December 19-23, 2011

USAID FINREP and NBU Banking University support for a pilot financial literacy course for 16-18 year-olds

The USAID FINREP Project and the Ukrainian Banking University (UBU) organized a Financial Literacy Course Workshop for 25 school teachers representing 13 secondary schools from Kyiv, Kharkiv, Cherkasy, Donbass, and Lviv region. The Financial Literacy course for secondary schools is a cooperative initiative of FINREP, the National Bank of Ukraine (NBU) and the UBU. FINREP staff and the UBU faculty spent about three months developing a full set of materials to teach the course: the syllabus, the textbook, the workbooks for students, and the teacher’s guide. The course was presented for the first time on December 19 for a group of school teachers who will teach it at their schools. “I welcome and support this initiative,” Volodymyr Khylenko, Acting UBU Rector. “In close collaboration with school teachers and the faculty of this University, we will make the financial literacy course understandable and interesting to both students and their parents.”

The course has 31 lessons and includes four blocks, – Money and Finance, Savings and Investments, Borrowing, and Financial Wellbeing. “The authors sought to avoid the mistake of the Soviet system of education, with its emphasis on theory, rather than practice,” pointed out Alex Kutsenko, FINREP’s financial literacy project coordinator. “Our goal was to teach students the key skills set and practical knowledge of finance they need to operate in a modern financial system.”

The workshop was designed and delivered in a format that included the content of the Financial Literacy course and the accompanying teaching methods. After the initial presentations delivered by the UBU authors, FINREP experts Benjamin Krensky and Russell Rushton made presentations of specific teaching methods based on their own experience in a U.S. high school. The workshop participants were also fully engaged in discussions with experts and among themselves and made valuable comments and suggestions on how to fit the course into Ukrainian schools.

The participants of the workshop said the financial literacy course was a well-developed and consistent approach to teaching practical financial skills. They supported its introduction at schools and asked FINREP to push forward this idea. FINREP and the UBU plan to introduce the course in February in five regions named above.

The feedback from the school teachers was very important. “We appreciate your input to an exchange of ideas about the best methods to teach this course,” said Tamara Smovzhenko, Advisor to the Acting UBU Rector, addressing the workshop participants.

FINREP and the UBU authors will now finalize the course products and ensure they are available for school teachers to start teaching in February 2012. “We want to empower individuals through learning, and contribute to a more reliable, resilient, and fair financial system for Ukrainians,” Michael Martin, USAID Acting Mission Director said in his closing remarks at the graduation ceremony. “We are experimenting here, trying to find out what we need to teach and how best to teach it. Teachers are central to this process, not just in the classroom but also in monitoring, evaluating, and providing feedback.”

November 30, 2011

FINREP Helps Deposit Guarantee Fund (DGF) Implement Automated Payment System for Making Guaranteed Payouts to Depositors of Banks to Be Liquidated

The Oracle Data Base Management System transferred to DGF from FINREP will ensure a reliable exchange of large informational and cash flows through information systems that are now in operation at DGF. The Oracle Database is one of the most advanced systems available on the market for performing pay-out to depositors. The introduction of an automated system will help protect the rights of depositors by way of accurate personification records in the database. This will speed up any payment to depositors if a bank fails.

It is expected that payouts to individuals (creditors) will be made by DGF agent banks, using the National System of Mass Electronic Payments (NSMEP) technology developed and coordinated by the National Bank of Ukraine. The equipment provided by FINREP to DGF is designed to protect information in compliance with NBU requirements in the process of making payouts.

"We are very grateful to USAID for assistance provided. I am confident that the new automated system of payments will ensure greater protection of bank depositors. Essentially, this is assistance to the entire financial sector, since enhanced reliability and performance of the Fund is a factor of restoring confidence in the banking sector," said Andriy Olenchyk, Acting Managing Director of the Fund, during the equipment and software licenses transfer ceremony The introduction of the automated payment system will help to reduce significantly the period of time between the bank liquidation and first payouts to depositors.

Supporting DGF is part of the action plan of FINREP to strengthen the organizational capacity of the financial sector institutions. With new technologies, the Fund will be able to work more efficiently, and perform not only all the major operating functions, but also new ones envisaged in a number of laws drafted by NBU and MPs.

Over the last year, the USAID-funded FINREP Project has had fruitful cooperation with the Deposit Guaranty Fund in the area of providing technical assistance to DGF to improve and continue to reform the deposit guarantee system in Ukraine.

November 16, 2011

Ministry of Finance and FINREP Joint Effort to Discuss Public Debt Management Strategy

USAID/FINREP sponsored a roundtable discussion “Public Debt Management Strategy for 2012-2014: Lessons from Previous Experience and Key Points for the Future” among GoU officials, primary dealers and other market participants on November 16. The purpose of this event was to discuss concrete steps that could potentially attract more interest to the Ukrainian OVDP market and improve the overall system of government debt management of Ukraine.

FINREP Senior Public Debt Advisor Paul Roberti presented a detailed overview of the current situation in the government securities market of Ukraine and offered his recommendations to the MoF. “It is necessary to make the market more liquid, efficient, and, most important, more attractive to investors,” Mr. Roberti pointed out. Mr. Roberti emphasized that the OVDP market had been developing nicely until spring 2011, when a combination of factors (GoU unwillingness to pay market rates, NBU interventions to support the UAH, etc.) led it to stall. Mr. Roberti’s remarks spurred a lively discussion about market liquidity and its impact on the debt market.

Denys Khrystoforov, deputy director of the MoF debt and international policy department, answered many questions posed by bankers operating in the OVDP market, and told the audience about the MoF vision of further prospects of the OVDP market. In particular, he spoke about the interaction between the MoF and the National Bank of Ukraine in open market operations. His colleague, Kostiantyn Kuznetsov, head of the public debt management within the MoF debt and international policy department, presented the CMU draft resolution “On the mid-term government debt management strategy in 2012-2014.” The government’s goal is to reduce government debt as a percentage of GDP, from 42% in 2011 to 35% in 2014. Total borrowings were estimated at UAH 92 billion in 2012, and UAH 112 billion in 2014.

FINREP expert Volodymyr Vysotskyi compared the actual cost of foreign borrowings with that of UAH borrowings over a similar horizon. Despite domestic market rates being significantly higher than those in the external markets, the effective cost of external borrowings has proved a lot higher. “This is why it makes sense for the MoF to borrow more actively in the domestic market, reflecting this in its future strategies,” Mr. Vysotskyi concluded.

At the end of the round table, Mr. Khrystoforov thanked FINREP for organizing this open discussion between the MoF and market participants. “We appreciate FINREP’s initiative in organizing this round table. This has been a truly useful discussion, and I am certain that it will help the MoF,” Mr. Khrystoforov said.

November 3, 2011

FINREP Supports Seminar for Regional Journalists with Involvement of Odessa Authorities and Major Banks

The lack of long-term financial resources, overexposure to exchange risks and unpredictable macroeconomic government policy remain major constraints to investments in the Ukrainian economy and the banking sector. This was the conclusion of participants of a roundtable discussion in Odessa on Ukraine for Investments: How to Stimulate Foreign and Domestic Capital Investments into Private and State Projects in the Region? The roundtable was held on October 3 in Odessa with the support of Odessa Oblast State Administration, USAID Financial Sector Development Project, the League of Financial Development, the Economic News and the Weekly Mirror. Yuriy Skolotyanyi, the event moderator, pointed out that Odessa Oblast is one of the leaders in attracting investment – from the beginning of this year this oblast attracted over USD 1.3 billion in investments. In addition, Odessa region has the highest concentration of banks, which facilitates financing for local business.

Yuriy Maslov, Head of Budget, Financial and Economic Policy and Banking Committee of Odessa Oblast Council analyzed the constraints to foreign investments in Ukraine. The roundtable discussion focused on the major challenges for business, such as bureaucracy, regulatory policy towards business, customs procedures, the shortcomings of the effective Tax Code, and the impossibility to hedge currency risks.

