US indictments of Archegos underscore regulatory design flaws of Total Return Swaps

The indictments last week by the SEC and CFTC of principals of family office Archegos, now famous for its Total Return Swaps (TRS) positions that resulted in substantial prime brokerage losses, are chasing a problem created in part by regulatory mandate. Rather than ask for additional reporting, regulators could solve large parts of the problem by adjusting capital rules that preference opaque derivatives over much more transparent physical financing. This wouldn’t solve the problem of lying but it would scale down the entire scope of exposure.
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