Arsen Ilin: New rules of the game in the capital markets and commodity markets

What has changed for investors and what opportunities have opened up for Ukraine?

In the summer of 2020, the reform of the capital market and organized commodity markets began in Ukraine. In particular, the Verkhovna Rada adopted Law On Amendments To Certain Legislative Acts Of Ukraine Concerning the Facilitation Of Investment Attraction And the Introduction Of New Financial Instruments №2284, part of which was taken by the European Bank for Reconstruction and Development (EBRD).

That, what has long been discussed in Ukrainian business circles, has finally begun to materialize: an organized commodity market opens up new opportunities for legitimate and transparent trade.

In addition, since July 1, 2021 the trading in standardized commodities (grain, timber, fuel, etc.) has been transferred to licensed exchange platforms. Let’s talk about this in more detail.

Key innovations

The adopted Law introduces significant amendments to several legislative acts, the key ones are two: On Securities And Stock Market (in the new edition – On Capital Markets and Organized Commodity Markets) and On Commodity Exchange (On Commodity Exchanges).

It should be noted that Ukraine undertook to adopt these amendments as part of the Association Agreement with the European Union, accepted on the basis of recommendations of the International Swaps and Derivatives Association (ISDA).

First of all, we are talking about creating a full-fledged legal framework for the use of derivative financial instruments: forwards, futures, options and swaps. Now the market participants get the opportunity to plan its activities for the long term, because these instruments allow them to purchase the necessary assets in the future.

The standardized commodities are now traded on licensed exchange platforms. A special State Regulator, the National Securities and Stock Market Commission (hereinafter the NSSMC), is responsible for licensing exchanges. The exchanges are required to monitor trading to prevent manipulation and insider trading, otherwise the exchange is expected to be sanctioned until the license is revoked.

In addition, we are talking about the personal responsibility of the asset owner, as a negative business reputation significantly affects the ability to operate in the market.

Most experts and specialized associations are convinced that the reform will significantly increase the transparency of processes in the Ukrainian market of commodities and capital. Due to the changes, the number of participants in transactions is expanding, the artificial barriers to their conclusion are eliminated, as well as eradicating the practice of secret agreements between the seller and the buyer.

However, this is a theory, and how are things in practice?

The European Way

The implemented changes are not unique: most Central and Eastern European economies followed the same path of reform 10-15 years ago. Like Ukraine, the former members of the socialist bloc sought to attract foreign investment and modernize the economy. Through policies of reform, the demonopolization of commodity markets, and the establishment of transparent rules, these countries were able to achieve significant economic growth.

A clear example of such changes is the Lithuanian Baltpool, which in 9 years of work has completely changed the structure of the Lithuanian biomass market. Like Ukraine, Lithuania depends on natural gas supplies from Russia and needs a reliable alternative to Russian fuel. The clear trading rules and product standards on the exchange allowed to increase the use of biomass for heat production and reduce the household payments for heating by a third.

The success in Lithuania allowed Baltpool to enter the markets of Poland, Latvia, Estonia and Scandinavia countries. I would like to note that Lithuania’s experience is especially valuable for solving the perennial problem of energy security.

As for Ukraine, we did not wait for the first results of the reform either. A striking example of this is the timber trade, which has already allowed the state forestries to significantly increase revenues.

If on the Prozorro system platform the average price of timber (the lot “Scots Pine”) was just over 2 thousand UAH per cubic meter, then on the exchange sites this indicator increased by about 50%. We expect that by the end of 2021 the additional effect for the state by trading timber on the exchange could amount to 1 billion UAH.

A wide range of investment instruments, which rules of the game correspond to the world ones, opens markets of commodities and capital for the general population. It should not be forgotten that the adoption of Law №2284 was an important condition for the continuation of the IMF stand-by program for Ukraine.

Instead of pep talk

Most of the changes envisioned by the commodity and capital markets reform in Ukraine will come into force within the next few years until 2024. Undoubtedly, the reform opens up new opportunities for both the state and private investors to make money, but it is absolutely not limited to this.

The creation of conditions for the formation of commodity and capital markets is an integral instrument for the formation of fair market prices for basic commodities. In addition, this step creates the preconditions for a significant increase in the number of market participants, which excludes the possibility of abuse of monopoly position by individual players. This will stimulate the industry to grow, the companies – to invest in the modernization of production and optimization of business processes, which together create the preconditions for the wages and jobs growth.

The introduction of generally accepted instruments and the legal framework for the operation of markets creates the additional guarantees for existing and potential bidders. For example, the use of hedging by traders, in turn, has a positive impact on the ability of financiers to attract new investors.

I am confident that Ukraine will be able to build effective mechanisms of work on the markets, which will provide the national economy with accelerated growth.

Source: NV Business