The prime brokerage world from a traditional asset class perspective is well established – with a wide range of bells and whistles, its USP is its holistic approach, covering everything from custody to capital introduction, and assisting its client base to source liquidity they couldn’t find themselves. But in the digital assets space, what role can prime brokers really play – and is it realistic to try and shoehorn the current model into this new decentralised world? Panellists at Blockworks’ Digital Assets Summit (DAS) this week discussed the concept of prime brokerage, and how it can be updated to apply to the new paradigm.

“Not everyone with a lending service can call themselves a prime broker,” warned George Zarya, founder, CEO and head of sales at crypto prime broker BEQUANT. But the problem is that, unlike in traditional finance, prime brokers in the crypto space have not yet evolved to offer everything that their clients need.  

“In crypto, it seems that ‘prime’ and ‘brokerage’ are two different things. Brokerage is just people buying crypto off each other,” agreed Maja Vujinovic, managing director of blockchain advisory and investment firm OGroup. “But Prime is a whole bundle of services. It depends on the seat you’re sitting in.”  

So what is a crypto prime broker, and is anyone filling that role yet?  

“There are some firms out there that are doing some parts – the custody role, for example – but right now I don’t think we have yet reached the finished article,” said Edd Carlton, institutional digital asset trader with Flow Traders. “The use of the word ‘Prime’ is usually because it’s a one-stop shop. If you don’t do all the pieces, you aren’t hitting the target.”   

Fragmentation 

“The two key variables we need to place importance on, when discussing the difference between crypto and tradfi, is fragmentation and pre-funding,” stressed Omid Zadeh, head of business development EMEA at Matrixport.  

“The crypto market is so fragmented, there is liquidity across hundreds of different venues, and you need to pre-fund them, which is very different to the traditional space. Pre-funding and fragmentation of liquidity is where the real value proposition of a crypto prime broker comes in right now – we can offer access to each exchange, and top tier fees to each exchange, which is very important in this low volume environment. We can also give the key advantage of offering one margin to play with – cross-margining services can be key for firms.”  

The panel agreed, however, that while there are currently numerous players in the market, we are likely to see significant consolidation going forwards – the question being, who buys who.  

Acquisition 

“It’s not an easy feat, to build a crypto specialist firm, such as crypto custody – there’s a lot of coding and technical architecture involved. Those pieces will inevitably get acquired. You can’t have a one-stop prime shop without offering a complete parcel and there are only two routes to that – you build or you buy. The Goldman Sachs approach has been to buy it, and we’re already starting to see more big tradfi names aligning themselves with specialist firms, either through acquisitions, licensing agreements etc. One of the roles of a prime brokerage is to be a rock to stand steadfast in turbulent times, and in times like these, balance sheet is important.” 

Zarya, however, disagreed. “Balance sheet is important, but it’s not everything. It’s all optics. What happened to Credit Suisse? To Lehman Brothers?” 

Disruption 

The concern appears to be avoiding a simple copy and paste of what is being done in the traditional world of finance. “Early adopters went into crypto because they were passionate about decentralisation,” stressed Vujinovic. “Now, we’re just trying to cram that back into a centralised model again. But I think technology is going to evolve to a point where it disrupts that. Yes the tools, the picks and shovels at the coal face, are being acquired by bigger institutions. But banks will end up just being software-as-a-service platforms. They’ll offload crypto custody, just like they do KYC. We’re in a place now where we have to change it up, think outside the box and create a different system that works better – not just do the same old thing, just because Goldman Sachs are doing it.” 

Carlton, however, pointed out that acquisitions could also work the other way – with big crypto firms buying smaller banks in order to bring in regulated capabilities.  

Centralisation 

“We need to get capital into the crypto markets, and the way to do that is by creating a market infrastructure model that replicates the prime model, with centralisation of clearing and risk, but with the nuance of a hybrid model using DLT and smart contract applications. That’s the way we’ll see the tide move,” he said. “Would a full belt and braces prime brokerage in the crypto market help right now? Yes. Would it increase investor confidence and make the market more efficient? Yes. I think that prime brokerage services have a key role to play in moving this forward.” 

