- Traders took on bets when indexes cut Russian stocks
- Banks have a chance to profit when sanctions lifted
- Clients rue missed the chance to share any profits
Several sources familiar with the trades said that MSCI’s and FTSE Russell’s decision last month to remove Russian stock from their indexes has left some of the world’s biggest banks unintentionally holding potentially valuable positions.
As a result, Goldman Sachs, BNP Paribas, JPMorgan Chase, HSBC, and other global banks have had to transfer Russian stocks and related derivative positions that they had taken to finance bets by institutional clients into their books, five sources, including investors and traders, said.
The banks could cash out those positions, when conditions permit, for what some of the sources said may result in sizeable profits.
Due to the opaque nature of derivative trading books, and the sources said that profits were not an assurance for the banks, Reuters could not ascertain the size of the positions.
Before Moscow invaded Ukraine, which the Kremlin calls a “special military operation”, billions of dollars overall tracked FTSE Russell and MSCI indexes that included Russian stocks. The future of these assets, which has not been formerly reported, indicates how Western sanctions have extensive and sometimes unintended impacts on the global financial system.
Goldman (GS.N), HSBC (HSBA.L), BNP Paribas (BNPP.PA), and JPMorgan (JPM.N) declined to comment. The parent of index provider FTSE Russell, the London Stock Exchange (LSEG.L) declined to comment. MSCI failed to respond to a request for comment as well.
Low-profile teams known as ‘Delta One’ trading desks have taken positions at the center of the unusual situation that the investors and banks now find themselves in.
In these divisions, traders sell derivatives such as index swaps to cultivated investors including hedge funds. Without them having to buy the stocks that make up that benchmark, investors then get a return from an index.
The banks acquire the stocks that make up the index on the back end of those trades, either outright or through other derivatives. Furthermore, they take other positions called hedges, which are meant to shrink their overall risk from such tradings.
Delta One desks had to strip Russian stocks such as Gazprom (GZAVI.MM) and Sberbank (SBMX.MM) from the baskets of swaps they had crafted for clients when FTSE Russell and MSCI removed them from their indexes in March. The five sources said that the Russian derivatives and shares were placed in different trading books, and it is now up to each bank concerned to determine what to do with them.
This amounted to “free money for banks”, said one of the sources, who directs an investor in these products and who refused to be named due to client confidentiality.
Several investors also intend to lay claim to any profit, two of the sources said, with some “incensed” that they could end up being left out on potentially lucrative returns. Three of the sources, however, said that any profit should accrue to the bank rather than the individual constituents since their clients had bought exposure to the index through swaps.
Two of the sources said there is no assurance that banks can realize any profits from the stocks. Any gains will depend on how the Russian exposures were hedged in the first place and the value assigned to the asset.
Furthermore, to realize any possible gains most banks would need to obtain the ordinary shares of sanctioned companies, four of the five sources said. But, it is impossible to know when that might happen.
On March 24, the Moscow Exchange (MOEX) – which closed after Russia invaded Ukraine on February 24 – partially re-opened but only to local investors.
One of the sources said that the market’s full re-opening has been postponed multiple times and Western investors now expect to wait “weeks if not months” for free access to it. Forfeiting any chance of a profit, several banks may opt to quit Russian risk ahead of sanctions being lifted and trading resuming.
While the long-term valuation damage remains unclear, the share prices of many Russian companies have plummeted. However, Russia is ready to distribute billions of roubles from its National Wealth Fund to support its stock market.
Assuming Western authorities permit unfettered trading, this could make it easier for some traders to exit positions profitably, one of the sources said. It is unclear if any of the banks are already seeking options to leave their Russian positions.
($1 = 77.7100 roubles)