International Capital Market Features
Russia-Ukraine: sanctions effects on markets by Leland Goss
The Russian invasion of Ukraine and implementation of broad Russian sanctions has impacted the markets and transactions of ICMA members. Over the past several weeks the ICMA Helpdesk has fielded enquiries from members particularly about secondary bond trading settlement fails caused by agreed transactions being frozen that are directly or indirectly subject to sanctions. This has caused questions and some confusion over the status of these unsettled trades, their accounting treatment and how, if at all, these trades can be resolved. The problem has been exacerbated by the speed of evolution of sanctions policies across jurisdictions and their lack of consistency, drawing in a widening pool of sanctioned counterparties and securities. To the extent that the bulk of these trades are unwound or cancelled rather than settled (late), there are likely to be mark to market and value transfer implications. ICMA is also aware of members attempting to use buy-ins to remedy unsettled transactions, although it is not clear how effective this could be, particularly if the buy-in transaction might also be subject to settlement restrictions. We are seeing similar issues with the repo market, where end-legs of transactions with sanctioned counterparties or in frozen securities are effectively becoming “orphaned”. Not only does this create uncertainty about how best to unwind the transaction, but there are also implications from a valuation and margining perspective. This also potentially creates scenarios where a sanctioned counterparty could be the economic beneficiary of a frozen repo. We believe the ICSDs are addressing these matters directly with relevant governmental authorities but as of today there has yet to be any indication of licences or other dispensation being granted to unfreeze blocked trades. From a market performance perspective, we have seen situations in the EUR Government bond market in particular where the scarcity of securities, effectively due to large holdings by sanctioned entities, have led to a heavily squeezed market in those instruments, but these issues have been largely normalised by the issuance of additional amounts of the PAGE 9 | IS S U E 65 | SECOND QUARTER 2022 | ICMAGROUP.ORG
affected securities. Looking at the broader picture, there has been little indication that secondary bond market settlement fails have caused material stress to the financial system or created systemic implications for markets. The recent payment on several Russian Government US$ bond coupons was notable but eyes have been on the US$2 billion repayment due on 4 April. We and others are watching to see whether policy makers agree with the principle – perhaps counter-intuitively to some – that not allowing Russia to service sovereign debt interest and repay principal mainly hurts non-sanctioned market participants but also provides Russia with effectively a form of debt relief. Moreover, such a policy avoids a sovereign default occurring that even in normal circumstances can be messy and give rise to undesirable externalities. The unwind licences – the sanctions’ exemption allowing investors to receive these payments – are due to end on 25 May so will need to be extended if this practice is to continue. The fact is that sanctions can both cause defaults and prevent the subsequent restructurings that are the usual and orderly means of resolving sovereign debt defaults. ICMA will continue to remain close to its members, documenting these and other issues arising from sanctions, providing guidance and frameworks where possible to facilitate orderly market activity, and engaging frequently with regulatory authorities to ensure members’ issues and concerns are flagged. Contact: Leland Goss leland.goss@icmagroup.org