Mykhailo Azarov, Head of the NBU Regional Office in Odessa, indicated that the share of non-performing loans of Odessa banks already exceeds 11%. For him, currently the most urgent problem for the banking sector in Ukraine is attraction of long-term savings by banks. However, without a major public information campaign, and pension reform implementation, people will continue to keep their money “under their mattresses.” According to the estimates presented at the round table, the Ukrainian population has from USD 80 to 100 billion in its hands. “It is a great volume presenting significant potential for the economic development,” said Mr. Maslov. On the other hand, bankers participating in the event claimed that only economic growth will lead to the banking sector growth. “A public information campaign will not resolve the situation. The credit market will not have prospects, if the economy does not evolve and if the income of people does not grow,” – says Mykola Chornyi, Corporate Business Director of Southern Macro Region, Erste Bank, JSC. Kostyantyn Smolskyi, Director of Odessa Directorate of OTP Bank, PJSC, noted that businessmen and investors are looking forward to comprehensible and predictable rules of the game, first of all in the area of taxation, currency regulation and customs policy.

October 19, 2011

FINREP Supports Discussion of Mortgage Market

The USAID FINREP Project supported the Mortgage 2011-2012 Conference held on October 19 at the Kyiv President Hotel. This Forum, bringing together about 90 professionals from the financial market and state regulators, was co-initiated by the Ukrainian National Mortgage Association (UNIA), the Confederation of Ukrainian Builders, and СBonds. UNIA is a Ukrainian non-governmental association bringing together organizations that are active in financial and real estate markets. СBonds is a portal on various financial instruments of CIS and Emerging Markets (bonds, stocks, investment and pension funds, collective investment institutions.) Confederation of Ukrainian Builders was founded by 58 major investment and construction companies of the country. Its mission is to facilitate the improvement of investment climate and the development of the construction industry in Ukraine. The Mortgage 2011-2012 Conference served as a public platform for market participants and regulators to discuss current problems of the mortgage market in Ukraine, its prospects and legislative framework. The event was attended by representatives of the 50 largest Ukrainian banks that offer mortgages, representatives of the State Mortgage Institution, the National Bank, the Ministry of Finance, and representatives of the construction industry. Specifically, members of the Confederation of Ukrainian Builders – a non-governmental organization bringing together over 75% of the country’s construction market participants – spoke at the forum. Igor Yushko, President of UNIA, presented his analysis of the market and predicted that the mortgage market would be restored. According to NBU data, for the first 9 months of the current year, households were given UAH 9 billion in loans (compared to about UAH 6 billion in 2010).The main problem with the real estate market is that demand for residential property exceeds the supply of financing. Moreover, the amount of debt owed by customers to banks is not going down. In the opinion of UNIA’s President, a key factor that stymies the development of mortgage lending is not only low income of people, but high cost of residential property built in Ukraine. Olexandr Dubykhvist, Director of the NBU Foreign Exchange Reserve Department, believes that one of factor that stymies market growth is the high cost of financing offered to potential buyers. In his view, interest rates could go down if banks were more active in using a so-called variable rate in loan agreements. In the opinion of the central bank representative, after the Law on Creditor and Borrower Protection took effect, the term “variable rate” obtained a rather strong legal status and can be safely used in mortgage agreements. “This is a normal tool that allows for reducing risks and, consequently, interest rate levels,” says Mr. Dubykhvist. Sergiy Volkov, Advisor to the Chairman of the Management Board of Oshchadbank, is also confident that, when entering into contracts with banks, customers should have the right to choose – enter into variable rate contracts or fixed rate contracts. FINREP Expert Alex Kutsenko believes that although the mortgage market is growing, its growth is significantly hampered by a low level of financial literacy of the public and low confidence of the public in the banking sector. A recent financial literacy survey conducted by the public suggested that only 13% of people show interest in mortgage loans and 29% – in consumer loans. “This figure is a striking display of the public knowledge of financial instruments,” stresses Mr. Kutsenko. “The growth of this market will be slow without an adequate awareness campaign.”

September 26, 2011

FINREP Participates in 14th International Forum of Capital Market Participants

250 market participants, government officials, and international experts gathered at the annual PFTS forum on capital markets that took place from September 22 to 25, 2011 in Alushta (the Autonomous Republic of the Crimea). The PFTS forum has become the key conference for discussing major Ukrainian capital markets issues and developments. The main topics discussed included:

• What are the prospects of the development of the stock market infrastructure in Ukraine?
• What may capital market participants expect from pension reform?
• What are the challenges to the introduction of new financial instruments (derivatives, REPO, mortgage securities)?
• What is the outlook for the government securities market?

Robert Bond, Paul Roberti, and Natalia Goryuk represented FINREP at the forum. Robert Bond, FINREP’s Chief of Party, offered his views on the importance of maintaining the depository system in private, diversified ownership hands during a discussion of Government of Ukraine plans to adopt a law nationalizing the depository functions. Natalia Goryuk, FINREP’s Senior Pension Lawyer, made a presentation on specific features of the Pillar II operation scheme proposed by the pension law, adopted in September 2011. Ms. Goryuk presented an analysis of the experience of operation of mandatory accumulation systems in several countries, specifically, in Chile where such a system has been operating for 30 years.

The holding of the forum coincided with the 15th anniversary of the establishment of the PFTS exchange which was founded in 1995-1996 with the assistance of USAID, as an analog to the US NASDAQ exchange. Now PFTS is one of the leading exchanges in Ukraine. Dr. Robert Bond, Chief of the USAID FINREP Project, addressing participants to the forum stated: “The 15th anniversary of PFTS is a remarkable achievement, and I would like to congratulate all those who played a key role in this, namely: PFTS founders, securities traders, investment companies, commercial banks, regulators, international organizations and the institution that I represent – USAID.” Dr. Bond also singled out Iryna Zarya as a driving force behind the success of the PFTS, and thanked her for her hard-work, dedication, and leadership.

September 22, 2011

USAID FINREP Sponsors Verkhovna Rada Roundtable on International Experience and Consumer Protection in Financial Services

Ukraine’s financial services consumer protection legislation should be amended as soon as possible to bring it in line with international best practices. This was the theme of the roundtable “Financial Services Consumer Protection: International Experience” organized jointly by the Verkhovna Rada Committee on Finance, Banking Activity, Tax and Customs Policy and the USAID Financial Sector Development Project (FINREP) on September 22.

The moderator for the event was Mr. Yuriy Poluneev, Member of Parliament and Head of a Subcommittee considering consumer and creditor rights issues.

Three distinguished international experts led the roundtable discussion. Ms. Mamiko Yokoi-Arai, OECD Principal Administrator, spoke about legal regimes and financial literacy programs in the OECD member states. Mr. Luke Reynolds of the U.S. Federal Deposit Insurance Corporation (FDIC), made a detailed presentation of the U.S. approach to depositor and consumer protection. He pointed out that following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the U.S. created the Consumer Financial Protection Bureau (CFPB), a single federal body empowered to effectively protect consumers of financial services in the country. Ms. Helena Kolmanova, executive director of the Czech National Bank, presented an overview of the measures taken by the Czech Republic to protect users of financial services in the country.

Ms. Angela Prigozhina of the World Bank presented an overview of the World Bank’s experience in financial users consumer protection and financial literacy.

Ukrainian commentators at the Roundtable generally agreed that the rights of Ukrainian users of financial services are easily ignored due to inadequacies of the legislative and regulatory framework, and because of deceptive practices by financial institutions. FINREP expert Alex Kutsenko emphasized that the first step to effectively protect financial services consumers had been made in Ukraine in 2005, with the relevant amendment to article 11 of the consumer protection law. Later on, as a response to the financial crisis, the NBU took another step in the right direction when it approved Resolution 168 obligating commercial banks to disclose information about the effective interest rate of loans.

Ms. Roksolana Pospolitak of the Kyiv-Mohyla Academy, who authored a paper on “Financial Services Consumer Protection: Legal Analysis,” argued that Ukrainians lack proper protection due to the failure of the consumer protection law to address the needs of financial services consumers. In addition, the legal framework is flawed by: the fragmentation and inconsistency of financial laws; lack of basic definitions to protect consumer rights; a weak and divided institutional structure to regulate financial service providers and protect consumer rights; and lack of an effective court system or alternate dispute resolution mechanism to adjudicate cases brought by consumers. “We need to create a high-level working group to review and revise existing laws and regulations on consumer lending, thereby creating a level playing field between creditors and consumers,” recommended Ms. Khanyk-Pospolitak. She also proposed more vigorous enforcement of existing laws against creditors who engage in deceptive practices, taking action to prohibit deceptive and unfair advertising, and developing industry-wide model template contracts for consumer lending.

Viktor Novikov, head of the NBU legal department, thanked FINREP for this round table discussion and agreed that Ukraine needs to pass new legislation as soon as possible based on international best practices to ensure effective protection of Ukrainian consumers of financial services.

