Ukraine Reforms its Capital Markets Regulation and Harmonizes with EU Law
On 19 June 2020, the Parliament of Ukraine finally passed the long-awaited (read our previous article here) Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Concerning Simplification of Attracting Investments and Introduction of New Financial Instruments” (the “Capital Markets Law” / “the Law”).
- Novelties in securities and capital market regulations
- New types of licenses
- Increased and specified entry requirements for investors (qualified investors)
- Cautious optimism
The new Capital Markets Law aims to improve Ukraine’s capital market viability and reflects the country’s policy of harmonization with best international investment regulation practices. In essence, the Law revises several core legislative acts regulating securities and capital markets, including the introduction of a number of new financial instruments.
In particular, the Law on Securities and the Stock Market and the Law on Commodity Exchange have been revised and renamed as the Law on Capital Markets and Organized Commodity Markets and the Law on Commodity Exchanges respectively.
The new amendments are essential and create a new regulatory basis for capital markets and extensively affect relations arising in derivative securities and contract markets, traders’ activities, bondholders’ rights, as well as bringing domestic legislation in line with EU regulations on professional activities in capital markets (implementing the MiFID II Directive, MiFIR Regulation, EMIR Regulation, Settlement Finality Directive, and the Financial Collateral Directive).
The 372-page compendium of amendments goes far beyond the two laws mentioned above. It also brings changes to core legislative acts such as the Civil, Commercial, Bankruptcy and Criminal Codes of Ukraine, the Code of Ukraine on Administrative Offenses, the Law on State Regulation of the Securities Market in Ukraine, the Law on International Commercial Arbitration, the Law on Financial Services and State Regulation of Financial Services Markets, the Law on Joint Stock Companies, the Law on Insurance, the Law on Banks and Banking, the Law on Credit Unions, the Law on Protection of Economic Competition and other legislative acts of Ukraine.
In this legal alert, we will highlight the major changes introduced by the new legislation.
The new Capital Markets Law aims to improve Ukraine’s capital market viability and reflects the country’s policy of harmonization with best international investment regulation practices.
Novelties in Securities and Capital Market Regulations
The new legislation introduces financial principles and instruments such as final netting on financial instruments (liquidation netting), a regulated market operator, central counteragents, trade repositories, commodity transactions in accordance with ISDA¹ standards, expanding the list of financial instruments by classifying money instruments as financial instruments as well as introducing other types of securities new to Ukraine, in particular:
- bank certificate of deposit – security that confirms an amount claimable from a bank and the right of the certificate holder to claim the amount upon the expiration of the specified period of the nominal value of the certificate and interest income;
- green bond – interest-bearing bond used for financing and/or refinancing environmentally friendly projects;
- option certificate – derivative security certifying the right of its owner to purchase from the issuer (option certificate of purchase) or to sell to the issuer (option certificate of sale) an underlying asset at a price, term and under the conditions specified by the prospectus (decision on the issuance of securities);
- depositary receipt – Ukrainian depositary receipt for securities issued abroad.
- stock warrant – a security that gives the holder the right to purchase a company’s stock at a specific price and at a specific date and only traded between the issuer and the investor.
The abovementioned principles and tools envisaged by the new Capital Markets Law reshape capital markets by separating strictly regulated markets, where significant issuers operate, from multilateral-trading platforms and organized trading facilities designed to facilitate small and medium enterprises’ needs.
New Types of Licenses
Under the new regulations, licenses for provision of activities on capital markets differ according to the following types of professional activities: trading of financial instruments; organization of financial instrument trading; clearing activities; depository activities; asset management by institutional investors; property management for funding construction and/or real estate transactions; administration of non-state pension funds.
The mentioned activities refer to the seven types of licenses required to trade securities on the capital market, namely:
- sub-brokerage license;
- brokerage license;
- dealer activities license;
- portfolio management license;
- investment consulting license;
- underwriting and/or placement activities with the provision of a guarantee license, and
- placement activities without provision of a guarantee license.
Increased and Specified Entry Requirements for Investors (Qualified Investors)
The new law introduces the concept of a “qualified investor”. According to the new Laws on Capital Markets and Organized Commodity Exchanges, only qualified investors are eligible to operate on capital markets. Qualified investors are:
- international financial institutions;
- foreign states and their central banks;
- the State of Ukraine represented by the Ministry of Finance of Ukraine;
- the National Bank of Ukraine;
- professional participants in capital markets and organized commodity markets, banks and insurance companies;
- foreign financial institutions that meet the criteria set by the National Securities and Exchange Commission;
- legal entities, including those created under the laws of another country, provided that they meet at least two of the following criteria: a) the balance sheet total is at least UAH 20 million; b) the annual net income for the last financial year is at least UAH 40 million; c) equity capital amounts to at least UAH 2 million;
- Other persons, including individuals, who act through an investment firm and meet certain qualifications (such as quantity and volume of security transactions performed during the past year, capital market professional experience, and amount of capital in cash and securities).
All other investors who do not meet the above-mentioned criteria are deemed “unqualified”.
N.B. The new Capital Market Law’s tools do not apply to activities on the electricity, gas, and heat markets which are regulated in Ukraine by the National Commission for State Regulation of Energy and Utilities. Unfortunately, this means that a significant part of Ukraine’s economy will still be governed by complex financial instruments.
The new law opens a number of business opportunities related to better governed and more sophisticated structuring of investments in Ukraine, in particular, on public market. Among other things, it is also expected that developing a trading infrastructure based on a unified approach in compliance with EU directives will reduce the risk of contract defaults in the future and help to ensure transparent asset prices and exchange indicators, and thus improve price risk management.
Businesses, investors and professional advisors are yet to see and assess the practical impact of the new Capital Markets Law, as its efficiency depends on a proper enactment and robust implementation and enforcement of the secondary legislation by the National Securities and Stock Market Commission.
¹ ISDA – the International Swaps and Derivatives Association
If you have any questions about risks, opportunities and compliance requirements of the new Law, please contact Taras Tertychnyi at our Kyiv office.