Updates on Regulation, Trading, and Market Reforms for the Alternative Investment Community

“Family Office”? What’s In a Name: The Implosion Heard Around the (Financial Markets) World

What Can We Expect from the Regulators?

Robin Powers, Partner, Rimon, P.C.

Archegos Capital Management’s collapse last week, and the resulting losses for several global banks, has and will impact financial markets for the foreseeable future. Regulatory efforts will likely focus on the ever-expanding shadow banking sector and shed light on its transparency (or lack thereof) and the risks. Shadow banking is a blanket term to describe financial activities that take place among non-bank financial institutions outside the scope of federal regulators and generally is defined to include family offices.*

Scrutiny of nonbanks was already a priority for Treasury Secretary Janet Yellen after last year’s Treasury market turmoil surrounding hedge funds, dislocations in the repurchase agreement market in 2019, and of course, the GameStop story earlier this year.

The current regulatory examination follows on the heels of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) (commonly referred to as Dodd-Frank) which overhauled financial regulation in the aftermath of the 2009 financial crisis. Under the Dodd-Frank legislation, family offices won a special carve-out from Congress that allows them to avoid SEC registration if they serve a single family and don’t give investment advice. Family offices made the case to Congress at the time that they only make conservative investments to preserve family wealth and they do not try to beat the markets. And so, despite managing around $10 billion, Archegos is not directly regulated by the SEC because it manages Hwang’s wealth as a single-family office.

CFTC Commissioner Dan Berkovitz said, “The collapse of Archegos Capital Management and the billions of dollars in losses to investors and other market participants is a vivid demonstration of the havoc that errant large investment vehicles called ‘family offices’ can wreak on our financial markets.” He added, “A ‘family office’ has nothing to do with ordinary families. Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes, and plan their estates.”

On March 31st U.S. Treasury Secretary Janet L. Yellen led the first meeting of the Financial Stability Oversight Council (FSOC) under the new Biden administration. The FSOC was scheduled to discuss hedge fund activity and analysts expect it also addressed Archegos.

As calls for closer scrutiny of the shadow banking sector grow louder, we can expect policymakers to revisit systemically important financial institution designations for nonbank financial entities. Being designated as systemically important would allow for tougher regulation and oversight from the Federal Reserve.

* Over 10,000 family offices globally manage an estimated $5-15 trillion in assets – larger than the entire hedge fund industry. The largest family offices operate like sophisticated investment firms, but they don’t have the same oversight. Unlike hedge funds, family offices do not have to disclose their assets, bank relationships, and other operational information.

About the author

Robin Powers advises buy-side and other market participants on a broad range of trading and derivatives documentation and transactions, with a focus on cleared and uncleared derivatives and cross border regulation. She counsels clients with respect to regulatory issues including Dodd Frank and EMIR compliance, clearing and Swap Execution Facility relationships and uncleared swap margin related issues.

Ms. Powers has extensive experience negotiating and documenting International Swaps and Derivatives Association (ISDA) master agreements, master repurchase agreements, collateral and other credit support documents, prime brokerage agreements, futures and options trading and clearing, and securities lending agreements. She assists clients in their various transactional activities including documentation of structured transactions, credit default swaps, equity derivative transactions, interest rate swaps, weather swaps, asset swaps, total return swaps and currency transactions. She has also developed master confirmations for various derivative products.

Ms. Powers focuses on the regulatory aspect of structuring and organizing domestic and offshore investment funds including the design, structure and operation of investment portfolios. She also provides ongoing advice to investment advisory clients relating to their investment products and services and trading issues. Ms. Powers assists both investment fund and investment advisory clients in the negotiation and documentation of agreements with service providers including administrators, data and electronic trading service providers, auditors, and prime brokers.

Add comment

Updates on Regulation, Trading, and Market Reforms for the Alternative Investment Community