As the fallout from hedge fund/family office Archegos Capital rippled through the financial market in the past weeks, market participants quickly asked an obvious question: is more regulation needed? If so, what kind? One painfully obvious remedy is better disclosure and oversight over opaque and highly geared instruments such as those used by Archegos. Highly geared and arcane derivatives have been behind virtually every hedge fund blow-up. Yet disclosure rules that apply elsewhere often do not apply in these corners. A case in point: under United States securities law, any investor – hedge funds included – that acquires more than 5 per cent of a company’s shares must report such holdings to the Securities and Exchange Commission (SEC) under the Schedule 13D form within 10 days. But this type of reporting is not required for positions held in the derivatives trade. Archegos did not buy shares in ViacomCBS and other companies outright; it used instruments called total return swaps which gave it economic exposure to the gains and losses of the stocks without owning them; in exchange, it pays a fee to its counterparties – large investment banks including Credit Suisse Group, Nomura Holdings, Goldman Sachs and Morgan Stanley. The shares were bought and held by these banks. In essence, this arrangement allows Archegos to take a geared position on stocks while not having to disclose it. Archegos was thought to have about US$10 billion of assets under management, yet is estimated to have had US$50 billion (some even claimed US$100 billion) worth of exposure to the underlying stocks. The implicit gearing was 5:1 (even 10:1) but it did not have to disclose anything – because in reality, it did not own the shares! Clearly, it would be useful to require the intermediaries – the large investment banks – to disclose such exposures to derivatives. Such reporting should be deposited with a central database – akin to a central clearing house – so the regulatory authorities can have a better global view and be equipped to spot potential weak links. Sadly, it turns out that the 2010 Dodd Frank Act required the SEC to implement exactly this type of disclosure rules. But it took the SEC nearly 10 years – until December 2019 – to finish writing the rules, and the roll-out will only start later this year. Alas, regulators can be woefully slow even when they have the right ideas. But another loophole is that Archegos is a family office and does not manage outside money. Therefore, it would have been exempt from such reporting requirements even after the regulations come into place. So by now you might be asking: why are hedge funds and family offices not tightly regulated? The fundamental reason is that these are sophisticated, wealthy actors; they can lose money and that is their problem. But when gearing is used, one small fund’s losses can start a domino effect and cause a contagion. The remedy for all of this is, again, requiring disclosure from the large intermediaries – the investment banks – regardless of the type of their counterparties. In this way, the Archegos exposure would have surfaced. But even after these rules are implemented, it is important to recognise the still-important role of self-regulation in the financial market. External regulation should not replace and crowd out the need for self-regulation. This is first of all because regulation can come too late, as in this case. But more importantly, regulations should be the minimum for what you do, not the maximum. Plenty of perfectly legal business practices would not look good when principles, values and reputations are considered, or from a long-term perspective. The biggest loser in the Archegos saga is Archegos itself. As a family office, was it sensible and in its self-interest to take highly geared and concentrated positions in highly volatile stocks? As for the banks, it appears that they relaxed their internal controls under pressure from the fee-generating side of the business; some banks succumbed to this more than others. The role of regulation is to establish the rules of the game and the information infrastructure; it is not to micromanage. Addressing the daily potential risks requires actors to have sound internal controls, and the culture and discipline to adhere to them, over and above regulatory requirement. An over-reliance on regulation as a solution to problems reduces private incentives and capabilities to address those exact problems and will be counterproductive in the long run. Lily Fang is professor of finance and the AXA chaired professor in financial market risk at INSEAD