As Wall Street reels, Archegos’ fire sale raises big questions about regulation

The diverging fortunes of major banks in the fallout from the Archegos Capital Management meltdown raise serious questions for global regulators, experts said. Archegos’ forced liquidation of several of its positions triggered a fire sale of a number of U.S. media stocks last week.

Nomura and Credit Suisse announced Monday that they expect to suffer “significant” losses, after the multibillion dollar family office defaulted on margin calls last week. Both banks had served as prime brokers to the beleaguered hedge fund. However, fellow brokers Goldman Sachs, Deutsche Bank and Morgan Stanley escaped relatively scot free, having already unloaded positions relating to their Archegos margin calls. The margin call defaults are estimated to have cost the banks around $6 billion in total.

Reports suggest that several of the banks had communicated with one another on the Archegos squeeze. Some proceeded to unload their positions in the nick of time, while others were left holding the bag. Former SEC lawyer Mark Berman said regulators would be looking not just at how Wall Street prime brokers allowed Archegos to build such heavily leveraged positions, but also the banks’ collective approach to credit negotiations and risk management.

“If it is true that four major prime brokers, commercial banks, were sitting trying to negotiate a situation, what caused some of them to go out on the side and deal to reduce their exposure and let others sink?” said Berman, CEO of compliance consultancy CompliGlobe. Berman and several experts told CNBC on Tuesday that the focus of regulators should be on the risk reporting by regulated entities such as investment banks.

Archegos reportedly purchased derivatives from the banks known as total return swaps, which enable investors to bet on share price moves without owning the underlying stock. The fund was therefore able to use loans to build outsized positions investing in global stock markets. The banks issued margin calls on the hedge fund last week — a demand that Archegos deposit more money into its margin accounts or sell some of the assets held in them, in order to bring it up to the brokers’ required minimum value. The hedge fund proceeded to default on these calls.

As Wall Street reels, Archegos’ fire sale raises big questions about regulation, CNBC, Mar 31