Skip to content

German Federal Court of Justice Limits Banks' Disclosure Obligations for Swap Transactions

Judgment dated 20 January 2015, file No XI ZR 316/13

The German Federal Court of Justice (BGH) has handed down an important decision on banks' obligations in connection with swap transactions. Further to a landmark decision in March 2011 on a structured interest rate swap, the BGH had to decide to what extent the strict standards of that case also apply to other scenarios. The BGH decided that a bank does not need to disclose the initial negative market value of a swap in all cases. Three-party situations in which the client's bank and the client's swap partner are not identical do not necessarily lead to a disclosure duty, at least if the client's chances of success under the swap transaction are not "materially impaired" by extensive bank charges.


Mis-selling claims in Germany typically involve an alleged breach of an advisory agreement. A bank is usually deemed, by German courts, to have "tacitly concluded" an advisory agreement when presenting investment opportunities to an investor. This agreement imposes a duty on the bank to inform the client comprehensively about the opportunities and risks of the potential investment. The extent of the information that has to be provided depends on the complexity of the product and the experience of the investor.

The German Federal Court of Justice (Bundesgerichtshof or BGH) gave its first ruling on banks' disclosure obligations for swaps in March 2011.1 It concerned a "CMS spread ladder swap", a fairly complex derivative relating to interest rates, that a bank had entered into with a mid-size German paper company. This judgment confirmed that, as a general rule, a bank does not need to disclose its profits to a customer. The BGH found, however, that "in some special circumstances" a bank may be obliged to disclose the initial negative market value of a product (reflecting the actual market value less the bank's cost and profit margin) on the basis that such a negative market value leads to a substantial conflict of interest for the bank. The BGH further decided that, when recommending complex financial products, a bank must ensure that the client's understanding of the risks associated with the financial product is largely identical to its own understanding.

Since then, many companies, individuals and municipalities have lodged claims for damages against banks in connection with losses incurred from swap transactions. Several appeal courts considered whether the BGH's findings were also applicable to cases involving a variety of swap transactions, reaching inconsistent conclusions.2 It was uncertain:whether the BGH's strict standards applied to all types of swap transactions, or whether it depended on the complexity of the transaction.

  • whether a bank must always inform its customer about the initial negative market value or other elements of a product's cost and profit structure; and
  • what information a bank must provide and whether the extent of the information required depends on the purpose of the swap and/or on the customer.


The facts of the recent case differ from those underlying the 2011 decision. The claimant was a wealthy businessman with experience in swaps and other investments. He had approached the defendant savings bank for a cross-currency swap. He identified the particular currencies – Swiss Francs and Turkish Lira – that he wished to link by virtue of the swap transaction. He even proposed an initial exchange rate. Following a meeting with two advisers from the bank, in autumn 2008 the claimant entered into a cross-currency swap relating to these currencies for a fixed term of three years with another German bank. The agreement specified the fixed interest rates to be paid during the term by both parties as well as the specific reference amounts to be paid at the end of the term, both in their respective currencies.
Contrary to the claimant's expectations, the Turkish Lira decreased in value against the Swiss Franc. The swap therefore had a negative cash value at the end of the term and the claimant made a considerable loss. The claimant sought damages from the savings bank, alleging negligent advice. At first instance and appeal, the claimant's claim was dismissed.

BGH decision

The BGH dismissed the claimant's case. The BGH held that the defendant savings bank was not obliged to disclose to the claimant a negative initial market value of the swap. The BGH referred to its March 2011 decision but stated that the two cases were not comparable because, in the present case, the defendant savings bank was not a party to the swap transaction and only acted in an advisory role. On that basis, the BGH denied the existence of any conflict of interest on the part of the defendant.

The BGH further confirmed the appeal court's findings that the defendant savings bank had complied with its obligation to adjust its advice to the investor and the planned investment. Considering the claimant's knowledge and experience, risk appetite, financial capacities and investment aim, the bank could assume that the claimant knew about the risk of currency fluctuations connected with the proposed transaction. The BGH emphasised that the claimant had not only initiated the swap, but had also suggested the currencies and the initial exchange rate.
Further remarks in the judgment may impact liability beyond circumstances in which the advising bank and the swap partner are not identical. The court stated that a negative initial market value of a swap is, as such, not necessarily a factor which is material for the client as the market value does not reflect the chances of success. The amount of the initial negative market value merely indicates the payment required by the client if he were to withdraw from the contract at that point.

The BGH emphasised that this situation does not differ much from other financial products having an initial negative market value, which the bank does not need to disclose either. The court concluded that a bank may be allowed to recommend entering into a swap transaction without having to disclose a negative initial market value, provided that the chances of success, and thereby the value of the transaction for the client, is not disproportionately negatively affected by extensive cost and profit elements. The claimant had not made such an allegation in this case.


The BGH had been silent on swaps since March 2011. Banks will be relieved to hear that, on this occasion, the BGH found in favour of the bank and denied a disclosure obligation relating to the negative initial market value of the swap transaction. To what extent these findings will also be applied to other scenarios beyond the narrow set of facts that the BGH had to decide on, in particular whether the judgment affects situations in which the bank has both the advisory role and enters into the swap with the client, is still unclear. Claimants and their lawyers will seek to limit the judgment’s application to three-party situations (ie where the client enters into a swap with one bank, but on the advice of a different bank). The present uncertainty may not, however, last long. The next hearing of another swap case has already been scheduled by Germany’s highest court. The BGH announced it will hear a dispute involving a two-party scenario between a municipialty and a state-owned Landesbank on 28 April 2015.

The BGH's comment in the current judgment that "extensive cost and profit elements" may justify a disclosure obligation will also evoke much debate. It appears unclear what will be considered "extensive" and how one can ascertain whether the specific characteristics of a swap transaction disproportionately and negatively affect a customer's chances of success. However, it seems likely that the specific extent of the cost and profit elements of a swap transaction could now come under more scrutiny by the courts. Banks entering into swap transactions will need to assess what effect these elements might have on a customer's chances of success.

It is worth noting that the leading case from March 2011 was not overturned. It may still provide a motivation for many law suits. Slowly, however, limitation periods will become more relevant. Under German law, claims are time-barred three years from the end of the year in which the damage occurred and the claimant knew or should have known about the relevant factual circumstances. This will often have been in 2011, after the BGH rendered its first decision on swap transactions which was widely reported and discussed in the media. Banks should be aware, however, that there may be cases of this type for which the limitation period has not yet expired. This might, for instance, be the case if discussions in relation to a customer's alleged claim lead to a suspension of the limitation period.


1. Judgment dated 22 March 2011, file No XI ZR 33/10, see article "German Federal Court of Justice (BGH) renders opaque judgment in misselling case regarding interest rate swaps", EFLR May 2011.
2. See article "Disclosure obligations and swaps: An analysis of regional variations in Germany", EFLR February 2014. The BGH’s recent decision was given in the case before the Nuremberg Higher Regional Court mentioned in that article.

Western Europe