The Financial Conduct Authority is pondering whether to allow retail funds to use “side pockets” to separate out illiquid Russian and Belarusian assets from their core investments.
With trading on the Moscow Exchange still suspended following global sanctions against Russia, asset managers are facing “significant practical challenges” in disposing of and accurately valuing assets, the watchdog said.
Countless UK domiciled funds with exposure to the region have been forced to suspend dealing.
Side pockets would alleviate some of this pressure by allowing new investors to enter the fund without getting exposure to Russian assets. Existing investors would be able to redeem the rest of their investment, while still retaining rights to any eventual value in the illiquid Russian assets parked to the side should trading resume.
The use of side pockets would be left up to the fund manager “based on acting in the best interest of each fund it manages,” but the FCA said it could help some funds which have suspended dealing reopen.
The regulator added the side pockets would be limited in scope to assets that are illiquid as a result of the Russia/Ukraine war. The precise scope will be determined as part of the consultation.
“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 regulator said.
“It is the authorised fund manager’s duty to ensure that assets are valued fairly and accurately, and that subscriptions and redemptions take place at a fair price.”
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