Down goes Archegos, up goes the risk for the FX industry
Just when you thought you’d seen it all, risk-averse Tier 1 banks succumb to their hunger for fees. Will this cause a curtailment of counterparty credit in FX? It really is time to control your own destiny and go multi-asset
Whether you can call it rashness or hypocrisy, the same Tier 1 banks that uniformly railed against the OTC derivatives sector in the middle of last decade following a Citigroup memo that insinuated that OTC FX counterparties could possibly be a default risk of over 57% default on their credit agreements, leading to the stipulation by many Tier 1 FX interbank dealers that brokers must put up over $50 million in clear balance to be able to retain their trading account with a bank have now ended up falling on their sword by being too greedy.
No, you cannot have a Tier 1 counterparty FX dealing agreement unless you show the bank a huge balance sheet, despite currency trading is a core activity for most banks, yet the very same banks will happily collapse themselves by bending over backwards for fees from an insolvent hedge fund.
Some commentators have inferred that last weeks news of the collapse of Archegos Capital Management brought back memories of the 2008 financial crisis. Suddenly we were back to talk of margin calls, complex over-the-counter derivatives and opaque corporate structures designed to prevent trades from being disclosed.
However, it is far more grave than that. It did not bring back memories of the 2008 crisis, because back then, OTC firms were able to transact freely with bank counterparties and not be looked at with disdain despite the huge $5 trillion per day notional volume that Canary Wharf’s banks handle and benefit from.
Bill Hwang, the architect of Archegos, was the protege of hedge-fund legend Julian Robertson, who from 1980 to 1998 delivered an annualized return of 31.7 per cent compared to the S&P 500’s 12.7 per cent. At Archegos, according to the Financial Times, Hwang was able to grow about US$200 million in assets which belonged to him and his family members to almost US$10 billion over nine years, using borrowed money from banks to leverage his returns.
Everyone was on board. Even Goldman Sachs, which originally declined Mr Hwang, had caved in and begun to provide capital.
Now the egg is all over their faces, and the pockets of the banks involved are empty to a huge tune.
Excessive leverage, something the OTC FX regulators do not stop bellyaching about, was out in force. It is estimated that Archegos had levered their already heavily concentrated positions anywhere from 5 to 20 times. Apparently, trouble began when one of their larger holdings (ViacomCBS) announced an equity issue, which Hwang choose not to participate in, triggering a selloff in the stock.
Given that Credit Suisse and Nomura, both tours de force in OTC FX top-level trading, have both been given a bloody nose and let go of some of their executives due to the ensuing losses sustained by this disaster, the future for OTC FX may well be one of extreme caution from banks, and potential rejection of order flow.
Thus, it is time to free your brokerage from that burden.
Today, FinanceFeeds spoke to Roman Nalivayko, CEO of TraderEvolution Global in order to look at why going down the multi-asset route is an antidote to these unforeseen rash moves by banks toward ill-judged deals.
“The only way to secure your brokerage and ensure that it is future proof is to have the right tools to offer full connectivity to global markets that include derivatives exchanges with central counterparties across all areas of the financial markets business worldwide.”
“By offering full access to regulated marketplaces in major financial centres, brokers are not at the absolute mercy of ever-decreasing counterparty credit-related issues which keep affecting the FX desks at tier 1 banks that then curtail credit to OTC derivatives firms, forcing them to then internalize trades on their own dealing desk, which is not what sophisticated traders want, and limits the accessibility and potential earnings of good quality traders, and also limits the commission business which could be long term beneficial to brokerages who can onboard a good quality client base,” said Mr Nalivayko.
“Global markets in which trades are executed via listed exchanges are never subject to a few bank executives making rash and dangerous decisions which result in massive losses which then end up affecting execution agreements with brokers” he continued.
“It is time to elevate brokerages away from such a narrow band of liquidity which can be removed at any time, and offer clients a full range of instruments via sustainable market places that distribute risk and products” he concluded.
Credit Suisse has cancelled the bonuses of its directors, slashed its dividend and announced the departure of two senior executives as the bank revealed £3.4bn in losses from the collapse of the Archegos investment fund. Not something that will likely be looked at favourably by the board, and certainly something brokerages which are liquidity takers should consider as a very serious matter indeed.
The days of being subservient to banks are long gone, as the multi-asset age of self-determination is well and truly here.