Key points
  • Westpac has been fined $1.8 million and ordered to pay $8 million of costs borne by ASIC
  • The Federal Court ruled the bank engaged in unconscionable conduct when executing Australia's largest ever interest rate swap transaction
  • Westpac pre-hedged up to 50% of the transaction without its client's permission, despite the potential to harm the client

The transaction was valued at $12 billion and eventuated in a $20.7 million profit.

Westpac will pay the $1.8 million maximum penalty following the Federal Court’s findings – a figure that would be significantly higher had the offence occurred today.

It will also pay $8 million to cover the legal and investigation costs of the Australian Securities and Investments Commission (ASIC), which brought the case against the bank.

The offence today deemed unlawful arose at the time a consortium, made up of AustralianSuper and a group of IFM entities, was purchasing a majority stake in Ausgrid from the NSW Government.

The consortium borrowed nearly $12.8 billion to fund the purchase and, in a bid to guard against the risk interest rates could change, entered the interest rate swap transaction with Westpac.

However, before the transaction, without the consortium’s permission, and to its potential detriment, Westpac engaged in pre-hedging.

ASIC said Westpac’s actions could have impacted the price of the interest rate swap, with every basis point increase potentially costing the consortium around $4.7 million. 

“This is a significant outcome which assists to clarify expectations regarding pre-hedging, particularly around disclosure and consent where the pre-hedging can have a detrimental impact on the counterparty to the transaction,” ASIC deputy chair Sarah Court said.

Pre-hedging means to hedge against risk born from an upcoming transaction.

Westpac pre-hedged up to 50% of the interest rate risk by trading in interest rate derivatives prior to the transaction.

“Appropriate conduct for pre-hedging is an issue of global significance,” Ms Court said.

“In this case, Westpac’s behaviour was unconscionable and exposed its client to significant risk.

“Westpac’s conduct was also in stark contrast with several other banks.”

Neither the financial watchdog nor the Federal Court appear enthused about the size of the penalty facing Westpac today.

These days, a finding of unconscionable conduct in breach of the ASIC Act or the Corporations Act could attract a fine of at least $15.65 million for a corporation or, for a large entity, the greater of $782.5 million or three times the benefit derived.

"We share the Court’s concern regarding the maximum penalty available in relation to the conduct, and note that had Westpac engaged in similar conduct today the maximum available penalty would have been significantly higher,” Ms Court said.

According to ASIC, Westpac’s derivatives trading desk realised a trading profit of around $20.7 million on the day of the swap, $3.7 million of which went to the sales team as commission. 

Initially, ASIC brought charges of insider trading against Westpac in the wake of its pre-hedging, but that was later dropped.

Despite the news, Westpac's (WBC) share price was up 1.51% today, while the ASX rose 1.06% off the back of softer than expected CPI numbers.

Image by Scancode Productions on Unsplash.