US sanctions on Venezuela have frozen trading in the country’s bonds and raised thorny questions for BlackRock’s flagship emerging market debt vehicle, the $17bn exchange traded fund EMB. Sovereign debt from Venezuela and bonds issued by its state oil company PDVSA are likely to be dropped from bond market indices, according to analysts. JPMorgan manages the most popular EM debt benchmarks, and liquidity is a criterion for inclusion. That in turn raises questions for ETFs following those indices, which could be forced to sell the bonds — even though the Treasury sanctions forbid any US entity from buying them. The Trump administration last week banned US citizens from buying PDVSA bonds, in its attempt to bring down Nicolás Maduro, whom it no longer recognises as president. On Friday it made clear the ban extended to sovereign debt. Any market in the bonds is likely to become marginal and highly illiquid Francisco Rodriguez, Torino Capital While current Venezuela bondholders in the US are still allowed to hold the debts, the sanctions in practice freeze almost all trading in the securities. In theory, non-US banks and investors can trade the bonds, but in reality most have US operations and will be wary of doing anything that might fall foul of the US Treasury’s Office of Foreign Assets Control. Fund managers say that Venezuelan bond market trading has now ground to a halt. “Trading activity came to a standstill [on the new sanctions] and is likely to remain in this condition, as financial institutions will balk at the risk of entering into any type of sanctions violations,” Francisco Rodriguez, chief economist at Torino Capital, said in a note. “Any market in the bonds is likely to become marginal and highly illiquid.” The bonds of Oleg Deripaska’s Rusal were removed from JPMorgan’s EM corporate bond index in April 2018 after the US slapped sanctions on Russia, and the bank’s index team is now reportedly reviewing whether to remove Venezuela from its benchmarks. “We are continuing to monitor, and both Venezuela Republic and PDVSA bonds currently remain eligible for the flagship benchmarks: EMBI Global Diversified, EMBI Global, and EMBI+,” JPMorgan said in a statement. Pimco, Fidelity, T Rowe Price, Ashmore and Goldman Sachs Asset Management are among the biggest Venezuelan bondholders, but index exclusion would be particularly problematic for passive investment vehicles that only attempt to mimic financial indices as accurately and cheaply as possible. The biggest EM bond index fund is BlackRock’s iShares JPMorgan USD Emerging Markets Bond ETF — EMB for short — which currently holds $17.1bn in assets. Venezuela and PDVSA bonds account for about 1.19 per cent of the fund, at a current market value of $206.2m, according to its most recent filing. Recommended The FT View The editorial board A broad diplomatic front is needed to address Venezuela’s crisis That has raised the question of what would happen if Venezuela drops out of JPMorgan’s indices and EMB has to dump its holdings at a time when many banks are not even quoting prices for Venezuelan bonds and many asset managers are de facto prohibited from buying them. “To get that through a market with zero capacity will be difficult,” said Paul McNamara, an EM bond fund manager at GAM. “I don’t even know what could happen, if I’m honest.” EMB’s prospectus indicates that it does have some flexibility in holding bonds that are not in its underlying index, if it believes this will help it track the benchmark. BlackRock declined to comment on what it might do if Venezuelan debt drops out of JPMorgan’s indices. It could even be precluded from selling. On its website Ofac said that American individuals and institutions can still invest in and trade through vehicles such as EMB even though they contain some sanctioned debt, but indicated that US funds “may not buy, sell, or otherwise engage in transactions related to debt, equity, or other holdings in blocked persons and must block such holdings, unless authorised by Ofac”.