The number of securities tainted by sanctions has increased by 262 per cent since the Ukraine war began in February 2022, according to data from the SIX Sanctioned Securities Monitoring Service (SSMS). The number of securities in scope grew from 24,000 on February 2022 to 89,000 in mid-May.
The growth in the volume of sanctioned securities creates a headache for market participants across buy and sell-side institutions, including those creating or providing ETFs for clients, SSMS says. This is because firms need to screen their ETFs and funds for sanctioned and, or tainted securities, in accordance with The Office of Foreign Assets Control (OFAC) compliance commitments, following Executive Order 13959 introduced in November 2020. This is in conjunction with greater scrutiny around reputational and liquidity risk since the start of the war in Ukraine.
Specifically, regarding ETFs, data pulled from SIX SSMS shows that roughly 7 per cent of all ETFs contain securities tainted by sanctions. Of the sanctioned components found in ETFs, 30 per cent originate in Russia. 26 per cent originate from China and 30 per cent in the US highlighting the broader impact of global sanctions regimes. The ETFs containing in-scope securities are mostly domiciled in China, with 47 per cent in mainland China and 7 per cent in Hong Kong. Almost 30 per cent are domiciled in North America, with 28 per cent in the US and 7 per cent in Canada, while 13 per cent are domiciled in Ireland.
The growing presence of sanctioned securities within ETFs could have detrimental effects on the valuation and liquidity of tainted ETF products, as assets are allocated into different investments with better performance that do not contain in-scope securities, SSMS says. A continued and growing presence of sanctioned securities in ETF products would create reputational issues for the firms who create ETFs and the sell-side firms who distribute them to their clients, the firm adds.
Oliver Bodmer, Senior Product Manager, Financial Information, SIX says: “This is a big wakeup call for the ETF universe, as the rollout of sanctions on Russia and China shows no signs of abating, meaning the number of ETFs with sanctions or tainted securities is on an upward trajectory. In this fast-moving sanctions environment, those firms creating and distributing ETFs need transparency to ensure they are able to act in line with OFAC requirements on the funds already created and ensure that no tainted securities are included in new products.”