Barclays structured notes blunder could cost £450m

4 min read
Americas, EMEA
Steve Slater

Barclays said it needs to buy back and cancel structured notes and other securities it issued in the United States that it should not have done, at a cost of about £450m to the UK bank. It sold over US$15bn more of the securities than it was allowed to.

It said "regulatory authorities are conducting enquiries and making requests for information" about how the mistake was made.

Barclays said, as part of its structured products business, its Barclays Bank Plc subsidiary issues structured notes and exchange-traded notes in the US, but during a period of about one year the securities offered and sold under its US shelf registration statement exceeded the registered amount.

It said, in August 2019, BBPLC registered US$20.8bn in maximum aggregate offering price of securities, and it exceeded that by about US$15.2bn.

It has to repurchase the affected securities – expected to include ETNs on the VIX volatility index and crude oil at their original purchase price. "As a result, BBPLC has elected to conduct a rescission offer to eligible purchasers of the affected securities," the bank said. It said details of the rescission offer will be published later. Rescission involves cancelling a contract and treating it as though it never existed.

"The announcement is embarrassing for Barclays," CreditSights analyst Simon Adamson said in a note. "The financial impact is not immaterial but is manageable … but this is clearly an unwelcome and unexpected distraction for Barclays."

It is also an embarrassment for new CEO CS Venkatakrishnan, who took over in November and was chief risk officer at the time of the incident.

Barclays shares were down 2.2% at 163.6p in early afternoon, while the European bank index was 1.6% higher.

Barclays said it "remains committed to its structured products business" in the US. It said BBPLC intends to file a new automatic shelf registration statement with the SEC as soon as possible.

The error arose after Barclays lost its right to issue unlimited securities in the US in 2017. It previously had well-known seasoned issuer, or WKSI, status, which allowed unlimited issuance, but lost that status in 2017 until it was reinstated in 2019. As a result, during that period, the bank had to file shelf registration documents, which limited issuance.

When Barclays discovered the error, it notified regulators and suspended some ETN products this month. On March 14, its suspended further sales and issuances of iPath S&P 500 VIX futures ETNs and iPath crude oil ETNs. It said at the time the suspensions were being imposed because Barclays did not have sufficient issuance capacity to support sales and issuances, and was not a result of the crisis in Ukraine or other market issues.

The SEC did not immediately respond to a request for comment.

Barclays said it has commissioned an independent review of the facts and circumstances relating to the matter including "the control environment" related to such issuances. That could span several areas, including its markets, legal, compliance and risk, treasury and finance teams.

"An unhelpful matter which has triggered an independent review around the control environment and regulatory enquiries may weigh on sentiment," analysts at Jefferies said in a note.

Barclays said, based on current market prices of the affected securities and the estimated pool of potentially eligible purchasers, it expects the rescission losses to be about £450m, net of tax.

Barclays' CET1 ratio will be in the middle of its 13%–14% target range at the end of March as a result, due to a 14bp reduction due to the loss and a further 15bp reduction because of an increase in risk-weighted assets due to short-term hedging arrangements to manage risks from the rescission offer. The hedging impact will reverse when the rescission offer ends.

The impact will be reflected in first-quarter results. The bank said its planned £1bn share buyback programme announced on February 23 will not start until after the first-quarter results.

Updated story: Adds analyst comment, other details