Ultimately, the report concluded that more work is needed to ensure that the risks related to derivatives exposures and leverage are being adequately monitored. “The data show clearly that Archegos had a highly concentrated portfolio and that any negative change in the price of the underlying stocks could trigger large mark-to-market losses and substantial variation margins,” the research found. Using that data retrospectively, the regulators found they were able to “track the evolution of Archegos’ positions in individual stocks,” and that they could also analyze the mark-to-market value of the portfolio of swaps held by Archegos. However, the review found that the buildup of the firm’s exposures can be seen in data that must be reported under European rules, known as the European Market Infrastructure Regulation (EMIR) - which require all entities, including family offices, to provide transaction-level reporting of derivatives positions. “Without relevant reporting requirements, regulators did not have the ability to identify risks related to Archegos, including high leverage and concentrated exposures.” “While Archegos was legally a family office, it implemented hedge fund–like strategies without being subject to regulatory and reporting requirements at entity level that apply to hedge funds,” the paper said. The lack of transparency to its trading partners meant that the firm’s large, concentrated trading exposures weren’t subject to adequate margin requirements - exacerbating the losses faced by its counterparty banks.Īt the same time, regulators were largely in the dark too, given the lack of oversight into the firm’s operations. “Overall, Archegos operations were largely invisible to regulators and market participants,” the report said. and its use of derivatives, which are less transparent to both regulators and other market players, to build its positions. In its report, ESMA finds that the risks at Archegos were allowed to accumulate largely undetected, given the firm’s status as a family office, which exempted it from the regulatory reporting requirements imposed on regulated investment fund advisers in the U.S. “When the price of the underlying stocks started to decline, the firm was unable to meet variation margins, resulting in the liquidation of the stocks by the counterparty banks,” the paper noted. The firm collapsed when stock prices moved against its large, leveraged and highly concentrated trading positions, which were built through total return swaps.

Archegos liquidation