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Anglo-Russian ETF issuer FinEx announced that investors in the FinEx Tradable Russian Corporate Bonds UCITS ETF suffered heavy losses from the fund’s currency hedging contracts.
Historically, the ETF offered exposure to US dollar and Euro denominated “Eurobonds” issued by Russian corporate issuers. The fund’s underlying benchmark was the Bloomberg Tradable Russian Corporate Bond Index.
At the start of the year, the ETF had two classes of shares – a currency-hedged share class denominated in rubles and listed on the Moscow Stock Exchange (Teleprinter: FXRB RM) and a US dollar-denominated share class listed on the London Stock Exchange (FXRU LN).
However, both share classes were effectively suspended in early March when the Russian Eurobond market nearly seized up due to international sanctions imposed on Russia following its invasion of Ukraine.
According to data from TrackInsight, at the end of February 2022, FXRB housed 853 million rubles (about $14 million) while FXRU held $62 million.
The ETF now officially does not track any indices – index providers no longer consider Russian Eurobonds as tradable investment assets. A statement from FinEx in March said the fund would continue to hold the underlying Eurobonds while reinvesting 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 net asset value for months.
To complicate matters further, even if all of the ETF’s assets were sold, investors would likely not be able to receive the proceeds, as the sanctions also blocked trading between European and Russian custodians. Such a transaction would likely be frozen by the fund’s settlement agent, Euroclear.
Investors in the ETF have essentially been locked in pending the lifting of sanctions so that the Eurobond market and inter-custodian trading can resume normal operation.
However, FinEx revealed on June 1 that FXRB suffered losses in early March – due to its currency hedging contracts – so large that all assets in the share class were wiped out.
The losses came because the ruble cratered nearly 40% against the US dollar almost immediately after sanctions were imposed on Russia, including on the country’s sovereign wealth fund. FXRB’s FX contracts, which are long the ruble to implement the share class’ currency hedge, felt the full impact of this event.
To cover losses from the foreign exchange contracts, FXRB had to sell its underlying Eurobonds just as the Eurobond market had dried up – sellers of Eurobonds at that time would have received approximately 20% of the value of a bond compared to shortly before the start of the invasion.
FXRB’s foreign exchange contract losses were in fact so severe that FinEx also had to sell some of the underlying Eurobonds to FXRU to meet FXRB’s obligations. According to FinEx, FXRU absorbed about $6.4 million in losses in this regard.
FinEx states that using FXRU’s assets to cover FXRB’s losses was justified as both are share classes of the same fund, their assets are not segregated and therefore each share class is not not immune to the losses suffered by the other.
Regarding the delay in reporting these events, FinEx argues that there was no reason for public disclosure as the future of FXRU and FXRB was still being decided by regulators – it appears that FinEx was finally forced to divulge these details as they were. required to publish the financial statements of the umbrella company, FinEx Funds, on June 1.