Business & Investment

Arquegos: Billions of secret derivatives at the heart of the Arquegos explosion

Compulsory liquidation of more than $ 20 billion in holdings related to Bill fanInvestment firms are paying attention to the secret financial products he used to build large-cap stocks Enterprise..

Much of the leverage used by fans Arquegos Capital management provided by Bank Includes Nomura Holdings and Credit Suisse Group through swaps or so-called contracts for difference (CFD), according to those who know the deal directly. This means that Arquegos may never actually own most of the underlying securities.

Investors with a 5% or greater stake in a US listed company typically need to disclose their position and future transactions, Derivatives Apparently used by Arquegos. Products made from exchanges allow managers like fans to raise shares in listed companies without declaring their holdings.

The rapid rewind of Arquegos has hit the globe after banks such as Goldman Sachs Group and Morgan Stanley have forced fan companies to sell billions of dollars of investment accumulated through high-leverage betting. called. The sale soared shares from Baidu to ViacomCBS, prompting Nomura and Credit Suisse to reveal that they are facing potentially significant losses in their exposure. One of the reasons for the growing fallout is the borrowing funds that investors use to grow their bets. If the market opposes a large leveraged position, a margin call will occur and the hedge fund will have to deposit more cash or securities with the broker to cover the loss. .. Archegos probably needed to deposit only a small portion of the total amount of the transaction.

The sequence of events triggered by this massive unwinding further reminds us of the role hedge funds play in the global capital markets. Gamestop Corp earlier this year. A short squeeze of hedge funds in the midst of a frenzy of stocks Reddit cost Gabe Plotkin’s Melvin Capital a $ 6 billion loss, causing scrutiny from US regulators and politicians.

The idea that one company can use derivatives to quietly gather large positions creates another wave of criticism against loosely regulated companies that have the power to destabilize the market. It can cause it.

Margin claims on Friday caused as much as 40% loss on some stocks, but there were no signs of widespread market transmission on Monday. In contrast, in 2008, Ireland’s wealthiest man at the time used derivatives to establish a tremendous position at the Bank of Ireland in Anglo, ultimately contributing to the country’s international bailout. did. In 2015, New York-based FXCM Inc. needed relief due to a loss at a UK affiliate due to an unexpected unpegging of the Swiss franc.

There are many uncertainties about fan trading, but market participants estimate that his wealth has increased from $ 5 billion to $ 10 billion in recent years and his total position may have exceeded $ 50 billion. There is. Fans did not respond to requests for comment.

CFDs and swaps are one of the custom derivatives that investors trade personally between themselves or over-the-counter, not on public exchanges. Such opacity helped exacerbate the 2008 financial crisis, and regulators have since introduced a huge number of new rules governing assets.

Arquegos: Billions of secret derivatives at the heart of the Arquegos explosion Arquegos: Billions of secret derivatives at the heart of the Arquegos explosion

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