This country update relates to the concept of a “qualified investor” which was
introduced into Kazakhstan legislation in February 2012 (the “Regulation”). The
Regulation represents an important development in Kazakhstan securities
legislation and significantly impacts OTC derivative transactions (“OTC
Transactions”) with Kazakhstan counterparties who are not deemed to be
“qualified investors” under the Regulation.
A general note to the reader on some of the terminology used in this update:
Kazakhstan legislation distinguishes between “derivative securities” and
“derivative financial instruments” (with the latter being a broader term, which
covers most OTC Transactions). However, from a practical perspective, this
distinction has limited impact on the Regulation as Kazakhstan legislation
often refers to an “acquisition” of a derivative security or derivative financial
instrument in the context of OTC Transactions.
Further, the legislation draws a distinction between (i) acquisitions made on
the so-called “organized securities market” (defined to include stock
exchanges and quotation organisations) and (ii) acquisitions made on the socalled “non-organised securities market” (anything other than the organised
securities market). Without going into extensive details, we believe that
where the legislation refers to the latter type of acquisition, the legislative
intent was to regulate OTC Transactions.
The following overview of the Regulation and its effect on OTC Transactions is
provided for the convenience of the reader. However, we recommend reading
this update in its entirety for a fuller and more detailed understanding of the
The Regulation applies to OTC Transactions because it applies to any
derivative instrument not listed or traded on an exchange.
Non-qualified investors are prohibited from entering into OTC Transactions
unless they obtain the status of qualified investor or enter into an OTC
Transaction relying on a statutory exception.
Most corporates are considered to be non-qualified investors. Financial
institutions (such as banks and pension funds) and certain other entities
(such as JSC “Sovereign Wealth Fund “Samruk-Kazyna”) are considered
to be qualified investors.
In our view, most corporates would be unable to obtain the status of
qualified investor. Therefore, their ability to enter into OTC Transactions is
limited to situations where they can do so in reliance on a statutory
The only exception which is effectively available for corporates is where,
― an OTC Transaction involves an underlying asset or obligation in the form
of national or foreign currency, currency indices, precious metals, interest
rates (including in the form of interest rate swaps, spreads and interest rate
volatility), certain types of securities (mostly limited to liquid corporate
securities, treasuries and bonds issued by international financial
organisations), certain indices (such as S&P 500 and FTSE 100), credit
risk, certain commodities (mostly limited to basic commodities, such as oil,
metals, grain, sugar, cotton, etc.) or commodity-based indices; and
― the corporate’s counterparty in such OTC Transaction has a certain
minimum rating from a rating agency (such as, “BBB-” from S&P for nonKazakhstan counterparty).
In practice, there does not currently seem to be any sanction in Kazakhstan
law for failure to comply with these requirements. However, it would be
prudent for foreign counterparties to ask for appropriate representations and
warranties and to ensure that as a matter of the foreign law governing the
OTC Transaction, there is no basis for the invalidation of the transaction.
More detailed information on the Regulation is set out below.
What does the Regulation mean?
The Regulation was introduced by the Risk Minimisation Law1
by way of amendment of the Securities Law2
. The Regulation was further detailed in two
regulations of the National Bank of Kazakhstan3
Pursuant to the Regulation, only legal entities and individuals deemed to be
“qualified investors” (“Qualified Investors”) have the right to acquire financial
instruments specified by the NBK in its regulation (“Restricted Instruments”).
Legal entities and individuals who are not deemed to be Qualified Investors
(“Non-Qualified Investors”) are not permitted to acquire Restricted
Instruments unless they either obtain the status of a Qualified Investor
pursuant to the established procedure or acquire the Restricted Instruments
pursuant to one of the exceptions available in the law.
The relevant provision of the Securities Law, which establishes the Regulation,
provides that Restricted Instruments may be acquired only “using the funds” of
Qualified Investors. “Using the funds” is the exact wording of the law. It is not
clear what exactly is meant by this.
We understand that this wording implies that the Restricted Instruments
should be acquired through a broker-dealer on the account of a Qualified
What are Restricted Instruments?
