UPDATE 1-Barclays did not join FX settlement due to NY regulator -sources

(Adds details, names monitor put into Barclays in New York)

By Steve Slater and Karen Freifeld

LONDON/NEW YORK, Nov 12 (Reuters) - Barclays didnot join a $3.4 billion settlement over alleged manipulation offoreign exchange rates because of issues with its New Yorkregulator, people familiar with the matter said.

Barclays is overseen in New York by the Department ofFinancial Services (DFS), unlike five other banks which settled with British, U.S. and Swiss regulators.

In the United States, bank regulation is fragmented, and theNew York DFS is the regulator for 87 branches of foreign banks,including Barclays, Deutsche Bank and BNP Paribas.

Barclays had been expected to join the settlement withBritain's Financial Conduct Authority (FCA) and U.S. CommodityFutures Trading Commission (CFTC). Five people familiar with thematter said it pulled out because of issues with the DFS, whoseSuperintendent Benjamin Lawsky has focused on bankingmisdemeanors. In 2012, he threatened to revoke StandardChartered's licence.

Barclays chose not to settle with no agreement with Lawskyin hand, three of the sources said. Although Lawsky can threatento revoke a bank's New York licence, that threat is not believedto have been made, two of the sources said.

Barclays said it had engaged with the FCA and CFTC andconsidered a settlement with them on terms similar to thoseagreed by other banks.

"After discussions with other regulators and authorities, wehave concluded that it is in the interests of the company toseek a more general coordinated settlement," it said, decliningfurther comment.

The five banks in the settlement were UBS,JPMorgan, Citigroup, Royal Bank of Scotland and HSBC.

Barclays shares fell 2.1 percent by 1415 GMT. Shares of thethree European banks who settled were flat to down 1 percent.

Lawsky, who started his investigation in February, chose notto coordinate on a settlement with other regulators because heviewed those deals as too weak, a person familiar with theregulator said.

A group settlement gives banks too much cover, and the DFScould pursue bigger fines or other non-financial penalties, theperson said. The New York regulator has installed advisory firmDevon Capital in Barclays to monitor its FX systems andbehaviour, two people familiar with the matter said.

A DFS spokeswoman declined to comment. (Additional reporting by Katharina Bart in Zurich; Editing byDavid Holmes and Jane Merriman)