Billions in secret derivatives at the centre of Archegos blowup

Goldman U-turn put Bank on verge of margin call

The forced liquidation of more than $20 billion in holdings linked to Bill Hwang’s investment firm is drawing attention to the covert financial instruments he used to build large stakes in companies.

Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps or so-called contracts-for-difference, according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities — if any at all.

While investors who build a stake of more than 5 per cent in a US-listed company usually have to disclose their position and future transactions, that’s not the case with stakes built through the type of derivatives apparently used by Archegos. The products, which are made off exchanges, allow managers like Hwang to amass stakes in publicly traded companies without having to declare their holdings.

The swift unwinding of Archegos has reverberated across the globe, after banks such as Goldman Sachs Group Inc. and Morgan Stanley forced Hwang’s firm to sell billions of dollars in investments accumulated through highly leveraged bets. The selloff roiled stocks from Baidu to ViacomCBS, and prompted Nomura and Credit Suisse to disclose that they face potentially significant losses on their exposure.

One reason for the widening fallout is the borrowed funds that investors use to magnify their bets: a margin call occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses. Archegos was probably required to deposit only a small percentage of the total value of trades.

Credit Suisse, Nomura slump as banks tally Archegos damage

Nomura Holdingsand Credit Suisse Group AG both plunged more than 15 per cent after saying they may face “significant” losses, as some of the world’s biggest banks tally their exposure to wrong-way bets by Archegos Capital Management.

Lenders to Bill Hwang’s New York-based family office are racing to contain the fallout after Archegos failed to meet margin calls last week. The forced liquidation of more than $20 billion of positions linked to the firm roiled stocks from Baidu Inc. to ViacomCBS Inc., casting a spotlight on the opaque world of leveraged trading strategies facilitated by some of Wall Street’s biggest names.

While the turmoil has so far had only a limited impact on broader financial markets, banks and people familiar with the matter indicated the unwinding of Archegos-related bets may have further to go. Credit Suisse and other lenders are still in the process of exiting positions, the bank said in a statement on Monday that didn’t mention Archegos by name. Morgan Stanley was shopping a large block of ViacomCBS shares on Sunday, people familiar said.

The saga has captivated much of the financial industry, swathes of which have been piling on leverage in recent years amid historically low interest rates and one of the strongest equity bull markets on record.

Much about Hwang’s trades remains unclear, but market participants estimate that his assets had grown to anywhere from $5 billion to $10 billion and total positions may have topped $50 billion.

A large portion of the leverage was provided by the banks through swaps, according to people with direct knowledge of the deals. That meant that Archegos didn’t have to disclose its holdings in regulatory filings, since the positions were on the banks’ balance sheets.