Sinead cruise and Carolina Mandl

LONDON/NEW YORK – Russell and MSCI took the decision to eliminate Russian stocks from their indexes last month. This has led some of the largest banks around the globe to hold potentially lucrative positions, according sources who were familiar with the trades.

JPMorgan Chase, Goldman Sachs, HSBC, BNP Paribas and other banks around the world have had to shift Russian stocks, and any related derivatives, they had taken in support of bets made by institutional customers, into their own books, according to five sources.

If conditions allow, banks may cash out these positions to make what sources claim could be substantial profits.

Reuters was unable to determine the value of these positions due to the opaque nature and trading book of derivatives. The sources also said that the banks did not make profits.

Globally, the MSCI and FTSE Russell Indexes, which included Russian stocks prior to Moscow’s invasion in Ukraine, were worth billions of dollars. The Kremlin called it a “special military operations”.

These assets’ fate, not previously known, shows that Western sanctions have had far-reaching effects on the global financial market, often unintended.

JPMorgan Goldman, BNP Paraibas, HSBC and JPMorgan declined to comment. The London Stock Exchange (parent of index provider FTSE Russell) declined to comment. MSCI declined to comment on a request.

DELTA-ONE DESKS

The unusual position that banks and investors find themselves in is centered around positions held by teams known as ‘Delta One’ trading tables.

These traders sell index swaps and derivatives to high-end investors, including hedge funds. The index returns investors without the need to purchase stocks.

The banks purchase the stock that makes up an index through derivatives or outright. The banks also hold other positions called hedges that reduce the risk associated with such trading.

According to five sources, when MSCI and FTSE Russell removed Russian stocks like Gazprom (MCX) from their March indexes, Delta One desks had the task of removing them from the swaps that they created for clients.

Sources said that the Russian shares and derivatives had been placed in their own trading books and each bank has to decide what they will do with them.

Sources who advised an investor in these types of products declined to identify themselves as clients due to confidentiality. One source said that this amount to “free money” for banks.

Two sources confirmed that several investors are also keen to claim any profits. One source said some were “incensed” at the possibility of missing lucrative returns.

Three sources claimed that the bank should earn any profits since clients bought index exposure through swaps and not individual constituents.

The guarantee is not binding

Two sources stated that there is no way to guarantee banks make any profit from stocks. According to five sources, any gains are dependent on the asset’s value and whether the Russian exposures have been hedged.

To realize potential gains, the four sources indicated that most banks must be able and willing to purchase ordinary shares of sanctioned corporations.

It is impossible to predict when this might occur.

Moscow Exchange was closed on February 24, when Russia invaded Ukraine. It partially reopened on March 24, but it is only open to local investors.

According to one source, the market reopening has been delayed several times. Western investors expect to have to wait for it to open again.

Some banks could decide to leave Russia risk, before sanctions are lifted. If trading resumes, they will lose any opportunity for profit.

Furthermore, share prices for many Russian corporations have dropped, while long-term damage is still unknown.

Russia’s National Wealth Fund is ready to release billions to its stock markets to boost its performance.

Sources indicated that this might make it simpler for some traders exiting positions profitably, provided Western authorities allow free trading.

We don’t know if the banks are considering exiting their Russian positions.($1 = 77.7100 roubles)