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The U.S. suspended derivative rules for a decade before the Archegos exploded

The U.S. suspended derivative rules for a decade before the Archegos exploded


To limit the potential for an explosion like the rules written after the 2008 financial crisis Archegos Capital they have not yet been fully implemented, drawing attention to regulators in a fiasco that has shocked and raised Wall Street questions Capitol Hill.

Relevant sections of the 2010 Dodd-Frank Act, the 848-page law, have been repeatedly delayed to strengthen large banks and mitigate excessive risk in the derivatives market.

Critics are arguing that the rules set the rules faster, the implosion of Bill Hwang’s family office and billions in losses caused two banks to be limited.

In particular, there are still no rules in place that would govern the knowledge of Archegos ’derivative trades, and there are also no conditions for players like Hwang to set an initial margin, payments to cover potential trading losses. Hwang was able to place more than $ 50 billion in bets on the share prices of a few U.S. and Chinese companies, and was unable to pay his counterparts when they started against him.

Diane Jaffee, TCW’s asset manager portfolio, said regulators have set Dodd-Frank at an “anemic” pace. The ability of an unknown family office like Archegos to take such excessive risks “is like the last hurricane. . . before the regulations were introduced, ”he said.

The full return on equity swaps used by Archegos is overseen by the Securities and Exchange Commission, which has been much slower to write its rules than the Commodity Futures Trading Commission, the main regulator of derivatives.

The SEC rules will go into effect Nov. 1, if they had already done so, the SEC would have data on Archegos ’professions, including the size of each transaction and who the family office negotiated with. Other sections of the CFTC-regulated derivatives market.

“The duty of the SEC to waive is not to have a properly regulated swap market when the 2008 crash caused and spread in 2008,” said Dennis Kelleher, chairman of the Better Markets advocacy group.

The opacity of Archegos ’positions was crucial in the event, as many of his trading counterparts were unaware that he had taken similar positions with other Wall Street banks. It was when Hwang called together a number of Archegos counterparts meeting in late March it was clear to each bank how far and concentrated Archegos ’positions were, according to those familiar with the meeting.

“The SEC has delayed 10 years in implementing rules that would provide greater transparency to what was happening,” he said in a large hedge fund based on government regulation. “The SEC completely threw the ball.”

The SEC declined to comment.

Margin requirements were delayed

The SEC has also not established rules on margin requirements for derivatives trading outside of exchange and clearing houses, which would affect broker-dealers.

The general rules requiring asset managers to save more money to cover their swap agreements are set out in the Basel Bank Supervisory Committee and the International Organization of Securities Commissions (Iosco), the umbrella group for global market watchdogs. Local regulators are given some space to adapt the rules to their markets.

In the US, this work is divided between a number of regulators. Federal regulatory banks have already set margin requirements for large banks that negotiate with each other. However, as Covid-19 hit last year, global regulators agreed to push back the implementation of rules that would cover smaller financial companies trading derivatives from September 2020 to September 2022.

That decision meant a group like Archegos (which had more than $ 50 billion worth of derivative positions, according to people who knew the trades), didn’t have to ask the U.S. for any margin when it began trading.

If the delay had not been agreed, Archegos would probably have gone above the designated size threshold in September last year, having to ask for a margin under Basel and Iosco rules after exceeding the exposure value value of its derivatives $ 8 billion. The rules would require enough money to deal with possible 10-day losses based on the historical performance of the shares.

“The rules were designed to address these risks, but they were designed at a time when it is too late to catch that counterpart,” said a derivatives lawyer at a large international law firm.

Wider markets were isolated

Many lawyers for derivatives noted that the capital rules of the post-financial crisis helped to isolate wider markets, with some banks absorbing large losses without the need for state intervention.

Credit Suisse-k a $ 4.7 billion loss, While Nomura warned It could lose $ 2 billion. Others, including Morgan Stanley, Goldman Sachs and Wells Fargo, sold more than collectively $ 20 billion in stock They held it as a cover for trades made with the Archegos to limit their losses. So far, nine banks have been involved in the incident, including Deutsche Bank, UBS, Mitsubishi UFJ Financial Group and Mizuho.

The main intermediary units of the bank that enabled Archegos ’overpaid business do not know how much margin the fund needed when it began its transactions. Lawyers working with banks have said they typically do not have regulatory minimums due to competitive pressures before they come into force.

Credit Suisse, Deutsche Bank, Goldman, MUFG, Mizuho, ​​Morgan Stanley, Nomura, UBS and Wells Fargo declined, as did Archegos.



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