On 6 July 2012 the Ukrainian Parliament adopted the Law of Ukraine “On the Depository System of Ukraine” (the “Depositary System Law”) which aims to consolidate the legal framework for key infrastructure institutions rendering services to all securities market participants.
In particular, the Depositary System Law changes the competitive environment which was supported by the previous legislation and stipulates that there may only be one central securities depository (CSD) in Ukraine. It appears that this change was introduced to alleviate the long lasting conflict between the two main competing depositors in the country.
The Depositary System Law, inter alia, introduces the following important changes:
- declares that the CSD will be established on the basis of one of the current securities depositaries: the National Securities Depositary of Ukraine. The shareholding of the state together with that of the National Bank of Ukraine (the “NBU”) in the charter capital of the CSD shall not to be less than 50%;
- expressly permits foreign CSDs and ICSDs (such as Euroclear, Clearstream) to become shareholders of the CSD;
- provides for establishing a settlement center which will ensure settlements of all securities trades executed both on the stock exchange and “over the counter”, provided the respective trade is settled on the “delivery versus payment” basis: this institution will also be controlled by the NBU and the NBU’s share in its charter capital shall not be less than 75%;
- clarifies the model for holding of intermediated securities whereby the market participant’s asset comprises the “rights in securities” rather than securities, which are confirmed by the book-entry in the custodian’s accounts;
- introduces two models for rendering of clearing services by clearing institutions and the settlement center, either with or without the involvement of the central counterparty. NBU and CSD may also render clearing services subject to limitations provided by the legislation. It appears that stock exchanges were only allowed to render clearing services in relation to derivatives transactions executed at such stock exchanges.
The Depositary System Law was adopted to replace the Law of Ukraine “On the National Depositary System and Particularities of Electronic Circulation of Securities in Ukraine”. It remains to be seen whether the mandatory introduction of a single CSD in Ukraine instead of reliance on competitive environment will be successful in practice. It also appears that consolidation of control over the key infrastructure institutions by the state (although temporarily), which may be viewed as not in line with the international standards, was not well received by the market participants.
The Depositary System Law clarified the model for holding of intermediated securities by drawing a distinction between the securities and the “rights in securities”. It also introduced a comprehensive basis for securities clearing and anticipated integration of foreign CSDs and ICSDs into the Ukrainian depositary system. The Depositary System Law was published on 11 October 2012 and will become effective 12 months after its official publication, except for certain provisions which become effective on the date of publication.