An Archegos Lesson: for Market Transparency, Cash Financing Beats Equity Swaps Every Time

An Archegos Lesson: for Market Transparency, Cash Financing Beats Equity Swaps Every Time

By Josh Galper
April 1, 2021, Finadium

Regulators and most market participants care about transparency, risk management and liquidity. The Archegos story is another example of why bilateral equity swaps, also called total return swaps (TRS), are a subpar option when it comes to achieving these goals. The better choices are cash financing in the form of margin and securities loans, or cleared TRS. It’s long overdue that regulators fix this problem.

The Archegos losses are a case of unhedged bank exposure against a counterparty that built up large, opaque positions with a number of firms. The same margin call implosion that occurred last week could happen in the cash markets too, with margin calls on positions going the wrong way leading to forced sales. But TRS have different characteristics from cash leverage that make them less useful for the public and harder to manage when something goes wrong.

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