What ASIC says Westpac did to allegedly manipulate bank bill swap rate
17 May 2016
Clancy Yeates
They are the billion-dollar trades that allegedly made Westpac traders millions in profits. The Australian Securities and Investments Commission's 58-page statement of claim alleges traders at Westpac Banking Corp moved the bank bill swap rate (BBSW) in favour of their positions by selling stockpiled bank bills into the market to push BBSW higher than it should have been, and by buying bank bills to reduce the rate below its natural level.
The strategy chosen depended on the exposure that Westpac's treasury group had on a given day to the products whose value depended on the BBSW.
The court documents allege that on two occasions Westpac traders believed they would make money if the BBSW went up, so they flooded the market with bank bills shortly before the swap rate was set on various days between 9.55am and 10amThe selling increased the supply of bank bills in the market at the critical time, pushing down their price. This sent the yield on the bills higher and, as prices and yields move in opposite directions, had the impact of pushing the BBSW higher.
'Other shenanigans'
An example of this alleged conduct was on Thursday, June 9, 2011. On that day, Westpac's treasury group had a net "long" exposure to the BBSW of around $7.63 billion, meaning if the BBSW went higher Westpac would make larger profits. ASIC alleges Westpac trader Sophie Johnston sold 90-day prime bank bills at a face value of $1.47 billion.
These trades represented 69 per cent of the total number of bills sold into the market that day. ASIC's statement of claim suggests traders knew what they were doing, as they communicated their intentions to each other - often in phone calls that were considered to be private but actually recorded and relied upon by ASIC. The regulator suggests Ms Johnston was thinking about her June 9 trading strategy three weeks before it actually happened. On May 16, 2011 she wrote an email to another trader, Colin Roden, pointing out "there will obviously be other shenanigans happening on 9 June".
Using trader shorthand, said added that "you may want to keep some of the large sets on the 1st and the 6th with NAB just to load up on paper so we can then churn it out on the 9th."
'We just had to do it'
There were 14 occasions where ASIC says Westpac believed it would make money if the BBSW rate fell. On these days, just before 10am, the traders spent millions of dollars buying bank bills, inflating their prices, which sent the BBSW lower. On example was April 6, 2010, when Westpac had a total net "short" exposure of approximately $14.06 billion.
On that day, Westpac, through Mr Roden, bought 30-day prime bank bills with a face value of $1.853 billion - representing all of the bills purchased that day. In a recorded telephone call that day, Mr Roden told Ms Johnston:
"We had a massive rate set today like we had like a f---ing 14 billion of 1 month. So I ended up buying like 2 1/2 billion dollars… I know it was completely wrong but f--- it I might as well, I thought f---it. We've got so much money on it, we just had to do it, right." At 10am, Westpac submitted a yield in the range of 4.23 per cent to 4.25 per cent for the 30-day BBSW; it was set at 4.23 per cent. ASIC says this was lower than it should have been. Because
Westpac had a short overall exposure, the lower rate lifted its profits on a range of products. These include interest rate swaps, bank accepted bill futures, forward rate agreements, cross currency swaps, asset swaps, interest rate options, swaptions, inflation swaps, floating rate notes, commercial loans and bank bills themselves, ASIC says.
Westpac is fighting the ASIC claims.