Shareholding regulations will require more transparency

A snippet from the FT on Archegos “regarding bank claims. . . . It will come down to what indemnity was in the loan and swap agreements.” What it fails to address is the market impact of these agreements. What comes to mind is that increased market transparency and disclosure is needed. With regulators continually demanding greater transparency to who the beneficial owners are – focus will be on these ‘swap agreements’. Include or exclude? I view it is the former.

The overriding principle of shareholding disclosure is driven by the policy that disclosure requirements are triggered by voting rights rather than economic interest, and as such, derivatives can be used to conceal equity.

Swaps are really a contract agreement regarding the exchange of cashflows between two parties. It’s a way of concealing equity and its use is to mask the ownership identity of the investor.

Why is this? Well, as a substantial owner of a stock, holding swaps is an easy way of not letting the market know who the ultimate beneficial owner is. Such a position will not be impacted by market dynamics i.e., shorts on the position or investors limited the amount of capital they would invest due to this ‘overhang’ vs. an equity holding.

With the regulatory environment already demanding and dynamic, global regulators are going to do a deep dive into how this could have been thwarted. Swaps will be under the regulator microscope in that the possibility that regulators will demand that investors like Archegos must declare their financial beneficial positions including swaps, despite not holding the underlying, be its shares or voting rights.

Prime Brokers will be wanting tools to monitor what is described as dynamic margins that allow them to know with the volatile price swings in the market what is the actual impact to margins. With this Archegos incident, regulators will be taking a hard look at swaps. At the moment, in the swap arena, only cash settled index swaps are needed to be included in shareholding disclosures. However, disclosure transparency is coming to swaps in the near future! It has been on the radars of European regulators for a while as the demand for more stringent investor transparency regime has been long pushed for adoption.

Archegos prepares for insolvency as banks seek compensation for $10bn losses | Financial Times (ft.com)