Nomura to tighten financing for hedge fund clients in the wake of Archegos blowup, new report says

  • Nomura is tightening financing for some hedge fund clients, per Bloomberg sources.
  • Japan’s largest brokerage is facing an estimated $2 billion loss due to the Archegos collapse.
  • Nomura will limit margin financing exceptions for hedge fund clients in order to prevent another blowup.
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Nomura is reportedly tightening financing for some of its hedge fund clients in the wake of the $20 billion collapse of Archegos Capital.

Japan’s largest brokerage is facing an estimated $2 billion loss due to the family office blowup, according to unnamed Bloomberg sources.

The Archegos collapse started when the family office, run by Bill Hwang, used total return swaps to take on leverage and place concentrated bets on a handful of stocks like ViacomCBS and Discovery.

Then a decline in share prices sparked a massive margin call that Archegos was unable to meet, leading banks to liquidate the family office’s assets.

The result was combined losses of $10 billion for global banks, according to estimates from JPMorgan.

Now in order to prevent similar blow-ups in the future, banks are taking action to reduce risk associated with hedge fund clients. The Securities and Exchange Commission has also opened an investigation into the matter.

Specifically, Nomura is tightening leverage for some clients that were previously granted exceptions to margin financing limits, Bloomberg said, citing people with direct knowledge of the matter.

The Japanese firm is the second bank to take action after the Archegos collapse.

Credit Suisse said earlier in the week that it will change margin requirements on swap agreements to dynamic from static after the collapse. Dynamic margin requirements force clients to post more collateral as positions move down, rather than setting a fixed margin requirement at the onset of the leverage contract.

Before the Archegos implosion, Nomura had been hitting on all cylinders with net income reaching a 19-year high for the nine months ended in December.

Now though, the bank has been forced to cancel the planned issuance of $3.25 billion in senior notes and share prices are down roughly 20% from March 26 highs.

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Regulators need to look at leverage in the prime brokerage business at the center of the Archegos meltdown, Guggenheim’s Millstein says

Jim Millstein
  • Jim Millstein of Guggenheim Securities said regulators should look into the prime brokerage business.
  • The co-chairman noted that lenders face increased risk when hedge funds use excessive leverage.
  • Millstein doesn’t believe the Archegos collapse presents a “risk to the financial system,” however.
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Guggenheim’s co-chairman Jim Millstein believes regulators should keep an eye on leverage in the prime brokerage business at the center of the Archegos meltdown.

In an interview with Bloomberg on Tuesday, Millstein said that the Financial Stability Oversight Council, which was formed under the Dodd-Frank Act of 2010, should “take another look at the prime brokerage business and the kinds of leverage that’s being extended both through the derivatives markets and directly.”

The prime brokerage business is a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds that allows them to borrow securities and cash.

Millstein discussed how “regulation T,” a collection of provisions that govern margin requirements for retail investors, doesn’t apply to family offices and hedge funds.

“Clearly family offices, hedge funds, other institutional investors clients of the prime brokerage business have been able to obtain much more significant leverage than the average investor, and so, and obviously there are risks associated with it,” Millstein said.

The co-chairman added that “when you’re highly levered against individual names and not terribly diversified you do run a significant risk of an effective margin call.”

Millstein said that this type of leverage not only puts hedge funds at risk, but lenders as well. If lenders are unable to liquidate collateral positions or cover derivate exposures fast enough there can be significant losses.

What Millstein is describing is exactly what happened to Credit Suisse, among others, after the recent Archegos collapse.

Credit Suisse said it will have to absorb a $4.7 billion write down due to its Archegos exposure. For reference, the investment bank’s total net income for 2020 was roughly $2.9 billion.

The firm has faced significant fallout after its Archegos losses with numerous top execs stepping down including the head of investment banking Brian Chin and the chief risk and compliance officer Lara Warner, as well as Paul Galietto, the head of equities sales and trading.

