Archegos, 2021

At a glance

What happened

Archegos built very large, concentrated bets on a few shares, including ViacomCBS, using total return swaps with several prime brokers at once. In late March 2021 ViacomCBS fell after announcing a share sale, Archegos could not meet its margin calls, and the banks began selling the underlying stock. Goldman Sachs and Morgan Stanley sold early and lost little; Credit Suisse lost about $5.5bn, Nomura about $2.9bn, and others hundreds of millions each.

Why it went wrong

Under a total return swap the bank holds the shares and the fund receives their return, so the fund crossed no disclosure thresholds and its position was invisible in public filings. Spread across five brokers, each bank saw a position it thought was large but survivable. Margin did not scale with how concentrated the book was or how long the shares would take to sell. Credit Suisse's own review later described limits repeatedly breached, margin terms loosened to keep the client, and internal warnings left unanswered.

What it teaches

Gross exposure matters when positions are correlated, because netting names that fall together nets nothing. A derivative can move disclosure to whoever holds the hedge, so public filings may not show who really bears the risk. And in a disorderly unwind, the order in which counterparties exit decides most of the outcome.

Key terms

Family office

A firm managing a single family’s wealth, subject to lighter registration and disclosure than a fund.

Prime brokerage

The bank service providing financing, execution and custody to a fund, and the margin terms that go with it.

Gross exposure

The total size of positions before offsetting longs against shorts — the number that matters when they move together.

Days to liquidate

How long a position would take to sell at normal volumes, and so how stale the price used to margin it is.

Beneficial ownership

Who is treated as holding a share for disclosure purposes — the dealer hedging a swap, not the fund receiving its return.

Disorderly unwind

A forced liquidation in which sellers compete, so the price achieved is far below the marked value.

Where it sits in the course

Case studies like this one are used throughout risk management teaching, including FRM® preparation, as worked examples of counterparty, concentration and margin risk in prime brokerage. In OTC Learn the lesson runs in five steps: what happened, the position, why it broke, what it cost and what it teaches, followed by a worked example with the numbers. See the lesson outline.

The instruments behind it

OTC Learn lessons on the products this case turns on:

• Total Return SwapRent the full return of an asset
• Equity SwapSwap equity returns for a funding rate
• Contract for DifferenceCash-settled exposure to a price move