ASIC’s high-stakes battle with the banks
April 6, 2016 10:06am
The regulator will have its work cut out if it attempts to make a case for market manipulation against all four of the big banks. The Australian Securities and Investments Commission’s actions against ANZ Bank and Westpac are going to be high-stakes and very complex. It will get even more complicated if it adds the other two majors, Commonwealth and National Australia Bank, to its hit list.
On Tuesday, ASIC launched proceedings against Westpac alleging that it had acted unconscionably and manipulated the market by trading in a manner intended to create an artificial market in the bank bill swap rate between April 6, 2010 and June 6, 2012. Last month, it made similar allegations — over a similar time frame — against ANZ. Each bank it adds to these actions makes its case more complex and challenging and the implications of any adverse outcomes will also be more important for both ASIC and the banks. It is known that ASIC has also had its team of investigators combing through the trading room “chat” records of CBA and NAB — who have spent tens of millions of dollars to respond to the investigation — and there is an expectation they will also be hauled before the courts.
The bank bill swap rate is the main interest rate benchmark. It is the reference point for billions of dollars of debt and trillions of dollars of derivatives and ultimately influences the interest rates charged to companies and households. At the time of the alleged offences (the mechanism for setting the rate has now been changed) the BBSW was set, after a five-minute window of trading, at 10am each morning. It was based on submissions from 14 banks based on the prices at which the bank bills issued by the four majors had traded. The four top and four bottom observations from the 14 banks were discarded, so the rate was set by the average of the remaining six.
The core of ASIC’s case against both ANZ and Westpac is that their traders manipulated the rate by intentionally moving the rate higher or lower in order to maximise their profits or minimise their losses to the detriment of those holding opposite positions. While ASIC has supported the action with some rather macho and colourful transcripts from the banks’ traders, one might have thought that in trading any sort of asset, whether financial or real, any buyer or seller is trying to maximise their profits and minimise their losses and will employ strategies and tactics to try to achieve those outcomes. No rational trader or investor would try to minimise their profits and maximise their losses.
For the major banks, given the billions of dollars of exposures they have to interest rate risk, their trading isn’t purely speculative. They have actual funding requirements and they also trade in both the physical and derivative markets to manage their overall risk exposures. They employ very sophisticated and complicated strategies to achieve their objectives and control the risks in their balance sheets. Markets are zero sum environments, so, for anyone who makes a profit from a trade there will be someone, or a group of ‘someones,’ who experience corresponding losses because they hold opposite positions. Simplistically, if ANZ or Westpac had winning trades, then other participants — and the majors would be the biggest participants — would have losing trades.
It is worth noting that the trades ASIC focuses on involve actual purchases and sales of billions of dollars of securities and, from the conversations between traders that it has cited, are related to underlying exposures in the tens of billions. Where ASIC might see trading that doesn’t reflect “genuine forces of supply and demand,” others could argue that trading on that scale, supported by real funding requirements and real management of interest rate risks, is itself quite a genuine element of the supply and demand. The cases aren’t going to involve black and white concepts of what’s genuine and what’s artificial.
The action against ANZ covers a period between March 2010 and May 2012. The proceedings against Westpac allege the manipulation occurred between April 2010 and June 2012. Given that the way the BBSW was calculated changed in 2013, one would imagine that any proceeding against CBA and NAB would be focused on similar periods. ASIC isn’t alleging there was any collusion between the banks, which makes its cases quite different to the market manipulation actions that have been brought elsewhere and that have resulted in billions of dollars of fines for some of the world’s largest banks.
If there were no collusion, to manipulate the BBSW each bank would have had to independently and successfully trade in a way that distorted the market in its favour, in a deep and liquid market where the other key participants are of similar size and profile and where there is a range of other participants, some of them global in scale. It is notable that in the two actions brought so far, ASIC has cited different days when each bank manipulated the rate within roughly the same two-year timespans. It would have been very difficult to allege that both banks manipulated the market in their favour on the same day.
The cases are going to be challenging enough to make out if the allegation is that each of them, acting without any collusion, rigged the BBSW over a two-year period but somehow “fixed” it on different days. If the allegations were extended to cover all four majors, the scale of the challenge — and the complexity of the cases — will increase dramatically. The banks have no option but to fight the actions not just because of the reputational damage and financial penalties they face if they lose but also due to the implications for their licences and the open-ended potential for class actions, given the centrality of the BBSW to domestic interest rates.
They would, of course, have preferred to have made “no admission” contributions to ASIC’s financial literacy fund rather than spend the best part of $100 million between them responding to ASIC’s investigation (each of them has had to trawl through years and tens of millions of trading room chats) as they now face very significant costs from litigation that will almost inevitably end up in the High Court.