“We have invited to this event all the interested parties, – financial service regulators, members of Parliament, representatives of consumer groups, and banks and financial institutions. Roundtables like this are part of FINREP’s efforts to promote creditor and consumer rights and financial literacy,” Dr. Robert Bond, FINREP Chief of Party, said.

MP Yuriy Poluneev emphasized that this event was very important for Ukraine to analyze the best practices of other countries. “Having experts from OECD in Paris, the United Sates, and the Czech Republic will permit us to benchmark our legislation and practice in consumer lending against others. This roundtable will inform future legislation in this area.”

In the memorandum approved by the participants of the round table, it was agreed that successful consumer protection reform requires resolving conflicts and filling gaps in legislation (either by amending current Ukrainian law or by developing new laws and regulations) to create a consistent, systemic, and unambiguous solutions to the most urgent problems in this area. This includes:

• protection of borrowers in legal credit relations (specifically in terms of access to essential information on the loan cost and their rights as financial services consumers);
• protection of bank and credit union depositors (specifically with respect to maintaining the uninterrupted operation of deposit guarantee systems);
• setting clear sanctions against financial institutions and their officers for violations of consumer rights in financial services and mechanisms of imposing such sanctions;
• providing for mechanisms of out-of-court settlement of disputes;
• prescribing legal mechanisms of filing collective lawsuits by non-government organizations in the financial market;
• ensuring the avoidance of conflicts of interest regarding the provision of services to customers (specifically to make claim surveyors independent of insurance companies and create conditions for their self-regulation as independent market participants).

September 19, 2011

The Second All-Ukrainian Contest “What’s Yours Is More Reliable!” Starts

The Second All-Ukrainian Contest “What’s Yours Is More Reliable!” for local mass media on the best story about the accumulation pension system in Ukraine starts on September 15, 2011.

Press Release
OPERATING PROCEDURES of the All-Ukrainian Contest "What’s Yours Is More Reliable!"

August 11, 2011

FINREP to Develop Financial Literacy Course for 16-20 Age Group with the NBU Banking University

“We believe that an educated consumer is the basis of a stable, effective financial system, and it is through improving financial awareness of the general public that trust in the financial sector can be enhanced”, said Dr. Robert Bond, Chief of Party of the USAID FINREP Project in his welcome remarks to participants of the financial literacy workshop that was hosted by the NBU Banking University on 11 August 2011. The purpose of this one-day event, attended by about 30 University lecturers, NBU Central Office representatives, international experts, and the USAID FINREP specialists, was to discuss issues regarding the development and implementation of a course in financial literacy. The development of this course is a new FINREP initiative supported by the USAID and NBU. The objective of the workshop was to discuss the main issues arising in the development and implementation of a new financial literacy course in Ukraine. These are included: What should be the content of the course, and how should it be taught? How fast and efficiently can this course be developed (the textbook, workbooks, and tests)? How to evaluate the impact of the course, and how to monitor the quality of the course delivery? How can this course be introduced in Ukrainian high schools and universities? Angela Kuznetsova, the NBU Banking University Deputy Rector, emphasized the significance of the Cooperation Protocol signed on August 8 by the USAID FINREP and the NBU Banking University to develop the financial literacy course. “We are very grateful to the UASID FINREP Project for choosing us as its partner. We are keen for the working group to meet as soon as possible”, Mrs. Kuznetsova said. This working group, made up of the teaching staff of the NBU Banking University, FINREP specialists and international experts, is to develop the first financial literacy course in Ukraine aimed at 16 to 20 year old Ukrainian students. This course, Mrs. Kuznetsova emphasized, is very timely and of great use to the Ukrainian youth: “It will help develop their skills of personal budgeting, make them more informed users of modern financial services, and increase their interest in savings and investments. This will facilitate the credibility of the banking sector”. The working group members heard presentations by two U.S. experts who teach a quantitative learning (financial literacy) course in Maryland, Mr. Russell Rushton and Mr. Benjamin Krensky. Russell Rushton, who has taught courses like this for 20 years, made a presentation called “Financial literacy: The Why’s and How’s”, whereas his colleague, Mr. Benjamin Krensky, spoke on “Quantitative Learning: Teaching Methods”. Both lecturers emphasized that such programs are to focus primarily on developing practical skills, rather than pure theory. “A course like this is only useful if the students can put the skills acquired to real life practice”, Mr. Krensky said. In the second session of the workshop, Tetiana Girchenko, Director of the NBU Banking Institute for Masters’ and Postgraduate Studies, presented the first draft of the structure of a financial literacy course prepared by her staff and by lecturers from the Lviv, Kharkiv, and Cherkasy NBU Banking Institutes. FINREP expert Oleksiy Kutsenko also offered his ideas on course structure. He supported the opinion of the U.S. experts about the practical impact of the course, and suggested that the course include four major sections: “Money and finance”, “Savings and investment”, “Credit”, and “Financial well-being”. He suggested that one of the unifying themes of the course should be increasing awareness of consumer rights in financial services. One of the most difficult issues in the follow-up discussion of the course implementation and assessment was how to fit in this course in the current high school and university syllabuses. NBU Banking University representatives recommended inviting Education Ministry officials as work group members so as to facilitate the official presentation of this course to the Ministry following the development of the textbook and workbooks, and after the completion of the pilot project, with a view to its incorporation into the syllabus of high schools and universities of Ukraine. Wrapping up the workshop, moderator Sergiy Shumikhin, Head of Mass Media Relations Unit and Deputy Head of the Office of Information Work Organization of the NBU Department of External Economic Relations, said that the NBU management was actively supporting the efforts to improve financial literacy of the general public in Ukraine. “We welcome the new initiative of the USAID FINREP Project, since this new program is to assist the younger generation of Ukrainians in becoming financially responsible and financially independent citizens, capable of living in the present day financial system. This dove tails perfectly with our plans. I appreciate FINREP efforts, which helped to set this work in motion”, Mr. Shumikhin said in conclusion.

