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LONDON/NEW YORK: The decision last month by FTSE Russell and MSCI to remove Russian stocks from their indices has left some of the world’s largest banks inadvertently holding potentially valuable positions, several sources familiar with the trades told Reuters .

JPMorgan Chase, Goldman Sachs, HSBC, BNP Paribas and other global banks had to move Russian stocks and related derivative positions they had taken to support institutional client bets to their own books, five sources including investors and traders, mentioned.

When conditions allow, banks could cash out those positions for what some of the sources said could result in significant profits.

Reuters could not determine the size of the positions due to the opaque nature of derivatives trading portfolios, and the sources said profits were not a given for the banks.

Overall, billions of dollars tracked the MSCI and FTSE Russell indexes that included Russian stocks before Moscow’s invasion of Ukraine, which the Kremlin calls a “special military operation.”

The fate of these assets, which has not been reported before, shows how far-reaching and sometimes unforeseen effects Western sanctions have had on the global financial system.

JPMorgan, Goldman, BNP Paribas and HSBC declined to comment.

The London Stock Exchange, the parent company of index provider FTSE Russell, declined to comment.

MSCI did not respond to a request for comment.

Offices ‘Delta One’

At the center of the unusual situation in which banks and their investors currently find themselves are positions taken by discreet teams called “Delta One” trading desks.

Russian stocks and derivatives have been placed on separate trading books, and it is now up to each bank involved to decide what to do with them, the five sources said.

One of the sources, who advises an investor in these products and who declined to be named due to client confidentiality, said it amounted to “free money for the banks”.

Several investors also want to claim any profit, two of the sources said, with some “furious” that they could end up missing out on potentially lucrative returns, a source added.

But three of the sources said any profit should go to the bank, since their clients had bought exposure to the index through swaps rather than the individual constituents.

No warranty

There is no guarantee that the banks will be able to make profits on the shares, two of the sources said. Any gain will depend on the value assigned to the asset and how the Russian exposures were covered in the first place, the five sources said.

Additionally, most banks should be able to access common stock of sanctioned companies for potential gains, four of the five sources said.

And we don’t know when that might happen.

The Moscow stock exchange, which closed after Russia invaded Ukraine on February 24, partially reopened on March 24, but only to local investors.

The market’s full reopening has been repeatedly delayed and Western investors now expect to wait “weeks or even months” to gain free access, one of the sources said.

Some banks may choose to exit Russian risk before sanctions are lifted and trading resumes, losing any chance of profit.

Moreover, the share prices of many Russian companies have fallen, while the long-term damage to valuation remains uncertain.

But Russia is set to deploy billions of rubles from its National Wealth Fund to support its stock market.

One of the sources said this could make it easier for some traders to exit positions profitably, assuming Western authorities allow unfettered trading.

It is unclear if any of the banks are already exploring options to exit their Russian positions.


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