Moneycontrol Pro Panorama: The Archegos episode may be the tip of a leverage iceberg – News 24-7 Live News 24-7 Live
Moneycontrol Pro Panorama: The Archegos episode may be the tip of a leverage iceberg

Moneycontrol Pro Panorama: The Archegos episode may be the tip of a leverage iceberg

In today’s edition of Moneycontrol Pro Panorama: The Archegos selloff that scared Wall Street, Kalyan Jewellers, Suryoday, lockdowns and interviews with P&H Health and Thermax.

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

In the financial markets, seemingly small events are later identified as the first signs of bigger trouble that was brewing. Since only hindsight is 20/20, were only left wondering whether the Archegos Capital Management issue is more than an isolated one.

In Could the Nomura/Credit Suisse selloff be the canary in the coal mine?, we have analysed the issue at hand, of how excessive leverage can cause grief. If credit default swaps attained infamy in the 2008 scam, the product in the limelight this time is contracts for difference (CFD). The more innocuous the name, the more sinister the financial engineering.

In a CFD, a fund takes a position in a stock using a bank as an intermediary.  If the trade is in profit on the settlement date, the difference is paid by the bank to the fund. The fund takes a leveraged exposure by paying a small margin, allowing it to earn higher profits than if it had taken a fund-based punt, while the bank earns a commission for its services. When the going is good everyone is happy. But when it isn’t, then it comes down to the fund’s ability to make good with collateral. Archegos’s inability to do so has triggered a selloff by banks.

News Source:- Money Control

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