The biggest issue in the space, however, remains the problem of pre-funding. Right now, most of the liquidity in the crypto space is on centralised exchanges, and these require pre-funding, which all the panellists agreed was not efficient.  

In addition: “The netting side of things doesn’t exist yet in crypto, and that needs to change,” pointed out Zadeh. “For example, let’s say you have two exchanges: Binance and FTX. If you’re Hedge Fund A trading $100 million on Binance long, and $100 million on FTX short, if you had a prime broker in between, he would require minimal margin from you. Whereas currently in the crypto space, it’s different, because of pre-funding. You would have to have $200 million at both exchanges. Obviously, you’d have a prime broker in between leveraging you, but that funding would be on those exchanges.

“The only way I can see that potentially changing in the future is regulation as the first step; then after regulation the real money clients will come in, the banks will then come in, and then a big player – a Citibank or a JP Morgan, with a ginormous balance sheet that dwarfs the exchanges, that could PB, and net across all of the exchanges, and then all of the institutional counterparties (the big real money clients that have trillions under management) can really start to trade crypto full pelt.” 

But will institutional traders ever come in at full pelt? 

“We have certainly seen a shift with institutional traders coming into the space, but we still run on retail rails,” said Zarya.  

Evolution 

The move, for institutional involvement, is likely to be accompanied by a shift from on-exchange to OTC trading – similar to the trajectory in the FX markets a few years back. “Electronification, going from hi-touch voice-driven trading to an API, FIX-driven market – we are seeing the same trends apply,” agreed Carlton.  

“Retail flow lends itself to exchanges, but institutional flow sits a lot more happily on the OTC markets. When the barriers are removed to allow true institutions to enter the market, I’m not saying the exchanges will become defunct, but they will probably continue to service retail clients while institutional flow will direct more to the OTC space.” 

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New York-based Finansiv has become the latest crypto prime brokerage to enter the institutional space, launching its infrastructure and execution services for clients this week.

The provider claims to be the first digital asset prime brokerage offering services to both retail as well as institutional investors, with the retail platform expected to go live by the end of the year.   

Scaling up 

The institutional element, which is already offering live OTC trades, provides an end-to-end platform for clients with a single touch point. It offers a full brokerage service including execution and capital management, one-step settlement, integrated custody, and post-trade reporting.  

Its trading platform allows investors to connect directly to exchanges and crypto markets, while its OTC desk is designed to help investors place large block trades without engaging with a specific user interface, using smart-order-routing technology to find the best execution for each order. .  

“Cryptocurrency trading lacks the transparency and liquidity that is nowadays the standard in traditional finance,” said Finansiv founder and CEO Aleksandar Ivanov.  

“Investors are seeking a better way to execute large trades. We’ve built a client-first company that leverages best-in-class technology tools and multiple liquidity sources to help clients plan trades and receive best execution.” 

Adding to the market 

The launch underlines a surge of activity in the institutional space for crypto trading. Earlier this month, London-based crypto lender Nexo launched its own proprietary prime brokerage platform for institutional, corporate and high-net-worth clients. Known as Nexo Prime, the service allows investors to trade, borrow, lend, and store their digital assets in a single product, along with advanced custody provision. The platform was incubated over the last 18 months with a core client base, and has now been released to the wider market.  

“Institutional and corporate demand for digital assets has never been greater, and the market for prime services could 10x over the next year,” said Kalin Metodiev, Nexo co-founder and managing partner.  

Coinbase ambitions 

Coinbase, one of the world’s largest publicly-listed players in the crypto space, is also rumoured to be planning big things in this arena, and recently hired a consultant (Wytrwal Industries) to explore expanding its infrastructure for institutional clients. It already provides a service through Coinbase Prime, an integrated solution providing secure custody, a trading platform and prime services that was first launched back in September 2021 with over 9,000 clients already enlisted (including Tesla, Anheuser-Busch and Franklin Templeton, among others).   

In Q4 last year, institutional trading volumes on the platform reached $371bn, an increase of 59% compared to Q3, and accounting for 68% of total trading volume. By comparison, back in Q4 2020 institutional volumes on the platform were just $57bn, meaning that volumes have jumped by over 550% in just two years. Over 2021 the firm grew its institutional customer base by over 50%, including doubling the number of custody customers, according to a shareholder letter.

