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BoE ushers in new risk assessment rules after $10bn Archegos collapse

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·Business Reporter, Yahoo Finance UK
·3-min read
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LONDON, ENGLAND - APRIL 06: A general view of Credit Suisse in the Canary Wharf business district on April 06, 2021 in London, England. On Tuesday the company announced that its chief risk officer and investment banking chief are leaving the company after it incurred heavy losses due to the collapse of the US hedge fund Archegos. Credit Suisse is also dealing with fallout from the collapse of Greensill Capital, a financial services company that originated $10 billion in supply-chain finance strategies that were run by Credit Suisse Asset Management. (Photo by Dan Kitwood/Getty Images)
It called on businesses to carry out a review of their equity finance business, risk management practices and controls. This should cover all major prime brokerage activity, including fixed income and derivative prime brokerage services, it said. Photo: Dan Kitwood/Getty Images

The Bank of England (BoE) has brought in new risk assessment rules to review global equity finance businesses after the $10bn (£7.6bn) collapse of Archegos.

In March this year, the little known hedge fund blew up and sent shockwaves through the world of investment banking.

Banks that worked with the New York investment fund, and lent it money to buy shares, were scrambling to offload its investments after a handful of risky bets made by the company went bad.

The rush to exit these positions hit public shares prices, leaving banks with huge losses.

“Following this significant event, the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA), and other global regulators have reviewed and assessed firms’ equity finance businesses, including for those who were counterparties to Archegos, focusing in particular on counterparty risk management,” the BoE said on Friday.

“Our observations include weaknesses in the holistic management of risk across business units; narrow focus of onboarding arrangements and inadequate re-assessment of client relationships thereafter; ineffective and inconsistent margining approaches; and an absence of comprehensive limit frameworks.”

In a letter to bank chief executives, it added that bonuses should also reflect whether bosses carry out any necessary improvements in a timely way.

It called on businesses to carry out a review of their equity finance business, risk management practices and controls. This should cover all major prime brokerage activity, including fixed income and derivative prime brokerage services, it said.

Read more: Hedge fund blowup sends shockwaves through Wall Street and the City

It comes as shortly after the Archegos collapse this year, UBS (UBSG.SW) and Nomura (8604.T) both reported steep losses, with the former taking a $774m hit in the first quarter, while the latter reported its heaviest quarterly loss since the financial crisis.

Goldman Sachs (GS), Morgan Stanley (MS), Deutsche Bank (DBK.DE), and Wells Fargo (WFC) all also dealt with Archegos but have reported far smaller losses or immaterial impacts from the implosion.

Archegos was the family office of Bill Hwang, a former star trader who made his bones at legendary hedge fund Tiger Management.

Archegos was little-known outside of a select group that dealt with it on Wall Street.

After it left a string of companies nursing billions in losses, prompting questions about how Hwang was able to accumulate such large and risky bets across a number of lenders without anyone raising the alarm.

The new business findings need to be reported to the PRA and the FCA together with detailed plans for remediation by the end of March next year.

The US Federal Reserve announced similar concerns to US banks in a letter on Friday.

Watch: How to prevent getting into debt

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