Interview with the head of the National Commission on securities and stock market of Timur Khromaev the Agency “Interfax-Ukraine” (part I)

The Cabinet recently decided to auction the electricity to the Ukrainian energy exchange (DEB). Earlier it began to sell gas “Naftogaz of Ukraine”. From time to time sound plans to launch exchange trading of grain and to create in Ukraine a stock indicator in this market.

In turn, the securities Commission recently also actively asserting its right to regulate commodity market, not only in terms of trade derivative and other financial instruments. What is your goal?

– To participants of the commodity market, including spot, not abdication of responsibility. One risk that we have seen, this lack of proper oversight of commodity exchanges, including those involved in the organization of trading in energy products. We regard them as subjects of financial supervision: because the exchange can trade energy, grain, corn, or bitcoin, but this does not mean that it will have 3, 4 or 5 controllers. Exchange as a subject carries out financial activity and the guaranteed account in the purchase transaction-purchase of some asset.

This for us was important. We therefore regulator of the energy market NKREKU, and before that with the Ministry, have agreed that they will not engage in the supervision of exchanges, regardless of the product that is there.

– Until recently it was believed that oversight of the commodity exchanges in Ukraine engaged in economic development.

– Ministry of economic development of their only registers. We have already received the Cabinet decision that the registration function will move to us. But we still have an important oversight.

But while the registration function of the Commission is not passed?

No, we need a law. It is needed to fully address the issue of exchanges. Because the question not only of registration. Here the agriculture Ministry, for example, still has an Agricultural exchange. They, of course, is no longer needed and have not performs its functions. All this remains piecemeal and unorganized attempts at establishing an organized exchange market, which came to no avail. Unfortunately, there is only the elements that we need to streamline and to avoid exacerbating this problem further.

We, therefore, the bill prescribed oversight of commodity exchanges and intend to sync it with the same activity of financial markets, because they do exactly the same thing regardless of what I’m trading.

– Yes, Ukrainian stock exchange, with the crisis in the stock market also already got all the commodity exchanges.

– Yes, they are also prepared. Technical requirements for all exchanges are identical. That they did not create subregionsa different subjects, we proposed that a single entity, the so-called “operator”, can arrange a trade for everyone. They will be able to run a system which will trade those or other products.

Before the adoption of the law, what can be your actions? Perhaps some pilot projects? I think the same UEB, which is now the leader in trading volume in energy resources, would be interested in improving their status, to also obtain and give guarantees to market participants from gosregulyatora. Because technically now they are not. Their warranty is a guarantee of big players, such as “Naftogaz” or “Ukrgazvydobuvannya” of today who use their services.

– Up to legislative changes, all attempts to create something – it is purely private attempts to invite participants of one or another market some technological solutions that simplify their process of bilateral trade. Nothing fundamental, unfortunately, existing Ukrainian legislative base they create, no matter how hard. It concerns the so-called “leaders” and those who follow them. There is a large legislative gap, the vacuum. Without rules, this trade will never happen, and by itself it will not appear.

On the other hand, the absence of a law should not slow down. They should try to do what I do now. It is important that now adopted and implemented the Third energy package on the electricity market and natural gas, and there organized a very popular trade. Gas, electricity, the role exchanges will only grow.

But if we don’t support this growth, legislative changes, then it will stop. Energy at one point will understand that exchange simply does not fulfill their obligations, that they – the weakest link, and this will lead to a very negative and bad processes in the energy sector. When one link breaks you, and breaks the circuit. Then we market gas and electricity will be very strange and abnormal processes in the formation of prices. I didn’t immediately attribute it to some conspiracy, but when there is a corresponding soil, you can grow whatever you want.

Accordingly, we as the regulator are actively working to prevent a legislative vacuum, to back this reform in the energy sector. Changes in the financial sector would allow investors to create a full-fledged stock exchanges, on the basis of those platforms to run high-quality products for trade, and on the basis of these products form the Ukrainian indexes. As a result, we come to the end of the “Rotterdam+”! That’s what’s important. What is “Rotterdam+”? This is the index from another country, from another region, the other end of the continent, which is used here. Such world market price – is the conventional view. It is, of course, better than manual control, but it is far from the concepts of fairness, transparent process of establishing prices. Because healthy arrangements work with this price is not. What will happen when the price in Rotterdam will fall very low as it is now fell? Immediately the first beneficiaries will be the consumers, and the manufacturer will suffer because it costs direct and Ukrainian, not Dutch. And then the manufacturer will offer that let’s do “Rotterdam” with the coefficient “2” and it could also be another manipulation.

