20 years: Trading & hedge funds
In this second video, Trevor covers the role of prime brokers and financing process of Archegos. Trevor also elaborates on the factors that led to the quick collapse of Archegos in March 2021 which ultimately cost billions in losses to global banks.
In this second video, Trevor covers the role of prime brokers and financing process of Archegos. Trevor also elaborates on the factors that led to the quick collapse of Archegos in March 2021 which ultimately cost billions in losses to global banks.
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12 mins 54 secs
Over the course of 2020 and 2021, it would seem that less than ten banks had racked up credit exposure of over $50bn to Archegos. And in a few weeks in March and April 2021, they had lost around $10bn.
Key learning objectives:
How did Archegos collapse?
What were the ramifications of the Archegos incident?
What else could have been done to avoid the collapse?
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The part of a bank that handles the financing relationship with a hedge fund or family office is the Prime Brokerage area or Prime Services.
Archegos was getting between 8 and 20 times leverage, which is the equivalent of posting between $5 and $12.50 on a $100 stock. This is fine in normal times but it is not enough when the stock falls from $100 to $45 in 5 days, as Viacom did.
A further impact of using TRS was that Archegos would not have to disclose its positions publicly, so it was not obvious that there was such a high concentration of exposure in just one fund.
Goldman Sachs and Morgan Stanley began selling quickly, limiting their losses. Nomura and Credit Suisse were not so quick, and so the value of their holdings plummeted. The losses were so large that they had a considerable impact on the banks’ share prices the following Monday. As at the end of April, Credit Suisse alone had lost $5.5bn and total losses exceed $10bn.
Tightening regulations may not be so easy. The total size of family office wealth around the world is an estimated $6 trillion, over 50% larger than the hedge fund industry. There are estimated to be around 10,000 such offices globally. These institutions are private and secretive and are pushing back against stricter regulations on disclosure.
Disclosure is a big issue, and probably one the regulators will look closely at - especially in the case of derivatives. Prime Brokers might also wish to have better disclosure on positions their counterparties have with other prime brokers.
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