Tag: BBSW

BBSW Funding Pressure Eases A Little More But …

Ironic that in the past two weeks a number of smaller lenders, including Macquarie and Bendigio/Adelaide Bank all hiked their mortgage rates, the interbank rate has eased.  A couple of weeks back it was above 32 basis points now its down to 25 basis points.

So does this mean the risk of mortgage rate hikes have also abated from the majors?

Not necessarily as according to the AFR today, investors are moving funds from deposits to offshore locations. The share of bank funding from deposits is falling, thus they will need “an estimated additional $70 billion of funding as superannuation funds shift out of cash into international assets while indebted households draw down on their savings”.

This additional funding is required to support continued mortgage loan growth.

The household savings ratio is also falling thanks to the need to service mortgage repayments.

The AFR concludes “The banks faced two choices in response to slowing deposit growth – either lift deposit rates, or increase their use of the capital markets to meet demand for credit as their loan books have swelled to $2.6 trillion”.

“Either measure should result in higher cost of bank funding”

So still pressure to lift mortgage rates then.

ASIC accepts court enforceable undertaking from CBA

ASIC says Commonwealth Bank of Australia (CBA) has entered into a court enforceable undertaking with ASIC in relation to their bank bill trading business and their participation in the setting of the Bank Bill Swap Rate (BBSW), a key benchmark and reference interest rate in the Australian financial system.

As part of the undertaking, CBA will pay $15 million to be applied to the benefit of the community and $5 million towards ASIC’s investigation and legal costs.

CBA will also engage an independent expert to assess changes CBA has made (and will make) to its policies, procedures, systems, controls, training, guidance and framework for the monitoring and supervision of employees and trading in Prime Bank Bills.

On 21 June 2018, the Federal Court in Melbourne imposed pecuniary penalties totalling $5 million on CBA for attempting to engage in unconscionable conduct in relation to BBSW. CBA admitted to attempting to seek to affect where BBSW set on five occasions in the period 31 January 2012 to 15 June 2012.

CBA also admitted that it failed to do all things necessary to ensure that they provided financial services honestly and fairly and that its traders were adequately trained.

Justice Beach of the Federal Court noted the terms of the court enforceable undertaking and, in imposing the pecuniary penalty of $5 million, stated ‘…that sum together with the other payments all totalling $25 million should be an adequate denouncement of and deterrence against the unacceptable trading behaviour of individuals within CBA that ought to have known better and a bank that ought to have better supervised its personnel.’

Background

ASIC commenced legal proceedings in the Federal Court against CBA on 30 January 2018 (refer:18-024MR), alleging that on three specific occasions between 31 January 2012 and October 2012, CBA traded in a manner that was unconscionable and created an artificial price and a false appearance with respect to the market for certain financial products that were priced or valued off BBSW.

This followed proceedings in the Federal Court against the Australia and New Zealand Banking Group (ANZ) on 4 March 2016 (refer: 16-060MR), against the Westpac Banking Corporation (Westpac) on 5 April 2016 (refer: 16-110MR) and against National Australia Bank (NAB) on 7 June 2016 (refer: 16-183MR).

On 10 November 2017, the Federal Court made declarations that each of ANZ and NAB had attempted to engage in unconscionable conduct in attempting to seek to change where the BBSW set on certain dates and that each bank failed to do all things necessary to ensure that they provided financial services honestly and fairly. The Federal Court imposed pecuniary penalties of $10 million on each bank.

On 20 November 2017, ASIC accepted enforceable undertakings from ANZ and NAB which provides for both banks to take certain steps and to pay $20 million to be applied to the benefit of the community, and that each will pay $20 million towards ASIC’s investigation and other costs (refer: 17-393MR).

On 24 May 2018,  the Federal Court found that Westpac engaged in unconscionable conduct under s12CC of the Australian Securities and Investments Commission Act 2001 (Cth) by its involvement in setting BBSW on four occasions (refer: 18-151MR). A further hearing of this proceeding on penalty and relief will be held on 12 October 2018.

In July 2015, ASIC published Report 440, which addresses the potential manipulation of financial benchmarks and related conduct issues.

The Government has recently introduced legislation to implement financial benchmark regulatory reform and ASIC has consulted on proposed financial benchmark rules.

On 21 May 2018, the new BBSW methodology commenced (refer: 18-144MR). The new BBSW methodology calculates the benchmark directly from market transactions during a longer rate-set window and involves a larger number of participants. This means that the benchmark is anchored to real transactions at traded prices.

If there is a breach of the undertaking entered into by CBA, then under the ASIC Act, ASIC can apply for orders from the court to enforce compliance.