Millstein also agreed with his colleague Scott Minerd who said that another Archegos-like implosion is “highly likely” moving forward.

When asked if the Archegos blow-up might lead to reverberations for the markets as a whole, Millstein pointed out that there is still “an enormous amount of monetary and fiscal stimulus” in the system and more could be on its way with President Biden’s Infrastructure bill.

The co-chairman said he doesn’t believe the Archegos collapse represents a “risk to financial stability” based on the relative size of the hedge fund and current market conditions.

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Billionaire investor Chris Sacca mocks ‘Robinhood bros’ for being reckless: ‘Stonks never go down!’

chris sacca
  • Venture capitalist Chris Sacca dismissed amateur traders’ huge gains in 2020 as the product of lucky timing in a recent tweet.
  • “To everyone who got into trading stocks this year, I have a little hard truth for you: You’re not actually that good at it,” the billionaire founder of Lowercase Capital and former “Shark Tank” star said.
  • Sacca mockingly praised day traders in a follow-up tweet after weathering backlash for his comments.
  • “To the angry Robinhood bros who got into trading stocks this year: I was wrong. You’re amazing,” he said. “Stonks never go down!”
  • Sacca has repeatedly underscored the risks of trading stocks and other assets such as Bitcoin, especially with borrowed money.
  • Visit Business Insider’s homepage for more stories.

Newbie traders who scored massive windfalls in 2020 simply got lucky, billionaire investor Chris Sacca said in a recent tweet.

“To everyone who got into trading stocks this year, I have a little hard truth for you: You’re not actually that good at it,” the former “Shark Tank” star and founder of venture-capital firm Lowercase Capital said. “You just caught a wild bull market. Take some money off the table.”

Read more: Wall Street’s biggest firms are warning that these 7 things could crash the stock market’s party in 2021

Sacca’s comments were met with swift backlash. Dave Portnoy, the Barstool Sports founder who became the face of a new generation of day traders earlier this year, told Fox Business that he doesn’t know who Sacca is, but the investor “sounds like a sore loser and an idiot.”

The Lowercase chief – an early investor in Twitter, Uber, and Instagram – responded to the criticism with a sarcastic tweet ridiculing Robinhood users, one of the most popular trading apps.

“To the angry Robinhood bros who got into trading stocks this year: I was wrong. You’re amazing. This has nothing to do with the market. It’s all you and your mad skillz. Don’t take profits off the table. Double down, on margin. Borrow everything you can. Stonks never go down!”

In internet slang, stonks is a deliberate misspelling of stocks.

Read more: BANK OF AMERICA: Buy these 16 medtech stocks with strong fundamentals that are set to soar post-pandemic

Sacca – who made his fortune in the early 2000s then lost a huge chunk of it when the dot-com bubble burst – has repeatedly cautioned amateurs about trading risks, particularly with borrowed money.

“What percent of retail ownership of crypto is supported by leverage? What about stocks? I am beyond worried about the debt lessons that a generation of app traders weren’t around to learn a cycle ago,” Sacca replied to a December 26 tweet by Bitcoin bull Mike Novogratz underscoring the risks of excessive leverage.

“Don’t borrow to trade stocks/BTC,” Sacca tweeted a few hours later.

Read more: The founder of the world’s first vegan ETF explains how her market-beating fund is naturally built to include the pandemic’s biggest winners – and why industry titans like Facebook and Uber fit the bill

Sacca has issued similar warnings in the past.

“I’m here to tell you that trading millions of dollars you don’t have is a thrilling way to ruin your health and financial future. Fun!” he tweeted in November 2019.

“Investing is a great way to make money. Trading is a great way to lose it. Do yourself a favor and hide your “Stocks” app forever,” Sacca tweeted in 2013.

Sacca and his wife and business partner, Crystal, shifted their focus from day-to-day investing to tackling issues such as climate change, voter suppression, and criminal justice reform in early 2017.

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