Interest-Rate Swap Offered by Sumitomo-Mitsui Bank: Was This for Hedging or Speculation?
Sumitomo-Mitsui Bank (the Bank) was found not to have breached its duty of explanation when an interest-rate swap agreement had been executed between the Bank and a customer (the Company), under which fixed and floating interest rates would be swapped and the resulting difference settled. The Company had borrowed substantially at floating-rate interest and wanted to hedge against the risk associated with rising interest rates. During the period from June 8, 2005 to June 7, 2006, the Company paid 8.8 million in total to the Bank as the difference between the fixed interest rate and the floating interest rate, and penalty interest payments due to delay. The Company then sued the Bank and asserted that it had breached its duty of explanation, abused its superior bargaining position, and inappropriately and unfairly solicited this agreement with the Bank. The Company had a basic question as to whether this swap was for hedging or speculation, and claimed that the Bank had not fully explained the product and the risk involved. A full economic analysis of this derivative for this case study was included so that it can be employed to assess the court decision.