Forget The Losses: Here Are The Real Reasons Traders Are Spooked About The Archegos Implosion

Earlier, we presented JPMorgan’s thoughts on what the monetary hit from the Archegos fiasco would be to those banks who were also the fund’s prime brokers.

While significant – with the bank expecting as much as $10BN in total losses concentrated at Credit Suisse – these loses will not be game changing.

Yet last Friday’s fiasco is likely to have far-reaching consequences for the broader financial sector for two main reasons as explained earlier today by JPMorgan’s Andrew Tyler, author of the bank’s Market Intelligence report. We excerpt from his note below:

Yesterday’s session was dominated by the block trades from the HF liquidation.

This is sparking concerns about (i) reduced leverage and (ii) increased regulation.

• On the leverage point, investors are increasingly concerns that prime brokers may reduce their risk by increasing capital requirements and/or lower their amounts of outstanding credit. This would potentially exacerbate thin liquidity situations, depending on size and timing.

• On regulation, given the market’s lack of transparency into OTC derivatives and swaps that allow investors to exceed regulatory disclosure rules, investors are asking if there will there be a behavioral change from the SEC. If so, how would that change manifest.

Tyler ends on a cheerful note, writing that for all the drama, “this may be an isolated event that dissipates as we move past quarter-end and the holiday on Friday.”

“If so,” he concludes – as JPM always does when addressing its client – that this is the time to BTFD: “this week represents a great buying opportunity since the macro story is unchanged (fiscal stimulus, Fed, and vaccines).