(Bloomberg) — Barclays Plc’s $600 million structured products blunder has little precedent on Wall Street. But the bank’s past misconduct may have set the stage for the paperwork fail it revealed this week.
A key issue at the heart of the regulatory breach appears to be its loss of the so-called well-known seasoned issuer status in 2017, a right granted by the U.S. Securities and Exchange Commission that allows banks to sells notes in the U.S. with fewer filing requirements.
Since 2007, Barclays had faced the risk of losing this right at least five times in the aftermath of issues from dark pool disclosures to foreign exchange manipulation, an analysis by Bloomberg News shows. The bank had to repeatedly engage with the SEC over it and apply for waivers so it didn’t lose this classification.
Barclays isn’t the only bank to have engaged in such back-and-forth with regulators, and the loss of the WKSI approval explains how a limit breach could happen. But the years-long battle to keep that status raises ever more questions over how it could have overlooked one of the most expensive clerical errors ever.
The oversight is landing the bank with about 450 million pounds ($600 million) in expected expenses from buying back unregistered securities the bank sold, a halt to a booming U.S. business, possible regulatory fines that will deepen the pain, and a delay to a highly anticipated stock buyback.
In 2019, the bank registered to sell $20.8 billion of exchange traded notes and structured notes, it ended up selling far more: $15.2 billion more. Because it wasn’t a WKSI, it shouldn’t have gone above that amount without filing new applications to the SEC. The mistake was called “basic”, “bizarre” and “embarrassing” by analysts.
“Barclays somehow managed to lose track of how many securities it was issuing,” Gimme Credit analyst Kathleen Shanley said in a Wednesday note. “Big banks continue to come up with new and creative ways to lose money.”
A spokesperson for Barclays declined to comment.
SEC Status
Banks and other firms need WKSI to issue debt and equity securities for customers without having to jump through a lot of regulatory hoops. Those lacking the classification can still sell products under more limited authorizations, but it is pricier and more cumbersome.
Plenty of banks have temporarily lost their WKSI approval, or faced the threat of its removal, in the past 15 years due to a string of scandals and granting a waiver is not uncommon for U.S. regulators.
In a 2015 letter, an SEC commissioner criticized the regulator for granting at least 23 waivers to five institutions — Barclays, Citigroup Inc., JPMorgan Chase & Co., Royal Bank of Scotland Group Plc and UBS Group AG — in the nine years to 2015.
“This type of recidivism and repeated criminal misconduct should lead to revocations of prior waivers, not the granting of a whole new set of waivers.” Kara M. Stein wrote in a dissenting statement.
Stein noted in her letter that Barclays was on its third waiver since 2007. The bank also appealed for waivers after issues relating to foreign exchange manipulation in 2015 and misleading investors over trading in dark pools in 2016, according to regulatory filings.
For investors and regulators, the misstep is posing awkward questions for Barclays’ new chief executive officer, C.S. Venkatakrishnan, who used to be the group’s chief risk officer before running the bank’s markets unit.
“In the greater scheme of things, the loss is not in itself particularly significant,” says Alan Beaney, CEO of RC Brown Investment Management, which has held Barclays shares since 2012. “But the fact it was allowed to happen raises some serious concerns over the bank’s controls.”
Clerical Error
Inside the firm, bankers are emphasizing that the problem was a clerical error and are trying to move on even as Barclays starts an investigation internally with the help of external counsel. So far, the bank has refrained from firing staff as it carries out its investigation, the people said.
The structured products sold by the bank are complex securities that are typically linked to the performance of a stock or an index of shares. The products are popular with high net worth clients and specialist firms who need bespoke edges.
Barclays is a key issuer of structured notes. Of more than $120 billion of notes registered with the SEC in 2021, Barclays sold $11.6 billion — making it the fourth largest issuer. In prior years it has regularly appeared in the top three.
The error will require the firm to repurchase affected securities — a so-called rescission offer — at their original price. It is also standard practice for the issuer to pay the interest on the structured notes.
It is also delaying a planned one-billion-pound share buyback from the first to the second quarter.
Bad Week
“The second order impact of the structured products recission could well be a need to bolster the compliance and controls processes. We have seen this at other European banks who have had compliance issues,” said Fahed Kunwar, an analyst at Redburn. “At the very least the 450 million pound payment reduced the capacity for a buyback during 2022.”
Such fears pushed the shares 4% lower on Monday. They fell again on Tuesday, as investors digested news that a top shareholder had sold about 900 million pounds ($1.2 billion) of stock in a block trade, the latest shift among the bank’s investors. Then on Wednesday, the bank’s Frankfurt offices were raided as part of a German probe into tax trades.
There is cause for optimism ahead of the bank’s first-quarter results at the end of April. Analysts have highlighted that the unexpected rescission charges didn’t put too much of a dent in the bank’s CET1 ratio, a measure of the capital strength.
For Joseph Dickerson, an analyst at Jefferies in London, that indicates “that Barclays had a relatively solid first quarter.” The bank’s CET1 ratio “stands at about 13.8% before the costs linked to the notes, which is at the higher end of its 13-14% target range.”
Future Pain
The British lender, which said on Monday it remains committed to its structured products business in the U.S., is expected to resume issuing notes in the U.S. in the coming weeks. But that’s unlikely to be the end of the episode.
In the U.S., regulators have started a formal investigation into the issue, according to people with knowledge of the matter. In the U.K., regulators are asking questions on whether the bank mis-sold notes to clients, another person said. Various U.S. law firms have started an investigation on behalf of investors. Lawyers expect the SEC to take a tough stance as previous fines for compliance breaches have not had a big enough deterrent effect.
Those investigations, according to investor Beaney, “may well result in further punishment.”
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