Banks Ask U.K. for Extra Days to Unwind Swaps With Russia’s VTB

(Bloomberg) -- Banks have already won 30 more days from the U.K. government to cut ties with Russia's VTB Bank PJSC. Now they're asking for a few more. 

Finance executives have again requested more time to terminate legal agreements with VTB to avoid taking a financial hit or potentially leave some funds frozen, according to people briefed on the discussions. Many firms have derivatives contracts with VTB that require 30 days' notice, slightly longer than the time governments around the world have allowed to wind down business with the bank, said the people, asking not to be named describing private talks. 

The wrangles over VTB are among the many complex issues international firms are grappling with as they rush to comply with still-expanding list of sanctions placed on Russia's finances by the U.K., European Union and U.S. In the banking world, there has been a focus on VTB given its size as Russia's second-biggest bank and greater presence in corporate and investment banking than its peers.

“You can have all kinds of complicated derivatives trades where people have short-term and long-term obligations. None of these rules were drafted with a view to those transactions,” said Barney Reynolds, global head of the financial services industry group at law firm Shearman & Sterling, who spoke generally about the challenges of unwinding financial contracts. 

“Deciding what you can and can't do is very difficult. It's complicated and significant losses could arise.”

VTB faces strict sanctions from the U.S. and U.K. as those nations look to financially isolate Russia through widening penalties. European Union ambassadors agreed this week to exclude VTB and six other banks from the SWIFT financial-messaging system.

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The U.K. government caused consternation in the City of London last Thursday when it announced an immediate freeze on VTB's assets. Following warnings the measure could prevent U.K. employees of Russian-owned businesses that bank with VTB from being paid their salaries, the government said late Friday that firms could have 30 days to cut ties with VTB. 

But the timing of the change made it difficult for banks and hedge funds to swing into action immediately to terminate their contracts, according to people involved in the situation. That has prompted calls for a few more days to be added to the grace period.

The problem centers on the fact that VTB has contracts which are based on a template dating back 30 years to something called the 1992 Master Agreement set out by the International Swaps and Derivatives Association. While some legal agreements underpinning derivatives and other transactions have shorter termination periods, many of VTB's contracts require 30 days' notice, according to several bankers at other firms.

The legal details only became a focus when bankers moved to pull out of the deals to comply with last week's announcements, those people said. Having to settle early may force disadvantageous terms on the banks, they added. 

Other Countries

Banks are asking for similar extensions in other countries as well, according to Justine Walker, global head of sanctions, compliance and risk at the Association of Certified Anti-Money Laundering Specialists.

“We are aware industry has requested that competent authorities confirm that they will extend the licence by 7 days if possible and take these 30 day grace periods into consideration if and when future licences are issued along these lines,” she said.

VTB could not be reached for comment. The Treasury didn't repsond to requests for comment. One option is for the government to give banks a special license to take longer to settle their VTB contracts, an industry expert said. 

Charlie Netherton, Head of Advisory Services & strategy at professional services firm Marsh, said questions about how to extract money from Russian firms was widespread among investors. “Firms are asking, what are they prepared to lose? They are going through things and making difficult decisions.”

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