Ukraine Central Securities Depository Under Development
The idea of setting up a Central Securities Depository (CSD) in Ukraine is finally becoming a reality. Capital market players agree that the lack of such an entity is one of the most crucial deficiencies of the local capital markets. Early this year, a consensus was reached among representatives of Ukraine’s private sector, the Securities Commission, the National Bank of Ukraine, and the international financial and donor community to establish a central depository through a merger of the All-Ukrainian Securities Depository and the Interregional Securities Union (MFS) Depository.
The independence and integrity of Ukraine’s depository system is essential to the successful development of its securities market, supporting investment requirements of pension reform, and attracting investment capital for production facilities and jobs. For more than 10 years, USAID through its various projects has been helping the securities industry develop the CSD by strengthening the MFS Depository and enhancing regulatory oversight by the Securities Commission.
Depositories play an important role in securities trades. First, they ensure prompt payment for securities. Second, they speed up the movement of securities between buyers and sellers and minimize the chance of losing securities, playing a vital role in accurate and timely price discovery.
Today, most securities, especially shares, are locked up in the huge concrete and steel vaults of a depository. That means that you probably won’t receive a certificate when you buy a stock unless you ask for it. You own it, of course, and your account records are your proof of ownership, but you’ll never see it. Instead of being registered to you, the securities are registered to a broker on your behalf.
A central depository uses computers to keep track of all purchases and sales of securities that are stored in its vaults. It is a modern, fast and efficient way of handling all transactions. This computer-based data system records the holdings of all securities (government securities, equities and corporate bonds, etc) in electronic form. The CSD functions in the form of a ‘’bank’’ for securities and it is linked to brokers that trade in securities, assuring their timely and expedient delivery and payment.
At the end of every trading day, transactions between firms are added up for every security. The depository sends a tab to each broker of the total amount owed by every other firm. Brokers then settle by sending funds to the depository for deposit in the accounts of other firms. Securities are transferred by book or computer entry. Essentially, a securities trade has been settled when a buyer has received the securities and a seller has received the money – and these transactions cannot be reversed. A CSD is, perhaps, the most critical element in the securities market infrastructure.
With strategic enterprises being privatized, and the advancement of pension reform placing increasing demand on Ukraine’s securities market, the CSD should be capable of handling the ever-increasing flow of transactions while maintaining investor confidence in the safety of their investments. A proper functioning CSD will ensure the investor that accurate custody of ownership records is maintained, and that shares will not be diluted, wrongfully lost, or challenged.
Apart from the obvious criteria that need to be met by the new CSD – such as independence, availability, reliability and international standards of efficiency – the creation of the CSD in Ukraine is, to a certain extent, a political issue and there is still a long way to go. However, the successful merger of the All-Ukrainian Securities Depository and the MFS Depository into a single central securities depository will be a major step for the development of Ukrainian capital markets and will bring Ukraine closer to international standards of depository, clearing and settlement operations.
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