___________________________________________________________________________

FINAL NOTICE
___________________________________________________________________________


To:

Barclays Capital Securities Limited (Barclays Capital or the Firm)

Of:

5 The North Colonnade


London


E14 4BB

FSA Reference No:
124431

Date:

24 January 2011

TAKE NOTICE: The Financial Services Authority of 25 The North Colonnade, Canary
Wharf, London E14 5HS (“the FSA”) gives you final notice about a requirement to pay
a financial penalty:

1.
THE PENALTY

1.1.
The FSA gave Barclays Capital Securities Limited (“Barclays Capital” or “the Firm”)
a Decision Notice on 17 January 2011 which notified the Firm that pursuant to
section 206 of the Financial Services and Markets Act 2000 (“the Act”), the FSA had
decided to impose a financial penalty of £1,127,559 on Barclays Capital in respect of
a breach of Principle 10 (Clients’ assets) of the FSA’s Principles for Businesses (“the
Principles”) and breaches of the related FSA rules contained in the Client Assets
sourcebook (“CASS”) (set out in Appendix 1 and referred to collectively in this Final
Notice as the “Client Money Rules”). The breaches occurred between 1 December
2001 and 29 December 2009 (the “Relevant Period”).

1.2.
Barclays Capital confirmed on 17 January 2011 that it will not be referring the matter
to the Upper Tribunal (Tax and Chancery Chamber).

1.3.
Accordingly, for the reasons set out below, the FSA imposes a financial penalty on
Barclays Capital in the amount of £1,127,559.

1.4.
Barclays Capital agreed to settle this matter at an early stage of the FSA’s
investigation and received a 30% (Stage 1) reduction in financial penalty under the
FSA’s executive settlement procedures. Were it not for this discount, the FSA would
have imposed a financial penalty of £1,610,799.

1.5.
In this type of case, the FSA considers an appropriate approach is to calculate the
financial penalty by reference to a number of factors, including the amount of client
money held. The penalty (before Stage 1 discount) is equivalent to 1% of the average
daily amount of unsegregated client money held by Barclays Capital over the
Relevant Period.

2.
REASONS FOR THE ACTION

2.1.
The principal objective of the Client Money Rules is to ensure that client money is
adequately protected. A fundamental requirement is that firms must keep client
money separate from firm money in segregated client accounts or money market
deposits with the firm’s trustee obligations acknowledged. This ensures that client
money is safeguarded and ring-fenced, to the extent possible, in the event of
insolvency of a firm.

2.2.
The FSA has imposed a financial penalty on Barclays Capital for failing to arrange
adequate protection for clients’ assets when it was responsible for them intra-day in
breach of Principle 10. Specifically, Barclays Capital failed to segregate client money
placed on GBP money market deposits intra-day in a segregated trust account, instead
co-mingling the client money with its own funds throughout the Relevant Period. The
funds were segregated overnight throughout the Relevant Period.

2.3.
Barclays Capital also breached CASS Rules 7.4.11R and 7.3.2R and the previous
applicable versions of these rules as set out in Appendix 1.

2.4.
The FSA views these failings as particularly serious because:

a)
Barclays Capital has a leading market presence both in the United Kingdom
and globally;

b)
the failure to segregate and, therefore, adequately protect client money intra-
day in accordance with the Client Money Rules remained undetected for over
eight years; and

c)
during the Relevant Period:

i.
the average daily amount of client money which was not segregated on
an intra-day basis held on an annual basis increased from approximately
£6 million in 2002 to approximately £387 million in 2009; and

ii.
the highest amount held in the account and at risk at any one time was
£752 million.

2.5.
Barclays Capital’s failure to segregate client money intra-day for over eight years
posed a significant risk of loss to its clients in the event that Barclays Capital became
insolvent intra-day during the Relevant Period. If Barclays Capital had become
insolvent intra-day there was the risk that its clients would have been classed as
general unsecured creditors in the insolvency process rather than having the right to
claim their money from a pool of protected client money. Further, in the event of
Barclays Capital’s insolvency, the co-mingling of client money and Barclays Capital’s
own funds would have hindered the ability to accurately trace client money.
Consequently, the likelihood of such clients recovering their money in the event of the
insolvency of Barclays Capital would have been reduced.

2.6.
Barclays Capital’s failures therefore merit the imposition of a significant financial
penalty. In determining the level of financial penalty, the FSA has taken into account
a number of factors, including:

a)
only one of the client money market accounts used by Barclays Capital was
affected;

b)
upon discovery of the issue by Barclays Capital, the Firm corrected the
situation promptly;

c)
Barclays Capital instigated a review of its compliance with Client Money
Rules at its own initiative (the “CASS Review”);

d)
the failure to segregate client money did not result in any incorrect financial
reporting by Barclays Capital during the Relevant Period or in any loss to
clients of Barclays Capital;

e)
the FSA does not consider that Barclays Capital committed the breach
deliberately or recklessly; and

f)
Barclays Capital co-operated fully with the FSA during its investigation.

