WESTPAC has been accused by the corporate regulator of insider trading and unconscionable conduct towards its clients AustralianSuper and IFM during the industry super powerhouses purchase of a controlling stake in NSW energy company Ausgrid five years ago.

The Australian Securities and Investments Commission (ASIC) alleges that Westpac breached its financial services licence and caused detriment to its clients AustralianSuper and IFM when it was arranging a financial instrument used in large transactions to manage interest rate fluctuations, known as an interest rate swap. Westpac acknowledged its receipt of ASICs claim in a statement to the Australian Securities Exchange on Wednesday morning.

On October 20, 2016 the New South Wales government agreed to sell a 50.4 per cent interest in a 99-year lease of Ausgrid to AustralianSuper and IFM Investors for $16 billion.

ASICs allegations relate to Westpacs role in executing a $12 billion interest rate swap transaction with a consortium of AustralianSuper and a group of IFM entities as part of the Ausgrid deal. The interest rate swap was at the time the largest ever arranged in Australia and a key element of the deal.

ASIC said in a statement that Westpac knew or believed it would be selected by the consortium to execute the interest rate swap transaction on October 20 and in receipt of that information it made nearly 900 trades to allegedly illegally profit off that information. Whilst in possession of the alleged inside information, Westpacs traders acquired and disposed of interest rate derivative products in order to pre-position Westpac in anticipation of the execution of the swap transaction, the regulator claims.

ASIC alleges the consortium could see on the day that the markets were working against expectations, effectively making the interest rate swaps it used to underpin the deal more expensive, but did not know why at the time. The consortium observed the prices for the traded products moving during the morning of October 20, 2016 to its detriment but could not know if it was trading by Westpac that was moving those prices.

ASIC has not filed any action relating to potential criminal breaches for the insider trading allegations but the bank could face fines in the hundreds of millions for its alleged breaches. The action names some of the banks most regarded traders and senior executives. ASIC alleges that they were aware Westpac would likely win the rights to arrange the interest rate swap when they made a flurry of trades between 8.30am and 10.27am on October 20, 2016 totalling more than $16 billion. These trades included the sale and purchase of financial derivatives based on Commonwealth Bonds.

Market sources said ASICs case could raise concerns at other financial institutions given some believe it is common to pre-hedge a transaction of that side to ensure the financial safety of the bank and to lock in its profits from handling that work.

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