The short-selling headache looks like a first in the ETF industry. In previous dramas, when a market or group of assets has shuttered, the structure of ETFs has allowed them to keep trading. When the underlying assets restarted, often they fell in line with ETF pricing. It’s a measure of the turmoil that on this occasion, ETFs had to halt, too.
The securities-lending market falls under the purview of the Securities and Exchange Commission, though it’s unclear whether regulators will get involved because no rules have been broken. An SEC spokesperson declined to comment.
RSX, the largest Russia-focused ETF, had an annualized borrow rate that hovered at 1% at the start of the year, according to S3. As Russia-Ukraine tensions intensified, the rate spiked above 20% before coming down slightly. The data from S3 captures the market rate, but rates can vary across brokers.
Short sellers aren’t the only group hit by these rising borrowing costs. Some put holders also tapped the securities lending market to find the shares to exercise their options -- and those who did are still paying.
Russell Edwards, a U.K.-based retail trader, managed to borrow 2,200 shares of RSX to exercise put options that expired in March. His brokerage requires him to pay borrow fees currently running at about 30%. It’s a minor drag on his tiny portfolio for now, but the 26-year-old has no idea how long it will last.
“If suddenly those shares cost a lot more to loan and it’s at 300% next day, I don’t really have any recourse to” help avoid the fees, he said. “I’m just kind of stuck waiting.”
In the fog of the invasion and sanctions, some holders and brokers have stopped making shares available to loan, according to Ihor Dusaniwsky, head of predictive analytics at S3. That, alongside the halt to new share creation by issuers, has capped the supply available to borrow, leading rates to rise, he said.
Being trapped in their bearish bets has also left borrowers facing the possibility that their winning wagers will be losers by the time they can get out. They need funds and stocks trading again to cover their positions, but that would likely only happen if the Russia-Ukraine war de-escalated and the outlook improved dramatically -- which could trigger a recovery in asset prices.
In such a scenario, “I wouldn’t be surprised if my short position ends up losing me a lot of money,” said Abraham Miller, a Seattle-based software engineer who is shorting ERUS.
This article was provided by Bloomberg News.