The National Bank of Ukraine (NBU) continues the public discussion of draft regulations laying the groundwork for a fundamentally new liberal and transparent FX regulation system under the Law of Ukraine On Currency and Currency Operations. To that end, the NBU has made public another three draft regulations today that provide the legal basis for the new system of FX regulation. The documents contain provisions that outline steps to simplify the conduct of business and ensure financial stability in Ukraine.
As a reminder, the NBU presented a draft FX regulation framework in September that comprises seven new fundamental regulations and published three of them (Nos. 1, 2, and 3) in early November. They stipulate FX regulation norms that will apply once Ukraine completes its transition to a system of free FX transactions that operates on the principle that “everything not expressly forbidden by law, is allowed.” The Law On Currency and Currency Operations outlines the legal framework for this transition.
Today, the NBU has published Draft Regulation No. 4, which stipulates the criteria and procedure for implementing contingency measures, and Regulations Nos. 6 and 7, which are to govern FX regulation between 7 February 2019 and when the transition to unrestricted FX operations is completed. Temporary Regulation No. 7 will be enacted to safeguard the economy and the financial system from crisis manifestations identified in Regulation No. 4. Temporary Regulation No. 6 is designed to prevent crises in the money market. When macrofinancial stability has been restored, the temporary Regulations will cease to be effective, and FX regulation will be carried out under the permanent Regulations (Nos. 1, 2, and 3).
In particular, the Guideline On the Procedure for FX Supervision of Compliance by Residents With Deadlines for Payments for Exports and Imports of Goods will include a number of innovations that should reduce the time and money that businesses spend on reporting to state authorities and following oversight procedures for such transactions. The document’s provisions aim to:
- abolish mandatory deadlines for less than UAH 150,000 in settlements under international agreements
- cancel the oversight of settlement due dates for exports of all works and services (upon receipt by the NBU of a requisite motion from the Cabinet of Ministers)
- dismiss the requirement that banks file duplicate hard copies of reports with the State Fiscal Service of Ukraine regarding violations of due dates under international settlements. In place of the current procedure, banks will file electronic reports with the NBU, which will accumulate and hand them over to tax authorities.
The Regulation On Certain Instruments of Money Market Stabilization stipulates the following:
- the procedure for provisioning by banks that raise foreign currency (investment metals) in the form of short-term deposits and loans from nonresidents, as well as the procedure for provisioning under FX derivatives operations
- the procedure for disclosure of information on loan agreements under which residents fulfill debt obligations to nonresident creditors. Designed for notification purposes, this information collection system will replace the existing licensing system within which such agreements are registered. The currently applicable cap on the maximum interest that is paid on such loans will no longer apply. A high interest rate on nonresident loans that is out of line with the market will be viewed as an FX operations risk that will have to be taken into account when conducting FX oversight.
The Regulation on the Procedure to Implement Safeguard Measures in the Area of FX Operations itemizes the arsenal of regulatory instruments that the NBU must use in the event of circumstances that threaten to undermine the stability of the financial system. In particular, the NBU is entitled to:
- demand the mandatory sale of a portion of FX proceeds from and set deadlines for settlements under commodity export and import operations
- impose limits on the conduct of certain FX operations
- set special requirements for operations associated with the movement of capital, etc.
Such measures will be applied in the event of a material weakening of the hryvnia exchange rate, a significant reduction in the international reserves or deposits in the banking system, a deterioration of social and political conditions, or if other considerable risks to macroeconomic and financial stability materialize.
In the absence of crisis manifestations, the NBU will continue with the FX market liberalization it launched in September 2015. The project pursues the ultimate goal of lifting all FX restrictions and that of ensuring a regime of free flow of capital as envisaged by the EU-Ukraine Association Agreement. The next round of easing of FX restrictions will take place on 7 February 2019, which is when the Law On Currency and Currency Operations will take effect.
Please send your comments regarding the draft regulations to: [email protected] before 13 November 2018.
In short order, the NBU will publish for the public discussion the last of the draft regulations – Regulation No. 5 – which will become part of the new FX regulation system.
Taking into account the results of the public discussion, the NBU Board will approve a final version of all of the seven regulations. The final version will be made public no later than 30 days before the day the Law On Currency and Currency Operations takes effect, i.e. before 7 January 2019.
For reference
The structure of the new FX regulation will rely on seven new fundamental regulations:
- No. 1: the FX market structure and rules for trading in foreign currency and investment metals
- No. 2: the procedure for settlements and operations to purchase and transfer foreign currency within Ukraine and abroad
- No. 3: the cross-border movement by banks, legal entities, and individuals of domestic and foreign cash and investment metals, as well as certificated securities
- No. 4: a general list of safeguard measures that may be applied by the NBU, as well as the criteria and procedure for their implementation, and terms of their extension and early termination
- No. 5: a list of implemented safeguard measures and the procedure for their application (this is a temporary anti-crisis regulation)
- No. 6: other macroprudential instruments for stabilization of the money market (provisioning under FX operations), as well as the notification system for the collection of information on FX operations
- No. 7: the procedure for meeting settlement deadlines established by the NBU.