Ukrainian capital markets major reform

19 August 2020

For many years, Ukrainian capital markets have barely functioned due to significant gaps and inconsistencies in the underlying legislation. The new law No. 2284 “On amendment of certain laws with respect to investments and new financial instruments” (the “New Law“) which was officially published on 15 August 2020 aims at restarting Ukrainian capital markets. It brings Ukrainian legislation in line with key provisions of the EU laws on capital markets (MiFID II, MiFIR, EMIR, Settlement Finality Directive and Financial Collateral Directive). The New Law creates a framework for an updated capital markets infrastructure and regulates commodity markets and derivatives matters.

The main highlights of the New Law:

1) Trading can be undertaken on organised markets (via stock exchange/other trading venues) and on over-the-counter markets (directly between two parties).

2) Organised capital markets consist of:

    • regulated markets (traditional markets for large-scale players);
    • multilateral trading facilities (MTF) (alternative self-regulated trading venues for smaller businesses, acting on the basis of non-discretionary rules); and
    • organised trading facilities (OTF) (trading venues which can exercise discretion when deciding whether to place a specific participant’s order in their system).
All market operators will need to be licensed by the Securities Commission. Foreign persons can also apply for such a licence. This, as well as the possibility of organising different types of trading venues, will hopefully open Ukrainian financial markets to competition.

3) Transactions executed on regulated markets will be mandatorily cleared by the central counterparty. To act as a central counterparty the company will need to obtain a licence, comply with certain regulatory capital requirements and agree its clearing rules with the Securities Commission. The clearing will be undertaken by way of novation of the obligations of participants, following which the central counterparty will become the buyer for every seller and the seller for every buyer. There are certain gaps in the New Law provisions relating to clearing (in particular, it is not clear what will happen with the security securing the cleared obligations); however, this will hopefully be regulated by the implementing legislation and/or clearing rules.

4) Introduction of trade repositories, which will collect and account for information about over-the counter derivative transactions. The parties will be required to report all over-the counter derivative transactions to the trade repository, otherwise they may be subject to fines. This will ensure integrity and transparency of the information on over-the-counter derivative trades.

5) Master agreement concept. The New Law provides for a documentation structure consisting of the master agreement and (i) the specification (with respect to regulated market trades); or (ii) the description (with respect to over-the-counter trades). This will allow using ISDA documentation as well as other standardised master agreements (e.g. the Global Master Repurchase Agreement) in Ukraine.

6) Liquidation netting. One of the major issues of the current legislation is the absence of an effective netting mechanism in case of default (insolvency) of the derivative counterparty. The New Law introduces, in case of the default of a party, that its obligations and obligations of its counterparties under derivatives will be novated, mutually terminated by way of set-off, and a net obligation of, or to, a defaulted party shall be determined. The determination will be made by the central counterparty. This procedure will prevail over Ukrainian insolvency legislation, and the insolvency administrator will not be able to invalidate or otherwise challenge derivative transactions which have been made subject to the liquidation netting.

7) The New Law differentiates between qualified and non-qualified investors. Financial institutions, banks, the state of Ukraine, foreign states and certain other companies the securities, assets or trade activities of which exceed specific thresholds will be considered qualified investors and will need to comply with certain regulatory requirements. Non-qualified investors will enjoy a higher level of regulatory protection.

8) The New Law introduces the concept of a systemically important professional participant (market operators which are “too big to fail”). They will be subject to additional supervision by the Securities Commission and/or the NBU.

9) Information disclosure, reporting and insider trading provisions in the New Law are introduced in accordance with the EU Market Abuse Regulation.

10) Increased protection of bondholders. This will be achieved by way of introduction of (i) bondholders’ meetings, which will be authorized to approve amendments to prospectus, execution of significant transactions by the borrower, waivers of events of defaults, etc.; and (ii) a bonds issuance administrator, who will act on behalf of bondholders and monitor compliance of the borrower with the prospectus. This will, hopefully, restart the corporate bonds market in Ukraine.

The New Law will become valid on 1 July 2021 (subject to transitional periods for the implementation of certain provisions).