- Credit Suisse is reining in limits on hedge funds following the $20 billion Archegos Capital meltdown, according to a Bloomberg report.
- The financial giant will absorb a $4.7 billion writedown after Bill Hwang's family office was forced to liquidate its entire portfolio, to which the bank was heavily exposed.
- Credit Suisse is now shifting to a dynamic margin requirement for clients that utilize swap agreements, according to Bloomberg.
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Credit Suisse is implementing new limits on hedge fund clients that utilize swap agreements following the $20 billion meltdown of Archegos Capital.
Bill Hwang's family office, Archegos, utilized equity-swap agreements to take on massive leverage and make concentrated bets on a handful of stocks like ViacomCBS and Discovery.
But a sharp decline in ViacomCBS sparked a massive margin call that Archegos was unable to meet, leading to a massive liquidation that cost some banks billions of dollars in losses. Credit Suisse seems to have been most exposed to Archegos after not unwinding Hwang's positions fast enough amid the market tumult last month. The bank said it booked a $4.7 billion writedown related to the event.
Now, to prevent a similar blowup from happening again, Credit Suisse is tightening its financing terms given to hedge funds and family offices, according to a Bloomberg report.
The bank is changing its margin requirement on swap agreements to dynamic from static, which is similar to the terms given in its prime-brokerage contracts, Bloomberg said, citing people with direct knowledge of the matter. A dynamic margin requirement would force its clients to post more collateral as a position moves down, rather than setting a fixed margin requirement at the onset of the contract.
The shift to dynamic margin requirements will increase the costs for hedge funds and family offices looking to unitize swap agreements, making the trades less profitable. Credit Suisse is now asking some clients to immediately switch to the news margin methodology, according to the report.
Whether Credit Suisse's move is more indicative of a broader limitation on the leverage hedge funds and family offices can take on remains to be seen.
It would not be surprising if some banks follow suit, given that the Switzerland-based bank wasn't the only one that lost billions. Nomura has said it lost as much as $2 billion related to the Archegos liquidation, and JPMorgan has estimated that the collective losses of multiple banks could reach $10 billion.
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