As Archegos losses are tallied up, regulatory scrutiny grows

ZURICH • Wall Street counted the cost of the Archegos Capital meltdown on Tuesday, with pressure mounting on heavily exposed Credit Suisse and regulators stepping up scrutiny of the fallout from banks' unwinding the New York fund's positions.

Archegos, a US$10 billion (S$13.5 billion) single-family office run by former Tiger Asia manager Bill Hwang, defaulted on margin calls by its banks. Its unwinding may result in those global lenders losing more than US$6 billion, sources familiar with the trades have told Reuters.

JPMorgan analysts, including Mr Kian Abouhossein, estimated that the banks' losses in total could potentially reach US$10 billion, "well beyond normal unwinding scenario for the industry".

They added that they expect full disclosure by the end of the week from Credit Suisse, which on Monday warned of a significant hit.

Credit Suisse's shares fell another 3 per cent on Tuesday and have slumped 16 per cent so far this week, while shares of most other major European and American banks bounced back from Monday's battering.

Archegos responded to a request for comment with a repetition of its Monday statement which said that "all plans are being discussed".

As the series of events that led Archegos' brokers to liquidate the fund's positions became clearer on Tuesday, regulatory scrutiny of the episode intensified.

United States and British regulators have been in discussions with market players, including broker-dealers, to determine the full extent of the fallout from the default on Archegos' equity swap positions, a source briefed on the talks said.

The US Securities and Exchange Commission and the Financial Industry Regulatory Authority (Finra) have held meetings with the industry to understand the impact on firms and their customers, ascertain the credit risks and encourage dealers to check for further exposure, the source said.

Britain's Financial Conduct Authority (FCA) has also been involved in some of the calls with market players, the source said.

"The fallout from Archegos Capital's margin call appears to be contained but the regulatory scrutiny will not go away anytime soon," wrote Mr Edward Moya, senior market analyst at Oanda in New York, adding that prime brokerages could "start pressuring family offices or hedge funds to bring down the leverage they are using".

"We would expect regulators will look carefully into this event and would not be surprised if there were some changes especially in light of the new administration," banking analyst Vivek Juneja of JPMorgan wrote in a note on Tuesday.

An SEC spokesman said on Monday that the agency was monitoring the situation but declined to comment further on Tuesday.

A spokesman for Finra did not respond immediately to a call for comment. Britain's FCA said on Monday it was monitoring the situation and declined to comment further on Tuesday.

Credit Suisse and Japan's Nomura are set to bear the brunt of the bank losses, according to statements from the banks and sources, one of whom said Credit Suisse could lose as much as US$4 billion. The bank has declined to comment on the size of its losses.

Credit rating agency Standard & Poor's on Tuesday revised its outlook for Credit Suisse to "negative" from "stable".

Several analysts on Tuesday flagged that Credit Suisse's share buyback programme and dividend may be at risk.

"The hits just keep coming for Credit Suisse," wrote Mr Eoin Mullany of Berenberg, adding that the bank may need to suspend its share buyback and reassess the way it manages risk.

The brokerage arm of Japan's Mitsubishi UFJ Financial Group on Tuesday flagged potential losses of around US$300 million at its European subsidiary related to a US client. It declined to comment on whether that client was Archegos.

Wells Fargo said it provided brokerage services to Archegos, but said it "did not experience losses related to closing out our exposure".

Other major banks have said they do not expect a major impact from the downfall of Archegos. Goldman and Morgan Stanley were quick to offload shares last Friday, averting a material financial impact, sources familiar with their trades said.

REUTERS