Westpac Banking Corp. was assessed a maximum fine of 1.8 million Australian dollars (U.S. $1.2 million) to address charges levied by the Australian Securities and Investments Commission (ASIC) of insider trading related to an interest rate swap transaction.
Westpac must also pay AUS$8 million (U.S. $5.2 million) to cover litigation and investigation costs, ASIC announced in a press release Jan. 31. Australia’s Federal Court sided with the regulator in the case.
ASIC noted because of the alleged misconduct occurring in October 2016, the maximum penalty was significantly lower. The current penalty for similar misconduct is about AUS$15.7 million (U.S. $10.2 million) minimum for corporations and AUS$782.5 million (U.S. $507.3 million) maximum for large entities.
The details: In October 2016, Westpac conducted pre-hedging before its AUS$12 billion (then-U.S. $8.6 billion) interest rate swap transaction, the largest in the country’s history, according to ASIC’s statement of agreed facts.
ASIC found “unconscionable conduct” related to the swap transaction because of interest rate risk associated with AustralianSuper and IFM’s purchase of electricity provider Ausgrid from the Government of New South Wales.
Because of this risk, Westpac’s pre-hedging had a “detrimental impact on the counterparty to the transaction,” ASIC Deputy Chair Sarah Court said in the release.
Further, Westpac allegedly acted on an internal plan to pre-hedge up to 50 percent of the interest rate risk by trading in significant volumes of interest rate derivatives before the swap was executed and failed to obtain client consent or fully disclose its planned pre-hedging.
ASIC found Westpac’s derivatives trading desk achieved a trading profit of approximately AUS$20.7 million (U.S. $13.4 million) on the day the swap was executed. Further, AUS$3.7 million (U.S. $2.4 million) was allocated to the sales team as commission.
Compliance considerations: At the time of the swaps transaction, Westpac did not have policies and procedures for conflicts of interest related to pre-hedging, per the statement of agreed facts.
Further, Westpac’s compliance monitoring programs were “limited to confirming the accuracy of the information recorded on its various registers used to manage its conflicts.”
ASIC found the company had inadequate training on disclosure to counterparties in relation to pre-hedging of deals.
The court reserved its decision to order Westpac to complete a compliance program with an independent review of its pre-hedging practices and controls, including relating to conflicts of interest management and client communications, according to ASIC.
Westpac did not respond to a request for comment.