Short Term Bank Funding Grinds Higher

Analysis of the Bank Bill Swap Rates today shows that short term bank funding continues to rise, with one and two month funding costs now 37 basis points higher. Longer term debt went sideways.

More pressure on banks to lift mortgage rates. Which is the big four will be first to blink, after the spate of smaller lenders, including ING late Friday, all lifted?

BBSW “Elastic” Stretches Again

The benchmark BBSW rate has moved higher again, with the 3 month series now at a high of 2.1185; up ~36 basis points from February.

We know that around 20% of bank funding is from short term sources, according to the RBA.

Of that, more is sourced offshore than onshore. Both overseas rates – as typified by the US LIBOR …

… and the local BBSW rates as we looked at before, suggest a hike in mortgage rates is coming. In fact more smaller lenders quietly lifted their rates last week, following Suncorp, ME Bank and others.

IMB Bank said  from 22 June, its standard variable interest rate will increase by 0.08 per cent for new and existing home loan customers and Auswide has also lifted with increases of five basis points (0.05%) for owner occupied home loans and thirteen basis points (0.13%) for investment home loans and residential lines of credit, effective 27th June.

Unless the majors follow suite, expect their profits to drop, and returns of bank deposit to fall further.

US Mortgage Rates continue higher too…

BBSW Signals More Bank Funding Pressures

The latest BBSW rates have moved higher again in response to the higher US rates, and local uncertainty in the banking sector. The key 3-month rate is around 30 basis points above its February lows.

This puts more pressure on the banks in terms of margin erosion.  As we said recently:

… we think something else is going on, because the spreads in Australia are a lot bigger now than other markets, and we suspect it’s a lack of confidence in our local banks, thanks to the revelations from the Royal Commission. A quick look at the recent share prices of for example Westpac, the largest investment loan lender…

  … and CBA the largest owner occupied loan lender tells the story.

 The markets are nervous. The pincer movements of higher funding, less confidence and a slowing and more risky housing market are all adding to the banks’ woes. They are stuck because any lift in mortgage rates will drive prices lower and lift defaults from overleveraged households.

Actually this is the reason why we think the RBA may be forced to cut the cash rate ahead.

A nasty cocktail.

 

BBSW Eases A Little… But…

The latest charts on the Bank Bill Swap Rate shows that rates eased slightly from the peaks reached in April 2018.  But we also see a move higher again in the past week, so the trajectory may still be up ahead.

In practice, the gap between the lowest and highest rates for the 3 month series peaked at 32 basis points, but is now back to 17.5 basis points. Still up, but it perhaps puts less pressure on bank margins as a result.

 

Westpac Dodges Rate Rigging Charges

The Federal Court has determined ASIC failed to prove Westpac manipulated the bank bill swap rate, but the judge found the bank engaged in unconscionable conduct, via InvestorDaily.

Justice Beach of the Federal Court has handed down a 643-page judgement on a civil court case brought by ASIC that alleged Westpac manipulated the bank bill swap rate (BBSW).

In his judgement, Justice Beach found ASIC has “not made out its case against Westpac” concerning market manipulation or market rigging.

However, he did find that Westpac engaged in unconscionable conduct under s12CC of the ASIC Act on four occasions (6 April 2010, 20 May 2010, 1 and 6 December 2010) “by trading Prime Bank Bills in the Bank Bill Market with the dominant purpose of influencing yields and where BBSW is set”.

Westpac was also found to have contravened paragraphs 912A(1)(a), (c), (ca) and (f) of the Corporations Act, which relate to the obligations of financial services licensees to operate efficiently, honestly and fairly.

ASIC did not make out its case in respect to any of its other claims, said the judgement.

In his summary, Justice Beach said Westpac had failed to take “reasonable steps” to ensure its representatives did not engage in trading in Prime Bank Bills with the “sole or dominant purpose of manipulating the BBSW”.

“Further, in my view Westpac failed to ensure that its traders were adequately trained not to engage in trading with such a sole or dominant purpose,” said the judgement.

“This should have been reinforced and stipulated to them orally and in writing. In those circumstances, Westpac also contravened s 912A(1)(f).”

Federal Court finds Westpac traded to affect the BBSW and engaged in unconscionable conduct

ASIC says Justice Beach of the Federal Court today found that Westpac engaged in unconscionable conduct under s12CC of the Australian Securities and Investments Commission Act 2001 (Cth) by its involvement in setting the bank bill swap reference rate (BBSW) on 4 occasions.

In civil proceedings brought by ASIC, the Court found that on these occasions, Westpac traded with the dominant purpose of influencing yields of traded Prime Bank Bills and where BBSW set in a way that was favourable to its rate set exposure.

