Court declares Westpac engaged in unconscionable conduct for interest rate swap, maximum penalty applied


The Federal Court has declared Westpac Banking Corporation (Westpac) engaged in unconscionable conduct in October 2016 when executing a $12 billion interest rate swap transaction, the largest of its kind in Australian financial market history.

Westpac will pay the maximum penalty of $1.8 million in relation to the conduct, together with $8 million for ASIC’s litigation and investigation costs.

Westpac’s unconscionable conduct arose when it engaged in pre-hedging ahead of an interest rate swap transaction 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 NSW Government of a majority stake in electricity provider, Ausgrid.

ASIC Deputy Chair Sarah Court said, ‘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.

‘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.

‘We share the Court’s concern regarding the maximum penalty available in relation to the conduct, and note that had Westpac engaged in similar conduct today the maximum available penalty would have been significantly higher.’

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

  • Westpac was aware of its client’s concern about trading prior to the swap transaction (pre-hedging) that had the potential to adversely affect the price of the swap transaction to their detriment. Every basis point increase to the price of the swap transaction would involve a cost to the Consortium of about $4.7 million;
  • Despite being aware of its client’s concerns, Westpac acted on an internal plan to pre-hedge up to 50% of the interest rate risk by trading in significant volumes of interest rate derivatives in the market before the swap transaction was executed;
  • Westpac failed to obtain client consent or give clear and full disclosure about the extent of its planned pre-hedging; and
  • Once Westpac commenced its on-market pre-hedging trading, the Consortium could not protect itself against the risk that Westpac’s trading would increase the price of the swap transaction to the Consortium.

‘If pre-hedging is not carried out in an appropriate manner it can be unfair, unconscionable and result in poor client outcomes. We will continue to hold participants in these markets to high standards,’ concluded Ms Court.

Westpac’s derivatives trading desk achieved a trading profit of approximately $20.7 million on the day the swap was executed (of which $3.7 million was allocated to the Sales team as commission).

The Court also declared that Westpac failed to have adequate arrangements to manage the conflict of interests between it and the Consortium and did not do all things necessary to ensure that the swap transaction was provided to the Consortium efficiently, honestly and fairly.

The Court reserved its decision on whether to make an order requiring Westpac to complete a compliance programme with an independent review of its pre-hedging practices and controls, including relating to conflicts of interest management and client communications.


ASIC originally alleged Westpac breached s1043A of the Corporations Act (insider trading), s12CB of the ASIC Act (unconscionable conduct) and s912A of the Corporations Act (breaches of the general obligations of an Australian financial services licensee) (21-093MR).

Pre-hedging involves trading to hedge the risk that a firm anticipates it will acquire from a future transaction.

The Consortium sought to enter into the interest rate swap transaction to hedge the interest rate risk associated with the money it had borrowed to fund its stake in Ausgrid. That borrowing was at variable interest rates and the Consortium wanted to protect itself from the risk of those rates increasing by converting that interest rate exposure to a fixed rate for the full term of the loan. The transaction remains the largest interest rate swap transaction executed in one tranche in Australian financial market history.

The $1.8 million penalty is the maximum the Court could order for statutory unconscionable conduct in 2016, when the conduct occurred. At the time, a contravention of s912A of the Corporations Act did not attract a penalty.

Civil penalties have significantly increased since 2016. The current penalty for unconscionable conduct in breach of the ASIC Act, or for a breach of s912A of the Corporations Act, is at least $15.65 million for a corporation. For a large entity, the maximum penalty may potentially be $782.5 million or three times the benefit derived (whichever is greater).

ASIC notes that issues around pre-hedging has received significant international attention and ASIC is actively engaged on this issue at the International Organisation of Securities Commissions (IOSCO).

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