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Archegos: Difference between revisions
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===Mismargining=== | ===Mismargining=== | ||
Credit Suisse’s margining methodology for swaps was, from the outset, positively moronic. The JC is a legal eagle, not a credit guy, but even I could spot the flaws in this. | Credit Suisse’s margining methodology for swaps was, from the outset, positively moronic. The JC is a legal eagle, not a credit guy, but even I could spot the flaws in this. | ||
*[[TRS]] not [[synthetic equity]]: CS appears to have documented the trades as “total return swaps” under a standard equity derivatives master confirmation agreement, and not synthetic equity derivatives under a portfolio swap master confirmation. The differences are subtle, but there are two in particular: TRS tend to be “bullet” swaps with a scheduled termination date and as a result do not “[[re-strike|restrike]]” before maturity, and are [[static margin|statically margined]]. Portfolio swaps are designed to replicate cash prime brokerage; there is not a specified maturity date, so the notional restrikes periodically (like, monthly), and [[initial margin]] is calculated daily against the prevailing “{{eqderivprov|Final Price}}” rather than the original “{{eqderivprov|Initial Price}}” | *[[TRS]] not [[synthetic equity]]: CS appears to have documented the trades as “total return swaps” under a standard equity derivatives master confirmation agreement, and not synthetic equity derivatives under a portfolio swap master confirmation. The differences are subtle, but there are two in particular: TRS tend to be “bullet” swaps with a scheduled termination date and as a result do not “[[re-strike|restrike]]” before maturity, and are [[static margin|statically margined]]. Portfolio swaps are designed to replicate cash prime brokerage; there is not a specified maturity date, so the notional restrikes periodically (like, monthly), and [[initial margin]] is calculated daily against the prevailing “{{eqderivprov|Final Price}}” rather than the original “{{eqderivprov|Initial Price}}”. As Hwang’s positions appreciated, the margin value as a proportion of the position eroded, and Hwang apparently used the [[variation margin]] to double down on the same trades, pushing the equity price further up, exacerbating the problem. | ||
*'''They didn’t keep an eye on the direction of the portfolio''': Archegos at first used the swap book to put on short positions that offset the long bias on its cash book. It used this bias to argue for lower margins — a request the business accommodated, provided the combined portfolio bias did not exceed 75% long or short. Over time Archegos crequently exceeded these limites, often for months at a time, but CS took no action, accepting Archegos’ promises to correct the bias. | |||
*'''They didn’t take ''enough'' margin''': Archegos pressured CS to lower its swap margins, citing more favourable margins it was getting from other brokers due to the effect of [[cross-margining]]. | |||
{{sa}} | {{sa}} | ||
''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}'' | ''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}'' | ||