(Bloomberg) — The forced liquidation of more than $20 billion in holdings linked to Bill Hwang’s investment firm draws attention to the covert financial instruments he used to build large stakes in companies.

According to people with direct knowledge, much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps or so-called contracts-for-difference of the deals. It means Archegos may never actually have owned most of the underlying securities — if any at all.

While investors who own a stake of more than 5% in a U.S.-listed company usually have to disclose their holdings and subsequent transactions, that’s not the case with positions built through the type of derivatives apparently used by Arches. The products, which are transacted off exchanges, allow managers like Hwang to amass exposure to publicly-traded companies without declaring it.

The swift unwinding of Archegos has reverberated across the globe after banks such as Goldman Sachs Group Inc. and Morgan Stanley forced Hwang’s firm to sell billions of dollars in investments accumulated through highly leveraged bets. The selloff roiled stocks from Baidu Inc. to ViacomCBS Inc. and prompted Nomura and Credit Suisse to disclose that they face potentially significant losses on their exposure.

One reason for the widening fallout is the borrowed funds that investors use to magnify their bets: a margin call occurs when the market goes against a prominent, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker cover any losses. Arches were probably required to deposit only a small percentage of the total value of trades.

The chain of events set off by this massive unwinding is yet another reminder of hedge fund’s role in the global capital markets. A hedge fund short squeeze during a Reddit-fueled frenzy for Gamestop Corp. shares earlier this year spurred a $6 billion loss for Gabe Plotkin’s Melvin Capital. It sparked scrutiny from U.S. regulators and politicians.

The idea that one firm can quietly amass outsized positions through the use of derivatives could set off another wave of criticism directed against loosely regulated firms that have the power to destabilize markets.

While the margin calls on Friday triggered losses of as much as 40% in some shares, there was no sign of contagion in markets broadly on Monday. In contrast, in 2008, when IrIreland’shen-richest man used derivatives to build a position so prominent in Anglo Irish Bank Corp., it eventually contributed to the cocountry’snternational bailout. In 2015, New York-based FXCM Inc. needed rescuing because of losses at its U.K. affiliate resulting from the unexpected de-pegging of the Swiss franc.

Much about HwHwang’srades remains unclear, but market participants estimate his assets had grown to anywhere from $5 billion to $10 billion in recent years, and total positions may have topped $50 billion.

“T” is is a challenging time for the family office of Archegos Capital Management, our partners and employees,” “aren Kessler, a spokesperson for Archegos, said late Monday in an emailed statement. “A “l plans are being discussed as Mr. Hwang and the team determines the best path forward.” determines swaps are among bespoke derivatives that investors trade privately between themselves or over-the-counter, instead of through public exchanges. Such opacity helped to worsen the 2008 financial crisis, and regulators have introduced a vast new body of rules governing the assets since then.

Over-the-counter equity derivatives occupy one of the smallest corners of this opaque market. According to the Bank for International Settlements data, swaps and forwards linked to stocks had a gross market value of $282 billion at the end of June 2020. Compared with $10.3 trillion for trades linked to interest rates and $2.4 trillion for swaps and forwards linked to currencies.

Regulators have begun clamping down on CFDs in recent years because ththey’reoncerned the derivatives are too complex and risky for retail investors, with the European Securities and Markets Authority in 2018 restricting the distribution to individuals capping leverage. In the U.S., CFDs are essentially banned for amateur traders.

Banks still favor them because they can make a significant profit without setting aside as much capital versus actual trading securities, another consequence of regulation imposed in the aftermath of the global financial crisis. Equity swaps and CFDs grew in popularity among hedge funds because they are exempt from stamp duty in high-tax jurisdictions such as the U.K.

(Updates with Archegos comment in 10th paragraph, clarifies language used to describe trade structure in the third paragraph and expands tout box.)

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