so that a systematic profit by the bank would inevitably not be expected (initial market value = zero).

Continuing effect for investor protection

The decision of the BGH on this topic now gives investors the opportunity to assert claims for damages against the advising banks also in the case of spread ladder swaps if a risk inquiry or risk disclosure was not or not sufficiently fulfilled. However, it remains to be seen whether the findings can also be applied to other swap transactions. However, it is already clear that the decision will have a signal effect for many other proceedings and disputes and will accordingly show the judges in charge of the issue the direction to be taken in future, namely in favour of the investor.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm


by courtesy of

www.handwerke.de (published in Computers in the Trades 12/2011)


www.innovationundtechnik.de (published in Innovation and Technology 01/2012, pages 45-46 under the heading: Advisory duties of a bank when concluding a SWAP transaction).

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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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