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Banks’ liability on margin calls

Andreas Moll

Recently, the Swiss Federal Supreme Court rendered a decision regarding a bank's liability in relation to margin calls.

The plaintiff opened an account at the bank in 1998. He signed, among others, an agreement regarding trading with derivatives. According to this agreement, the plaintiff traded on his own account and at his own risk. To protect its own interests, the bank was obliged to determine and to modify in its own discretion the extent to which the plaintiff's financial commitments had to be covered by the account's assets (the margin) at any given time. In the event of a margin shortfall, the bank had the right to, but was not obliged to, take all measures to restore the required coverage to ensure that the ratio met the pre-determined minimum level.

The plaintiff had never signed an asset-management agreement with the bank. Therefore, the bank's role was limited to that of a broker. Knowing the plaintiff's long experience in trading with derivatives, the bank gave direct access to the plaintiff for submitting his orders to the relevant markets. The margin was first set at 35% and later reduced to 20% and then 15%.

In 1999, the account's assets only covered 10% of the commitments and the bank decided to make a margin call to the plaintiff forcing him to transfer further assets to the account. Between January 2000 and September 2001, the actual margin was below the required threshold but the bank decided not to make a margin call due to what it saw as favourable markets at the time. After the markets crashed following the events of September 11 2001, the margin's shortfall of the account amounted to €1.9 million ($2.7 million). The bank demanded compensation of this amount, forcing the plaintiff to immediately liquidate several positions of his portfolio.

Subsequently, the plaintiff took legal action against the bank, claiming nearly €2.5 million in compensation for damages. He argued that by not constantly following up the margin level and not informing him accordingly the bank had violated its duty of information and duty of care.

Confirming the decisions of the lower instances in the case at hand, the Federal Supreme Court stated that the bank was not obliged to protect the plaintiff's interests but only to follow his instructions as no asset-management agreement had been signed. As a result, the bank was not obliged to actively reduce the risks of the plaintiff's investments and had no duty of constantly informing the plaintiff whether the account's assets fulfilled the margin requirements.

The Court further stated that, according to the agreement, the margin requirements have the sole purpose of protecting the bank's interests and it is therefore in its sole discretion whether a margin call shall be made. Consequently, the plaintiff's argument that the bank's decision to make a margin call on September 17 2001 (after not having done so for more than a year) was an abuse of rights could not be heard.

The Federal Supreme Court confirmed its legal practice by denying the plaintiff's claim for compensation based on alleged violations of the bank's duties. However, the decision also showed the significance of the bank's terms and conditions limiting its liability.

Andreas Moll

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