Family offices have grown in the US, but that segment remains slightly regulated – and that could be a problem for the financial industry, warned a former lawyer with the Securities and Exchanges Commission.
The risks posed by large family offices came into the spotlight after multi-billion dollar Archegos Capital management was forced to run more than $ 20 billion in deals last week.
The move resulted in a heavy sell-off of certain stocks, including US media giants ViacomCBS and Discovery, which rocked the broader market. Shares in several large banks that were supposedly involved in the deal also saw their own storage tank.
“This could … escalate into a much bigger problem since I think these family offices have really gotten going and they can do pretty much anything they want because there just isn’t a lot of oversight,” said Thomas Gorman , the former SEC attorney, told CNBC’s Squawk Box Asia on Thursday.
Gorman, now a partner in law firm Dorsey & Whitney LLP, pointed out that Archegos used money borrowed to build and leverage massive positions in the markets Instruments that were also “not particularly strongly regulated”.
This contributed to the fund’s huge losses, he said.
Amy Lynch, a former SEC regulator, warned that the Archegos episode may not be an isolated incident.
She told CNBC’s Squawk Box Asia on Thursday that financial markets could become “pretty frothy” and “near the point of bubble bursting”.
“And usually, before that happens, you see these kind of explosions because companies are taking a lot of risk, a lot of leverage, and when their trading goes wrong they have a big margin call, which is what happened to Archegos,” said Lynch, the now founder and is president of the consulting firm FrontLine Compliance.
A margin call refers to a broker requesting that an investor fund their account in order to meet the minimum required amount. This can happen when the assets held in the account have depreciated and the investor can choose to deposit more money or sell some of the assets.