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The U.S. Federal Reserve has warned that current measures to leverage hedging funds “may not capture significant risks,” and as a result, Archegos Capital as an example of the weaknesses hidden in the global financial system.
The U.S. Central Bank’s annual report on financial stability has found that some asset valuations are “high by historical standards” and “vulnerable to significant declines if they are at risk of starvation.”
But the Fed has acknowledged that regulators do not have the tools to control the risk of traders like Bill Hwang, who made big bets on shares through the Archegos family office.
“The Archegos event shows limited visibility of hedge fund exposures and reminds us that the measures available to hedge hedge funds do not pose significant risks,” said Lael Brainard, the Fed’s governor, who heads the central bank’s financial stability committee.
He added: “The importance of knowing more about the financial conditions that hedge funds can face in terms of material stress can be emphasized, with greater frequency and frequency.”
A warning about the risks of unseen hedge funds The Fed expressed concern that the worsening of the global pandemic could “stress the financial system in emerging markets and some European countries.” Effect in emerging market countries it could increase if global interest rates “suddenly rise,” he added.
In the U.S., the central bank said “some businesses and households continue to face significant tensions,” even though better economies, lower interest rates and government aid have helped them serve their debts to corporations and consumers.
The Fed said that “banks remain capitalized, and that there is little leverage for broker sellers.” The leverage measures of hedge funds are “above the historical average,” he said, and the data “may not capture significant risks from hedge funds or other leverage funds.”
It was difficult to control Hwang’s high-wire action because family offices had limited disclosure requirements and used derivatives known as swap for the return of full assets. With these tools, Archegos had profits from individual stock increases with payments that were only part of the size of the underlying positions.
The other side of the bet was that the banks tried to cover the risks by buying the underlying shares, but they had problems when Hwang’s fortunes diminished and he failed to meet margin calls. Banks threw up their shares and suffered losses of more than $ 10 billion, including $ 5.4 billion for Credit Suisse and $ 2.9 billion for Nomura.
It combines the frustrations of U.S. regulators with the fact that the biggest losses in the Archegos affair have been bank desks directly overseen by officials in other countries.
U.S. regulators soon expressed concern about the hidden leverage in the financial markets when the Archegos exploded. In March, the Financial Stability Supervisory Board, headed by U.S. Treasury Secretary Janet Yellen, relaunched its hedge fund oversight group to assess the risks taken by mutual funds.
Gary Gensler, the new chairman of the Securities and Exchange Commission, told the House Financial Services Committee this week that he has directed his staff to consider new conditions for reporting all return swaps made by Archegos.
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