The head of the CFTC, one of the main US regulators, has criticized how family offices that are essentially investment organizations but don't take in outside money are exempt from certain rules. They are often large enough for their actions to affect markets, he said.
A top US regulator has called for controls over family offices, criticizing how they are exempt from certain market rules and worrying that the multi-billion dollar demise of Archegos highlights potential systemic risks.
“The Archegos failure highlights the importance of strengthening the CFTC’s oversight of these large funds and preventing bad actors from trading in our markets,” Dan M Berkovitz, commissioner, at Commodity Futures Trading Commission, said in a statement late last week.
The Archegos entity operates as a family office for former New York hedge fund executive Bill Hwang. Its demise has caused multi-billion losses for Credit Suisse, Nomura and a number of other banks including Goldman Sachs, Morgan Stanley, Citigroup, BNP Paribas, Deutsche Bank and UBS.
There has been a trend over the past 10 years of hedge fund firms morphing into family offices by ceasing to manage third-party funds - George Soros is an example. As a result, these entities aren’t covered by the Securities and Exchange Commission, as would otherwise have been the case following the Dodd-Frank legislation enacted after the 2008 financial crash.
“The collapse of Archegos Capital Management and the billions of dollars in losses to investors and other market participants is a vivid demonstration of the havoc that errant large investment vehicles called `family offices’ can wreak on our financial markets. Family offices can be active in both securities and commodities markets,” Berkovitz said in a statement on the regulator’s website.
“Unfortunately, in the last two years the CFTC has loosened its oversight of family offices. In 2019, and again in 2020, the Commodity Futures Trading Commission (CFTC) approved rules that exempted family offices from some of our most basic requirements,” he continued.
“I objected to these exemptions at the time, warning in 2019 that `[t]he approval of [these rules] without any checks and balances on exempt family office CPOs [commodity pool operators] will increase risks to our markets and market participants’,” Berkovitz said.
Berkovitz said the term “family office” has “nothing to do with ordinary families.”
“Rather, it is an investment vehicle used by centi-millionaires and billionaires to grow their wealth, reduce their taxes, and plan their estates. According to a 2019 report, the average wealth of family offices surveyed in North America was $1.3 billion, with $852 million in assets under management. As we have just seen, the failure of a large family office can cause significant harm to our financial markets,” he said.
“Because family offices do not solicit investments from the public, they are generally exempt from certain CFTC regulations that relate to investor protection. But the CFTC strayed far beyond this rationale when it also exempted multimillionaire and billionaire family offices from basic requirements related to market protection and integrity,” he said.