Several sources have told the ABC that financial market participants regularly circumvent the law to improve the “bottom line”, motivated by “greed”.
“In the minds of the people doing it, it’s probably not consciously ‘we’re going out to break the system’ or be bad but financial people are, by their nature, innovative,” professional investor and writer Danielle Ecuyer said.
“The motivation of greed — that’s humanity, that’s the way it works.
“If there’s a more simple way to get to an optimal bottom line then they will probably pursue it.
“You see it in financial products that constantly come to the market and the industry will always look for an easier way, a better way to do something that avoids the rules.”
Ms Ecuyer said the continual evolution of the industry posed a problem for regulators.
“I think it’s a case of regulators constantly chasing their tails,” she said.
Macquarie Bank in hot water
Australia’s biggest investment bank has been caught misreporting hundreds of thousands of financial transactions.
“[Investment banks] dream up and trade and structure products for clients who have an interest in over-the-counter options solutions and maybe futures solutions as well,” investment analyst Henry Jennings said.
Over the counter, or OTC derivatives, are financial contracts traded directly between two counterparties, and not via an exchange like the ASX or Wall Street.
What’s their purpose?
Some of the big electricity users in this country — such as the big aluminium producers — want to lock in the prices they pay for energy.
They can do this via a financial futures contract.
Macquarie Bank facilitates these transactions.
Mr Jennings used to run Macquarie Bank’s derivatives trading desk in the late 1990s.
“Macquarie Bank would then structure a product for, say, for example, Alcoa, that would enable them to ensure they get electricity at the price they’ve agreed, and they would on-sell that contract perhaps, or even take the position themselves, which would give them exposure to any upside on that pricing structure,” he said.
To put it at a retail level, it would be like a household calling Macquarie and saying: “We’d prefer to have electricity at $10 a quarter,” and Macquarie enters a contract with the electricity wholesaler and locks that price in for you.
“So, what would happen then is that if the future price of electricity was $8 instead of $10 then obviously you’re paying a little bit over,” Mr Jennings said.
“If the price went to $20 you’d still be locked in at $10, and anyone who bought that contract from you at [the] $10 level would then benefit from the upside in that electricity price rise.”
In September 2024, ASIC slapped Macquarie Bank with a record $4.995 million fine for failing to prevent suspicious orders being placed on the electricity futures market.
ASIC commissioner Simone Constant suggested on Wednesday that little has changed after that intervention, saying today: “We were particularly disappointed that Macquarie failed to prevent 11 suspicious orders being placed on the electricity futures market via Macquarie terminals shortly after ASIC had referred similar failures to the Markets Disciplinary Panel.”
“Our intervention underscores our concern with the recurrent nature of Macquarie’s failures, which were caused by ineffective supervision and weak compliance and control management,” Ms Constant said.
ANZ pulled over by corporate cop
Macquarie Bank is not the only bank in hot water.
The ANZ Bank has been rocked by allegations that its traders manipulated the bond rate during a $14 billion bond raising for the federal government’s debt agency.
It’s alleged the ANZ Bank sought to raise bond yields by trading in what is called the “futures market”, which is essentially a market that allows traders to bet on future interest rate moves.
“Those bets also influence the reference rate that is used to set the price of new bonds,” University of New South Wales banking and finance researcher Associate Professor Mark Humphery-Jenner said.
A reference rate is an interest rate benchmark used to set other interest rates.
“The government looks to the futures rate to assess what return the market requires on its debt and to set the coupon [interest] rate on the bonds it issues,” Dr Humphery-Jenner said.
“If that futures rate climbs, then so too does the coupon rate on the government’s new bond issues.
“This increases the government’s total interest bill.
“ANZ is alleged to have manipulated futures yields higher, enabling it to buy bonds from investors at a low price.”
Bond prices move inversely to their interest rate.
Banking royal commission’s dark shadow
The Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Industry was established in 2017.
Led by Commissioner Kenneth Hayne, it investigated misconduct within the banking, superannuation, and financial services sectors.
There were concerns, however, that too few recommendations from the inquiry were implemented.
The Albanese government legislated the Financial Accountability Regime (FAR) in September 2023.
This completed the final major recommendation to government made by the banking royal commission.
The FAR replaced the Banking Executive Accountability Regime by imposing tough new accountability obligations on banks, insurers, and superannuation funds.
The FAR ensures that these institutions clearly identify individuals who will be held accountable for the actions of the organisation.
Risk of widespread suspicious trading in finance industry
Dr Humphery-Jenner is concerned “suspicious transactions” in the finance industry remain widespread.
“There’s certainly the risk of it,” he said.
“How large that is — potentially there could be more illicit or illegal transactions underneath that iceberg.
“For stocks there are often automated programs that will look for suspicious or very odd transactions — particularly around market announcements — however, in this particular case, we’re looking at over-the-counter derivatives where there’s a lot less of that type of automated screening.
“So, absolutely there’s a risk of [widespread dodgy financial transactions] which is why ASIC really wants to get that compliance in order.”
Macquarie Bank released a statement responding to ASIC’s action.
“Macquarie Bank takes its role as a licensed entity extremely seriously, including the importance of ensuring the integrity of the markets in which it operates and learning from instances where compliance has been inadequate,” the bank said.
