Definition and legal basis of the term “spread”
The term “spread” plays a central role in economic and legal contexts and generally refers to the difference between two values, typically between purchase and sale prices or interest rates. The spread is particularly relevant in the financial world and securities trading, but it also exists in other legal areas where price differences, conditions, or margins play a role.
The spread is not only an economic parameter but is also subject to various legal regulations concerning trading, transparency, and accounting. In Germany and the European Union, the legal requirements arise in particular from the Securities Trading Act (WpHG), the Banking Act (KWG), regulatory guidelines from the European Securities and Markets Authority (ESMA), as well as other national and European regulations.
Spread in securities trading
Meaning and function
In securities trading, the spread primarily describes the difference between the bid price and the ask price. This difference represents the profit of a market maker or an exchange providing liquidity. The spread can be seen as an indicator of the liquidity of a security: the narrower the spread, the more liquid the security.
Legal foundations
Transparency and disclosure obligations
The legal regulation of the spread in the securities sector is implemented, among other things, through the requirements of the WpHG as well as the MiFID II Directive (Markets in Financial Instruments Directive), which aims to enhance investor protection and market transparency. Securities service companies are obliged to inform their clients about spreads and their impact on the final price (§ 63 paras. 1 and 7 WpHG). The publication obligations for spreads in organized markets serve transparency and are intended to ensure the comparability of orders.
MiFID II and Best Execution
MiFID II obliges companies to provide “Best Execution”, i.e., the best possible execution of client orders, with special consideration given to the spread (Art. 27 MiFID II). An excessively large spread may constitute a violation of the Best Execution principle.
Civil law significance
The spread can be relevant to civil law in the context of claims for damages. Incorrect or inadequate information regarding the spread may lead to liability claims against the executing institution, for example, if investors are disadvantaged by unfavorable spreads.
Spread in banking and credit law
Interest rate spread for loans and deposits
In banking, the spread often refers to the difference between the interest rate paid by the bank on deposits and the interest rate it charges on loans. This interest spread is an important calculation factor for the profitability of the credit institution.
Legal framework
The calculation of spreads must comply with supervisory requirements, such as those set out in the KWG and banking supervision by the Federal Financial Supervisory Authority (BaFin). Pricing must not contain immoral, discriminatory, or abusive elements; § 138 German Civil Code (BGB) (usury) may apply in cases of excessive spread. The General Equal Treatment Act (AGG) and the Banking Act also provide legal guidelines in this regard.
Spread in derivatives and OTC trading
Term and legal particularities
In the trading of derivatives, especially in OTC (over-the-counter) transactions, the spread is the main source of revenue and must be clearly contractually agreed and disclosed. The derivatives regulation (EMIR: European Market Infrastructure Regulation) and relevant national provisions require appropriate risk-bearing capacity and transparency with regard to spreads.
Disclosure obligations and contract structuring
In most cases, the procedures for calculating spreads are stipulated in framework agreements such as the ISDA Master Agreement. The spread must be comprehensible and verifiable; otherwise, disputes may arise regarding the fairness and transparency of the agreements.
Spread in competition and antitrust law
Price differences in markets
Pricing and spreads may be subject to antitrust review. A spread that results from price-fixing or market abuse can constitute an antitrust violation. Pursuant to Art. 101 TFEU and §§ 1 ff. GWB (German Act against Restraints of Competition), anti-competitive agreements are prohibited.
Investigation and sanction possibilities
Competition authorities may initiate investigations in cases of suspected collusive determination of spreads (spread cartels). Sanctions range from fines to claims for damages by market participants.
Tax implications of the spread
Accounting treatment
Income generated from spreads must be recognized as operating income in accordance with commercial and tax regulations. Proper recognition and assessment in the annual financial statements are mandatory under the German Commercial Code (HGB) and the Income Tax Act (EStG).
VAT assessment
In the relevant case of spreads in the financial services sector, a VAT exemption often applies pursuant to § 4 No. 8 UStG, as trading in financial instruments is generally VAT-exempt.
Consumer protection and spread
Disclosure obligations
With regard to consumer protection, information about the spread is a central topic, particularly with structured investment products, loan agreements, and payment services. The Consumer Credit Directive as well as the Securities Prospectus Act require transparent information about the spread to ensure traceability and comparability for consumers.
Legal consequences of violations
Lack of or insufficient information about the spread may lead to contract withdrawal rights or trigger claims for damages.
Spread in international law
Comparative analysis of various legal systems
The legal treatment of the spread varies internationally; however, there is increasing harmonization with regard to transparency and disclosure obligations due to international trade law, the International Financial Reporting Standards (IFRS), and EU directives.
