By Jonathan Shapiro, James Eyers and Patrick Durkin
ANZ Banking Group offered to settle allegations it manipulated a key market interest rate over a two-year period but wouldn't go far enough to satisfy the corporate regulator and is now gearing up for a long legal and public relations battle.
A Federal Court lawsuit alleging market manipulation and unconscionable conduct was filed by Australian Securities and Investment Commission on Friday afternoon after intense negotiations between ANZ chairman David Gonski, chief executive Shayne Elliott and ASIC chairman Greg Medcraft ended in a stalemate.
ASIC chair Greg Medcraft has pinned his legacy on punishing rate-rigging banks. Credit: Daniel Munoz
ANZ offered more than than $50 million to settle the action but refused to concede a demand that it admit to manipulating the bank bill swap rate (BBSW), which influences the setting of interest rates across the economy, sources said.
The bank said ASIC's case was "based on a misunderstanding of how bank bill issuance and interest rate risk management operates" and that it operated in a consistent way with market practices.
ANZ's New York office has been accused of hosting a discriminatory culture.Credit: Jessica Shapiro
Mr Medcraft has staked his legacy on punishing interest rate rigging banks and devoted extensive resources to the investigation, saying ASIC had an $80 million legal warchest. He has repeatedly called on banks to cooperate or face action.
Court documents filed by ASIC show how it believed ANZ traders from various divisions in the bank shared information and acted in concert to move the bank bill rate in a direction that favoured their multi-billion dollar trading positions. The bank stockpiled bank bills and short term deposits selling them into the market to force up the bank bill rate during the five minute trading window in which the daily rate is calculated. The bank also bought bills, at times, if it needed the rate to fall.
ASIC says ANZ "traded in a manner intended to create an artificial price for bank bills on 44 separate days" between March 2010 and May 2012. It claims ANZ's behaviour is likely to have caused "financial detriment" to customers with the opposite exposure to the BBSW, or products that were referenced to BBSW.
ANZ was one of four commercial banks and ten investment banks that traded bills and it is understood the bank believes it would have been difficult for it to manipulate prices on its own.
ASIC's legal claim, which relies on internal messages between bank staff and taped phone conversations, named at least 20 members of ANZ staff. ANZ said chat messages between traders "is an issue that we will continue to review. We have already dealt with chats and behaviours that breach our Code of Conduct through internal disciplinary action against the individuals involved."
ASIC has already accepted enforceable undertakings from UBS, BNP Paribas and Royal Bank of Scotland related to potential misconduct relating to the swap rate.
The decision to take court action comes after weeks of negotiation between ASIC and ANZ, which is the first major bank to face action from the corporate watchdog, which is determined to penalise interest rate rigging banks. At least one other bank is still being pursued by the regulator.
Legal experts say the long and expensive legal battle is likely to end up in the High Court of Australia given the lack of legal precent on market manipulation.
ANZ, which in November 2014 suspended seven traders in relation to the investigation, is the first major bank to come under intense scrutiny from ASIC which began its probe into rate rigging in 2012.
Mr Medcraft told the Senate in February that banks involved in the alleged rigging of BBSW should plead guilty to avoid the force of the regulator's powers.
"We can have a contested outcome in the court or have an agreed outcome in the court. We have to be a model litigant and we have to launch these actions making sure we've been fair. I'd rather not go to a contested matter in court," he said.
The swap rate is the most important and widely referenced interest rate in the Australian market. It is the base rate used to calculate payments on hundreds of billions of dollars of securities, and billions more in loans from mortgages to credit cards to corporate loans.
The prospect that this rate has been manipulated has unsettled regulators from ASIC to Australian Prudential Regulation Authority to the Reserve Bank of Australia.
ASIC's investigation was prompted by tip-offs from overseas regulators that found evidence of widespread manipulation of over key benchmark rates such as the London Interbank Offer Rate (or LIBOR).
The prospect that this rate has been manipulated has unsettled regulators from ASIC to APRA to the Reserve Bank of Australia.
"There is a presumption that when those contracts are entered into, that the index rate represents a fair market rate,"" APRA chairman Wayne Byres told a Senate committee in February.
"If behaviour distorts that then people will pay more or receive less than they should fairly have done."
Mr Elliott has made improving ANZ's culture one of his key priorities since taking over January 1. He has had to deal with two court actions from former traders that exposed a culture of sex, drugs and alcohol.