The Australian Securities and Investments Commission (ASIC) says it has started action in the Federal Court against ANZ for allegedly rigging interest rates.

Key points: ASIC alleges ANZ created an artificial price for bank bills on 44 days

ASIC alleges ANZ created an artificial price for bank bills on 44 days ANZ says it will "vigorously defend legal action"

ANZ says it will "vigorously defend legal action" Bank accuses ASIC of misunderstanding bank bill issuance

ASIC alleges there has been market manipulation over setting the bank bill swap reference rate, which affects commercial and personal loan rates.

ASIC said it had commenced legal proceedings in the Federal Court in Melbourne against ANZ for "unconscionable conduct and market manipulation in relation to the ANZ's involvement in setting the bank bill swap reference rate (BBSW)" between 2010 and 2012.

The BBSW is the primary interest rate benchmark used in the Australian financial market and is the rate at which banks lend to each other and is the reference point that is used to set interest rates on most business loans, and indirectly helps to set personal lending rates.

In a statement, ASIC said: "It is alleged that ANZ traded in a manner intended to create an artificial price for bank bills on 44 separate days during the period of 9 March 2010 to 25 May 2012."

ASIC is alleging that "ANZ had a large number of products which were priced or valued off BBSW and that it traded in the bank bill market with the intention of moving the BBSW higher or lower".

"ANZ was seeking to maximise its profit or minimise its loss to the detriment of those holding opposite positions to ANZ's," it said.

The corporate regulator has already secured voluntary contributions of $1.6 million from the Royal Bank of Scotland, and $1 million from UBS and BNP Paribas after those banks discovered "potential misconduct" in their BBSW submissions.

ASIC to seek fines in excess of $1 million

ASIC has been investigating potential rigging of the BBSW since 2012.

Back then it was revealed the United Kingdom's benchmark, the London Interbank Offered Rate (Libor), had been systematically manipulated by staff at some of the world's biggest financial institutions, later resulting in multi-billion-dollar fines and one trader going to jail.

Last month during a Senate Estimates committee hearing, ASIC chairman Greg Medcraft urged banks involved in manipulating the BBSW to "plead guilty".

ASIC will now pursue declarations from the court that ANZ contravened the Corporations Act and is seeking both fines and an order requiring ANZ to implement a compliance program.

While ASIC would not specify the magnitude of the fines it is pursuing, it is understood to be well in excess of the $1 million-plus enforceable undertakings against the three foreign banks.

ANZ says ASIC's claim based on 'misunderstanding'

In a statement, ANZ rejected all of the allegations and said it would would "vigorously defend legal action".

"We have cooperated fully with ASIC's investigation over many months, at a cost of many millions of dollars. This includes actively seeking to resolve the Commission's concerns since January 2015," ANZ chief risk officer Nigel Williams said.

"We believe the Commission's statement of claim is based on a misunderstanding of how bank bill issuance and interest rate risk management operates and the limited case law which applies to this area.

"Our practices in the BBSW market were consistent with Australian market practices in wholesale financial markets and we reject ASIC's characterisation of the transactions in question.

"Chat messages between traders is an issue that we will continue to review.

"We have already dealt with chats and behaviours that breach our code of conduct through internal disciplinary action against the individuals involved."

The ANZ noted ASIC's legal action is likely to take a considerable time to reach a resolution through the courts and the matter of penalties is uncertain.

Before September 2013, the BBSW was set by submissions from up to 14 banks, quoting the interest rate they were paying and receiving at 10:00am each business day.

That old process left the door ajar to manipulation, because it depended on the banks to provide accurate data.

The BBSW is now electronically calculated from market data collected by the Australian Financial Markets Association rendering market manipulation far more difficult.