S&P Dow Jones Indices (SPDJI) has decided against dropping any Russian securities from any of its collection of indices, at least for now, after a two-and-a-half week consultation period with its clients and stakeholders and research conducted by index executives.
The line-up includes 11 indices composed exclusively of Russian securities across the S&P and Dow Jones brands, plus another 79 indices which are made up of Russian and non-Russian securities from both S&P and Dow Jones.
S&P Dow Jones reached out to obtain perspectives from clients in light of the 16 July 2014 sanctions ordered by the US Treasury Department’s Office of Foreign Assets Control (OFAC) in response to the clash between Russia and separatist groups in eastern Ukraine. Under the US Executive Order 13662, the Treasury Department issued a prohibition for US citizens “transacting in, providing financing for, or otherwise dealing in debt with a maturity of longer than 90 days, or new equity if that debt or new equity is issued on or after 16 July 2014” by persons flagged by the US government with ties to Russian-backed Ukraine groups. The group includes companies from the Russian economy’s energy, financial and defence sectors.
“The majority of respondents were with us on doing nothing,” David Blitzer, managing director and at S&P Dow Jones Indices told SRP. A couple of commentators expressed concerns that if the index provider pulled constituents out of the indices, that “the Russian market would drop precipitously,” he added. Some respondents noted that they would require several months’ notice of S&P Dow Jones’ intent to drop specific Russian securities in order to be able to unwind their investments.
Precedent
Although Blitzer said that his firm will continue to monitor developments in the region, it is the index firm’s understanding that Russian laws require sufficient notice of new equity issuance which would give S&P Dow Jones the ability to make future adjustments if necessary.
Unlike S&P Dow Jones Indices which creates, maintains and periodically reconstitutes the indices , other investment managers and firms often invest in most, all or a representative sampling of the components of the indices in order to mimic an index’s performance.
Structured products are created to track to the performance of a specific index or basket of indices using derivatives but do not invest directly in those constituent companies.
Dropping the securities of a country is unusual but not unheard of, Blitzer said. For years, the US has had prohibitions against investing in Iranian securities. During the financial crisis, S&P dropped companies in Iceland “because there was nothing left to trade,” he said. He also pointed to an S&P index competitor who, during the Asian crisis of 1997 and 1998, dropped all Malaysia securities.
SRP data shows that one of the most prominent benchmarks in the structured products market featuring Russian stocks is the S&P BRIC 40 index which currently has $5.6bn of AUM (excluding leverage and flow) across 354 products in different jurisdictions.