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Industry roundup: 3 March

Russian exodus “a test for fund managers”

The escalating financial crisis triggered by Russia’s invasion of Ukraine has provided fund managers with a further test of their liquidity limits, suggests a Reuters report.

Reuters Breakingviews columnists Karen Kwok and Peter Thal Larsen report that with most trading on the Moscow stock exchange halted since the invasion on 24 February, firms including J P Morgan and Amundi have suspended redemptions from funds with more than US$4 billion, despite asset managers’ promise that customers can withdraw cash whenever they want.

JPMorgan Asset Management suspended its Russia Equity Fund and Emerging Europe Equity Fund with immediate effect, the company informed its investors in a letter on 28 February, preventing them from redeeming, switching or buying shares in the funds.

Western asset managers in Russia face multiple headaches, say Kwok and Thal Larsen. The extended closure of the Moscow bourse – unparalleled since October 1998 – as authorities attempt to fend off a market collapse has prevented money managers from liquidating their holdings. Although bonds are still trading, restrictions on capital movements make it almost impossible to get money out of Russia.

US exchanges have temporarily halted trading in stocks of Russia-based companies such as internet group Yandex and the London Stock Exchange (LSE) has frozen depositary receipts of sanctioned Russian banks such as VTB. UK press reports say that Russian companies have seen the value of their London-listed shares collapse in the past two weeks as the rollout of sanctions and Moscow’s triggers a mass sell-off.

An index tracking London-traded Russian companies such as Gazprom, Sberbank and Rosneft has plunged 98% in a fortnight, wiping US$572 billion (£428bn) off their valuations. On 3 March the LSE said that it had suspended trading in 27 companies with strong links to Russia, including Gazprom and Sberbank. The LSE added that it was moving to block trading in the companies, which also include EN+, Lukoil and Polyus, with immediate effect “in light of market conditions, and in order to maintain orderly markets”.

The Reuters report suggests that the sharp loss of liquidity could see index provider MSCI eject Russian stocks from its benchmarks. Earlier this week MSCI said it was consulting market participants on how to treat Russian equities in its indexes. One option was to reclassify the MSCI Russia Indexes as so-called standalone markets, removing them from the company’s Emerging Markets benchmarks.

MSCI’s head of index research Dimitris Melas told Reuters that Russia’s stock market is “uninvestable” after stringent Western sanctions and central bank curbs on trading and the removal of Russian listings from indexes a “natural next step”.

“Funds dedicated to Russia therefore have little choice but to suspend withdrawals,” comment Kwok and Thal Larsen. “Asset managers with broader emerging market remits also face risks. As investors demand cash, these funds can raise money by selling investments in other markets. But this increases the proportion of remaining assets stuck in Russia, which in turn makes customers more likely to head for the exit.”

A week on from the incursion of Russian troops into Ukraine, the website of the Russian Association of Corporate Treasurers (RACT) does not offer any commentary on the crisis. As of 3 March the most recent news item on the site dates from 20 February.


VTB’s commodities trading unit winds down

The commodities-trading arm of Russia’s VTB Group has begun winding down its base-metal positions, reports Bloomberg. The news comes after financial partners withdrew support after the bank was targeted with sanctions and potential exclusion from the SWIFT system.

VTB Commodities Trading closed off all its hedging positions in base metals shortly after Russian troops invaded Ukraine on 24 February, according to individuals who asked not to be identified discussing private information. It acted after lenders gave it 24 hours’ notice to close the positions, they said.

The report notes than in recent years, VTB had spearheaded an effort by Russian banks to fill a void left in commodities markets as their western counterparts scaled back, and its rapid expansion turned the company into a significant trader and financier in industrial metals markets.

By 2016, it was trading about 200,000 tons of aluminium a year and had a major presence in other industrial and precious-metals markets. The company further expanded in metals in 2018 and 2019 with hires from Castleton Commodities in Zug and Singapore as well as MRI Trading and Levmet.

The Zug, Switzerland-based commodities-trading unit is part of VTB Commodities Trading Designated Activity Company, an Irish holding company.

The company will seek to complete its outstanding long-term contracts, one of those interviewed told Bloomberg. These include an offtake deal for metal from Eurasian Resources Group’s Kazakhstan Aluminium Smelter.

The UK Treasury has issued a general license under sanctions s to allow for a 30-day wind down period for transactions involving VTB Bank.

The move is the latest sign of how the invasion of Ukraine is impacting commodity markets as banks around the world either halt or restrict funding deals for commodities from Russia, limiting the flow of goods ranging from oil and metals to wheat.

IMF paper focuses on building cash management capacity

Building cash management capacity in fragile states and low-income developing countries is the topic of a new paper issued by the International Monetary Fund (IMF).

Co-authored by senior IMF individuals Sailendra Pattanayak, Racheeda Boukezia, Yasemin Hurcan and Ramon Hurtado, the paper notes that fiscal institutional capacity in most fragile states (FS) and several low-income developing countries (LIDCs) is much lower than in the rest of the world. Governments in these countries face several cash management challenges as they often lack credible budgets, have smaller and less diversified revenue bases, have limited access to financial markets, and rely largely on donors to fund a large portion of their budgets.

Available public funds in FS and LIDCs often remain dispersed outside the control of the ministry of finance. In the absence of a good cash forecasting function, these countries typically resort to cash rationing to meet their priority spending needs, often in an ad hoc manner, which can adversely affect budget execution and achievement of fiscal policy targets.

