FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v National Australia Bank Limited [2017] FCA 1338

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiff have leave to file in court a Second Further Amended Originating Process in the form of Annexure A1 to this Short Minute of Order.

2.    The Second Further Amended Originating Process be heard instanter.

3.    Pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth), the Court makes declarations in the form of Annexure A2 to this Short Minute of Order (Declarations).

4.    In respect of the attempted contraventions the subject of the Declarations, the defendant pay a pecuniary penalty in the sum of $10 million, to be paid to the Commonwealth of Australia within 14 days of this order.

5.    The defendant pay the plaintiff’s costs of and incidental to these proceedings.

6.    The proceedings otherwise be dismissed.

THE COURT NOTES THAT:

7.    The defendant has given to the plaintiff an Enforceable Undertaking which is material to the consideration of penalty, and which provides for the defendant to take certain steps and to pay $20 million to be applied to the benefit of the community.

8.    ASIC will issue to the defendant a direction under section 91 of the ASIC Act requiring the defendant to pay the plaintiff’s investigations costs.

9.    The plaintiff and the defendant have agreed that the aggregate of the plaintiff’s investigation costs referred to in paragraph 8 above, the plaintiff’s costs of and incidental to these proceedings which are the subject of order 5 above, and certain costs in respect of the sum payable under the Enforceable Undertaking to the benefit of the community, is $20 million.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT ORDERS THAT:

BY CONSENT:

1.    The plaintiff have leave to file in court an Originating Process in the form of Annexure A1 to this Short Minute of Order (Originating Process).

2.    The Originating Process be heard instanter.

3.    Pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth), the Court makes declarations in the form of Annexure A2 to this Short Minute of Order (Declarations).

4.    Pursuant to s 12 GBA(1)(b) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and in respect of the attempted contraventions the subject of paragraph 2 of the Declarations, the defendant pay a pecuniary penalty in the sum of $10 million, to be paid to the Commonwealth of Australia within 14 days of this order.

5.    The defendant pay the plaintiff’s costs of and incidental to these proceedings.

6.    The proceedings otherwise be dismissed.

THE COURT NOTES THAT:

7.    The defendant has given to the plaintiff an Enforceable Undertaking which is material to the consideration of penalty, and which provides for the defendant to take certain steps and to pay $20 million into a fund that is to be applied to the benefit of the community.

8.    The plaintiff proposes to issue to the defendant a direction under section 91 of the ASIC Act requiring the defendant to pay the plaintiff’s investigation costs.

9.    The plaintiff and the defendant have agreed that the aggregate of:

(a)    the costs of establishing the fund as referred to in paragraph 7 above;

(b)    the plaintiff’s investigation costs referred to in paragraph 8 above; and

(c)    the plaintiff’s costs of and incidental to these proceedings which are the subject of order 5 above,

is the sum of $20 million.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

JAGOT J:

Summary

1    National Australia Bank Limited (NAB) and ANZ Banking Group Limited (ANZ) have admitted that they each attempted to manipulate the Bank Bill Swap Reference Rate (BBSW) to their own advantage and to the disadvantage of counterparties and thereby attempted to engage in unconscionable conduct in connection with the supply of financial services. For this, each is liable to the imposition of a pecuniary penalty of up to $1.1 million per attempt. NAB has admitted to 12 attempts to manipulate the BBSW. ANZ has admitted to 10 attempts. Each has also admitted to failing to do all things necessary to ensure that it provided financial services honestly and fairly, including by not providing employees engaged in providing those services with adequate training.

2    The Australian Securities and Investments Commission (ASIC) has agreed with each of NAB and ANZ that the proceedings taken against them should be resolved by the making of declarations and orders. The agreed orders involve each of NAB and ANZ paying a pecuniary penalty of $10 million, giving enforceable undertakings which include a payment of $20 million to a proposed Financial Consumer Protection Fund, and the payment of $20 million to ASIC on account of the cost of the investigation, the cost of the proceedings, and in connection with the establishment and management of the proposed Financial Consumer Protection Fund.

Statutory provisions

3    NAB and ANZ, on the occasions identified below, contravened s 12CC(1) and, in the case of ANZ, s 12CB(1), of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), as well as s 912A(1)(a) and (f) of the Corporations Act 2001 (Cth).

4    Section 12CB(1) of the ASIC Act, the current provision, provides that:

A person must not, in trade or commerce, in connection with:

(a)    the supply or possible supply of financial services to a person (other than a listed public company); or

(b)    the acquisition or possible acquisition of financial services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

5    Section 12CB(1) of the ASIC Act applies to conduct after 1 January 2012. In this case, only ANZ engaged in conduct after 1 January 2012.

6    Section 12CC(1) of the ASIC Act, as in force at the time, applied to conduct before 1 January 2012. Its terms were the same as the current terms of s 12CB(1).

7    By s 12BA(1) of the ASIC Act “supply” includes “provide, grant or confer when used as a verb in relation to services” and has the corresponding meaning when used as a noun. The concept of the supply or possible supply of financial services thus includes providing, granting or conferring financial services.

8    Section 12BAB(1)(b) of the ASIC Act provides that “a person provides a financial service” if, relevantly, they “deal in a financial product”. Section 12BAB(7) provides, relevantly, that for the purposes of s 12BAB, “dealing” in a financial product means applying for or acquiring a financial product, issuing a financial product, varying a financial product, or disposing of a financial product.

9    The products to which NAB and ANZ were parties which used the BBSW as a reference were a “derivative” as defined in s 761D of the Corporations Act, being arrangements under which a party is required to provide at some future time consideration determined by the value or amount of an asset or a rate (including an interest rate). As such, the products were “financial products” for the purposes of Pt 2 Div 2 of the ASIC Act (which includes s 12CB and the former s 12CC).

10    By s 12GBA(1)(b) of the ASIC Act if the Court is satisfied that a person has attempted to contravene a provision of Subdivision C, D or GC (other than s 12DA) of the ASIC Act (which includes s 12CC(1) and s 12CB(1)), the Court may order the person to pay to the Commonwealth such pecuniary penalty in respect of each act or omission by the person to which this section applies, as the Court determines to be appropriate. By s 12GBA(2), in determining the appropriate pecuniary penalty, the Court must have regard to all relevant matters including:

(a)    the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and

(b)    the circumstances in which the act or omission took place; and

(c)    whether the person has previously been found by the Court in proceedings under this Subdivision to have engaged in any similar conduct.

11    The maximum penalty for a corporation is 10,000 penalty units for each act or omission constituting a contravention (s 12GBA(3)). A penalty unit, at the relevant times, was $110 (s 4AA(1) of the Crimes Act 1914 (Cth)). Accordingly, for each contravention the maximum penalty is $1.1 million. This means that the maximum penalty for NAB’s contraventions of the ASIC Act is $13.2 million and for ANZ’s contraventions is $11 million.

12    Section 912A of the Corporations Act provides that:

(1)    A financial services licensee must:

(a)    do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly;

…

(f)    ensure that its representatives are adequately trained (including by complying with section 921D), and are competent, to provide those financial services;

…

13    Section 921D specifies education and training standards for employees authorised to provide advice in relation to financial products and is not material to the proceedings against NAB and ANZ.

Agreed facts

14    In each proceeding the parties filed a statement of agreed facts. The facts are agreed as between NAB and the ASIC and ANZ and the ASIC. The facts set out below are confined to those essential to understand the nature and significance of the conduct of NAB and ANZ in contravention of the law.

