Credit Suisse tightens hedge fund terms after Archegos cost it $4.7bn

New York — Credit Suisse Group is tightening the financing terms it gives hedge funds and family offices, in a potential harbinger of new industry practices after the Archegos Capital Management blow-up cost the Swiss bank $4.7bn.

Credit Suisse has been calling clients to change margin requirements in swap agreements so they match the more restrictive terms of its prime-brokerage contracts, people with direct knowledge of the matter said. Specifically, Credit Suisse is shifting from static margining to dynamic margining, which may force clients to post more collateral and could reduce the profitability of some trades.

A spokesperson for Credit Suisse had no comment.

Swaps are the derivatives trader Bill Hwang used to make highly leveraged bets on stocks at Archegos, the New York-based family office that imploded when his positions suddenly lost value last month. Credit Suisse took a $4.7bn hit, the biggest so far among the investment banks that had extended credit to Hwang, triggering a management shake-up and casting fresh doubt on the Swiss bank’s checkered record of managing risks.

Static margining sets a fixed amount of collateral a client has to post to maintain a certain size of position or account. With dynamic margining, a dealer can require more collateral if the underlying risk of the position or account increases due to factors such as volatility or concentration.

Typically, clients locks in margin terms on swap agreements for a period of, say, 60 or 180 days. Credit Suisse is asking some clients to move to the new terms immediately, one of the people said.

The move may signal a broader tightening of financing terms for hedge funds and family offices — firms that manage money for the very wealthy. Three of the banks that did business with Archegos have disclosed $7bn of losses collectively, and analysts at JPMorgan Chase have estimated they may reach $10bn.

In addition to reporting the largest of those losses, Credit Suisse forced out executives, including the head of its investment bank, Brian Chin, and the head of risk, Lara Warner. Equities trading chief Paul Galietto also left.

The bank cut its dividend and suspended its share buyback until a key measure of capital strength recovers. Top executives’ bonuses for 2020 have been scrapped.

CEO Thomas Gottstein, who took over in February last year after a spying scandal toppled his predecessor, has said that “serious lessons will be learnt” from the scandal. He has pledged to reduce risk in parts of the investment bank, including the prime services business, and signaled a broader strategy review once António Horta-Osório joins the bank as chair later this month.

While Credit Suisse was one of several global investment banks to facilitate the leveraged bets of Archegos, it was slower than others to unwind the positions. It had initially tried to reach some sort of standstill agreement, people familiar with the matter have said, but the strategy failed as rivals rushed to cut their losses.

Global banks, including Goldman Sachs Group and Deutsche Bank, have told investors that they shed their Archegos-linked positions with little financial impact. Nomura Holdings has signaled it could lose as much as $2bn.

Bloomberg