Interview of the Chairman of the National Securities and Stock Market Commission of Ukraine, Ruslan Magomedov, and Commissioners, Yurii Boiko, Maksym Libanov, and Yaroslav Shliakhov, to the Interfax-Ukraine agency
Author: Dmytro Koshovyi
— Ukraine’s memorandum with the International Monetary Fund (IMF) contains an article on bringing the securities market rules into line with international standards. «The long-standing lack of authority of the National Securities and Stock Market Commission (NSSMC) in relation to international standards is well known», writes the IMF. And he adds that after receiving technical assistance from several international financial organizations, the authorities undertook to make changes to the law on the NSSMC by the end of May 2023 (draft law No. 5865), which should significantly strengthen the powers of the NSSMC, its independence and institutional capacity, as well as its mandate for cross-border and internal cooperation.
Can you explain what is the meaning of such attention to NSSMC at the height of the war?
Ruslan Magomedov: – The draft law in question is designed to make the NSSMC flexible and truly modern. It’s like it’s hard to make a new taxi service on an old car. So the draft law is designed to update our car fleet, if we take such an analogy.
The history of NSSMC can be divided into two stages. The first is the formation of the stock market, privatization, creation of industrial groups, which now in many cases exist in the form of joint-stock companies.
The second is the launch of a new capital market. And although now we have a war, a war for independence, I believe that this is precisely the moment when we have to do everything in a new way, to make our stock market. And not only the stock market, because the NSSMC also regulates the organized commodity market and virtual assets. The task is to ensure that in our country all these markets work as they should work, as they work in many developed countries.
A simple example is the issue of securities. As the head of the regulator, I am forced to admit that today this is not a promising business, if you compare the amount of effort that needs to be spent and the results that can be hypothetically obtained. We have a lot of requirements for those who want to either issue or become a participant in the securities market. I was surprised by this both when I was on the other side – in business, and when I have now been in the position of the Chairman of the NSSMC for two years. On the one hand, there are a lot of requirements, and on the other hand, there are many loopholes that can be used to bypass them. That is, in this form it does not make any sense.
To do this humanly, we have to start with ourselves, adjust everything inside, then adjust everything outside.
— In the financial market of Ukraine, there are two state regulators – the NSSMC and the National Bank. But everyone is well aware of the National Bank: a powerful and respectable institution, while the NSSMC has remained in the shadows for many years. What is the problem – lack of financial independence, lack of authority?
— People know what they use, but how not to use money in today’s world? There is another illustrative example. For example, there is such a commission of the NEURC – regulation of energy and communal services, which appeared much later than the NSSMC and the National Bank. But they hear and know about her. Why? – Because it regulates the energy market, because we all consume energy in one way or another, be it as individuals or as enterprises.
It seems to me that if we go even to economic universities and ask there what the NSSMC does in Ukraine, we are unlikely to hear many correct answers. And this is logical, because we do little that is useful for people living in our country.
Why did this happen? Because, as I have already said, the NSSMC served as a regulator of the processes that took place after privatization, in fact the primary accumulation of capital. If someone did not buy something at the auctions of the State Property Fund, they bought it through brokerage companies, others resold it to each other, and then to the final beneficiaries anyway. But no one used the stock market to attract partners to their idea. Because what is a joint-stock company and share capital? This is when you have a business idea that needs not three or five partners, but hundreds and thousands. It has never worked for us, but I want us to fundamentally change it during our mandate.
Yaroslav Shliakhov: The financial market in the world consists of two main parts: banks, where the regulator is the National Bank, and the capital market. A bank is a rather archaic structure that requires the fulfillment of certain conditions, such as guarantees, collateral, in order to attract the capital that can be attracted to it, that is, it limits your ability to attract resources.
The capital market makes it possible to attract a larger amount of money for business development without collateral and under transparent conditions. And that is why it is currently more common in the world. If the investor believes in the development of this business, he gives him a de facto blank loan through various instruments, which allows the business to develop quite quickly. This is the basis of the capital market as an alternative to the banking market. And there should be such an alternative in Ukraine.
As for the fact that the National Bank is an institutionally capable body, in contrast to the NSSMC, which regulates no less assets. Institutional capacity is made up of many things, including the ability to finance activities, the ability to attract staff with expertise, and the ability to enact regulations that will not be influenced by bodies that do not have expertise. These three factors prevented the development of the NSSMC.
