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Westpac fined $1.8m over pre-hedging

Westpac has been fined the maximum $1.8 million for engaging in unconscionable conduct during a $12 billion interest rate swap transaction in 2016.

In the Federal Court today, the Big Four member was also ordered to pay $8 million in court costs to the Australian Securities and Investments Commission (ASIC).

ASIC had alleged the bank breached the Corporations Act 2001 (Cth) by pre-hedging (trading to hedge the risk a firm expects to acquire from a transaction) ahead of the interest rate swap with a consortium comprising AustralianSuper and IFM entities.

The interest rate swap related to managing interest rate risk associated with the consortium’s purchase from the New South Wales Government of a majority stake in electricity provider Ausgrid.

The court declared Westpac’s conduct was unconscionable in that:

  • the bank was aware of its consortium’s concern about trading prior to the swap transaction that it could be detrimental;
  • the bank pre-hedged up to half of the interest rate risk;
  • the bank failed to obtain the consortium’s consent or give clear and full disclosure about the extent of its planned pre-hedging; and
  • once the pre-hedging began, the consortium could not protect itself against the risk that Westpac’s trading would increase the price of the swap transaction to the consortium.

ASIC Deputy Chair Sarah Court said inappropriate pre-hedging could be “unfair, unconscionable and result in poor client outcomes”.

“This is a significant outcome which assists to clarify expectations regarding pre-hedging, particularly around disclosure and consent where the pre-hedging can have a detrimental impact on the counterparty to the transaction,” Ms Court said.

“Appropriate conduct for pre-hedging is an issue of global significance. In this case, Westpac’s behaviour was unconscionable and exposed its client to significant risk. Westpac’s conduct was also in stark contrast with several other banks.”

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