Barclays nears end game for £1bn structured notes blunder
Barclays is close to finalising the financial hit and settlement with US regulators from its £1bn blunder on the overissuance of structured notes in the US, but its pain may have ratcheted up in recent months due to sterling's weakness.
Barclays announced in March it had made a mistake and needed to buy back and cancel structured notes and other securities it issued in the US that it should not have done. In Q2 results at the end of July, its provision for the error was increased to £1.76bn, which included £165m set aside for an expected fine from US regulators. It hedged some of the impact, to reduce it by £758m and leaving a net impact of £1bn.
But it also warned the provision could fluctuate materially before it was finalised, due to a variety of factors, including: how many investors submitted notes to be cancelled; the effectiveness of its hedges; movement in underlying markets, notably the S&P 500 and US stock indices; foreign exchange moves; and interest rates.
"We hope to provide the final financial results related to that in relatively short order," Barclays CEO CS Venkatakrishnan told analysts and investors at a financial conference on Tuesday.
Venkatakrishnan said in the previous week he hoped to settle the issue with US authorities soon, notably the Securities and Exchange Commission. "We are very, very far along in discussions with the SEC on resolving all the sort of outstanding issues with that matter," he said.
Barclays' offer to buy back the notes started on August 1 and closed on September 12. Settlement can take time as checks on claims are made.
Currency moves could be a negative, after sterling, which Barclays reports in, slumped to a 37-year low against the US dollar on Thursday. For example, in its Q2 results, Barclays said the expected £165m fine from US authorities was based on a US$125m civil monetary penalty to the SEC and US$75m to the CFTC. Unless that was hedged, the cost has risen to £177m as a result of the pound's fall.
In the Q2 results, Barclays said the volatility of US equity markets in the first half of 2022 had already worked against it and forced it to increase the size of the provision. Interest rates have jumped this year and were costing it £34m a month.
The bank said its provision assumed that some structured note investors will not accept the offer, and that appears to have happened. Barclays said on September 15 that US$17.7bn of securities were subject to the offer, of which US$9.5bn were eligible to be submitted via The Depository Trust Company's automated tender offer programme, and claims representing US$7.7bn of those securities had been submitted and settled. What amount of the remaining US$8.2bn of securities was submitted has not yet been released.
"Completely avoidable"
The blunder arose because during a period of about one year in 2018 and 2019 Barclays issued structured notes and exchange-traded notes that exceeded the amount it was allowed to under its US shelf registration. It offered to repurchase the affected securities at their original purchase prices through a rescission offer to eligible purchasers. Rescission involves cancelling a contract and treating it as though it had never existed.
The bank has commissioned an independent review of what happened but has not yet published the results. The mistake appears to have been due to human error in its controls function rather than intentional misconduct.
"It was completely avoidable; it was a mistake that should not have happened," Venkatakrishnan told analysts this month. "It was particularly disappointing because we had made a lot of progress and have continued to make progress in having very strong controls, in investing in technology, to have, as seamlessly as you can, good business operations. But the thing did happen. We are learning our lessons," he said.
It is also an embarrassment for Venkatakrishnan, who took over at CEO in November and was chief risk officer at the time of the incident.
Barclays took a £581m hit from the overissuance in its attributable profit for the first half of the year, net of tax.
Barclays has said it "remains committed to its structured products business" in the US.