Benchmark rigging down under: Westpac censured by ASIC for manipulating interest rate derivative swap rate

Regulatory censuring against major interbank FX institutions in Switzerland, Britain and North America may have drawn to a close in November 2014 with collective fines totaling $4.3 billion having been issued, followed by class action lawsuits which also ran into several billion dollars, however a year and a half on, Australia’s astute regulatory authority, ASIC, is now taking on Westpac as the second bank in its jurisdiction to be on the receiving end of legal action for allegedly rigging the BBSW rates.

BBSW, which stands for Bank Bill Swap, is an Australian term which is particular to the Australian Financial Markets Association (“AFMA”) which is an industry association which stands for efficiency, integrity and professionalism within Australia’s capital, credit, derivative and FX markets.

In terms of etymology and functionality, the Bid and Ask values of BBSW are used, amongst other things, by market participants to price floating rate loans. Being directly derived from BBSW and where the only difference is the predetermined and non-variable bid/ask spread to BBSW, rates published on BBSY are a familial derivative of BBSW and not a separate benchmark.

In this particular case, ASIC considers its case against Westpac to be based on the finding by the regulator that Westpac traded in a manner intended to create an artificial price for bank bills on 16 occasions during the period of April 6, 2010 and June 6, 2012. Earlier this year ASIC launched action against ANZ Bank for allegedly rigging the BBSW on 44 days.

The regulator has stated that its case against Westpac differs from the case it brought against ANZ because the staff which ASIC alleges manipulated these particular benchmark are employed within Westpac’s Treasury facility, which is the division responsible for funding the bank and therefore is seperate to the bank’s financial markets business.

ASIC alleges that during the two year period in question, Westpac had a large number of products which were priced or valued off BBSW and that it traded in the bank bill market with the intention of moving the BBSW higher or lower to maximise its profit or minimise its loss to the detriment of those holding opposite positions to Westpac’s.

Westpac’s Managing Director of Group Treasury Colin Roden, alongside colleague Sophie Johnston have been cited in court documents as being executives who were involved in allegedly conspiring to manipulate the BBSW rate in order to benefit Westpac.

ASIC states:

“Acting through Mr Roden, Westpac bought 30-day Prime Bank Bills with a face value of $1.853 billion in the bank bill market comprising 100 per cent of all purchases of that tenor made through brokers on that day. That trading did not constitute engagement in a genuine process of supply and demand in the bank bill market as it was conducted in order to lower the rate at which the BBSW was set on that day as recorded in statements made by Mr Roden to Ms Johnston during a telephone conversation”

According to the regulator, the use of foul language was expressed by Mr. Roden to Ms. Johnston as part of an admission to having rigged the benchmark, as Mr. Roden said

“I know it’s completely wrong but f— it, I might as well, I thought f— it. We’ve got so much money on it we just had to do it, right?”

Westpac CFO Peter King has refuted the allegations, as well as having rejected ASIC’s interpretation of the alleged communication between Mr. Roden and Ms. Johnston and has stated that the bank fully cooperated with ASIC’s investigation, however Mr. King also stated that the bank would vigorously defend any action.