Recent allegations faced by ANZ in regards to the rigging of interest rates shines a light on illegal conduct in Australian markets. Investigations in Australia have been ongoing since 2012 following revelations of systematic manipulation of the London Inter Bank Offered Rate (Libor).
The LIBOR scandal
Global financial markets have had their fair share of debacles in the past decade. From unscrupulous lending practices and flawed regulation in America, which catalysed the Global Financial Crisis of ‘08 to the more recent Libor rigging scandal.
The Libor is widely regarded as one of the most significant interest rates in the financial world. This rate is used by banks to charge each other for short-term loans. It acts as a benchmark figure for financial institutions throughout the world to determine the rates of financial instruments such as student loans, mortgages, government bonds and more.
Preceding the revelation of the rigging scandal, the Libor was calculated by taking the average of the interest rates that banks were willing to lend to one another. These interest rates were estimated and submitted separately by a panel of banks and calculated thereafter. This process can be simplified and illustrated as follows:
| Banks | Bank A | Bank B | Bank C | Bank D |
| Submitted rates | 1.5% | 2% | 2.5% | 3% |
| Top and Bottom figures discarded | 1.5% | 2% | 2.5% | 3% |
| Calculated average (LIBOR) | 2.25% | |||
As the interest rates that were submitted for the calculation of the Libor were based on estimates rather than actual transactions, this left room for banks to rig the Libor by submitting false rates. Between the years 2007 to 2010, numerous banks such as Barclays, Royal Bank of Scotland, Deutsche Bank and more colluded with one another to manipulate the Libor by deliberately submitting figures that were either larger or smaller than their true estimated values. By fixing the Libor to fit their personal needs, the banks involved were able to reap greater trading profits for themselves. As depicted by the following exchanges between the Royal Bank of Scotland and some fellow traders regarding Libor rigging, the banks were undoubtedly involved in some unethical conduct:
The following is an extract between a trader and a LIBOR submitter obtained by the Telegraph
December 4, 2008:
Swiss Franc Trader: can u put 6 month swiss libor in low pls?
Primary Submitter: NO
Swiss Franc Trader: should have pushed the door harder
Primary Submitter: Whats it worth
Swiss Franc Trader: ive got some sushi rolls from yesterday?
Primary Submitter: ok low 6 month, just for u
Swiss Franc Trader: wooooooohooooooo[,] 0.01%? thatd be awesome
Primary Submitter: 1.33
Swiss Franc Trader: perfect[.] u r a nice man
May 14, 2009:
Swiss Franc Trader: [Primary Submitter] pls can we get super high 3month super low 6month
Swiss Franc Trader: PRETTY PLEASE!
Collectively the banks paid several billion dollars in fines for their misconduct. The biggest fine sat with Deutsche Bank for $2.5B, while UBS and Barclays followed with $1.5B and $350M fines respectively. This alludes to the immense profits made by individual banks for swinging the Libor rates in their favour.
Alleged misconduct in Australia
In the Australian financial market, the Bank Bill Swap Rate or more commonly known as the BBSW, acts as the equivalent of the Libor: a benchmark for determining the interest rates of financial instruments. In the years preceding 2013, the BBSW was similar to the Libor as it was calculated from the average of market interest rates that were provided by a panel of banks. Specifically, the panel of banks involved consisted of ten international banks and the four prime banks of Australia (Commonwealth Bank, ANZ, Westpac and National Australia Bank).
However, the BBSW differed from the Libor in one key aspect: the banks involved were required to submit actual market rates rather than subjective estimates of interest rates. This raised confidence in the BBSW as its use of actual rates provided a sense of transparency and integrity to the system. Nonetheless, the Australian Financial Markets Association (AFMA) reformed the process of calculating the BBSW in 2013, following investigations launched by the Australian Securities and Investments Commission (ASIC) as a result of the fallout from the Libor scandal. Currently, the BBSW is calculated electronically by the AFMA using samples of the best bids and offers for certain securities in the financial market. This reform raises what is possibly the most important question for the Australian market in recent years: could the apparently infallible BBSW have been tampered with?
Accusations faced by ANZ
Following on from the investigations of ASIC, on the 4th of March of this year, ASIC launched an official court case against ANZ. The fourth largest bank in Australia was accused of “abusing its position in the Bank Bill Market” between the 9th March 2010 and 25th May 2012. The indictment specifies 44 instances of ‘market manipulation, unconscionable conduct and other unlawful behaviour’ undertaken by ANZ, which ‘likely influenced the setting of the BBSW in such a way as to advantage ANZ over others with opposite exposure to the BBSW’.
How one bank “fixed” the BBSW
The allegations are realistic given the significant role ANZ plays in the Bank Bill Market. ANZ has one of the largest dealing desks in the country, which holds billions of dollars’ worth of bank bills in its inventory that are traded with other banks and financial institutions. ASIC alleges that ANZ used its size within the market to manipulate the BBSW in the direction that favoured the bank’s position by influencing the supply and demand of bank bills in the five-minute period when the BBSW was set. If the bank was in a ‘long’ position for the BBSW (i.e. buying assets in the future), it would benefit from a higher BBSW, whereas if the bank was in a ‘short’ position (i.e. selling assets in the future), the reverse would be true.
