Hong Kong investigates block and derivatives trading after Archegos collapse

Hong Kong’s top financial watchdog will tighten oversight of block and derivatives trading by banks and investment funds following scandals in the US, 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 into Hong Kong’s derivatives market following the collapse of US-based family office Archegos Capital last year.

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

“US regulators’ scrutiny of block-trading practices has been a hot topic in recent news articles,” Leung said in a speech at a conference held by Asia’s largest financial lobby group Asifma.

“We are looking into how market participants communicate information with potential investors prior to the announcement of a transaction, commonly known as ‘market sounding.’”

Federal authorities in the US are scrutinising block trades — sales of large chunks of a company’s shares — by Wall Street banks and hedge funds over concerns about the improper flow of information prior to the deals being announced.

Leung also said that the collapse of Archegos had prompted the SFC “to take a fresh look at the surveillance tools we use to detect concentrated positions in the [over-the-counter derivatives] market”.

The family office of ex-hedge fund manager Bill Hwang imploded after it built a portfolio of assets worth more than $160bn by trading highly leveraged derivatives, leaving its lenders with $10bn of losses. Hwang has pleaded not guilty to charges of racketeering, fraud and market manipulation in the US.

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

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

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

The Financial Times reported in August that the SFC and Hong Kong’s central bank were developing a system to track dangerously concentrated exposures to stocks as part of efforts to prevent an Archegos-style blow-up.

The project will use centralised trade databases to identify excessive risk-taking by banks and investment funds trading derivatives on Hong Kong markets. It will involve a lengthy data cleansing process and the creation of systems that would flag 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 trades in Hong Kong about three years ago. It is not known whether Hong Kong authorities investigated the Goldman claim.

In February, the Chinese securities regulator ordered Morgan Stanley to provide information relating to the US block trades probe.

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

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