Ukrainian Exchange: "Nee" to New Securities Depository Legislation
The Ukrainian Exchange suspended trading for one hour this morning to protest a new law creating the operating rules and procedures for a central securities depository.
The decision following an announcement made on Tuesday that it would cut trading by two hours. Established in 2008, the exchange ultimately opted to shorten that timetable to between 10AM and 11AM today after consulting with member firms. Even so, the exchange faces sanctions from the country's securities commission.
Ukrainian President Viktor Yanukovych has yet to sign the measure which appears to have support from the banking community but is opposed by just about everyone else. There is plenty of concern that should the legislation be adopted in current form, Ukraine's already fragile stock market could plunge even further. As of the end of August, it was considered the world's second worst performer behind Cyprus.
At the heart of the controversy is the government's hefty ownership stake and control of the new securities depository. The Ukrainian legislation aims to merge a largely defunct state-owned depository the National Depository of Ukraine with an independent one known as the All Ukrainian Securities Depository, which would be compelled to transfer all its holdings to the National Depository within a year of its registration as the country's central securities depository.
The AUSD is only 30 percent owned by the state and the newly created depository would be at least 50 percent owned by the state and National Bank of Ukraine, which could decide to retain its position as the country's central securities depository for T-bills and municipal bonds. The legislation doe allow for the Ukrainian government and national bank to reduce their combined stake after five years, but it will still be no less than a 25 percent of the new depository.
Such an ownership stake -- and control -- is an anathema to Western analysts, as well as foreign and local broker-dealers, who warn that corrupt government officials and potential corporate raiders could capitalize on confidential data on securities transactions and ownership. "The information only has value to those who have ill intentions. Unfortunately, Ukraine is not immune from those level of intentions and from people who would be able to use that information for ill purposes," Marius Vismantus, an expert on financial legislation at the World Bank tells local Ukrainian media. "There is no apparent need from a policy perspective for the state to continue investing public taxpayer money into the state-owned financial institutions."
Of the two depositories, the AUSD processes the bulk of securities transactions in the Ukraine. Established with financial aid from the US government over a decade ago, it is considered far more financially sound and technologically advanced. The NDU, which has been criticized for its operational inefficiency, could also end up as the country's new central clearinghouse -- whose creation is allowed under the new depository legislation.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)