Funds to weigh in on FCA’s plan to separate Russian assets

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” href=”https://www.law360.com/internationaltrade/articles/1488205/#”>Ronan Barnard ·

Law360, London (April 28, 2022, 6:27 p.m. BST) – The finance watchdog on Thursday asked financial services providers to comment on its proposals to allow fund managers to separate Russian and Belarusian assets basic investments and avoid exposing investors to breaking sanctions.

The Financial Conduct Authority has started its consultation to allow retail funds licensed in the UK to use side pockets – accounts that fund managers can use to structure their funds and segregate riskier investments.

The proposal would allow fund managers to separate Russian and Belarusian investments from the rest of their portfolio if they cannot be sold due to the range of Western government sanctions imposed on the two countries after the invasion of Ukraine.

The watchdog did not say when it would put the proposals into effect or how long the proposed changes would continue.

“We want UK licensed retail funds exposed to affected investments to be resilient and to operate in a way that all investors are treated fairly,” the regulator said. “We also want new investors to feel confident that they can invest in the funds without exposure to Russian and Belarusian assets.”

The financial watchdog said in its consultation paper that the so-called side pockets would only be available for investments subject to financial sanctions by Britain, the EU, Canada and Japan.

The war on Ukraine has affected investments, including securities issued by sanctioned companies, exchange-traded assets related to Russian companies, and bonds issued by Russian, Belarusian and Ukrainian organizations.

The regulator said it would consider the proposal a success if funds that stopped trading due to sanctions reopened and other funds with affected investments used side pockets. The FCA also said it would have been a success had it found evidence that investors were more confident.

Funds that hold war-affected assets in Ukraine, such as a bond held by a sanctioned Russian organization, may be unable to produce accurate prices for investors. This could result in unfair treatment of some investors.

Some funds have reacted to this by suspending trading altogether, preventing investors from investing or redeeming their assets in the funds.

The regulator seeks to consult with fund managers and their clients, as well as professionals involved in the bond market, such as custodians, investment service providers and insurers.

Fund distributors and investment intermediaries will also be consulted on proposed changes to regulations.

The consultation is due to end on May 16.

the proposals have been announced in March as Chancellor Rishi Sunak called on UK businesses to “think carefully” on the decline in investment in Russia.

London-based stockbroker Sova Capital, owned by Russian banker Roman Avdeev, has also filed for insolvency in March after Western sanctions caused it a cash crunch.

— Additional reporting by Najiyya Budaly. Editing by Joe Millis.

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