The teeth gnashing and hand wringing in the aftermath of the problems at Archegos misses a fundamental problem that is still to be addressed — misuse of collateral.

The hedge fund synthetically purchased Chinese and US shares using derivatives known as total return equity swaps. The off-balance sheet transactions did not require payment of the full purchase price but merely agreement to meet so-called margin calls. These are payments made to a counterparty to help cover potential losses on trading positions.

Archegos would have lodged an upfront amount, the initial margin, against the risk of a large market move or non-payment of a margin call. As the initial margin is a fraction of the value of the shares, such swaps allow creation of a large position with up to 10 times leverage.