Bearish banks 

But not everyone is on board, with some players still expressing reservations. Earlier this month Michael Moro, CEO of prime crypto brokerage Genesis Global Trading, warned that while institutional and individual investment might be on the rise, banks themselves were still “very far away” from trading crypto.  

Speaking at the Bitcoin 2022 conference in Miami he noted that bearish sentiment from regulators was one of the key factors inhibiting involvement from financial institutions. 

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Olivetree Financial is currently at the centre of merger talks, the TRADE can exclusively reveal.

One of the interested parties is said to be New York-based financial services firm StoneX. It is unclear whether negotiations will result in a deal, and whether it will be a full buyout, merger or a potential joint venture. 
 
Olivetree recently conducted a strategic review of its operations in the US, resulting in a number of job losses, according to a source, who spoke on condition of anonymity as the matter is private.  
 
The broker is choosing to focus on European markets as this is where it sees more opportunity in the near term. It still employs a number of people in New York, the person added. 
 
An Olivetree spokesperson declined to comment. StoneX also declined to discuss the matter when contacted by The TRADE, beyond noting that the firm does not comment on “employee movement”.  

The number of independent brokerages in Europe has been falling in recent years following a wave of consolidation. TP ICAP, the world’s largest inter-dealer broker, acquired Louis Capital, an equities and fixed income specialist, in July 2020. In November of the same year, Makor Group announced that it had entered into a strategic alliance with rival Churchill Capital. 
 
A boom in deal-making has also seen firms adding headcount to teams that specialise in mergers and acquisitions. M&A in Europe reached a 14-year high in 2021 and deals involving European targets totalled $1.4 trillion, an increase of 46% over the previous year, according to data from Refinitiv. 
 
The surge in M&A activity worldwide has been fuelled in part by private equity funds and the growth of special purpose acquisition vehicles (SPACs), Refinitiv said. 
 
Olivetree recently added to its event driven team in London with two senior hires from BTIG, as reported by The TRADE. Greg Levett and David Abraham joined the broker in September 2021, while Tim Caulton also re-joined the firm in July. 
 
The firm also made a number of hires in the US around the same time, with the appointment of Richard Orlando and Robert Weibel, also event driven specialists. 
 
Event driven strategies seek to profit from corporate events, including merger and acquisitions, restructurings, and spin offs. 
 
StoneX, formerly known as INTL FCStone, describes itself as an institutional-grade financial services network. The company’s London-based subsidiary, StoneX Financial, joined the London Stock Exchange (LSE) and its pan-European multilateral trading facility (MTF), Turquoise, as a member in May of last year, in a move designed to expand its offering in cross-border equities and boost its cross-asset capabilities.  

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Image: Pierre Borthiry

Crypto prime brokerage, Genesis, has released record performance figures for the fourth quarter of 2021, highlighting the seemingly unstoppable march of cryptocurrency into the mainstream.

The platform, which is owned by giant blockchain investor Digital Currency Group, recorded its strongest quarter to date, with approximately $102 billion in transactional volume, cementing a year of significant growth across all of its business lines. Loan originations reached $50 billion, up 40% over Q3 2021. For the full year, loan originations totalled $131 billion, nearly seven times higher than 2020.

Notably, trading volumes also surged. In 2021, Genesis recorded spot trading volumes nearly six times higher than the previous year, at $116.5 billion, while derivatives notional volume grew nine times to $53.8 billion.

In its market trends report released this month, the broker identified a number of key trends in the institutional crypto market: including the continued diversification of digital asset investments, the deepening sophistication of institutional investors entering the crypto market, new types of institutions participating in the market, increasing allocations from managers of diversified portfolios and the growing need for multi-service institutional prime brokerages.

“Last year was a pivotal year for the crypto industry, and one that demonstrated the merits of smart tactical trading around a core position,” said Michael Moro, CEO at Genesis. “As this asset class continues to mature, driven by increasing institutional participation and growing regulatory clarity, we believe that taking a comprehensive approach to portfolio management will only become more important.”