Bank Bill Swap Reference Rate

15    The Bank Bill Market is a market in which participants buy (bid) and sell (offer) Prime Bank Bills to and from other participants through interdealer brokers. Participants in the Bank Bill Market include the banks designated as Prime Banks by the Australian Financial Markets Association Limited (AFMA), a financial markets industry association, and other banks and financial institutions. The four major Australian banks (ANZ, Commonwealth Bank of Australia, NAB and Westpac Banking Corporation) are designated as Prime Banks.

16    Prime Bank Bills are instruments by which a Prime Bank, being a bank recognised as such by AFMA, may borrow money for the short term. Prime Bank Bills are issued for terms (usually referred to as “tenors”) of one, two, three, four, five and six months. Prime Banks Bills are Negotiable Certificates of Deposit (NCDs) and Bank Accepted Bills (BABs) accepted by Prime Banks. They are recognised to be of the highest quality with regard to liquidity, credit and consistency of yield.

17    The Bank Bill Swap Reference Rate (BBSW) is the central benchmark interest reference rate which AFMA publishes each Sydney business day. It is widely used as a reference rate in financial agreements in Australia.

18    The BBSW is a rate independently and transparently determined by a committee of AFMA known as the BBSW Committee by reference to bids and offers for trading in Prime Bank Bills and in accordance with published procedures known as the BBSW Procedures. The BBSW is the trimmed, average midrate of the best bid and offer yields for Prime Bank Bills for certain tenors calculated on each Sydney business day.

19    The process for the calculation of the BBSW on each Sydney business day was prescribed in the BBSW Procedures as follows:

(1)    on each Sydney business day, AFMA received submissions relating to the bid and offer rates of Prime Bank Bills from panellists who were participants in the Bank Bill Market (BBSW Panellists);

(2)    AFMA required each BBSW Panellist to make a submission to AFMA by 10:05am Sydney time on each Sydney business day about the Panellist’s view as to the mid-point of the bid and offer rates at which Prime Bank Bills in each tenor were trading at 10.00am on each trading day;

(3)    following the receipt of submissions from the BBSW Panellists, the highest and lowest mid-rates submitted for each tenor were eliminated until a maximum of eight submissions remained; and

(4)    the BBSW for that day was calculated or set by AFMA by ascertaining the average of the remaining mid-rates for each tenor to four decimal places.

20    AFMA published the BBSW from approximately 10:10am on each Sydney business day. It was made available to subscribers to the BBSW service by information vendors such as Bloomberg or Reuters shortly after approximately 10:10am on the day of calculation, and to the general public on the following day.

NAB’s conduct

21    NAB holds an Australian Financial Services Licence and authority to carry on banking business under the Banking Act 1959 (Cth). NAB is one of Australia’s largest companies with net assets that, at September 2016, exceeded $51 billion, a net operating income that exceeded $17 billion, and a profit that exceeded $6 billion.

22    NAB supplied to and acquired from counterparties financial products referenced to BBSW.

23    The divisions of NAB included Group Treasury and Global Markets. Group Treasury was responsible for managing NAB’s funding, capital and balance sheet requirements. Global Markets derives revenue for NAB by trading in NAB’s name in financial products in financial markets and otherwise. One subdivision within Global Markets was known as the Short Term Interest Rate Risk desk or STIRR. STIRR was based in NAB’s Sydney office. STIRR dealt in Prime Bank Bills with entities which participated in the Bank Bill Market and other entities which did not.

24    STIRR held assets, including forward rate agreements or FRAs and interest rate swaps, in the STIRR portfolio and reported to NAB on the profits and losses of that portfolio. This report was an important metric by which STIRR’s performance was measured at the close of business on every business day.

25    An FRA is an agreement in which:

the parties agree to exchange interest rate payments on the settlement date based on the difference between an agreed contract rate (the “fixed” side) and a settlement rate (ordinarily, BBSW in the particular tenor on the future settlement date based on a nominal sum). The settlement rate is not fixed or known at the date of agreement and is therefore often referred to as a “floating rate”. A FRA has a payer and a receiver. The “payer” pays the fixed rate on the settlement date (and receives the settlement rate); the “receiver” receives the fixed rate (and pays the settlement rate).

26    An interest rate swap is:

an arrangement whereby two parties contractually agree to periodically exchange net interest rate cash flows by reference to a nominal underlying principal sum for the term of the agreement. The common term of an interest rate swap is between 2 and 10 years, although it may extend as long as 25 years. The principal amount is nominal only – an interest rate swap does not involve any payments of principal.

All single currency interest rate swaps have a “pay” leg and a “receive” leg. Either leg can be fixed or floating. For Australian-dollar denominated interest rate swaps, the floating leg may be referenced to, among other things, either BBSW or BBSY (which is described in the following paragraph).

“BBSY” is the “bid” (the offer to buy) and “ask” (the offer to sell) values for each tenor of Prime Bank Bills with a margin of five basis point spread over and above BBSW.

Under an interest rate swap, on each “reset” date, a party is obliged to pay an amount – which is either fixed or floating – and has a right to receive an amount – which is either fixed or floating. Where the floating leg of an interest rate swap varies by reference to BBSW or BBSY, the swap is BBSW-referenced in the sense that the quantum of payment obligations or receipt rights derives from where BBSW sets on the reset date.

27    The employees of NAB working within STIRR were also responsible for making NAB’s submissions to AFMA each Sydney business day for the purpose of calculating the BBSW.

28    On a number of occasions employees of STIRR engaged in conduct the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. Specifically:

At all material times, on each Sydney business day, STIRR held on the STIRR Portfolio FRAs and interest rate swaps in relation to which:

(a)    an obligation to pay an amount of money would be quantified when the relevant BBSW was set on that day;

(b)    the amount payable by STIRR to the counterparty or the amount payable by the counterparty to STIRR depended upon the rate at which the relevant BBSW was set on that day; and

(c)    the profit and loss of the STIRR Portfolio was affected by movement in the BBSW on that day.

The net aggregate Face Value of the FRAs and interest rate swaps in a particular tenor held on the STIRR Portfolio which are to “fix” on a particular day is referred to below as the BBSW Rate Set Exposure for that day. The exposure is “net” in the sense that, if STIRR was, on a particular day, a payer of an amount referenced to BBSW on products of Face Value “x” and a receiver of an amount referenced to BBSW on products of Face Value “y”, the exposure is “x - y”. A net long exposure refers to the case where STIRR is a net receiver of BBSW in the particular tenor; a net short exposure refers to the case where STIRR is a net payer of BBSW in the particular tenor.

During the Relevant Period, the net and per desk BBSW Rate Set Exposure of Global Markets, Group Treasury and NAB, were not systematically provided to employees of STIRR, although STIRR employees were sometimes aware of the BBSW Rate Set Exposure of another desk through communications with employees of that desk.

