CBA traders ‘had co-ordinated approach to BBSW exposure’

The Australian 12:00am March 6, 2018

Ben Butler

Traders at the treasury and markets divisions of Australia’s biggest lender, Commonwealth Bank, agreed on a “co-ordinated ­approach” to managing exposure to the benchmark bank bill swap rate, according to Federal Court documents.

An email recording the agreement between the two parts of the bank is contained in documents filed with the court by the corporate regulator, which is pursuing CBA for allegedly rigging or ­attempting to rig the BBSW six times in 2012.

A schedule of particulars, filed by the Australian Securities & Investments Commission late on Friday afternoon and made available ­yesterday, also includes excerpts of ­conversations between CBA traders discussing whether they wanted the rate to set high or low.

A CBA spokesman said the bank “disputes the allegations made by ASIC as we do not believe our employees have engaged in unlawful conduct, nor have they done anything that would have adversely impacted the efficiency and integrity of ­financial markets as alleged, or at all”.

The filing comes as CBA executives prepare for an appearance at the royal commission into the banks next week, which is to hear evidence about allegations of fraud and substandard behaviour in a different business area, consumer loans.

On February 16, 2012, according to an email cited in the filings, senior CBA interest rate trader Mark “The Powerful Owl” Hulme laid out the result of a meeting between portfolio risk management, part of the treasury division responsible for funding the bank, and IB Markets Swaps, part of the markets division that looks after customer trading.

The two divisions agreed that on Monday morning they would “combine rate settings from markets and treasury”.

“If have same interest on particular days, especially for low BBSW then can co-ordinate purchase of Bills/CD’s (certificates of deposit) on screen and possibly receiving of FRA’s (forward rate agreements) beforehand,” Mr Hulme wrote.

“Common days that benefit from high BBSW should not be actively managed due to sensitivity of Retail bank to Cash BR levels.

“Similarly a high BBSW on days preceding weekends and especially long weekends should be avoided due to its disproportionate effect on the Cash BR ­calculation.

“If funding of the bank is required through the street, this will take precedence over any interest to buy in the street for rate set.”

He reiterated CBA’s “one face to the market” model, in which Mr Hulme often did the trading during the five-minute window during which the BBSW was set every morning. (The system has since changed.)

“The process for collating a combined markets and treasury rate set ladder has been implemented,” he said. Email and phone conversations, also ­tendered to the court, show traders discussing how much money was on the line when setting the BBSW.

Setting a higher BBSW was in the bank’s interests when it had lent out a lot of money benchmarked against the rate while a lower rate was in its interests when borrowing money.

In an email sent on the afternoon of December 13, 2011, CBA head of swaps Peter Psihoyos told Mr Hulme and chief swaps dealer Grant Barnes: “ ... think it would be in the bank’s interests if you didn’t buy 3-month bills on the 15th”.

“We have almost $5 billion setting on that date,” Mr Psihoyos said.

ASIC filed against CBA in January.

The regulator last month stepped up the pressure on the bank by doubling the number of attempts to rig the rate it alleges CBA engaged in from three to six.

In an ­attempt to show the existence of a pattern of behaviour, it also outlined an additional 13 ­alleged breaches that fall before the six-year statute of limitations.

ASIC also included details of an embarrassing telephone conversation between Mr Barnes and his wife, in which she appears to tell a nearby child that “Daddy’s very sad” and won’t be getting a bonus because of unsuccessful BBSW trading.

ANZ and NAB settled their rate-rigging cases in November.

However, Westpac fought the regulator through to trial in the Federal Court, and is awaiting judgment.