Hong Kong plans new risk controls to prevent Archegos-style collapse

Bill Hwang updates

Hong Kong’s central bank and top financial regulator are developing a system to track dangerously concentrated exposures to stocks as part of efforts to prevent an Archegos Capital-style blow-up, according to two people familiar with the matter.

The project, which was launched in the wake of the debacle at the family office run by Bill Hwang, will use centralised trade databases to identify excessive risk-taking by banks and investment funds trading derivatives on Hong Kong markets.

The people familiar with the matter said the project had garnered the attention of regulators in the US, where the collapse of Archegos in April was one of the most spectacular on Wall Street in a decade.

Hwang made up to $50bn of highly levered bets on the shares of a handful of US and Chinese companies through derivatives called total return swaps, resulting in $10bn of losses at its lenders when the stocks fell. The losses included $5.4bn for Credit Suisse; $2.9bn for Nomura; and $911m for Morgan Stanley.

The incident has led to recriminations at the eight banks known to have offered tens of billions of dollars of leverage to Archegos and prompted investigations into their risk controls from regulators in the US, UK and Switzerland.

Archegos has hired restructuring advisers to prepare for possible insolvency as banks have threatened lawsuits in an attempt to recoup some of their losses.

The Hong Kong Monetary Authority and the Securities and Futures Commission introduced requirements for banks to report over-the-counter derivatives transactions to a central registry known as the trade repository in 2013 as part of reforms following the global financial crisis.

The latest project involves a lengthy data cleansing process and the creation of systems that would flag concentrated risks to regulators, who would then alert financial institutions that would be expected to mitigate them. One person close to the project said it could “solve” the Archegos problem.

The HKMA is Hong Kong’s de facto central bank, with a mandate to control inflation and maintain the stability of the city’s currency and financial systems. The HKMA declined to comment. The SFC, Hong Kong’s financial regulator, declined to comment.

Hwang became a notorious figure in Hong Kong when he was banned from trading in the city for four years in 2014. Tiger Asia Management, the hedge fund Hwang previously ran, admitted to using inside information to trade Chinese bank stocks in Hong Kong and the US. The case was the first time the SFC directly presented a case to Hong Kong’s market misconduct tribunal.

Archegos, which Hwang established after sanctions in the US and Hong Kong meant he could not manage money for external investors, had few dealings in the Chinese territory when its holdings were liquidated in April. However, the Archegos incident raised global concerns about regulatory oversight of family offices, which have become prevalent in Hong Kong where some of Asia’s wealthiest families manage their estates.

It also shone a spotlight on the slow pace of regulatory reform that would more heavily monitor derivatives trading disclosures in the US.

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