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.
The blunder appears to have been due to human error in its controls function, although the bank 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.
"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 fell 4.1% on Monday, the day of the announcement. They lost another 2.5% on Tuesday when a block of 600m shares was sold by Goldman Sachs. The identity of the seller is not yet known, nor if the sale was prompted by the structured notes blunder. Barclays shares were trading at 150.7p on Friday morning, down 10% on the week.
Goldman launched the offer to sell 575m shares, upsized the sale to 600m and priced them at 150p, a 6.5% discount, due to high demand. That represented 3.5% of Barclays' share capital.
Only Qatar Investment Authority and BlackRock held more than 600m shares in Barclays, according to Refinitiv data, with stakes of 6.1% and 5.6%, respectively. The Vanguard Group held just under 540m shares, or 3.2%.
Shelf-life
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.
In August 2019, BBPLC registered US$20.8bn in maximum aggregate offering price of securities, and it exceeded that by about US$15.2bn, the bank said.
It has to repurchase the affected securities – expected to include ETNs on the VIX volatility index and crude oil – at their original purchase price through a rescission offer to eligible purchasers of the affected securities. 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 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 allows unlimited issuance, but it lost WKSI status for a period. It has since been reinstated, but for a period the bank had to file shelf registration documents, which limit issuance and should have been renewed whenever the bank neared its shelf limit.
When Barclays discovered the error, it notified regulators and suspended some ETN products this month. On March 14, it 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 "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.
"Whilst a very costly and embarrassing control matter [it] is unlikely a widespread 'conduct' issue such as those which plagued the sector in the aftermath of the GFC, nor does it reflect on the market risk management or underwriting acumen of the group, which have largely been exemplary for at least the past 6 years," 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 due to temporary hedging arrangements to manage risks from the rescission offer, which will later reverse.
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.