Ukraine is setting out on capital market reforms that will make it easier for foreign investors to participate and domestic corporates to borrow, the participants on a panel at the Ukrainian Financial Forum said on September 26.

ED: The research department of the Ukrainian investment bank ICU Group issued a synopsis of the discussion, which is reproduced below.

Improving market infrastructure is crucial to support the making of markets, trading in securities, and attracting investment to Ukraine. Currently, infrastructure inefficiencies and overregulation cause excessive complexity. One of the most challenging problems for Ukraine today involves regulations that non-residents must comply with to access the domestic securities market, according to panellists.

In addition to market fragmentation, non-residents face a myriad of issues that limit their access to Ukraine's markets: the high cost of access, excessive documentation, specific financial monitoring, and a requirement to open special accounts etc. This results in a small number of non-resident participants and lowers volume.

There is considerable interest from non-residents in Ukraine's markets, and facilitating their access would have positive results. Negotiations are underway with international depositaries to facilitate opening accounts in Ukraine and give non-residents easier access to the domestic market. There is strong interest in the T-bills market among non-residents, and in the past month, holdings have increased to UAH2.7bn. The Ministry of Finance has been working on developing this market for the past one and a half years. 

Deputy Finance Minister Yuriy Butsa described plans for major changes and measures that have already been taken. The Ministry is gradually reducing the number of bonds issues, thereby accumulating greater volume in each, and it has plans to change the primary dealer system.

At this time, the Ministry of Finance does not dictate to the market, but communicates with the primary dealers, who are expected to become market makers and work directly with customers. This function does not work properly now and has to be revised or cancelled.

The National Bank and the National Securities and Stock Market Commission signed a memorandum on market infrastructure development this year to create the kind of infrastructure the country needs. In addition, the development and reform of the National Depository of Ukraine is underway. New software is being introduced, and new products will be launched in 2019.

One of the problems that has stalled reform is the Settlement Centre. According to the memorandum, its status will be changed, capital reduced, and its functions focused on clearing operations. It also should become a central counterparty for Repo operations, which will greatly improve the functioning of the secondary market and distribution of liquidity among its participants. Panel members stressed that infrastructure improvements must adhere to best practices of developed markets.

Due to the stabilizing economy and improvement of the macroeconomic situation, interest rates in the capital markets have significantly decreased, which increases the interest of the corporate sector for new borrowings.

Corporate borrowers have a growing interest in accessing the capital markets, including state-owned companies. Large corporate clients are starting to enter the Repo market as an alternative to deposits.

Three-month deposit certificates of the NBU will likely become the benchmark for issuing corporate floating-rate bonds, as well as for the long-awaited issue of European Bank for Reconstruction and Development bonds denominated in the national currency.

There appears to be renewed interest in domestic capital markets, for both government and corporate bonds. To attract investors, it will be necessary to reform the market infrastructure by improving and simplifying access.

"If we want investments coming to us, we need to build the rails, and it is desirable to build them with the same width as in Europe," said Konstantin Stetsenko, Managing Partner, ICU.