FCA consults on side pockets for Ukraine-impacted funds

FCA consults on side pockets for Ukraine-impacted funds
  The economic sanctions imposed on Russia and Belarus in retaliation for the invasion of Ukraine has exposed some UK retail funds

The Financial Conduct Authority has asked for industry feedback on its proposals to create ‘side pockets’ in funds exposed to the war in Ukraine.

The regulator announced last month that it had begun discussions with stakeholders over the side pockets, which would allow fund managers to separate Russian and Belarusian assets from the funds’ other core investments.

A number of funds with exposure to Russia and Belarus have been suspended for dealing since the invasion of Ukraine, due to global sanctions making it near-impossible to offload Russian assets, as well as concerns over valuation. 

As a result, a number of these assets are essentially illiquid.

The consultation, announced today (April 28), has asked for feedback on proposals to allow authorised fund managers to create a separate class, or range of classes, within the fund for these assets. 

These classes would be valued based on the illiquid assets only, and not the remaining assets in the fund, which would have their own valuation.

Once these side pockets have been created, new or existing investors looking to buy into the fund would receive units valued based on the liquid assets.

Side pockets would allow new investors to enter the fund without sharing in the exposure to the impacted investments, as well as allowing existing investors to sell the units which are not in the side pockets, ultimately allowing the gated funds to end their dealing suspension, the regulator said.

Side pockets are commonly used in non-retail funds, such as hedge funds or institutional funds, however they are not available to retail funds which are meant to hold liquid assets so they can offer redemption on demand.

The new regulation would only be for UK authorised funds managers with exposure to investments impacted by the Ukraine war.

The regulator said it is aiming to allow affected funds to operate fairly and efficiently in the interests of all investors.

Edwin Schooling Latter, director of wholesale markets at the FCA, said creating the side pockets could help existing and new investors in these funds. 

“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.

“We are grateful to the support we have had from industry and other stakeholders in developing these proposals over the past weeks."