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BFCSA: Westpac claims victory in interest rate rigging case

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Westpac claims victory in interest rate rigging case

Australian Financial ReviewMay 24 2018 7:39 PM

James Frost, Patrick Durkin


The corporate regulator has failed to prove Westpac manipulated the bank bill swap rate with the Federal Court finding that while the bank had acted unconscionably the trades did not amount to market manipulation.

Justice Jonathan Beach rejected the Australian Securities and Investment Commission's central case that Westpac had engaged in market manipulation in setting the bank bill swap rate (BBSW), a key benchmark interest rate in Australian financial markets.

ASIC's landmark case launched by former chairman Greg Medcraft in 2016 follows decisions by the ANZ, CBA and NAB to settle similar cases for a total of $125 million.

ASIC was emboldened by the successful actions of regulators against global banks for rate-rigging which have raised more than $US9 billion.

Justice Beach accepted that while Westpac traders acted in four cases with the "dominant purpose of influencing the level at which BBSW was set in a way that was favourable to its BBSW rate set exposure, I do not consider that the [market manipulation] contraventions ... have been made out".

"For the moment, it is sufficient to say I am not satisfied that the holding of the relevant dominant purpose on the said four occasions, together with other evidence, establishes the effect or likely effect of creating or maintaining an artificial price," the judgment says.

"Generally speaking, it is one thing to say that incentives existed [to manipulate BBSW]. But it is another thing to say that the traders engaged in manipulative trading."

However, lawyers for ASIC also claimed victory, describing themselves as "ecstatic" about the decision which is expected to result in a penalty of less than $3.3 million. ASIC expected to seek part of its legal costs which are believed to top more than $100 million in total against the four big banks.

"This is a very significant and positive outcome for the integrity of Australia's financial markets," an ASIC spokesman said.

The regulator said Justice Beach's findings that Westpac engaged in unconscionable conduct four times amounted to a significant win for ASIC in what was a weaker case than against ANZ or NAB.

"On the four occasions that I have identified, Westpac engaged in unconscionable conduct... but in making this finding I have avoided descending into the 'formless void of individual moral opinion'.

"It is sufficient for me to say ... without dwelling in the paradigm or moral obloquy, Westpac's conduct was against commercial conscience as informed by the normative standards and their implicit values enshrined in the text, context and purpose of the ASIC Act specifically and the Corporations Act generally," the judgment says.

"I have also concluded that by reason of inadequate procedures and training, Westpac contravened its financial services licensee obligations under ... the Corporations Act".

Justice Beach largely gave Westpac's traders Colin 'The Rat' Roden and Sophie 'The Perfumed Steamroller' Johnston the benefit of the doubt on key trades.

He meticulously examines the alternative innocent explanations provided by the Westpac traders, some of which he accepts but others which he has described as problematic and implausible.

Vindication for Hartzer

The decision is seen as partial vindication for Westpac's chief executive Brian Hartzer and chairman Lindsay Maxsted who personally reviewed ASIC's claim of unconscionable conduct and market manipulation charges line by line and decided to back their traders.

In a lengthy trial last November, ASIC argued that Westpac developed and implemented a practise of trading bank bills during the rate set window to benefit the bank's long or short exposure.

The regulator also argued that during the relevant period Westpac' traders were acting with the sole or dominant purpose of moving the rate so that it BBSW rate would produce a yield that did not reflect the genuine forces of supply and demand.

Westpac was found to have engaged in unconscionable conduct on four of the 16 occasions when it was involved in setting the benchmark rate between April 2010 and June 2012.

However ASIC failed to make out that the intention of the traders actually amounted to a manipulation of the rate or misleading and deceptive conduct towards bank customers.

Justice Beach however did not appear swayed by the use of the transcripts as evidence, saying that whenever there was uncertainty as to what was said "after considering the context and all relevant circumstances, I have resolved that in Westpac's favour".

The decision is also expected to shut down the prospect of class actions against the bank with Justice Beach finding that evidence from Origin Energy and Mirvac that they were unaware Westpac might engage in attempted manipulation, didn't prove the listed companies had suffered a loss.

Westpac said in a statement that it is "committed to working with regulators in a constructive manner including when we have a genuine difference of opinion. When that occurs our aim is to resolve the difference in an open, transparent and respectful way," a spokesman said.

Earlier this month, the Commonwealth Bank admitted it attempted to engage in unconscionable conduct and paid $25 million in penalties and costs as part of the settlement of a case alleging it manipulated the bank bill swap rate in 2012.

National Australia Bank and ANZ Banking Group also settled a similar case brought by ASIC with admissions they attempted to engage in unconscionable conduct.

CBA's penalty was half of the $50 million paid by each of NAB and ANZ - but ASIC brought fewer allegations against CBA.

NAB ultimately admitted to 12 instances of attempted unconscionable conduct, and ANZ to 10. ASIC originally alleged NAB had committed 50 breaches, ANZ 44 breaches, and Westpac 16 breaches.

Approving settlement of the NAB and ANZ case last November, Federal Court judge Jayne Jagot said the general public would be "shocked, dismayed and disgusted" by the behaviour of the banks and their traders.

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