On 27 June 2017, Acting NBU Governor Yakiv Smolii and Head of the National Securities and Stock Market Commission (NCSSM) Tymur Khromaev signed a Memorandum of Understanding on cooperation in the area of capital market infrastructure development in Ukraine.
“Without a fully-fledged capital market infrastructure that meets international standards it will be impossible to ensure the smooth operation of the market and the protection of ownership rights, which would hamper the development of the financial sector. The domestic regulatory framework should incorporate the European Market and Infrastructure Regulation (EMIR) and the the internationally recognized Principles for Financial Market Infrastructures (PFMI IOSCO). Apart from infrastructure issues, the Memorandum will address corporate governance issues, notably the segregation of functions related to the regulation of operations within the infrastructure and the management of corporate rights of the central elements of the infrastructure,” said Head of the NCSSM Tymur Khromaev, commenting on the essence of the Memorandum.
The Memorandum sets out the objectives of the financial sector reform strategy with regard to the reshaping of the capital market infrastructure and the principles underlying this infrastructure and its separate elements, as well as steps to be taken to redesign the infrastructure.
The Memorandum is designed based on the report issued by global consulting firm Oliver Wyman that reviews international best practices in building the capital market infrastructure in an effort to find an optimal model capable to meet the current market needs and offer opportunities for the development of the stock market. The report was prepared as part of the project to overhaul and consolidate the post-trading infrastructure, which is implemented with assistance from the European bank for Reconstruction and Development.
The Memorandum highlights a vision agreed by the regulators that would provide a basis for the settlement and clearing infrastructure reform.
The Memorandum outlines the following key measures to be taken to reshape the capital market infrastructure:
A stepwise approach will be taken to implement a new clearing model in Ukraine, taking into account the current state of the capital market, challenges and risks, the needs of the capital market and its participants, as well as requirements and opportunities.
New legislation will be passed to strip the Settlement Center of its monopoly position in clearing and processing cash settlements for securities transactions and the requirements to clearing activities will be revised.
The Settlement Center will be transformed from a banking institution into a specialized financial institution. The Settlement Center will serve as a light CCP rather than clear cash settlements for securities transactions. The Settlement Center will become the central counterparty that handle clearing and settling of securities transactions by pre-depositing of securities on custody accounts and providing partial pre-depositing of cash for securities transactions that are settled on a T+N basis.
The adoption of corporate governance best practices and standards by the National Depository of Ukraine (NDU) and the Settlement Center aims, inter alia, to improve governance and enhance the operational efficiency of the NDU and the Settlement Center enabling them to reach a breakeven and attract a strategic investor.
The main functional, technological and regulatory preconditions will be created to consolidate the existing depositories (the NBU and the NDU). In particular, we are referring here the smooth execution by the NBU of monetary operations and ensuring the safekeeping and settlement of government securities.
“The NBU is fully aware of the importance of the project to redesign the capital market infrastructure. A new, transparent and modern infrastructure will become investor friendly for both domestic and foreign investors and make Ukraine more attractive to investors. The NBU, for its part, is ready to comply with commitments undertaken under the Memorandum of Understanding, including through efforts to amend regulations, withdraw from the capital of the Settlement Center, merge the NBU Depository with the NDU once the necessary preconditions are met to enable the NBU to efficiently execute all the monetary operations in the consolidated depository,” said Acting NBU Governor Yakiv Smolii.
The reshaping of the capital market infrastructure is one of the key elements of the Comprehensive Program of Ukrainian Financial Sector Development Until 2020. The Project Working Group embarked on efforts to develop a target model of the capital market infrastructure in late 2016. The Project will be completed in 2019.