Australia’s corporate watchdog is suing Westpac for alleged insider trading and breach of licence over the lender’s role in an A$12bn ($9.3bn) debt deal linked to the privatisation of the nation’s biggest electricity distributor.
The case, which the Australian Securities and Investments Commission filed on Wednesday, is expected to shine a light on the opaque world of derivatives trading and internal controls at the country’s second-largest bank by assets.
The allegations come as Westpac attempts to rebuild its reputation following money-laundering allegations and a public inquiry into financial sector misbehaviour.
In a statement, Asic said the allegations of insider trading related to Westpac’s role in executing the largest interest rate swap transaction in Australian history on behalf of pension funds that bought Ausgrid, an energy company, from the New South Wales government in 2016.
Asic alleges that several Westpac traders and executives knew that the bank had been chosen by the pension funds to handle the mammoth transaction, which was intended to hedge interest rate risk tied to a syndicated debt deal required for the purchase.
Over two hours on October 20 2016, the day the Ausgrid deal was announced, Westpac executed several hundred trades that drove up the prices its pension fund clients would have to pay for the interest rate swaps, the watchdog alleged in papers filed with Australia’s federal court.
The pension fund consortium, which included Australian Super and IFM Investors with more than A$300bn assets under management, could observe the prices moving to its detriment in the morning of the debt transaction but could not know it was due to trading by Westpac, Asic alleged.
Westpac said it took the allegations “very seriously”. Its shares gained 0.2 per cent on Wednesday.
Analysts said the case could dent Westpac’s efforts to restore its reputation, which was tarnished last year when it paid a A$1.3bn fine over money-laundering allegations that cost Brian Hartzer, then chief executive, his job.
Elizabeth Sheedy, an expert in financial regulation at Macquarie University, said the insider trading case was unusual as it was against an institution, rather than individuals.
“In theory, the bank’s policies and systems should have prevented anything like this from happening, but we already know that Westpac’s operational risk management systems were not up to scratch at the time of the alleged events,” she said.
Sheedy said the case would be important for Asic, which last year lost a suit against Westpac related to responsible lending laws.
Nathan Zaia, an analyst at research group Morningstar, said the allegations reflected poorly on Westpac following a government-commissioned public inquiry two years ago into wrongdoing in the financial sector.
But he said the bank’s significant investments in risk management and corporate culture since 2016 could help prevent such misbehaviour in future.