Westpac will pay nearly $10 million after being found to have engaged in unconscionable conduct during a multibillion-dollar interest rate swap.

The bank was taken to the Federal Court by the corporate regulator Australian Securities and Investments Commission (ASIC) in 2021 and reached a settlement agreement on Wednesday.

The court found Westpac’s conduct was unconscionable when it engaged in pre-hedging before a $12 billion interest rate swap with a consortium of AustralianSuper and IFM entities in October 2016.

The swap, the largest of its kind in Australian financial market history, related to the consortium purchasing a majority stake in Ausgrid from the NSW government.

Pre-hedging involves trading to hedge the risk a firm expects it will acquire from a future transaction.

Westpac agreed to pay the maximum penalty of $1.8 million along with $8 million for ASIC’s litigation and investigation costs.

Although it was handed the maximum fine, the banking giant avoided a significantly higher penalty as the offence occurred in 2016 when penalties were lower.

But ASIC deputy chair Sarah Court said the court ruling would help clarify expectations around pre-hedging, disclosure and consent.

“Appropriate conduct for pre-hedging is an issue of global significance (but) in this case, Westpac’s behaviour was unconscionable and exposed its client to significant risk,” she said.

“Westpac’s conduct was also in stark contrast with several other banks.”

Court noted had the same actions been taken in 2024, Westpac would have been hit with a much higher penalty.

The court found Westpac knew its client was concerned about trading before the swap transaction yet acted on an internal plan to pre-hedge up to 50 per cent of the interest rate risk.

It also found the bank did not have the consent of its client to do this nor did it disclose the extent of its planned pre-hedging.

“If pre-hedging is not carried out in an appropriate manner it can be unfair, unconscionable and result in poor client outcomes,” Court said.

“We will continue to hold participants in these markets to high standards.”

A Westpac spokesman said the bank had agreed to settle civil proceedings commenced by ASIC.

“Westpac welcomes the withdrawal of insider trading allegations,” the spokesman said in a statement.

“We have already taken action to strengthen processes and policies in relation to pre-hedging activity.”

-AAP