ASIC alleges that, on multiple occasions when the bank was in a ‘long’ position, ANZ traders would stockpile bank bills and then flood the market with them during the five-minute period, bringing down the price and, hence, driving up the rate of bank bills. The panel of banks would then submit the higher bank bill rates to the regulator and a higher BBSW would be set. While ANZ would lose money initially by selling the bank bills at a lower price, its overall ‘long’ position means that the bank would profit greatly from the process.
Proving market manipulation
The outcome of ASIC’s lawsuit remains uncertain and unpredictable. The regulatory body will have difficulties in proving the creation of an artificial price by ANZ traders due to the opaque nature of the debt market. The few cases of market manipulation that have gone to court have involved the manipulation of the price of shares listed on an exchange, and therefore leave little precedent for ASIC to follow.
The current definition of an artificial price is “one that is not driven by genuine supply and demand.” This calls for ASIC to prove that traders acted on the sole basis of maintaining a price for bank bills that could not be otherwise attained through a normally operating market.
However, ANZ can highlight various other strategies that may necessitate the excessive selling or buying of bank bills during the 5-minute period whereby the rate was being set. The bank may argue that its trading was under the intention of hedging interest rate risk or simply the selling off of bank bills due to overexposure.
Due to the uncertainty of this definition within the Corporations Act, it will be hard for ASIC to prove allegations without a guilty plea.
A bad run
Newly appointed CEO of ANZ Shayne Elliot has inherited a company in a frenzy of negative media attention. From the decision to cull its business in Asia to the embarrassing $30M lawsuit by former employee Etienne Alexiou (for the bank’s condoning of a drug and sex fuelled culture), ANZ has experienced a PR nightmare in the last 6 months. With the announcement of formal proceedings from ASIC against rate rigging and recently an inquiry into ANZ’s insurance and superannuation arm, the company’s share price has suffered.
What now?
Despite the poorly timed culmination of events faced by ANZ, the rigging of the BBSW stands beyond one corporation and has implications that reach further than Australia. Even following the regulatory crackdown brought on by the GFC, banks continue to skirt the line of unethical and illegal at the expense of the everyday consumer. Whilst the BBSW may seem insignificant to the average person, this single rate acts as a benchmark for mortgages, student loans and bank deposits. This rate underpins all financial instruments, and whilst the changes to the rate were minimal enough to leave little impact on everyday consumers, the banks made astounding profits from such slight alterations. It will take time to see the repercussions faced by ANZ for its allegations, but it is more than likely that this story will end with a light slap on the wrist and hefty payout by ANZ.
Bibliography
Eyers, J. (2016). Proving ANZ created an ‘artificial price’ will be tricky, say lawyers. Australian Financial Review. Retrieved from http://www.afr.com/business/banking-and-finance/proving-anz-created-an-artificial-price-will-be-tricky-say-lawyers-20160307-gncl32?login_token=-TlyywT3Np8Udwpee2gwCb0_QIVWIaLIPyn-9arypPgMciGAE2UMAi1ggfqPJKG4pHZTj254bKb6x7-PHTzGTw&expiry=1458042601&single_use_token=9D_h3WBZc5UcqOXveUnKEPP14uq5bEQ7yzL-atlDikoAtbi3z0tMlySwlZMSiYRv6MlYLJx8DbeVosa9Wu4X8Q
Ferguson, A. (2016). ASIC ready to launch rate-rigging case against ANZ. Australian Financial Review. Retrieved from http://www.afr.com/business/banking-and-finance/asic-ready-to-launch-raterigging-case-against-anz-20160207-gmnmab
Moran, E. (2016). Calculation and use of BBSW and BBSY. Cuffeelinks. Retrieved from http://cuffelinks.com.au/calculation-use-bbsw-bbsy/
Myles, D. (2016). AFMA: What Libor can learn from Australia’s benchmark rate. IFLR. Retrieved from http://www.iflr.com/Article/3065497/Afma-what-Libor-can-learn-from-Australias-benchmark-rate.html
Shapiro, J. (2016). How ANZ were alleged to manipulate the BBSW. Australian Financial Review. Retrieved from http://www.afr.com/business/banking-and-finance/financial-services/how-anz-were-alleged-to-manipulate-the-bbsw-20160304-gnaw26
The Telegraph. (2016). RBS Libor rigging emails: ‘It’s just amazing how Libor fixing can make you that much money’, says trader. ‘I’m like a whores drawers’ adds another. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9852632/RBS-Libor-rigging-emails-Its-just-amazing-how-Libor-fixing-can-make-you-that-much-money-says-trader.-Im-like-a-whores-drawers-adds-another.html
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