3.
RELEVANT STATUTORY AND REGULATORY PROVISIONS

3.1
The FSA’s statutory objectives set out in section 2(2) and section 3 of the Act include
maintaining market confidence in the financial system.

3.2.
Section 206 of the Act provides:

“If the Authority considers that an authorised person has contravened a requirement
imposed on him by or under this Act, it may impose on him a penalty, in respect of the
contravention, of such an amount as it considers appropriate.”

3.3.
The FSA’s Principles are a general statement of the fundamental obligations of firms
under the regulatory system. They derive their authority from the FSA’s rules making
power as set out in the Act and reflect the FSA’s regulatory objectives.

3.4.
Principle 10 states:

“A firm must arrange adequate protection for clients’ assets when it is responsible for
them.”

3.5.
The related Client Money rules referred to in paragraph 1.1 are set out in Appendix 1.

3.6.
The FSA’s approach to exercising its enforcement powers is set out in the Decision

Procedure and Penalties manual (“DEPP”) and Enforcement Guide (“EG”). As this
matter relates to events prior to the introduction of EG and DEPP, the FSA has also
had regard to the previous relevant policies set out in the Enforcement Manual
(“ENF”).

4.
FACTS AND MATTERS RELIED ON

4.1.
Barclays Capital is a wholly owned subsidiary of Barclays Bank PLC (“BBPLC”) and
is part of the investment banking division of BBPLC.

4.2.
Since 1 December 2001, Barclays Capital has been regulated and authorised by the
FSA to hold and control client money. It is required to do so in accordance with the
provisions of the FSA’s Client Assets Sourcebook (“CASS”) and before that the
Conduct of Business Sourcebook (“COB”) (see Appendix 1). In particular, Barclays
Capital is required, under CASS 7.4.11R, to hold client money in segregated client
accounts with authorised credit institutions and banks. Barclays Capital’s client
money is held in segregated accounts at BBPLC. Barclays Capital is also required,
under CASS 7.3.2R, to put in place arrangements to minimise the risk of loss of client
money, or of rights associated with client money.

The nature of the segregation issue

4.3.
On a daily basis, following completion of the client money calculation, Barclays
Capital segregates client money with its parent, BBPLC, overnight.

4.4.
From the initial set up of the GBP client money market deposit account on 3 February
1999 until 29 December 2009, the GBP client money market deposit account within
Barclays Capital (“GBP client money market account”) was segregated overnight.
However, the deposits were set up to auto-mature the following morning (before
9:00 am), whereby the funds flowed back into Barclays Capital’s corporate account
with BBPLC (“the Corporate Account”). The GBP client money then remained in the
Corporate Account for between five and seven hours each day until the GBP
denominated client money was calculated and segregated again at the end of the day
and placed overnight.

4.5.
The Corporate Account did not have trust status in place and co-mingled Barclays
Capital’s own funds and client money. The Corporate Account was also used by
Barclays Capital during the day to make and receive payments. As a result, GBP
denominated client money auto-maturing into the Corporate Account was mixed on a
daily basis with Barclays Capital’s own funds, typically for between five and seven
hours, on an intra-day basis. In the event of the intra-day insolvency of Barclays
Capital, the daily co-mingling of client money in the Corporate Account would have
potentially inhibited the tracing of client money.

4.6.
Since March 2008, Barclays Capital had a combination of GBP and USD
denominated client money markets deposits. The failings identified by the FSA relate
solely to the GBP denominated client money market deposits. The USD denominated
client money market deposits were segregated both inter-day and intra-day throughout
the Relevant Period.

Identification of the segregation issue

4.7.
In late 2009 Barclays Capital initiated the CASS Review, which was its own review
of compliance with the FSA’s CASS requirements.

4.8.
The initial stage of the CASS Review included an exercise to map CASS related
processes and controls from both the Barclays Capital and BBPLC perspectives.
During the course of reviewing the front to back processes for the GBP and USD
segregation processes, Barclays Capital identified an inconsistency in the booking
conventions used for the GBP and USD denominated overnight client money market
deposits. It was noted that the GBP money market deposit within Barclays Capital
was set up to auto-mature the following morning into the corporate account whereas
the USD money market deposit was not.

