One Million Options Contracts on Biggest Russia ETF in Limbo

(Bloomberg) — The suspension of trading in the world’s largest Russia ETF has left the fate of options worth hundreds of millions of dollars hanging.

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Cboe Global Markets Inc. halted trading of shares and options in the VanEck Russia ETF (ticker RSX) after the market close Friday as the fallout of the Russian invasion of Ukraine made the fund’s underlying securities practically impossible to trade.

At the time there were about 1 million options tied to the exchange-traded fund worth roughly $285 million, according to Bloomberg Intelligence. That was the highest level since 2014.

The Options Clearing Corp. typically automatically exercises options on expiry if they’re in-the-money, but it said in a memo Tuesday that it will stop doing that if the fund is still not trading by the expiration date. That’s because if the product is not trading, there’s no way to value the fund and determine if options are in-the-money, according to Steve Sosnick, chief strategist at Interactive Brokers LLC.

The only way investors would be able to exercise an option is if they reach out to their broker and request it. If that happens, Sosnick said he currently expects investors would see the option be removed from their account and the corresponding shares of RSX moved in or out.

“OCC has basically told us they don’t know what these things are worth, they don’t want to make a decision as to what it’s worth,” Sosnick said. “They will leave it for options holders to make that decision for themselves, but it is important for the options holders to understand that any decision they make carries a lot of risk because they won’t know the full consequences of that decision for an indeterminate amount of time,” since it’s unclear what the fate of the fund will be, he said.

The clock is ticking for investors to figure out what to do, with the earliest contracts tied to RSX expiring from as soon as March 11 until January 2024, per BI.

RSX is one of a slew of Russia-focused funds halted on exchanges worldwide in the fallout from the Ukraine war. Sanctions and Russia’s response, including introducing capital controls and temporarily shutting the Moscow market, have made valuing the nation’s securities a tall order.

Read more: An ETF in Tokyo Looks Like Last Place to Make Russia Stock Bets

RSX was pricing at a premium of more than 500% to its underlying assets when it halted, according to data compiled by Bloomberg. In other words, despite the ETF falling almost 80% this year, its underlying assets are seen to have dropped far further.

It all plays havoc with pricing options connected to the fund.

(Updates with OCC memo, comments from Steve Sosnick.)