SFC strengthens policy after Archegos incident

It eyes stricter regulation over prime brokers, amongst others.

The Securities and Futures Commission (SFC) will strengthen its regulatory measures, following the Archegos incident that led to a multi-billion sell-off and large losses.

SFC CEO Ashley Alder said whilst the Commission does not have direct regulatory power over Archegos, it can regulate prime brokers.

“The focus for now is on how potential red flags can be identified before problems occur,” Alder said. “We will consider additional guidance for prime brokers if we identify shortcomings.”

The SFC has so far communicated their expectations of licensed firms to properly manage risks and establish procedures for stress testing.

Another point of improvement, Alder said, is the scope and effectiveness of some post-crisis reforms to the derivatives market.

“Archegos used multiple prime brokers, so it seems each only had limited visibility over the positions it had taken,” he said.

“This seems to have resulted in an increase in the concentration risk as well as the counterparty risk.”

According to Alder, international margin requirements need in-scope firms to collect and post margin to reduce systemic impact of a counterparty default. The requirements have already started to roll out, and is scheduled to complete implementation for September 2022.