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The client in question was Archegos Capital Management, a $10 billion family office founded by renowned New York investor Bill Hwang, which was ultimately  the biggest loser. The investment firm faced off with its prime brokers in late March as they demanded collateral to cover the fund’s exposure on swaps it had purchased on Viacom CBS and other technology stocks. Archegos failed to meet the margin calls, prompting a massive $20 billion fire stock sale as the banks, or at least some of them, rushed to sell off the fund’s positions to make cash so that Archegos could pay what was owed.

The alarm bells began ringing publicly on Monday 29 March when investment banks Credit Suisse and Nomura both declared that the event had significantly impacted their prime brokerage businesses.

By the time the dust settled, Nomura tallied up a weighty 307 billion yen, or $2.87 billion, loss from the event related to the winding down of positions and changes in market prices. Speaking to investors on Nomura’s first earnings call in 2021 shortly after, chief financial officer, Takumi Kitamura, said the Japanese bank had taken a “disciplined approach to exit our positions, taking into account both market impact and minimising losses”.

In Switzerland, Credit Suisse counted an eye watering $5.5 billion total loss following the Archegos default, the largest loss suffered within the prime brokers by far. The fallout forced Credit Suisse to raise $1.9 billion in capital from investors to counter its balance sheet after the Swiss bank was also left reeling from the insolvency of its supply chain funds partner Greensill Capital in November.

“The significant loss in our prime services business relating to the failure of a US-based hedge fund is unacceptable,” Thomas Gottstein, CEO of Credit Suisse, told investors on the bank’s first quarter 2021 earnings call. “In combination with the recent issues around the supply chain finance funds, I recognise that these cases have caused significant concern amongst all of our stakeholders.”

In response to the collapse of Archegos, Credit Suisse made sweeping changes to its leadership which included the immediate departure of Brian Chin, CEO of the investment bank business, and Lara Warner, chief risk and compliance officer. Bonuses were also waived for the executive board for 2020.

Credit Suisse and Nomura were not the only banks to have had prime brokerage relationships with Archegos. Wall Street heavyweights Goldman Sachs and Morgan Stanley, alongside Europe’s UBS and Deutsche Bank, also had close ties with the family office but all four were reportedly much quicker out of the gate in exiting the fund’s positions that fateful week.

As Credit Suisse and Nomura admitted mistakes in their handling of the Archegos saga, Goldman Sachs boasted record average balances in its prime business in the first quarter 2021 as it avoided entanglement amid the fallout. According to reports, Goldman Sachs was the first to offload a huge chunk of its portfolio on 26 March after reaching a deal with Archegos to sell a block of between $3 billion and $4 billion in stocks. The reports added that over the course of the day, Goldman Sachs sold more than $10 billion of shares in stocks linked to Archegos.

“We have robust risk management that governs the amount of financing we provide for these types of portfolios,” said David Solomon, CEO of Goldman Sachs, on the bank’s first quarter 2021 earnings call. “We identified the risk early and took prompt action consistent with the terms of our contract with the client. I am pleased with how the firm handled it.”

Goldman’s US investment banking rival Morgan Stanley was equally as quick off the mark, reportedly offloading $8 billion worth of shares on 26 March. The institution did not escape entirely unscathed, however, after it confirmed the collapse of Archegos led to a $911 million loss, including $644 million from the amount the family office owed Morgan Stanley but failed to pay, and $267 million in trading losses. 

Similar to Morgan Stanley, UBS incurred a relatively small loss in comparison to its Swiss counterpart Credit Suisse of $861 million, while MUFG Securities logged trading losses of $270 million after it closed all positions with Archegos.

Deutsche Bank was arguably the biggest winner of the collapse of Archegos. As the German institution posted its best quarter since 2014, it surfaced unharmed from the market event with no major losses. Reports suggested that Deutsche Bank had brokered a $4 billion private deal with buyers including hedge fund Marshall Wace on the same day that Goldman Sachs and Morgan Stanley had sold their positions. After years of major litigation troubles and dwindling profits, Germany’s largest investment bank had emerged somewhat triumphant compared to rivals.

