Archegos Capital’s collapse caused shockwaves across financial markets

The collapse of Archegos Capital Management caused one of the largest margin calls of all time on Wall Street last week, sending shockwaves across global financial markets.

The New York-based family office defaulted after it failed to meet some large margin calls, forcing the big banks to liquidate near 30 billion dollars’ worth of positions on behalf of the fund. 

The banks sold massive blocks of trades to cover margins on Archegos’ leveraged trades, sending the value of the media companies Viacom and Discovery more than 50% lower in just a few days.

Analysts estimate that the investment banks could face a total loss of 10 billion dollars from the liquidation of the fund, including huge losses from Nomura and Credit Suisse.

The fund was borrowing tens of billions of dollars to make leveraged equity swaps agreements and other synthetic derivative deals with multiple investment banks. 

Derivative bets are very popular with hedge funds since they allow them to make large investments without buying the shares or disclosing their positions to the Securities and Exchange Commission.

Financing synthetic derivatives to hedge funds, is a very profitable business for the large investment banks since the clients’ positions are consolidated against each other. However, the incident creates doubts about the quality of risk management among hedge funds and investment banks, while the regulators are now studying the risks that hedge funds pose to the financial system, and call for tighter regulation.