Escalation of the segregation issue

4.9.
Following discovery of the segregation issue, Barclays Capital CASS Review project
team decided to change the GBP client money market account process by bringing it
into line with the process used for the USD money market deposit. The process
change was approved on 23 December 2009 and implemented on 29 December 2009,
immediately following the Christmas break. The inconsistency in the GBP and USD
money market deposit process and subsequent process changes were not escalated to
senior management within Barclays Capital at this time. The FSA was therefore not
notified of the issue at this time.

4.10. In response to the FSA’s Dear CEO letter dated 19 January 2010 and accompanying
Client Money & Asset report, Barclays Capital appointed external consultants in
February 2010 to undertake a quality assurance review of the work completed by
Barclays Capital and to provide technical advice.

4.11. On 4 March 2010 the external consultants advised senior management within
Barclays Capital that the historic auto-maturing process for the GBP client money
market account deposit resulted in a lack of intra-day segregation and constituted a
breach of the FSA’s CASS rules. Senior management immediately instigated an
investigation into the structure and operation of the historic and current client money
bank accounts and notified the FSA about the segregation issue on 17 March 2010.

Impact of the segregation issue

4.12. From the point of set up of the GBP client money market account overnight deposit
account, the timing of the GBP money market deposit placement and maturing
processes were such that client money was co-mingled with Barclays Capital funds
each day for approximately five to seven hours and not segregated in accordance with
the FSA’s CASS rules. In March 2008 the USD client money market overnight
deposit account was introduced by Barclays Capital. Since the USD client money
market deposit account was not set up to auto-mature it was not affected by the same
issue as the GBP client money market account.

4.13. The amount of client money that was not segregated intra-day ranged from
£1.6 million to £752 million during the Relevant Period. The average daily amount of
unsegregated client money held on an annual basis increased throughout the Relevant
Period from approximately £6 million in 2002 to approximately £387 million in 2009.

5.
SANCTION

5.1
The FSA’s policy on the imposition of financial penalties and public censures is set
out in DEPP and EG. In determining the financial penalty, the FSA has had regard to
this and to the provisions of ENF that were in force during the Relevant Period.

5.2.
The principal purpose of a financial penalty is to promote high standards of regulatory
conduct by deterring firms that have breached regulatory requirements from
committing further contraventions, helping to deter other firms from committing
contraventions and demonstrating generally to firms the benefits of compliant
behaviour.

5.3.
For the reasons set out above, the FSA considers that Barclays Capital breached
Principle 10 and the CASS Rules. In determining that the financial penalty is
appropriate and proportionate in this case, the FSA has considered all the relevant
circumstances. The FSA considers the following factors to be particularly important.

5.4.
The FSA has always viewed compliance with its client money requirements as of
significant importance. The FSA considers there is a need to send a strong and robust
message to the industry that firms must handle client money in a way that is compliant
with CASS Rules and the FSA’s Principles. In particular, firms must ensure that
client money is segregated at all times, both intra- and inter-day, thereby affording
some protection to clients in the event of a firm's insolvency.

5.5.
Barclays Capital is a wholly-owned subsidiary of BBPLC, and has a leading market
presence both in the United Kingdom and globally. Barclays Capital was fully aware
of the obligations placed on it by the CASS Rules and understood the importance of
segregating client money.

Seriousness and impact of the breach

5.6.
The FSA has had regard to the seriousness of the breach including the nature of the
requirements breached and the duration of the breach. The FSA considers Barclays
Capital’s breach of Principle 10 and breaches of the CASS Rules to be particularly
serious for the following reasons:

a)
in the event of the insolvency of Barclays Capital, the risk to unsegregated
client money held by it intra-day was significant. The average amount of
unsegregated client money held on an annual basis increased throughout the
Relevant Period, from approximately £6 million in 2001 to approximately
£387 million in 2009. At its peak, the highest amount that was unsegregated at
any one time was £752 million;

b)
the segregation error remained undetected by Barclays Capital for in excess of
eight years and client money was, therefore, at risk intra-day throughout the
Relevant Period; and

c)
Barclays Capital did not notify the FSA of the intra-day segregation failure

until two and a half months after it was initially identified and remedied.

5.7.
Although no client of Barclays Capital suffered any loss as a consequence of the
segregation error, significant amounts of client money were put at risk of financial
loss for five to seven hours each day during the Relevant Period. The principal
purpose of the segregation requirement under the Client Money rules is to protect
client money in the hands of a third party in the event of the insolvency of the third
party. Where client money is not segregated, such protection is lost and the purpose
of Principle 10 and the CASS Rules is defeated. Crystallisation of risk is therefore
irrelevant in assessing the seriousness of a CASS breach, since the CASS Rules are
intended to prevent such risk crystallising in the first place.

