Korea Investment Trust Management to Maintain Listing of 'Russia ETF' Until End of Next Year

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[Asia Economy Reporter Hwang Junho] The 'KINDEX Russia MSCI (Synthetic) ETF' managed by Korea Investment Trust Management, which faces delisting risk due to the Russia-Ukraine war, will maintain its listing until next year.

Korea Investment Trust Management announced on the 31st that it plans to make efforts to maintain the listing of the ETF (Exchange-Traded Fund) and has decided not to delist or terminate the ETF until the end of next year, when the liquidation of the 'iShares MSCI Russia ETF,' held as a hedge asset by the swap counterparty of this ETF, is completed.

This measure is to reflect the distributions that may occur during the liquidation process of the iShares MSCI Russia ETF in the swap settlement amount of the KINDEX Russia ETF.

Korea Investment Trust Management disclosed on the same day that, as the delisting and liquidation procedures of ERUS have commenced, it has signed a swap amendment agreement with the OTC derivatives (swap) counterparty to enable the continuation of the KINDEX Russia ETF. The amendment contract size is approximately 0.000007% compared to 100% of the original swap contract size (about 0.000025% compared to the contract size amended on April 28).

The KINDEX Russia ETF is a synthetic ETF operated through a swap contract with a securities firm acting as the counterparty. The swap counterparty of a synthetic ETF performs hedging using assets such as futures or other ETFs to provide the fund manager with the agreed-upon underlying index returns. If the hedge asset is delisted or liquidated, the swap counterparty can no longer perform hedging. Consequently, maintaining the swap contract becomes impossible, and the fund manager finds it difficult to continue operating the ETF.

ERUS, managed by the U.S. asset management company BlackRock, was the hedge asset used by the swap counterparty contracted with Korea Investment Trust Management. BlackRock announced on the 3rd (local time) its plan to liquidate ERUS by converting its holdings into cash and delisted ERUS on the 29th. BlackRock conducted the first distribution of cashable assets among ERUS holdings on the 17th and plans to sell the remaining Russian assets by the end of December next year. If sales prove difficult, BlackRock will liquidate ERUS without guaranteeing additional distributions.

The delisting of ERUS corresponds to a 'Market Disruption Event - Hedging Disruptions,' which is a possible cause for terminating the swap contract between Korea Investment Trust Management and the counterparty. According to domestic regulations, if the swap held by the ETF ends before maturity without a corresponding contract, it qualifies as a delisting condition, and the ETF must be terminated within 10 days of delisting. However, if the swap contract ends and the KINDEX Russia ETF is delisted or terminated, any additional liquidation distributions from ERUS cannot be settled with domestic investors.

Therefore, Korea Investment Trust Management has enabled the continuation of the KINDEX Russia ETF by not fully terminating the swap contract and signing a minimal amendment agreement with the counterparty. This is to reflect the distributions the counterparty may receive during ERUS's liquidation process in the swap settlement amount of the KINDEX Russia ETF. The counterparty has agreed to pay the liquidation distributions from ERUS, after deducting related expenses, to the KINDEX Russia ETF.

However, since the swap size has been drastically reduced, Korea Investment Trust Management explained that even if the underlying index of the KINDEX Russia ETF (MSCI Russia 25% Capped Price Return Index) rises in the future, the value change of the KINDEX Russia ETF due to the underlying index increase will be minimal.

Korea Investment Trust Management stated, "The asset value of KINDEX Russia ETF investors will hardly change according to future movements of the underlying index and will fluctuate only based on the amount of ERUS liquidation distributions received," adding, "The liquidation distributions received by the counterparty will be reflected in the termination settlement amount when the KINDEX Russia ETF is terminated."

Korea Investment Trust Management also said, "However, since BlackRock, the ERUS manager, cannot predict the amount or timing of the sale of Russian assets, it is currently unknown how much and when the KINDEX Russia ETF will receive liquidation distributions," and added, "Korea Investment Trust Management will do its best to protect investors and plans to provide additional guidance through website notices if related changes occur."

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