Those that play in the arcane and rarefied world of trading interest rate derivatives remember October 20, 2016 – not just as the day a record-breaking $12 billion interest rate hedging deal was executed – but the day some found themselves on the wrong side a trade.
Five years on the corporate regulator, the Australian Securities and Investments Commission (ASIC) has alleged Westpac is the culprit and is accusing the bank of an illegal trifecta – insider trading, engaging in unconscionable conduct and breaching its financial service licence obligation.
Perhaps the most damaging of the claims made by ASIC is that Westpac’s behaviour came at a cost to its own client – the AustralianSuper and IFM consortium.
Westpac had acted on behalf of the consortium to manage the interest rate risk associated with its acquisition of 50.4 per cent of the NSW Ausgrid. ASIC has alleged that Westpac was aware it would be selected by the consortium to execute the swap transaction and thus had inside information.
The regulator has further claimed that Westpac got itself set in the market before executing for its client and in doing so affected the market price of the swaps instrument to the detriment of the consortium.
Given the size of the deal it would be prudent practice for Westpac to hedge its own risk – a point that ASIC would doubtless acknowledge. The trouble is, ASIC has contended that Westpac didn’t let the client know.
This probably explains why members of the consortium also watched, with some confusion, price movements of the interest rate as that October day progressed.
ASIC alleges Westpac was aware, or should reasonably have been aware, or was indifferent to the risk, that engaging in the morning trading ahead of executing the swap deal would or had the potential to affect the trading prices.
Westpac, should it decide to argue the case, will probably contend that it was just following convention and was inside the regulatory guidance on the swaps market.
The extent to which Westpac profited from the deal has not been outlined in ASIC’s concise statement of claim nor does it outline what penalties it is looking for.
But there are 800 alleged trades involved and each breach carries a $1.8 million for unconscionable conduct and $1 million for insider trading – although experts believe they are unlikely to be dealt with as individual breaches.
For its part, Westpac heralded the deal as a great success and highlighted its part in an investor briefing in 2017.
Under the heading; ‘Ausgrid case study- leveraging expertise across the business’, Westpac wrote that it ‘executed and novated the largest single parcel of Australian dollar interest rate swaps in the Australian market and was ‘awarded the sole execution role’…due to market experience ‘competitive pricing and trusted advisor status’.
Strangely, ASIC’s decision to do battle with Westpac was not the result of a complaint by the consortium, rather it was a more general decision to wade into practices with the interest rate swaps market.
It was two years after the Ausgrid sale that ASIC started to investigate Westpac’s role with the consortium. While ASIC does not characterise it as a test case, a win for the regulator could open a can of worms for others that inhabit this market.
In some respects it has a flavour of the cartel action taken in 2018 by the Australian Competition and Consumer Commission (ACCC) against ANZ and a group of investment banks for cartel conduct.
In that instance, the ACCC case – in which ASIC has since become involved – was characterised as regulators straying off the reservation by attacking what was considered conventional industry practice.
Westpac’s case also involves a similar departure by the regulator.
For the most part allegations of insider trading are associated with equity markets, and the alleged perpetrators have engaged in buying or selling shares on the back of information the broader market is not aware of.
The victims are generally the less sophisticated retail investors. There are no unsophisticated players in interest rate hedging – it’s a market in which banking institutions routinely ply their trade.
But for Westpac’s chief executive Peter King who is part of a new guard inside the bank, the prospect of dealing with another legal/behavioural ghost must be his worst nightmare.
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Source: Thanks smh.com