Archegos Implosion: Options Expert Explains How Derivatives Caused It; Lessons From a Liquidation

Mar 31, 2021

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Lead Stories

Archegos Implosion: Options Expert Explains How Derivatives Caused It
Vicky Ge Huang – Business Insider
In the aftermath of the implosion of “Tiger Cub” Bill Hwang’s family office, major Wall Street banks could be facing anywhere between $5 billion to $10 billion in losses, according to a new JP Morgan note written by analysts led by Kian Abouhossein.
The debacle, which has now implicated banks including Goldman Sachs, Morgan Stanley, UBS, Deutsche Bank, Credit Suisse, Nomura, Wells Fargo, and Mitsubishi UFJ Financial, has reminded investors of the near-collapse of Long-Term Capital Management in 1998 and the GameStop-induced market upheaval just two months ago.

Lessons From a Liquidation; The Archegos affair holds cautionary tales for bankers and regulators alike.
Bobby Ghosh – Bloomberg
As Wall Street picks through the wreckage of the Archegos Capital implosion, my colleagues at Bloomberg Opinion have been pondering the larger lessons. John Authers runs his rule over the inevitable debate about regulating financial innovation while preserving a free market. He counsels against blaming derivatives for the dastardly — or plain dumb — things people do with them, but he argues that everyone stands to benefit from greater transparency.

Archegos Fiasco Is Latest Reminder Super-Rich Love Leverage
Venus Feng – Bloomberg
Bill Hwang used leverage from across global banks to build his family office into a whale with positions that may have topped $50 billion.
Then came the collapse, with more than $20 billion in holdings linked to his Archegos Capital Management liquidated in just days. That’s prompted warnings of losses at banks including Nomura Holdings Inc. and Credit Suisse Group AG, as well as speculation over whether other investors with high leverage could cause more market chaos.

Capstone chief surfs the highs and lows of market volatility waves
Laurence Fletcher – Financial Times
Few people know more about market volatility than Paul Britton.
The founder of New York-based Capstone Investment Advisors, one of the world’s biggest hedge funds specialising in volatility and derivatives trading, has experienced the highs and lows of betting on market choppiness during a career of more than 25 years.

Crypto Options Giant Deribit Launches Bitcoin Volatility Index
Omkar Godbole – Coindesk
Panama-based Deribit, the world’s largest crypto options exchange by trading volume and open interest, has launched a bitcoin volatility index called DVOL to help traders assess the market’s mood. “DVOL uses the implied volatility smile of the relevant expiries to output one number that gives a gauge of the 30-day annualized implied volatility,” the exchange said Wednesday in an announcement. Implied volatility refers to investors’ expectations for price turbulence over a specific time period.

Rough volatility’s steampunk vision of future finance
Kris Devasabai –
Rough volatility has generated a good amount of buzz in quant finance circles lately, which is somewhat surprising given its throwback origins. The models rely on a mid-20th century statistical measure called the Hurst parameter to capture the memory effect in markets. In an era of big data and machine learning, that makes them something of an anachronism. A quant at one large bank says, half jokingly, that his firm is “only interested in data-driven approaches”.

Regulation & Enforcement

Archegos’s Collapse Is a Wakeup Call for Regulators; Post-crisis capital requirements have saved Credit Suisse and Nomura from more serious problems while also pushing risk into darker corners of the financial system
Rochelle Toplensky and Telis Demos – WSJ
The big damage from Archegos’s collapse seems to have been limited to Credit Suisse and Nomura. But that doesn’t mean all is well in the financial system. As the dust settles on the fund’s implosion, the impact is becoming clearer. Credit Suisse and Nomura were slow to sell shares, costing them dearly relative to early movers Goldman Sachs, Morgan Stanley and Deutsche Bank. The anticipated losses are enough to cause Credit Suisse and Nomura serious pain, but not to threaten their solvency.

Yellen Plans to Reinvigorate Financial Risk Panel
Kate Davidson and Andrew Ackerman – WSJ
Treasury Secretary Janet Yellen is reviving a council of regulators tasked with monitoring the stability of the financial system, homing in on risks that emerged during the market turmoil of a year ago when the coronavirus pandemic hit the U.S. economy.
Ms. Yellen will lead her first meeting Wednesday of the Financial Stability Oversight Council, focusing on a variety of issues, including money-market mutual funds’ and hedge funds’ activities and their roles in the market turbulence last year, the Treasury Department said last week.


