Nomura Tightens Leverage For Some Hedge Funds Clients As ECB Starts Asking Questions

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One day after Credit Suisse traders realized that they may be the biggest losers from the Archegos debacle following reports that banker bonuses at the Swiss bank will be slashed by “hundreds of millions of dollars“, another bank is about to feel the pinch amid the ongoing prime broker crackdown (especially among those prime brokers – like Nomura and Credit Suisse – who lost billions during the Archegos margin call).

According to Bloomberg, Japan’s Nomura Holdings is beginning to tighten financing for some hedge fund clients following the Archegos Capital Management fiasco that may cost Japan’s biggest brokerage an estimated $2 billion.  The restrictions include tightening leverage for some clients previously granted exceptions to margin financing limits, a Bloomberg source said.

As we discussed last week, the (long overdue) crackdown on prime broker leverage abuse by preferential, i.e., high paying, clients will result in widespread delevearging by hedge funds and family offices, many of whom may have had similar generous Total Return Swap terms as Archegos which allowed the $15BN fund to have $100BN in exposure thanks to 8x leverage.

Desperate to close the barn door long after the horse has escaped, Nomura is seeking to reduce risk at its prime brokerage unit in the wake of the Archegos collapse that may result in combined losses of $10 billion for global banks. Credit Suisse has also been tightening financing terms for hedge funds and family offices, in a potential revamp of new industry practices after the blowup. The Swiss bank is also planning a sweeping overhaul of the hedge fund business at the center of the incident.

Its involvement in the Archegos debacle took Wall Street by surprise as it is very much out of character for the otherwise conservative Japanese bank. Under Kentaro Okuda, who became chief executive officer last April, Nomura’s net income reached a 19-year high for the nine months ended in December, driven by a boom in trading and investment banking at home and overseas. The brokerage said in late March that it had an estimated $2 billion claim against a U.S. client, which Bloomberg identified as Archegos.

Meanwhile, even as Wall Street appears to have moved on from the Archegos episode, some are worried that there will be more than one cockroach. Enter the ECB.

As Bloomberg reports separately, Europe’s top financial watchdog has asked some of the bloc’s largest banks for additional information on their exposure to hedge funds after the recent collapse of Archegos Capital Management.

“There is a need to scrutinize the reasons why the banks enabled the fund to leverage up to such an extent,” ECB executive board member Isabel Schnabel said in an interview with Der Spiegel last week. “It is a warning signal that there are considerable systemic risks that need to be better regulated.”

The checks by the European Central Bank on lenders such as Deutsche Bank and BNP Paribas are said to be standard practice after such a disruptive event for the industry, although it may not be “standard” what they reveal.


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