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Archegos Capital Fire Sale Triggers Billions in Investment Bank Losses

Multiple media reports, as well as statements from at least two investment banks, put the Archegos Capital at the heart of a multi-billion sell-off on Wall Street.

Nomura  (NMR) - Get Nomura Holdings Inc ADR American Depositary Shares Report and Credit Suisse's  (CS) - Get Credit Suisse Group American Depositary Shares Report U.S.-listed shares plunged lower Monday after the investment banks said its exposure to an unnamed hedge fund could trigger a billions in loss as investors picked-through the debris of the Archegos Capital margin call.

Credit Suisse Group  (CS) - Get Credit Suisse Group American Depositary Shares Report, a Zurich-based investment bank that also has shares listed on the New York Stock Exchange, cautioned Monday that a "significant US-based hedge fund defaulted on margin calls made last week" on positions in unnamed stocks, adding that "a number of other banks are in the process of exiting these positions."

Media reports have named Archegos Capital as the hedge fund in question, with details emerging of a $10 billion to $20 billion position in so-called total return swaps (TRS) that allow a 'buyer' to receive running payments on a basket of reference shares without actually owning them. Archegos was also reported to have used 'contracts for difference" or CFDs, which are similar to total returns swaps but only pay out at the end of a defined period. 

Leverage was used to increase that exposure, which was based on U.S. and China-based media stocks including ViacomCBS VIAC, Discovery  (DISCA) - Get Warner Bros Discovery Inc Com Ser A Report, Baidu  (BIDU) - Get Baidu Inc. 百度 Report and Tencent Music  (TME) - Get Tencent Music Entertainment Group American Depositary Shares each representing two Class A 腾讯音乐娱乐集团 Report, while the shares themselves were held by the banks, which acted as prime brokers New York-based Archegos. 

"While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results, notwithstanding the positive trends announced in our trading statement earlier this month," Credit Suisse said in a statement.   

"Nomura is currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results," the bank said Monday, adding its current estimate is "approximately $2 billion based on market prices as of March 26" but is "subject to change depending on unwinding of the transactions and fluctuations in market prices."  

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Nomura shares were marked 13.5% lower in pre-market trading in New York to indicate an opening bell price of $5.72 each. Credit Suisse shares slumped 13.5% to $11.13 each.

With investment banks tapping near-zero interest rate liquidity from central banks around the world, many of their prime brokerage operations have been able to provide significant leverage to hedge fund clients, allowing them to boost exposure to stocks and other assets while ramping-up potential returns in the process.

This may have allowed Archegos Capital and its founder, Bill Hawang, to build massive exposure to certain stocks without drawing the notice of market regulators, as the structure of a TRS doesn't require disclosure of ownership in the underlying stocks.

ViacomCBS shares, which were at the heart of the Archegos trade, began trading lower last week after the media group announced a $3 billion capital raising initiative. Tencent and Baidu, meanwhile, fell later in the week amid reports that the Securities & Exchange Commission was working through rule changes that could see some China-based stocks removed from U.S. exchanges.

The losses triggered a margin call from various prime brokerage operations, including Nomura and Credit Suisse, that may have resulted in a massive 'block sale' of shares on Friday that was ultimately traced back to Archegos.

ViacomCBS slumped 6.1% lower in early trading Monday to change hands at $45.30 each while Discovery shares were last seen 1.7% lower at $41.15 each.