The dependence on the fluctuations of any market outside of our control can lead to very unpredictable consequences. We want to avoid this and build a market on such foundations and principles on which to build the European market. And to do it quickly in order to synchronize the process of reforming the energy and gas market. And agricultural market, including.

– What are commodity markets, in your opinion, who is the most ready to launch full-fledged stock market trading, if the law is passed?

– Energy and agro.

– Agro, in your opinion, are you ready? Last year in Chicago was launched trading on the Ukrainian index, but, as far as I know, the trading volume was not very large.

Potential large volumes and very large, perhaps tens of billions of dollars. We evaluated: the market of agricultural products and energy is 20-30% of Ukraine’s GDP, which may be involved in these processes. It is very large figures.

As for the build and readiness, the lagging financial sector. Not agro or energy. They suffer from a lack of financial instruments.

That is, the key problem is the financial side?

– Absolutely. It’s not their problem – they are ready. But what to prepare, if we are only talking about theory? In our Parliament for two years is the law on derivatives. And these are the tools our farmers and consumers of agricultural products to give them an opportunity to hedge the cost to insure themselves from price volatility. Due to the adoption of these laws we can easily catch up and build in Ukraine a high-quality recognized in the world market in three to five years. It is absolutely possible.

– The market for gas and electricity are major public agents, which will play important function. This “Ukrtransgaz” and “Ukrenergo” – the operators of the system, which can guarantee delivery and the volume of gas in storage. In agro, this is difficult.

– Difficult for everyone. You’re right that probably in the gas market a little easier, because the point of delivery one is “Ukrtransgaz”. Electricity also have a supply is “Ukrenergo”. So, most likely, the product you deliver. But what about the calculations and money, their guarantees? That’s a big problem here and the power. The company is not engaged. The same with electricity. Therefore, in this area of law should help us to solve the problem of guaranteeing calculations. Because there’s nothing worse than insolvent market participants. Then we have the price of electricity and gas is not clear where.

We hope that we will solve this problem with energy before, and farmers will have to enjoy these solutions. From the point of view of accounting and point of supplies, in the agricultural sector will be more difficult, but we are also going to take a comprehensive approach to solving delivery problems and elevators, and General stores. It could be not only wheat and corn, it can be any oil. Storage must be full participants in system supply contracts. We got ideas, we’re right in the middle of April began a project with Baker McKenzie with the support of the EBRD. Even earlier, in the beginning of this year, we published the concept of warehouse receipts presented to the participants of the market, approved with state authorities and is now writing the law. The goal is to start next year the system of release and accounting of warehouse receipts. It would be entirely voluntary, will be designed for a large warehouse. For example, in wheat, we average, probably only 30-40 of such major deliverable of the warehouses for which the warehouse receipts will be needed. Then we get a more clear and understandable infrastructure for grain.

– Participation of the state in creating such infrastructure is only the legal and regulatory environment? Or is it some participation in the market operators?

Key regulation: state the controller must write the rules very effectively and quickly. And not for someone, and General specific and clear, which should live all market participants (and participate in writing them).

As regards participation in assets, the state has invested some of the projects: the Central Depositary of the agrarian exchange. But any new investments, of course, we do not anticipate, and they are not needed. We assume that the need to bring order to what is already the state has. And so it is not lost, and that was made by the same party with other investors in development of complex financial and commodity markets.

– When do you expect the adoption of the law? I understand that now it is a very difficult question.

We always expected… But his absence doesn’t stop us from writing bylaws, policies, technical requirements. Writing a law, we just go on. Even in this scenario, usually from the adoption of the law before starting any practical solutions, takes place from 12 to 24 months. For example, in the case of the introduction of the activities of informagency after the adoption of the law on approval of normative requirements took about a year.

– That is, the optimistic scenario is 2021-22 years?

Yes. Although technical changes in the Depository system will this year, even without the law. The current law does not forbid us to introduce European standards, he’s just very narrowly limits the functionality and capabilities. The same thing we’re doing, and to support clearing activities in the commodity markets. We are now developing clearing and new technology, attract people.

This would also allow us to more efficiently build a process in the Parliament, because we already have people create expertise and expanding the circle of parties involved. This creates a demand: adoption of certain laws becomes a consequence and not the cause of the change.

Thus changing the paradigm, we increase the effectiveness of a law. But no matter how big or small the law may be, you still have to spend about a year. Faster is impossible, and longer – you can, if you want to get a quality finalized a law that will require three months of any change.