A meeting of the Working Group, featuring representatives of the National Bank of Ukraine, the National Securities and Stock Market Commission, the National Depository of Ukraine (NDU), and capital market participants, took place yesterday to discuss a Framework for the development of the depository and clearing infrastructure of the financial sector. The meeting participants focused their deliberation on ways to establish an efficient securities clearing and settlement infrastructure for deals concluded on the stock exchange and OTP markets, and discussed an Action Plan for the implementation of the proposed transformation project.
“Presently, the execition of stock exchange deals is 100% guaranteed by cash pre-funding and pre-depositing of securities by both sides. This approach is easy, reliable, but very inefficient. It is inconsistent with international practices and does not work for T+N settlement,” said NBU Deputy Governor Mr Oleg Churiy. Furthermore, in Ukraine the settlement of securities transactions is carried out on a delivery-versus-payment basis that requires cash pre-funding on accounts with a commercial bank, which is inconsistent with international settlement practices where transactions are settled through the payment system of the central bank. As a result, we have one more element in the securities settlement process, which makes the settlement of securities transactions time-consuming and leads to additional transaction costs. Therefore, this practice is viewed as obsolete and inconsistent with international best practices of developed financial markets.
Another important step toward the development of the domestic infrastructure is the opening of accounts by the central securities depositories of the NBU and NDU for the leading international central securities depositories. This will make it easier for investors to access the Ukrainian capital market.
In view of the above, the regulators proposed to overhaul the securities clearing and settlement infrastructure to gradually move away from the use of services provided by the Settlement Center for Servicing Financial Market Agreements. At the first stage, the functions performed by this institution, in particular those related to cash pre-funding and pre-depositing of securities traded on organized securities markets, will be transferred to the NDU. Additionally, stock exchanges will be allowed to execute these deals. Going forward, as the Ukrainian capital market develops further, its participants themselves will select a model to be used to secure the fulfillment of obligations under securities agreements, and determine the need for the creation of a domestic central counterparty, or attraction of a foreign one.
“We share a common vision with the NBU and we would like to put our views to forward market players for consideration. Going forward, further discussions within working groups will follow to work out a concerted position with the market. It will be presented for public discussion in October and will provide the foundation for the Framework for the development of the depository and clearing infrastructure of the financial sector, which will be developed by an international consulting company engaged by the European Bank for Reconstruction and Development in the capacity as an advisor to the National Securities and Stock Market Commission,” said member of the National Securities and Stock Market Commission Mr Dmytro Tarabarkin.
The meeting participants also discussed prospects for the NDU as the Central Depository to assume responsibility for the safekeeping of securities currently under the custody of the NBU. “Given the size of Ukraine’s stock market, it is inappropriate to have two depositories in place – the NBU’s depository and the NDU. Furthermore, depository institutions have to maintain different securities accounting systems, which complicates their operation,” said Head of the NBU Office for Custodial Activity Mr Andrii Suprun. However, Mr Suprun said that two conditions have to be met for government securities to be transferred for custody to the NDU. First, the smooth execution by the NBU of monetary operations, including refinancing operations, has to be ensured. Second, the NDU has to ensure the secure safekeeping and settlement of government securities. Once these conditions are met, government securities worth over UAH 500 billion will be transferred for custody to the NDU within one year.
The materials presented at the meeting are available in the “Publication” subsection of the “Financial Markets” section on the NBU’s website. To view these materials, please click the links below:
1. Development of Ukrainian Capital Market Infrastructure (available in English)
2. Conditions and Stages of the Creation of a Single Depository (Draft for discussion).