The Australia & New Zealand Banking Group (ASX: ANZ) share price edged higher today after the bank's top brass announced an "in-principle" agreement has been reached with the corporate cop ASIC "to settle court action relating to the Australian interbank BBSW market".
The bank bill swap rate (BBSW) is the overnight rate at which Australian banks will lend to each other and is important in helping them manage their balance sheet risk on assets (loans) and liabilities (deposits) held on their giant balance sheets.
The bank bills commonly have 90 days to maturity and act as interbank loans (among other forms of paper debt) designed to help treasury teams offset their net long or short exposure to higher or lower interest rates on their balance sheets.
ASIC has effectively alleged that it gradually dawned on banks' balance sheet risk trading teams that if the BBSW could be manipulated higher or lower by the deliberate buying or selling of large amounts of bank bills one bank could benefit financially to the detriment of another.
ASIC has also accused National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) traders of similar behaviour in trying to rig the rate in favour of themselves to the detriment of rival banks holding opposite net long or short positions in different assets or liabilities on their balance sheets.
The kicker being that the BBSW is supposed to be a benchmark lending rate determined by market forces, rather than a weapon of banks' treasury risk trading teams to get one over on the other.
Therefore even if the BBSW was artificially manipulated just one or two basis points higher or lower by the ego-driven trading of some bank staff this could have a downstream effect on the returns of normally debt-backed securities totally unrelated to the banks' balance sheets.
For example collateralised debt funds in the form of bundled mortgage-backed securities offered by independent providers will commonly offer floating returns to investors a fixed-margin above the BBSW as the most relevant benchmark-lending rate.
In theory then BBSW's deliberate manipulation would contravene numerous general financial services laws under the Corporations Act and ASIC Act as ASIC's lawyers allege manipulation would, inter alia, come under the definitions of misleading or deceptive conduct.
ANZ's desire to settle comes as the bank's ex-traders were also recently been accused of past indiscretions including drug taking and partying that suggest some traders saw the Wolf of Wall Street movie as more behavioural handbook than cautionary tale.
Given the allegations of misconduct engulfing the entire sector right now, it's no surprise that ANZ and NAB are looking to escape the spotlight by settling for relatively small financial penalties.
