SK Hynix has been THE poster-child for 'Vol Up, Spot Up' FOMO-chasing over the past few months of exuberant semi-shortage panic-buying...
And volumes in levered Semi trades has been astronomical...
With SK Hynix standing out among the most-levered bets...
Driven by massive speculative momentum (margin loans at record highs)...
...which faced huge forced liquidations amid the recent volatility...
So it really should not be a surprise that Bloomberg reports that global banks are curbing hedge funds’ leveraged bets on Asia’s top chipmakers including SK Hynix and Samsung.
According to people familiar with the matter, brokers including Citigroup, JPMorgan, and Goldman Sachs have raised the financing cost for hedge funds to take bullish wagers on SK Hynix and Samsung Electronics shares via swaps
Banks have also tightened the size of new trades and which firms they will give them to.
Swaps are a popular way for hedge funds to bet on assets without actually owning them and with the aid of leverage. In markets like South Korea, where few hedge funds have their own trading IDs with the exchange, swaps with brokers are the default way to bet on stocks.
Swap financing rates quoted by the banks on SK Hynix and Samsung were increased to a range from 300 basis points to as much as 11% over the secured overnight financing rate (SOFR), the people added. With SOFR standing at 3.6%, the new rates translate into nearly 15% at the top end of the range.
They have taken similar steps for Taiwan Semiconductor Manufacturing.
Morgan Stanley is turning away clients seeking new swap trades in the two Korean stocks while some second-tier banks have also stopped accepting additional orders in the past two weeks, the people said.
Some large global banks that are still willing to take new orders are assessing requests on a case-by-case basis, they added.
Bank of America, BNP Paribas and UBS are also lifting financing costs and restricting the size of swap trades in the two stocks.
One reason for the banks' pushback: banks were burned dramatically back in 2021, hedge fund Archegos used total return swaps (TRSs) to build highly leveraged, concentrated positions in a handful of stocks — most notably ViacomCBS and Discovery — without putting much capital up front, while evading regulatory disclosure limits and traditional margin. Once the stocks reversed their gains, the fund faced catastrophic margin calls and the banks that had funded these positions ended up nursing massive losses, most notably Credit Suisse which lost $5.5 billion and which was the precursor to the bank's eventual failure and acqusition by UBS a little over a year later.
Archegos managed about $10 billion of its own money but leveraged it into an estimated $50 to $100 billion in stock exposure using total return swaps across several banks; a similar trade is taking place now with the two Korean memory stocks. The only question is why funds are involved, and stand to suffer catastrophic losses once the memory trade reverses.
Banks are concerned that a major correction would affect the value of their clients’ holdings, leading to potential defaults on margin calls and ultimately threatening losses for banks, the people said.