Westpac has become the second major bank hauled into the courts by corporate regulators over allegations of a multi-billion dollar rigging of interest rate trading.

Key points: ASIC alleges Westpac created an artificial price for bank bills on 16 occasions over two years

ASIC alleges Westpac created an artificial price for bank bills on 16 occasions over two years Westpac rejects allegations, says it does not believe any employee acted unlawfully

Westpac rejects allegations, says it does not believe any employee acted unlawfully Action follows similar charges bought by ASIC against the ANZ last month

The Australian Securities and Investments Commission (ASIC) launched a Federal Court action against Westpac for unconscionable conduct in relation to the bank's involvement in setting the bank bill swap reference rate (BBSW) over a two-year period between April 2010 and June 2012.

The action followed similar charges bought by ASIC against ANZ last month.

ASIC is alleging Westpac traded in a manner intended to create an artificial price for bank bills on 16 occasions, involving billions of dollars of trade, over the two-year period.

The BBSW is the primary interest rate benchmark used in the Australian financial market.

It 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 and mortgage lending rates.

"The independence and transparency of the BBSW is a critical factor in ensuring the efficiency, integrity and good operations of those markets," ASIC noted.

ASIC alleges that on the days in question, Westpac 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.

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

Westpac said it would vigorously defend the court proceedings.

'We've got so much money on it, we just had to do it'

In a statement filed with the Federal Court, ASIC alleged Westpac's managing director of group treasury Colin Roden was a central figure in the rate rigging.

ASIC's statement pointed to an example in April 2010 when, acting through Mr Roden, Westpac bought 30-day Prime Bank Bills with a face value of $1.85 billion, comprising 100 per cent of the purchasing of the bills on that day.

"That trading did not constitute engagement in a genuine process of supply and demand in the Bank Bill Market, as it was conducted in order to lower the rate at which the BBSW was set on that day," ASIC said.

The ASIC statement gives a blunt and frank insight into the culture on bank trading floors, quoting several telephone conversations recorded between employees.

In one conversation in April 2010, Mr Roden is quoted telling another colleague from the treasury group, Sophie Johnson, about using $14 billion of bank bills to drive the BBSW down and net a $12 million profit.

"We made about $12 million today so that's not, that's what you'd call a good day, right?" Mr Roden is quoted as saying.

"We had a massive rate set today, like we had like a f****** s*** $14 billion of 1 month because I pushed the month down, right. It was going to set at 30, right, then I got it down to 23."

Mr Roden goes on: "I'm going to trash them on Friday".

"I know it's completely wrong, but f*** it, I might as well. I thought f*** it. We've got so much money on it, we just had to do it," he said.

Westpac in breach of Financial Services Licence: ASIC

ASIC is seeking the court find that Westpac breached the Corporations Act by engaging in market manipulation and unconscionable conduct, as well as false and misleading conduct.

ASIC chairman Greg Medcraft has urged banks involved in the rate rigging to plead guilty. ( AAP: Julian Smith )

It is also seeking a finding the bank was in breach of its Financial Services Licence.

Apart from the earlier action taken against ANZ, ASIC has already secured voluntary contributions of $1.6 million from the Royal Bank of Scotland (RBS), and $1 million from UBS and BNP Paribas after those foreign banks discovered "potential misconduct" in their BBSW submissions.

The corporate regulator has been investigating potential manipulation of the bank bill swap rate since 2012, when it was revealed a similar rigging exercise had been uncovered in the UK's London Interbank Offered Rate (LIBOR).

That investigation has seen multi-billion dollar fines handed out to many of the world's biggest financial institutions — including RBS, UBS and BNP Paribas — and one trader jailed.

Earlier this year, ASIC chairman Greg Medcraft urged banks involved in the rate rigging to plead guilty before the regulator pursued them.

No employee acted unlawfully: Westpac

Westpac Group's chief financial officer, Peter King, said the bank took conduct very seriously and had fully cooperated with ASIC in its investigation, including providing over 12 million documents for review.

"We reject the allegations made by ASIC and do not believe Westpac, or any employee, has acted unlawfully in relation to the instances detailed by ASIC," Mr King said in a statement.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 3 minutes 34 seconds 3 m 34 s Westpac to vigorously defend rate rigging allegations ( Peter Ryan ) Download 6.5 MB

Mr King made it clear Westpac would be standing by the employees cited in ASIC's statement.

"The operation of the interbank short-term money market, as well as bank balance sheet management, is highly complex and activity occurs for a range of valid reasons," Mr King said.

"We disagree with ASIC's interpretation of the communication between employees referred to in the court documents and their assessment of trading activity given the complexity of strategies involved."

The method of setting the bank bill swap rate, involving up to 14 banks quoting rates they were paying before trade commenced each morning, was changed during the course of ASIC's industry-wide investigation into the short-term money market.

From late 2013, the BBSW has been electronically calculated from market data collected by the Australian Financial Markets Association making market manipulation far more difficult.