Conclusion: Summary of legal aspects
The spread is a comprehensively regulated concept in German and European law, subject to different regulations in various legal fields, particularly concerning transparency, disclosure requirements, competition law, and consumer protection. Legal treatment always requires precise contract drafting, lawful disclosure, and compliance with regulatory limits to avoid civil, supervisory, or tax-related risks.
Frequently Asked Questions
What legal requirements apply to the disclosure of the spread by financial service providers?
Financial service providers are obliged under EU law, notably the Markets in Financial Instruments Directive (MiFID II), to inform investors comprehensively and transparently about all costs associated with financial products. This explicitly includes the spread, i.e., the difference between purchase and sale price. Providers must present this spread clearly and in understandable language prior to contract conclusion, so investors can realistically assess the total costs and potential yield. The disclosure obligation refers both to the historical average spread and to maximum and minimum values within representative periods. Furthermore, national implementations and requirements of national financial supervisory authorities (in Germany, for example, BaFin) demand that actual transaction costs and the spread are shown separately in confirmations of individual trades. Non-compliance with these transparency obligations can be sanctioned as a violation of investor rights and as an act of unfair competition.
What liability consequences arise if the spread is not correctly disclosed?
If spreads are not properly, misleadingly, or even not disclosed at all in financial transactions, this can have far-reaching liability consequences. Affected investors may assert claims for damages against the financial service provider since this would constitute a breach of duty within the advisory contract. In addition, the rules on prospectus liability and tortious liability pursuant to §§ 823 ff. BGB apply. Supervisory measures such as fines and prohibition orders may also be imposed by the competent authority (e.g. BaFin). Civil law rescission of the transaction may also be possible in some cases if the spread was not properly disclosed and the investor suffered provable damages as a result.
How must changes to the spread be handled and communicated legally?
According to applicable supervisory law, financial service providers must communicate any change in cost structure, including adjustments to the spread, in a timely, clear, and understandable manner. The legal provisions require that affected customers are informed in written form (letter, e-mail, or via the online customer portal) about essential changes prior to such changes taking effect. An adequate lead time must be provided so that customers can decide whether to continue or terminate the business relationship before the change comes into force. The duty to inform applies to both permanent and temporary adjustments to the spread, for example, during periods of increased market volatility. Failure to provide timely information may be sanctioned as a breach of disclosure obligations (§ 63 WpHG in Germany).
What legal particularities apply to spreads in OTC trading?
In over-the-counter (OTC) trading, stricter transparency requirements apply with regard to the spread, since the spread is set directly by the counterparty and there is no independent central exchange determination. The EU regulation MiFIR, as well as national stock exchange laws, require market makers and systematic internalisers in particular to disclose price components and provide pre- and post-trade transparency, as required by the traded product category. If customers are not expressly informed of the discretion and potentially wider spreads in OTC trading, this can be considered misleading and thus a violation of the Securities Trading Act (WpHG). In addition, it must be ensured that all legal documentation and control obligations are regularly fulfilled in OTC trading.
Are there regulatory differences between various financial products regarding the spread?
Yes, regulatory distinctions exist depending on the type of financial product. For traditional securities like stocks or bonds, there are clearly defined exchange and supervisory requirements regarding spread transparency. For more complex products such as derivatives (CFDs, options, futures), stricter information requirements apply (such as through the PRIIPs-KID), which must factor the spread into the overall cost consideration. The legal requirements also differ between retail and professional clients, with retail clients benefiting from more extensive information and protection rules. Compliance with these provisions is monitored by the respective supervisory authority, with violations being sanctioned to varying degrees of severity.
How is the appropriateness and market conformity of the spread legally reviewed and enforced?
The market conformity and appropriateness of the spread are assessed based on industry-specific benchmarks and statutory norms. Financial service providers are required to determine spreads in line with market conditions and to regularly review them so as not to demand disproportionate or non-market-related prices. The national financial supervisory authority (such as BaFin in Germany) may carry out controls and investigations, taking random samples and comparing them with the spreads of other providers and marketplace data. If deviations are found that indicate a systematic disadvantage to clients, supervisory measures may be taken, up to and including a prohibition on the business model and significant fines. Antitrust proceedings under the German Unfair Competition Act (UWG) are also possible.
What documentation obligations exist with regard to the history of spreads?
Financial service providers are subject to strict documentation obligations arising from MiFID II, MiFIR, and national financial market laws. They must record all spread histories and changes in a traceable manner and retain them for a legally prescribed period (in Germany, usually at least five years). This includes storing historical price data, which must be made available to clients upon request or during regulatory audits. The records must be verifiable and traceable at all times, so that the supervisory authority can verify price structuring and any changes. Failures in documentation may result in supervisory and liability consequences.
