Adoption of the new law on capital markets and organized commodity markets: part 2

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On June 19, 2020, the Ukrainian Parliament passed a law (Bill No. 2284) to introduce sweeping new changes to the regulation of financial instruments (the Law). The law also paved the way for a wide range of new financial instruments such as derivatives, green bonds, loan notes and other structured financial products.

The first part of our newsletter published on June 30, 2020 was devoted to the new conception of questions relating to financial markets and infrastructures. This part 2 will provide an overview of the new financial products that will be available to Ukrainian banks and companies, with a particular focus on clearing and insolvency issues.

NEW TYPES OF FINANCIAL PRODUCTS AVAILABLE ON THE LOCAL MARKET

The law introduces an expanded list of financial instruments that will be available to counterparties and may be traded on the trading venues referred to in Part 1, which include: transferable securities (stocks, bonds, credit notes), money market instruments (deposit receipts, promissory notes), and various types of derivatives (which can be settled physically or in cash) and other products.

It should be noted that the law clearly categorizes the main constituent elements of derivatives transactions, such as call/put options, swaps, forwards and forward contracts. Derivatives transactions can be deliverable, non-deliverable or mixed, having currencies, interest rates, commodity prices, stock indices, stocks or others as their underlying assets. To this end, market participants are being offered a wide range of new financial products and instruments that can be used for different business purposes such as lending, hedging exposure and modeling a structured product.

FRAMEWORK AGREEMENT DOCUMENTATION

In order to ensure consistency of Ukrainian derivatives regulation and global financial markets, the law proposes to use the same style of documentation for documenting local derivatives transactions. Indeed, the Law uses an ISDA-like architecture setting out the following types of documents: a master agreement and specification for centrally cleared transactions or a confirmation (description) for OTC transactions.

RESOLUTION COMPENSATION

It probably wouldn’t be an overstatement to say that a central piece of master agreement documentation deals with netting agreements. The law contains detailed provisions on “close-out netting”. The proposed changes to netting agreements will help establish an efficient and well-functioning financial market. The definition of “netting with closing” allows the counterparty to offset the market values ​​of all transactions under the framework agreement in the event of early termination due to a default or an event specified. Among the closing events, the law stipulates the decision of a Ukrainian commercial court, the National Securities and Exchange Commission (NSSCM) or the National Bank of Ukraine on the following points:

  • the opening of bankruptcy proceedings against a party to the transaction;
  • provisional administration imposed on the party to the transaction or discharge of the management of the party, if such a decision foresees and entails a limitation or delay in the transfer of goods or funds;
  • the insolvency of a bank that is party to a securities or currency transaction, or party to a derivative contract; and
  • revocation (termination) of the license of a capital market participant and/or liquidation of a party to the transaction, if such a decision contemplates and results in a limitation or delay in the transfer of assets or funds.

Each of the above decisions must be made public and default by the party cannot be invoked until such decision has been made public.

By law, close-out netting will also apply to all documented currency or securities transactions under a master agreement. However, there are a few instances where netting is not available and therefore relevant agreements are prohibited under the law; for example, if: (i) the master agreement does not stipulate netting agreements, (ii) the master agreement setting out the “close-out netting” provisions is entered into after the above decision of the competent public authority, or (iii) the derivative contract is concluded on the basis of the relevant framework agreement after the aforementioned decision of the competent public authority. Other close-out netting events may be determined in the netting rules of the relevant clearing entity.

Notably, the law introduces modifications to the existing bankruptcy regime by providing additional protection to the validity and enforceability of “closing” compensation.

DLA PIPER COMMENT

The law was passed by Parliament; however, to enter fully into force, the law must be signed by the President of Ukraine. Once signed, the Law will enter into force on July 1, 2021. At the same time, the amendments envisaged by the Law relating to netting and certain insolvency matters will be enacted the day after the official publication of the Law.

In general, the reform of capital and derivatives markets is a long-awaited and welcome development for Ukraine, as it efficiently raises capital and provides liquidity. This therefore acts as an engine to further develop the economy. The law appears to be harmonized and integrated with modern EU standards, although some provisions represent framework legislation and much of the detail will need to be discussed and agreed in secondary regulation.

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