We have seen another example of the damage that swaps with their underlying counterparty risk and lack of transparency can do to the banks that issue/hold them. Credit Suisse, Nomura, and other banks entered into total return swaps on some individual securities with Archegos, a large family office. The family office levered up their positions resulting in significant counterparty risk for the banks.
This type of transaction is similar to some transactions done before the financial crisis of 2008-2010. Down Up Equity Trust Securities (“duETS”) were explicitly designed to avoid this kind of counterparty risk while requiring transparency regarding the amounts of securities issued into the market. duETS reduce systemic risk while total return swaps of the nature engaged by Archegos and the banks increase systemic risk.
With duETS, you can only lose the money you put up to obtain your position. There are no margin calls. The returns to duETS are backed by Treasuries. You can still lose money. But you don’t lose more than used to purchase the securities.
duETS prices and transactions will be cleared through DTC, and the resulting data will be published on national financial data platforms and GIG’s product website.
Archegos debacle is a reminder of why duETS are an important innovation. For more information, see the Introducing duETS.