29    On 20 December 2010 an employee of NAB within STIRR made two offers to sell 90 day Prime Bank Bills at yields higher than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee, acting within the scope of his actual or apparent authority from NAB, and knowing that STIRR had a net long exposure to the 90 day BBSW on that day in the amount of approximately $5,692,250,000:

(a)    intended that the offers would be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed those offers would submit higher yields to AFMA that day;

(c)    intended that BBSW would, accordingly, set higher;

(d)    intended that STIRR would, by reason of BBSW setting higher than it otherwise would, be entitled to receive more money than it otherwise would pursuant to the payment obligations counterparties had under the instruments giving rise to STIRR’s net long BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

30    On 17 January 2011 an employee of NAB within STIRR made an offer to sell 90 day Prime Bank Bills at yields higher than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee, acting within the scope of his actual or apparent authority from NAB and knowing that STIRR had a net long exposure to the 90 day BBSW on that day in the amount of approximately $1,915,000,000:

(a)    intended that the offer would be observed by BBSW Panellists, or that the acceptance of the bid would result in bids and offers at higher yields that would then be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed those bids or offers would submit higher yields to AFMA that day;

(c)    intended that BBSW would, accordingly, set higher;

(d)    intended that STIRR would, by reason of BBSW setting higher than it otherwise would, be entitled to receive more money than it otherwise would pursuant to the payment obligations counterparties had under the instruments giving rise to STIRR’s net long BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

31    On 7 February 2011 an employee of NAB within STIRR made a bid to buy 90 day Prime Bank Bills at yields lower than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee acting within the scope of his actual or apparent authority from NAB and knowing that STIRR had a net short exposure to the 90 day BBSW on that day in the amount of approximately $1,901,630,000:

(a)    intended that the bid would be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed the bid would submit lower yields to AFMA that day;

(c)    intended that BBSW would, accordingly, set lower;

(d)    intended that STIRR would, by reason of BBSW setting lower than it otherwise would, be required to pay less money than it otherwise would pursuant to the payment obligations counterparties had under the instruments giving rise to STIRR’s net short BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

32    On 7 February 2011 an employee of NAB within STIRR made an offer to sell 90 day Prime Bank Bills at yields higher than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee, acting within the scope of his actual or apparent authority from NAB and knowing that STIRR had a net long exposure to the 30 day BBSW on that day in the amount of approximately $1,625,000,000:

(a)    intended that the offer would be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed the offer would submit higher yields to AFMA that day;

(c)    intended that BBSW would, accordingly, set higher;

(d)    intended that STIRR would, by reason of BBSW setting higher than it otherwise would, be entitled to receive more money than it otherwise would pursuant to the payment obligations counterparties had under the instruments giving rise to STIRR’s net short BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

33    On 30 June 2011 an employee of NAB within STIRR made an offer to sell or accepted a bid to buy 90 day Prime Bank Bills at yields higher than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee acting within the scope of his actual or apparent authority from NAB and knowing that STIRR had a net long exposure to the 90 day BBSW on that day in the amount of approximately $780,000,000:

(a)    intended that the offer would be observed by BBSW Panellists, or that the acceptance of the bid would result in bids and offers at higher yields that would then be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed those bids or offers would submit higher yields to AFMA that day;

(c)    intended that BBSW would, accordingly set higher;

(d)    intended that STIRR would, by reason of BBSW setting higher than it otherwise would, be entitled to receive more money than it otherwise would pursuant to the payment obligations counterparties had under the instruments giving rise to STIRR’s net long BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

34    On 12 July 2011 an employee of NAB within STIRR made an offer to sell or accepted a bid to buy 90 day Prime Bank Bills at yields higher than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee, acting within the scope of his actual or apparent authority from NAB and knowing that STIRR had a net long exposure to the 90 day BBSW on that day in the amount of approximately $1,324,000,000:

(a)    intended that the offer would be observed by BBSW Panellists, or that the acceptance of the bid would result in bids and offers at higher yields that would then be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed those bids or offers would submit higher yields to AFMA that day;

(c)    intended that BBSW would, accordingly, set higher;

(d)    intended that STIRR would, by reason of BBSW setting higher than it otherwise would, be entitled to receive more money than it otherwise would pursuant to the payment obligations counterparties had under the instruments giving rise to STIRR’s net long BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

35    On 5 October 2011 an employee of NAB within STIRR made four offers to sell 90 day Prime Bank Bills at yields higher than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee, acting within the scope of his actual or apparent authority from NAB and knowing that STIRR had a net long exposure to the 90 day BBSW on that day in the amount of approximately $1,635,000,000:

(a)    intended that the offers would be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed those offers would submit higher yields to AFMA that day;

(c)    intended that BBSW would, accordingly, set higher;

(d)    intended that STIRR would, by reason of BBSW setting higher than it otherwise would, be entitled to receive more money than it otherwise would pursuant to the payment obligations counterparties had under the instruments giving rise to STIRR’s net long BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

36    On 25 October 2011 an employee of NAB within STIRR made a bid to buy or accepted an offer to sell 90 day Prime Bank Bills at a yield lower than warranted by the conditions of the Bank Bill Market the sole purpose of which was to influence the BBSW to the advantage of STIRR and the detriment of counterparties. In so doing, the employee, acting within the scope of his actual or apparent authority from NAB and knowing that STIRR had a net short exposure to the 90 day BBSW on that day in the amount of approximately $1,050,000,000:

(a)    intended that the bid would be observed by BBSW Panellists, or that the acceptance of the offer would result in bids and offers at lower yields that would then be observed by BBSW Panellists;

(b)    intended that BBSW Panellists who observed those bids or offers would submit lower yields to AFMA that day;

(c)    intended that BBSW would, accordingly, set lower;

(d)    intended that STIRR would, by reason of BBSW setting lower than it otherwise would, be require to pay less money than it otherwise would pursuant to the payment obligations STIRR had under the instruments giving rise to STIRR’s net short BBSW Rate Set Exposure;

(e)    did not consider or direct himself to anyone other than STIRR’s counterparties; and

(f)    intended to obtain an advantage over STIRR’s counterparties.

37    The employees of NAB within STIRR, and senior executives within Global Markets, had not been trained by NAB about the implications of attempts to influence the BBSW. NAB also did not monitor trades by STIRR to ensure that they had not been executed with the purpose of changing the BBSW to the detriment of counterparties who had acquired financial products from NAB. NAB also did not have policies, procedures and systems which adequately ensured that its STIRR employees did not engage in the conduct as identified and took no steps to instruct its employees within STIRR to cease and not to engage in such conduct.

38    By reason of the conduct NAB made:

(a)    one attempt on each of 17 January 2011, 7 February 2011 (in respect of 90-day Prime Bank Bills), 7 February 2011 (in respect of 30-day Prime Bank Bills), 30 June 2011, 12 July 2011 and 25 October 2011 to engage in conduct, in trade or commerce, in connection with the supply or acquisition of financial services that was, in all the circumstances, unconscionable;

(b)    two attempts on 20 December 2010 to engage in conduct, in trade or commerce, in connection with the supply or acquisition of financial services that was, in all the circumstances, unconscionable;

(c)    four attempts on 5 October 2011 to engage in conduct, in trade or commerce, in connection with the supply or acquisition of financial services that was, in all the circumstances, unconscionable.

39    As a result, NAB attempted to contravene s 12CC(1) of the ASIC Act (as it was at all material times prior to 1 January 2012).

40    Further by:

(1)    making bids or offers on the days described as set out above; and

(2)    failing to have adequate policies or procedures for supervision and monitoring, and adequate supervision and adequate monitoring of the conduct of its employees within STIRR,

NAB contravened s 912A(1)(a) of the Corporations Act in that it failed to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly.

41    NAB also contravened s 912A(1)(f) of the Corporations Act in that it failed to ensure that its employees within STIRR were adequately trained and competent so as not to engage in the contravening conduct.

42    It is also agreed that:

The attempted contraventions were deliberate and not transparent to counterparties.

If the identified conduct were successful in changing where BBSW set on the respective dates, counterparties with an opposite rate set exposure to STIRR on those days would have paid more to the defendant or received less from the defendant (as the case may be).

From mid-2012, ASIC undertook inquiries of BBSW Panellists including NAB in relation to their involvement in the BBSW rate set process, and subsequently conducted an investigation into conduct including trading by NAB which may have been intended to influence the rate at which BBSW set. ASIC incurred costs of the investigation, and subsequent legal proceedings, which are agreed to be paid by NAB in the amount of $20 million.

