Swap annulment: Oxygen for renewable producers
On April 7th the news was released that the National Commission of Markets and Competition (CNMC) is investigating 4 major banks for “possible practices restricting competition” in the setting of prices in relation to the subscription of derivatives used to offset the risks of interest rate fluctuation in syndicated loans. With this news in mind, and because we are aware that many renewable producers may be affected by swaps, we take the opportunity in this post to outline the main characteristics of these kind of products as well as the current state of the case law.
A swap is a kind of derivative contract through which two parties exchange financial instruments. For those of you who, like myself, are not experts on the topic, this means that its cost is based on the price of another asset (underlying), which may be an interest rate, inflation, shares or another index. According to the Spanish Share Market Law, these are complex contracts that accordingly require, specific and detailed information in order to be offered to non-professional clients. Generally, given the many different underlying assets that may be included in swaps, their evolution calculation is a topic for professionals, specialists within financial institutions.
According to the Share Market Law, a non-professional client is one who does not fulfil two or more of the following requirements: a) that the total value of assets is equal or above 20 million euros, b) that its annual turnover is equal or above 40 million euros, or c) that its own assets are equal to or above 2 million euros.
The bank must inform the client that, given that these contacts have a high degree of unpredictability, the benefits to one party constitute the losses to the other. Therefore, there exists a clear conflict of interest between the bank and the client. Consequently, a swap requires both parties to have access to a specific market in better conditions than the other, as long as that comparative advantage has the potential of being distributed both ways, enabling both parties a saving in costs.
The Supreme Court has consolidated case law that clearly determines the reach of the duty of information that banks must provide in order to guarantee the protection of non-professional clients. Said duty of information stems from several national laws and from two directives and one regulation that comprise what is known as MiFID regulation (Markets in Financial Instruments Directive). In other words, the legal duty to provide information to non-professional clients about the financial product and its risks lies exclusively on the bank. If that duty is not complied with, the imbalance of information between the parties entails an invalid acceptance (error) of the offer, meaning that the contract is null and that there must be restitution of all consideration between the parties. The Supreme Court was very explicit when it stated that “that absence of information enables to presume there has been an invalid acceptance or error”.