Nomura hires McKinsey to examine Archegos failings

Risk framework under external review as DOJ reportedly opens probe into fund’s collapse

Nomura
Photo: MIKI Yoshihito/Flickr

Nomura has hired consultancy McKinsey to carry out a review of its risk framework in the wake of the losses it suffered from the blow-up of family office Archegos, according to people familiar with the matter.

Risk.net understands the consultancy won a tender to review the Japanese bank’s risk framework following its client’s default, which inflicted over $10 billion in combined losses on its prime brokers and sent shockwaves through the industry.

Nomura declined to comment. McKinsey has been contacted for comment.

Nomura reported a loss of $2.3 billion “from transactions with a US client” in the first quarter, and said it expected a further loss of some $570 million from its original exposure that it didn’t exit before the end of March. On a May 12 investor day presentation, the bank’s chief executive, Kentaro Okuda, said Nomura had conducted a “fact-finding investigation” and implemented “preventative measures” to avoid a similar incident in future. The CEO added that, in future, the firm would hire external third-party experts on risk management to review practices at the bank.

On May 18, it announced had unwound all its positions related to the default.

The massive losses sustained by multiple global banks following the default of Archegos, the family office of former hedge fund manager Bill Hwang, has sent banks and regulators alike scrambling to review margining and risk management practices. Some sources have indicated that they expected a repricing of prime brokerage services for clients, to better reflect the counterparty credit risk taken on by banks on uncleared trades.

Scrutiny has also turned to the amount of leverage granted to prime brokerage clients. Risk.net recently revealed that Credit Suisse allowed Archegos to trade on around 10% margin.

The US Department of Justice (DOJ) has also opened a probe into the collapse of Archegos, Bloomberg has reported, and is said to have requested information from banks that acted as prime brokers to the family office.

Regulators are also mulling their options in the wake of the default. Gary Gensler, the incoming chairman of the US Securities and Exchange Commission, suggested in a recent interview that “transparency was lacking” in the trades Archegos had with its dealer banks, and that the fund was permitted a “lot of leverage”. He added that he had asked staff to make recommendations on how to deal with these two issues. 

Banks often hire consultants to conduct reviews of risk practices after major blow-ups. Wells Fargo engaged McKinsey, PwC and Oliver Wyman to review the risk practices that led to the 2016 mis-selling scandal at the US bank. The incident led to $3 billion in penalties to the DOJ and the SEC, which included a fund set up to pay redress to affected customers.

Oliver Wyman was also hired to help conduct a root-and-branch overhaul of Wells’s chief risk office, which included appointing chief risk officers in a number of divisions, the Financial Times reported last year.

Correction, May 28, 2021: A previous version of this article mistakenly identified the consultancy Nomura had hired to lead the review of its risk function as Oliver Wyman.

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