European regulators issued new guidance to investment fund managers on addressing the impact of the ongoing Russian invasion of Ukraine in their investment portfolios.
The European Securities and Markets Authority’s (ESMA) guidance addresses valuation and liquidity issues for Russian, Belarusian and Ukrainian portfolio assets, including the processes that fund managers should follow when evaluating these assets and whether these assets should be segregated in so-called “side pockets.”
“ESMA expects fund managers of investment funds with exposures to assets facing liquidity issues to assess whether a fair value of these assets can still be determined and adapt the valuation without undue delay,” it said.
The regulator indicated that fund managers should consider actions to preserve liquidity, such as suspending redemptions, in cases where the fair value of assets can’t be determined, or if it’s determined that redemptions at current market prices are “not in the best interest of investors,” it said.
Instead of suspending redemptions, firms should also consider using “side pockets” to segregate impaired assets, in order to protect investors against dilution and allow investors to access liquidity, it suggested.
ESMA said it would continue to closely monitor the impact of the Russian invasion of Ukraine on investment funds, with a particular focus on the use of liquidity management tools.
Separately, ESMA also issued guidance for issuers on addressing the impact of Russia’s invasion in their upcoming interim financial statements.
In that guidance, the regulator set out its disclosure expectations for public companies and their auditors, and advised them of the IFRS accounting standards that may apply, including the requirements on the impairment of both financial and non-financial assets.
The guidance “highlights the need for issuers to provide information that is useful to users and adequately reflects the current and, to the extent possible, expected impact of Russia’s invasion of Ukraine on the financial position, performance and cash-flows of issuers,” it said.
ESMA expects firms’ disclosure to cover the direct and indirect impacts of the invasion — and the resulting economic and financial sanctions against Russia — on “issuers’ strategic orientation and targets, operations, financial performance, financial position and cash-flows, measures taken to mitigate the impacts, and cybersecurity risks.”
The regulator said it expects issuers, their management, boards and auditors to consider its guidance when preparing their interim financial reports.