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09.02.2021
Tymur Khromaev, Chairman of the National Securities and Stock Market Commission
On June 19, 2020, the Verkhovna Rada adopted the Law of Ukraine on Amendments to Certain Legislative Acts of Ukraine concerning Simplification of Investment Attraction and Introduction of New Financial Instruments № 738-IX (hereinafter – the Law № 738). This document eliminates a number of problems that hindered the full functioning and further development of capital markets in Ukraine. What role does the Law № 738 play for the economy of Ukraine, what are the hopes for it?
T.Kh.: The capital market of Ukraine may be no different from the capital markets in the European countries and be part of these markets. To do this, Ukrainian companies should be able to freely raise funding for their development through various financial instruments, and the cost of this funding will not be cosmic. Ukrainian farmers or energy companies will be able to manage risks effectively. Ukrainian investors will have more opportunities to invest and accumulate funds than OVDPs (Internal governmental bonds), and the current rules of the game will provide basic protection against risks. All this is possible thanks to the adopted Law № 738 and its implementation in our Ukrainian realities and legislative field.
The title of Law № 738 refers to the introduction of the new financial instruments. What does the concept of “financial instruments” include and which of them are new to our market?
T.Kh.: A financial instrument can be considered to be a contract that results in the creation of a financial asset of one entity and a financial liability or equity instrument of another entity. The Law № 738 introduces such a financial instrument as derivative contracts. Such contracts concluded by Ukrainian companies will be recognized on the international market, and derivative securities will finally receive general rules of issue, circulation and trade.
Corporate bonds issued under the new procedure will provide better protection to their owners and restore investor confidence in this financial instrument (the main innovations of the Law are the bondholders’ meetings and the issuer’s administrator).
Ukrainians will also get another, more flexible, financial instrument in addition to deposits which is a bank certificates of deposit.
New financial instruments also include green bonds.
The Law № 738 includes a number of securities that are not currently provided for in the current Law on Securities. There are green bonds among the “new faces”. Under what projects can they be issued? What are they interesting for investors? How do green bonds “work” in the world, in the EU?
Kh.: The emergence of green bonds is caused by the rapidly growing demand of institutional investors to invest in environmentally friendly projects, and this segment is developing dynamically in many countries. Ukraine is not the exception, and with the adoption of the Law № 738 our country has the opportunity to develop this instrument actively. There have been established rules for the participants in this market and the concept of this instrument is clearly defined, what is a prospectus that provides for the use of borrowed funds exclusively for financing or refinancing the costs of green (environmentally friendly) projects.
Is it possible to say that with the entry into force of this Law we will join the best international practice, in particular of the European Union, in the use of financial instruments? Please, give some examples.
T.Kh.: The Law complements the infrastructure of the markets with the elements it lacked. It gives more flexibility and opportunities for financial intermediaries, introduces new financial instruments and reloads some old ones, and most importantly, it introduces the rules of the game went by civilized capital markets.
The process of revision of all current legislation of Ukraine in the field of functioning of capital and commodity markets and its adaptation to the EU standards is also launched. First of all, we will use the key European legislation, such as MiFID II, MIFIR, EMIR, which are binding on all EU member states, as well as those in the European Economic Area. It is not about copying acts, but adapting them to our realities, taking into account all the features of our market.
It is important to introduce for all financial institutions the «know your customer» model, which is used in Europe by all participants in the financial market – banks, stock exchanges, other companies that work with money of private individuals. This practice helps to counter fraud, embezzlement, money laundering and the financing of illegal transactions.
Institute of related agents. What will give its introduction in the capital markets?
T.Kh.: The introduction of the institution of related agents in the capital markets was aimed at expanding the mechanisms of investors’ access to the services of investment firms. In particular, by enabling related agents to provide certain services on behalf of and at the expense of the investment firm on the basis of an agreement. These include advertising the services of an investment firm, accepting orders from clients to enter into transactions in financial instruments, arranging the placement of securities, etc., as well as performing other actions provided by the agency agreement related to the direct professional activity of the investment firm in the market.
Such changes will allow investment firms to increase their representation in Ukraine without the need to establish branches, which, in turn, could potentially reduce the cost of such representation and increase the amount of clients of investment firms in general.
What measures, tools are provided by Law № 738 to protect the rights of bondholders?
T.Kh.: The Law introduces a “bondholders’ meetings” and a “bond issuer’s administrator” for bonds and their holders. Meetings will give the bondholders better control over the issuer’s condition and the opportunity to make decisions collectively that are binding on the issuer. And the administrator will facilitate the collective actions of the owners and establish a connection between the issuer and the owners.
What are the key changes for commodity exchanges?
T.Kh.: Due to the imperfection of Ukrainian legislation, commodity and financial exchanges have been used for many years, mostly for other purposes, causing significant damage to the country’s economic interests. Commodity exchanges were often part of tax evasion or tax optimization schemes.
Our goal is to provide the financial and commodity markets with a reliable exchange infrastructure for organized trade and quality financial instruments. Therefore, at the legislative level, the concept of netting, a system of pre-trade and post-trade reporting on transactions with underlying assets, introduces a procedure for authorization of key infrastructure facilities and supervision of their activities to counter manipulation and other abuses in the markets. The main elements of such a new infrastructure of capital and commodity markets will be the Central Counterparty, repository, trading platform operators.
It is very important that the pricing of the asset is transparent and no market participant has the opportunity to influence prices significantly. To do this, price information should be public, the methods of collecting this information should be reliable, and the sources should be unbiased and trusted by the market.
What should professional stock market participants be prepared for, what innovations of this Law should they take into account in the first place? What are the requirements for their professional activities, licensing?
T.Kh.: Instead of stock exchanges, the draft Law introduces two types of markets – a regulated market with stricter requirements, which will ensure centralized execution of transactions, and a less regulated market of alternative trading platforms (multilateral trading facilities (MTF) and organized trading facilities (OTF). In Ukraine, a central counterparty will finally be established, which reduces the risks of non-performance of agreements and guarantees settlements under agreements. We will use a trading repository, which is a mandatory element of a full-fledged derivatives market.
If earlier there was 1 license for exchanges in the stock market, and there was in general 0 licenses in the commodity market, now there will be 7 licenses in the capital markets and 2 licenses in the commodity market. This will be evidence of greater diversification and flexibility in the market, rather than a quantitative indicator.
The securities trader will be transformed into a model of a full-fledged investment firm, which is widespread in Europe, and it will get more business opportunities. Licensing will be based on the principle: less responsibility – less requirements for obtaining a license, more responsibility – more requirements. An investment firm will be able to use related agents in its activities, who will act on behalf of, under the control of and at the expense of such firm.
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