Interest rate swaps & interest rate derivatives

What we do

Interest rate swaps are financial products often offered by banks to entrepreneurs. Based on an agreement between the bank and the customer, it is agreed to switch interest rate terms.

Entrepreneurs who have taken out a loan with a variable interest rate can hedge against rising interest rates by means of an interest rate swap. Through an interest rate swap, the variable interest rate is, as it were, converted into a fixed rate (the swap rate). If the Euribor rate (the European interest rate benchmark) rises above the swap rate, the client benefits. When the Euribor rate falls below the swap rate, the contract has a negative value. The negative value of the contract is at the client's risk. Variants of this also exist, such as a fixed-to-variable interest rate swap or an interest rate cap. Interest rate swaps are always interest rate derivatives, but not all interest rate derivatives are interest rate swaps.

Because an interest rate swap is a derivative (a derived financial product), so-called margin requirements apply if the contract has a negative value. This means that the bank requests the customer to deposit an additional amount to cover the negative value of the derivative. If the customer fails to do so, significant losses are incurred.

Interest rate derivatives are complex financial products. The description provided above is therefore a simplified representation of the actual system of interest rate derivatives and the associated advantages, disadvantages, and risks. Given the complexity and within the framework of the special duty of care, banks must exercise extreme care when offering, advising on, and concluding interest rate derivatives. Our lawyers have the expertise to provide careful guidance on matters concerning interest rate derivatives and the duty of care of banks.

We have the knowledge and expertise to assume diverse roles: from advisory services to dispute resolution. We have an experienced team of lawyers and legal experts in the field of interest rate swaps and interest rate derivatives. Contact us to discuss the possibilities.

Types of interest rate derivatives and structured products

An interest rate swap is the best-known form, but the term interest rate derivatives encompasses more products, each with its own risk profile. With an interest rate swap , you exchange the variable interest rate on your loan for a fixed swap rate. An interest rate cap sets a ceiling on the interest rate above which you do not pay, but allows you to benefit from falling interest rates; for this, you pay a premium. An interest rate collar combines a cap with a floor (a lower limit), resulting in a lower premium while ensuring you continue to pay a minimum amount in the event of falling interest rates. In addition, there are more complex structured products, such as swaps with a knock-in or a deferred start date. The more complex the product, the heavier the duty of information and care resting on the bank. We assess which type of product has been taken out and whether this was appropriate for your financing needs and level of knowledge – whether you are an international corporation or the baker on the corner.

Breach of the duty of care by the bank

Banks are subject to a special duty of care. This serves to protect the client against the dangers of their own recklessness and lack of insight. When advising on and concluding an interest rate derivative, the bank must fully and comprehensibly explain the essential characteristics and risks of the product, and must investigate whether the product is suitable for the financial position, objectives, and expertise of the company (“know-your-client”). The duty of care is heavier when an advisory relationship exists. Case law has confirmed that a bank that provided financing and advised on the associated interest rate swap acted not only as a contracting party but also as an advisor – with all the associated obligations. If the bank breaches its duty of care, this may lead to an obligation to pay damages for non-performance or unlawful act (Articles 6:74 and 6:162 of the Dutch Civil Code). Common complaints include insufficient information regarding the margin requirement, the operation of the risk premium, and the consequences of a negative market value upon early termination (the termination fee).

Error and annulment of the interest rate swap contract

In addition to a breach of the duty of care, an interest rate swap can be challenged by invoking error (Article 6:228 of the Dutch Civil Code). Error arises when the company entered into the agreement based on a misrepresentation of facts, while the bank breached its duty of disclosure. In its case law, the Supreme Court has clarified that the duty of disclosure regarding error must be distinguished from the general banking duty of care: the bank must provide the information necessary to prevent the customer from contracting under the influence of a misrepresentation, and what the bank knows about the customer from its investigation or advice can increase that duty. If an appeal based on error is successful, the agreement may be annulled; because performances already rendered (such as assuming the interest rate risk) cannot always be reversed, compensation for the value may subsequently be considered (Article 6:210 of the Dutch Civil Code). We assess whether error, breach of duty of care, or both form the strongest foundation for your case.

Statute of limitations: do not let your claim expire

With interest rate swaps, the statute of limitations a real risk that can block your case before it has been assessed on its merits. For annulment due to error, a three-year period applies (Article 3:52 of the Dutch Civil Code), running from the moment the error is discovered. For a claim for damages due to a breach of the duty of care, a five-year period applies (Article 3:310 of the Dutch Civil Code), commencing as soon as the injured party has sufficient certainty—though not absolute certainty—that damage was caused by deficient or erroneous conduct. The Supreme Court applies a subjective test in this regard: the mere fact that a swap had a negative value or that margins were increased does not mean that the entrepreneur already knew or ought to have known at that time that the bank was in default. Nevertheless, caution is advised. The statute of limitations can be interrupted by a written demand or notification (Article 3:317 of the Dutch Civil Code). Are you in doubt as to whether your claim is still timely? If so, have it assessed urgently.

Uniform Recovery Framework for Interest Rate Derivatives (UHK)

For many SME entrepreneurs, compensation was handled through the Uniform Interest Rate Derivatives Remediation Framework (UHK), which was established under the supervision of the AFM and through which banks reassessed and compensated eligible customers. The remediation framework provides, among other things, for the technical rectification of imperfections in products, a goodwill payment, and compensation for unjustified interest surcharges. However, not every company and not every product fell under the framework, and the outcome of a reassessment does not always align with the actual damage suffered. We assess whether you have received an offer under the remediation framework, whether this offer is fair to your situation, and whether supplementary or independent proceedings against the bank are likely to succeed. This prevents you from signing for less than you are entitled to.

What we do for you in the event of an interest rate swap dispute

Our mixed teams of lawyers and in-house counsel assist companies of all sizes – from international corporations to small business owners – with disputes and issues concerning interest rate derivatives. We analyze your interest rate swap file and the underlying financing documentation, assess whether the bank has breached its duty of care and disclosure, monitor limitation periods and interrupt them in a timely manner where necessary, review an offer under the Uniform Remediation Framework, and conduct negotiations or proceedings against the bank. Where desired, we liaise with the complaints institute Kifid or the civil courts. Our broad experience with derivatives and financial litigation enables us to act in both an advisory and litigation capacity.

Frequently asked questions about interest rate swaps and interest rate derivatives

Can I get my money back if the bank has breached its duty of care?

That is possible. If the bank failed to inform you sufficiently or advised an unsuitable product, it may be liable for the damage suffered as a result, such as unjustified interest surcharges, an excessive termination fee, or the consequences of a margin requirement. We assess the amount and substantiation of your damages.

What is the market value of my interest rate swap and why is it negative?

The market value indicates what it would cost to terminate the swap early. If the market interest rate falls below the agreed swap rate, a negative value arises that is at your risk and which the bank may charge upon early redemption or termination.

Has my claim already expired?

Not necessary. The limitation periods only start running from the moment you had sufficient certainty regarding the damage and its cause. However, because the periods are short (three years for error, five years for compensation), a prompt assessment and, if necessary, interruption are advisable.

Financial law at MKB Juristen

Interest rate swaps and interest rate derivatives are one of the topics within our broader specialization of Financial Law. Within this area, we also advise on and litigate derivatives, financial supervision , and financial litigation. Through this integrated knowledge, we combine the civil aspects of an interest rate swap dispute with insight into the financial supervisory law to which banks are bound. Please feel free to contact us to discuss your situation without obligation.