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Barclays Faces $150M Fine for Electronic FX Trade Rigging

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In sync with its Chairman John McFarlane's plan to resolve "legacy and conduct issues" as quickly as possible, Barclays PLCBCS has agreed to settle allegations of malpractices at its electronic foreign-exchange ("FX") trading platform. The London-based bank will pay a penalty of $150 million to the New York Department of Financial Services ("NYDFS"), largely pertaining to "certain internal systems and controls failures."

Further, as part of the settlement deal, Barclays has agreed to remove the global head of its electronic fixed income, currencies and commodities automated flow trading. Nonetheless, name of the person to be dismissed was not revealed.

Anthony Albanese, acting superintendent of the NYDFS, said "This case highlights the need for greater oversight and action to help prevent the misuse of automated, electronic trading platforms on Wall Street, which is a wider industry issue that requires serious additional scrutiny."

The Allegations

The matter was mainly related to the "last look" feature being used by Barclays. The feature was supposed to act as a safeguard for market makers against wide price fluctuations led by the time lag between placing and executing an order in the FX market. Also, it was supposed to protect the bank from so-called "toxic-flow orders" placed by electronic traders.

However, during 2009-2014, Barclays had been using this feature to automatically reject those client orders, which were deemed unprofitable for the company due to price changes in milliseconds-long hold periods. As a result of such practices, the company reportedly gained "unfair advantages over clients and counterparties through its forex trading platform".

Further, Barclays did not provide proper reasons to clients for rejecting the trades. In the settlement notice, the NYDFS stated that certain senior Barclays employees even instructed traders and information-technology workers to conceal the existence of "last look" feature to the sales staff.

Additionally, as per internal emails cited by the NYDFS, Barclays' staff described "last look" feature as a measure to "ensure profitability of a trade for Barclays," while laying emphasis on "Our Team generally does not share this info with the client."

Further, despite revising its "last look" feature last year following investigation by the NYDFS, Barclays did not upgrade one of its trading platforms. Therefore, approximately 7% of its trading platforms were still using the above-mentioned feature till Aug 2015. Notably, the company has since updated all its trading platforms.

Road Ahead

The penalty amount will be reflected in Barclays' fourth-quarter 2015 results. Nonetheless, over the past several quarters, the company has been taking additional legal provisions to meet the litigation headwinds.

Earlier in May 2015, Barclays was part of a $2.4-billion multi-regulatory settlement pertaining to alleged rigging of spot FX trades. At that time, the NYDFS had slapped a $485 million fine on the bank. The company had also pleaded guilty for conspiring to manipulate FX market.

The latest settlement, being the first one in electronic FX trading, might spell trouble for many other financial institutions including Deutsche Bank AG DB , Credit Suisse Group AG CS and The Goldman Sachs Group, Inc. GS , as these firms too use electronic trading platforms for FX trading.

Notably, Barclays stated that it will continue to co-operate with other ongoing probes and manage related litigation risks.

Currently, Barclays carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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