As fund managers grapple with how to handle their exposure to Russian assets that are impaired by economic sanctions, the U.K.’s Financial Conduct Authority (FCA) plans to launch a consultation on a mechanism for allowing firms to park those assets, while allowing the rest of their funds to function normally.
The FCA said it has started consulting on the use of so-called “side pockets” for retail investment funds with exposure to sanctioned and suspended Russian assets. This would allow fund managers to separate Russian and Belarussian assets that are difficult to sell — and/or hard to accurately value — from the rest of their portfolios.
The British regulator says this approach would enable new investors to buy into funds without getting exposure to Russian assets.
Additionally, existing investors would be able to redeem their investments based on the value of the core portfolio assets — with the illiquid Russian assets held separately (typically marked to zero) — while retaining their rights to any eventual value that may be realized from those assets in the future.
“We will consult on proposals with the aim of ensuring that any side pockets that are introduced, and the date on which the side pocket takes effect, treat existing, redeeming and subscribing investors fairly, and do not encourage speculative new investment at the expense of existing investors,” the FCA said in a release.
The regulator noted that the proposed use of side pockets would be limited to assets that are illiquid directly as a result of Russian invasion of Ukraine, and the resulting economic sanctions. The use of side pockets would be optional based on fund managers’ views on the best interests of each fund.
The precise scope of these arrangements is to be determined as part of the consultation.