Institute for Eastern Studies & National Institute for Strategic Studies Second Europe-Ukraine Forum February 27-29, 2008 Kyiv, Ukraine Opportunities and challenges of EU/Ukraine FTA for the development of the Ukrainian capital market Presentation by Michel Noel Lead Financial Specialist, World Bank

Structure of the presentation 1. Context 2. Possible scope of EU/Ukraine FTA 3. Impact of FTA+ on capital markets 4. Regulatory approximation: the case of MiFID 5. Market adaptation: the case of investment firms and exchanges 6. Mutual recognition of regulators: the case of licensing 7. Key priorities going forward

1. Context WTO Agreement (2008) EU/Ukraine FTA Preparation Period (± 3 years) Ratification Transition Period (± 3 years)

2. Possible scope of EU/Ukraine FTA FTA classic: cancellation of import and export duties FTA+: liberalization of services sector harmonization of regulatory environment with EU standards

3. Impact of FTA+ on capital markets Approximation with EU capital market directives Prospectus Directive Market Abuse Directive Issuer Transparency Obligations Directive Capital Requirement Directive Market in Financial Instruments Directive (MiFID) Adapting market infrastructure (exchanges, CSDs, investment firms, advisory firms, solution providers) (MiFID) Achieving mutual recognition of regulators (MiFID)

4. Regulatory approximation: the case of MiFID MiFID Pillars MiFID requirements for investment firms MiFID requirements for exchanges

MiFID Pillars MiFID replaces the Investment Services Directive (ISD); effective November 1, 2007 (27 EU countries + 3 EEA countries) Pillar One: strengthened single passport for investment firms quid pro quo:  high standards of investor protection rules valid across EU  internal governance of investment firms  harmonized conduct of business rules for securities trading  categorization of clients  best execution of trades  transaction reporting

Pillar Two: Abolition of concentration rule of the ISD free competition between exchanges, Multilateral Trading Facilities (MTFs) and systemic internalizers quid pro quo: increased pre- and post- trade transparency

MiFID requirements: investment firms Governance requirements risk management internal audit and compliance conflict of interests for directors, managers and employees limits to outsourcing

Conduct of business requirements suitability of investment advice and portfolio management for client appropriateness of other services best execution fee transparency mandatory written client agreement Transaction reporting requirements reporting of trades to regulators sharing of trade data among regulators

MiFID requirements: exchanges Requirements for organization and conduct of regulated markets and MTFs Transparency requirements for shares admitted on regulated markets, MTFs and systematic internalizers Post-trade obligations for OTC trades

5. Market adaptation: the case of investment firms and exchanges MiFID impact on investment firms Consolidation of brokerage industry Degree of systematic internalization

MiFID impact on exchanges Increased competition from other channels for trade information Impact from EU and ECB initiatives on CSDs EU CSD code of conduct ECB European-wide CSD Market developments in the investment firm industry (systematic internalizers) Development of MTFs

6. Mutual recognition of regulators Meeting international standards of regulation and supervision: IOSCO, IAIS, IOPS Assessments of Observance of Standards and Codes (Financial Sector Assessment Program: FSAP) Peer Review Process Political Independence and financial autonomy of regulators Political independence and accountability Financial autonomy The case of licensing: Tracing ultimate controllers of securities market professional participants and NBFIs Carrying out detailed background check of ultimate controllers Relicensing of existing institutions

7. Key priorities going forward Short-term: Adopt revised Financial Services Law to empower capital market regulators to trace ultimate controllers of securities market institutions and NBFIs and carry out detailed background checks of these ultimate controllers, enabling consolidated supervision Adopt and implement strategy to ensure political independence and financial autonomy of regulators Ensure independence of CSDs (limit ownership by single entity, direct or indirect to 5%) Design and Implement twinning programs between capital market regulators and EU partner regulatory agency

Medium to long-term Approximate EU capital market directives (pre and post FTA approval) Launch information campaign on impact of MiFID for market participants Continue implementation of twinning programs with EU partner regulatory agency Measure progress toward international standards through Regular assessment of Standards and Codes Regular peer reviews

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