July 14, 2011

The Best Customer is an Educated Consumer

“An adequate and effective monetary financial policy in Ukraine is impossible without educated and protected consumers.” With these words, Oleksandr Savchenko, Rector of the International Institute of Business, kicked off his speech at the forum “Financial Services and Consumer Protection in Ukraine.” About 100 representatives from the financial services industry, regulatory bodies, and consumer rights group gathered at this event to discuss the legal framework for financial services consumers in Ukraine, and whether consumer rights are protected sufficiently. In her opening remarks Mrs. Natalia Berezhna, Financial Sector Projects Manager of the USAID Office of Economic Growth, pointed out that the USAID FINREP Project 6 months ago surveyed the population in order to find out the level of confidence in financial institutions and the level of financial literacy of Ukrainians. “This survey demonstrated that people do not believe in a fair solution of conflicts with financial institutions, that Ukrainians have an extremely low level of confidence in the financial sector, and that they use a limited range of financial services,” Natalia Berezhna said. Two new studies prepared by FINREP experts were the focus of discussion. The first study “Financial Services Consumer Protection in Ukraine: Legal Analysis,” was prepared by. Roksolana Khanyk-Pospolitak, Head of Department of Applied Legal Studies of the National University of Kyiv-Mohyla Academy. The second study – “Consumer Lending in Ukraine: Surveying the Landscape” was prepared by Mr. Oleksiy Kutsenko, a FINREP consultant. Roksolana Khanyk-Pospolitak’s paper provides an analysis of the legal and regulatory framework for consumer protection in financial services in Ukraine. It discusses existing laws on financial consumer protection and their inadequacies, problems with the court system and arbitration tribunals, regulatory and enforcement issues at the NBU, FSR, and SSMSC, and the overall institutional framework for financial consumer protection. Alex Kutsenko’s paper examines financial services industry practices with regard to consumers. The paper focuses on the issues of transparency (the level of disclosure, terms, conditions, and risks of various financial products), privacy (consumer data protection and credit rating agencies), and choice (nature of competition, selling and advertising of financial products). The key commentators at the forum were: Yuriy Poluneev, Member of Parliament; Victor Novikov, Head of Legal Department, NBU; Andriy Olenchyk, Deputy Executive Director, the Deposit Guarantee Fund; Volodymyr Lavrenchuk, Head of Management Board of Raiffeisen Bank Aval; and Dmytro Zinkov, Head of Management Board of OPT Bank. Representatives of non-governmental organizations involved in protection of financial services consumers’ rights included: Anatoliy Sobolevskyi, Senior Lawyer of the All-Ukrainian NGO on Protection of Financial Services Consumers’ Rights; Sergiy Grygoryan, Chairman of the Consumer Protection Group “Nash Zahyst”; and Myroslava Mulyar, a Senior Lawyer of this organization. During her presentation, Mrs. Roksolana Khanyk-Pospolitak analyzed the major “problem points” with Ukraine’s legislative framework for ptotection of financial services consumers. “The current legislation does not indicate clearly in what cases the regulators should protect financial services consumers. As a result, the issue of protection of financial services consumers de-facto is left out of the sphere of application of the state regulators”, Mrs. Roksolana Khanyk-Pospolitak noted. One of the weakest points of the legislation is the fact that the Law “On Protection of the Rights of Consumers” in practice does not directly apply to financial services. The lack of a clear legal ground for protecting the rights of financial services clients of financial institutions results in the fact that neither government regulators nor the judicial system are able to help consumers. Complaints filed by consumers with the financial regulators turn out to be ineffective since, as a rule, officials suggest that individuals should apply directly to court. “In most cases consumers lose their disputes with financial institutions in courts. Courts have sided almost exclusively with financial institutions”, Mr. Anatoliy Sobolevskyi, who took part in 72 legal trials between financial institutions and clients, commented. One of the major unresolved problems is the fact that different courts apply differently the same norms of the legislation. “This is the result of the fact that highest judicial bodies do not have a unified position”, Mr. Sergiy Grygoryan said.According to Mr. Volodymyr Lavrenchuk of Raiffeisen Bank Aval, at present there are about 197 thousand legal cases regarding loan agreements in Ukrainian courts. Mrs. Myroslava Mulyar of Consumer Protection Group “Nash Zahyst” indicated that fines and penalties, which sometimes are charged by courts, in cases involving banks and consumers, can exceed the principal amount of loan by dozens of times. She is sure that under such conditions the majority of bank clients will be unable to repay their debts, and therefore the confrontation will only become aggravated. Mr. Andriy Olenchyk of the DGF reminded the audience that financial regulators had taken initial steps to meet the needs of consumers. The State Commission for Regulation of Financial Services Markets of Ukraine was the first to begin discussing the rights of financial services consumers, but unfortunately, this activity resulted only in the development of a Concept Paper. The NBU developed resolution No. 168, but the implementation of this resolution also caused a “misunderstanding”. The functions and powers of the NBU do not extend to borrowers. The Law “On Banks and Banking” states that the National Bank should protect the interests of depositors and creditors; there is not a single word in the Law about the borrowers who are financial services consumers. The “Gordian knot” of legal problems that have formed can be cut only by a series of amendments to the legislation which governs the rights of financial services consumers. “Then, it is necessary to appoint the regulators responsible for the rights of consumers, and to enable them to impose required sanctions which would be applied to dishonest financial services providers”, Mrs. Roksolana Khanyk-Pospolitak stressed. A logical question that arises after such a proposal is: who out of the state regulators, in particular, should assume responsibility for protection of the rights of financial services consumers in Ukraine? Some conference participants argued in favor of strengthening consumer protection departments within existing regulatory bodies. However, Mr. Victor Novikov of the NBU believes that the establishment of a separate specialized body or inspectorate that would deal with protection of the rights of consumers is necessary. He argued that the issue of protection of the rights of consumers should be withdrawn from the financial regulators since a conflict of interests will always exist. “Regulation and prudential supervision over financial institutions will always gain the lead”, he explained. Mr. Olenchyk also sees a systemic conflict of interests if separate divisions that deal with protection of financial services consumers operate within the framework of financial regulators. “One and the same body will not deal with the functions of prudential supervision, regulatory functions and protection of the rights of consumers. That is why it is reasonable to move to setting up a separate body/agency,” Mr. Olenchyk said. Mr. Volodymyr Lavrenchuk is sure that establishment of a separate agency will not play a key role in protection of the rights of consumers. “Only active criticism against the banks which sell poor products, criticism via the press and the society will play a key role in solving this problem. It is known that existence of negative comments is very sensitive for banks,” the banker noted. The majority of the forum participants agreed that more balanced protection of the rights of financial services consumers should become a key issue of state policy. The recently passed Law No. 7351, which governs the legal relations between creditors and consumers of financial services, is generally considered biased towards creditors. “Solving this problem will improve prospects for formation of sustainable savings and adequate accumulation of financial services within the banking system and all financial markets, and provide domestic investments that are required for modernization of the country’s economy”, Yuriy Poluneev said. He announced the first congress of financial services consumers, to be held in September, and invited those wishing to join the working group that will elaborate a priority action plan to amend the effective legislation. The MP publicly expressed gratitude to the USAID FINREP Project for the studies conducted. “These studies are very useful. This analysis will be used for improvement and introduction of systemic legislation”. Mr. Victor Novikov also assured those present that the discussion held was well-timed. “The proposals on improvement of the legislation in the area of consumers’ protection made by FINREP are essential, and I believe that they should be taken into account when working out a systemic law”, Mr. Novikov noted. This event was part of FINREP’s Program on financial literacy and consumer protection, which includes studies, conferences, publications, and educational outreach efforts. “In the autumn we expect to make a large-scale presentation of the final versions of the two studies, and hope that they will prove useful to the state regulators, government officials, MPs and market participants. The FINREP goal is to assist Ukraine in elaborating an effective action plan on strengthening protection of the rights of consumers, and fostering confidence in the financial sector”, Mr. Robert Bond, FINREP Chief of Party, stressed.

July 4, 2011

Roundtable on Central Securities Depository

On July 4, a roundtable "Creating the Single Central Securities Depository of securities: Which Way for Ukraine?" was held by the League of Financial Development with the support of the USAID Financial Sector Development Project and Zerkalo Nedeli Ukraina weekly. The roundtable discussed the obstacles which have prevented creation of the central securities depository (CSD) for 10 years, the issues of division of functions between the existing depository institutions, as well as the form of ownership in the CSD.

The key speakers invited to take part in the discussion were Dmytro Tevelyev, Chairman of the State Commission on Securities and Stock Market, and Yuriy Kolobov, First Deputy Governor of the National Bank of Ukraine. Their introductory speeches on the history of the issue and the GoU’s proposal to create a CSD with majority government ownership were immediately followed by the remarks by Robert Bond, Head of the USAID Financial Sector Development Project, who was asked by the roundtable’s moderator to present his viewpoint.

Dr. Bond stated he was speaking on his own behalf, not that of USAID. He reminded the audience about the joint letters that the International Financial Institutions have sent to Ukraine’s government officials about the creation of a CSD, and noted that he had publicly opposed this plan on the grounds that it is not in accord with best international practices, is bad for investment, domestic as well as foreign, and that it is bad for the development of capital markets. FINREP’s head also suggested that journalists should ask the 5 questions which will help reveal the basic premises underlying the Government plan to own and control the depository:

1) What problem is the Government trying to solve by nationalizing the depository system, as opposed to promoting a merger of the AUSD and the NDU under private ownership?
2) If there are any issues with regard to the activities of the AUSD or its members/owners, why hasn’t the Government used its regulatory powers to deal with the problems? Why is ownership control rather than regulatory enforcement the preferred solution?
3) Why does the Government think there is greater trust in, and capacity of, the NBU and state banks in the depository field, rather than in the privately owned and managed AUSD?
4) Where will the money come to finance the creation of the CSD, since central budget funds will not be used?
5) What guarantee is there that the CSD will be privatized in the future, after the Government has politicized it by its very own actions?

In Robert Bond’s opinion, the Ukrainian financial press should focus on these questions since obtaining answers would go a long way toward clarifying the issues. Also speaking at the roundtable were Anzhela Prigozhina from the office of the World Bank Director for Ukraine, Belarus and Moldova, who reported the main principles of the above-mentioned letters from the International Financial Institutions; Borys Tymonkin, Chairman of Board of Ukrsotsbank; Artemiy Yershov, CEO of the Troika-Dialogue Ukraine investment company; Vadim Grib, Chairman of the Board of the TEKT Group of Companies; Oleh Tkachenko, Chairman of Board of the Ukrainian Stock Exchange; and Iryna Zarya, President of the Securities Market Partnership Association.

