'KINDEX Russia ETF' Listing Maintained... "Investor Protection is Top Priority"

Baek Jae-gyu, CEO of Korea Investment Trust Management, is being interviewed on the 16th at Korea Investment Trust Management in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Junho Hwang] Due to the Russia-Ukraine war, Morgan Stanley Capital International (MSCI) changed the calculation method of Russia-related indices, putting the 'KINDEX Russia MSCI (Synthetic) Exchange-Traded Fund (ETF)' at risk of delisting. However, the ETF's listing will be maintained. The resumption date of trading has not been confirmed.

Korea Investment Trust Management announced this on the 28th through its website under the title 'KINDEX Russia MSCI (Synthetic) ETF Investor Notice.'

Russia ETF Listing Maintained

[Image source=Yonhap News]

Korea Investment Trust Management explained, "Following Russia's invasion of Ukraine in February, a series of Russian economic crises occurred, causing risks related to country risk, over-the-counter derivatives risk, and delisting risk for this ETF's operation. Despite these extreme circumstances, prioritizing investor protection, we conducted various consultations with swap counterparties and others, resulting in the decision to extend the swap contracts to the extent possible to maintain the ETF listing."

This ETF is a passive ETF that tracks the index converted into Korean won of the 'MSCI Russia 25% Capped Index' calculated by MSCI. Unlike physical replication ETFs that invest directly in the constituent stocks of the tracked index, this synthetic ETF operates by tracking index performance through swap contracts (over-the-counter derivatives that provide an agreed-upon return at a specified time) with counterparties (securities firms).

However, due to the Russia-Ukraine war in February, Western countries implemented economic sanctions against Russia, and on the 9th of last month, MSCI announced that it would apply a value of 0.00001 (in dollars or rubles) to Russian stock values in all indices it publishes. Following MSCI's change in Russian stock value application, the closing price of the underlying index for this ETF dropped from 7,499.76 points on March 8 to 0.02 points on March 10. The net asset value (NAV) per ETF unit also decreased from 11,051.02 KRW to 158.11 KRW during the same period.

This value decline and the liquidation, trading suspension, and delisting of Russia-related global financial products constitute market disruption events that terminate transactions with counterparties under the swap contracts. However, Korea Investment Trust Management decided to maintain the contracts within the manageable asset scope to protect investors rather than terminating the swap transactions in principle, continuing consultations with counterparties.

The extension of swap contracts with counterparties is carried out within the scope of hedge assets held by the counterparties. Korea Investment Trust Management signed maintenance and modification contracts for swap agreements at about 28.8% of the nominal amount of the existing swap contracts. The counterparties previously used approximately 71.2% futures (Eurex MSCI Russia Futures) and about 28.8% U.S.-listed Russian ETFs (iShares MSCI Russia ETF, ERUS) for hedging. Since the futures were delisted in March, the futures portion in the swap contracts was liquidated. Korea Investment Trust Management extended the contracts within the remaining 28.8% managed through ERUS.

Recovery of Underlying Index Difficult

[Image source=Yonhap News]

As the swap contract size has been reduced to about 28.8% of the original contract, even if the underlying index recovers to pre-war levels, it will be difficult for the ETF's net asset value (NAV) to return to previous levels. Korea Investment Trust Management estimated that even if the underlying index, which dropped to 0.02 points, rises to around 1,000 points, the ETF's NAV would be approximately 900 KRW. The KRW-to-RUB exchange rate was assumed to be 9.52, applied to the index value on the 8th of last month. Even if the underlying index recovers to about 7,000 points, similar to the level on the 8th of last month, the ETF's NAV is expected to be only around 3,300 KRW.

Korea Investment Trust Management stated, "Even if the Russian stock market normalizes, if MSCI does not restore the price system applied to Russian stocks (0.00001) to its original state, the ETF's performance may diverge from the Russian market." They added, "There is also a possibility of repeated risks related to over-the-counter derivatives (swaps) and delisting risks. Even if trading resumes, during the normalization process of the Russian financial market, market risks and volatility are expected to increase significantly, causing large tracking errors and deviations."

Designated as a cautionary investment item under Article 26 of the Securities Market Business Regulations and Article 40 of the Enforcement Rules, this item has had trading suspended since March 7 to protect investors and stabilize the market. The resumption date of trading has not been confirmed. Separate notice will be provided when the trading suspension is lifted.

Korea Investment Trust Management said, "The most important thing in asset management is customer trust," and added, "We will continue to prioritize building trust through customer value orientation."

This content was produced with the assistance of AI translation services.