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Bloomberg
Billions in secret derivatives at the center of the Archegos explosion
(Bloomberg) – The forced liquidation of more than $ 20 billion in stakes tied to Bill Hwang’s investment firm is drawing attention to the hidden financial instruments he used to build large stakes in companies. by banks such as Nomura Holdings Inc. and Credit Suisse Group AG through swaps and so-called contracts for difference, according to people with direct knowledge of the deals. It means that Archegos may never have owned most of the underlying securities, if any. While investors who own a stake of more than 5% in a company listed in the US generally have to disclose their holdings and subsequent transactions, that is not the reason. case with positions built through the type of derivatives apparently used by Archegos. The products, which are traded on exchanges, allow managers like Hwang to accumulate exposure to publicly traded companies without having to declare it. The rapid disintegration of Archegos has had repercussions around the world, after banks such as Goldman Sachs Group Inc. and Morgan Stanley. forced Hwang’s company to sell billions of dollars in accumulated investments through highly leveraged bets. The liquidation shook shares from Baidu Inc. to ViacomCBS Inc., prompting Nomura and Credit Suisse to disclose that they face potentially significant losses in their exposure. One reason for the growing consequences is the borrowed funds investors use to magnify Your Bets: The margin call occurs when the market goes against a large leveraged position, forcing the hedge fund to deposit more cash or securities with your broker to cover any losses. Archegos was probably required to deposit only a small percentage of the total value of the operations. The chain of events unleashed by this massive disintegration is another reminder of the role that hedge funds play in global capital markets. A hedge fund shortage during a frenzy fueled by Reddit for Gamestop Corp. and other stocks earlier this year resulted in a $ 6 billion loss for Gabe Plotkin’s Melvin Capital and prompted scrutiny from US regulators and politicians. Through the use of derivatives it could unleash another wave of criticism directed at loosely regulated companies that have the power to destabilize markets. markets generally on Monday. Contrast that with 2008, when Ireland’s richest man used derivatives to build such a large position in Anglo Irish Bank Corp., he eventually contributed to the country’s international bailout. In 2015, New York-based FXCM Inc. needed bailout due to losses at its UK subsidiary as a result of the unexpected untying of the Swiss franc. Much about Hwang’s operations remains unclear, but market participants estimate that its assets had grown to between $ 5 billion to $ 10 billion in recent years and total positions may have exceeded $ 50. billion. “This is a challenging time for the Archegos Capital Management family office, our partners and employees,” Archegos spokeswoman Karen Kessler said Monday night in an emailed statement. “All plans are being discussed while Mr. Hwang and the team determine the best way forward.” CFDs and swaps are among the derivatives as investors trade privately with each other, or over the counter, rather than through public exchanges. This opacity contributed to worsening the 2008 financial crisis, and regulators have introduced a vast new body of rules governing assets since then. OTC equity derivatives occupy one of the smallest corners of this opaque market. The equity-linked swaps and forwards had a gross market value of $ 282 billion at the end of June 2020, according to data from the Bank for International Settlements. That compared to $ 10.3 trillion for interest rate-linked swaps and $ 2.4 trillion for currency-linked swaps and forwards. Regulators have started cracking down on CFDs in recent years because they are concerned that the derivatives are too complex and too risky for retail investors, with the European Securities and Markets Authority in 2018 restricting distribution to individuals and limiting leverage. In the US, CFDs are largely prohibited for amateur traders, but banks still favor them because they can make big profits without having to set aside as much capital instead of trading real securities, another consequence of regulation imposed on root of the global financial crisis. Among hedge funds, stock exchanges and CFDs grew in popularity because they are exempt from stamp duty in high tax jurisdictions like the UK (Updates with Archegos comment in 10th paragraph, clarifies language used to describe the commercial structure in the third paragraph and expands the retail box). .) For more articles like this, visit us at bloomberg.comSubscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP
