Salz Review - Wall Street Journal

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Salz Review
An Independent Review of Barclays’ Business Practices
understanding a transaction, this should be disclosed to us prior to completion.
Firms should also disclose to the FSA any existing transaction with such features.” 67
5.28 Having reviewed the transactions entered into by Barclays, the FSA determined that
they were not explicitly prohibited by the rules in place. However, it amended the
rules in 2010 and Barclays was required to unwind certain transactions. We consider
these transactions to be examples of Barclays’ inventiveness in designing new
approaches to alleviate some of their regulatory challenges, but – in so doing – of
being insensitive to the spirit of the capital rules. Barclays’ approach would have been
improved if it had discussed these transactions with the FSA in advance.
Protium Off-Balance Sheet Structure 68
5.29 Following market pressures and questions over the valuation of its assets, Barclays
sold a selection of assets in September 2009 to an off-balance sheet vehicle called
Protium, a transaction designed to achieve both financial reporting and regulatory
capital benefits. Many of our interviewees referred to Protium. We go into it in some
detail because to many it exemplified Barclays’ corporate character at the time.
5.30 Protium was a complex transaction, designed by SCM. The assets being considered
for the Protium transaction were recorded by Barclays in the part of its balance sheet
which it fair valued (its trading book). Barclays explained when announcing the
transaction that it ensured that Barclays’ specialist team (approximately 45 employees
of Barclays) would be available, and appropriately incentivised, to manage the assets.
Barclays stressed that there was a real risk that this team, which was important to
Barclays in realising the maximum value for the assets, would otherwise leave.
5.31 In formulating the Protium proposal Barclays also considered the potential
accounting volatility in its financial statements related to the illiquid sub-prime assets.
The valuation was uncertain, depending on a variety of factors, such as the projected
cash flows from the underlying assets. In addition, there were concerns about the socalled
‘jump to default risk’ 69 associated with the monoline credit insurance wrapper
on some of the underlying assets. If the monoline insurer defaulted, Barclays would
have to recognise a lower current market value under the rules relating to fair-value
accounting.
5.32 The bank’s expectation in undertaking the Protium transaction was that Barclays’
accounts would reflect the Protium assets as having been sold and replaced by the
loan made by Barclays for the acquisition and that this loan would be less volatile
under the valuation rules than the underlying assets, potentially with benefits to the
calculation of Barclays’ capital requirements.
67 FSA, FSA letter to industry on tranche protection trades, February 2010.
68 Protium is a complex structure which is difficult to summarise in simple, non-technical terms; this section
provides such a simplified description and should not be taken as a full and precise account of the legal
and commercial responsibilities.
69 ‘Jump to default’ is a phrase used when a credit defaults suddenly before the market has had time to
factor its increased default risk into current spreads; credit wrapping involves the provision of a financial
guarantee to the obligations of the underlying issuer. In the event of a default in payment of principal and
interest by an issuer, the monoline promises to make funds available in the amount of the interest or
principal due.