To sum up, we have a situation where the regulator is the same as the market, or if there is no regulator, there is no market that this regulator should regulate. This requires people who understand what conditions need to be created. These people need funds and the opportunity to implement the results of their work, that is, to adopt those acts that will establish principles and help control their implementation. That is, the regulator must be capable, and any reform must begin internally with the regulator itself. As long as the regulator does not change, everything around it will not change either. Because the fish is from the head…
Ruslan Magomedov (laughs): Yes, off the top of the head. And from the possibility of attracting qualified personnel, which costs a certain amount of money, because otherwise the specialist will not go to this job. And in addition to money, he should be given the opportunity to translate the fruits of his labor into a regulatory framework. For this purpose, the draft law laid down a certain number of control mechanisms, including from the market and the expert environment. For the documents to pass through a sieve that has expertise, unlike the current design. Because now our regulatory act is analyzed, conditionally, by the same unit in the Ministry of Justice, which analyzes the regulatory framework of the Ministry of Agrarian Policy, the Ministry of Energy, and someone else.
Unfortunately, the draft law does not have this very important, key point – canceling the procedure for the coordination of our regulatory legal acts with other state bodies and the Ministry of Justice. And this is a problem that I want to emphasize. Because if we want to create a body that works in a new way, that is really flexible and responds quickly (and that’s the only way to work in the market now), then it must be done. A vivid example of this is the National Bank, because otherwise, most likely, your market will beat you.
There is a simplified procedure for registering our regulatory acts in the draft law, but the very fact of its existence indicates that, most likely, it will be very difficult for us to react quickly. Because the stock market has also accelerated, and the market of virtual assets and even the commodity market – they are all very fast.
In fact, it seems to me that during the war, when this requirement of coordination was removed from us, we worked well and showed that we can make Resolutions quickly, efficiently, and no one suffers. On the contrary, I believe, we saved the national debt of Ukraine and our country in general from devaluation: there were no rates of 100% or more on domestic government bonds and other debt securities. We have protected assets from theft.
— By the way, will this new law, if adopted, enter into force already in peacetime? Because now, if I understand correctly, your activity is regulated in many respects by a special law that was adopted in April last year. The documents from the IMF talk about the full implementation of the new law by the end of 2025.
— Yes, this law is for peacetime. More precisely, the law enters into force in the period of wartime, but it contains deferred norms that are related, among other things, to wartime. There is a part that is related to other covenants. For example, this is the accession to the European Union, which is connected, among other things, with sanctions or supervision payments. As long as we are not in the EU, its norms are not relevant for our market, but there are norms that should be prerequisites for entry.
In addition, there is a desire to join IOSCO – an international organization of national regulators, which will add a sufficiently large number of opportunities, including in the exchange of information and in joining us to the civilized world, where we will be perceived as a subject, and not as an object. Therefore, the draft law contains a certain list of norms that are mandatory for IOSCO member national regulators.
— Yes, according to IOSCO, there is a separate deadline in the materials with the IMF – until the end of 2024.
Regarding financing. The first version of the draft law was adopted even before the war. And the market criticized her for the supervision payments, because it considered them inappropriate at this stage. Now there is a war and it is clear that the participants have even more difficulty with money. How are you trying to solve this problem?
Yaroslav Shliakhov: Supervision payments as a tool will be introduced, but they will not have a decisive impact on the financing of the NSSMC, as we understand that until there is a developed market, it is a utopia to provide the regulator’s activities at the expense of this source. But as a concept, it is already included (in the draft law) with a sufficiently low level, which will then require changes to the law depending on how the market will develop. We have to somehow evolve to come to what model of fees from the market should work.
Now, from the point of view of finances, we cannot pledge anything other than budget funding for the period while the reorganization of the NSSMC is underway and until we have created the conditions under which the market will begin to develop and we will be able to start self-financing. We have to answer the question, what comes first – chairs or money. The market says it is willing to pay if there is business and if the NSSMC delivers in terms of effective regulation. Whenever there is a reform, this reform is financed by the state or the institution that carries out the reform. This is a normal practice, because the result of the reform is always after the reform has been carried out.
By the way, the law stipulates funding at the same level as today, there is simply the possibility of more effective use of it within the NSSMC due to changes in the structure, approaches to personnel, and so on. The only thing is that we are opening up an additional opportunity that will allow us to improve working and development conditions – a special fund that includes supervision payments, fees for administrative services we provide, and targeted grants. For example, to update software, personal computers or windows, because half of my staff is sick due to the lack of heating in the building all winter. We are talking about international grants from donors who are ready to help us in this part, but must understand that this established mechanism of using money through a special fund will be effective.
— Compared to the first reading, have the amounts of supervision payments changed?
Yaroslav Shliakhov: We did not change the system, it remained the same.