The extent to which the breach was deliberate or reckless

5.8.
The FSA does not consider that Barclays Capital committed the breach deliberately or
recklessly.

The size, financial resources and other circumstances of the firm

5.9.
In deciding the level of penalty, the FSA has had regard to the size of the financial
resources of Barclays Capital and the wider BBPLC group. The FSA has no evidence
to suggest that Barclays Capital is unable to pay the financial penalty.

The amount of profits accrued or loss avoided

5.10. Barclays Capital did not profit from, or avoid losses as a result of, the breach.

Conduct following the breach

5.11. Following discovery of the segregation issue in December 2009, Barclays Capital
corrected the situation promptly. However, Barclays Capital did not inform the FSA
of the issue until 17 March 2010, some two and a half months later.

5.12. Barclays Capital has cooperated fully, working with the FSA to facilitate an early
settlement of this matter.

Disciplinary record and compliance history

5.13. In August 2009, the FSA took enforcement action against Barclays Capital for failures
concerning transaction reporting, imposing a financial penalty of £2.45 million.
Whilst the subject matter of the previous case is not directly related to the current
action, the FSA has had regard to this when considering the sanction in the current
case.

Other action taken by the FSA

5.14. In determining the level of financial penalty, the FSA has taken into account the
penalties imposed by the FSA on other authorised persons for similar behaviour.

5.15. The FSA considers that the seriousness of Barclays Capital’s breach of Principle 10
and the CASS Rules merits a significant financial penalty. In determining the
financial penalty the FSA has considered the need to send a clear message to the
industry of the need to ensure that client money is properly segregated at all times,
both intra- and inter-day, in accordance with the relevant rules and that failure to do
so will result in severe consequences.

7


5.16. The FSA considers, taking into account the applicable Stage 1 discount for early
settlement, that a financial penalty of £1,127,559 million is appropriate. This figure
has been arrived at by reference to all of the factors above, in particular, the amount of
client money held in respect of the GBP client money market account, and the failure
of Barclays Capital to segregate client money held by it intra-day for over eight years.

5.17. The penalty also takes account of the mitigating factors set out above, in particular
Barclays Capital’s co-operation with the FSA following discovery of the breach.
Before the Stage 1 discount, the penalty is equivalent to 1% of the daily average
amount of unsegregated client money held by Barclays Capital in respect of the GBP
client money market account over the Relevant Period.

6.
DECISION MAKER

5.1
The decision which gave rise to the obligation to give this Final Notice was made by
the Settlement Decision Makers on behalf of the FSA.

7.
IMPORTANT

7.1.
This Final Notice is given to Barclays Capital in accordance with section 390 of the
Act.

Manner of and time for Payment

7.2.
The financial penalty must be paid in full by Barclays Capital to the FSA by no later
than 9 February 2011.

If the financial penalty is not paid

7.3.
If all or any of the financial penalty is outstanding on 9 February 2011, the FSA may
recover the outstanding amount as a debt owed by Barclays Capital and due to the
FSA.

7.4.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information
about the matter to which this notice relates. Under those provisions, the FSA must
publish such information about the matter to which this notice relates as the FSA
considers appropriate. The information may be published in such manner as the FSA
considers appropriate. However, the FSA may not publish information if such
publication would, in the opinion of the FSA, be unfair to Barclays Capital or
prejudicial to the interests of consumers.

FSA contacts

7.5.
For more information concerning this matter generally, you should contact Samantha
Carruthers (Tel: 020 7066 0174) of the Enforcement and Financial Crime Division of
the FSA.

William Amos
Head of Department
FSA Enforcement and Financial Crime Division
APPENDIX 1: RELEVANT CLIENT MONEY RULES

1.1.
Conduct of Business Rule 9.3.37R, in force from 1 December 2001 to 31 March 2004,
states:

“A firm must, except to the extent permitted by the client money rules, hold client
money separate from the firm’s money.”

1.2.
Client Assets Rule 4.3.3R, in force from 1 April 2004 to 31 October 2007, states:

“A firm must, except to the extent permitted by the client money rules, hold client
money separate from the firm’s money.”

1.3.
Client Money Rule (“CASS”) 7.4.11R, in force from 1 November 2007 onwards,
states:

“A firm must take the necessary steps to ensure that client money deposited, in
accordance with CASS 7.4.1R, in a central bank, a credit institution, a bank
authorised in a third country or a qualifying money market fund is held in an account
or accounts identified separately from any accounts used to hold money belonging to
the firm.”

1.4.
CASS 7.3.2R, in force from 1 November 2007 onwards, states:

“A firm must introduce adequate organisational arrangements to minimise the risk of
the loss or diminution of client money, or of rights in connection with client money, as
a result of misuse of client money, fraud, poor administration, inadequate record-
keeping or negligence.”