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Interview of Arsen Ilin, Commissioner (NSSMC), to Interfax-Ukraine
Author: Dmytro Koshovyi
— Let’s start with the results of 2023. We know the overall results of the Ukrainian economy: it grew, according to various sources, from 5% to 6%. What was the dynamics of the organized commodity exchange market last year?
— The market was launched at the end of 2021. 2022 was a difficult year for both the commodities market and all of us. Last year, the total amount of trading on the organized commodity market amounted to UAH 310 billion, which is more than in previous years, and definitely more than 6% compared to 2022.
— What was the commodity structure like?
— The largest commodity traded last year, as well as the year before, was electricity – 62.5%, oil and distillates – about 14%, unprocessed wood – about 8.5%, liquefied petroleum gas – about 7.6%. Everything else is much smaller, but there is coal, bitumen, and others. There are 8 basic items, excluding subtypes.
Usually, the commodity market rarely trades many items. As a rule, a commodity is traded that is the main one for this market, for the country that produces or extracts it. The main commodity traded in the world is oil. Other energy commodities are also quite often traded because people need to understand what it costs at a given time and it is important to have a hedge. In addition, it is simply a transparent and technological way to trade through an exchange so that no one has any questions.
— UAH 310 billion – not everyone can understand whether this is a lot or a little. And if we take the share of the exchange market of these individual commodities to the total volume of trade in them, what will it be? Accordingly, how representative are the price indicators set in exchange trading?
— The electricity market is fragmented into several different segments, with prices for each segment being formed separately, and several segments being traded under different mechanisms altogether. But in general, the share of electricity traded on the exchange is quite significant – it can reach 60%, so the exchange price is already an important indicator and can be used as a guide. Even though it does not affect the price in other segments.
— As far as I know, other segments still take into account the price on the DAM, which is the main exchange market.
— Yes. Can it be done better? Yes, it can. If you look at the trading curve, you can’t say that there is liquidity every day. But this is not a question for the exchange, because it is not the exchange that puts the goods up for auction. It’s a question of how the market itself is organized and how the market wants to trade: whether it wants to trade short contracts or longer ones – that is, it depends on the organization of the market. In addition, the time is very nervous now.
Another important aspect is that we are gradually integrating into the European markets and adjusting to their requirements. So we will gradually move away from artificial indicators, come to the market price in Ukraine and compare it with the price in Europe.
— Since mid-2021, when the NSSMC became the regulator of the Ukrainian exchange-traded commodity market, how many similar price indicators have appeared on it? I see about two and a half: electricity, gas, and a little bit of wood, and even gas has been having problems lately.
— Yes, the situation with gas is complicated because exports are banned, and «Naftogaz» left the stock market in 2022 and then returned. «Naftogaz» is the main market maker, so if it is not on the market, it is difficult to talk about any indicators. But in 2023, it was definitely there and working, and gas returned to the exchange market.
So, in general, I agree with your assessment, but I would add that in 2023, oil and distillates also appeared. This is largely due to the fact that the state has temporarily gained control over some assets (Ukrnafta ) and made sure that products are traded transparently.
— A major event last year was the doubling of the number of commodity market organizers – from two to four. How did this affect trading volumes?
— If the market is the same and a new participant enters it, the shares are simply redistributed, but the volumes do not increase. Volumes will increase if someone comes with a new product. Moreover, the new exchanges, the Ukrainian Trading Platform (UTP) and the Ukrainian Resource Exchange (UREx), received their licenses only in August and entered the market at the end of the year: the UTP’s share was less than 1% of the total volume, and the UREx managed to make only one test transaction.
But now the market has a choice of four entities, several of which use different software. And although the market has not yet become more crowded, the chances of someone entering it with a new product have increased.
— To finish with 2023. What key legislative and regulatory changes were adopted?
— 2023 was quite stable in terms of regulatory changes in the commodity markets. We are still living in a war, and we did not see any point in making any changes to the regulatory framework: the market is developing, the growth dynamics are normal.
— So let’s move on to 2024. The NSSMC recently met with all four exchanges. In your release, you mentioned that they discussed the possible expansion of exchange-traded products. Could you elaborate on what plans and hopes the NSSMC and the four organizers have for this year?
— We really want the existing markets to grow a little bit. I’m not even talking about money, but about volumes: in megawatts or cubic meters or tons, depending on which market we are talking about. It is also very important for us that each commodity market has normal liquidity. For example, in my understanding, the coal market does exist now, but it is not liquid, and this is a significant obstacle to its development.
