October 2012
NEWSLETTER

Cardinal Changes in the Functioning of the Depositary System

On 6 July 2012 the Law of Ukraine On Depositary System of Ukraine (the "Law") was adopted. The Law will become effective on 12 October 2013 except for the rules regulating the procedure for the establishment of the Central Depositary of Securities (the "CD"), of the Processing Center for Servicing Agreements on Financial Markets (the "Processing Center"), and of depositary institutions, and Sections 5 10 of Chapter VI of the Law, which will become effective on 11 October 2012.

The Law itself is a document providing basic legal infrastructure for the depositary system. Starting from October 2013, the Ukrainian depositary system will be centrally organized, and, according to this principle, a single CD will operate. The Law determines an exclusive competence of the CD, requirements as to the composition of its shareholders and shareholding capital, and the structure of its governing bodies.

The Law also introduces the following important changes.

After the Law becomes fully effective, all active licenses for the performance of depositary activities of a securities depositary, depositary activities of a securities custodian, activities on keeping a register of registered securities owners, and the clearing and settlement activities will become inoperative. By that time, all the custodians and registrars must bring their activities in line with the Law and file with the National Securities and Stock Market Commission (the "Commission") documents required to obtain new licenses, or otherwise must wind down their operations according to the procedure established by the Commission. The relevant procedures, namely the procedure and terms of granting a license for carrying out depositary activities, must be developed by the Commission by 12 April 2013.

According to the Law, the so-called "issue" securities (including all traditional securities such as shares and bonds) must be issued in Ukraine in a non-documentary form only. Therewith, starting from 11 October 2012, an issuer, in the course of its securities issue, may only choose a non-documentary form of their existence, and shall conclude with the National Depositary of Ukraine the agreement on servicing any issues of such securities. All the issuers of registered securities will be obligated to ensure existence thereof in a non-documentary form and to enter into the agreement on servicing of such securities issue with the CD within three months from the date of the registration of the CD Rules by the Commission (that is to say, the date of obtaining of the CD status by the respective joint stock company). The registered "issue" securities, if their issue was registered prior to the publication of the Law, may remain in a documentary form until 12 October 2013.

The Law establishes that an owner of the dematerialized securities shall approach a depositary institution, which was selected by its securities issuer, and shall personally enter into an agreement on servicing of securities account with such an institution, or shall transfer all of his/her/its rights in securities to respective securities account opened with another depositary institution. Should the securities owner fail to do that by 12 October 2013, the securities which grant the right to participate in governing bodies of the issuer will not count when determining a quorum of and voting at respective governing bodies of the issuer. The said restrictions shall be established in the securities depository accounting system by a depositary institution as from the first business day after the lapse of one year after the entry into force by the Law (i.e. 12 October 2014).

Also, the Law establishes the exhaustive list of events, which justify the disclosure of information contained in the securities depositary accounting system (Article 25 of the Law).

Securities issuers would be well-advised to review the list of additional services, which under the Law may be offered to them by depositary institutions:

  1. depositary institutions may perform the functions of a registration or vote-counting commission at general meetings of shareholders;
  2. they may prepare and supply reference and analytical materials on the securities market to an issuer;
  3. they may provide advice on securities accounting and/or securities turnover matters;
  4. they may administer the securities account opened by the issuer with the CD or provide other services with respect to the securities issued by the issuer;
  5. they may otherwise assist owners in exercising their rights in securities.

In accordance with the Conclusive and Transitional Provisions of the Law, the CD will be established on the basis of National Depositary of Ukraine PJSC, to which all of the global certificates will be transferred for custody and which shall be deemed the legal successor of rights and obligations of other depositories vis-a-vis securities' issuers.

The Law may make performance of obligations by placement of securities in a notary's deposit a reality. Under the Law, if securities are entered to the notary's deposit, the secured creditor will hold all the rights related to such securities. The securities placed in the notary's deposit shall not count when determining the quorum of and voting at the general meeting of shareholders of the issuer, and dividends and other income on such securities would accrue to the benefit of the creditor and would have to be paid to the creditor through the notary.

Thanks to the Law, the securities market will get a centralized national depositary, accounting and clearing infrastructure in accordance with the global practices. The lack of such infrastructure in Ukraine is considered by many as a sign of an underdeveloped and risky financial market. However, despite a great number of positive novelties, certain provisions of the Law are rather controversial and have provoked resistance from many market players. Some believe they will undergo certain changes before the Law becomes fully operational.

In other legal news for securities market, October 2012 saw four new resolutions of the Commission come into effect. The regulations enacted by the resolutions deal with (i) the procedure for compiling administrative data by keepers of registers of registered securities owners, (ii) the registration of bond issues and bond issue prospectuses, (iii) rules for supervising compliance of professional market participants with securities law, and finally (iv) rules for internal audits to be undertaken by professional securities market participants.



For further information please contact partner Vadym Samoilenko
and senior associate Oles Kvyat

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