Hong Kong regulator steps up scrutiny of derivatives after Archegos saga

888 7th Ave, a building believed to house Archegos Capital is pictured in the Manhattan borough of New York, New York, U.S., March 29, 2021. REUTERS/Carlo Allegri/File Photo

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HONG KONG, June 28 (Reuters) – Hong Kong’s financial watchdog is stepping up oversight of derivatives markets after the collapse of Archegos Capital Management, a senior official at the Securities and Futures Commission (SFC) said on Tuesday. the city.

Archegos, a US family office of investor Bill Hwang that had $36 billion in assets, blew up last year when it was caught short on highly leveraged trades and left the global banks with $10 billion in losses. Read more

The majority of Hwang’s exposure was built up through a type of over-the-counter equity derivative, underwritten by his bank counterparties, which helped him circumvent rules requiring position reporting to US regulators.

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“The collapse of Archegos has prompted us to review the monitoring tools we use to detect concentrated positions in the over-the-counter (OTC) market,” said Julia Leung, Deputy Managing Director of SFC.

Prime brokers operating in the OTC derivatives markets faced “tough challenges” and that was “evident in the Archegos saga last year”, said Leung, who is also SFC’s executive director for intermediaries.

The regulator is also conducting a thematic review of OTC derivatives business in Hong Kong to assess prevailing market practices, she said, and the scope of the review will examine management practices, business risk assessment and escalation.

Fragmented global practice and regulation in the opaque OTC derivatives market compounds regulatory challenges, Leung said, adding that oversight gaps will remain unless “risk governance structures” are integrated.

The SFC will also soon launch a review of block trades or large sales of shares in Hong Kong with the aim of potentially introducing standards on how to conduct such business activities.

“We look at how market participants communicate information to potential investors before an announcement of a (block) transaction, commonly referred to as market sounding,” she added.

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Editing by Jacqueline Wong

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