They are looking to move to dynamic portfolio-based margin models, where risks such as concentration, illiquidity attract higher margin premiums to secure the PB from idiosyncratic losses. Static vs Dynamic Margining:Prime Brokers are reviewing their lending books holistically where they have Initial Margin (IM) for their PB or Synthetic PB clients at fixed level. With the intensified pressure both internally and externally, the measures Banks are taking are directly impacting the hedge fund industry in the following ways. Regulators have intensified their scrutiny with focus on how huge amounts of hidden leverage was prevalent in a post-2008 world. The failures across the board led most of the Banks to overhaul their Risk and Prime Brokerage departments. Credit Suisse have today (July 29th 2021) published an internal report on exactly what led to the Archegos related losses. Since the true extent of Archegos’ leverage in the street was hidden from each of its brokers, they would have continued providing excessive leverage individually to capitalize on the financing revenues. This is looked at alongside qualitative factors such as internal ratings and credit limits to counterparties, the revenue relationship with the counterparty and most importantly how the hypothetical loss measures up against potential revenue. Prime Brokers run Gap Risk Monitoring on its counterparties to assess where clients margin requirements are below market stress scenarios to avoid exactly such situations. The stocks had run up multi-fold in the year following the onset of the pandemic once the market corrected, Archegos faced a liquidity crunch and it’s Prime Brokers (PB) started liquidating the assets to cover the missed Variation Margin(VM) calls.Īrchegos’ holdings in these underlying stocks went up in value multi-fold post the pandemic driven market lows As the stocks corrected and dropped in value, Archegos missed Variation Margin calls to its Prime Brokers forcing them to liquidate the underlying assets at distressed values leading to huge losses. Being a family office, accessing leverage via total return swaps, they were able to avoid the strict regulatory disclosure requirements that hedge funds would have had if they held exposure directly.īy not holding the positions as cash securities, it was also able to avoid regulatory margin minimums subject to the US markets. Source: Financial Times, Company Disclosures What led to thisĪrchegos had highly concentrated positions in a handful of high growth stocks. Written by Vardaan Kohli, Product Specialist, Cassini Banks overhaul Prime Brokerage Lending after suffering $10 Billion in losses to Archegos how can hedge funds navigate this?Īfter suffering huge losses from providing excessive leverage to a family office run by an ex-Tiger Management star trader, banks have started to holistically review their risk and balance sheet allocation to Hedge Funds and Family Offices.
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