NAB defended this proceeding for around 16 months from commencement, and resolution was reached very shortly before trial, which had been fixed to be heard over several months.

At all material times, NAB had structures and processes within the organisation directed towards compliance (although inadequate to address the contravening conduct).

NAB has shown a disposition to cooperate with ASIC in relation to the attempted contraventions of the s 12CC of the ASIC Act and contraventions of s 912A of the Corporations Act identified in this Agreed Statement and has made admissions in respect of those matters. NAB does not contest the appropriateness of the Court imposing a pecuniary penalty.

NAB has not previously been found by a Court in proceedings under Part 2, Division 2, Subdivision G of the ASIC Act to have engaged in any similar conduct in the past.

In conjunction with the settlement of the Proceedings, NAB has agreed to enter into an Enforceable Undertaking directed at ensuring no repetition of the attempted contraventions and contraventions….

Since the conduct of STIRR traders identified in this Agreed Statement, the process by which BBSW is calculated has changed. From September 2013, AFMA has calculated BBSW benchmark rates as the midpoint of the observed best bid and best offer for Prime Bank Bills using live and executable bid and offer prices sourced from interbank trading platforms approved by AFMA. The bids and offers are sourced at three points in time around 10.00 am each business day.

Further reforms to the calculation of BBSW are to commence shortly. Effective 1 January 2017, ASX became the BBSW rate administrator. In 2018, ASX will introduce a new BBSW calculation methodology based on the volume weighted average price of actual transactions in Bank Bills. In support of the new methodology, ASX has developed BBSW Trade and Trade Reporting Guidelines, which are designed to provide clarity to participants on market practices to be followed when trading Bills and NCDs, to define trade reporting for the purpose of calculating a BBSW rate based on actual transactions and to meet regulatory requirements for Benchmark Administrators. The full BBSW Guidelines will come into effect in 2018.

43    Section 93AA(1) of the ASIC Act provides that “ASIC may accept a written undertaking given by a person in connection with a matter in relation to which ASIC has a function or power under this Act”. If ASIC considers that the person who gave the undertaking has breached any of its terms, ASIC may apply to the Court for an order under s 93AA(4). The Court may make:

(a)    an order directing the person to comply with that term of the undertaking;

(b)    an order directing the person to pay to the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach;

(c)    any order that the Court considers appropriate directing the person to compensate any other person who has suffered loss or damage as a result of the breach;

(d)    any other order that the Court considers appropriate.

44    NAB has agreed to give an enforceable undertaking to ASIC under s 93AA(1). Under the undertaking NAB has agreed to ASIC appointing an independent expert who will have access to all of NAB’s books and a capacity to interview NAB’s employees to provide reports relating to a BBSW program involving (as set out in paragraph 3.5(a) of the undertaking):

…changes to its existing policies, procedures, systems, controls, training, guidance and framework for monitoring and supervision of employees (BBSW Controls) in its Prime Bank Bill and NAB BBSW Product businesses to prevent, detect and respond to attempts to influence benchmark rates including through trading in Prime Bank Bills in order to ensure compliance with NAB’s obligations under the Corporations Legislation…,

and which specifies the date by which each proposed action will be taken.

45    The BBSW program will deal with compliance with guidelines from the BBSW Administrator (responsible for calculating the BBSW), guidance and training, monitoring and period audits, records retention, and complaints and reporting. Following review by the independent expert of an interim BBSW program a Final BBSW program will be implemented by NAB, which will also be subject to assessment by the independent expert over a period of three years, at NAB’s cost. Further:

NAB undertakes that each year for a period of 3 years from the full implementation of the Final BBSW Program, the Group Chief Risk Officer will attest that:

(a)    he or she has taken reasonable steps to satisfy himself or herself that the systems and controls in place to ensure the effectiveness of the Final BBSW Program (including any material changes) are appropriate and adequate to effectively prevent, detect and respond to the matters set out at paragraph 3.5(a); and

(b)    nothing has come to his or her attention during the previous 12 months to suggest that the Final BBSW Program (including any material changes) is not appropriate, to the extent reasonably possible, to address the matters set out at paragraph 3.5(a); or

(c)    identifies any matters that have come to his or her attention during the preceding 12 months that would indicate that the Final BBSW Program (including any material changes) is not appropriate, to the extent reasonably possible, to address the matters set out at paragraph 3.5(a) and the steps NAB has taken to address those matters.

46    NAB has also agreed to various measures in respect of the employees who were involved in the conduct which includes their suspension from trading activities unless and until they have “actively and in good faith participated in a program of compliance training conducted by an appropriately qualified external independent training provider focused on compliance with the Corporations Legislation in respect of trading on markets for fixed income products”, as well as monitoring of their activities.

47    By paragraph 3.19 of the undertaking :

NAB undertakes to pay the amount of $20 million to a Financial Consumer Protection or similar Fund or Funds (the Fund), to be nominated by ASIC, by 31 March 2018 or such later date as ASIC may agree. The Fund will finance any one or more of the following purposes:

(a)    promoting the confident and informed participation of investors and consumers in the financial system;

(b)    promoting understanding of the protection afforded to corporate whistleblowers and providing advice and other support to them;

(c)    promoting such other purposes agreed by ASIC that are consistent with ASIC’s functions under subsections 12A(2) and (3) of the ASIC Act.

The Fund will be invested, distributed and otherwise administered by a board or other entity(ies) independent of ASIC. The fees and expenses of the administrator in this role may be paid from the Fund. The Fund will not be used to fund ASIC employees or ASIC’s operations.

ANZ’s conduct

48    The Relevant Period for ANZ’s conduct is 9 March 2010 to 25 May 2012.

49    ANZ holds an Australian Financial Services Licence and authority to carry on banking business under the Banking Act. In the Relevant Period, ANZ provided a broad range of banking and financial products and services to retail, small business, corporate and institutional customers. It conducted its operations primarily in Australia, New Zealand and the Asia Pacific region. ANZ is one of Australia’s largest companies. It is listed on the Australian Securities Exchange. It had a market capitalisation as at 28 October 2017 of AUD$87.652 billion. ANZ’s statutory profit after tax for the full year ending 30 September 2017 was AUD$6.41 billion. It had a statutory operating income for the full year ending 30 September 2017 of AUD$20.27 billion.

50    ANZ was subject to prudential regulation of its banking business. The regulation included compliance with Prudential Standards promulgated by the Australian Prudential Regulation Authority (APRA) under s 11AF of the Banking Act relating to interest rate risk in its banking Book (IRRBB) (under Prudential Standard APS 117), market risk (including interest rate risk) on trading book positions (Trading Book Risk) (under Prudential Standard APS 116), and liquidity (under Prudential Standard APS 210).

51    In the Relevant Period, ANZ issued interest rate swaps, FRAs and 90 Day Bank Accepted Bill Futures (BAB Futures) (together, the BBSW Referenced Products) under which the rights or obligations of the parties sometimes referenced or were influenced by or derived from the BBSW for a relevant tenor on a particular day or days.

52    Interest rate swaps and FRAs are described above, which is not materially different from the description agreed by NAB and the ASIC.

