The Joint Audit Committee In The Post-Archegos Risk Management Landscape – Commodities/Derivatives/Stock Exchanges

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Regulators—including the Federal Reserve, the US Securities and Exchange Commission, the Commodity Futures Trading Commission and the Joint Audit Committee—are increasingly focusing on the terms and conditions of account agreements under which banks, broker-dealers and futures commission merchants’ contract with their customers, and in particular on terms and conditions relating to limits, the right to call for margin, limited recourse, and grace periods that may toll the right to exercise remedies upon a default. This focus derives from legitimate risk management concerns. The market crash in March 2020 and the ensuing weeks of volatility, and then, a year later, the default of Archegos Capital Management, spurred regulatory and supervisory assessments and reviews of risk management practices across the industry.1

For many firms, this process has cast a spotlight on practices around documentation of trading and clearing arrangements with institutional clients. There was a time, before the 2008 financial crisis, when dealers, for the most part, exerted most of the leverage in document negotiations with those clients. (The template forms of the ISDA Master Agreement and Credit Support Annex attest to this fact.) In the wake of the crisis, however, the balance began to shift and dealers increasingly faced the choice between conceding risk points to top-tier clients, and losing the business. Of course, at the same time non-market and market risk management functions at the dealers were becoming more robust, more fully staffed, and more intensively regulated. So, dealers were able to get comfortable that they could manage the risk entailed by concessions around key documentation terms.

Now, in the wake of the March 2020 volatility and the Archegos default, dealers are experiencing something of a regulatory reckoning around these risk management practices. In this article I examine three recent examples of this new vigilance: SR 21-19, issued by the Fed’s Division of Supervision and Regulation with specific reference to Archegos;2 a March 2022 Statement by the SEC’s Division of Trading and Markets3 ; and the Joint Audit Committee’s recent practice in the conduct of annual financial and operations audit of the industry’s largest FCMs. After an overview of SR 21-19 and the TM Statement, I look at the history of the JAC’s audit practice around the issues raised by those regulatory releases. My objective is to reveal what the three regulatory initiatives have in common, and suggest ways that the JAC’s initiative might look to the Fed and the SEC actions as instructive precedents to action they should consider as well in addressing a matter of common concern, among not just the regulators, but among the market participants as well (on both the sell-side and the buy-side).

SR 21-19

Last December the Fed’s Division of Supervision and Regulation issued an SR Letter, SR 21- 19, summarizing a supervisory assessment undertaken by Fed staff of counterparty credit risk management in light of the Archegos Capital Management Default in March 2021.4

SR 21-19 identifies several risk management practices of concern for banks and dealers entering into leveraged derivatives transactions:

  • Diligence at onboarding and in periodic credit reviews. Firms may “accept incomplete and unverified information from” counterparties, particularly with regard to the fund’s strategy, concentrations, and relationships with other market participants. These concerns are “heightened where a fund client has a history of concentrated positions and losses.”
    • Remediation. Onboarding and ongoing monitoring diligence should include “information regarding size, leverage, largest or most concentrated positions,” as well as information about the counterparty’s other prime brokers “with sufficient detail or frequency” to permit the firm to determine the counterparty’s ability to meet its bonds on outstanding transactions.

  • Control Functions. Firms should be vigilant to how “poor communication frameworks and inadequate risk management functions, as well as fragmented systems and ineffective governance, may hamper their ability to identify and address risk.”

  • E Reputation Risk. Firms should “consider reputational risk in making risk assessments; when they do so, they should establish a clear connection between such factors and specific financial decisions made by the firm with regard to a specific client.”

  • Documentation. Finally, firms should ensure that there is comprehensive review by internal stakeholders (sales, market risk, non-market risk, credit, finance) of “contractual terms and practices relating to internal limits,” since those terms can materially affect the risk a counterparty present.
    • SR 21-19 specifically calls out the risk of accessing to “inappropriate margin terms,” ​​which may include “failing to provide for adequate margin levels or sufficient risk-sensitivity.” Contractual terms “that prevent a firm from improving its margin position or closing out positions quickly if a fund misses margin calls, even when presented with an increasing risk profile at the fund, may be inconsistent with safe and sound practices.”

    • Firms should “ensure that margin practices remain appropriate to the fund’s risk profile as it evolves, avoiding inflexible and risk-insensitive margin terms or extended close-out periods with their investment fund clients.”


