Westpac faces another drawn out court battle after ASIC filed allegations of insider trading and unconscionable conduct over a bumper interest rate swap mandate the bank executed in 2016 for a consortium of leading industry superannuation investors.
The bank could face fines and penalties in the order of A$1 billion if the regulator is successful in the civil proceedings that were filed in the Federal Court on Wednesday.
In its claim ASIC asserts that IFM Investors and the country’s largest super fund, Australian Super, were harmed by Westpac traders who allegedly helped to drive up the cost of local interest rate swaps in the hours before the bank completed a $12 billion swap deal requested by the investment consortium.
Australian Super and other members of the consortium entered the massive swap deal with the bank to mitigate their exposure to floating interest rates on $12 billion of loans used to fund the purchase of NSW electricity distributor, Ausgrid.
The regulator alleges that several senior Westpac executives and derivatives traders knew at around 8.30 am on 20 October 2016 that the consortium would be entering a massive swap deal with the bank to hedge its borrowing risks.
However, the consortium’s likely cost of acquiring interest rate protection appears to have increased soon after that time as Westpac traders started offloading more than 44,000 bond futures contracts notionally worth more than $4.4 billion and 6,109 bank bill futures with a face value of $6.1 billion.
According to ASIC, the bank’s traders were also busy acquiring more than $4 billion worth of Australian dollar denominated interest-rate swaps.
ASIC argues that Westpac acted unconscionably because it never disclosed to the consortium – its client - that it planned to sell billions worth of bond futures and interest-related derivative contracts before completing the massive swap deal.
The bank made no disclosure even though the client apparently raised concerns about the impact Westpac’s proprietary trading could have on pricing of the swap deal.
The allegation of insider trading hangs on an argument that Westpac used its knowledge of the Ausgrid sale and the swap deal request to pre-position its trading book to the potential detriment of its client and other market participants.
Westpac has not yet indicated whether it plans to defend all or parts of the ASIC civil claim, saying yesterday it was considering its position.
“Westpac takes these allegations very seriously and is considering its position having just received the Originating Application and Concise Statement of Claim,” the bank told the ASX.
“As the matter is now before the court it would not be appropriate to comment further at this time.”
In the statement of claim, ASIC names six staff employed in Westpac’s institutional bank who had knowledge of the Ausgrid transaction and the consortium’s swap deal request.
They include the former executive head of the institutional bank Lyn Cobley and three derivatives traders – Nicholas Allen, Benjamin Mitchell and Shane Dorman.
ASIC alleges that the three traders were involved in repositioning Westpac’s trading book for almost two hours before the consortium’s swap deal was executed.
“ASIC alleges that Westpac’s trading occurred while it was in possession of information that was not generally available to other market participants including those that traded with Westpac that morning,” the regulator said in a statement.
“The consortium, via a special purpose vehicle, executed the interest rate swap transaction with Westpac at 10:27am.
“ASIC alleges that Westpac’s trading on the morning of 20 October 2016 had the potential to impact the price of the swap transaction to the detriment of the consortium or the special purpose vehicle.”
The civil action could deliver another billion dollar hit to Westpac shareholders if the insider trading claims are upheld by the court.
Given there were at least 780 transactions executed by Westpac traders that were allegedly informed by inside information on the Ausgrid transaction, the bank could be exposed to a $1 million fine for each trade.
The court could also find that the trades amounted to a single breach if ASIC’s claim was successful.