The Financial Conduct Authority (FCA) said it started discussions with its shareholders regarding the possibility of UK authorised retail funds being given the option to use “side pockets” for Russian and Belarussian assets given sanctions placed following the former’s invasion of Ukraine.
Side pockets could provide the choice to dispose of assets from the two countries, as they are difficult to sell and/or tricky to value, from the fund’s main investments.
A side pocket is a type of account, normally used in hedge funds, to separate riskier or illiquid assets from more liquid investments, Investopedia said.
Should it be accepted, they would allow “new investors to enter the fund without getting exposure to Russian assets [and] some funds [could see an] end [to] their current suspension of dealing,” the FCA commented.
Existing investors would also be able to redeem the rest of their investment, while illiquid Russian assets remain in the separate side pocket (often marked to zero), while retaining rights to any eventual value, the financial services regulator added.
Any side pockets introduced would treat existing, redeeming and subscribing investors fairly and not encourage speculative new investment at the expense of current investors, the FCA confirmed.
It will be up to the fund manager to fairly and accurately value assets and to ensure subscriptions and redemptions are executed at a reasonable price.