ANZ lacked 'capacity' to meddle with BBSW
Australian Financial Review Aug 3 2016 7:26 PM
James Eyers, Jonathan Shapiro
ANZ Banking Group says it could not have distorted the bank bill swap rate even if it had wanted to because it was not as powerful as market forces.
In its defence to allegations that it rigged the key market interest rate, ANZ said it had "no capacity" to distort the bank bill swap rate (BBSW), which was determined by a "dynamic market process".
In a 58-page response to the Australian Securities and Investments Commission's claims of market manipulation and unconscionable conduct, ANZ argued it traded bank bills for a variety of commercial and regulatory reasons, which would prevent ASIC proving the "dominant purpose" of its traders was manipulation of BBSW.
A day after Westpac Banking Corp accused ASIC of taking trader conversations out of context and mis-characterising them in its defence of a similar case, ANZ said the regulator has misunderstood the influence that any one bank involved in setting BBSW can have on the outcome of the rate set.
"ANZ had no capacity to raise (or maintain higher) or lower (or maintain lower) the level at which the BBSW was set by AFMA [the Australian Financial Markets Association] on any given Sydney business day in the relevant period to a level that did not reflect the forces of genuine supply and demand," ANZ said in a document filed with the Federal Court of Australia on Wednesday.
Different defence
ANZ said "there was no likelihood" that any participant in the market "would have any particular effect" on the yield at which bank bills traded, or on the views of any of the banks as to where the BBSW should be set.
ANZ's legal defence to allegations it manipulated the BBSW rate on 44 separate occasions between March 2010 and May 2012 is different from Westpac's, which chose to respond to various specific conversations by its traders that ASIC highlighted as evidence of wrongdoing. In several parts of its defence, Westpac attempted to explain how ASIC had misunderstood the nature of the conversations, including one between its head trader Col Roden and an official from the Reserve Bank of Australia.
In contrast, ANZ's defence does not specifically refer to any of the trader conversations being used by ASIC to support its case. Rather, ANZ simply denies any of the conversations cited by ASIC proves the law was contravened.
The BBSW is a benchmark index used to determine interest rates on billions of dollars of bonds, loans and derivatives.
ANZ continually points back to the multiple reasons for participating in the bank bill market. It said trading in bank bills "were influenced by a range of regulatory and commercial factors", including the bank's obligations to AFMA as a market maker for bills, its funding needs, management of liquidity requirements, and managing internal trading and credit limits. The defence also points to the use of bank bills to manage interest rate and trading risks.
ANZ says that prices for bills being bid and offered by other banks in the process were also influenced by a similar range of factors. It suggests that because it was engaged in the market for a range of reasons, allegations of misconduct identified by the regulator will not be sufficient to trigger a breach of the corporations legislation under tests previously set down by the courts.
All of the sales or purchases of bank bills during the rate setting window "was an arm's length transaction entered into at prices (yields) that were determined by the dynamic interaction of bids and offers made by ANZ and all other bank bill market participants", ANZ said.
Challenge on definitions
In a similar fashion to Westpac, ANZ indicated that it will challenge the regulator on the definitions of financial products. The two financial products in focus in the case are interest rate swaps and bank bill futures contracts. ANZ said because interest rates swaps are not traded on a financial market, they are not actually caught by the relevant provision of the Corporation Act that ASIC is seeking to rely on.
"Interest rate swaps are heterogeneous contracts which are issued (entered into) between counterparties in bilateral over-the-counter transactions ... Neither the issue nor secondary sale occurs on a financial market."
The defence also pointed out several errors the regulator made in its pleadings, including misconstruing the corporate and organisational structure of ANZ and misrepresenting its corporate governance framework.
National Australia Bank's defence to similar claims of market manipulation and unconscionable conduct is due to be filed in October.
ASIC is yet to file an action against Commonwealth Bank of Australia despite speculation last month that a similar claim was imminent.
A case management hearing is due to be held on August 22 before Justice Jonathan Beach, who has set a provisional trial date for the cases of August 1 next year.
Adrian Blundell-Wignall says low rates ineffective
Australian Financial Review Aug 3 2016 7:08 PM
Jonathan Shapiro
One of the world's leading economists says increasingly aggressive monetary policy will prove ineffective in restoring global growth in a world awash with a supply of commodities.
Adrian Blundell-Wignall, the Australian economist at Paris-based OECD, said negative interest rates were also crimping the world's banks as returns from their liquid assets ate into returns.
A "one size fits all monetary policy" did little to solve the issue of overcapacity and was resulting in even more investment in sectors where returns were falling.
"It doesn't matter what you make interest rates – you have to get a capital allocation process that bring creative destruction in certain sectors of the global economy," he said in Sydney on Wednesday.
In a presentation to the nation's top economists Mr Blundell-Wignall explained that emerging market companies had returns on equity that were below their cost of capital, a sign that they were ignoring market-enforced discipline to curtail supply.
Over 40 per cent of the world's capital expenditure by companies was in energy and mining where returns were poor and the use of debt had increased. This, he said, was the reason for much of the world's deflationary pressures.
"The global problem is the headwind caused by misallocations of resources in the energy and material sector all around the world."
'Currency wars'
Falling global inflation has led central banks to lower interest rates to ultra low and sometimes negative levels to spur investment and spending to meet their inflation targets. Low and negative interest rates have also forced their respective exchange rates lower, making exports more competitive. But that has sparked what some have labelled "currency wars" as other economies are forced to respond to exchange rate rises from yield-seeking capital inflows by lowering their interest rates.
When asked if Tuesday's reduction in the cash rate to 1.50 per cent was justified, Mr Blundell-Wignall said the Reserve Bank could not be "impervious" to interest rate settings around the world
"Even with floating exchange rates you can't run completely divergent policies," he said.
"[If you have] countries with minus half a per cent you can't be plus 10 per cent. If you put your head above the trench you will get a big exchange rate appreciation."
With a cash rate at 1.50 per cent, the RBA could still provide some monetary stimulus if there was a recession.
"If you compare Australia to the rest of the world we have a hundred miles to go on interest rate cuts so we have a fair bit of ammunition."
He said "Australia has always benefited from having open and international capital markets" reiterating the importance of a free floating exchange rate.
China model at fault
However, he pinned much of the deflationary forces facing the world on China's economic model in which it continues to invest in sectors that do not produce a positive return.
"With excess capacity you need to have a capital allocation process which allows for when returns on equity drop below the cost, there is a mechanism to stop doing that investment and reallocate it somewhere else."
"But that works less well in countries which have closed investment and protectionist policies."