“Long” term in the legal context
The term “Long” originates from English and is particularly significant in the context of civil, commercial, and capital market law. It is widely used in typical legal and contractual relationships on stock exchanges, in securities trading, and in connection with derivative financial instruments. The following provides a comprehensive explanation of the various legal manifestations and implications of the term “Long”.
Definition and development of the term
In a legal context, “Long” regularly describes the position of a market participant who acquires ownership, title, or possession of an asset (e.g., stock, bond, commodity, derivative) by purchasing it and speculates on an increase in value. The “Long position” is thus opposed to the “Short position,” where the expectation is of falling prices.
Legal nature of a long position
A long position establishes rights and obligations within the framework of the respective contractual and statutory provisions of the underlying transaction. It is characterized by the fact that the holder owns the commodity, claim, or security belonging to the contract and, as a rule, can derive advantages under property and traffic law from this possession.
Forms of long positions
Long in spot transactions
In spot transactions, the long position involves the physical acquisition of ownership of a security that is delivered immediately or within a standardized short period. Legally, the buyer becomes the full owner and receives all associated rights (e.g., voting rights for shares, entitlement to dividends).
Long in futures and derivatives trading
In futures trading (futures, forwards, options, swaps), “Long” refers to contracts in which the buyer bets on rising prices. Depending on the contract type, various legal consequences arise:
- Futures and forwards: Here, long means the contractual obligation to purchase an underlying asset at a set price at a predetermined future date. The contractual relationship is established upon conclusion of the agreement.
- Options: The long position corresponds to the right, but not the obligation, to acquire an asset at a specified price within a certain period (call option).
- Swaps: Long can also be relevant in the context of swaps, for example, when a market participant speculates on positive developments in the value of a particular payment series.
Long in bonds and debt securities
In the area of bonds, the holder takes a long position by acquiring bonds and thereby obtaining creditor rights, such as to interest payments and repayment at the agreed maturities.
Legal implications of the long position
Transfer of ownership and modalities of transfer
Entering into a long position may, depending on the market type and contract design, be associated with different rules regarding the transfer of ownership: In spot transactions for securities, the transfer of ownership and risk typically occurs immediately upon execution of the transaction or fulfillment of the delivery conditions.
Obligations and risks
Assuming a long position involves:
- Price risk (market risk): The risk that, contrary to expectations, the price falls and the position turns out to be loss-making.
- Contractual claims: The long position gives rise to claims for performance (delivery, payment, transfer of title), and in the case of derivatives, to claims for cash settlement or delivery of the underlying asset.
- Reporting obligations: Pursuant to the German Securities Trading Act (WpHG) and EU transparency directives, holders of certain long positions must make disclosures to the public once specified thresholds are exceeded.
Insolvency law aspects
In the event of insolvency of a business partner, long positions are typically part of the insolvency estate. Creditors may assert claims for fulfillment of delivery or payment, as the case may be, in accordance with the German Insolvency Code.
Regulatory framework conditions
Supervision and disclosure obligations
In order to ensure market transparency and fair trading, long positions in certain financial instruments are often subject to reporting obligations under the German Securities Trading Act, Market Abuse Regulation (MAR), and further EU regulations. This particularly covers trading in voting share capital or significant stakes in publicly listed companies.
Prohibited market manipulation
The use or reporting of long positions may become legally relevant in the context of insider trading and market manipulation. The deliberate dissemination of false information to influence prices in connection with long positions may result in fines or criminal prosecution.
Long positions in international law
Since securities markets operate globally, the legal foundations for long transactions can differ significantly between countries. While there is increasing harmonization within the EU (e.g., through MiFID II, MAR, etc.), divergent reporting and settlement rules exist in the USA or Asia.
Distinctions and special cases
Difference to short positions
While the long position is characterized by an ownership right in the goods or security, the short position is based on initiating a short sale position, where the seller does not own the underlying asset and bets on a price decrease—accompanied by particular civil law and regulatory obligations.
Long in the context of investment funds
Investment companies and funds also act as holders of long positions in various ways. The management and documentation of such positions are subject to specific rules under the German Capital Investment Code (KAGB) and BaFin’s guidelines for proper use of funds and risk diversification.
