Barclays to Pay Additional $150M Penalty on FX Trading Misconduct

Barclays reached a settlement agreement with the New York State Department of Financial Services (DFS) in connection with its investigation into the bank’s electronic trading of foreign exchange (FX) and FX electronic trading systems.

Barclays agreed to pay an additional penalty of $150 million primarily for its failures in certain internal systems and controls.

Combined with the previous enforcement action related to the spot FX trading market manipulation, Barclays paid an overall penalty of $635 million. In April, the bank disclosed that it set aside additional £800 million to cover potential settlements related to the foreign exchange manipulation allegations.

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Barclays used Last Look system as a general filter to reject unprofitable trades

According to the DFS, Barclays used the Last Look system to reject client order automatically in some cases if it would be unprofitable for the bank. The agency said the bank failed to provide clear reasons to clients when asked why their trades were rejected.

In an internal message, Barclays’ head of automated electronic foreign exchange trading told another trader to “Blame it on the weekend IT release and say it’s being fixed” when clients asked why their trades were rejected.

DFS Acting Superintendent Anthony Albanese said, “We are pleased that Barclays worked with us to resolve this matter. 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 bank designed the Last Look system to protect itself from toxic flows. The Last Look system imposed a hold period between its receipt of a customer order and its acceptance and execution of the same.

The bank’s FX electronic trading clients are categorized into two: 1)clients that traded using its graphical user interface (GUI), and 2) clients that trade using its financial information exchange application program interface (FIX/API).

According to the DFS, “Barclays did not seek to distinguish toxic order flow from instances in which prices merely happened to move in favor of the customer and against Barclays after the customer’s order was entered on Barclays’s systems. Barclays instead applied Last Look to all FIX/API trades, as well as a handful of GUI customers.”

The DFS said the bank not use Last Look as a pure defensive measure, instead it was used as a “general filter to reject customers’ orders” the bank predicted to be unprofitable based on price movements during the hold period.

Barclays terminated its eFICC head

Barclays suspended its managing director and global head of Electronics Fixed Income, Currencies, and Commodities (eFICC) Automated Flow Trading (eFICC ).

The DFS ordered the bank to take all necessary actions to terminate the executive given his role in the bank’s misconduct.  The eFICC head was terminated after the agency completed its FX trading investigation.

The bank continues to cooperate with other ongoing investigations. It will reflect the civil penalty payable under the settlement in its financial results for the fourth quarter of 2015.