A senior official at the Securities and Futures Commission SFC said on Tuesday that Hong Kong's financial watchdog is tightening oversight on derivatives markets after the collapse of Archegos Capital Management.
Archegos, a U.S. family office of investor Bill Hwang, had $36 billion in assets, blew up last year when it was caught short on highly leveraged trades and left global banks with $10 billion in losses.
Hwang's exposure was built via a type of equity derivative traded over the counter, written by his bank counterparties, which helped him circumvent rules requiring reporting positions to U.S. regulators.
The collapse of Archegos prompted us to look at the surveillance tools we use to detect concentrated positions in the over-the- counter OTC market, said Julia Leung, SFC Deputy Chief Executive Officer.
Leung, who is also the executive director of SFC's executive director for intermediaries, said that Prime brokers operating in the OTC derivatives markets have faced tough challenges and it was evident from the Archegos saga last year.
The scope of the review will be that of firms' risk management, assessment and escalation practices, as well as a thematic review of OTC derivatives activities in Hong Kong, she said.
Leung said gaps in oversight would remain unless risk governance structures are integrated because of the fragmented global practice and regulation in the opaque OTC derivatives market.
The SFC will soon launch a review on block trading or large sales of shares in Hong Kong with an aim to introduce standards for how to conduct business activities.
She said that we are looking into how market participants communicate information with potential investors prior to the announcement of a block trade transaction.