US regulator favours tougher disclosure requirements for hedge funds in the wake of Archegos

Watchdog has backed new disclosure rules that require hedge funds to more quickly report significant losses that could harm investors or the broader financial markets.

The Securities and Exchange Commission (SEC) has proposed amendments to hedge fund disclosure rules in a bid to safeguard the markets from the repetition of events such as the Archegos fallout.

The proposed amendments relate to the US regulator’s confidential reporting form for certain registered investment advisors for private funds and would see their disclosures sped up to just one business day if they suffer a systematic loss that could ultimately harm investors and the equilibrium of the wider markets.

SEC chair Gary Gensler said the new reforms would help the watchdog to plug “significant information gaps” in its oversight using more timely information.

“The private fund industry has grown in size to $11 trillion and evolved in terms of business practices, complexity of fund structures, and investment strategies and exposures,” he said.

“We have identified significant information gaps and situations where we would benefit from additional information. Among other things, today’s proposal would require certain advisers to hedge funds and private equity funds to provide current reporting of events that could be relevant to financial stability and investor protection, such as extraordinary investment losses or significant margin and counterparty default events.”

The development follows the colossal losses caused by the fallout of family office Archegos Capital Management in March last year. Family offices would not be covered in the scope of the new rules, however, hedge funds that operate in the same way would be included.

A significant drop in share prices in stocks that Archegos had significant long positions in – ViacomCBS and Discovery – triggered margin calls it was unable to meet that sparked a $20 million fire sale.

Those hit the hardest were Credit Suisse and Nomura, which suffered losses of $5.5 billion and $3 billion respectively, and subsequently saw the former exit the prime brokerage business altogether in November.

A subsequent report from Law firm Paul Weiss, Rifkind and Warton examining the unravelling of the collapse highlighted Credit Suisse’s repeated failure to address continuous red flags from potential exposure limits put in place and manage margin levels attached to swap positions.