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Ukraine’s Capital Markets: A Regulatory Snapshot

Ukraine’s Capital Markets: A Regulatory Snapshot

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Relatively high inflation and lowering deposit interest rates became characteristic for Ukraine in recent years, thus heating investors’ demand for yields. Savings have been growing continuously, boosting the segments with a higher risk appetite and propelling the development of new investment opportunities. At the same time, the domestic financial sector is undercapitalized and has few financial instruments to offer. The market, therefore, attracts the attention of various non-resident providers of financial services – from the most diversified investment banking groups to single product enthusiasts, who are asked by Ukrainian corporations and high-net-worth individuals to offer a service or specifically target potential customers.

The cross-border financial services regime, however, is a work in progress: Ukraine is not a member of the EU, while the domestic securities markets authority – the National Securities and Stock Market Commission (NSSMC) – is not certifiable as an independent body under IOSCO standards. If a law is passed to ensure the NSSMC’s political and financial autonomy (following six years of public debate, the relevant bill awaits its second reading in the legislature, in 2022), the commission will join the club of reputable regulators and start the mutual recognition of proper supervision with other IOSCO members.

Thus, offshore investment banks lawfully providing their services directly to local Ukrainian investors, on a reach-in or fly-in basis, is still a matter of the future. Meanwhile, the recommended course of action would be working through an onshore licensed entity, as an intermediary, or establishing a permanent presence in Ukraine. The NSSMC has been actively supporting the coupling of the capital market with EU and North American infrastructure.

On the investor’s side, the retail segment has now obtained a premium category of “qualified investor,” with simplified access to the market and looser protection. The initial threshold is a UAH 20 million balance sheet and UAH 2 million in cash equivalents (approximately EUR 625,000 and EUR 62,500, respectively) or even as low as UAH 0.5 million (EUR 16,500) – if the investor has at least one year’s experience in capital market transactions. The threshold, however, is set to increase progressively every year, e.g., multiplied by a factor of six in 2022 – with that factor going up as high as 30, in 2030.

The 2020 restatement of the Capital Markets Law (effective as of mid-2021) consolidated the state’s practice of participating in capital markets and, separately, the roles of the National Bank of Ukraine as an independent investor as well as the administrator of securities with a sovereign rating. In short, both the National Bank and the state (acting through the Cabinet of Ministers and the Minister of Finance) are mostly exempt from the statutory law and can determine their issuer and investment strategies, enjoying more freedom in contract bargaining. Thus, targeting the government of Ukraine and/or the NBU as a prospective issuer (borrower) or investor has become a simpler task, from a regulatory compliance standpoint.

As to the potential instruments of investment, the new rules embraced many more possibilities, to which the issuers have yet to adjust: the most developed to date have been treasury notes and sovereign bonds, with very few shares, mortgage-backed securities, and corporate bonds on top. To remedy the situation, the money market contracts have been officially recognized in support of FX transactions. Further, the notion of derivatives has been set in detail, as part of the financial instruments market and their separation from spot contracts. Most types of betting contracts are now expressly allowed, after decades of consensus that a “contingency contract” (i.e., a derivative) ran a high risk of being confused with a “game of chance” (i.e., gambling).

Notably, “wholesale energy products” can be used as alternatives for investment, since they are exempt from the financial instruments framework – OTC and OTF-traded derivatives contracts for natural gas and power with mandatory physical delivery already conform to the so-called “REMIT carve-out”, even though Ukraine is late on the implementation on the rest of the body of transparent energy markets rules. Finally, the legislation in Ukraine has caught up with trendy securities such as green bonds, infrastructure bonds, bonds of the international financial organizations and removed some redundancies in mortgage-backed securities.

By Oleh Zahnitko, Partner, Integrites

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

Integrites at a Glance

Founded in 2005, INTEGRITES is a full-service law firm with head office in Ukraine and representative offices in Germany and the UK.

INTEGRITES is particularly sought after for its cross-border work – sophisticated deals and transactions, complex dispute resolution, and projects which require in-depth industrial expertise, as well as for comprehensive advice on current business operations.

In 19 years in the market the firm has served 1500+ clients from around the globe, including Fortune 500 companies, international financial institutions, and recognized leaders in various industries: from real estate and construction, infrastructure, and agriculture to manufacturing, pharmaceuticals, and retail.

Climate Change Task Force within the firm provides clients with comprehensive advice on projects targeted at the sustainable development of their business and the country in the context of energy transition and green technologies.

The expertise of the team has consistently received recognition globally and domestically

Managing partner of the firm, Dr. Oleksiy Feliv, received The Lawyer European Awards 2023 as top-3 European managing partner of the year. Named as Commended, Dr. Feliv became the only Ukrainian representative selected for this nomination.

In 2023-2024 Yurydychna Gazeta (Ukraine) named INTEGRITES in top-5 firms with the widest impact on the development of the Ukrainian legal services market, with Dr. Oleksiy Feliv on top of the list of the most effective law firm leaders in the country.

INTEGRITES was shortlisted for Law Firm of the Year: Ukraine award by Chambers Europe and The Lawyer in 2021 and 2022.

Since 2020, INTEGRITES has been listed by GAR100 as one of the world’s best law firms in arbitration.

Firm's website: www.integrites.com