53    BAB Futures contracts are standard form futures contracts traded on the ASX 24 futures exchange. Under the contract, one party agrees to buy and the other party agrees to sell a 3 month Prime Bank Bill at an agreed price (and thus yield) on the expiry date of the contract. Each contract has a notional face value of AUD$1,000,000. BAB Futures contracts expire on one of four dates each year, being the Thursday before the second Friday of the months of March, June, September and December. The contracts are deliverable, meaning that, upon expiry, any existing open positions are required to be settled by delivery of physical 3 month Prime Bank Bills. The price for a BAB Futures contract reflects the market's expectation, as at the date of trading, of the price at which 3 month Prime Bank Bills are likely to be trading on the future expiry date of the contract. The price of BAB Futures and the 3 month BBSW typically converge towards the expiry date of the futures contract.

54    In the Relevant Period ANZ’s Australian business was structured into three principal divisions, being Retail, Commercial and Wealth. There was also a division known as Institutional.

55    ANZ’s Group Treasury Division supported the Retail, Commercial, Wealth and Institutional divisions. The Group Treasury Division was responsible for managing ANZ’s AUD liquidity, and wholesale funding requirements. The Group Treasury Division included a business unit identified as the Short-Term Funding Group (STFG) based in Melbourne. The principal function and objective of the STFG was to ensure that the short term funding and liquidity of ANZ’s Australian balance sheet was maintained as required. The employees within the STFG measured and monitored ANZ’s compliance with the liquidity requirements for ANZ’s Australian balance sheet. The employees and officers within the STFG made decisions each business day whether to issue NCDs for sale, and, if so, in what volume.

56    Global Markets had responsibility for managing market risk (including interest rate risk), credit risk and operational risk in the Australian banking book and trading book and did so through five business units one of which was known as Balance Sheet. Balance Sheet was comprised of sub-units or “desks” identified as Mismatch and Liquidity.

57    The Mismatch desk was responsible for the management of IRRBB in respect of ANZ’s Australian balance sheet through ANZ’s funds transfer pricing (FTP) system and any interest rate risk resulting from derivative contracts. The Mismatch desk entered into and held BBSW Referenced Products, and traded in BAB Futures.

58    The Liquidity desk managed the Liquidity portfolio, which was a prudentially regulated asset book that ANZ was required to maintain in accordance with APS 210 (APRA’s Prudential Standard APS 210 (Liquidity)). APS 210 required ANZ to ensure that it had sufficient liquidity to meet its obligations as they fell due. The Liquidity desk managed a portfolio of financial products which included, among other products, Bank Bills, floating rate notes and derivative products. It also held a portfolio of liquid assets for the purposes of compliance with ANZ’s Liquidity and Funding Management Policies, and was responsible for the management of interest rate risk resulting from those assets. It entered into and held BBSW Referenced Products and traded, in the name of ANZ, in BAB Futures and floating rate notes.

59    Rates Trading included desks identified as Short Dated Securities, Swaps and Interest Rate Options.

60    The Short Dated Securities desk, also referred to as the Short Term Securities Trading desk, the Bills desk and the Rates Flow desk, was responsible for managing the short term interest rate risk resulting from Bank Bills held by ANZ. The employees and officers on the Short Dated Securities desk also made ANZ’s submission to AFMA each Sydney business day for the purpose of calculation of the BBSW, managed ANZ’s portfolio of Bank Bills, and traded principally in financial products that matured within 12 months, including Bank Bills, commercial bills, promissory notes, Treasury notes and short-dated fixed income securities.

61    The Swaps desk (also known as the Interest Rate Swaps desk) was responsible for the management of interest rate risk resulting from Australian dollar interest rate swaps entered into by ANZ and for market making in the Bank Bill Market. The employees on the Swaps desk traded principally in interest rate swaps, but also traded in other products including Bank Bills and BAB Futures, and managed a portfolio of financial products which included interest rate swaps and forward rate agreements. The Swaps desk was operated through a number of trading books reflecting different interest rate swap products, with transactions booked to different books. During the Relevant Period, these books included the Short Term Interest Rate Trading book (the Short Swaps Book), the Long Term Swap books (the Long Swaps Book) and the Cross Currency Swap book.

62    The Interest Rate Options desk was responsible for the management of interest rate risk resulting from interest rate options entered into by ANZ. The employees on the Interest Rate Options desk traded in and managed a portfolio of financial products principally comprised of interest rate options.

63    Market Risk was responsible for oversight of the traded and non-traded market risk, operational risk and compliance within Global Markets, setting and monitoring of trading and credit limits, investigation of significant limit breaches, and since August 2012, monitoring of ANZ’s BBSW submissions to AFMA and Bank Bill trading activity.

64    On each Sydney business day in the Relevant Period the earnings of the books managed by the Mismatch desk, Liquidity desk, and Rates Trading desks in Global Markets were affected by the rate at which the BBSW for different tenors was set on that day. The principal value of the products so affected is referred to as ANZ’s BBSW Rate Set Exposure.

65    Employees and officers on each desk in Global Markets were able to ascertain the BBSW Rate Set Exposure for their desk from ANZ’s risk management systems, and did so on each of the days identified below as a Contravening Day.

66    On each of the Contravention Days, the books managed by the Mismatch desk, Liquidity desk and Rates Trading in Global Markets had either:

(1)    a long net BBSW Rate Set Exposure in the 3 month tenor, meaning that the net profit of the books managed by the desk would be increased if the BBSW of that tenor was set by AFMA at a higher rate on that day and, correspondingly, would be decreased if the 3 month BBSW of that tenor was set by AFMA at a lower rate on that day; or

(2)    a short net BBSW Rate Set Exposure in the 3 month tenor, meaning that the net profit of the books managed by the desk would be increased if the BBSW of that tenor was set by AFMA at a lower rate on that day and, correspondingly, would be decreased if the BBSW of that tenor was set by AFMA at a higher rate on that day.

67    As a result, ANZ also had a long or short exposure once the books of the various desks were aggregated.

68    Further:

(1)    the rights and obligations of ANZ to counterparties under its BBSW Referenced Products which reset on the Contravention Days were affected by the movement in the BBSW in the relevant tenor on those days;

(2)    ANZ’s net earnings were affected by reason of the movement in the BBSW in the relevant tenor on those days; and

(3)    the gross exposure of counterparties who were not Bank Bill market participants to interest rate swaps and FRA’s has been disclosed in an annexure to the agreed facts which I do not accept to be confidential.

69    Accordingly, on the Contravention Days, ANZ’s net earnings were affected by reason of the movement in the BBSW in the relevant tenor on those days.

70    ANZ’s Contravention Days are 3 September 2010, 10 March 2011, 1 April 2011, 10 June 2011, 20 June 2011, 10 August 2011, 12 August 2011, 8 December 2011, 9 December 2011, and 3 February 2012.

71    On 3 September 2010, the Mismatch Desk had a net long 3 month BBSW rate set exposure of approximately $4,048,374,592 and the Rates Trading business unit (of which Swaps was a constituent desk) had an aggregate net long 3 month BBSW rate set exposure of approximately $1,203,566,385.

72    On 10 March 2011, the Mismatch Desk had a net short 3 month BBSW exposure position of approximately $485,463,133. The Rates Trading business unit (of which Swaps was a constituent desk) had a net short 3 month BBSW exposure position of approximately $2,290,904,338.

73    On 1 April 2011, the Mismatch Desk had a net long 3 month BBSW rate set exposure of approximately $4,039,720,690.

74    On 10 June 2011, the Mismatch Desk had a long 3 month BBSW rate set exposure of approximately $2,652,999,798 and the Rates Trading business unit (which included the Swaps desk) had a long 3 month BBSW rate set exposure of approximately $3,515,130,852.

75    On 20 June 2011, the Mismatch Desk had a long 3 month BBSW exposure of approximately $746,259,867 and the Rates Trading business unit (which included the Swaps desk) had a long 3 month BBSW exposure of approximately $6,855,865,976.