The floor was also given to Serhiy Rumpa, Chairman of Board of the National Depository of Ukraine, and Mykola Shvetsov, Chairman of Board of the All-Ukrainian Securities Depository, who described the differences between the two depositories’ approaches. Viktor Stetsenko, Deputy Head of the USAID Financial Sector Development Project, also took part in the summing up of the 2-hour-long discussion.

July 1, 2011

Road Map of the IFRS Introduction in Ukraine is Made by Regulators with the Assistance of Business

“The reforms being implemented by the Government in the area of accounting will make the Ukrainian economy more attractive for foreign investors and attract capital to Ukrainian enterprises.” With these words, Mr. Mykola Chmeruk, Director of the Department of Tax, Customs Policy, Income, Payment Administration, and Accounting of the Ministry of Finance, kicked off his speech at the roundtable “Action Plan for Introducing the International Financial Reporting Standards (IFRS) in Ukraine in the Context of the Adoption of Legislative Changes”. The event was organized by the Ministry of Finance of Ukraine, the Ukrainian Federation of Accountants and Auditors of Ukraine (UFAAU), with the cooperation of the USAID Financial Sector Development Project (FINREP). It brought together about 70 accounting professionals. The implementation of the Law “On Accounting and Reporting in Ukraine” passed in May, 2011 was the main subject of the roundtable discussion. The Law envisages that from January, 2012 all public joint stock companies, banks and insurance companies will prepare financial reporting according to the International Financial Reporting Standards (IFRS). Oleksandr Papayika, President of the Ukrainian Federation of Accountants and Auditors of Ukraine and an advisor to the Prime Minister, called the adoption of IFRS “a significant even,” and noted that Ukraine would become the 127th country to use IFRS. “These standards have become a favorite language of business”, Mr. Papayika said. Therefore he was sure that nobody doubted the correctness of the decision approved by Parliament. In a panel on “Legislative and Regulatory Principles of the IFRS Introduction” regulators explained in detail how their agencies would introduce IAS in their subordinated structures, and how possible problems that might arise would be solved. Specifically, Mrs. Vira Rychakivska, Deputy Governor of the National Bank (NBU), shared the experience of converting the banking system to IFRS, since accounting reform began first in banks as far back as January 1, 1998. Mrs. Rychakivska stated that the efforts of the NBU Department of Accounting have been concentrated on finally bringing the methodology of accounting at banks in compliance with IFRS. “By the end of the year NBU will approve a new Instruction on preparation and submission of financial reporting by banks of Ukraine”, Mrs. Rychakivska said. In his turn, SSMSC Commissioner Burmaka proposed to extend IFRS not only to public companies, but also to professional stock market participants. He is sure that issuers’ converting to IFRS will make it possible to upgrade the quality of information disclosure for investors both at the stage of securities placement and during their circulation. Mrs. Valentyna Levchenko, Deputy Chair of the State Commission for Regulation of Financial Services Markets of Ukraine told about the planned steps of the State Commission for Regulation of Financial Services Markets of Ukraine related to the IFRS introduction for the nonbank financial services market, specifically drafting Guidelines on IFRS application for insurance companies and non-state pension funds. Oleg Kantsurov, Director of the Minfin Department of the Methodology of Accounting, informed that the Ministry of Finance had already signed Memorandum on cooperation with NBU, according to which both regulators undertook to exert every effort in the IFRS introduction in Ukraine. During the roundtable, participants were invited to join this Memorandum and render assistance in the implementation of the measures envisaged by it. Among the priority activities are: translation of the IFRS text and relevant guidelines into Ukrainian, preparation of a regulatory framework required for the IFRS introduction in Ukraine, publication of information through various communication channels, training of specialists and elaboration of certain provisions and guidelines which should ensure efficient state supervision over reporting in IFRS. The Government has already taken major steps to implement IFRS: working groups on IFRS introduction have been set up, Minfin made more active its cooperation with the London International Accounting Standards Board (IASB), a translation and publication editorial committee which would deal with an IFRS translation has been established. The Ministry of Finance jointly with its partners has been working on creating a special portal on best practice of the International Financial Reporting Standards application. Mr. Mykola Chmeruk informed those present that the Cabinet of Ministers submitted to Parliament a draft law that proposes to amend the Tax Code to conform to international standards in calculating taxes (in the cases when income and losses are evaluated according to international accounting norms). “The fact that finally the international standards “acquired the right of residence” is a significant event”, Oleksandr Papayika said summarizing the roundtable. “And the principal result is that Ukrainian companies will obtain access to foreign investments and capital owing to financial reporting being more comprehensible”. He was entirely supported by Mr. Robert Bond, FINREP Chief of Party, who assured that the introduction of transparent and globally acceptable financial reporting standards will be of decisive importance for Ukraine in the course of attraction of foreign investments. “USAID applauds this important step of the Government of Ukraine, Mr. Bond said. “And for me it is especially gratifying that Ukraine follows this course. USAID continues to remain a partner of the Government for rendering assistance in this conversion process”. ROUNDTABLE MATERIALS

June 22-24, 2011

FINREP provides training on REPO, Derivatives

On 22-24 June 2011, the USAID Financial Sector Development Project (FINREP) conducted training workshops on derivative financial instruments for financial market participants and the National Bank of Ukraine (NBU). Mr. Paul North, formerly of the London International Financial Futures Exchanges (LIFFE), delivered the lectures.

The first workshop entitled “REPO and Derivatives Market” was held on 22 June, and was directed at treasury staff members of commercial banks, traders, and specialists of financial firms and stock exchanges. The second workshop was on “Use of Intermediate Financial Derivative Instruments” and held on 23-24 June. The target audience was specialists of the General Monetary Policy Department and of other key departments of the National Bank of Ukraine. The objective of this intensive two-day workshop was to expand the scope of knowledge of the NBU staff members on derivatives so as to ensure effective and proper regulation future of this market.

During the two workshops, Mr. Paul North gave an overview of the REPO and derivatives market structure, explained the common methods of hedging risks by means of these instruments, and outlined the “rules of the game” on the derivatives market and the role of its participants, with a particular emphasis on the matters of clearing and settlement. Participants learned about special features of derivatives, their use and the risks involved. They also received answers to their questions about: the advantages and disadvantages of derivatives trading on exchanges and on the over-counter market, the importance of a clearing house; the functions of a central counterparty; and of institutions that may potentially perform this function, as well as the process of margining involved in REPO and derivatives transactions. The NBU officials were receptive to the idea proposed by Paul North that the market development should start from the launch of REPO transactions, and that on this initial stage of its development NBU might act as the central clearing agent for REPO transactions, since their underlying assets will be exclusively government bonds.

“We are certain that such specialized, highly professional lectures constitute a core requirement to the growing needs of the market”, said Paul Roberti, FINREP senior public debt advisor. “There is a pressing need to clarify the rules of transactions with financial instruments that are new for Ukraine”, said Dr. Robert Bond, FINREP Chief of Party, who assured that this USAID Project stood ready to provide further support efforts of Ukraine’s financial markets participants and regulators as regards the development of up-to-date financial instruments.

June 9, 2011

FINREP Expert Took Part in Public Debates on a Draft Law to Protect the Rights of Creditors and Borrowers

