Archegos Showed That Prime Brokers Could Not See Each Other
A family office took enormous concentrated positions through swaps at several banks simultaneously. No individual bank knew the total, and the unwind cost them billions.
The Structure
Archegos Capital Management was a family office, meaning it managed the wealth of one individual and was therefore subject to lighter disclosure requirements than funds managing outside money.
It took very large positions in a limited number of stocks, not by buying shares directly but through total return swaps.
Why the Swap Mattered
In a total return swap, the bank buys the shares and the client receives the economic return, paying a financing charge. The bank is the registered owner.
Two consequences follow. The client obtains the economic exposure with substantial leverage, posting only margin rather than the full value. And because the bank holds the shares, disclosure obligations that would apply to a large direct holder do not attach to the client in the same way.
Each bank could see the exposure it had provided. None could see that the same client held similar positions at four or five other banks simultaneously.
The Aggregate Nobody Measured
Archegos ran these arrangements with multiple prime brokers at once. Each bank assessed its own exposure and concluded it was manageable relative to the collateral posted.
None could assess the total, because there was no mechanism requiring disclosure of positions held elsewhere and no central repository visible to them.
The aggregate position in several stocks reportedly represented a very large share of the free float, meaning the total exposure was far larger than any single counterparty believed it was facilitating.
The Unwind
When the underlying stocks declined in March 2021, margin calls followed. Archegos could not meet them, and the banks moved to liquidate.
Because they all held the same securities against the same client, they were selling into each other. Banks that acted fastest recovered most. Those that moved more slowly, or attempted to coordinate an orderly unwind, sold into prices already driven down by competitors.
Credit Suisse reported losses in the region of five billion dollars, and other institutions reported substantial losses. Losses were highly uneven, reflecting speed of exit rather than differences in the original underwriting.
The Risk Management Failures
Subsequent reviews identified inadequate margin requirements relative to the concentration of the positions, insufficient attention to the client's total leverage across the industry, and failures to escalate concerns.
The structural issue is that concentration risk was assessed at the level of each bank's own book rather than at the level of the client's overall position. A client with modest leverage at five institutions may be extremely leveraged in aggregate.
What Changed
Regulators moved toward greater disclosure of swap positions and family office activity, and banks strengthened requirements for clients to disclose exposures elsewhere as a condition of doing business.
The Bottom Line
Archegos was invisible in aggregate because each prime broker measured only its own slice. Concentration must be assessed at the level of the client rather than the counterparty, or the number everyone computes is the wrong one.