As agreed in 2019, Deutsche Bank is in the process of transferring its prime brokerage and electronic equities business to BNP Paribas under a major deal aimed at restructuring the business. The transfer was still underway when Archegos collapsed, meaning the risk remained with Deutsche Bank. James von Moltke, chief financial officer at Deutsche Bank, said on the bank’s first quarter earnings call that the situation had strengthened the partnership with BNP Paribas as they worked through it collaboratively.

Another winner from the Archegos collapse was Wells Fargo, which confirmed it also had a prime brokerage relationship with the family office but had managed to unwind its exposure without suffering any losses.

While banks linked to the downfall of Archegos have tallied up total combined losses of roughly $10 billion, questions have been raised about prime brokers offering cheap leverage to hedge fund clients. To make big trades, hedge funds typically borrow money from prime brokers, allowing them to leverage the cash they hold and increase their positions – potentially earning far greater returns if their bets come good but also, on occasion, losing more money than they hold in client funds. Nomura, for example, reportedly granted Archegos leverage four times more than a typical long/short equity fund. The bank has since reportedly planned to withdraw from providing cash prime brokerage services in the US and Europe. 

Morgan Stanley and other prime brokers involved have started to review their relationships with clients, specifically family offices that have dealings with multiple prime brokerages. The CEO of Morgan Stanley stated that transparency and lack of disclosure related to certain clients is different from hedge fund institutions and scrutiny from regulators on the issue would be “good for the whole industry”.

The multi-billion-dollar fiasco may prove to be a huge wake-up call for the entire industry as the US securities watchdog has since opened a preliminary investigation into Bill Hwang – a convicted insider trader who is banned from trading in Hong Kong – and his leveraged trades that rattled Wall Street.

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Goldman Sachs reported revenues of £815 million from equities financing in the second quarter, as a result of record average hedge fund balances in the prime brokerage business. 

Elsewhere, JP Morgan posted equities trading revenues of $2.7 billion, up 13% year-on-year, also off the back of record prime brokerage balances.

The two US banks have been relatively unscathed by the blow-up of hedge fund Archegos Capital in March, which resulted in losses of over $10 billion for Wall Street, and are now planning to expand as some banks look to scale back their operations. 

“You’ve obviously seen open expressions by other firms who are looking to reduce down their prime business. We are going the other way. We want to grow that business,” said Stephen Scherr, chief financial officer, Goldman Sachs on its earnings call this week. 

“I suspect clients in motion around prime are coming to Goldman Sachs as they are to others and we are looking to sort of grow that business more broadly.”

Nomura is reportedly planning to withdraw from providing cash prime brokerage services in the US and Europe following the $2.9 billion hit from Archegos – according to a story from Bloomberg – and Credit Suisse is significantly resizing the prime services unit with an aim to scale back the types of hedge fund clients it services. 

The fallout of Archegos has also resulted in many banks reviewing their financing and margin procedures in a bit to manage and lower risk exposures to volatile stock market events. 

According to one report, JP Morgan is said to have asked its hedge fund clients to post more cash collateral on an intraday basis on their single-name equity swap positions if they lose value. 

Meanwhile, the rise in balances comes as global hedge fund assets jumped to $4.07 in trillion in June, a new record, according to BarclayHedge in response to easing of lockdown restrictions, optimistic economic forecasts, and rising equity and commodity prices.

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 The Swiss bank stated in its first quarter 2021 earnings that it is undertaking an extensive review of the business, where it will focus on its underlying risk positions and the types of hedge fund clients it services.  

 It said the strategic review will aim to de-risk and resize its prime brokerage and prime financing unit, with a primary focus on serving its most important franchise clients. 

 The bank added the fallout of the Archegos Capital collapse and the resizing of the prime services business will likely have an impact on its second quarter earnings, as it looks to reduce its investment banking leverage exposure by at least $35 billion, accounting for a third of its total exposure.  

 “Our results for the first quarter of 2021 have been significantly impacted by a CHF 4.4 bn charge related to a US-based hedge fund,” said Thomas Gottstein, CEO of Credit Suisse. “The loss we report this quarter, because of this matter, is unacceptable. Together with the board of directors, we have taken significant steps to address this situation as well as the supply chain finance funds matter.”