76    On 10 August 2011, the Mismatch Desk had a net short 3 month BBSW rate set exposure of approximately $2,060,843,635 and the Rates Trading business unit (which included the Swaps desk) had a net long 3 month BBSW rate set exposure of approximately $2,508,357,289.

77    On 12 August 2011, the Mismatch Desk had a net long 3 month BBSW rate set exposure of approximately $4,127,176,163.

78    On 8 December 2011, the Mismatch Desk had a net short 3 month BBSW rate set exposure of approximately $3,004,088,654 and the Rates Trading business unit (which included the Swaps desk) had a net short 3 month BBSW rate set exposure of approximately $3,822,452,024.

79    On 9 December 2011, the Mismatch Desk had a net long 3 month BBSW rate set exposure of $6,044,657,322 and the Rates Trading business unit (which included the Swaps desk) had a net long 3 month BBSW rate set exposure of approximately $1,434,900,970.

80    On 3 February 2012, the Mismatch Desk had a long 3 month BBSW rate set exposure of approximately $3,242,768,627. The Rates Trading business unit, of which Swaps was a constituent desk, held a long 90-day exposure of $924,525,550.

81    On each of the Contravention Days on which the Mismatch and Rates Trading Desks had a net long 3 month BBSW Rate Set Exposure, ANZ was party to one or more BBSW Referenced Products in respect of which a counterparty may have had an opposite exposure to the 3 month BBSW arising under that product on the Contravention Day in which event if a payment was required to be made by ANZ to the counterparty, the payment would have been decreased if the 3 month BBSW set higher on that Contravention Day and if a payment was required to be made by the counterparty to ANZ, the payment would have been increased if the 3 month BBSW set higher on that Contravention Day.

82    On each of the Contravention Days on which the Mismatch and Rates Trading Desks had a net short 3 month BBSW Rate Set Exposure, ANZ was party to one or more BBSW Referenced Products in respect of which a counterparty may have had an opposite exposure to the 3 month BBSW arising under that product on the Contravention Day in which event if a payment was required to be made by ANZ to the counterparty, the payment would have been decreased if the 3 month BBSW set lower on that Contravention Day and if a payment was required to be made by the counterparty to ANZ, the payment would have been increased if the 3 month BBSW set lower on that Contravention Day.

83    On each of the Contravention Days, ANZ was a party to one or more BBSW Referenced Products in respect of which a counterparty may have had an exposure to the 3 month BBSW arising under that product on the Contravention Day that was directionally the same as the net exposure of the Mismatch and Rates Trading Desks on the Contravention Day.

84    The counterparties were not listed companies and not participants in the Bank Bill Market.

85    ANZ has also made admissions for the purpose of this proceeding. In its admissions the Contravention Days are referred to as the “Schedule A Dates”. ANZ’s admissions are as follows:

2.    ANZ admits that:

(a)    on each of the Schedule A Dates, by transacting or seeking to transact via brokers by way of sale or purchase of Prime Bank Bills on the Bank Bill Market, ANZ Traders attempted to seek to change where BBSW set on that date in circumstances where:

(i)    the BBSW was, and was known by ANZ to be, a key benchmark and reference interest rate for the pricing and revaluation of Australian dollar loans, bills, derivatives, securities and other instruments, which was regarded by the market as independent, objective and transparent, and determined based upon prices for Prime Bank Bills formed by the competitive forces of supply and demand;

(ii)    had the attempt to change where BBSW set been successful:

(A)    ANZ’s Australian BBSW rate set risk exposure would have been advantaged; and

(B)    Counterparties who had a BBSW rate set risk exposure opposite to that of ANZ may have been detrimentally affected;

(b)    the conduct in (a) was conduct in trade or commerce and in connection with the acquisition or supply or possible acquisition or supply of financial services to a person (other than a listed company); and

(c)    by the conduct in (a), ANZ attempted, within the meaning of s 12GBA(1)(b) of the ASIC Act, to engage in conduct which would be in all the circumstances unconscionable in contravention of:

(i)    in the period prior to 1 January 2012, s 12CC(1) of the ASIC Act (as it then was); and

(ii)    in the period on and after 1 January 2012, s 12CB(1) of the ASIC Act.

3.    ANZ admits that:

(a)    by engaging in the conduct specified in paragraph 2 above, and

(b)    by failing to have in place, on the Schedule A Dates, adequate policies and procedures requiring ANZ Traders to abstain from conduct of the nature referred to in paragraph 2(a), and

(c)    by failing to have in place, on the Schedule A Dates:

(i)    adequate policies and procedures for supervising and monitoring the conduct of ANZ Traders;

(ii)    adequate supervision of the conduct of ANZ Traders; and

(iii)    adequate monitoring of the conduct of ANZ Traders,

ANZ failed to do all things necessary to ensure that the financial services covered by its Australian Financial Services Licence were provided efficiently, honestly and fairly on each of the Schedule A Dates and thereby contravened s 912A(1)(a) of the Corporations Act.

4.    ANZ admits that by failing to adequately train ANZ Traders not to engage in the conduct referred to in paragraph 2(a) above, ANZ failed to ensure that on the Schedule A Dates ANZ Traders were adequately trained to provide financial services and thereby contravened s 912A(1)(f) of the Corporations Act.

86    It is also agreed that:

From mid-2012, ASIC undertook inquiries of BBSW Panellists including ANZ in relation to their involvement in the BBSW rate set process, and subsequently conducted an investigation into conduct including trading by ANZ which may have been intended to influence the rate at which BBSW set. ASIC incurred costs of the investigation, and subsequent legal proceedings, which are agreed to be paid by ANZ in the amount of $20 million.

Since the conduct identified in this Agreed Statement, the process by which BBSW is calculated has changed. From September 2013, AFMA has calculated BBSW benchmark rates as the midpoint of the observed best bid and best offer for Prime Bank Bills using live and executable bid and offer prices sourced from interbank trading platforms approved by AFMA. The bids and offers are sourced at three points in time around 10.00 am each business day.

Further reforms to the calculation of BBSW are to commence shortly. Effective 1 January 2017, ASX became the BBSW rate administrator. In 2018, ASX will introduce a new BBSW calculation methodology based on the volume weighted average price of actual transactions in Bank Bills. In support of the new methodology, ASX has developed BBSW Trade and Trade Reporting Guidelines, which are designed to provide clarity to participants on market practices to be followed when trading Bank Bills, to define trade reporting for the purpose of calculating a BBSW rate based on actual transactions and to meet regulatory requirements for Benchmark Administrators. The full BBSW Guidelines will come into effect in 2018.

87    ANZ has agreed to give an enforceable undertaking to ASIC under s 93AA(1) of the ASIC Act. Under the undertaking ANZ has agreed to ASIC appointing an independent expert who will have access to all of ANZ’s books and a capacity to interview ANZ’s employees to provide reports relating to a BBSW program involving (as set out in paragraph 3.6(a) of the undertaking):

…changes it has made, (and it will make) to its policies, procedures, systems, controls, training, guidance and framework for monitoring and supervision of employees (BBSW Controls) in its Prime Bank Bill and ANZ BBSW Product businesses to prevent, detect and respond to attempts to seek to change where BBSW set, including through trading in Prime Bank Bills, in order to ensure compliance with ANZ’s obligations under the Corporations Legislation and the ASX BBSW Trade and Trade Reporting Guidelines…,

and which specifies the date by which each proposed action under the program will be taken.

