Australia’s big four banks and Macquarie Group Ltd (ASX: MQG) could be forced to pay out billions over their alleged manipulation of the Australian bank bill swap rate (BBSW).

Two US hedge funds and a derivatives trader have filed action against Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), as well as Macquarie and around a dozen other international banks who were members of the panel that set the bank bill swap rate.

The BBSW is used to price many securities as well as being the underlying interest rate many securities use to set their own interest rates. The US investors claim that the prices of various derivatives including swaps, forward rate agreements, futures contracts, foreign exchange swaps and forwards and bank bill futures contracts were all impacted because of their link to the BBSW rate.

ANZ and NAB have both said that they deny the claims and will defend themselves. Westpac also denies the allegations, although all three banks are being sued by the corporate regulator, the Australian Securities and Investment Commission (ASIC) for alleged market manipulation and unconscionable conduct. The regulator has yet to bring proceedings against CBA and Macquarie, but media reports suggest they may not be far away.

The US claim refers to ASIC’s proceedings as “smoking gun evidence including emails, phone calls, and electronic chats, demonstrating a conspiracy among BBSW panel banks and interdealer brokers to fix the prices of BBSW-based derivatives.

UBS, Royal Bank of Scotland (RBS) and BNP Paribas were also named in the US claim. All three banks settled claims of BBSW manipulation with ASIC in 2013 and 2014.

But the launch of the US claim likely means less chance of the big four settling with ASIC. A settlement with ASIC could mean the chances of a settlement with the US hedge funds increases.

It could also bring not only big fines but also significant legal or settlement bills for the five Australian banks.

Foolish takeaway

The big four banks’ reputations are already tarnished from past treatment of customers and political pressure for not passing on the full rate cut to mortgage holders earlier this month. This is not going to help – never mind the potentially huge financial cost. Another headwind to add to the growing list.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.