“Among other decisive actions, we have made changes in our senior business and control functions; we have enhanced our risk review across the bank; we have launched independent investigations into these matters by external advisors, supervised by a special committee of the Board; and we have taken several capital-related actions.” 

Credit Suisse has exited about 97% of its exposure to Archegos and expects an additional $654 million hit in the second quarter, taking its total loss from the collapse to about $5.5 billion.  

Throughout April, Credit Suisse has let go many of its most senior risk and prime brokerage executives as a result of the Archegos saga.  It was recently announced that its co-heads of prime brokerage, John Dabbs and Ryan Nelson, will step down immediately while assisting Credit Suisse through mid-May for an orderly transition.  

Roger Anerella has been appointed as interim head of prime services, while Doug Crofton was made head of Americas cash with responsibility for execution and advisory sales and Stuart McGuire put in a similar role for Europe, Middle East and Africa. 

Earlier this month, the bank also said its chief risk officer, Lara Warner, would leave and Paul Galietto, head of equities sales and trading, would also step down.  

According to a report from Bloomberg Ryan Atkinson, head of credit risk for the investment bank; Ilana Ash, head of counterparty credit risk management for that unit and Manish Mehta, head of counterparty hedge fund risk, are also among those that are understood to have left. 

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Morgan Stanley confirmed that in the first quarter it incurred a $911 million loss from the event last month, including a net loss of $644 million from the amount Archegos Capital owed the institution but could not pay and a further $267 million in trading losses.

The investment bank liquidated large single stock positions through a series of block sales which were concluded on Sunday 28 March and then decided to de-risk the hedge fund’s remaining smaller long and short positions as quickly as possible.

“I regard that decision as necessary and money well spent,” James Gorman, CEO of Morgan Stanley, told analysts on the bank’s first quarter 2021 earnings call. “The results are all reflected in the first quarter. I’m very pleased with how the institution came together and responded to this very complex situation.”

Gorman added that the collapse of Archegos Capital, which took Wall Street by storm in March as several major investment banks reported multi-billion-dollar losses, would not impact its prime brokerage business. It may, however, scrutinise family-office relationships, which account for roughly less than 10% of Morgan Stanley’s prime brokerage business, more intensely in future.

“[The prime brokerage business] is a core part and backbone of the equities business, and it doesn’t change that at all. I think we’ll certainly be looking hard at family office-type relationships, where they’re very concentrated and you have multiple prime brokers,” Gorman said.

“Frankly, the transparency and lack of disclosure relating to those institutions is just different from the hedge fund institutions. That’s something I’m sure the [US Securities and Exchange Commission] is going to be looking at, and that’s probably good for the whole industry.”

Morgan Stanley is the latest major institution to report losses from the collapse of Archegos Capital in the first quarter, although its losses are far smaller than other prime brokers that were entangled with the hedge fund.

Credit Suisse confirmed a $4.7 billion hit from the event, while Nomura signalled it expects a $2 billion loss depending on unwinding of transactions and fluctuations in markets prices. Both banks were reportedly slower than Goldman Sachs, UBS and Morgan Stanley to offload Archegos Capital’s positions.

Goldman Sachs confirmed in its first quarter earnings that average hedge fund balances hit record highs during the period as it avoided major losses. The bank was among the first to sell a large chunk of the family-office’s portfolio, which triggered a significant $20 billion stock fire sale. Similar to Gorman, CEO of Goldman Sachs, David Solomon, also said he expects regulatory scrutiny from the fallout of the collapse.

Net revenues for the equities business at Morgan Stanley increased 17% in the first quarter compared to the same period in 2020 to $2.87 billion. The results included the total $911 million loss related to Archegos Capital.

“We’re never happy taking a loss, but our job is to deal with the facts as reality, get on top of it and get it done, and that’s what we did,” Gorman added on the earnings call. “We have some phenomenal family office clients all over the world and they’re tremendous institutions… This is not a judgment call on family offices, this is a very idiosyncratic event.”

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Equities financing revenues at Goldman Sachs soared 65% year-on-year to just over $1.1 billion reflecting increased activity during the period, including record average balances in the prime business.

Stephen Scherr, chief financial officer at Goldman Sachs, said on the institution’s first quarter earnings call that while average balances grew to record levels, it is difficult to be more precise on the bank’s overall balance sheet exposure.