Why The Game Changer is the Best Options Strategy for Trade Management | tradeTALK Series
Kai Zeng – tastytrade
Traditionally, traders use three types of signals to exit or manage a trading position: Stock price level, profit/Loss Target, Technical Indicators. But no scientific studies can prove the legitimacy of these methodologies. And oftentimes, these approaches are complex and challenging to follow. tastytrade’s Kai Zeng explains how to make trade management easier with a simple technique known as the “Game Changer.” Learn more about it below and in his recent tradeTalk presentation.

(Podcast) AO 101: Choosing The Best Options Strategy For Your Clients
The Advisors Option – Options Insider Radio Network
Host: Mark Longo, The Options Insider Media Group
Co-host: Matt Amberson, Option Research & Technology Services
Guest: Jon Cherry, Northern Trust


Should You Invest In Derivatives?
Samantha Barnes – International Banker
“We view them as time bombs for the parties that deal in them and the economic system. In our view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” That was how a certain Warren Buffett described derivatives in Berkshire Hathaway’s 2002 annual report. And in many ways, the Oracle of Omaha was proven correct just a few years later. Derivatives were much maligned for their roles in triggering the 2008 global financial crisis (GFC) and the severe market crashes of the time. Perhaps most notoriously, they were used heavily as a way to trade in the subprime mortgage market, with collateralised debt obligations (CDOs) and credit default swaps (CDSs), in particular, being attributed to the surge in derivatives usage during that time. By the second half of 2008, the total value of over-the-counter derivatives hit their peak of just under $35 trillion, shortly before the collapse of Lehman Brothers.

Fundamentals of Futures & Options (also applicable to Series 3 Exam)
For more than 30 years, IFM has consistently provided learners with a solid foundation and understanding of futures and options markets and trading including terminology, risk management, pricing, and basic trade strategies. This instructor-led virtual course includes lectures from an engaging instructor with real-world expertise and supported by class discussion, practice exercises and educational materials. The course fee includes two must-read industry books – Futures and Options and the Guide to U.S. Futures Regulation.
Date May 10, 2021 12:00 p.m. – May 14, 2021 2:00 p.m.
Location: Virtual Live. 2-hour sessions over 5 days.
Early-bird $495
Fee $595
Instructor: Marti Tirinnanzi
Class size registration is limited to approximately 20 participants to promote student participation and interaction.


A New Virtual Experience
The Options Industry Conference is Going Virtual in 2021. Join OCC and the options exchanges for the 39th annual Options Industry Conference, April 28-29, 2021. While the conference will be held virtually for the first time in history, the focus will continue to be the key topics facing the options industry today, from the regulatory shifts in the U.S. and Europe to the technological developments that are driving monumental change in markets around the globe.

DOJ enforcement priorities in commodities & derivatives markets: A discussion with DOJ leadership
April 13, 2021 • 1:00 p.m. – 2:00 p.m. ET
During this discussion, James McDonald, Sullivan & Cromwell Partner, will interview Robert Zink, U.S. Department of Justice, Acting Assistant Attorney General (and Chief of the DOJ Fraud Section from January 2019 to August 2020), regarding DOJ’s enforcement priorities in the commodities and derivatives markets and white collar area more generally.


‘No High-Fives Rule’ Keeps Tastytrade’s CEO Grounded
Leaders usually love to celebrate big wins with their staff. Beaming bosses pop the champagne and toast their team’s triumph. But Tastytrade founder Tom Sosnoff would rather skip the party. An options trader who co-founded two successful fintech firms, Sosnoff imposes a “no high-fives rule” among his senior managers.

*****Tom Sosnoff recently sat for an Open Outcry Traders History Project video, which we hope to publish next week. He also spoke at our MarketsWiki Education World of Opportunity series three years ago. He is one of the most interesting people in our industry.~JJL

The Four Goals of Investing
Michael Oyster – Options Solutions
What many investors have been told to expect by Wall Street has not always meshed with the actual experience. After multiple historic stock market corrections and subsequent dizzying advances, one of the most common feelings among investors is a feeling of “what now?”

The Women Shaping Global Derivatives Markets
Nahiomy Alvarez, Anna Paulson, Maggie Sklar – Chicago Federal Reserve Bank
In its latest episode, LaSalle Street, a podcast from the Financial Markets Group at the Federal Reserve Bank of Chicago, hosts a conversation on identity, gender and careers in finance with four women shaping global derivatives markets. Joining LaSalle Street for this episode are Laura Astrada, Managing Director at DTCC; Caroline Pham, Managing Director and Head of Capital Markets Regulatory Strategy at Citi; Maggie Sklar, Director of International Engagement, the Federal Reserve Bank of Chicago; Petal Walker, Special Counsel, WilmerHale.

*****This is a powerful title and a powerful group of women.~JJL

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