Few people on Wall Street had ever heard of the name Archegos Capital Management until it collapsed last month. However, that collapse is changing a part of the global banking sector.

Nomura Holdings and Credit Suisse, the two banks most severely affected by the Archegos scandal, began to limit the provision of funding services to hedge funds and home offices. In Europe, regulators are looking at the risks that banks face when lending such customers loans. In the US, the authorities also began a preliminary investigation of this issue.

Washington’s latest moves to Zurich and Tokyo are both a harbinger of some of the biggest changes coming since the global financial crisis unfolding in the global banking sector as a a major stockbroker.

These companies, often part of the securities sector of a large investment bank, were founded with the purpose of lending the hedge fund cash and securities, and conducting their own securities transactions. This operation is often very important for investment banks.

However, the downfall of Archegos, the family office run by former fund manager Bill Hwang, has shown the risks that banks take when doing business with such customers, even with their loans. secured by collateral.

The bank lost 2 - 4 billion USD

Credit Suisse is the most heavily affected bank so far when it has to write a decrease of $ 4.7 billion in the first quarter. As one of the leading securities brokers in Europe’s banking world, Credit Suisse is considering a significant reduction in the brokerage business in the coming months, Bloomberg quoted sources as saying.

The bank has also urged clients to change the margin requirements in swap contracts - a derivative that Mr. Hwang used to play securities - to accommodate stricter terms in other brokerage contracts, according to sources familiar with. Specifically, Credit Suisse is changing the form of escrow, forcing customers to register more collateral and may reduce the profitability of some transactions.

Nomura is also likely to lose around $ 2 billion from the Archegos demise. Bloomberg said the bank also implemented some restrictions, including tightening leverage services for customers who had been granted exceptions to the margin lending limit. These restraint measures are considered to be part of the bank’s as‌sessment of brokerage operations. As a result, Nomura’s brokerage business is likely to shrink.

"Nomura is investigating the cause of the potential loss, though it is too early to determine the impact on the results of the business," an anonymous director at Nomura said in March.

How does Bill Hwang borrow money from the bank?

Hwang’s home office has been in a position with at least 9 shares thanks to leverage from several banks. This amount of positions is large enough to make him one of the largest shareholders of these companies.

Meanwhile, the level of leverage for Archegos is also unusual for an investment fund. Archegos can bet big on stocks with derivatives and as a private company they can avoid disclosing trading details like most investors. In other words, in an almost invisible way, Mr. Hwang amassed a portfolio that, according to some sources, is worth up to $ 100 billion.

Even though the banks that financed Hwang know what Archegos is doing and the transaction they fund, they still don’t know that he takes the same positions in multiple companies and gives more leverage to the same number of shares, sources knowledgeable.

In the US, the regulator has suggested that new rules should be applied. Officials at the US Securities and Exchange Commission also signaled to banks that they would require investment funds to disclose their transactions to a higher priority, and seek to deal with risks as well. like leverage.

"Hopefully this will cause the bank’s brokers to reevaluate their relationships with highly leveraged hedge funds," wrote Sheila Bair, former president of Federal Deposite Insurance. Twitter.

In Europe, the highest banking regulator is believed to have asked some of the biggest banks in the bloc to provide more information about their exposure to hedge funds.

"It is important to consider carefully why these banks allow the Archegos fund to use such leverage. This is a warning sign that there are huge systemic risks that need to be well managed. European Central Bank executive board member Isabel Schnabel said in a recent interview.