88    The BBSW program will deal with compliance with guidelines from the BBSW Administrator (responsible for calculating the BBSW), guidance and training, monitoring and period audits, records retention, and complaints and reporting. Following review by the independent expert of an interim BBSW program a Final BBSW program will be implemented by ANZ, which will also be subject to assessment by the independent expert over a period of three years, at ANZ’s cost. Further:

ANZ undertakes that each year for a period of 3 years from the full implementation of the Final BBSW Program, the Group Chief Risk Officer (or, in the event of that position being discontinued, ANZ’s Chief Executive Officer) will attest that:

(a)    he or she has taken reasonable steps to satisfy himself or herself that the systems and controls in place to ensure the effectiveness of the Final BBSW Program (including any material changes) are appropriate and adequate to effectively prevent, detect and respond to the matters set out at paragraph 3.6(a); and

(b)    nothing has come to his or her attention during the previous 12 months to suggest that the Final BBSW Program (including any material changes) is not appropriate, to the extent reasonably possible, to address the matters set out at paragraph 3.6(a); or

(c)    identifies any matters that have come to his or her attention during the preceding 12 months that would indicate that the Final BBSW Program (including any material changes) is not appropriate, to the extent reasonably possible, to address the matters set out at paragraph 3.6(a)and the steps ANZ has taken to address those matters.

89    ANZ has also agreed to various measures in respect of the employees who were involved in the contravening conduct including their suspension from issuing or trading Prime Bank Bills “unless and until they have actively and in good faith participated in a program of compliance training conducted by an appropriately qualified training provider (endorsed by an external industry expert) focused on compliance with the Corporations legislation in respect of trading on markets for fixed income products and the issuance and trading of Prime Bank Bills”, as well as review of their salaries and clawback of bonuses for misconduct, future deployment, and monitoring of their activities.

90    Paragraph 3.21 of the undertaking is in these terms:

ANZ undertakes to pay the amount of $20 million to a Financial Consumer Protection or similar Fund or Funds (the Fund) by 31 March 2018 or such later date as ASIC may agree. The Fund will finance any one or more of the following purposes:

(a)    promoting the confident and informed participation of investors and consumers in the financial system;

(b)    promoting understanding of the protection afforded to corporate whistleblowers and providing advice and other support to them;

(c)    promoting such other purposes agreed by ASIC that are consistent with ASIC’s functions under subsections 12A(2) and (3) of the ASIC Act.

The Fund will be invested, distributed and otherwise administered by a board or other entity(ies) independent of ASIC. The fees and expenses of the administrator in this role may be paid from the Fund. The Fund will not be used to fund ASIC employees or ASIC’s operations.

Joint submissions

General

91    Each of NAB and ASIC, and ANZ and ASIC, filed joint submissions.

92    The parties agree that “unconscionable” in s 12CC and s 12CB of the ASIC Act is to be given its ordinary meaning. It means something done not in good conscience, that which is irreconcilable with what is right or reasonable, or showing no regard for conscience Ordinarily at least, statutory unconscionability involves a high level of moral obloquy, serious misconduct or something which is clearly unfair or unreasonable, moral tainting, or unethical behaviour. However, it is not appropriate to focus exclusively upon the presence of moral obloquy in assessing whether conduct is unconscionable. Moral obloquy is not necessarily confined to notions of dishonesty and is to be assessed having regard to relevant values and norms more generally.

93    Apart from the mandatory considerations in s 12GBA(2) of the ASIC Act and the factors which are always to be taken into account as relevant to the assessment of penalty, other principles apply.

94    The totality principle means that the total penalty for related offences ought not exceed what is proper for the entire contravening conduct involved.

95    The “course of conduct” or “one transaction” principle means that consideration should be given to whether the contraventions arise out of the same course of conduct or the one transaction, to determine whether it is appropriate that a “concurrent” or single penalty should be imposed for the contraventions.

96    The “parity principle” requires that persons or corporations guilty of similar contraventions should incur similar penalties.

NAB

97    ASIC and NAB have agreed that an appropriate penalty for NAB’s attempted contraventions of s 12CC of the ASIC Act is $10 million. As noted, the maximum penalty for all of NAB’s contraventions would be $13.2 million (12 attempts at a maximum of $1.1 million each).

98    NAB and ASIC agree that NAB’s contraventions involved attempts to change where BBSW was set, in circumstances where BBSW was a key benchmark interest rate in financial markets in Australia. BBSW was used as a reference rate in various financial products, including FRAs and interest rate swaps as the base rate for pricing a range of financial products and had application in lending transactions.

99    NAB and ASIC also agree that:

(a)    STIRR’s conduct was deliberate in the sense that it was engaged in with the intention of achieving an outcome proscribed by the ASIC Act, and was not transparent to counterparties: Agreed Facts at [149].

(b)    There were multiple occasions over a period spanning more than 10 months.

(c)    STIRR’s conduct was not prevented by NAB policies and systems or by the senior staff member in STIRR, Mr Howarth, and senior executives of Global Markets did not prevent or give instructions to prevent repetition of the conduct: Agreed Facts at [57]-[59], [142], [148].

(d)    None of the STIRR employees or senior executives in Global Markets had been trained about the implications of attempts to influence the BBSW for their compliance with NAB’s policies: Agreed Facts, [58].

(e)    STIRR’s conduct was engaged in for the purpose of profiting at the expense of persons who were vulnerable to that conduct.

(f)    If NAB’s conduct were successful, it could have gained at the expense of others.

(g)    The Court needs to be careful to ensure that to attempt to contravene the ASIC Act is not more profitable than paying a penalty. NAB is one of Australia’s largest public listed companies. As at 30 September 2016, its net assets exceeded $51 billion, its net operating income exceeded $17 billion and its profit exceeded $6 billion: Agreed Facts at [147]. It has ample resources to meet any penalty; and any penalty should operate as a meaningful deterrent to NAB within the context of those ample resources.

(h)    NAB did not make admissions until shortly before the eve of the trial. There has been a corresponding inconvenience to the Court and to other litigants.

100    In joint submissions NAB and ASIC said that:

The award of the penalty will strongly serve a general deterrence purpose. There is a weighty public interest in the proper functioning of Australia’s financial markets and the financial services industry. General deterrence is a particularly important consideration when imposing a penalty for a contravention which is difficult to detect. The Court can notice that the penalties awarded in this case are likely to be widely publicised. They will be apt to deter others from attempting to engage in contraventions in connection with the provision of financial services in Australia.

The award of the penalty will also serve a specific deterrence purpose. While the manner in which BBSW is set has changed, and while NAB has taken steps – including through the offer to enter into the enforceable undertaking and the admission of attempted contraventions – which indicate that it is unlikely that NAB would repeat the specific conduct the subject of these orders, the Court would expect that the levying of a significant penalty would operate as a strong message to NAB not to attempt to contravene financial services laws again.

101    It is also relevant that:

NAB, however, has not previously been found by a Court in proceedings under Part 2, Division 2, Subdivision G of the ASIC Act to have engaged in any similar conduct in the past. There is no evidence that any person was in fact harmed by NAB’s conduct.

ANZ

102    ANZ and ASIC agree that ANZ’s conduct on the Contravention Days involved the taking of steps towards contravention of s 12CB and s 12CC of the ASIC Act, as applicable at the different dates. Supporting facts include the following:

First, the BBSW was, and was known by ANZ to be, a key benchmark and reference interest rate for the pricing and revaluation of Australian dollar loans, bills, derivatives, securities and other instruments, which was regarded by the market as independent, objective and transparent, and determined based upon prices for Prime Bank Bills formed by the competitive forces of supply and demand.

