The Securities and Exchange Commission is scheduled to brief members of the House Financial Services Committee on Wednesday about the meltdown of Archegos Capital that has sent shockwaves through markets and the banking industry, according to a staffer of a panel member.
The meeting comes as the SEC is launching an investigation of Bill Hwang’s family office investment firm and its complex derivative trades that forced its large bank lenders and brokers to sell off roughly $20 billion in positions and sink shares of media companies ViacomCBS, Discovery, Baidu and Tencent Music last month. Banks like Credit Suisse and Nomura Holdings that helped Archegos arrange the trades have
Lawmakers are exploring what the response will be to yet another financial scandal more than a decade after the 2010 Dodd-Frank reforms were put in place to rein in risk taking in the darker corners of the markets.
Central to the blowup is the use of certain derivatives to take positions in public companies without having to disclose the holdings. Archegos was part of a private market that entered into contracts with large banks for these instruments. When the broader market moved against the companies these swaps were linked to, Archegos faced margin calls it couldn’t meet and so the banks the firm dealt with had to exit the positions and sell them off in massive blocks without other investors knowing about the exposure.
There are also questions surrounding whether family offices should continue to be exempt from making broader disclosures about their holdings, a requirement that was left out of the Dodd-Frank law.
An SEC spokesman declined to comment about the briefings. A House Financial Services Committee spokesman also declined to comment.
It’s unclear if a Democratic-controlled Congress will push bills in response to the Archegos debacle or leave changes up to regulators like the SEC.
“I expect Congress to let the banking agencies and SEC decide how best to address post-Archegos rewrites, although hearings will pressure the agencies for action that goes beyond tough enforcement to stiffer rules,” said Karen Petrou, managing partner of Federal Financial Analytics.
Sen. Sherrod Brown, an Ohio Democrat who chairs the Senate Banking Committee, blasted investment banks for putting "profits first and enabl[ing] risky derivatives trading" that led to in billions of dollars in losses.
"We must make sure our financial watchdogs work together to protect the financial system and our economy," he said. "I expect the SEC and other regulators to take a closer look.”
