Skip to content

German Federal Court of Justice limits banks’ disclosure obligations in connection with swap transactions

Related people
Bussian Wolf
Dr Wolf Bussian

Managing Partner Germany

Frankfurt am Main

View profile →

Windthorst Jan Erik
Jan Erik Windthorst


Frankfurt am Main

View profile →

20 January 2015

The German Federal Court of Justice handed down an important decision today 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.

According to the court’s press release, 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 prospects of the client under the swap transaction are not materially impaired by extensive cost and profit elements.


The basis for mis-selling claims in Germany is typically an alleged breach of an advisory agreement. Under the established pattern of German case law, a bank will usually be deemed to have “tacitly concluded” an advisory agreement when presenting investment opportunities to an investor. This agreement results in a duty of the bank to inform the client comprehensively about the prospects and risks of the potential investment. The level of information that is required depends on the complexity of the product and the experience of the investor.

The German Federal Court of Justice (Bundesgerichtshof or BGH) rendered its original decision 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. At the same time, however, the BGH found that a bank has to disclose an initial negative market value of a structured product under certain circumstances. The court held, in particular, that the existence of an initial negative market value reflected a severe conflict of interest of the bank which it must disclose to its client. The BGH further held that a bank must ensure that the client’s understanding of the risks associated with a complex product is largely identical to the bank’s own level of understanding. Thereby, it introduced a novel and very strict standard.

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, having read the decision in various ways. In particular, it was uncertain whether the BGH’s strict standards applied to all types of swap transactions, or whether this depended on the complexity of the transaction. Further, it was unclear 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, what information exactly 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 March 2011 decision had effectively raised more questions than it had answered. The new decision rendered today[2] declined to apply these standards and also commented on the much-debated issue of whether a negative market value must be disclosed in all scenarios.

[1] Judgment dated 22 March 2011, file no. XI ZR 33/10.

[2] Judgment dated 20 January 2015, file no. XI ZR 316/13.

Facts of the case 

The facts of the case that were now before the BGH differ from those underlying the previous 2011 decision. The claimant is 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. Therefore, the swap had a negative cash value at the end of the term and the claimant made a considerable loss. He now claims damages from the savings bank, alleging negligent advice.

The appeal decision

The first instance decision dismissed the customer’s claim. On appeal, the Higher Regional Court in Nuremberg confirmed this view[3]. The appeal court found that the defendant bank had complied with its disclosure obligations. The cross-currency swap had also been a suitable product for the claimant, considering his specific experience and risk appetite. It had been a simple swap with a risk structure that was readily assessable by the claimant. Although his maximum risk was theoretically unlimited, it was caused by currency fluctuations. As with an ordinary foreign currency account, this risk was obvious to any investor. The appeal court held that a bank provides sufficient information if the client is able to comprehend the circumstances relevant for the success or failure of the investment decision. It further declined to apply the BGH’s standard from March 2011 and, in particular, held that the bank had not been under a duty to disclose the initial negative marked value of the swap. The Nuremberg Court explained that this was a far less complex transaction and both sides knew from the beginning what they would have to pay. There was no hidden advantage for the bank and it was not required to disclose its profit margin.
[3] Judgment dated 19 August 2013, file No 4 U 2138/12.

The new BGH decision

The full judgment is not yet available, but the BGH has dismissed the claimant’s case and issued a press release. 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 where it had found such a disclosure obligation regarding an initial negative market. It 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 interests on the part of the defendant.
There are additional remarks in the judgment, however, which may have a potential impact beyond the specific set of circumstances in which the advising bank and the swap partner are not identical. For example, the court’s press release states that a negative market value does not mirror the prospective chances of financial success of a swap transaction. 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.
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.


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 also impacts two-party situations, is still unclear. Much will depend on the exact wording of the judgment.

Effects on other disputes

Claimants and their lawyers will seek to strictly limit the judgment’s application to three-party situations. It remains to be seen, however, to what extent individual elements of today’s judgment will become relevant for other situations. The BGH also comments on “extensive cost and profit elements” that may justify a disclosure obligation. This will also evoke much debate. In particular, it appears unclear what will be considered “extensive” and how one can ascertain whether the specific characteristics of a swap transaction permanently impair the customer’s chances of success.

More cases coming up?

Given that the claimant lost, it appears unlikely that more bank clients will feel encouraged by today’s decision to lodge new claims against banks. On the other hand, the leading case from March 2011 was not overturned. It still provides 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 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.

Consequences for banks’ disclosures

Most banks had already adapted their approach to informing clients about swap transactions after the BGH’s March 2011 decision. The new decision also adds that the specific extent of the costs and profit elements of a swap transaction could come under scrutiny of the courts. Banks will need to assess what effect these elements might have on the customer’s chances of success.