Archegos, 2021

Five banks, one position, and none of them could see it

Archegos Capital Management held concentrated bets on a handful of shares through total return swaps at several prime brokers at once. Because the dealers held the stock and the fund held the return, no disclosure was triggered and no bank saw more than its own slice. When the largest holding fell, the margin calls went unmet, the dealers raced each other to sell the same shares, and the banks lost roughly $10bn between them in a matter of days.

Open in the app · Case Studies · intermediate

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What the lesson covers

1. What happened
2. The position
3. Why it broke
4. What it cost
5. What it teaches

Key terms

• Family office — A firm managing a single family’s wealth, subject to lighter registration and disclosure than a fund.
• Prime brokerage — The bank service providing financing, execution and custody to a fund, and the margin terms that go with it.
• Gross exposure — The total size of positions before offsetting longs against shorts — the number that matters when they move together.
• Days to liquidate — How long a position would take to sell at normal volumes, and so how stale the price used to margin it is.
• Beneficial ownership — Who is treated as holding a share for disclosure purposes — the dealer hedging a swap, not the fund receiving its return.
• Disorderly unwind — A forced liquidation in which sellers compete, so the price achieved is far below the marked value.

Every key term, A to Z

In practice

Prime brokers now ask for portfolio-level margin that scales with concentration and liquidation horizon, and supervisors have pressed banks on whether they can see a client’s exposure across the street rather than only on their own book. The disclosure gap the trade exploited has been narrowed but not closed.

Read next

• Total Return Swap — Rent the full return of an asset
• Equity Swap — Swap equity returns for a funding rate
• Contract for Difference — Cash-settled exposure to a price move

In the app, Archegos, 2021 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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