Westpac began trading in the market on October 20, 2016, hours before the historic $ 16.2 billion privatization announcement was announced.
ASIC alleges that at 7 a.m. on October 20, 2016, the consortium signed the privatization agreement and at 8:30 a.m. Westpac knew it would be selected to execute the swap transaction. According to ASIC, this was “presumed inside information”.
“Westpac traders have acquired and sold interest rate derivatives in order to pre-position Westpac in anticipation of the execution of the swap transaction,” ASIC said in a statement.
Documents filed by the court show that four Westpac traders began selling bond futures, entering into derivative swaps and other interest rate and note derivative futures. bank shortly after 8:30 a.m. on October 20, 2016.
Among the counterparties in swap exchanges were Deutsche Bank, Goldman Sachs, Merrill Lynch, Nomura, JPMorgan, TD, UBS, Citi, and major banking counterparties ANZ and NAB.
“ASIC alleges that Westpac’s transactions took place while it was in possession of information which was not generally available to other market participants, including those who traded with Westpac that morning.”
The transaction was accompanied by a $ 12 billion loan and proportionate interest rate swap transaction, of which ASIC said: “Remains the largest (…) in a tranche of l ‘History of Australian Financial Markets’.
The consortium executed the swap transaction at 10:27 a.m. ASIC alleged “that Westpac’s negotiation on the morning of October 20, 2016 had the potential to impact the price of the swap transaction to the detriment of the consortium or ad hoc vehicle.”
It is difficult to determine the levels at which the interest rate markets might have traded had Westpac not carried out these transactions. However, IFM Investors and AustralianSuper may have ultimately paid a higher cost to hedge their interest rate risk as a result of these actions.
IFM Investors and AustralianSuper declined to comment on the case. A spokesperson for AustralianSuper said the matter was between ASIC and Westpac.
ASIC also alleged that Westpac’s failure to provide “full and informed disclosure of its intention to pre-position its trading portfolios prior to and with notification of the execution of the swap transaction was unreasonable behavior.”
The regulator said Westpac did not prevent its traders from trading to pre-position its trading portfolios before the trade is executed.
Westpac also failed to inform the consortium of its actions and that they could have affected the price of the swaps to the detriment of the consortium. The bank also did not have a formal policy on pre-positioning trading portfolios, nor was there adequate training, practice, procedure or documentation for its traders, the regulator said.
Westpac said it acknowledged the process and said it was not appropriate to provide further comment given the case was in court.
“Westpac takes these allegations very seriously and is considering its position after receiving the initial request and a concise statement,” said a statement from the bank.
If Westpac chooses to defend the claims, it will once again test the limits of an acceptable practice in the OTC dark market. There is no precedent for insider trading in the fixed income markets, legal sources have said.
Westpac may avail itself of the so-called “own intentions” exemption from the insider trading rules which authorize transactions carried out for the entity’s own activities.
The Ausgrid transaction was one of the largest debt financing transactions in the Australian capital markets. The debt involved debt at three, five and seven years, part of which was in the form of a bridging loan.
Market sources said at the time that Westpac was the most competitive bidder to play the hedging agent role.
The hedging agent arranges the derivatives required by a financier to protect them from adverse movements in interest rates. While asset owners tend to prefer to fix interest rates in order to have certainty on absolute borrowing costs, banks prefer floating interest rates to match their own sources of funding.
Australian swap contracts rose significantly in the three hours to 11am on the day in question, as the market digested the volume of hedging required by the 15 banks. About $ 6 billion of debt was in the form of a five-year loan, while $ 1.5 billion was given over seven years.
Westpac traders, according to sources at the time, made tens of millions of dollars in profits and senior executives celebrated the profits with drinks and canapes at the end of the week.
The large market movements, however, caught the attention of some interest rate traders worried about being on the wrong side of a trade in which the counterparty had an informational advantage – mainly that there were billions of dollars in. debt seeking coverage.
The case comes after ASIC and Westpac battled in court over allegations the bank manipulated the banknote swap rate. After a long, high-profile trial, Westpac has been convicted of unreasonable behavior on four occasions, but has not been convicted of market manipulation.
The bank paid a fine of $ 3.3 million, which Judge Jonathan Beach described as insufficient but the maximum that he could impose under the law. The other three big banks all settled with the regulator before going to trial.