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WASHINGTON - The implosion of New York-based Archegos Capital Management and the resulting losses for global banks is likely to intensify regulatory efforts to curtail the ballooning shadow banking sector and shed light on its risks.
Scrutiny of nonbanks was already a priority for Democratic lawmakers and Treasury Secretary Janet Yellen after hedge funds were involved in last year's Treasury market turmoil, dislocations in the repurchase agreement market in 2019, and January's GameStop saga.
The meltdown at Archegos, run by former hedge fund manager Bill Hwang, is another strike against the lightly regulated nonbank sector, said analysts. Archegos' soured leveraged equity bets have left big banks that financed its trades nursing at least $6 billion in losses, drawing scrutiny from watchdogs.
Despite managing around $10 billion and being leveraged to the tune of around $50 billion, according to a person with knowledge of the fund's positions, Archegos was not directly regulated because it manages Hwang's personal wealth as a single-family office.
On Wednesday, Yellen is leading the first meeting of the Financial Stability Oversight Council (FSOC) under the new Biden administration. The body is set to discuss hedge fund activity, among other issues, and analysts expect it will address Archegos too.
The U.S. Securities and Exchange Commission (SEC), which is a member of FSOC, has been discussing the incident with brokers to understand the impact on them and their customers, and areas of potential additional exposure, said one person with knowledge of the matter.
"The forced deleveraging of Archegos will keep the 'gamification' of markets a continued focus of Congress and federal financial regulators," wrote Raymond James analysts, adding policymakers would likely push for tougher single-family office disclosure rules, among other new reforms.
After the 2009 financial crisis, Congress imposed tough rules on banks, pushing riskier activities into more lightly regulated sectors, such as asset managers and private funds, also referred to as the shadow banking sector.
In response, the FSOC began a review of the asset management industry, warning in 2016 that leveraged hedge funds could cause instability during market stress if they became forced sellers. It planned to monitor the risks and plug data gaps, but the former Trump administration shut down that project.
REGULATORY BLIND SPOT
Family offices are even more of a regulatory blind spot. Single-family offices, which invest just one family's wealth, are not required to register with the SEC and therefore, unlike hedge funds, do not have to disclose their assets, bank relationships and other operational information.
While FSOC's 2020 annual report found net U.S. hedge fund assets were $2.9 trillion - $6.3 trillion in gross assets when accounting for leverage - it gave no data on family office assets.