ASIC has explosive evidence against Westpac over manipulation of interest rate
The Australian Securities and Investments Commission (ASIC) has explosive evidence it may use in a lawsuit against Westpac over allegations employees manipulated the bank bill swap rate, according to reports. It includes excerpts of recorded phone calls revealing how traders at the bank opening discussed manipulated the rate set.
"And then in 2 years time there's some enquiry that you have been f---ing with the rate set that's cost them all 10 basis points and, you know what, leave me alone, its got nothing to do with me, right. That's my biggest fear and that's what I will express to them…," the transcript said. ANZ, Westpac have raised interest rates on interest-only loans amid looming crackdown. Credit: Nicholas Rider 'Biggest concern' In the conversation, "our biggest concern" about the "reputation" of the bank among corporate borrowers and other market participants was expressed, as opposed to the "professional" inter-broker dealers, who "know what they were doing" and probably "spend half their life trying to stitch people up." "The unprofessional, unknown random you know with $50 million of debt that's getting stitched up by his bank… that at some point wakes up and has a dummy spit and quite deservedly so".

The filings present more instances that allege Westpac tried to favourably influence the setting on the bank bill swap rate setting on days when they had large exposures, in either direction. They did this by stockpiling more bank bills and selling them when they needed a higher rate, or buying up bank bills to drive the rate lower when they required a lower setting, ASIC implies. $460m sale For example, on June 10, 2010, ASIC alleges Westpac, through Mr Roden, sold 90-day prime bank bills with a face value of $460 million. This was carried out "with the sole or dominant purpose… of raising or maintaining the rate at which the 90-day BBSW set on 10 June and therefore at yields which did not reflect the forces of genuine supply and demand in the bank bill market," ASIC's claim says.

Two days before the trade, Mr Roden told a colleague that: "…I'm going to f--- them as well that's why I don't want to get... I'm going to f--- the rate set right on the 10th…", according to the pleading. Mr Roden is known as the most influential and highest paid trader in Australian interest rate markets. Almost a year later, on June 9, 2011, ASIC details another trade where Westpac, through trader Sophie Johnston, sold 90-day prime bank bills with a face value of $1.47 billion in an alleged attempt to raise the yield on the BBSW. In an email to Mr Roden three weeks before, Ms Johnston wrote, according to the pleading, that "…there will obviously be other shenanigans happening on the 9 June when we have a large [rate set of the BBSW] …. So you may want to keep some of the large sets on the 1st and 6th with NAB just to load up on paper so we can then churn it out on the 9th." Westpac defending the case

Westpac is defending the case. Mr Roden and Ms Johnston are still working at the bank. ASIC has not taken any action against Mr Roden or Ms Johnston. ASIC says that while Westpac has a code of conduct, a risk appetite statement and dealing room policies for traded risk, the bank "did not have any policies or procedures specifically on trading in the bank bill market or making submissions to AFMA as to Westpac's view of the mid-rate of the yield for prime bank bills." ANZ Banking Group is facing a similar action, which was filed by ASIC on March 4. The regulator alleges ANZ manipulated the BBSW rate on 44 separate occasions over a similar period. ANZ is also defending the case. BBSW is used to directly set the price of derivatives such as interest rate swaps, cross-currency swaps and forward rate agreements as well as business loans and securities such as bank bill futures and bonds. ASIC chairman Greg Medcraft said in February the rate indirectly flow through to consumers because it is the source of many institutions' capital funding. ASIC commissioner Cathie Armour has led the regulator's investigation into the banks. ASIC's case – which is based on legal arguments of unconscionable conduct and market manipulation – alleges that traders realised that by virtue of their size, they could influence the supply and demand of bank bills during the five-minute trading window when the rate was set.

Friday's updated statement of claim also provides details of how the case will allege damages were inflicted on Westpac counterparties, including listed companies and individuals not participating in the bank bill market, but who held financial products referenced to BBSW. Westpac offered a large number of products priced or valued off BBSW and that it traded in the bank bill market. By moving the BBSW higher or lower to maximise its profit or minimise its loss, it caused detriment to those holding opposite positions to Westpac's, ASIC alleges. 12 million documents Westpac has co-operated with ASIC in its BBSW investigations, including providing over 12 million Westpac documents for review. A spokesman for Westpac said the bank is working through the schedule of particulars as part of the court procedure.

"We disagree with ASIC. It's a complex and technical issue and we will be defending our position," the spokesperson said The bank had been "upfront in its position" but given the matter is before the court it was "inappropriate for us to comment further". Both ANZ and Westpac have broadly maintained that the traders were performing the crucial and complex task of funding their institutions and managing the bank's interest rate risk, rather than manipulating the market in their favour. They are also likely to claim that they were not capable of meaningfully moving the bank bill rate set in their favour. During the period Westpac is alleged to have manipulated the rate, it was set by a panel of 14 banks which submitted the rates at which they traded bank bills. The conversations also hint at highly adversarial relationship between Westpac's treasury and National Australia Bank, which is mentioned on several occasions.

'The scum' Mr Roden referred to NAB as "the scum" "f---ing NAB" and "deadshits" in a conversation with colleague Sophie Johnson on April 6, 2010, in which he described how he pushed the one month bank bill rate lower after buying paper from UBS that Westpac had issued directly to NAB, who then sold it without Westpac's knowledge. The transcript was presented by ASIC to show how, when Westpac's treasury had a $14 billion 'short' exposure to the one month bank bill rate, it sought to push it lower. He bought $500 million from UBS, $250 million from Bank of Scotland, $350 million from JPMorgan and $300 million from Goldman Sachs. "I hate those f---ers as well," Roden said. The Westpac and ANZ cases are listed for a directions hearing on June 27.