Regulators are focusing increasingly on the risk of concentrated stock exposures

Post by Caleb Woo, Co-Founder

In the wake of the financial crisis in 2009, regulators around the world embarked on OTC derivatives reform regulations, in which market participants would send their OTC derivatives to a centralized data repository. The HKMA introduced such regulations in 2013.

Recently, in the wake of the Archegos debacle in 2021, there have been reports that the HKMA, together with the SFC, are embarking on a project to develop a system to track highly concentrated stock exposures, to ensure that an Archegos style collapse does not happen again.

According to the Financial Times, this will take the form of a centralised database to identify any excessive risk-taking by banks of investment funds, involving a lengthy data cleansing process and a system that would flag concentration risks. While this is HK focused project, it has also caught the eye of regulators worldwide. While looking at large exposures is nothing new, having been part of the Basel III regulations for a while, the regulators have been looking at the credit exposures. But as Archegos has taught us, concentrated equity exposures are equally important. Looking specifically at concentration risks on stock exposures is not something that is well regulated today.

This is a bellwether of what regulations are to come. There need to be robust internal controls within banks and investment funds to monitor concentration, not just on direct holdings, but also on much harder to monitor derivatives, in order to provide a sound risk management practice within the firm.

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