— What about new products? Perhaps, finally, agricultural products?
— We have been working for two years now to ensure that biofuels are traded on exchanges, which will be an additional contribution to energy independence. We are working with colleagues from the State Agency on Energy Efficiency and Energy Saving. I hope there will be a result, but the market volume here is average.
But the agricultural market is a really big opportunity in terms of volumes. But, frankly, this market is quite complex, because in addition to the trade itself, there are also issues of supply control. Moreover, you need to make sure that you are delivering exactly what was in the contract. This procedure is much more complicated than one might imagine. There are also logistics issues, because the biggest problem now is not just selling something, but providing logistics. And we also understand that there are additional issues regarding the security of large warehouses of something, such as grain, during the war.
If I dream, I would also like to launch a hydrogen market, although it is still more difficult than, for example, agriculture. On the other hand, it is also natural for Ukraine to produce and trade hydrogen. It is good both for maintaining the energy balance and for the environment. So this is in the plans.
— And then I’ll ask about emissions trading, because the organization of such a market is one of the requirements of the European Union.
— Yes, we also remember about emissions and are also moving forward. I think you’ve heard about the project that the Ministry of Environment has in this regard, and we are also involved in it. But it is now on hold for a while, because its implementation will put pressure on producers and increase production costs. Whether it is necessary to do this in times of war is a question. So emissions trading is important and should be done, just like in other European countries, but now, at the stage of survival and struggle, we must first think about the products that allow our economy to work.
In my subjective opinion, it would be better to trade hydrogen now because it is an energy product. Hydrogen, for example, allows us to store cheap excess electricity generated at night.
— We are currently discussing the creation of additional tools, incentives, and sanctions to minimize the non-return of foreign exchange earnings. Does the NSSMC, as the regulator of the exchange commodity market, have something to offer here?
— Yes, that’s why we are really fighting for the existence of the agricultural exchange market, because then it will be clear from what base we pay taxes. Exchange trading with its transparency has advantages, so it is possible that we could offer an automatic VAT refund in case of trading on the exchange for export. Or, for example, it could provide access to Ukrzaliznytsia’s transportation, because exchange trading allows you to plan your loading. I think it would be attractive for many not super large companies. Especially if they could sell at a higher price on the exchange.
At the same time, I repeat, only what is standardized can be traded on the exchange, and many goods that are typical for Ukrainian exports are not standardized.
— As for competition with Prozorro.Sale. I interviewed Rostyslav Shurma, deputy head of the Presidential Office, in which he said that he had doubts that the sale of timber by the state enterprise «Forests of Ukraine» through the exchange is the most effective form. In his opinion, Prozorro.Sale is a good alternative. What is the NSSMC’s position on this? How can you argue that the exchange market is the most efficient form of organizing trade in goods such as timber, oil, and oil products?
— We consulted with Prozorro.Sale regarding obtaining a license. You need to understand the big difference between an exchange and a platform like Prozorro.Sale. The platform allows you to select the product you need and choose the best price. But it doesn’t follow up to ensure that the contract is fulfilled. And it doesn’t answer what will happen if you get the wrong wood or the wrong kind of wheat.
— As far as I understand the situation, there are problems with the fulfillment of contracts in the case of timber and exchange trading. It is easier with gas and electricity, but it depends less on the exchange and more on the market infrastructure.
— It’s easier with gas and electricity. There are cases of non-fulfillment of contracts. The share of contracts that are being fulfilled, for example, for timber has increased from 55% to 86%. But if we look at oil, coal, and agriculture, nothing will happen without control over the supply and fulfillment of the contract. Without such a tool as clearing, market development in general will be very difficult.
So far, I don’t see any tools in Prozorro.Sale to control contract fulfillment, delivery of goods, and settlements. Although, in general, they are a powerful team, and if they want to come to the exchange market, they have everything to do so.
— Are there currently any other applicants for a license to organize commodity trading on commodity exchanges? I know that Kharkiv Commodity Exchange and Inex have applied. Market Operator and the Ukrainian Exchange once had plans.
— As of now, we are not considering any applications: we are in talks with various participants, but they have not submitted any documents to the NSSMC. We cannot say that we have not satisfied anyone as of now.
As for Market Operator, we have been in negotiations for a long time, even after the second stage of the war, but the license application package has not been submitted.
