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The UK’s financial watchdog has set out a proposal to allow fund managers to ring-fence assets that are frozen due to sanctions over Russia’s invasion of Ukraine in side pockets.

The use of the side pocket method allows asset managers to set up a vehicle to hold assets that are too risky and illiquid to handle.

The proposal was laid out by the UK’s Financial Conduct Authority (FCA) in a public consultation aimed at dealing with Russian and Belarusian assets held by asset managers in UK-authorised retail funds that have become illiquid or untradeable in the wake of sanctions.

According to the authority, side pockets would allow new investors to enter the fund without sharing in the exposure to the affected investments.

It will also enable existing investors to sell the units which relate to assets that are not affected investments. Additionally, side pockets could enable some funds to end their current suspension of dealing.

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Asset managers would be allowed to charge a fair annual fee for the side pocket.

The FCA said in a statement: “Where the affected investments are a significant proportion of a fund’s assets, some funds have suspended dealing. This means that investors are unable to further invest, or to redeem their assets.

“We want these funds to operate fairly and efficiently in the interests of all investors. So we propose allowing authorised fund managers to use separate new classes of units (side pockets) to hold affected investments.”

The short consultation will close on 16 May 2022 with final rules set to be announced shortly afterwards.

In March, a report by Bloomberg said that the European asset managers were pressing regulators to side-pocketing to safeguard their Russia-linked portfolios from tumbling into losses.