New law on capital markets and organised commodities markets adopted: Part 2

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

Part 1 of our Newsletter which appeared 30 June 2020 focused on new design of financial market and infrastructure matters. This Part 2 will provide an overview of new financial products which will be available for Ukrainian banks and corporates with particular regard given to close out netting and insolvency matters. 

New types of financial products available on the local market

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

It is noteworthy that the Law clearly categorizes the main building blocks for derivative trades, such as call/put options, swaps, futures and forwards. Derivative trades may be deliverable, non-deliverable, or mixed, having either currencies, interest rates commodities prices, market indexes, equity or other as underlying assets. To that end, market participants are offered a wide range of new financial products and instruments capable of being used for different commercial purposes such as lending, hedging exposure and modelling a structured product.

Master agreement documentation

In an attempt to ensure consistency of the Ukrainian derivative regulation and global finance markets, is the Law proposes to use the same style of documentation to document local derivative trades. In fact, the Law uses ISDA-style architecture setting out the following types of documents: a master agreement and a specification for centrally cleared trades or a confirmation (description) in respect of OTC trades.

Close-out netting

It would probably not be an overstatement to say that a core element of the master agreement documentation deals with netting arrangements. The Law incorporates extensive provisions on “close-out netting”. The proposed amendments relating to netting arrangements will help to build up an efficient and well-functioning financial market. The definition of “close-out netting” enables the counter party to net mark-to-market values of all transactions under the master agreement upon their early termination as a result of a default or a specified event. Among close-out events, the Law stipulates the decision of a Ukrainian commercial court, the National Securities and Stock Market Commission (NSSCM) or the National Bank of Ukraine on the following:

• commencement of bankruptcy proceedings in respect of a party to the transaction; 
• temporary administration imposed on the party to the transaction or discharge of the party’s management from office, if such a decision contemplates and results in limitation or delay in transfer of assets or funds; 
• insolvency in respect of a bank which is a party to securities or currency transaction, or a party to a derivative contract; and
• revocation (termination) of the licence of a capital market participant and/or liquidation of a party to the transaction, if such a decision contemplates and results in limitation or delay in transfer of assets or funds. 

Any of the above decisions should be made publicly available and the default of the party cannot be called earlier than such decision was made public. 

According to the Law, close-out netting will also apply to any trades either in currencies or securities documented under a master agreement. However, there are a few instances where netting is unavailable and therefore the relevant arrangements are prohibited under the Law; for example, if: (i) the master agreement does not stipulate netting arrangements, (ii) the master agreement setting out “close-out netting” provisions is entered into after the aforementioned decision of the relevant state authority, or (iii) the derivative contract is entered into based on the relevant master agreement after the aforementioned decision of the relevant state authority. Other events of close-out netting can be determined in the Clearing Rules of the relevant clearing entity.

Notably, the Law introduces changes to the existing bankruptcy regime giving additional protection to the validity and enforce ability of “close-out” netting.  

DLA Piper comment

The Law was adopted by the Parliament; however, to become fully effective the Law requires the signature of the President of Ukraine. Once signed, the Law will come into force from 1 July 2021. At the same time, amendments contemplated by the Law relating to netting and certain insolvency matters will be enacted on the day after the Law is officially published.

Generally, capital and derivative markets reform is a long-awaited and welcome event for Ukraine as it allows capital to be raised efficiently and provides liquidity. This consequently acts as a driver to further expand the economy. The Law appears to be harmonised and integrated with modern EU standards, albeit certain provisions represent the framework legislation and will require much of the detail to be discussed and agreed in the secondary regulation.