In March 2022, Staff of the Division of Trading and Markets issued a statement in the same vein. Without naming Archegos, the Statement urges broker-dealers and other market participants

  • E to remain vigilant to market and counterparty risks that may surface during periods of heightened volatility and global uncertainties and to maintain strong risk management practices;

  • to collect margin from counterparties “to the fullest extent possible in accordance with any applicable regulatory and contractual requirements;”

  • to monitor concentrated positions of prime brokerage counterparties and to seek sufficient information to determine counterparties’ aggregate positions in any markets that may experience liquidity concerns and work with the counterparties to mitigate risk;

  • to stress test positions with the proper severity in light of current events and potential market movements, and act to manage the risk of the positions, particularly those that are concentrated, appropriately; and

  • to monitor risk management limits, calibrated to the financial resources of the broker-dealer, closely intraday and escalate any breaches promptly to senior management.


In 1984, a number of futures exchanges, acting in their capacities as self-regulatory organizations, and the National Futures Association, entered into a Joint Audit Agreement, under which any FCM that is a member of more than one self-regulatory organization would have a single designated SRO. Under the Agreement, the DSRO would be primarily responsible for periodic financial examinations, the results of which would be shared with the other SROs of which the FCM is a member.5

The CFTC endorsed the Joint Audit Agreement when it adopted Regulation 1.52, which permits DSROs to enter into such agreement subject to the CFTC’s approval after public notice and comment.6 Under Regulation 1.52 an SRO may delegate responsibility for regulatory oversight over a member FCM to a designated SRO with respect to

  • minimum financial and related reporting requirements and risk management requirements, including policies and procedures relating to the customer funds, adopted by such SRO and the CFTC; and

  • financial reports and notices necessitated by such minimum financial and related reporting requirements.

The current Joint Audit Program assigns each FCM to either CME or NFA as the FCM’s DSRO (specifically, all FCM clearing members of CME are assigned to CME, all other FCMs to the NFA). Accordingly, only the CME and NFA currently engage in routine, periodic on-site examinations of FCMs pursuant to the Joint Audit Agreement.7


1. Archegos Capital Management, an investment firm heavily concentrated in leveraged equity swap positions on a small number of US and Chinese technology and media companies, defaulted in March 2021, causing over $10 billion in losses across several large banks that had been counterparty to those positions. In April 2022 federal prosecutors unsealed an indictment charging Bill Hwang, Archegos’s founder, and Patrick Halligan, its CFO, with racketeering conspiracy, securities fraud, and wire fraud offenses in connection with schemes to manipulate the prices of securities in Archegos’s portfolio and to defraud its prime brokers. Inevitably this complicates the post-mortems around apparent risk management issues, by casting into stark relief just how extraordinary a tail event the collapse of Archegos was. Risk managers might well question how they should control for the risk that a client is lying to them. That said, “fraud risk management is an intrinsic part of banking,” and being “systematically misled,” as the indictment states, is no less a risk management issue than permitting a client to breach risk limits. See Helen Bartholomew and Luke Clancy, “How banks got caught in Archegos’s web of lies,”, 10 May 2022 (quoting an unnamed former regulator, and the federal indictment)

2. See SR 21-19: The Federal Reserve Reminds Firms of Safe and Sound Practices for Counterparty Credit Risk Management in Light of the Archegos Capital Management Default (December 10, 2021), available here: The Fed’s supervisory assessment was undertaken in consultation with other regulators, including the Bank of England and the Financial Conduct Authority, which released a similar notice the same day. See Dear CEO Letter, Supervisory review of global equity finance businesses (December 10, 2021), available here:

3. See TM Staff Statement, SEC Division of Trading and Markets, March 14, 2022, available here:

4. SR21-19 notes that “Archegos Capital Management, an investment firm heavily concentrated in a small number of US and Chinese technology and media companies, defaulted on March 26, 2021, causing over $10 billion in losses across several large banks.”

5. The DSRO process “is intended to enhance the effectiveness and efficiency of the SROs’ financial surveillance function by avoiding unnecessary duplicative financial examinations of FCMs that are members of more than one SRO.” Commodity Futures Trading Commission, “Joint Audit Committee Operating Agreement,” 73 FR 52832 (September 11, 2008).

6. See CFTC Regulation 1.52(h).

7. Commodity Futures Trading Commission, “Financial Surveillance Examination Program Requirements for Self-Regulatory Organizations,” 84 FR 12882 at 12884 n. 22 (April 3, 2019).

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