The Fed’s just published a letter under SR 21-19 to supervise and assess the actions that led to the Archegos default by examining financial institutions and their relationships to investment funds.
The Federal Reserve is issuing this guidance to limit risk management.
SR 21-19 is intended for banking organizations with large portfolios and relationships with investment funds, such as hedge funds.
Some of you in the community wanted me to explain what this letter means and so I’m going to be breaking it down for you today.
Welcome to Franknez.com – today’s market news has to do with the Fed’s cracking down on banks and hedge funds. Interesting things are happening at the end of the year, aren’t they?
Let’s get started!
Speaking of interesting things happening.
The ape community has attracted the attention of the SEC, mainstream media, and now the Federal Reserve.
It’s worth noting that progress is progress, no matter how slow or long it takes.
Why is SR 21-19 Significant?
This federal piece of document is significant for many reasons.
- It highlights lack of transparency in the markets.
- The letter acknowledges a relationship amongst financial entities and confirms strategic involvement.
- It expresses how overleveraging positions pose a major risk towards meeting debt obligations.
- And finally, SR 21-19 touches topic on providing proper margin terms to these institutions.
Reserve banks are being asked to distribute this letter to the supervised organizations in their districts and to appropriate supervisory staff.
The board is continuing to review firms’ weaknesses to take further action.
The Feds are looking for a solution that will mitigate risk and prevent hedge funds from defaulting, as seen with Archegos.
Archegos defaulted on March 26, 2021, causing over $10 billion in losses across several large banks.
We saw Citadel has lose billions of dollars shorting AMC stock before ultimately making their money back.
The hedge fund also began freezing any attempts for its clients to pull their investments out by issuing ultimatums that would make it impossible for the customer to return.
And on top of that, they issued a hefty fee for withdrawing their investments.
New Margin Call Terms Are on The Horizon
It is unclear what the margin call terms will be for these overleveraged financial institutions.
However, the letter states that they will be ensuring that these institutions receive the appropriate margin requirements.
They will either avoid inflexible and risk-insensitive margin terms or extend close-out periods.
Risk-insensitive meaning appropriately raising the margin requirements dependent upon how overleveraged a financial institution is.
Hedge funds shorting AMC and GME stock have amounted an overwhelming number of borrowed shares to short the stocks.
Yet these stocks have remained leveled due to the strength of retail investors.
The feds are about to impose massive margin requirements on overleveraged hedge funds.
Now, we won’t know how long this process will take.
What we do know is that the federal government isn’t taking hedge funds lightly anymore.
And if the appropriate margin terms are too high for hedge funds to maintain, then they’ll be forced to close short positions.
Getting To the Bottom of Synthetic Shares
Will the feds come across the millions of synthetic shares these overleveraged hedge funds have created?
It will be a massive surprise if they don’t.
See, the feds are requiring their supervisors to receive adequate information to fully understand the risks of the investment funds they are investigating.
This includes positions and counterparty concentrations, or a specific sector in which two financial entities are specifically focused on.
Failing to meet transparency will mean the feds will take action on setting conservative terms between the parties.
Identifying synthetic shares in the market is a rabbit hole the feds themselves will have to go down.
My suggestion is for the community to push the Department of Justice to investigate these synthetics.
Raising awareness to these problems in the market is key to sparking a MOASS.
Interesting Year for Hedge Funds
Hedge funds face more scrutiny than ever before in history.
They have created system risk and pose a threat to our businesses and economy.
Hedge funds never saw a community of activists fight them for a fair market.
Retail investors caused Archegos to default and Melvin Capital to lose billions of dollars resulting in a life-line from Citadel Securities.
Melvin Capital has stated that they’re out of the game.
With the feds now involved, this is going to be an interesting year for both hedge funds and retail investors.
Leave Your Thoughts Below
What do you think of the SR 21-19 letter?
Could this federal document be the first step towards the uncovering of synthetics in the market?
Are we closer to margin calls than ever before?
Leave your thoughts below.
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