As for Inex, this is an old story that started before the large-scale invasion, but the package was not finalized then. From what I know, the main initiator is now serving in the Armed Forces, so I don’t know how relevant it is.
We did refuse the Kharkiv Commodity Exchange. We had a frank discussion with the owners and representatives of the exchange about the comments and reasons for the refusal.
I would add that, in addition to the willingness and ability to form the authorized capital with money, you need to constantly comply with the requirements of the license, even though they are quite simple. Among other things, you need to have proper software, because you can’t take software that trades on the stock market and say that I’m going to use it to trade on the commodity market, because it doesn’t work that way. You have to create such software on your own or buy it and customize it for yourself. The last company that received our license spent two years on this. I think few companies today agree to either buy such software for a lot of money or create it and then enter the market, which is not that big.
That’s why there was a time before the large-scale invasion when there were many applicants, but gradually, as we reviewed and communicated with each company and explained to them, there were fewer of them, although the attitude and requirements for all of them were the same.
— To conclude this topic, I would like to ask about the Ukrainian Interbank Currency Exchange (UICE), which was suspended by the NSSMC in May 2022 until the end of the war. I know that the exchange tried to appeal, but I didn’t follow it any further. What is the status of this process now?
— UICE filed a complaint, but they have now lost one of the courts along the way. The story is not yet finalized, but as of now, the score is in favor of the NSSMC.
— How does the NSSMC currently assess the state of the fight against market manipulation? How does it cooperate with other regulators, primarily with the National Electricity and Utilities Regulatory Commission (NEURC), which is involved in the implementation of REMIT?
— A memorandum of cooperation was signed with the NEURC in 2019, and in general, relations have always been normal and working. However, in the summer of 2023, the law on REMIT — on the prevention of abuse in wholesale energy markets — was adopted, and now we need to interact with each other much more. The EU project «Assistance to the National Securities and Stock Market Commission (NSSMC) in improvement of Ukraine’s energy commodity markets and commodity products organized trading in Ukraine» is currently underway, which helps the NSSMC to gain the appropriate capacity to regulate the commodity market, as we are still more specialized in financial instruments.
As part of this project, we were given the opportunity to learn how it works in Poland and Germany, because Poland is a close market to us, and Germany is a fairly developed commodity market. We had the opportunity to communicate with regulators and professional participants: the largest exchanges. We also had the opportunity to further study the experience of the Netherlands and Belgium.
I will not focus on each country separately, but I will say that you cannot just take something from someone else and do it in a one-to-one manner. Because the powers between the authorities can be divided in different ways, and commodity market operators can work in different ways, especially since each commodity market has its own operator: gas, electricity. Therefore, all these interactions between the exchange, the market operator, and those who trade on it are very serious technological work.
We realized, first, that a modern commodity exchange is a large IT company. Secondly, there must be a commodity and a corresponding hub with storage, because goods are not always bought for the purpose of using them. Thirdly, it should be clear to everyone how the ownership rights change and how payments are made.
Fourthly, and I have already mentioned this, there are already established markets: for example, in some countries it makes sense to trade coal, the Netherlands has a developed emissions market and is now building a hydrogen market and starting with the infrastructure to store and transport hydrogen. It’s super expensive, but without this infrastructure, there will be nothing at all, because there will be no way to physically deliver the goods.
So, coming back to the European Project, we are really grateful that it was explained to us how different authorities and regulators should interact with each other, for example, the NSSMC and the NEURC, the NSSMC and the Antimonopoly Committee of Ukraine, or all three of us together. This may be a different interaction in each market. For example, in the timber market, we will cooperate with the Ministry of Environmental Protection and Natural Resources or with the State Forest Resources Agency of Ukraine, and in the future agro market, we will cooperate with the Ministry of Agrarian Policy and Food of Ukraine and several large operators.
This is a lot of horizontal cooperation, although we cannot always share information with each other because of professional secrecy, for example. But we have the opportunity, according to the law (on REMIT), to conduct joint investigations. This mechanism is currently being developed. And in the next two months, we are going to sign a new expanded memorandum with the NEURC that will meet the current requirements for both regulators. We want the investigation process to be clear for both us and market players.
— At the beginning of this year, the NEURC announced the launch of an investigation into possible manipulations on the DAM.
— We know nothing about this. They have not addressed us with such requests as of today.
