The National Bank of Ukraine (NBU) can enhance its role in the capital market infrastructure to ensure financial stability. This was suggested in the NBU proposals to the Draft Law of Ukraine On Amendments to Certain Laws of Ukraine on the Settlement Center on Servicing Contracts in Financial Markets that were presented last week during the off-site meeting of the Committee on Financial Policy and Banking of the Verkhovna Rada of Ukraine.
These proposals provide the NBU legal powers to conduct oversight of the capital market infrastructures that are critical for ensuring the financial stability in the country. Specifically, the proposals authorize the NBU to conduct oversight of the central securities depository (currently known as the National Depository of Ukraine) and the central counterparty (whose functions are partially performed by the Settlement Center at this time).
Oversight consists in the verification of compliance of these capital market players with international standards such as the Principles for Financial Market Infrastructures (PFMI) issued by the Committee on Payments and Market Infrastructures, Bank for International Settlements, and the International Organization of Securities Commissions. At this time, neither the National Depository of Ukraine (NDU) nor the Settlement Center (SC) have undergone the verification of compliance with these standards. At the same time, the National Securities and Stock Market Commission, as before, remains the regulator of the NDU and SC and will cooperate with the NBU in order to bring said players in line with the PFMI.
“The NBU using its extensive experience in conducting oversight of the payment systems will ensure the stability of the capital market infrastructure as well as create preconditions for its further development through conducting oversight of central securities depository (CSD) and central counterparty (CCP)” said Oleg Churiy, Deputy Governor of the NBU.
Brining the NDU operations in line with the PFMI creates an opportunity to establish a single CSD. In particular, the NBU will be authorized to transfer the government securities from the NBU’s depository to NDU as the CSD. Considering the current volume of the securities market, existence of two depositories is unnecessary and ineffective, since establishment of the single CSD will contribute to a more efficient market and may increase the market’s attractiveness for investors. Proposals to the daft law also detail the process and conditions for transferring government securities to the NDU.
Simultaneously, proposals to the draft law provide for a greater role of the NBU in the corporate governance of the systemically important elements of the capital market infrastructure. For that purpose the NBU’s share in the NDU capital needs to be increased to at least up to 51%.
“Participation of the NBU as the major shareholder of the NDU will improve investors’ confidence in the NDU as well as address public interests by creating favorable conditions for effective market rather than making profit,” highlighted Oleg Churiy. In the future, as the market matures NBU will be able to decrease its share and fully withdraw from the NDU capital.
Also, proposals to the Draft Law include optimizing operations of the SC and its transformation from a bank institution to a specialized financial institution. The document envisages abolishing of monopoly of the SC on securities transactions’ settlements on delivery versus payment basis (DVP). In line with best EU practices NBU believes that DVP settlement of all types of securities should take place in central bank money in the NBU’s System of Electronic Payments. Developing of this technology would reduce settlement risk for securities transactions which are currently settled through depositing funds in the commercial bank.
At the same time, an important step of the SC transformation will be the Сost-Benefit Analysis (CBA) conducted jointly with international donors and experts that should assess the viability of operating CCP in Ukraine. According to the CBA findings a decision will be made on the NBU’s participation in the CCP’s capital. If the СВА finds the existence of CCP is not justifiable considering the present market development in Ukraine, the SC will continue risk-free clearing activity.
Transformation of the SC will enable the state to return excess funds from SC capital that can be defined as the difference between SC’s current capital and its future capital necessary for operating as financial clearing company.
The mentioned NBU proposals for the law regarding future regulation of capital market infrastructure correspond to Memorandum of Understanding on Cooperation for Developing the Securities Markets’ Infrastructure in Ukraine and cooperation of the NBU and the NSSMC for improving the securities market infrastructure, which was established in 2016. Furthermore, the draft document incorporates recommendations provided by the International Monetary Fund during its technical support mission in June this year.
“We hope that the NBU’s proposals will find support from all related stakeholders including Committee on Financial Policy and Banking of the Verkhovna Rada of Ukraine and be promptly reviewed by the Parliament,” noted Oleg Churiy.
To view the NBU proposals to the Draft Law of Ukraine On Amendments to Certain Laws of Ukraine on the Settlement Center on Servicing Contracts in Financial Markets go to:
- proposals to the Draft Law
- comparative table to the Draft Law
- presentation of proposals to the Draft Law.
E-mail your remarks and comments to the draft to: [email protected].