The Archegos meltdown remains an important issue to be discussed within the industry, from market participants to regulators. While many have called for stricter oversight over family offices, an Op-ed by CFTC Commissioner Brian Quintenz and the Securities and Exchange Commission’s Commissioner Hester Peirce says otherwise.
Bill Hwang’s spectacular failure with his derivative products investments – specifically, total return swaps on individual stocks — has pushed large losses to a number of banks.
“Yet the systemic impact on the financial system of the Archegos-fueled losses was zero. Indeed, even the most directly affected firms easily weathered the event. Morgan Stanley and Goldman Sachs Group Inc., for instance, still posted record quarterly earnings. Only Credit Suisse Group AG, which also suffered from the Greensill Capital implosion, was compelled to raise a small amount of equity, and it did so smoothly and quickly”, they said.
Family offices are organizations set up and overseen by wealthy individuals to manage their own money and are not required to register with either the SEC or the CFTC. The investment adviser registration and regulatory regimes focus on investor protection, which are deemed unnecessary when the investors are all in the family.
Events like this one serve as a reminder of the importance of risk management as it offers an opportunity for investors to revisit their own risk-management systems, firm cultures, and incentive structures.
The CFTC and SEC Commissioners further addressed calls for revamped family office regulation as they “ignore the prudential-like swap dealing and reporting rules mandated by the Dodd-Frank Act to address Archegos’s specific problem a large and concentrated position spread out across the financial marketplace unknowable to anyone except financial regulators. These rules, a cornerstone of Dodd-Frank, were designed to provide regulators insight into the opaque over-the-counter swaps markets after the 2007-2009 financial crisis.”
Dodd-Frank provided the CFTC with jurisdiction over banks’ swaps activity that involves interest rates, broad credit or equity indices, foreign exchange, and commodities (which amount to around 95% of total notional traded swaps).
Dodd-Frank gave the SEC jurisdiction over banks’ activities in single-stock swaps, such as those dealt to Archegos, but only recently the regulator finalized its rules around security-based swaps reporting requirements, which will come into full effect later this year.
“If the SEC’s rules had been completed earlier, the trades and positions of various banks related to Archegos could have been aggregated and flagged”, they reckoned.
The lack of systemic impact from the Archegos losses, the misalignment of family office structures with the rationale for investment firm regulation, and the new swaps oversight regimes allow the Commissioner to conclude more oversight over family offices is unjustified.