Will the CFTC force family offices to hire trading professionals?

Advisers say the Commodity Futures Trading Commission will encourage family offices to hire professional advisers to guard against systemic risk resulting from the use of leverage and derivatives in their portfolios. 

On 1 April, CFTC commissioner Dan Berkowitz slammed the exemption of family offices from trading restrictions, updated in 2020. 

Archegos Capital Management, a former hedge fund, now a family office, collapsed in March. 

According to Berkowitz: “Convicted felons, market manipulators and other financial miscreants can operate freely within the confines of a family office, unbeknownst to the CFTC.” He said family offices needed to make basic disclosures to retain the integrity of markets, rather than being exempt from them. 

Berkowitz is not seen as likely to succeed Heath Tarbert as chairman of the CFTC.  The next chairman is tipped to be Chris Brummer, who has expertise in cryptocurrencies.

But Berkowitz’s views have weight. According to one family office consultant, the CFTC could press for the appointment of professional commodity trading advisers by family offices particularly when they use banks to take on complex strategies. 

This process would deter family offices from taking on such deals, although it could also lead to risk monitoring by the CTFC.

According to Deborah Mehta of law firm Cadwalader, Wickersham & Taft: “The vast majority of family offices in the US are not taking such outsized risks as Archegos with the use of leverage and multiple prime brokers on the institutional side of the bank. 

“Rather, a typical family office’s goal is preservation of wealth, which generally means an un-levered portfolio with a private bank.”