Is it a question of shortness of memory on the part of financial institutions, or is it just a matter of the prospect of huge returns making risky investment decisions worthwhile? Whatever the motivation, the Archegos implosion has prompted regulators in the US, UK, Switzerland and Japan to investigate the risk controls of eight major banks including Credit Suisse, Nomura, Morgan Stanley, UBS, MUFG and Mizuho, who collectively suffered losses in excess of US$10 billion.
The New York headquartered Archegos Capital Management is an asset management company that straddles banking and securities financing transactions. In the regulation and supervision of banks, financial soundness of the institution possibly overshadows other considerations. In the regulation and supervision of securities firms, depending on the nature of their activities, governance of business and market conduct considerations dominate, whilst financial soundness remains relevant. Regardless of the differences in the business models of banks and securities firms, there is a significant commonality of issues and concerns, hence the joint letter dated 10 December 2021 from the Bank of England (BOE) and the Financial Conduct Authority (FCA) to firms involved in the equity finance business. The focus was on counterparty risk management. Banks and securities financing firms in the UK are being compelled to review the roles of the front office (first line of defence), also known as operational management, the oversight function of risk management (second line of defence) and senior management.