The paper sets out the key objectives and building blocks of a cash management function in FS and LIDCs. It suggests several measures to progressively build cash management capacity in three interrelated areas: consolidating cash resources, forecasting cash flows, and managing cash balances with sound institutional setups.

China to overhaul SCF mechanism

China is preparing to rein in its booming, yuan (CNY) 167.23 trillion (US$26.4 trillion) market for commercial acceptance bills, a controversial and risky form of business financing that contributed to the 2019 collapse of the Inner Mongolia-based regional lender Baoshang Bank, reports Singapore’s The Straits Times.

It says that the bank's collapse motivated China’s central bank and top banking regulatory agency to overhaul the 25-year-old regulations governing the bills. The rapid growth in their use in recent years and their involvement in fraudulent financing and other violations spurred regulators to close loopholes and tighten supervision of the instruments.

A 14 February deadline was set for comments on a draft revision of interim measures issued in 1997 covering commercial acceptance bills, which enable supply chain businesses to monetise their receivables. The revisions are expected to impact on commercial banks, financial companies and commercial acceptance bill issuers and intermediaries.

The new measures stress that commercial acceptance bills should be based on real transaction relations and set the maximum maturity of such bills at six months, from one year previously. The draft rules would cap the maximum payment of acceptance bills at 15% of the payer’s total assets, and the margin deposit for acceptance bills at 10% of the payer’s total deposits at the issuing bank.

Commercial acceptance bills are issued by companies that promise to pay a set amount to the bill's holder on a designated date. The bills are usually used for business-to-business payments but also as a form of short-term trade financing. The payee can choose to hold the bill until maturity and receive payment then, or before the maturity date can transfer it to another party or sell it to a bank at a discount and receive the money in advance.

China’s market for commercial acceptance bills expanded 13% in 2021 year-on-year, according to the Shanghai Commercial Paper Exchange. Although detailed data is unavailable, industry participants say a significant share of the market is probably financing bills, which have no underlying transactions between the payer and the payee.

Their main purpose is for companies to obtain funding from banks. Another significant portion of the market is arbitrage bills, in which banks issue acceptance bills to obtain deposits, industry participants said. The new rules aim to restrict the arbitrage use of commercial acceptance bills, which is especially widespread among smaller banks.


Charles Schwab to launch crypto EFT

US multinational financial services giant Charles Schwab has filed with the US Securities and Exchange Commission (SEC) to launch a Crypto Economy exchange traded Fund (ETF). The ETF will invest at least 80% of its net assets into the stocks listed on the Schwab Crypto Economy Index from companies that utilise Bitcoin and other digital assets.

Schwab’s asset management division, Charles Schwab Investment Management, will handle the new product. 

The move is reported to be in response to significant client demand; last week the group’s Head of Investor Services said that one in six clients expressed interest in investing in crypto in the first half of the year. This indicates huge potential as the company serves 33.3 million accounts and is one of the biggest US banks.

Schwab confirmed that the new ETF will not hold spot Bitcoin or other digital assets, which is unsurprising as the SEC has rejected every other application. Schwab's chief rival, Fidelity Investments, only sells a bitcoin ETF in Canada whose regulators are more relaxed about the cryptocurrency than their US peers.

However, market participants suggest that the SEC will give approval for Schwab’s ETF application fairly swiftly. “It is an equity ETF, so I have no doubt that it will be approved,” said Ben Johnson, an ETF analyst for Morningstar.

According to Eric Balchunas, ETF analyst for Bloomberg 12 or 15 reasonably similar blockchain ETFs already exist in the marketplace, although demand has so far been muted and their combined assets under management (AUM) total no more than around US$2 billion.

Companies that Schwab might potentially include in its crypto index are believed to include Coinbase and Robinhood.


B2B payments solutions seen as inadequate

The majority of financial institutions (FIs) acknowledge that they don’t do enough to solve their clients’ business-to-business (B2B) payments pain points, a survey suggests.

The New User Experience: Tracking the Consumerisation of B2B Payments is jointly compiled by and US fintech FIS and based on a survey of 311 FI executives. The findings suggest that “the achievement gap… is glaring” and while 66% of FIs believe the ability to offer clients digital payment solutions for addressing B2B payment frictions is “very” or “extremely” important, only 30% say their current solutions are “very” or “extremely” effective in addressing them.

The figure varies by client type, with the portions of FIs serving cross-border payments customers, large enterprises and middle-market companies that see digital payments as highly important to their customers being even larger. To facilitate the consumerisation of B2B payments, 64% of FIs are “very” or “extremely” willing to adopt new technologies, while 24% are “somewhat” willing to do so. 

The top digital payment innovations FIs are currently pursuing include enabling corporate customers to issue virtual debit cards to their end customers, which is cited by 84% of FIs, and sharing data between accounts payable (AP) and accounts receivable (AR) to automatically net invoices, cited by 82% of FIs. 

In addition, about three in four of the FIs surveyed said they are currently working on or planning to work on several other digital solutions for their corporate clients, including a single view of cash for cash-flow management and forecasting, instant digital card issuance to mobile wallets for corporate spend management, automatic matching of payments and invoices, the ability for receivers to choose their method of payment and virtual cards for making payments.

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