Britain proposes ring-fencing fund assets hit by Ukraine war

·2-min read
FCA signage is seen at their head offices in London

By Huw Jones

LONDON (Reuters) - Fund managers could ring-fence assets that have become untradable due to sanctions over Russia's invasion of Ukraine in "side pockets", Britain's Financial Conduct Authority said on Thursday.

The FCA set out its proposals in a public consultation aimed at dealing with Russian and Belarusian assets held by asset managers in UK-authorised retail funds that have become illiquid or untradable due to sanctions imposed on the two countries by Western powers.

Side pockets, commonly used by hedge funds and institutional funds, could allow retail funds that had to suspend dealings to reopen to accept new investors and pay redemptions, the FCA said.

"We want these funds to operate fairly and efficiently in the interests of all investors. So we propose allowing authorised fund managers to use separate new classes of units (side pockets) to hold affected investments," the FCA said in a statement.

Jonathan Lipkin, director of policy at the Investment Association, which represents asset managers, said ensuring that side pockets work appropriately and that all investors are treated fairly will be paramount.

"While the immediate focus is on providing a solution for funds affected by the current crisis, we would welcome further dialogue on how we ensure that we have the appropriate liquidity management tools in place to enable us to address future events," Lipkin said.

The illiquid assets could be parked in the so-called side pockets to separate illiquid Russian and Belarusian securities from other assets in the fund.

"Existing investors could access the rest of their investment in funds that are currently suspended. New investors could buy these funds without acquiring Russian assets they do not want," said Edwin Schooling Latter, the FCA's director of markets, wholesale policy and wholesale supervision.

Asset managers would be allowed to charge a fair annual fee for the side pocket, the FCA said. The short consultation closes on May 16 and final rules will be published as soon as possible thereafter.

The FCA said it was not proposing to set any time limit on side pockets given how the situation in Ukraine might develop.

(Reporting by Huw Jones; Editing by David Clarke and Bernadette Baum)

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