The court also found Westpac had inadequate procedures and training and had contravened its financial services licensee obligations under s912A(1)(a), (c), (ca) and (f) of the Corporations Act 2001 (Cth)

His Honour said in his judgement, “Westpac’s conduct was against commercial conscience as informed by the normative standards and their implicit values enshrined in the text, context and purpose of the ASIC Act specifically and the Corporations Act generally.”

A further hearing of this proceeding on penalty and relief will be held on a date to be determined.

Background

ASIC commenced legal proceedings in the Federal Court against the Australia and New Zealand Banking Group (ANZ) on 4 March 2016 (refer: 16-060MR) and against National Australia Bank (NAB) on 7 June 2016 (refer: 16-183MR).

On 10 November 2017, the Federal Court made declarations that each of ANZ and NAB had attempted to engage in unconscionable conduct in attempting to seek to change where the BBSW was set on certain dates and that each bank failed to do all things necessary to ensure that they provided financial services honestly and fairly. The Federal Court imposed pecuniary penalties of $10 million on each bank (refer: [2017] FCA 1338).

On 20 November 2017, ASIC accepted enforceable undertakings from ANZ and NAB which provides for both banks to take certain steps and to pay $20 million to be applied to the benefit of the community, and that each will pay $20 million towards ASIC’s investigation and other costs (refer: 17-393MR).

On 30 January 2018, ASIC commenced legal proceedings in the Federal Court against the Commonwealth Bank of Australia (CBA) (refer: 18-024MR).

On 8 May 2018, CBA announced that ASIC and CBA reached an in-principle agreement to settle ASIC’s claims (refer: CBA ASX Announcement). CBA and ASIC will be making an application to the Federal Court for approval of the settlement.

ASIC has previously accepted enforceable undertakings relating to BBSW from UBS-AG, BNP Paribas and the Royal Bank of Scotland (refer: 13-366MR, 14-014MR, 14-169MR). The institutions also made voluntary contributions totaling $3.6 million to fund independent financial literacy projects in Australia.

In July 2015, ASIC published Report 440, which addresses the potential manipulation of financial benchmarks and related conduct issues.

On 28 March 2018, Parliament passed legislation to implement financial benchmark regulatory reform.

On 21 May 2018, the new BBSW calculation methodology commenced, calculating directly from market transactions during a longer rate-set window and involving a larger number of participants. This means that the benchmark is anchored to real transactions at traded prices (refer: 18-144MR).

ASIC and RBA welcome the new BBSW calculation methodology

ASIC and the Reserve Bank of Australia (RBA) have welcomed the new BBSW calculation methodology, which commenced today.

The bank bill swap rate (BBSW) rate is a major interest rate benchmark for the Australian dollar and is widely referenced in many financial contracts. Previously, BBSW was calculated from the best executable bids and offers for Prime Bank securities. A major concern over recent years has been the low trading volumes during the rate-set window, the period over which the BBSW is measured.

The new BBSW methodology calculates the benchmark directly from market transactions during a longer rate-set window and involves a larger number of participants. This means that the benchmark is anchored to real transactions at traded prices. ASX, the administrator of BBSW, has consulted market participants on this new methodology. In addition, the ASX has recently conducted a successful parallel run of the new methodology against the existing method.

RBA Deputy Governor Guy Debelle said, ‘The new methodology strengthens BBSW by anchoring the benchmark to a greater number of transactions. This should help to ensure that BBSW remains robust.’

ASIC Commissioner Cathie Armour said, ‘A transaction-based BBSW supports the market’s trust in the robustness and reliability of BBSW.’

‘ASIC and the RBA expect all bank bill market participants – including the banks that issue the bank bills, as well as the participants that buy them – to adhere to the ASX BBSW Guidelines and support the new BBSW methodology. The rate-set window is the most liquid period in the bank bills market, and market participants are therefore likely to get the best outcomes for their institutions and their clients by trading during this time.’

‘We expect market participants to put in place procedures so that as much trading as possible happens during the rate-set window.

This change follows passage through the Parliament in March of legislation that puts in place a framework for licensing benchmark administrators. Consistent with the approach taken in a number of other jurisdictions, it also made manipulation of any financial benchmark, or products used to determine such a benchmark, a specific offence and subject to civil and criminal penalties.

ASIC intends shortly to make financial benchmark rules, on which ASIC consulted in 2017. ASIC also expects to declare BBSW, and a number of other financial benchmarks, as ‘significant benchmarks’ in Australia and to license the administrators of those significant benchmarks.