Restricted Instruments include the following:
non-Kazakhstan residents’ securities and other financial instruments if they
― issued under foreign (i.e. non-Kazakhstan) law; and
― not listed on a Kazakhstan or foreign stock exchange;
shares and units of a high-risk investment fund4
derivative securities and derivative financial instruments if they are not
traded on either:
― a Kazakhstan stock exchange or commodity exchange; or
― a foreign (i.e. non-Kazakhstan) stock exchange or commodity
The definition of Restricted Instruments includes OTC Transactions. This
effectively precludes Non-Qualified Investors from entering into OTC
Transactions. Therefore, in order to be able to enter into OTC Transactions, a
Non-Qualified Investor must obtain the status of the Qualified Investor or enter
into the OTC Transaction pursuant to one of the exception available in the law.
Who is a Qualified Investor?
A legal entity or an individual can be a Qualified Investor if it is recognised as such under the law or if it obtains the status of a Qualified Investor.
All of the following persons are recognised as Qualified Investors under the law:
financial organisations, which are defined to include Kazakhstan legal entities with a licence to conduct a certain type of regulated financial activity, such as:
― pension funds;
― insurance companies; and
― entities that perform professional activities on the securities market (such as broker-dealers);
legal entities that under Kazakhstan law have the right to perform professional activities on the securities market without a licence (e.g., entities which operate on
the basis of a special law, such as the Development Bank of Kazakhstan);
legal entities that are deemed to be “national holding companies” and “national managing holding companies” (such as JSC Sovereign Wealth Fund “SamrukKazyna”); and
International Financial Institutions5.
Any legal entity or individual that does not fit within one of the above categories is deemed to be a Non-Qualified Investor.
How a person can become a Qualified Investor?
The law establishes a procedure that allows Non-Qualified Investors to obtain
the status of a Qualified Investor. The procedure is available to any individual
or legal entity provided it can meet the requirements for becoming a Qualified
The authority to grant the Qualified Investor status is vested in any
Kazakhstan broker-dealer and any organisation that has a licence to carry out
investment portfolio management activities (an “Authorised Organisation”).
To obtain Qualified Investor status, an applicant (including a legal entity or an
individual) must confirm to the Authorised Organisation that it has entered into
at least 50 transactions with securities and financial instruments on the
organised securities market within the calendar year preceding the application
Further, an individual can become a Qualified Investor provided he has:
― higher economic, mathematical or legal education; and
― at least three years of work experience in a financial organisation.
A legal entity can become a Qualified Investor if it has at least two employees
― higher economic, mathematical or legal education; and
― at least three years of work experience in a financial organisation.
Qualified Investor status may be obtained in respect of a particular type of
Restricted Instrument or in respect of all types of Restricted Instruments.
When an Authorised Organisation recognises a person as a Qualified Investor,
it specifies in its decision the types of instruments in respect of which the
person is recognised as a Qualified Investor.
All persons recognised as Qualified Investors are included in the register
maintained by the Authorised Organisation. The Authorised Organisation has
the right to periodically verify compliance with the qualification requirements.
In our view, the above qualification requirements are overly restrictive (in
particular, the requirement to have entered into at least 50 transactions on a
stock exchange within one calendar year). We believe that, as currently
drafted, the qualification requirements are practically impossible to comply
with for most corporates.
What are the exceptions from the Regulation?
There are two exceptions pursuant to which Non-Qualified Investors are
permitted to enter into OTC Transactions7
The Derivatives Exception
The first exception permits Non-Qualified Investors to acquire certain types of
derivative financial instruments (the “Derivatives Exception”). The Derivative
Exception directly applies to OTC Transactions and is discussed in detail
The Derivatives Exception applies provided that:
the underlying asset8 of a derivative financial instrument is a certain type of
asset (a “Permitted Underlying Asset”); and
at least one of the qualifying conditions with respect to the proposed
transaction (a “Qualifying Condition”) is satisfied.
We note that the Derivatives Exception refers to derivative financial
instruments only. Therefore, derivative securities are not covered by the
scope of the Derivatives Exception. We do not see any logic for this.
Therefore, we believe this is an omission that should be corrected in the
future. However, for the purposes of OTC Transactions this omission is of no
relevance as most OTC Transactions would fall within the definition of
“derivative financial instruments” in any case.
