How can swaps hide leverage? (Archegos, 2021)

In March 2021, a private investment firm most market participants had never heard of collapsed over roughly two days and cost its banks about $10 billion. Nothing exotic was involved — just the total return swap from the previous lesson, used at scale, across several counterparties who could not see each other.

This lesson is a factual case study. It is here because it is the clearest documented illustration of how leverage can accumulate invisibly.

What was reported

Archegos Capital Management was a family office run by Bill Hwang. Because it managed only its principal's money, it operated outside much of the disclosure regime that applies to funds managing outside capital.

Rather than buying shares, Archegos took its positions largely through total return swaps and similar contracts with prime brokers — reportedly including Credit Suisse, Nomura, Morgan Stanley, Goldman Sachs, UBS, Deutsche Bank and MUFG. The brokers held the actual shares as their hedge; Archegos held the economics.

Three features compounded:

• The positions were concentrated. Exposure was reported to be heavily focused on a small group of names, including ViacomCBS, Discovery and several US-listed Chinese technology companies. In some names, the combined broker hedges represented a very large share of the free float.
• The positions were not visible as ownership. Because they were swaps rather than shares, they did not appear in the ownership filings where a large stake would normally show up.
• No single broker saw the whole picture. Each prime broker could see its own book and margin its own exposure. None could see the sum. Reported total exposure ran into the tens of billions of dollars against roughly $10 billion of capital.

The unwind

In the week of 22 March 2021, ViacomCBS announced an equity offering and its share price fell sharply. The concentrated positions lost value fast. Margin calls followed on 25 March that Archegos could not meet. The brokers then moved to liquidate their hedges — selling the same concentrated names, at the same time, into a market already falling.

Some banks sold first and escaped comparatively lightly. Those that sold later absorbed the worst of it. Reported losses: Credit Suisse about $5.5 billion, Nomura about $2.9 billion, Morgan Stanley about $900 million, UBS about $770 million, MUFG about $300 million — roughly $10 billion in total.

The US Federal Reserve and the UK's Prudential Regulation Authority later fined Credit Suisse a combined sum of around $380 million over its risk-management failures in the episode, and the Swiss regulator FINMA, which has no power to fine, found serious breaches of supervisory law and ordered remedial measures. In 2024, Bill Hwang was convicted in a US federal court on fraud and related charges and sentenced to a lengthy prison term.

The four transferable lessons

1. Leverage is a system property, not a position property. Every individual broker's exposure looked manageable. The aggregate did not exist in any one system.
2. Concentration turns an exit into the price move. When the hedges are a large share of the float, liquidating them is the crash.
3. Margin terms are competed away. Prime brokerage is a business with clients to win; the firm asking for the least collateral gets the trade, and the loosest terms in the market set the system's effective leverage.
4. Disclosure gaps are structural, not accidental. The instrument choice determined the visibility. Regulators in several jurisdictions have since moved toward more reporting of large security-based swap positions; the rules differ by jurisdiction and continue to evolve.

In the data

Registered ownership is public. Any large company's institutional and fund holders are one tab in the EODHD Terminal, and its officers' and directors' own trades another; Apple's are below.

Open AAPL.US — holders in the EODHD Terminal

Open AAPL.US — insiders in the EODHD Terminal

Swap exposure appears in neither list. The bank on the other side of a total return swap holds the shares as its hedge, so if anyone shows up as a holder it is the bank, while the client with the economic exposure holds only a contract. A holder list is complete only for people who own stock, which is exactly the gap that kept Archegos invisible until its positions were unwound.

Try it now

1. The stock at the centre of it is charted below as daily candles, under the name it traded as then, ViacomCBS. Navigate to March 2021 and Measure the peak-to-trough move over that week. The company has been renamed since, and a renamed company's old price history does not always follow it to the new name, which is why the chart keeps the old one.

2. Apply that move to a hypothetical $10 billion of capital carrying five times its capital in exposure. Notice that the arithmetic reaches total loss well before the price bottoms.
3. Write one sentence explaining why the brokers lost money when it was the client who was leveraged. If you can answer that, you understand counterparty risk.