What went wrong for Barclays with its £450m structured notes loss?

Barclays has just revealed that it’ll have to shell out nearly half a billion for a failure to fill in the right form. John Stepek explains what went wrong.

Investors in Barclays got a nasty shock this week when the bank revealed that a US paperwork blunder will cost it around £450m. Put simply, Barclays messed up the administration requirements around the issuance in the US of financial products called structured notes and exchange-traded notes (ETNs). 

So what went wrong? Any financial securities sold to the public in the US have to be registered with the US financial regulator, the Securities and Exchange Commission (SEC). As Bloomberg’s Matt Levine explains, this is usually done via a blanket “shelf registration statement”, which contains a “very large arbitrary number for how many securities you might sell”. In 2019, Barclays registered to sell just under $20.1bn of securities in a statement. The trouble is that apparently it forgot to keep track of how much of this $20.1bn capacity it had used, and ended up issuing a combined $36bn securities or so – around about $15bn in the last year – instead of $20bn, before realising its error.

A minor mystery solved

The error does appear to explain why Barclays stopped issuing new shares in two of its most popular ETNs – one tracking the Vix volatility index (VXX) and the other tracking crude oil prices (OIL) – a couple of weeks ago. This was at the height of market volatility around Russia’s invasion of Ukraine. The decision resulted in dramatic price moves for both the VXX and OIL products. The inability to issue new shares meant the ETNs could no longer track their underlying indices. Instead they become more like an investment trust – where the price is driven by supply and demand for the shares, and so can trade at an entirely different price to the value of the underlying assets – which, needless to say, is not the point of an ETN.

The £450m cost is due to the fact that, because the securities were issued in error, holders have “a right of rescission”. In other words, Barclays has to buy them back at the original sale price. Of course, anyone who made a loss on their structured notes, or perhaps on these two ETNs, will almost certainly exercise this right and get their money back at Barclays’ expense. As you’d expect, the bank is conducting a review into what went wrong.

We suspect that few MoneyWeek readers trade ETNs, and we’ve also railed against structured products often enough to dissuade you from them too. And in this rare case, investors may well have benefited from the error rather than lost out. But it’s another very good demonstration of why you shouldn’t invest in anything that you don’t understand thoroughly. If even a banks’ back office can’t get it right, what hope do you have?

Recommended

China’s economy is heading for a sharp slowdown
Chinese economy

China’s economy is heading for a sharp slowdown

With a slowing property market, Covid lockdowns sapping growth and the CSI 300 stock index down by 22% this year, China’s economy is in trouble.
6 Oct 2022
5 of the world's best stocks
Share tips

5 of the world's best stocks

Concentrating on a few highly profitable companies that excel in their fields can reduce the overall risk in your portfolio, says Rupert Hargreaves. H…
6 Oct 2022
The dangers of derivatives as the “Goldilocks era” ends
Investment strategy

The dangers of derivatives as the “Goldilocks era” ends

That this is no longer a benign environment for investors, says Andrew Van Sickle. But – as the recent pension-fund derivatives blow-up shows – not ev…
6 Oct 2022
There’s still time to submit your energy meter reading to avoid a higher charge
Personal finance

There’s still time to submit your energy meter reading to avoid a higher charge

You need to submit your gas and electricity readings as soon as possible to avoid overpaying after the October energy price increase.
6 Oct 2022

Most Popular

Should you take a 25% tax-free pension lump sum in instalments?
Pensions

Should you take a 25% tax-free pension lump sum in instalments?

Taking out a 25% tax-free lump sum sounds appealing but it might not be the best way to manage your pension
30 Sep 2022
Markets may have bounced, but this is not the end of the bear market
Stockmarkets

Markets may have bounced, but this is not the end of the bear market

Stocks are back on the rise, commodities and precious metals prices are up – even the pound has rebounded. But none of this is typical of bull markets…
5 Oct 2022
October’s Premium Bonds: how to check if you are a winner
Savings

October’s Premium Bonds: how to check if you are a winner

NS&I has added almost 110,000 more prizes to October’s Premium Bond draw – are you a winner?
4 Oct 2022