Conclusion
A long position legally describes the status of a purchaser of an asset with the aim of profiting from its positive performance. The legal framework is multi-layered and depends on the specific form of the transaction (spot, forward, derivatives trading, bonds). Essential aspects when dealing with long positions include, among others, transfer of ownership, contractual claims, regulatory disclosure requirements, and insolvency law questions. Compliance with legal regulations is mandatory for legally compliant capital market transactions.
Frequently Asked Questions
What legal requirements must be met to open a long position?
To open a long position, various statutory and regulatory requirements must be fulfilled. First, it is necessary to ensure that the trader has a securities account at an authorized financial institution licensed to conduct securities transactions. Requirements apply as per the German Securities Trading Act (WpHG) and the Federal Financial Supervisory Authority (BaFin). The investor’s identity must be verified, and where applicable, the source of funds checked as part of anti-money laundering requirements. Additionally, the EU MiFID II directive requires financial service providers to assess the client’s profile to determine the appropriateness and suitability of the financial instruments offered, particularly in the case of complex products and leveraged transactions. No long position may be opened without compliance with these requirements.
What statutory information obligations exist when entering into a long position?
When entering into a long position, financial institutions are required to provide the investor with comprehensive advice and information. According to Section 63 WpHG, the institution must make all essential information regarding the features, risks, and functioning of the traded security or financial product available to the client. This also includes disclosure of costs, commissions, and potential conflicts of interest. Prospectus-eligible securities are additionally subject to the requirement to prepare and publish a securities prospectus pursuant to the Securities Prospectus Act (WpPG). Upon request, supplementary information and risk warnings must be provided in an understandable manner. Documentation of this information is legally mandatory.
What special features exist in the taxation of profits from long positions?
The taxation of profits from long positions in Germany is governed by the Income Tax Act (EStG), specifically taking into account the flat-rate withholding tax (§ 20 EStG). Profits from the sale of securities held as a long position are generally subject to the flat-rate withholding tax plus solidarity surcharge and, if applicable, church tax. The tax is typically withheld directly by the custodial bank and paid to the tax authority. For private investors, there is an annual tax exemption amount, currently EUR 1,000 (as of 2024). Profits exceeding this exemption are taxable. Different tax rules may apply to legal entities or for commercial trading.
What liability risks do investors face when trading long positions?
Investors entering into a long position generally bear the full risk of loss of the capital invested. For example, if a price decline is underestimated, this can result in a total loss of the invested amount. In special cases, such as trading derivative financial instruments on a long basis (e.g., options), margin requirements may arise if leverage effects cause losses to exceed the original capital invested. Legally, it should be noted that incorrect advice or insufficient information by the financial service provider can give rise to claims for damages (§§ 280, 823 BGB), if the investor incurs economic loss as a result of a breach of duty.
What reporting and documentation obligations apply to long positions for private and institutional investors?
Private investors are generally not subject to explicit reporting obligations to supervisory authorities when acquiring long positions, unless reporting thresholds are exceeded, for example, under the Securities Trading Act for holdings in publicly listed companies. Institutional investors, by contrast, have had to submit extensive transaction reports on certain product classes to the competent authorities since the entry into force of the European Market Infrastructure Regulation (EMIR) and the Transparency Regulation (MAR). Custodian banks and trading venues generally require complete documentation of all transactions to facilitate audits, e.g., by BaFin or the Bundesbank.
What regulatory restrictions apply to trading long positions in Germany?
Although the purchase of securities in long positions is generally permitted for private investors, regulatory restrictions may apply. This concerns, for example, access restrictions to certain investment products that are only permitted for professional clients or semi-professional investors. In the case of derivative long positions, such as long CFDs, restrictions on leverage and margins can be imposed by the Federal Financial Supervisory Authority (BaFin) or ESMA (European Securities and Markets Authority). In addition, there are bans on the distribution of particularly high-risk products to retail investors. Sanctions, including account suspensions, may be imposed by banks if statutory regulations are violated.
What are the legal consequences of breaching statutory requirements in trading long positions?
Violations of statutory requirements in connection with trading long positions can result in both civil and criminal consequences. These include potential claims for damages by investors against financial service institutions for advice or disclosure errors, as well as fines and regulatory measures by authorities such as BaFin. If, for instance, reporting obligations are disregarded or trading bans circumvented, criminal investigations and sanctions may also result. In repeated cases, the financial service provider’s license may be revoked. In extreme cases, investors may experience losses through the suspension or cancellation of trades and face additional tax assessments.