"The current version of the draft law “On Amendments to Certain Laws of Ukraine in Relation to Protection of Creditors’ and Financial Services Consumers’ Rights” is not balanced between protecting consumers' rights and creditors' rights," said Yulia Vitka, Head of FINREP’s Legal Department, at the financial press-club meeting entitled "The Law on the Rights of Creditors and Borrowers: Will It Ensure the Protection of Interests of Financial Services Customers?". The strengths and weaknesses of the draft law #7351 were the subject of this discussion held by the League of Financial Development and supported by the USAID FINREP Project. The occasion for the discussion was the draft law’s passing the first reading in the Verkhovna Rada. Discussion participants were: Viktor Novikov, Director of the National Bank of Ukraine’s (NBU) Legal Department; Anatoliy Maksyuta, Deputy Minister of Economic Development and Trade; Yulia Vitka, Head of FINREP’ Legal Department; and the chairmen of several commercial banks: Dmytro Zinkov (OTP Bank), Serhiy Podrezov (Oschadbank), and Boris Tymonkin (Ukrsotsbank). Mr. Novikov, who was the key speaker, stated that the mentioned draft law is a compromise between borrowers’ and creditors’ rights. He explained in detail the most significant innovations proposed in the draft law. For example, the draft law would allow for early repayment of consumer loans without penalty; it would introduce a mechanism of “floating” rates and ban individual consumer loans in foreign currency it would further require contract language and format to be more transparent (including doing away with “small print”); and would oblige banks to inform the consumers about transferring their rights under the consumer loan contract to a third party. The representatives of the banking sector generally supported the draft law, hailing it as a progressive financial sector law. Mr. Podrezov, Chairman of the state-run Oschadbank, stated that the draft law #7351 is a means to protect creditors from fraudulent delinquent borrowers. Mr. Zinkov, Chairman of OTP Bank, added that the new law would eliminate several schemes used by delinquent debtors in the attempt to avoid their obligations under loan agreements, such as intentional bankruptcy of individual-businesspeople or the fraudulent reorganization of companies. The bankers also viewed as positive the proposed amendments to the Criminal Code that would significantly raise the level of responsibility of the real owners of companies who do not repay the loans. FINREP’s Ms. Vitka on the other hand, stated that the current version of the draft is still not balanced, as it does not sufficiently protect the rights of financial services consumers. As an example, she mentioned the mechanism of changing floating interest rates in loan agreements, which is not clearly defined by the draft law. “If the index which is linked to the rate goes in favor of the borrower, the bank may change the rate, but is not obligated to do so,” Ms. Vitka said. She also mentioned that the proposed procedure of forced eviction of defaulted mortgage debtors from their premises is a throwback to Soviet times and needs to be revised. The FINREP legal team has already sent its proposal for further changes to the authors of the draft law. The roundtable participants agreed that protecting consumers of financial services is a key issue, in particular because enforcement in this area is lacking in Ukraine. According to Ms. Vitka, Ukraine's western neighbors the Czech Republic, Slovakia, and Croatia - have separate state agencies that regulate this area and have the authority to impose sanctions. "The Slovak Trade Inspectorate may impose a fine of 70,000 Euros on a bank or its officials for one violation, and 140,000 Euros for the second violation," said Ms. Vitka. Deputy Minister of Economic Development and Trade Maksyuta suggested the use of mediation for the settlement of disputes between banks and consumers, instead of court proceedings. He proposed to investigate the experience of other countries with their Financial Ombudsman offices, which he stated seems to work effectively.

May 23, 2011

FINREP Helps Develop a New Financial Instrument

”Regulation of the REPO market in Ukraine should be convenient for the majority of market participants. The subject of REPO is not only interesting and complicated, but also profitable, and therefore, necessary for the market.” With these words, Mr. Sergiy Biriuk, Commissioner of the Securities and Stock Market State Commission, kicked-off the roundtable “REPO Market Development in Ukraine: Current Status and Growth Prospects.” The event was organized by the USAID FINREP Project and the “Securities Market Partnership” Association, and brought together about one hundred participants. The purpose was to discuss a strategy for the development of the REPO market in Ukraine and to elaborate a specific action plan for implementing a financial instrument that is new for the Ukrainian financial market.

During the roundtable discussion, three key sets of problems were identified which restrain the REPO market development. First, the issue of state regulation of market activity was raised. The current REPO market is regulated by separate regulations (Tax Code, NBU regulations, and certain regulations of the Ministry of Finance) in a fragmented way. There is no clear structure for regulation of this market.

In the Ukrainian legal framework, the REPO market remains a poorly regulated area. Some participants of the discussion believe that the state should regulate the REPO market as little as possible, and argue that the existing legal framework makes it possible to develop this market without participation of the state. Others, to the contrary, believe that REPO market regulation is required, and that without the support of the state regulators and a separate regulation to regulate the REPO market, there will be no active growth of the market. Thus, Oleksiy Tarasenko, Director of the Department of Methodology of Securities Market Regulation of SSMSC, suggested that the lack of sufficient state regulation is the reason that banks do not operate on the present market. “If there is no legislative regulation on this market, banks will not operate there,” Mr. Tarasenko said. Commissioner Sergiy Biriuk believes that the Commission still does not have a definite answer regarding the issue of the REPO market regulation, and that is why it is now reviewing strategies of REPO market regulation in different countries.

Secondly, in the process of the discussion it turned out that the most difficult problem of the REPO market was taxation of such transactions. The ambiguous legal interpretation of the economic essence of the REPO transactions in the Tax Code, and in other regulatory documents, results in potential disagreement between the State Tax Administration and market participants. “These differing interpretations could lead to very different taxation treatments”,” Andriy Potapov, Head of the Department of Financial Markets of ING Bank Ukraine, said. In the opinion of Mrs. Oksana Paraskaieva, Head of the Department of Securities of Marfinbank, the legal risk remains a primary and so far unsolved problem of the REPO market.

The majority of participants of the roundtable believe that it is necessary to start the market development by establishing a Global Master Agreement of REPO market participants. “Such a General Agreement, first of all, should minimize the risks that arise when market participants conclude REPO agreements. There are settlement risks and the risks of possible default of the securities issuer’s that are the subject of the REPO agreement,” stressed Sheila Tschinkel, USAID/FINREP expert who delivered a speech during the roundtable meeting. The US expert was supported by Dmytro Lazariev, Head of the Section of Dealing Operations of Erste Bank, who argued that a clear mechanism and technology of REPO agreement regulation which would function in case of default should be established. He suggested that in addition to setting up a REPO committee, a committee on settlements of payments on the stock exchange be established.

Mrs. Iryna Zaria, President of the “Securities Market Partnership” Association, the roundtable moderator, is sure that the development of a master REPO agreement should result in expanding a REPO instrument demand and supply and enhancing the investment attractiveness of the Ukrainian economy as a whole. “It is important that market participants seize this opportunity to move the REPO market forward themselves,” - FINREP Project Chief of Party Robert Bond noted “Only by working together will it be possible to form an optimal environment – a general agreement, regulations, required exchange and settlement infrastructure,” Mr. Bond assured. Mr. Michael Martin, Head of the USAID Office of Economic Growth, stated that arrival of additional liquidity in the market and enhancement of competitiveness of the Ukrainian economy will become a primary macroeconomic result of the REPO market recovery. “This, in turn, will result in an increase of investments in the country,” Mr. Martin underlined.

May 18 - 20, 2011

IFRS For Ukraine Moves Forward

FINREP partnered with the Ukrainian Federation of Professional Accountants and Auditors (UFPAA) to organize an international conference entitled “Prospects for Development of Accounting, Auditing and Analysis in the Context of Euro-Integration,” which was held in Odessa from May 18-20, 2011.

Several senior Ukrainian authorities on accounting, auditing, and financial reporting gave presentations at the conference. The conference presented Ukraine’s professional accounting community with an opportunity to learn first-hand the efforts of Ukraine’s regulators to implement IFRS in Ukraine, and provided the community an occasion to voice concerns and ask questions about Ukraine’s adoption of IFRS. About 150 accounting professionals attended the conference.

The conference was opened with welcome addresses from Alexander Papaika, President of UFPAA, Mikhail Zveryakov, Professor and Rector of the Odessa State Economic University, and Dr. Robert Bond, Chief of Party for FINREP. The first working session focused on international experiences of implementing IFRS. Ms. Aldona Kamela-Sowinska, a former Minster of Treasury in Poland, spoke on the role of the International Federation of Accountants (IFAC) in establishing IFRS as the world’s international language for accounting. Mr. Henri Fortin, Head of the World Bank’s Centre for Financial Reporting Reform (CFRR) in Austria, followed with a presentation on how the adoption and implementation of IFRS transpired in the European Union (EU) over the last decade. Mr. Zurab Lalazashvili, Chairman of the Georgian Federation of Professional Accountants and Auditors, then delivered a synopsis of IFRS implementation in Georgia as a case-study in transitional issues in former Soviet republics.

Mr. Oleg Kantsurov, Head of the Accounting Methodology Department at the Ministry of Finance of Ukraine, and Mr. Bohdan Lukasevych, Chief Accountant at the National Bank of Ukraine, closed the first working session with presentations on what steps the Ministry of Finance and the National Bank of Ukraine have taken to implement IFRS and how the two regulators plan to cooperate in the future. Mr. Kantsurov stated that a key mission of the Ministry of Finance is the successful realization of the Presidential Administration’s Program of Economic reforms (2010-2014) to establish a stable economic environment in Ukraine. Accounting reform is one key component for modernization of the national economy and a strategic aim of the Ministry of Finance is to improve accounting and the financial reporting system to be consistent with international standards and EU legislation. Mr. Lukasevych detailed how banks started moving towards IFRS-based reporting in 1998 and that, as of today, the accounting methodology in Ukraine’s banking sector is almost fully compliant with IFRS, with some discrepancies in the procedure of forming reserves. Mr. Lukasevych also noted the lack of a well-developed market infrastructure for defining the fair value of financial instruments, the lack of a proper legislative base that is consistently updated, and differences between accounting and tax legislation.

