Credit Suisse and Nomura face multi-billion prime brokerage losses from Archegos sell-off

A $20 billion stock fire sale shook markets as Bill Hwang’s hedge fund Archegos defaulted on margin calls prompting losses at Credit Suisse and Nomura.

Credit Suisse and Nomura are both facing potential losses in the billions within their prime brokerage businesses following a mass sell-off by family office Archegos Capital Management.  

Nomura signalled a potential loss of $2 billion, while Credit Suisse said its losses could be ‘highly significant’ and may have a material effect on its first quarter results. 

The Japanese bank added the estimated loss is subject to change depending on unwinding of the transactions and fluctuations in market prices. 

Archegos, the $10 billion family office founded by Bill Hwang, had large exposures to ViacomCBS and several Chinese technology stocks. When shares in the US media group began to fall last week, the fund faced margin calls and defaulted. As the banks sold off the hedge fund’s positions, a $20 billion stock fire sale took place prompting heavy losses across prime brokerage divisions.  

“While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results, notwithstanding the positive trends announced in our trading statement earlier this month,” said Credit Suisse in a statement.

According to reports, losses for Credit Suisse and Nomura were exacerbated as they were slower in offloading share blocks into the market. Goldman Sachs, Morgan Stanley and UBS – which also acts as a prime broker for Archegos – were able to sell positions quicker. Deutsche Bank was also reportedly exposed to the sell-off, however its losses are expected to be a fraction of the other brokers. 

Some banks had cut off trading ties with Hwang after he was convicted for wire fraud and insider trading in 2012. He was also banned from trading by Hong Kong’s regulator in 2014. 

One source quoted in the Financial Times stated that Archegos was granted leverage by Nomura four times more than a typical long/short equity fund, while another has quoted an official from Japan’s Financial Services Agency that Nomura still has positions to unwind. 

To make big trades, hedge funds typically borrow money from prime brokers, allowing them to leverage up the cash they hold and increase their positions – potentially earning far greater returns if their bets come good. However, it also means hedge funds can theoretically lose more money than they hold in client funds. 

The incident further highlights the dangers of over-leveraging hedge funds and could force some prime brokers to recognise the excessive risk that can occur.  

Last year, Dutch bank ABN Amro reported a $200 million loss from a US hedge fund client that defaulted on margin calls at the height of the COVID-19 pandemic in April.  

The loss comes as Credit Suisse is still grappling with the insolvency of its supply chain partner, Greensill, and a $10.1 billion line of funds the two co-managed. Last year, the Swiss bank also took a hit of around $450 million after US-based York Capital Management confirmed it would be winding down its European hedge fund operations.