Qi Qi Dong March 16, 2022
The Financial Conduct Authority (FCA) is engaging stakeholders to explore using ‘side pockets’ for UK-authorised retail funds facing difficulties in managing Russian and Belarussian assets. These assets, complicated by global sanctions and restrictions, present unique challenges in terms of disposal and valuation.
What Are Side Pockets? Side pockets are separate accounts that could isolate illiquid assets like Russian and Belarussian holdings from a fund’s main investments. This segregation could allow fund managers to manage these troubled assets independently without affecting the core fund portfolio.
Benefits of Side Pockets
- New Investors: Prospective investors could join funds without inheriting exposure to Russian assets.
- Existing Investors: Current investors could redeem their investments in core assets, with illiquid Russian assets held in the side pocket. These assets would be marked to zero but would retain rights to any potential future value.
- Fund Suspensions: Some funds might be able to lift suspensions on dealings in light of these isolated assets.
Ensuring Fairness and Preventing Speculation The FCA intends to ensure side pockets are used fairly, protecting both new and existing investors from speculative activity. The proposed side pocket usage would be optional for fund managers, focusing solely on assets affected by the Russia-Ukraine conflict. The FCA emphasizes that asset valuation and fair pricing for subscriptions and redemptions will remain the fund manager’s responsibility.
The FCA plans a formal consultation to finalize rule changes and encourages early feedback from market participants, consumer groups, and investor representatives. This consultation aims to gather diverse insights to refine the approach, aiming for balanced solutions that serve the best interests of all investors.
The full statement available from the FCA website: