Hong Kong investigates block and derivatives trading after Archegos collapse

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Hong Kong’s top financial watchdog will step up oversight of block and derivatives transactions by banks and investment funds following scandals in the United States, an official in the territory said on Tuesday.

Julia Leung, deputy chief executive of the Securities and Futures Commission, said the regulator was launching a review of the Hong Kong derivatives market after the collapse of US family office Archegos Capital last year.

Leng said the regulator would also investigate block trades by banks and hedge funds, a market that is also being probed by US authorities.

“U.S. regulators’ scrutiny of block exchange practices has been a hot topic in recent news stories,” Leung said in a speech at a conference hosted by the biggest financial lobby group Fiji. Asia, Asifma.

“We look at how market participants communicate information to potential investors before a deal is announced, commonly referred to as ‘market sounding’.”

In the United States, federal authorities are reviewing block trades – sales of large chunks of a company’s stock – by Wall Street banks and hedge funds amid concerns about the improper flow of information before announcement of transactions.

Leung also said the Archegos collapse prompted the SFC “to review the surveillance tools we use to detect concentrated positions in the [over-the-counter derivatives] market”.

Former hedge fund manager Bill Hwang’s family office imploded after building a portfolio of assets worth more than $160 billion by trading highly leveraged derivatives, leaving his lenders with $10 billion dollars of losses. Hwang pleaded not guilty to charges of racketeering, fraud and market manipulation in the United States.

Hwang became a notorious figure in Hong Kong when he was banned from doing business in the city for four years in 2014. Tiger Asia Management, the hedge fund Hwang previously ran, admitted to using inside information to trade bank stocks Chinese in Hong Kong and the United States. .

“We are currently conducting a thematic review of OTC derivatives activities in Hong Kong to assess prevailing market practices,” Leung said.

She added that the review would examine the practices of prime brokers – the teams at banks that facilitate dealings with hedge funds – and investigate “risk management, assessment and escalation practices” at brokerage firms. financial services.

The Financial Times reported in August that the SFC and the Hong Kong central bank were developing a system to track dangerously concentrated equity exposures as part of efforts to prevent an Archegos-like explosion.

The project will use centralized trading databases to identify excessive risk-taking by banks and investment funds trading derivatives in Hong Kong markets. This will involve a long process of cleaning data and creating systems that would signal concentrated risks to regulators, who would then alert financial institutions.

In April, Goldman Sachs reported rival bank Morgan Stanley to the SFC over a series of block deals in Hong Kong about three years ago. It is unclear whether Hong Kong authorities have investigated Goldman’s complaint.

In February, China’s securities regulator ordered Morgan Stanley to provide information related to the US investigation into block trading.

Hong Kong-headquartered hedge fund Segantii Capital, run by British businessman and Blackpool FC owner Simon Sadler, has also come under scrutiny over block trading.

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