The second working session focused on how accounting, auditing, and public disclosure of information affects the overall investment climate in a country. Mr. Nikolai Burmaka, Commissioner of Ukraine’s Securities and Stock Market State Commission (SSMSC), opened the session with a presentation that outlined the need for greater financial disclosure by public financial institutions. Mr. Burmaka has been a strong proponent of increased public access to financial information. In November 2010, the SSMSC mandated disclosure of financial reporting for public companies under IFRS beginning in 2011, and implemented use of the Electronic System for Comprehensive Information Disclosure (ESCRIN) in January 2011. ESCRIN allows companies to submit financial data electronically in compliance with both Ukrainian Accounting Standards and IFRS, which can then be viewed by the public. Ms. Valentina Levchenko, Deputy Head of the State Commission for Regulation of Financial Services Markets in Ukraine (FSR), discussed the current status of IFRS implementation for non-banking financial institutions, such as insurers, non-state pension funds, and collective investment (mutual) funds. In 2009, the FSR approved an action plan for implementing IFRS for non-bank financial institutions. Also, a new procedure for reporting by non-state pension funds was introduced that is based on the IFRS 26 guidelines for disclosures by private pension funds. Ms. Levchenko also noted the lack of methodological materials for converting to IFRS and the lack of specialists familiar with IFRS.

Mr. Andrei Busuioc, Financial Management Specialist also from the World Bank’s CFRR in Austria, followed with a presentation on how IFRS financial statements and disclosures promote investor confidence. Dr. Michal Skopowski, an expert from the Business Reporting Advisory Group, then introduced the IFRS-XBRL taxonomy as the future of worldwide financial reporting. Mr. Paul Van Geyt, Audit and Accountancy Expert for the Institute of Enterprise Auditors in Belgium, spoke about how the role of auditors evolved in Belgium. Ms. Jurgita Kirvaytiyene, President of the Auditors Chamber of Lithuania, delivered a parallel report on the auditors role in Lithuania. Mr. Ivan Nesterenko, Chairman of the Auditors Chamber of Ukraine, then addressed the conference on Ukraine’s experience with regard to auditors and the audit function in Ukraine. The session ended with an address by Mr. Nikolai Gaidai, Head of the Accounting and Audit Methodology Department at Academy of Finances, under the Ministry of Finance, on prospects for improving the regulation of audit activity in Ukraine.

The third working session was opened by Ms. Natalia Vovchuk, Head of the Ukrainian Representative Office of the Association of Chartered Certified Accountants, who gave a presentation on future avenues accounting professionals may pursue in Ukraine. Ms. Elena Velichko, Department Deputy Head of the SSMSC, spoke on how IFRS implementation will affect Ukraine’s stock markets. Mr. Andreas Philippou, Director of Baker Tilly Klitou in Cyprus, followed with a review of the IFRS implementation experience in Cyprus. Ms. Nadezhda Konovalenko of Ernst & Young then discussed the practical implementation of IFRS by Ukrainian companies. Mr. Mikhail Melnik of Deloitte & Touche, ended the third working session with a review of challenges faced by Ukrainian companies to implement IFRS and improve the quality of financial reporting.

The final session began with an address by Dr. Lyubov Napadovskaya, Head of the Accounting Chamber at the Kyiv National Trade and Economics University, on the subject of developing accounting in Ukraine during times of global change. Mr. Vitaliy Gavrysh of Baker Tilly Ukraine and Ms. Olga Kulaga of Ukrgazbank both spoke on the issues of professionalism and ethical standards of professional accountants. Ms. Valentina Maximova, Head of Accounting and Audit Department at the Odessa State Economic University, presented a synopsis of the changes necessary in the standards and curricula of institutions of higher education. The conference’s final speaker was Ms. Svitlana Zubilevych, Professor and Head of UFPAA’s Education Committee, who addressed the availability and need for continuing professional education of accountants in Ukraine.

The conference participants generally agreed on the proposed reform of IFRS implementation. However, three major areas of concern were raised: 1) creating a clear legal and regulatory framework for IFRS implementation with a corresponding official translation of the updated version of IFRS; 2) locating the funding necessary for training on IFRS conversion; and 3) how to properly supervise/regulate auditors to improve the credibility of Ukraine’s financial reporting. The Ministry of Finance announced during the conference that it had finalized its memorandum of cooperation with the National Bank of Ukraine on implementation of IFRS. This joint cooperation hopes to address these three concerns and efforts will begin shortly to implement IFRS in Ukraine. The memorandum addresses several action items to move the implementation of IFRS forward in Ukraine. These measures include: 1) making an official translation of the current IFRS texts, glossary, and guidance; 2) developing a regulatory framework for the implementation of IFRS; 3) conducting public outreach and providing information on IFRS and the first-time application of IFRS; 4) creating a free, online resource for end-users to obtain data on IFRS; 5) educating accountants that are required to report under IFRS; and 6) creating regulation to ensure effective oversight of IFRS reporting.

FINREP intends to support several measures included in the memorandum that coincide with FINREP’s own action plan for technical assistance in the implementation of IFRS in Ukraine. These measures will include assistance in creating an updated IFRS translation and supporting materials, the creation of open-source guidance on the application of IFRS, and support of IFRS training seminars for both governmental and professional organizations.

CONFERENCE MFTERIALS

April 13 - 15, 2011

FINREP Supports Participation of Government Officials in an International Pension Conference

Public understanding of the pension “rules of the game,” effective management of pension funds, political independence and transparency – these are the main conditions of enhancing the reliability of pension systems. This was the tenor of the conference entitled “New Reform Directions in Privately Funded Systems”, which took place in Tallinn on April 13-15, 2011. The event was organized by the World Bank and the NASDAQ OMX Tallinn exchange. Distinguished pension experts from 20 countries participated, along with four representatives of Ukraine (Mr. Serhiy Chervanchuk, Advisor to the Vice Prime Minister of Ukraine Mr. Tihipko, the Cabinet of Ministers of Ukraine; Mr. Andriy Lytvyn, First Deputy Head, the State Commission for Regulation of Financial Services Markets of Ukraine; Ms. Tetiana Matyukh, Head of Department the Ministry of Social Policy; and Ms. Anastasia Danovska, Head of Pension Reform Unit, the Pension Fund of Ukraine).

Adjustment of “pension” policy by governments as a result of the financial crisis was the subject-matter of many speeches. In the course of the financial crisis, it became apparent that that Pillar II and Pillar III of several European countries were vulnerable not only to economic risks (when the pension assets value plummets), but to political ones as well (when Pillar II and Pillar III operation rules were changed unilaterally by governmental authorities). “Previously we believed that politicians would not be able to interfere with Pillar II operation”, Veiko Tali, Secretary General of the Ministry of Finance of Estonia, told to the forum participants, “However, after the state suspended making contributions in behalf of Pillar II participants in 2009-2010, all understood that Pillar II monies are also vulnerable to political risks”. In the opinion of Natalia Goryuk, Senior Pension Lawyer of the FINREP Project, the participation of the Ukrainian authorities was important because the government is now preparing the final version of the Draft Law “On Pension Reform Legislative Measures”. One main conclusion that could be learned from the forum is: pension legislation should minimize as much as possible a possibility of “political” influence on accumulation pension systems. “The population will believe in pension changes only if the rules of Pillar II and Pillar III operation are transparent, permanent and will not be changed on political grounds”, Mrs. Goryuk says.

Much of the conference was devoted to narrow professional issues of management of pension assets. Topics that were addressed included: reliability of record keeping of pension contributions; disclosure of information on the state of an accumulation account; pension fund rate of return; annuities (annuity payments). In addition, participants of the conference touched upon the problem of high administration costs of pension assets management. On the second day of the conference, participants visited the office of the NASDAQ OMX Tallinn exchange where the Portfolio 3000 system was demonstrated in detail. The system makes it possible to account the pension fund asset portfolio round-the clock, to determine a net value of pension assets and a net value of pension assets unit, and to exercise monitoring of pension fund activities by the Estonian Securities Commission.

