The Hong Kong securities watchdog has stepped up surveillance of prime brokers and over-the-counter markets to prevent a meltdown in Hong Kong such as that of Bill Hwang’s Archegos Capital Management.
To mitigate the risk of such events happening in the city, the Securities and Futures Commission (SFC) was enhancing its “line of sight” into over-the-counter markets to identify any build-up of concentrated positions, and was stepping up its surveillance of prime broker activity, Julia Leung Fung-yee, the commission’s deputy chief executive, told the annual Hong Kong Investment Funds Association conference on Monday.
“The recent implosion of Archegos, the family office that defaulted on total return swaps’ margin calls, serves as a reminder that a fund with outsize and concentrated bets could go from winning to losing overnight, triggering massive sell-offs and leaving a trail of losses by prime brokers,” Leung said during her keynote speech. “We reminded some firms to strengthen the robustness of their liquidity monitoring and controls in terms of stress testing, setting targets and assessing expected redemption patterns,” she said.
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The meltdown at Archegos in March left banks such as Credit Suisse Group, Nomura Holdings and Morgan Stanley nursing losses worth more than US$10 billion. Hwang, a Korean-American Wall Street investor, made big highly geared bets on companies such as ViacomCBS and was unable to meet margin calls when his bets went wrong. His wagers were financed by the banks through their prime brokerage units, which lend money to hedge funds and other private investment firms.
The Archegos meltdown is being investigated by both the US Department of Justice and the Securities and Exchange Commission.
Hwang and Tiger Asia Management, his hedge fund, were both banned from trading in Hong Kong for four years until 2018 after the city’s Market Misconduct Tribunal found them guilty – based on an investigation by the SFC – of insider dealings in the shares of two mainland Chines banks.
The SFC also introduced a cap in October 2019 on the amount of money a brokerage could lend to clients for trading stocks at five times their capital. Earlier, there was no restriction on the practice, which is known as margin lending.
“The Hong Kong regulators have been very proactive in introducing measures to enhance market risk management, and to prevent over leverage of margin lending in Hong Kong,” said Au King-lun, executive director of the Financial Services Development Council, a government advisory body for the strategic development of Hong Kong as an international financial centre.
Hong Kong needed to consider the closer scrutiny of financial firms’ lending to family offices, said Steve Vickers, the chief executive of corporate risk consultancy Steve Vickers & Associates. “The situation involving Bill Hwang clearly involved a bald failure of due diligence. Publicly available indications of prior sanction in 2012 should have given relevant financial institutions pause for thought,” he said.
Meanwhile, the SFC will offer more guidelines to financial firms about staff working from home. “As we come out of the pandemic, financial firms are transitioning to a hybrid working arrangement for cost-saving and lifestyle reasons,” Leung said.
“It will be important for us to provide more guidance to firms on our expectations and share examples of good practices for remote work access, information security … as these hybrid arrangements are likely to stay for a while,” she added.
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