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The largest interest rate swap transaction ever executed in one hit in Australian history is now the subject of an insider trading case against Westpac (ASX: WBC), with the corporate watchdog alleging unconscionable conduct and breaches of Westpac's financial services licensee obligations.
The $11.93 billion trade centred around the privatisation of a majority stake in electricity provider Ausgrid by the NSW government.
The privatisation deal was reportedly signed at about 7am on 20 October 2016 with a consortium of AustralianSuper and a group of IFM entities.
The Australian Securities and Investments Commission (ASIC) alleges that by 8:30am that day Westpac knew or believed it would be selected by the consortium to execute the interest rate swap transaction on that morning, and the regulator alleges that was inside information.
When the market opened at 8:30am, whilst in possession of the alleged inside information, Westpac's 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 consortium, via a special purpose vehicle, then executed the interest rate swap transaction with Westpac at 10:27am.
ASIC alleges that Westpac's trading occurred while it was in possession of information that was not generally available to other market participants including those that traded with Westpac that morning, and that its trading had the potential to impact the price of the swap transaction to the detriment of the consortium or the special purpose vehicle.
"Prohibitions against insider trading are a fundamental tenet of market integrity," ASIC said in a statement today after filing proceedings in the Federal Court.
"In addition to the insider trading allegation, ASIC also alleges that the circumstances surrounding Westpac's trading on the morning of 20 October 2016, including its failure to provide to the Consortium full and informed disclosure about its intention to pre-position its trading books prior to and with notice of the execution of the swap transaction, amounted to unconscionable conduct.
"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 is seeking declarations and pecuniary penalties for Westpac's alleged contraventions s1043A of the Corporations Act and s12CB of the ASIC Act, a declaration for Westpac's alleged contravention of s912A of the Corporations Act, and ancillary orders."
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