ASIC has today commenced proceedings in the Federal Court against Westpac Banking Corporation (Westpac) for insider trading, unconscionable conduct and breaches of its Australian financial services licensee obligations.
The allegations relate to Westpac’s role in executing a $12 billion interest rate swap transaction with a consortium of AustralianSuper and a group of IFM entities (Consortium). The transaction occurred on 20 October 2016 and was associated with the privatisation of a majority stake in the electricity provider Ausgrid by the NSW government. The transaction remains the largest interest rate swap transaction executed in one tranche in Australian financial market history.
At about 7am on 20 October 2016, the Consortium signed an agreement with the NSW Government for the acquisition of Ausgrid.
ASIC alleges that by about 8:30am on 20 October 2016, Westpac knew, or believed, it would be selected by the Consortium to execute the interest rate swap transaction on that morning. ASIC alleges this was inside information. When the market opened at 8:30am, whilst in possession of the alleged inside information, Westpac’s traders acquired and disposed of interest rate derivative products in order to pre-position Westpac in anticipation of the execution of the swap transaction.
ASIC alleges that Westpac’s trading occurred while it was in possession of information that was not generally available to other market participants including those that traded with Westpac that morning. Prohibitions against insider trading are a fundamental tenet of market integrity.
The Consortium, via a special purpose vehicle, executed the interest rate swap transaction with Westpac at 10:27am.
ASIC alleges that Westpac’s trading on the morning of 20 October 2016 had the potential to impact the price of the swap transaction to the detriment of the Consortium or the special purpose vehicle.
In addition to the insider trading allegation, ASIC also alleges that the circumstances surrounding Westpac’s trading on the morning of 20 October 2016, including its failure to provide to the Consortium full and informed disclosure about its intention to pre-position its trading books prior to and with notice of the execution of the swap transaction, amounted to unconscionable conduct.
ASIC is committed to improving market practices in the institutional and Fixed Income, Currency and Commodities (FICC) markets. This matter serves as an important reminder that the insider trading prohibitions apply equally across all financial markets.
ASIC is seeking declarations and pecuniary penalties for Westpac’s alleged contraventions s1043A of the Corporations Act and s12CB of the ASIC Act, a declaration for Westpac’s alleged contravention of s912A of the Corporations Act, and ancillary orders.
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Background
In September 2016, the Consortium made an unsolicited bid for a controlling interest in Ausgrid from the NSW Government, which was ultimately accepted by the NSW Government on 20 October 2016. Following the completion of the transaction, the Consortium holds 50.4% stake in Ausgrid while the NSW government holds 49.6%.
As part of the Ausgrid transaction, a special purpose vehicle was established to obtain $12.77bn in syndicated debt funding for the acquisition and ongoing funding requirements of Ausgrid. It also sought to hedge the floating interest rate risk from this financing through the execution of eleven interest rate swaps, that were to amortise over ten years, in one transaction which had a notional value of $11.931bn. This effectively enabled the conversion of variable interest rates for the debt funding to a fixed rate, being the price of the swap transaction.
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Editor's note 1:
At a case management hearing on 19 May 2021, a further case management hearing was listed for 14 July 2021. The proceeding was listed for hearing commencing at 10.15am on 7 February 2022 in Sydney, with a current estimate of ten weeks.
Editor’s note 2:
The trial date for 7 February 2022 was vacated. The next case management hearing is listed for 30 June 2022.
Editor's note 3:
A trial date has been fixed for 18 March 2024.
Editor's note 4:
On 31 January 2024, the Federal Court has declared Westpac engaged in unconscionable conduct in October 2016 when executing a $12 billion interest rate swap transaction. Westpac will pay the maximum penalty of $1.8 million in relation to the conduct, together with $8 million for ASIC’s litigation and investigation costs (refer 24-011MR).