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World Bank Document 47371 Public Disclosure Authorized World Bank Working Paper No. … Public Disclosure Authorized Challenges and Opportunities of EU-Ukraine Free Trade Agreement for the Development of Securities Markets and Non-Bank Financial Institutions in Ukraine Public Disclosure Authorized October 2008 Public Disclosure Authorized Acronyms and Abbreviations AA Agreement of Association between Ukraine and the European Union AFSP World Bank Access to Financial Services Project AMA Advanced Measurement Approach ATCI USAID Access To Credit Initiative AUSD All-Ukrainian Share Depository BIA Basic Indicator Approach CCP Clearing and Central Counterparty CEBS Committee of European Banking Supervisors CEIOPS Committee of European Insurance and Occupational Pension Supervisors CESR Committee of European Securities Supervisors CIT Corporate Income Tax CLC Commercial Law Center CMP USAID Capital Markets Project CRD Capital Requirement Directive CSD Central Security Depository CSE Communal Services Enterprise DG General Directorate DVP Delivery vs. Payment EACH European Association of Central Counterparty Clearing Houses ECSDA European Central Securities Depositories Association EEA European Economic Area EC European Commission ECB European Central Bank ENP Europe Neighborhood Policy EU European Union FESE Federation of European Securities Exchanges FIRST World Bank Financial Sector Reform and Strengthening Program FOP Free of Payment FOR Fixed Overhead Requirement FSAP Financial Services Action Plan FTA Free Trade Agreement FX Foreign Exchange G-30 The Group of Thirty GDP Gross Domestic Product IATF/SEC/NBFI Inter-Agency Task Force for the Reform of the Legal and Regulatory Framework for Securities Markets and NBFIs ICAAP Individual Capital Adequacy Assessment Process IAIS International Association of Insurance Supervisors IAS International Accounting Standards IFRS International Financial Reporting Standards 2 IMS Interim Management Statement IORP Institution of Occupational Retirement Provision IOSCO International Organization of Securities Commissions ISD Investment Services Directive JII Joint Investment Institutions JSC Joint Stock Company LTV Loan-to-Value MCR Minimum Capital Requirement MiFID Market in Financial Instruments Directive MFS Interregional Depository and Clearing/Settlement Organization (Mizhregionalny Fondovy Sojuz) MOF Ministry of Finance MOU Memorandum of Understanding MTF Multilateral Trading Facility NAV Net Asset Value NBFI Non-Bank Financial Institution NBU National Bank of Ukraine NDU National Depository of Ukraine NSPF Non-State Pension Fund OTC Over-the-Counter PCA Partnership and Cooperation Agreement PD Primary Dealer PFTS First Securities Trading System ( Persha Fondova Torgova Systema) PPP Public-Private Partnership PTAP USAID/World Bank Programmatic Technical Assistance Partnership Repo Repurchase Agreement ROSC Report on the Observance of Standards and Codes SCR Solvency Capital Requirement SCRFSM State Commission for Regulation of Financial Services Markets SCSSM State Commission for Securities and Stock Market SDMD The Financial Policy and Debt Management Department of the Ministry of Finance SMI State Mortgage Institution SNG Sub-National Government SPV Special Purpose Vehicle SRO Self-Regulated Organization TD Transparency Directive TSA The Standardized Approach UAH Ukrainian Currency – Hryvnia UC Ultimate Controller UCIT Undertaking of Collective Investment in Transferable Securities UICE Ukrainian Inter-Currency Exchange UIT Unit Investment Trusts USAID United States Agency for International Development WTO World Trade Organization 3 Acknowledgements ________________________________________________________________________ This Report has been prepared by Michel Noel (Lead Financial Specialist, ECSPF, World Bank), and Vitaliy Bigdai (Consultant, ECSPF, World Bank Country Office – Kyiv), with contributions from Natalia Berezhna (Project Management Specialist, USAID – Kyiv), David Lucterhand (Chief of Party, USAID ATCI), Barry Pitts (Chief of Party, USAID CMP), David Bardsley (Senior Regulatory Specialist, USAID CMP), Gary Hendricks (Senior Pension Advisor, USAID CMP), Viktor Stetsenko (Senior Capital Market Advisor, USAID CMP) and Gleb Krivenko (Senior Advisor, USAID CLC). The authors are grateful to Sarah Wines (Deputy Mission Chief, USAID Kyiv), Martin Raiser (Country Director for Ukraine, Belarus and Moldova, World Bank), Fernando Montes-Negret (Director, ECSPF, World Bank), Lalit Raina (Sector Manager, ECSPF, World Bank) and John Pollner (Lead Financial Specialist, ECSPF, World Bank) for their support in the preparation of the Report. Any remaining errors and omissions are the sole responsibility of the authors. 4 Table of Contents Executive Summary.......................................................................................................... 