“I would say that our business has skewed historically to the long-short and less so competitively relative to the quants,” he said. “Our ambition is to continue to grow it, but that growth is not going to happen absent corresponding risk… We are very aware of the embedded risk and liquidity consumption in that book.”

David Solomon, CEO of Goldman Sachs, also warned on the call that the recent Archegos Capital scandal will likely not be the last the industry will see, but risk controls the bank put in place before the March events had worked well. 

“We have robust risk management that governs the amount of financing we provide for these types of portfolios,” Solomon said. “We identified the risk early and took prompt action consistent with the terms of our contract with the client. I am pleased with how the firm handled it.”

Goldman Sachs had avoided being entangled in the collapse of Archegos Capital last month, while several other major banks that had acted as a prime broker for the $10 billion family office suffered huge losses. 

According to reports, Goldman Sachs was the first to sell a huge chunk of its portfolio, triggering a $20 billion stock fire sale that shook markets as the banks sold off the fund’s positions after it defaulted, prompting multi-billion-dollar losses at Credit Suisse and Nomura. 

Losses for Credit Suisse and Nomura had been significantly higher than the other prime brokers as they were not as quick to offload positions. According to reports, Goldman Sachs, Morgan Stanley, and UBS were able to sell positions much quicker. 

Solomon added on the bank’s earnings call that while it is too early to speculate on the impact of the scandal, including if some players may retreat from the business, he expects regulators to take a closer look at the events. 

“Given the visibility of this, I do think there will be regulatory discussions around it and we will participate constructively in those discussions,” he said. “I do think to some degree, this was a one-off event – we see from time-to-time people get overly concentrated, they have too much leverage and that leads to unwinds.”

Revenues across the equities business at Goldman Sachs surged 68% in the first quarter this year compared to the same period last year to $3.69 billion. The bank said the results reflected significantly higher net revenues in derivatives and cash products, as well as higher average client balances in its prime business. 

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Nomura signalled a potential loss of $2 billion, while Credit Suisse said its losses could be ‘highly significant’ and may have a material effect on its first quarter results. 

The Japanese bank added the estimated loss is subject to change depending on unwinding of the transactions and fluctuations in market prices. 

Archegos, the $10 billion family office founded by Bill Hwang, had large exposures to ViacomCBS and several Chinese technology stocks. When shares in the US media group began to fall last week, the fund faced margin calls and defaulted. As the banks sold off the hedge fund’s positions, a $20 billion stock fire sale took place prompting heavy losses across prime brokerage divisions.  

“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,” said Credit Suisse in a statement.

According to reports, losses for Credit Suisse and Nomura were exacerbated as they were slower in offloading share blocks into the market. Goldman Sachs, Morgan Stanley and UBS – which also acts as a prime broker for Archegos – were able to sell positions quicker. Deutsche Bank was also reportedly exposed to the sell-off, however its losses are expected to be a fraction of the other brokers. 

Some banks had cut off trading ties with Hwang after he was convicted for wire fraud and insider trading in 2012. He was also banned from trading by Hong Kong’s regulator in 2014. 

One source quoted in the Financial Times stated that Archegos was granted leverage by Nomura four times more than a typical long/short equity fund, while another has quoted an official from Japan’s Financial Services Agency that Nomura still has positions to unwind. 

To make big trades, hedge funds typically borrow money from prime brokers, allowing them to leverage up the cash they hold and increase their positions – potentially earning far greater returns if their bets come good. However, it also means hedge funds can theoretically lose more money than they hold in client funds. 

The incident further highlights the dangers of over-leveraging hedge funds and could force some prime brokers to recognise the excessive risk that can occur.  

Last year, Dutch bank ABN Amro reported a $200 million loss from a US hedge fund client that defaulted on margin calls at the height of the COVID-19 pandemic in April.  

The loss comes as Credit Suisse is still grappling with the insolvency of its supply chain partner, Greensill, and a $10.1 billion line of funds the two co-managed. Last year, the Swiss bank also took a hit of around $450 million after US-based York Capital Management confirmed it would be winding down its European hedge fund operations.  

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