— And the date of introduction?
Yaroslav Shliakhov: One year after the amendments to the Budget Code. The issue is that we are bound by the emergence of a special fund to amendments to the Budget Code.
— How do you assess the market for the second year of the war? Are there any sprouts emerging that further stimulate the acceleration of the transformation of the NSSMC? Here is the bill on the accumulative pension reform introduced the other day. We see that rates on domestic government Bonds have started to decrease and the first corporate issuers, such as «Nova Poshta», have appeared.
Ruslan Magomedov: Many representatives of the state – from the president to the Ministry of Economy – communicate with international financial institutions, with private banks and managers, such as JP Morgan or BlackRock. So there is an understanding that without our own developed market of financial instruments, a quick recovery will be impossible. And the commodity market, and derivatives on it, and virtual assets – all this will also be needed by international investors when we start living in a new way after victory. It is impossible to change and transform all this overnight, we need to prepare for what victory will be like, and we need to work and do a lot right now. Because while the war is on, let’s be honest, there is nowhere to invest, on the contrary, Ukrainian businesses are opening their offices abroad, the same «Nova Poshta» or «Rozetka».
Before that, we need to adopt a law and implement its norms so that we can issue securities in a month and not submit 200 unnecessary pieces of paper here, but do it all electronically. So that we, as a state body, become completely digital in communication both with those who are under our supervision and with investors. Without this law, we cannot do anything about it, because a lot of things have to be done on paper.
Therefore, my dream is to make the NSSMC a body that everyone wants to work for, because it is enormous knowledge, well-paid work and an opportunity to realize yourself. For example, in the field of virtual assets, which have already become a large part of life.Today it is already clear that the regulation of them in the world will happen in any case, so our task is to make it in such a way as to leave a maximum of opportunities, but to minimize the likely harm.
Our task is to provide new opportunities similar to those in developed countries. The same derivatives, hedging. Because there are futures for weather in the world, but they don’t even work for currency in our country.
If we have all this, then we will become the body to which they will come and say: guys, let’s do something interesting and useful there, so that we, and the clients, and the state will make money. This is the ultimate goal of all our transformations in the NSSMC.
— Can any of this appear before the end of the war?
Ruslan Magomedov: Not sure. We wanted to make it so that our Ukrainian government bonds could be bought all over the world by opening accounts in Ukraine, and we spent a lot of effort on this. But all this turned out to be useless, because we were told that it is not possible to implement all this within the requirements of the law on prevention and countering of legalization and other financial monitoring regulations. Who will buy if you have to personally appear somewhere on the other side of the globe in a war-torn country with a piece of paper and justify your level of risk and income? Why is it possible to open a bank account remotely today, but it is really impossible to open a securities account and sign a brokerage agreement? This is impossible not only for ordinary citizens, but also for respectable institutions. I even joke that if the same BlackRock wants to open its branch here, then their first managers will have to go to us, join the SRO (self-regulatory organization) and prove that they are them. As a regulator, we want to do everything to remove it, but we are not allowed.
I believe that when the law is adopted, the country, investors and professional market participants will feel qualitative changes regardless of when the war ends. I don’t want to get attached to war.
— Pension reform. Previously, one of the reasons why it is not on time was the weakness of the NSSMC as a regulator. To what extent, in the case of the adoption of your law, the NSSMC will be able to fulfill its role in the implementation of this second, accumulative level of the pension system.
Yurii Boiko: Indeed, both the pension reform and the recommendations of our partners clearly state the need to have the institutional capacity of the NSSMC. We all understand very well that when a new second-level pension system is being built and billions of money will go to the market, the National Pension Fund must be different. The new draft law No. 5865 changes the very principle of supervision: we will try to prevent possible violations, and not try to catch up, as we do now, when we have already seen them in the reports.
By the way, the head of the specialized committee Halyna Tretiakova, who is also a co-author of the pension bill, said two or three years ago that they should go in a package.
Maksym Libanov: According to the most conservative estimates, in the first year of operation of the system within the framework of the second level, more than UAH 20 billion will be accumulated. Even if you break it down into 12 months and take into account that 20-30% will go directly to the market, then given the small scale of the market today, the probability of various kinds of speculation and abuse in manipulation will be very high. Since the second level of the pension reform is about additional pension provision, such fraudulent actions should be made impossible. Therefore, the regulator must be able to effectively counteract such abuses: detect them, record them and apply sanctions that will be proportionate and adequate.
— Does this law give you such powers?
