A federal court has declared Westpac unreasonable when it executed a $12 billion interest rate swap in October 2016.。

Westpac will pay a maximum fine of $1.8 million related to the act, as well as $8 million for litigation and investigations by the Australian Securities and Investments Commission (ASIC).。

Westpac's unconscionable conduct arose when it was pre-hedged prior to an interest rate swap transaction with a consortium of AustralianSuper and IFM entities。The interest rate swap involves managing interest rate risk associated with the consortium's purchase of a majority stake in electricity supplier Ausgrid from the NSW government.。

The court declared Westpac's conduct unconscionable in the following respects:

• Westpac understands customers' concerns about pre-swap transactions (pre-hedge transactions), which have the potential to adversely affect the price of swap transactions to the detriment of customers。For every basis point increase in the price of the swap, the consortium loses about $4.7 million;
• Although Westpac was aware of the client's concerns, it acted on an internal plan to pre-hedge up to 50 per cent of interest rate risk by heavily trading interest rate derivatives in the market prior to swap execution.
• Westpac did not obtain the client's consent and did not provide clear and adequate disclosure as to the extent of its planned pre-hedging;
• Once Westpac begins pre-hedging transactions in the market, the consortium cannot protect against the risk that the bank's transaction will increase the price of the consortium's swap transaction。

Westpac's derivatives desk earned approximately $20.7 million in trading profits on the day of swap execution ($3.7 million of which was distributed to the sales team as a commission)。

The court also declared that Westpac did not make proper arrangements to manage its conflict of interest with the consortium and did not take all necessary measures to ensure that swaps were offered to the consortium efficiently, honestly and fairly.。

The court reserves the right to order Westpac to complete the compliance program and conduct an independent review of its pre-hedging practices and controls, including those related to conflict of interest management and customer communication。