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Written by: Commentary Editing Room
2021-04-07 17:30
Last update date: 2021-04-07 17:31
Archegos Capital Management, a family office established by former Tiger Asia Fund Bill Hwang, was previously liquidated because it was unable to meet the investment bank's increased margin requirements. The incident involved many banks. Among them, Credit Suisse announced on Tuesday that the bank lost 47% due to the incident. Billion US dollars (about 36.56 billion Hong Kong dollars), and is expected to record a loss of about 900 million US dollars in the first quarter.
The incident is alleged to be caused by the US government's loose supervision of family offices. Looking back at the Hong Kong government's plan to promote the development of family office business in 2020, the Hong Kong government's supervision of this growing financial business has also attracted the attention of the market.
Credit Suisse (Credit Suisse) announced on Tuesday that the bank lost US$4.7 billion (about HK$36.56 billion) due to the incident and expects to record a loss of about US$900 million in the first quarter.
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Loose regulation in family offices
The "Family Office" is designed to provide wealth management services for wealthy families with huge assets, such as paying close attention to the family's asset status, hiring investment managers, managing the family's asset portfolio, and being responsible for the inheritance of family assets.
Family funds do not involve public investors. Therefore, whether it is a regulatory agency in the United States or Hong Kong, the supervision of family funds was generally relaxed before the Archegos incident.
For example, after the 2008 financial crisis in the United States, the investment advisory law was amended to require companies with less than 15 clients to be registered with the U.S. Securities and Exchange Commission (SEC), but as long as the family office is "wholly owned" by a family , In a disguised form, it is not bound by the regulations, no registration, no reporting, and no need to disclose the derivative financial instruments held.
The situation in Hong Kong is the same. For family funds that only serve a single family, the supervision is not strict.
The Securities and Futures Ordinance currently does not define "family" or "family office". It only indicates whether the family office needs to be licensed or not depends on three main elements: 1. The services provided by the family office constitute the "Securities and Futures Ordinance" Define one or more regulated activities; second, the family office is operating a business that provides related services; third, the business is operating in Hong Kong.
The above factors depend only on the operation of the relevant fund. At present, Hong Kong does not have a specific licensing system for family offices. Even the Securities and Futures Commission has stated that it has no intention to expand the scope of supervision to cover such single-family office arrangements.
The 2008 financial crisis has shown that once ultra-high leveraged investment has the first blood in the market, the subsequent vicious circle of falling stock prices, calling for margin, and being liquidated will likely make market conditions worse.
Since the stock market crash in March last year, coupled with the rapid rebound thereafter, many citizens have rushed into the market with hard-earned money. If there is another financial crisis due to the ultra-high leverage of family funds in the future, the ones who will bear the brunt will be the last. It is the general public.
How to prevent the problems of a family fund from spreading into systemic financial risks is naturally a necessary work for the government.
The high degree of freedom and loose supervision of family funds make it easier for these family funds to engage in highly leveraged investment activities.
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Be cautious of financial crisis, the scope of disclosure should be determined
In theory, how rich families allocate their assets should not be interfered with.
However, from Archegos's example, the high degree of freedom and loose supervision of family funds undoubtedly make it easier for these family funds to engage in highly leveraged investment activities.
These family funds are not required to disclose the derivative financial products they hold. According to Bloomberg, even if the bank involved knows the total scale of Archegos’s borrowings, the bank cannot know beforehand that Archegos is focusing on higher leverage. With a small number of stocks, when many banks want to "cut positions" for Archegos, the snowball effect of the stock price decline has become more and more urgent.
According to a report by the accounting firm Ernst & Young (EY), there are currently more than 10,000 single-family offices in the world, and their total capital has surpassed the sum of private equity and venture capital.
Private family capital family funds sit on huge amounts of wealth, and related asset management businesses will be an attractive source of income.
In its 2020 policy address, the Hong Kong government also mentioned the need to "promote Hong Kong's family office business", strengthen the promotion of Hong Kong's advantages in Hong Kong and other major markets, and provide one-stop support for family offices interested in operating in Hong Kong service.
However, after the Archegos liquidation incident, the government should also study how to supervise the possible excessive leverage on these family funds.
For example, family funds should be required to declare to the supervisory authority when conducting high-leverage transactions, or the office should be required to disclose relevant shareholdings to the borrowing bank, so that banks and supervisory authorities can prevent the emergence of crises similar to Archegos as early as possible.
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