FinEx has announced that investors in the FinEx Tradable Russian Corporate Bonds UCITS ETF sustained severe losses arising from the fund’s currency hedging contracts.
Most investors in ETFs holding Russian assets have been stuck waiting for sanctions to be lifted.
Historically, the ETF provided exposure to US dollar- and euro-denominated ‘Eurobonds’ issued by Russian corporate issuers. The fund’s underlying reference was the Bloomberg Tradable Russian Corporate Bond Index.
At the start of the year, the ETF had two share classes – a ruble-denominated currency-hedged share class listed on Moscow Exchange (Ticker: FXRB RM) and a US dollar-denominated share class listed on London Stock Exchange (FXRU LN).
However, both share classes were effectively suspended in early March when the Russian Eurobond market all but seized up due to international sanctions imposed upon Russia over its invasion of Ukraine.
According to data from TrackInsight, as of the end of February 2022, FXRB housed RUB 853 million (approx. $14m) while FXRU contained $62m.
The ETF now officially tracks no index – index providers no longer consider Russian Eurobonds to be tradeable investment assets. A statement from FinEx in March announced that the fund would continue to hold the underlying Eurobonds while re-investing any proceeds received from the bonds into money market instruments. Due to the state of the Russian Eurobond market, the ETF has not calculated its NAV in months.
Further complicating matters, even if all assets of the ETF were sold, investors would likely be unable to receive the proceeds as sanctions have also stalled operations between European and Russian depositories. Such a transaction would likely be frozen by the fund’s settlement agent Euroclear.
Investors in the ETF have essentially been stuck waiting for sanctions to be lifted so that the Eurobond market and inter-depository operations can return to normal functioning.
However, FinEx revealed on 1 June that FXRB sustained losses in early March – due to its currency hedging contracts – so significant that all assets in the share class were wiped out.
The losses arose because the ruble cratered by nearly 40% against the US dollar almost immediately following the imposition of sanctions on Russia, most notably on the country’s sovereign wealth fund. FXRB’s currency contracts, which go long the ruble to enact the share class’s currency hedge, felt the full impact of this event.
To cover the losses from the currency contracts, FXRB had to sell its underlying Eurobonds right when the Eurobond market had dried up – sellers of Eurobonds at that time reportedly received approximately 20% of a bond’s value compared to shortly before the invasion began.
The losses from FXRB’s currency contracts were actually so severe that FinEx also had to sell a portion of the Eurobonds underlying FXRU to meet FXRB’s obligations. According to FinEx, FXRU absorbed approximately $6.4m of losses in this regard.
FinEx states that using FXRU’s assets to cover FXRB’s losses was warranted as both are share classes of the same fund, their assets are not segregated, and, therefore, each share class is not immune from losses incurred in the other.
As to the delay in reporting these events, FinEx maintains that there had been no grounds for public disclosure as the future of FXRU and FXRB were still being decided by regulatory authorities – it appears as though FinEx was eventually forced to disclose these details as it was required to publish financial statements of the umbrella company, FinEx Funds, on 1 June.