6 Main Text......................................................................................................................... 12 I: Background .............................................................................................................. 12 II: Joining the EU Single Market in Financial Services: Key Challenges for Ukrainian Securities Markets and NBFIs ................................................................. 13 III: Approximation of Ukrainian Legislation with EU Securities Market and NBFI Directives and Implementing Measures..................................................................... 16 IV: Mutual Recognition of Ukrainian Securities Market and NBFI Regulatory Agencies with their Counterparts in EU Member States......................................... 59 V: Adaptation of Ukrainian Professional Securities Market Participants, NBFIs and Securities Issuers to the EU Single Market in Financial Services: Challenges and Opportunities........................................................................................................ 71 VI: A Summary Multi-Year Action Plan................................................................... 77 Technical Annexes .......................................................................................................... 85 Technical Annex I: The Evolution of the Ukrainian Securities Market and NBFIs from 2003 to the Present ............................................................................................. 85 Technical Annex II: Transposition Status of EU FSAP Directives (as of June 20, 2008)............................................................................................................................ 102 Technical Annex III: Ukrainian Securities Market and NBFI Laws and Regulations to be approximated with EU Directives.............................................. 104 Bibliography .................................................................................................................. 112 5 Executive Summary 1. This Report examines the challenges and opportunities presented by the future integration of the Ukrainian securities market and NBFIs in the EU single market in financial services, in the framework of the Free Trade Agreement (FTA) currently being negotiated between the Ukrainian Government and the European Commission. The FTA is part of the proposed Agreement of Association that is set to replace the existing Partnership and Cooperation Agreement between Ukraine and the European Union. 2. Ukraine faces three key challenges in integrating its securities market and NBFIs in the EU single market in financial services: (i) Approximation of Ukrainian legislation with EU securities market and NBFI Directives (Level 1) and implementing measures (Level 2); (ii) Mutual recognition between Ukrainian securities market and NBFI regulatory agencies and their counterparts in EU Member States; and (iii) Adaptation of Ukrainian securities market professional participants, NBFIs, and securities issuers to the EU single market in financial services. Approximation of Ukrainian legislation with EU securities market and NBFI Directives and implementing measures 3. The EU Directives concerning securities markets and NBFIs and their implementing measures constitute a deeply integrated and far-reaching body of financial legislation and regulation. This body of legislation is built upon a set of fundamental, cross-cutting principles: (i) Level playing field among market participants. The Directives establish a comprehensive set of rules concerning internal governance, conduct of business, risk management, and compliance management that ensure a level playing field among market participants; 1/ ___________________ 1/ Private equity investment funds and non-occupational private pension funds are not covered by the EU Directives as of to date, with the exception of the Directives on supplementary supervision of financial conglomerates, acquisition and increase of 6 holdings in the financial sector, and money laundering that apply, directly or indirectly, to all financial services firms. (ii) Freedom of services. The Directives establish a passport for market participants, allowing a regulated entity licensed by the regulatory authority in its home state to provide services in other EU Member States upon simple notification by the regulated entity to the host state regulator. This applies to investment firms, undertakings of collective investment in transferable securities (UCITSs), institutions of occupational retirement provision (IORPs), and insurance and re-insurance companies. Regulated markets (exchanges) licensed in one Member State are allowed to provide
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