Australia’s oldest bank is being taken to court over alleged insider trading relating to a record-breaking $12 billion transaction.
Westpac was chosen to execute a transaction where AustralianSuper and IFM (an Australian investment management company) would buy a controlling stake in Ausgrid from the NSW government, in what is known as an interest rate swap transaction (see explanation below).
Westpac taken to court over deal
In October 2016 Westpac was named as the executor of this swap deal which was the largest interest rate swap transaction in Australian history.
But now, ASIC is taking the bank to court over alleged insider trading and unconscionable conduct over that deal.
The alleged timeline of events:
07:00am: The $12 billion agreement was signed for the NSW government to sell its stake in Ausgrid to the consortium including AustralianSuper and IFM. It was set to be the largest interest rate swap transaction in Australian history.
08:30am: ASIC alleges Westpac knew, or believed, that it would be selected to execute the interest rate swap between the NSW government and the consortium.
When the market opened, whilst in possession of the information that Westpac was likely to be selected, ASIC alleged traders at the bank acquired and disposed of Commonwealth bonds in order to pre-position the bank in anticipation of the transaction.
The court documents alleged Westpac executed 692 trades of 35,900 three-year Commonwealth Bond Futures worth over $3.59 billion and 8,189 10-year Commonwealth Bond Futures worth $818.9 million.
This would pre-position the bank’s trading books ahead of being asked to execute the deal so it would be in the best possible position to do so and benefit.
The court documents allege that Westpac’s trading occurred while it was in possession of the information that was not yet available to other market participants.
10:27am: The deal was executed by Westpac. ASIC alleged the trades that were executed prior to the deal becoming public knowledge had the “potential to impact the price swap transaction to the detriment of the consortium”.
Wait - what’s an interest rate swap?
An interest rate swap is “a forward contract in which one stream of future interest payments is exchanged for another”, according to Investopedia.
In this case, the NSW government owned Ausgrid, but AustralianSuper and IFM wanted to buy 50.4 per cent of the energy provider, essentially making the company private.
In order to do this, AustralianSuper and IFM needed to establish a special vehicle to obtain $12.7 billion for the acquisition and the ongoing funding requirements of Ausgrid.
To do this, AustralianSuper and IFM established a consortium, which is when two or more entities come together for a common goal, so whilst they are not the same company, for the sake of doing the deal they were acting as one.
The sale of government assets is a bit more tricky than a regular sale, and as such the consortium was actually buying the controlling stake in the company but only on a lease for 99-years. This is because there are certain regulations in place around the sale of government assets.
The size of the loan to purchase the stake (over $12 billion) was too large for a single lender, so the consortium borrowed the money through multiple lenders. This is called a syndicated loan facility.
Because lenders often have different interest rates, the consortium wanted to hedge the risk of the variable rates by executing 11 interest rate swaps.
This allowed the consortium to turn all the variable rates into a fixed rate so all parties receive the same amount of interest.
The most senior member of the Westpac team named in the court documents is the CEO of Westpac Institutional Banking Lyn Cobley.
Head of fixed income trading Simon Masnick and managing director of corporate and institutional distribution and origination in financial markets Michael Correa were also named.
Finally, on the Westpac derivatives trading desk, Nicholas Allen, Benjamin Mitchell and Shane Dorman are being accused of partaking in the alleged insider trading.
ASIC said these individuals “knew some or all of the Ausgrid information” ASIC alleged.
“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 said.
“Prohibitions against insider trading are a fundamental tenet of market integrity.”
Since the court documents were lodged, Westpac released a statement acknowledging the allegations.
“Westpac takes these allegations very seriously and is considering its position having just received the Originating Application and Concise Statement of Claim,” Westpac’s statement said.
“As the matter is now before the court it would not be appropriate to comment further at this time.”