The FTSE Notice Treatment of Companies Affected by US and EU Sanctions in FTSE Equity Indices set out FTSE’s understanding of the nature of OFAC and EU sanctions, identified VTB and Sberbank as existing index constituents affected by the sanctions, and provided two broad proposals for the treatment of those constituents should they announce plans for new equity issuance.
Since the publication of the notice, FTSE has sought additional clarification on a number of issues related to the sanctions and has engaged with clients and other stakeholders to determine the most appropriate treatment.
This follow-up notice updates FTSE’s understanding of the implications of the sanctions and sets out FTSE’s proposed course of action should a sanctioned company announce a new issue of equity.
Summary of Likely Impact of Sanctions
The points below summarise FTSE’s understanding of how index users currently view the impact of sanctions.
• There has as yet been no clarification from either OFAC or the EU on whether secondary market transactions of newly issued equity would be considered as contravening the sanctions. In the absence of any such clarification, the consensus is to assume that secondary market trading should be avoided following a new equity issue as the trades could be considered tainted by the potential inclusion of shares that had been newly issued.
• There has also been no clarification on whether secondary market trading of stock arising from stock dividends, bonus/split issues, or warrant/bond conversion would be allowed. Although certain of these events are not associated with the issuance of new equity and do not result in a change to the equity capitalisation of the company, the conservative view is to assume that secondary market trading should be avoided following such issues lest those trades too might be considered tainted.
• Some investment managers have received comfort from their custodians that they would be able to trade existing holdings of sanctioned companies following an announcement of a new issue but only before the new shares become available for trading.
• In the light of these considerations, the consensus amongst index users is that they would not wish to see sanctioned companies deleted prematurely from FTSE indices but would want the sanctioned stock to be deleted in advance of the new shares becoming available for trading.
Summary of Points Relevant to Equity Issuance in Russia
The following points set our FTSE’s understanding of the affected companies’ plans and the timetable that would have to be followed should either seek to issue new equity.
• Both companies have stated publicly that they have no intention of issuing new equity whilst the sanctions persist.
• VTB has further confirmed that without an amendment to its charter it is unable to distribute dividends as stock, that it has no convertible bonds or warrants outstanding, and that it has no plans for a bonus/split issue. FTSE’s research has not identified any convertible bonds or warrants outstanding for Sberbank but FTSE has been unable to confirm this point.
• Both companies have subordinated debt that could be converted to preference shares. Such stock would be distinguished by a different ISIN and would not be included in FTSE indices.
• FTSE understands that equity issuance in the Russian stock market follows a prescribed timetable. For new issuance of less than 25% of the existing equity, the new shares can become tradable 20 business days after Supervisory Board approval has been obtained, and 14 days after the notification of the rights subscription period. For issuance that exceeds 25% of the existing equity, the new shares become tradable c. 80 days after Supervisory Board approval, 30-40 days after EGM approval and 14 days after the start of the rights prescription period.
• Stock dividends (where permitted by the company charter) and issues of bonus shares would be required to follow the same timetable as that for ordinary share issuance.
• If an otherwise identical new issue were to take place under a different Sedol, the existing line would not immediately be considered tainted; however, after c. 80 days the two lines would have to be combined.
Implications for FTSE Index Treatment
Given the above, FTSE concludes that in the - presumed unlikely - event of a sanctioned company announcing a new issue of shares in a class that is an existing constituent of FTSE indices, there would be sufficient notice for FTSE to consult clients on the appropriate treatment at that time. Consistent with the FTSE Policy Document FTSE Index Policy in the Event Clients are Unable to Trade a Market and Proposal 2 in FTSE’s notice of 01 August 2014, FTSE would look to proceed as follows:
• Unless an announcement provides only very short notice, sanctioned companies would not be immediately deleted from the indices following the announcement of a new issue of shares in an existing index constituent.
• Over the subsequent 40 Russian trading days, or the period before new share commence trading if shorter, FTSE will seek the views of market participants on the preferred timetable for the stock’s deletion from FTSE indices and on the preferred price for that deletion. For example, given sufficient notice, the deletion might be staggered to avoid excessive market impact, and - depending on market conditions - the deletion price could be at last trade (as now), the closing auction price, a VWAP price, or zero.
• FTSE would only maintain the affected constituents in FTSE indices beyond 40 Russian trading days if it had received assurance from OFAC, the EU or other relevant authority that the sanctions would be lifted imminently or that secondary market trading of the stock following new issuance would not contravene the sanctions.
• During the period in which the stock is retained in the indices, no changes will be made to the index shares-in-calculation as a result of any corporate activity by the sanctioned company. However the weight of the sanctioned company may change as a result of divisor changes occasioned by corporate activity in other constituents. Consequently clients may experience tracking error.
• Any stock so deleted from the indices will not be eligible for immediate re-inclusion in the indices once sanctions have been lifted, but rather would follow the same process as for all new non-fast entry constituents. A minimum three month period between the lifting of sanctions and a semi-annual review cut-off date will be required for liquidity to be tested.
There will be no immediate change to the country classification of Russia as a result of the sanctions imposed by OFAC and the EU. Any future change in Russia’s classification would be subject to review by the FTSE Country Classification Committee and the FTSE Policy Group.
Indices Composed of Depositary Receipts
For indices that incorporate Depositary Receipts, including the FTSE Russia IOB Index, the FTSE BRIC50 Index and the FTSE EMEA40 Index, the situation is further complicated. Although Depositary Receipts may be linkable to equity issues made prior to the sanctions date, the OFAC sanctions FAQ state that “The term equity includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership”. Given this, and in the absence or any subsequent clarification being made to the contrary by OFAC, FTSE proposes to treat indices that include Depositary Receipts in the same way as those that include the underlying shares.
For clients who would prefer to exclude Russia entirely from their indices, FTSE has created a range of ex-Russia indices. Please contact email@example.com for further information.
Given that some uncertainty exists surrounding the precise implications of the notified sanctions, FTSE will continue to monitor the situation and would be pleased to receive continued feedback from index users and other stakeholders on the contents of this notice. Should new information come to light that would cause FTSE to alter its proposed course of action, a subsequent notice will be published.
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