Leverage & Margin

What you'll learn

• ✓Compute leverage ratios
• ✓Understand margin calls

Lessons

1. 🧲
   Wiped Out in One Afternoon

   How $10,000 becomes a debt to your broker
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2. Reg T, Maintenance, and the 100x Crypto World

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3. The Leverage Zoo

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4. Archegos: $10B Becomes $50B Becomes Zero

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5. Final Boss: Volatility Decay

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Sources

All content is drawn from the sources below. We deliberately avoid unverified material.

• Regulation T, 12 CFR Part 220 (Credit by Brokers and Dealers)
  Board of Governors of the Federal Reserve System · institutional
  Primary source for the 50 percent initial margin requirement on US equity purchases (12 CFR 220.12). Backs the Reg T claims throughout lessons 2 and 5.
  https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-220
• FINRA Rule 4210 (Margin Requirements)
  Financial Industry Regulatory Authority · institutional
  Primary source for the 25 percent maintenance margin floor on long equity positions. Backs the maintenance margin claims in lesson 2 and the recap in lesson 5.
  https://www.finra.org/rules-guidance/rulebooks/finra-rules/4210
• SEC v. Sung Kook (Bill) Hwang et al., Complaint (22-cv-3402)
  US Securities and Exchange Commission · institutional
  Filed April 27, 2022. Primary source for the Archegos figures: roughly 10 billion in capital, market exposure exceeding 160 billion at peak, total return swap structure across multiple prime brokers.
  https://www.sec.gov/litigation/complaints/2022/comp-pr2022-70.pdf
• Credit Suisse Group Special Committee of the Board of Directors Report on Archegos Capital Management
  Paul, Weiss, Rifkind, Wharton & Garrison LLP for Credit Suisse · institutional
  Issued July 29, 2021. Primary source for Credit Suisse's approximately 5.5 billion dollars in losses, the chronology of margin calls in March 2021, and the prime brokers' lack of aggregate visibility.
  https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/csg-special-committee-bod-report-archegos-202107.html
• The Dynamics of Leveraged and Inverse Exchange-Traded Funds (Minder Cheng and Ananth Madhavan)
  Journal of Investment Management, 2009 · academic
  Foundational paper deriving the path-dependence and volatility decay of daily-rebalanced leveraged ETFs. Backs the lesson 5 worked example.
  https://www.joim.com/the-dynamics-of-leveraged-and-inverse-exchange-traded-funds/
• Investor Bulletin: Leveraged and Inverse ETFs
  US Securities and Exchange Commission, Office of Investor Education and Advocacy · institutional
  Plain-language SEC warning that leveraged and inverse ETFs reset daily and are generally unsuitable for buy-and-hold investors. Reinforces the volatility decay teaching.
  https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm
• A Demon of Our Own Design (Richard Bookstaber)
  John Wiley & Sons, 2007 · book
  Reference for the structural argument that leverage plus complexity plus tight coupling produces unpredictable cascading failures. Provides the framing for the Archegos lesson.
• CFTC Order against HDR Global Trading (BitMEX) and related entities
  US Commodity Futures Trading Commission · institutional
  August 10, 2021 order with 100 million dollar penalty. Source for the offshore crypto-perpetual leverage figures cited in lesson 2 (BitMEX advertised up to 100x to 125x leverage).
  https://www.cftc.gov/PressRoom/PressReleases/8412-21