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Westpac fined $1.8m for pre-hedging interest rate swap

The Federal Court found Westpac engaged in unconscionable conduct when it executed Australia’s largest interest rate swap transaction.

user iconNaomi Neilson 31 January 2024 Big Law
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The banking giant was penalised with a maximum of $1.8 million fine for breaching the Corporations Act when it went through with a $12 billion interest rate swap transaction in October 2016.

The penalty is in addition to the $8 million it will pay to cover the Australian Securities and Investments Commission’s (ASIC) fees.

ASIC alleged that ahead of the transaction with a consortium comprising of AustralianSuper and IFM entities, Westpac engaged in pre-hedging, which refers to the practice of trading to hedge the risk that a firm anticipates it will acquire from a future transaction.

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Westpac’s derivatives trading desk saw a profit of approximately $20.7 million as a result, with $3.7 million going to the sales commission.

ASIC deputy chair Sarah Court said if pre-hedging is not done appropriately, “it can 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.

In making findings against Westpac, the Federal Court found it was aware of its client’s concerns prior to the swap transaction.

Despite this, Westpac acted on an internal plan to pre-hedge up to 50 per cent of the interest rate risk by trading in significant volumes of interest rate derivatives before the transaction was executed.

The court also found Westpac failed to have adequate arrangements to manage conflicts of interest between it and the consortium, and it did not do all things necessary to ensure the transaction was provided to the consortium efficiently, honestly and fairly.

“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,” Ms Court said.

Naomi Neilson

Naomi Neilson

Naomi Neilson is a senior journalist with a focus on court reporting for Lawyers Weekly. 

You can email Naomi at: This email address is being protected from spambots. You need JavaScript enabled to view it.

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