Ruble fixing conundrum sparks new debate on pricing benchmarks

When the first Russian tanks crossed the border into Ukraine, the ensuing raft of sanctions sent the ruble into freefall. Banks and investment firms that needed to hedge exposures in the currency instead looked frantically to use US dollar-dominated non-deliverable forwards (NDFs) where possible to avoid handling physical rubles.

But those turning to NDFs have run into trouble of their own. This is because the fixing used to value the contracts, provided by the Moscow Exchange, became detached from where spot was trading in the international market.

On February 28, the difference between the spot prices shown by banks in the ALLQ function on Bloomberg at the time of the Moex fix – 12:35pm Moscow time – was 16%. On March 7 and 8, the fix did not publish at all. On March 10, there was a 12-ruble difference between the NDF fix and the spot rate, off by 10%, and this had come down to around 2% by March 21.

It has left market participants unsure about how to value their Russia-linked hedges. For new trades, market-makers may also find hedging tricky when the spot hedge is trading so far away from the derivative.

The NDFs don’t appear to provide an easy way out for those worried about the divergence. The contracts, designed by the Emerging Markets Trade Association, include standard language that covers periods where there is no fix – settlement can effectively be paused for a period of up to 14 days until one becomes available. But apart from two days, Moex has been able to produce a fix.

Some Emta contracts feature so-called exchange rate divergence clauses that allow market participants to effectively freeze settlement for a period if onshore and offshore rates diverge sufficiently. But controversy around the application of these clauses when Argentina imposed currency controls led to them being stripped from the applicable NDF contract.

Leslie Payton Jacobs, senior legal counsel and managing director at Emta, confirms that there are no exchange rate divergence clauses in standard US dollar/ruble NDF contracts.

In the meantime, notional volumes and number of trades in USD/RUB NDFs have plummeted. According to the Depository Trust & Clearing Corporation’s swap data repository, notional weekly volumes fell from $15.5 billion for the week ending February 13 to $4.2 billion for the week ending March 13. Similarly, weekly trade count dropped from over 2,700 to roughly 600 over the same period.

A lot of this is likely down to moves by asset managers to dump Russian exposures as their value nosedived and they were removed from various benchmarks that the managers track. Fewer local assets mean fewer FX hedges are required.

But for those that still need to trade the USD/RUB NDF, the question now is whether new trades should reference a benchmark other than the Moex, to reduce the basis between onshore and offshore prices.

Traditional benchmark providers such as Bloomberg and Refinitiv may be up for the task of providing a replacement. There would have to be broad industry agreement on this, however, and it’s not clear at this stage how much interest there is in such a move if the basis is slowly shrinking, or how long such a change might take.