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BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551 

DIVISION OF SUPERVISION

AND REGULATION

SR 21-19 

December 10, 2021 

TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY 

AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK

SUBJECT: The Federal Reserve reminds firms of safe and sound practices for counterparty credit 

risk management in light of the Archegos Capital Management default

Applicability: This letter applies to institutions supervised by the Federal Reserve that have large 

derivatives portfolios and relationships with investment funds.

Archegos Capital Management, an investment firm heavily concentrated in a small 

number of U.S. and Chinese technology and media companies, defaulted on March 26, 2021, 

causing over $10 billion in losses across several large banks, principally outside the United 

States. The Federal Reserve, along with other U.S. and foreign regulators, initiated a supervisory 

assessment to understand the actions that led to Archegos’ failure and assess any riskmanagement shortcomings at supervised firms. 

 

In light of the Archegos default, and in the context of firms’ relationships with 

investment funds, the Federal Reserve is issuing this guidance to remind firms of the supervisory 

expectations in Interagency Supervisory Guidance on Counterparty Credit Risk Management, 

and to make firms and industry participants aware of practices that may be inconsistent with safe 

and sound banking practices.1 This letter is intended primarily for use by banking organizations 

with large derivatives portfolios and relationships with investment funds, as well as for 

supervisors as they assess and examine such institutions. This letter is generally not applicable to 

community banking organizations and banking organizations with insignificant derivatives 

portfolios or relationships with investment funds. 

The Federal Reserve is concerned with practices where, both at the inception of a fund 

relationship and, on an ongoing basis during periodic credit reviews, firms accept incomplete and 

unverified information from the fund, 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. More generally, these 

practices represent insufficient due diligence and may be inconsistent with safe and sound 

banking practices. Similarly, when initiating a relationship and on an ongoing basis, firms should 

obtain critical information regarding size, leverage, largest or most concentrated positions, and 

number of prime brokers with sufficient detail or frequency to determine the fund’s ability to 

service its debt. If a client refuses to provide this information, firms should consider whether it 

1 See SR Letter 11-10, https://www.federalreserve.gov/supervisionreg/srletters/sr1110.htm. 
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is consistent with safe and sound practices for them to begin or maintain a relationship with the 

fund or whether they can use strong compensating measures, such as significantly more stringent 

contractual terms, to mitigate the risk. 

 

The Federal Reserve also is reminding firms that poor communication frameworks and 

inadequate risk management functions, as well as fragmented systems and ineffective 

governance, hamper their ability to identify and address risk. Risk management and control 

functions should have the experience and stature to effectively control risks associated with 

investment funds. Further, both oversight and business groups should review contractual terms 

and practices relating to internal limits to assess whether they are commensurate with the risk the 

fund poses to the firm. Firms may 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. 

Finally, the Federal Reserve is concerned that firms may agree to margin terms 

inappropriate to their investment fund clients, 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. 

 

In summary, consistent with the guidance in Interagency Supervisory Guidance on 

Counterparty Credit Risk Management,2 firms should: 

• Receive adequate information with appropriate frequency to understand the risks of the 

investment fund, including position and counterparty concentrations, and either 

reconsider the relationship or set sufficiently conservative terms for the relationship if the 

client does not meet appropriate levels of transparency;

• Ensure the risk-management and governance approach applied to the investment fund is 

capable of identifying the fund’s risk initially and monitoring it throughout the 

relationship, and ensure applicable areas of the firm – including the business line and the 

oversight function – are aware of the risk their investment fund clients pose to the firm 

and have tools to manage that risk; and 

• 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. 

2 See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20211210a.htm. 
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Reserve Banks are asked to distribute this letter to the supervised organizations in their 

districts and to appropriate supervisory staff. The Board is continuing to review firms’ 

weaknesses identified in the above areas and may take further action. Questions may be sent via 

the Board's public website.3

Michael S. Gibson

Director

Division of Supervision and Regulation 

Cross References: 

• SR Letter 11-10, “Interagency Counterparty Credit Risk Management Guidance”

3 See http://www.federalreserve.gov/apps/contactus/feedback.aspx