Maksym Libanov: Yes, it is designed to eliminate these gaps that currently exist, to give us the opportunity to carry out appropriate internal and institutional transformations to use this updated toolkit. For example, anti-tampering powers. Now they are ineffective due to various objective and subjective reasons, draft law No. 5865 will change this situation.
— The last two questions are a bit provocative, but I heard them in the market and they can be asked by deputies during the hearing of the draft law. So it’s better to answer now.
First. In the market, from time to time they say that why do we need this NSSMC at all? The State Financial Service was handed over to the National Bank, and it somehow manages itself there, because it is a powerful institution. So let’s combine it all into a single regulator. What do you say to that? Why do we need a separate body and a separate law? Or can it really be best to give everything to the NBU?
Ruslan Magomedov: First of all, you can ask not only the donor, but also the recipient. Why does he need a fifth leg or a third arm.
But to be honest, the answer has been known for a long time and is supported by international institutions. What happened with the State Financial Services Agency is not over yet. That is, you cannot bite off any new pieces of pie without chewing and digesting the previous ones. This, by the way, is also recognized by the National Bank. Therefore, it is not the right time to make a mega-regulator now. And when some time passes there, it will be clear: maybe we do not reject, and there will be an effective mega-regulator, but we are sure that now there is an opportunity to create a normal regulator that exists in developed countries. Which will take care of all those markets and enable them to become a tangible component of the country’s economy. I emphasize once again that we are not only responsible for the stock market, but also for commodity markets and virtual assets. Personally, I have no idea how the National Bank will take care of the commodity markets, and I can’t even remember that somewhere in some country this has happened.
That is, maybe this question was relevant there three years ago, but now, especially during the war, it is definitely not.We have to do our work and it has to bear fruit. I am sure that they will be felt as soon as we get the powers and reform the NSSMC. As the Chairman of the NSSMC, as a person who has been on this market for much more than 10 years, I want the NSSMC to be a very desirable employer that opens doors for you not only financially, but also intellectually. And that a private company, a bank or some international financial institution will be happy to take those who once had work experience at the NSSMC.
– Then the second question. To what extent will this law increase the institutional independence of the NSSMC so that it can vocally and effectively protect investors in the market, especially minority investors? Many complaints against your predecessors were that they did not protect minorities very much. But we will not talk about the former, but we can also talk about the present. This is the story with «Motor Sich» and «Ukrnafta», because until now the minorities – not the Chinese, Boguslaev or the «Privat» group, but the real ones – do not understand their rights, guarantees of the return of their property and how their interests will be protected after the war. Will the NSSMC be able to become an advocate for investors in the government, because without investors’ trust in the regulator, it seems to me that the market is also unlikely to be built.
Ruslan Magomedov: I agree that if there is no feeling that the regulator is a defender of investors’ interests, then there will be «no cinema». But, believe me, few people mentioned the protection of minority investors in all cabinets and personally in the president’s cabinet as much as I did. And he always said that we can do a lot, but we must not forget about the minorities. And, by the way, the president always heard it.
During the period of martial law, not everything can be done in public, but rest assured that the NSSMC always stands in defense of the interests of the minorities, because we understand that they are the driving force.
Sometimes there is another problem, that we are simply forgotten. A vivid example is the story about the sanctions on Freedom Finance Ukraine, which we learned about from the news, and it was a huge problem that we still haven’t fixed. But currently I am already a member of the Interagency Working Group on Sanctions, and the state has understood what role the NSSMC plays.And this, I believe, is a great achievement. So, little by little, we are changing the situation: if at the beginning of our term, many things were done in the state and we were not even mentioned, now we have changed it. Perhaps this is not visible in the press, because many issues concern the security of the state, but it is so.
If we become more capable, it will be easier for us to defend the interests of investors and other market participants. Because when we do some things, they will be felt for the state in an economic sense.
— And was it possible to unblock the domestic government bonds and the money of «Freedom» clients?
— Unfortunately, this issue is beyond our competence. But it is important that such a story with the conditional new «freedom» will not be repeated.
As for Ukrnafta, Motor Sich and three other enterprises, this should not be compared with the nationalization of PrivatBank, because no one nationalized them. They were taken into use during the war. And the big question is how these companies treated minorities before this, for example, the same «Ukrnafta», which for years selectively paid dividends. And the NSSMC, not having the institutional capacity, could not do anything about it.
We will change that. We will arrange things with professional participants so that the license of the NSSMC means that at least they have money. Those who really want to do it, they will continue to do it, and we will not chase the number. How mobile operators once understood that the important thing is not the number of SIM cards distributed, but the number of those that are actually used. It should be the same here, because administration is also money, and it is taxpayers’ money.
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