— The updated memorandum will have a clear division: when someone manipulates the exchange, it is the responsibility of the NSSMC to investigate, and when someone shuts down a power unit and the price goes up because of this, is it the responsibility of the NEURC?
— If it is related to the physics of the product, to the law on electricity, then this is definitely not our area. But if it falls under the law on capital markets, yes, please come.
If the issue is more complex, then there will be a working group to consider it. It is difficult because both the NSSMC and the NEURC have a collegial decision-making mechanism, and it is quite difficult to guarantee anything. But the procedure of the review itself can be ensured.
— From what you have seen in the framework of the EU Project, have you drawn any conclusions about the need to improve the exchange infrastructure of the Ukrainian market and clearing?
— We have long been on the path to normal clearing. But, first, this is a project that requires a lot of resources, including financial ones. Secondly, for clearing to make sense and be economically viable, we need a certain market volume.
So, yes, we have recommendations on clearing from the EU Project. We have received them a month ago, and we are still looking for ways to implement them. If there were negotiations before the war, I don’t know anyone who would like to do clearing in commodity markets, because so far the financial models are not yielding positive results. I hope that with the growth of the market, this financial model will appear in some time, and then it will be a question of who will do it. We need to find out for ourselves whether, for example, players in certain markets are ready to act as co-owners of a clearing institution. As of the beginning of the war, there was no such readiness, although there were talks about it.
— You mentioned the stability of the legislation and regulatory framework during the war. But are there any changes expected for this year? At the very least, the Parliament passed the long-suffering draft law No. 5865 on strengthening the powers of the NSSMC.
— Thus, on February 22, the Verkhovna Rada adopted Draft Law No. 5865 in the second reading and as the Law on Amendments to the Law of Ukraine on State Regulation of Capital Markets and Organized Commodity Markets and Some Other Legislative Acts of Ukraine on Improving State Regulation and Supervision of Capital Markets and Organized Commodity Markets No. 3585-IX. Currently, the procedure for signing it is still ongoing.
— What changes directly affect commodity market participants? Perhaps, the requirements for them will be increased, your information capabilities will be enhanced, and participation fees will be increased.
— Yes, Law No. 3585-IX provides for the NSSMC to receive payments from the market. This is a motivation for the regulator to ensure that the market not only exists but has every opportunity to grow. This is how most regulators are financed. However, this provision will become operational in the distant future, after amendments to the Budget Code of Ukraine are made.
— In addition to No. 5865, what other legislative and regulatory changes do you hope for?
— There is also a draft law on electronic agricultural receipts, a joint project with IFC. We used to have agrarian receipts in the usual form, but it became clear after a while that it doesn’t work that way: you need a notary and everything else, so the volumes are negligible. Perhaps the electronic form will give some impetus to this story, although I’m not 100% sure.
— There is also a Cabinet of Ministers resolution that certain goods should be traded only on exchanges. Do you see any potential for market growth here?
— It is up to the Cabinet of Ministers to decide, and there may be our recommendation, but nothing more. The NSSMC stands by the fact that it can recommend that certain commodities be included in this resolution for a limited time. We learned this experience from the Polish, because they did exactly that: the market became much better five years after the commodity started trading on the exchange, and after that it made no sense to limit its trade so much. The participants understood the benefits of clearing, guaranteed settlements, quality of supply, and so on.
And it was also clear that you come not only to get the goods, but you also have commodity derivatives, which will only begin to appear in our country this year: you can order today and fix the price, but get them in the future.
— In the case of Ukraine, what kind of derivatives are we talking about?
— I think we will start with commodity derivatives on timber, because there is demand for it. The gas market could still be a good option with its seasonality, but it is currently subject to great restrictions. There are also non-residents in the timber market, and their share is gradually growing. It may make sense for processors to have a basket of contracts of different lengths.
But if it works out in the timber market, which is closer to the agricultural market in terms of its «physics», then it will be able to work in the agricultural market as well.
— The last question is about the adaptation of Ukrainian legislation and the regulatory framework to the European one. Market participants have different opinions on this and definitely have concerns.
— In my opinion, it would be better to use the European version, but unfortunately, given the structure of our legislation, this is impossible. We need to translate and insert it into a separate act. Therefore, we have a huge task in terms of European integration and, to be honest, I don’t even understand yet what resources we have to do it with. It’s not just the NSSMC, it’s a situation in many bodies now. But if we want to come to the European Union, to become part of the normal world, we need to work very, very hard.
Source: Interfax-Ukraine

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