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Traders snicker as Barclays blames technical problems

Section: Daily Dispatches

Barclays Borrows £1.6 Billion from Bank of England

By Edmund Conway and Philip Aldrick
The Telegraph, London
Friday, August 31, 2007

Barclays has been forced to tap the Bank of England's emergency lending fund after a major error in the City's trading systems wreaked havoc on the money markets.

The bank borrowed up to £1.6 billion from the central bank's standing facility after it failed to settle its positions on the open market. It is the second time in as many weeks it has had to turn to the lender of last resort.

The embarrassing move came on a chaotic day in which a major problem with the electronic settlement system, CREST, forced the Bank of England to take the extraordinary step of extending trading for almost an extra hour.

Clearing banks such as Barclays have to settle thousands of different trades at the end of every day in order to balance their books. Usually, any shortfall on their account can be made up by borrowing money on the open market, from other banks.

However, a key part of the CREST system -- the communication link with the Bank of England -- failed for around an hour on Wednesday afternoon.

As a result, the bank delayed its final deadline for using its emergency standing facility from 4.30 p.m. to 5.15 p.m.

Barclays said: "Had there not been a technical breakdown, this situation would not have occurred. At the end of the day, there was excess liquidity in the money markets, where bank reserves were larger than bank borrowings. There are no liquidity issues in the UK markets. Barclays itself is flush with liquidity."

However, traders expressed surprise at the excuse, saying that if these technical problems were really the culprit it would have affected far more institutions.

Euroclear also said that none of its members had reported settlement problems to it -- a strong indication that, although the system problems were a disruption, they were not directly to blame for the use of the bank's emergency facility.

Either way, the mistake was a costly one for Barclays, which took the money at a penal rate of 6.75 percent -- almost a full percentage point above money market rates. It borrowed £314 million from the facility last week, forcing the bank to reject concerns about the health of its balance sheet and the state of its money market operations.

Yesterday's events pushed the pound temporarily lower as traders speculated the lending could be symptomatic of worsening problems facing financial markets.

John Anderson of Rensburg Fund Management said: "When people tap into this facility, it can mean only one thing: Liquidity is gone."

Neither the Bank of England nor any of the major banks would comment.

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