Second, ANZ was a Prime Bank and a Bank Bill Market participant and thereby enjoyed a position of commercial advantage with respect to trading in the Bank Bill Market, which was unavailable to counterparties who were not participants in the Bank Bill Market.

Third, as a member of AFMA, ANZ agreed to abide by the AFMA Code of Ethics and was encouraged to use the AFMA Code of Ethics as the basis to develop and implement more detailed procedures to effect the objectives of the AFMA Code of Ethics within ANZ. The AFMA Code of Ethics set out the minimum standards, principles and rules of behaviour applicable to AFMA members in the conduct of their business. Amongst other things, the AFMA Code of Ethics required AFMA members to conduct their trading activities in a fair and orderly manner, maintain the integrity of financial markets and not carry out trading that would interfere with the normal supply and demand factors in the market for a financial product.

Fourth, on each of the Contravention Dates, either or both of ANZ’s Mismatch desk and the Rates Trading desks had a net BBSW rate set exposure that would have been advantaged if the attempt had been successful.

Fifth, ANZ’s Mismatch and Rates Trading desks were not authorised to trade for the purpose of changing where the BBSW set.

Sixth, on each of the Contravention Dates, there were counterparties to BBSW Referenced Products with ANZ that were non-listed companies (and that were not Bank Bill Market participants) who had an opposite BBSW exposure to that of ANZ such that some of them may have been detrimentally affected if the attempt had been successful.

103    ANZ does not admit that ANZ’s trading of Prime Bank Bills in the Bank Bill Market on any of the Contravention Days changed where the BBSW set on those dates.

104    The agreed facts establish that ANZ did not do all things necessary to ensure that ANZ dealt in BBSW Referenced Products efficiently, honestly and fairly. By failing to prevent the contravening conduct, ANZ failed in its obligation under s 912A(1)(a) of the Corporations Act. ANZ’s failure created the potential for its dealings in BBSW Referenced Products to be otherwise than efficient, honest and fair.

105    ANZ admits that by failing to adequately train ANZ’s employees not to engage in the contravening conduct, ANZ failed to ensure that, on the Contravention Days, its employees were adequately trained to provide financial services. Adequate training under s 912A(1)(f) necessarily encompasses training to prevent contraventions of relevant financial services laws such as s 12CB and s 12CC of the ASIC Act. While ANZ had in place various conduct and ethics policies, it acknowledges that its training was not adequate to educate its employees about the contravening conduct.

106    ASIC and ANZ have agreed that an appropriate penalty for ANZ’s attempted contraventions of s 12CB and s 12CC is $10 million. As noted, the maximum penalty for all of ANZ’s contraventions would be $11 million (10 attempts at a maximum of $1.1 million each).

107    ASIC and ANZ have agreed that this penalty reflects the following:

(1)    the conduct involved attempts to change where BBSW was set, in circumstances where BBSW was a key benchmark interest rate in financial markets in Australia;

(2)    general deterrence is a particularly important consideration when imposing a penalty for a contravention which is difficult to detect;

(3)    the conduct occurred in respect of the 10 separate contravention days, occurring within an 18 month period;

(4)    if the attempts had been successful counterparties may have incurred substantial losses;

(5)    ANZ is one of Australia’s largest companies;

(6)    the size and financial position of ANZ is relevant to ascertaining the level of penalty necessary to achieve specific and general deterrence in all the circumstances;

(7)    ANZ admits that its conduct involved an intention to seek to bring about the prohibited result;

(8)    the contravention arose out of the conduct of experienced employees within the Global Market division of ANZ’s Institutional business, some of whom held positions involving management responsibility;

(9)    despite extensive policies and procedures, ANZ admits that on each of the Contravention Days it failed to have in place adequate policies and procedures requiring employees who traded in Prime Bank Bills to abstain from conduct of the nature referred to above; and

(10)    ANZ failed to ensure that, on each of the Contravention Days, ANZ Traders were adequately trained not to engage in the contravening conduct.

108    Otherwise, from mid-2012, ASIC undertook inquiries of BBSW Panellists including ANZ in relation to their involvement in the BBSW rate set process, and subsequently conducted an investigation into conduct including trading by ANZ which may have been intended to influence the rate at which BBSW set. The proceeding was commenced on 4 March 2016 and it was defended by ANZ until 23 October 2017 (a period of approximately 19 months). ANZ and ASIC achieved a resolution of the proceeding at the commencement of the trial, which was estimated to continue for approximately 4 months. The resolution will avoid a lengthy and complex trial of the issues raised in the case that was brought by ASIC.

109    ANZ and ASIC agree that the proposed penalties are necessary and appropriate in order to satisfy the principal object of a penalty under s 12GBA of the ASIC Act, namely deterrence. The principal object of the penalty is to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene. It is important to send a message into the marketplace that contraventions of the kind under consideration are serious and not acceptable.

110    The enforceable undertaking, which includes a payment of $20 million to a Financial Consumer Protection or similar fund by 31 March 2018 or such later date as ASIC may agree, and ANZ’s agreement to pay ASIC’s costs of the investigation, the proceedings and incidental to the fund to be established under the undertaking, are also relevant.

Conclusions

111    It may be thought that penalties of around 76% of the maximum penalty for NAB and 91% of the maximum penalty for ANZ are severe. They are and they ought to be. NAB and ANZ, in this one regard at least, are to be commended for accepting that their conduct requires the imposition of penalties at the higher end of the range despite the obligations each has accepted in the enforceable undertakings and the costs agreements.

112    Each of NAB and ANZ has admitted to unethical and dishonest conduct. It is difficult to convey the seriousness of what the attempts involved. Knowing the function of the BBSW in the Australian financial system and that it was relied upon as an independently established benchmark throughout the system, employees of NAB and ANZ deliberately sought to manipulate that benchmark to advantage their employer (and their own performance) over counterparties who had no means of protecting themselves from the effects of such manipulation, and had a right to expect that NAB and ANZ would deal with them fairly, honestly, and in good faith.

113    From the perspective of the counterparties, the conduct involved gross departures from basic standards of commercial decency, honesty and fairness.

114    From the broader perspective of the Australian financial system, a system which depends on public and institutional trust in its integrity, the conduct was even worse.

115    That any employee performing these kinds of functions within a bank, let alone two pillars of Australia’s banking system, could have conceived of manipulating the BBSW, and in fact attempted to do so repeatedly over such periods of time bespeaks fundamental failings in the culture, training, governance and regulatory systems of both NAB and ANZ. The public should be shocked, dismayed and indeed disgusted that conduct of this kind could have occurred. The conduct involved attempts to corrupt a fundamental component of the entire Australian financial system for mere short term commercial advantage. The conduct involved a repeated failure to fulfil what would generally be perceived as the most basic standards of honesty, fairness and commercial decency, let alone the standards that would properly be expected of these two banks. The conduct tends to undermine public confidence in the entirety of the Australian financial system.

116    To achieve the object of protecting and promoting the public interest in securing compliance with the law, penalties at the higher end of the available scale, as have been agreed, are essential.

117    I accept the apologies of each of NAB and ANZ for these serious contraventions.

118    I accept that ASIC has given careful consideration to the resolution of both proceedings and considers the resolutions, on the facts, admissions and terms agreed, to be appropriate and in the public interest.

119    Given the enforceable undertakings and the agreements as to costs, I am prepared to accept the single pecuniary penalty agreed for all contraventions by each of NAB and ANZ, and will make declarations and orders otherwise as proposed in each matter.

Associate:

Dated:    10 November 2017