Barclays is looking to re-establish its position as one of the top issuers of structured notes in the US following an embarrassing regulatory breach that cost the bank around £900m and forced it to temporarily shutter the business.
Barclays restarted its US structured note issuance programme in September following a six-month hiatus and has been gradually rebuilding its presence in these markets where it sells investment products to retail and institutional clients.
“We are extremely committed to the business,” said Shilpa Akella, head of equities structuring for the Americas at Barclays. “This year we are looking to get back towards the top of the rankings in US structured notes.”
The UK bank’s determination to rehabilitate its US structured note platform underlines the importance of a business that had not only become a growing source of revenue for Barclays' stock-trading division in recent years, but also provided billions of dollars of funding for its broader banking operations. Prior to the 2022 losses, US structured products was one area where the bank had been looking to expand as part of a wider push in equities trading.
Barclays was the largest issuer of US structured notes in three of the five years prior to 2022, according to data from StructuredRetailProducts.com, often outstripping homegrown rivals such as JP Morgan and Goldman Sachs.
That put the lender at the forefront of a rapid expansion in these markets, as products once associated primarily with Asian and European retail investors increasingly gained favour in North America. US structured note sales increased over 60% between 2019 and 2021 to a record US$101bn, according to StructuredRetailProducts.com, before falling back slightly last year. Barclays alone sold US$12.7bn of the products in 2021.
Halting activity
But the bank's issuance programme came to a screeching halt in March 2022 after it realised it had fallen foul of a routine piece of regulatory compliance. Barclays lost its right to issue unlimited securities in the US in 2017 and instead had to apply in advance to the Securities and Exchange Commission for permission. Barclays registered in August 2019 to issue as much as US$20.8bn in securities, but then failed to track how many notes it sold.
By the time it identified its error two and a half years later, Barclays had exceeded its issuance limit by US$17.7bn, roughly 87% of which came in the form of structured notes. The UK bank informed the SEC, suspended issuance and offered to buy back the offending products from clients, via what is known as a rescission offer.
Barclays said in September that it would settle claims from the rescission offer representing about US$7.7bn in securities submitted by "initial investors" in structured notes and that it was in the process of reviewing other claims. Barclays recorded a loss of £966m for 2022 from the incident on top of a £220m hit from the previous year. That included a roughly £1bn loss from the rescission offer spread across both years and a £165m fine it paid to the SEC. Overall, that brought Barclays' total pre-tax loss from the whole episode to £894m once accounting for some offsetting hedges.
Structured notes can take a variety of formats, but the most popular products typically offer investors a specified return on their money if a group of stocks reach a pre-agreed level by a particular date. Selling these notes can be a profitable activity for banks’ trading divisions, which design the products and charge for derivatives embedded within them. The product also provides banks with another source of funding for their wider operations outside mainstream capital markets.
Barclays US structured note market share slipped dramatically as it paused new issuance while it repaired the damage, dropping from 14% in the first half of 2021 to under 5% a year later, according to StructuredRetailProducts.com. At the same time, the likes of Citigroup, Goldman Sachs and JP Morgan all increased their market share as the top issuers in this space.
Turning around
Barclays has been looking to turn things around in recent months since restarting its US note programme. It is now plugged back into most of the large distribution agents for retail structured products in the US, sources said, and is in negotiations with the remaining few.
"Most distributors look for diversification of issuers and Barclays continues to be a strong name. It will take time, but we’re confident we will gain back our market share,” Akella said.
Akella highlighted the registered investment adviser market as one "interesting area of growth" in the US where the bank is focusing efforts. "More generally, it's about trying to be competitive on pricing and funding of these products," she said.
Barclays' decision to rebuild its presence in US structured notes comes amid an ongoing push to expand its broader global markets franchise, where it has been one of the fastest-growing banks in recent years in terms of revenues. Group finance director Anna Cross told reporters following the bank's latest results that it would continue to invest in hiring staff and in technology as it looks to make further gains.
Some structured products specialists believe 2023 could prove to be a challenging environment as higher levels of bond yields offer investors an appealing alternative to equity-linked notes. Akella struck a more upbeat tone on the outlook, saying that she expected the expansion of the registered investment adviser business to add to the growth of the overall market this year.
"If we get more certainty around inflation and interest rate decisions, the market could look up in terms of new sales," she said.