Archegos’s margin call:

There’s this man named Bill Hwang. He is a Tiger cub, having worked for the hedge fund named Tiger, run by Julian Robertson. Hwang runs New York based Archegos Capital.
Archegos was a family office of Hwang, and runs capital of around $10 billion. But the real exposure was much more. What Hwang did, it seems, was that he didn’t buy stocks directly – he bought a certain “derivative” instrument called a Contract for Difference (CFD). there are no securities filings by Archegos on SEC’s repository for such filings, EDGAR (Electronic Data Gathering, Analysis, and Retrieval), despite the huge transactions undertaken by Archegos.
In a CFD, you deal with a bank and say, “listen, if the stock goes up, you pay me the difference, and if it goes down, I’ll pay the difference”. The bank then takes the underlying position in your name, and hedges out the risk. The stock is held by the bank, not in your name.
Effectively, Hwang could build large positions in certain stocks without revealing that he owned those position. If he had bought stock directly, anything above 5% had to be reported. But it wasn’t because of the CFD trick. Hwang had $10 billion. His positions were $50 billion.
The 5x multiple was “leverage”, offered by large banks such as Nomura, Credit Suisse, Morgan Stanley and Goldman. He’d put his $1 and they’d lend him $4 against the security of the very stocks he would buy through a CFD. All it took was for Hwang to ensure that he paid up if the stocks fell down. The problem, of course, arises when the bet goes spectacularly wrong and the share price falls instead of rising. And the stocks kept going up rapidly in 2021, with once of them – ViacomCBS – moving from $36 to $100 between the start of 2021 to March 22.to buy more of these stocks, such as Viacom and Discovery. He also owned shares of Baidu, Tencent and a bunch of Chinese tech companies.
Viacom between March 23 and 24, the stock fell from $100 to $67. A 33% fall in three days. Now think of this:
You have $100 multiplied to $500 by leverage offered by the banks.
You own $500 worth of Viacom, but not in your own name – as a CFD. So the shares are owned by the banks and kept as collateral.
The stock falls 33%.
Effectively you’ve lost $150.
You owned only $100 in the first place
The bank says give me the extra 50 and then some more to cover for volatility.
You don’t have it.
The bank panics and starts selling the stock like crazy. That’s exactly what happened to Archegos.
Archegos was forced to unload $20 billion of shares following its inability to meet margin obligations to brokers on 26th March 2021. The led to prices of stocks like ViacomCBS and In just four days, ViacomCBS lost more than half its market value, Discovery crash and US-listed shares of China-based Baidu and Tencent Music plunging 33-48 percent.
Not surprisingly, one of the big lessons for bankers from the Archegos meltdown is that prime brokerage is a lot more risky than they assumed. In a low-interest-rate environment bankers are easily attracted by the chance of earning lucrative fees. It’s very clear that bankers were very eager to do business with Archegos, and they weren’t focusing on the potential risks. Banks were in thinking that they are the only one to give huge funds to them but Archegos had taken leverage from others banks also. Archegos isn’t the biggest unwinding the market has seen, so we’ll just have to wait to see who else gets hit.