SEC Commissioner Hester Peirce and CFTC Commissioner Brian Quintenz argued that the collapse of the family office of Bill Hwang, Archegos Capital Management, does not necessitate new regulations on family offices.
In an op-ed published by Bloomberg, Ms. Peirce and Mr. Quintenz asserted that while the Archegos Capital Management family office "failed in spectacular fashion" as it quickly accumulated losses in complex derivatives products that were too large for the firm to cover, counterparties to the firm's trades were able to weather the event.
The Commissioners contended that policymakers and commentators overemphasized the systemic risks arising from the Archegos event, and misinterpreted the purpose of the SEC and CFTC's regulatory regimes. The Commissioners stressed that the primary purpose of investor adviser registration and regulations is to protect investors - more specifically, outside investors - by means of disclosures, fiduciary-duty requirements and reporting obligations. They argued that such protections are not needed for family offices, as the purpose of a family office is to cater to a wealthy individual or family in which only the management of the wealth of family members and key employees is permitted.
As to effective oversight regimes, the Commissioners highlighted (i) the CFTC's existing swap dealer registration, capital, margining and reporting rules, which provide the CFTC with real-time data on banks' trading operations, and (ii) the SEC's recently finalized security-based swaps reporting requirements, which go into effect later this year. The Commissioners noted that, had the SEC's rules been finalized earlier, the Archegos-related trades and positions of various banks may have been detected sooner with aggregation mechanisms in place, indicating that additional regulation would not have been necessary.
Commentary Dorothy Mehta
The op-ed shows a measured and smart response to a singular event by the heads of the key regulatory regimes. An initial response by commentators was a call for the regulation of family offices simply because Archegos was structured as such. The Commissioners pointed out the facts: systemic chaos evidenced in this market event was zero, and the purpose of regulation is to help investors in need of protections under the law.
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