Hong Kong plans risk management rules to prevent Archegos-like scandals
Hong Kong’s market regulator is reportedly developing a track exposure mechanism to dangerously concentrated stocks to prevent financial debacles like the Archegos collapse.
The project will use centralised trade databases to identify excessive risk-taking by banks and investment funds trading derivatives in the city, reported Financial Times.
The Hong Kong Monetary Authority and the Securities and Futures Commission introduced a requirement for banks to report over-the-counter derivatives transactions to the transaction repository in 2013 as part of the post-financial crisis reforms.
The regulators now request for a lengthy data cleansing process and introducing a new system to flag centralised risks and remind financial institutions to mitigate the risks.
The project has caught the attention of regulators in the US, according to Financial Times.
The moves come after the debacle of US hedgie Archegos Capital in April, which is a family office run by Korean-American investor Bill Hwang.
Hwang made a high leverage bet of up to $50bn on the stocks of some US and Chinese companies through derivatives called total return swaps.
The collapse of Archegos cost the lenders to lose about $10bn in total, including Credit Suisse, UBS, and Morgan Stanley.
Credit Suisse later probed and found a lack of accountability and weak internal controls to monitor risk drove the lender’s loss on Archegos.
Hwang was banned from trading in Hong Kong for four years in 2014, after his previous hedge fund Tiger Asia Management admitted to using inside information to trade Chinese bank stocks in Hong Kong and the US.