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The Financial Conduct Authority (FCA) in the UK is considering the so-called ‘side pockets’ method to enable fund managers deal with Russian and Belarussian assets amid sanctions.

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Britain’s financial watchdog said that it is in discussions with stakeholders about options to allow the UK authorised retail funds to make exceptional use the practice.

Side pockets will enable authorised fund managers the option to separate Russian and Belarussian assets, which are hard to sell or value due to sanctions imposed on both countries over the military attack on Ukraine.

According to FCA, the side pockets could enable existing investors in funds with Russian exposure to redeem the rest of their investment while keeping illiquid Russian assets separately.

They method allows them to retain rights to any eventual value of these assets, which are marked to zero.

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Additionally, side pockets could enable new investors to join the fund without incurring exposure to Russian assets.

It will also allow certain funds to end their current suspension of dealing, the watchdog said.

The FCA said: “The use of side pockets by the authorised fund manager would be optional, based on acting in the best interests of each fund it manages.

“The side pocket proposals would be limited in scope to assets that are illiquid as a result of the Russia/Ukraine war. The precise scope would be determined as part of the consultation.”

Commission de Surveillance du Secteur Financier (CSSF), Luxembourg’s markets watchdog, is also weighing the use of side pockets, reported Reuters.

The CSSF is considering the practice in connection with EU-regulated funds called UCITS exposed to investments in illiquid Russian securities.