Any of the following is deemed to be a Permitted Underlying Asset:
a credit risk of a Kazakhstan resident entity, which has a rating of not less
than “BB-” from Standard & Poor’s or Fitch or a rating of not less than
“Ba3” from Moody’s Investors Services or a rating of not less than “kzBBB”
according to the national scale of the above rating agencies;
a credit risk of a non-Kazakhstan resident entity, which has a rating of not
less than “BBB-” from Standard & Poor’s or Fitch or a rating of not less
than “Ba3” from Moody’s Investors Services;
a credit risk of a Kazakhstan resident entity under a loan provided to such
a credit risk of a Kazakhstan resident applicant under an already issued
guarantee or letter of credit; or
an underlying asset that is permitted to be acquired by a bank pursuant to
the regulation of the Committee of the NBK for the Control and Supervision
of the Financial Market and Financial Organisations (the “FMSC”)9
A Qualifying Condition is satisfied if:
a non-Kazakhstan resident party to the transaction is an organisation that
has a rating10 of not less than “BBB-” from Standard & Poor’s or analogous
rating from Moody’s Investors Services or Fitch; or
a Kazakhstan resident party to the transaction, is an organisation that has
a rating of not less than “BB-” from Standard & Poor’s or Fitch or not less
than “Ba3” from Moody’s Investors Services or not less than “kzBBB”
according to the national scale of the above rating agencies; or
― there is a quote for the sale and/or purchase of such instrument in
either of the Bloomberg or Reuters systems; or
― (if such quote is not available) there are at least three quotes from
three different counterparties and such counterparties have a rating of
not less than “BBB-” from Standard & Poor’s or an analogous rating
from Moody’s Investors Service or Fitch; or
― the underlying asset of a derivative financial instrument is admitted to
circulation on the Kazakhstan Stock Exchange or in the systems of
trade organisers recognised by international stock exchanges11
What are the exceptions from the Regulation? (cont.)
The Investment Fund Exception
The second exception permits an investment fund (other than a high-risk
investment fund) to invest its funds into derivative securities and derivative
financial instruments that are not traded on a Kazakhstan or an overseas stock
exchange or commodity exchange (the “Investment Fund Exception”).
The Investment Fund Exception would apply to an OTC Transaction if the
counterparty is a Kazakhstan-incorporated investment fund only. We do not
discuss the Investment Fund Exception in this update due to its limited
How does the Regulation impact you?
The scope of the Regulation is such that it could potentially apply to any OTC
Transaction. Therefore, if you propose to enter into an OTC Transaction, you
does the OTC Transaction involve a Restricted Instrument? This will likely
be the case given that the Transaction usually does not create a derivative
instrument capable of being traded on an exchange.
Is the Kazakhstan counterparty a Qualified Investor? If you are not dealing
with a licensed financial institution or any of the state-owned entities that
have the status of a Qualified Investor, this will likely be the case too.
If the Kazakhstan counterparty is a Non-Qualified Investor, can the
Derivatives Exception be used? Given that the qualification requirements
for recognition as a Qualified Investor are difficult (if not impossible) to
meet for most corporates, it is likely that a Non-Qualified Investor would
have to rely on the Derivatives Exception in order to be able to enter into
the OTC Transaction.
As of yet, Kazakhstan law does not provide for any specific sanctions for
failure to comply with the Regulation. In theory, a Kazakhstan counterparty
may become subject to an administrative fine under a catch-all provision of the
Kazakhstan Administrative Violations Code if it enters into an OTC
Transaction in violation of the Regulation.
Further, entry into an OTC Transaction in violation of the Regulation could also
be a basis for the invalidation of the OTC Transaction as a matter of
Kazakhstan law. However, since OTC Transactions are typically governed by
foreign law, it would be a question to be determined under the applicable
foreign law whether the Transaction can be invalidated due to a violation of the
The Regulation is an important development in Kazakhstan securities
legislation. The Regulation has a significant impact on OTC Transactions with
Kazakhstan counterparties. As currently drafted, the Regulation significantly
restricts ability of Kazakhstan corporates to enter into OTC Transactions.
We believe that the Regulation requires further development and clarification
in certain respects. In particular, we would like to see further clarifications with
respect to the definition of Permitted Instruments, relaxation of the qualification
criteria for becoming a Qualified Investor and expansion of the list of
exemptions available for acquisition of Restricted Instruments by NonQualified Investors.
Further, the Regulation requires clarification with respect to its applicability to
derivative transactions which do not have a cross-border element. In our view,
such transactions should be excluded from the scope of the Regulation.
We believe that the application of the Regulation to such transactions may
significantly restrict the use of derivative instruments between Kazakhstan
residents (including, for instance, option agreements which are often used in