April 6 - 7, 2011

FINREP and NBU Study Repos in London

USAID/FINREP initiated a study trip to London for an intensive two day course on repurchase/reverse repurchase agreements. FINREP representatives Paul Roberti, Senior Sovereign Debt Advisor, and Alina Chernomaz, Sovereign Debt Analyst, were accompanied by two senior officials from the National Bank of Ukraine, Serhiy Chechel, Division Head for Investment Operations and Stock Market and Grygoriy Vagis, Deputy Unit Head, Foreign Exchange Reserve and Open Market Transactions.

The introduction of repurchase agreements and their expanded use is the next important step in development of the sovereign domestic debt market in Ukraine. A functioning repurchase agreement would be the foundation for an active money market, allow for a relatively risk free mode for secured lending, and provide a continuous yield curve from one day to five years.

The course, taught by Paul North, former director of education for London Interbank Financial Exchange, LIFE, covered such topics as a definition of repurchase agreements as a transferring of title to underlying collateral to allow for relatively risk free collateralized lending, the use of Haircuts and Margining, and the role of repos in preventing a significant worsening of the 2008-09 financial crisis. North continued with explanations of how diverse entities could employ repurchase/reverse repurchase agreements in their daily operations: corporation managing cash flows; municipalities lowering borrowing costs; central banks utilizing repos to both manage reserves for setting and maintaining monetary policy. The course syllabus covered both lecture material as well as several hands on examples employing repos in several different modes. The course also introduced participants in a preliminary way to the use of derivatives from euro dollar and interest rate futures to credit default swaps and their interaction with repos.

All participants came away with an increased knowledge of repurchase agreements, their strategic role in market development, and the necessity for their development in Ukraine. FINREP is contemplating bringing Mr. North to Kyiv for additional lectures on both repos as well as derivatives in the near future.

March 16 - 17, 2011

Representatives of the Financial Sector Development Project (FINREP) Participate in Training NBU Regional Offices Staff

At a three day seminar organized by the National Bank of Ukraine for its regional offices, FINREP delivered three lectures on the operation, structure, control, and regulation of the repurchase agreements market, or REPO market.

Mr. Paul Roberti, FINREP Project Senior Government Debt Advisor, provided trainees an overview of the REPO market in the USA, including the importance of a master agreement, reliable clearance and settlement, and the role of the central bank in establishing a functioning market. In his presentation, he highlighted central banks’ transactions in the REPO market and explained how central banks, government and municipalities can use REPO. “For example, the Federal Reserve is very active in using REPO to manage liquidity,” says Mr. Roberti, “as REPO is a more secure cash management tool than loans. This tool was very actively used by governments and central banks during the latest financial crisis.”

The benefits to Ukraine from launching the REPO market were explained by Volodymyr Vysotsky, FINREP Government Debt Expert. He provided a detailed account of current “rules of the game” of Ukraine’s government securities market, and introducing REPO transactions in Ukraine. REPO can significantly increase demand for equity instruments in addition to ensuring greater safety of investing funds from the MoF single treasury account. “A well-developed REPO market stimulates demand for securities, thus substantially reducing public debt service costs to the state budget,” Vysotsky said.

Also discussed at the seminar was how municipalities (cities) can use REPO transactions to optimize their payment calendar (schedule of receipts and disbursements). Paul Roberti believes that the development of the REPO-market brings benefits not only to the government, which receives a new banking debt and liquidity management tool, but also to market participants who have an additional possibility to manage cash efficiently. That is why, in his opinion, it is important to ensure that both regulators and market participants have a good understanding of this tool (REPO-transactions) which is new to the Ukrainian market.

February 21, 2011

FINREP Speaks in Favor of Central Depository Supported by Market and Compliant with International Best Practices

“According to the investment attractiveness index of the World Economic Forum, Ukraine is trailing at the back. On the investor protection and shareholder protection indices, Ukraine ranks 135th and 138th, respectively. On the financial sector development index, Ukraine slipped from 106th place down to 119th”. These were the opening remarks for the Press Conference “What Central Depository Will Emerge” of Mr. Vasyl Rohovy, Chairman of the Supervisory Board of the All-Ukrainian Securities Depository (AUSD). According to him, investor protection is linked to the reliability of ownership title to securities and, therefore, to the quality of the operation of a depository – the entity that keeps ownership records.

The press conference was held February 21 at the UNIAN agency, with the participation of leading Ukrainian mass media. In addition to Mr. Rohovy, the speakers were Mykola Shvetsov, Charman of the Management Board of the All-Ukrainian Securities Depository, Iryna Zarya, President of the Stock Partnership Association, Angela Prigozhina, Senior Financial Specialist of the World Bank, and Robert Bond, Chief of Party of the USAID Financial sector Development Project (FINREP).

The press conference was sparked by initial steps of the Government to take over control of the securities depository. The Government is proposing the administrative merger between the National Depository of Ukraine (NDU) and “the depository of NBU.” On December 10, 2010, the Government of Ukraine signed a communique with the International Monetary Fund and undertook to “merge two existing depositories in 2011, thus establishing a single central depository”. Since only two legal entities in Ukraine have a license from SSMSC to carry out depository activities and clearing and settlement activities (AUSD and NDU), it was assumed that a merger would take place based on the AUSD, which dominate. However, it turned out that, based on memos of some high ranking officials, Prime Minister Mykola Azarov, gave instructions to create a working group to merge other entities: NDU and “the depository of NBU.” This misunderstanding is difficult to explain. “There is no depository of the National Bank of Ukraine as a separate legal entity,” stated Mr. Rohovy, “There is a separate unit for depository record keeping of securities that was created within the structure of NBU to service government securities trading. This unit is part of the NBU Monetary Policy Department.”

During the press conference, reporters made an interesting discovery: not a single market participant, or representative of the Ministry of Finance (government securities issuer), or of the Presidential Administration had been invited to participate in the working group for the NBU and NDU depositories merger. Stock market participants, represented at the press conference by the President of the largest stock market association “Stock Partnership” Ms. Iryna Zaria, were surprised at the prospect of establishing a central depository without market participants and the largest player in the depository services market - AUSD.

An attempt to put the record keeping infrastructure of the stock market under government control finds no support whatsoever from professional market participants. “When a scheme to create a single depository is selected, at least several proposals, rather than one proposal, should be considered. There cannot be just one merger scheme imposed by someone,” said Iryna Zaria at the press conference. In her opinion, merger scheme selection criteria are clear and evident: the execution of securities trades must be fast and cheap. “Besides, the scheme should be accepted by market participants and the international community, it must be understandable to foreign investors,” added Ms. Zaria.

Chief of Party of the USAID Financial Sector Development Project Robert Bond is confident that there is no legitimate reason for the state to own a central securities depository. «Of the 27 European Union member states, only four have majority state-owned depositories for corporate securities: Cyprus, Malta, Bulgaria and Poland; and Poland has announced its intention to privatize its depository,” said Dr. Bond. As an example, he mentioned Russia that has two depositories for corporate and governmental securities, and both are majority privately owned. “Global experience shows that there is a model where the state has a minority interest in the authorized capital,” pointed out Dr. Bond.

In the opinion of the World Bank Senior Specialist Anzhela Prigozhyna, it is very important now for the Government to expand the working group for the establishment of a single depository, “The working group should equally represent all stakeholders including banks, investment funds that have to use the services of a depository, and it is they who should have their say regarding the streamlining of this process of creating an effective environment for making settlements and attracting investments into Ukrainian securities.”

The model of establishing a single securities depository in Ukraine should be selected only after public discussion and not through separate backroom arrangements and behind-the-scenes agreements. This was a recurrent theme of the press conference. Mr. Vasily Rohovy said: “Market participants are now practically fenced off from the issue of establishing a single depository; nobody is asking the opinion of the market. Such approach is harmful to the image of Ukraine.”

According to Vasily Rohovy, the sooner Ukraine has a merged central depository that is not only understandable to professional market participants but also compliant with international best practices, the higher will be the investor confidence level and the sooner the state can provide high quality depository services to investors. The high quality infrastructure is a prerequisite to the development of the entire stock market, raising of foreign investments and improvement of the investment attractiveness of the country.

Central Securities Depositories: Key Facts; February 21, 2011

February 17, 2011

Deposit Guarantee Fund Studies Best International Practices

"The Ukrainian banking system is growing so fast that the current system to guarantee deposits is lagging behind. That's why there is a need to transform significantly the activities of the Ukrainian Deposit Guarantee Fund on the basis of the best international experience," said Vasyl Pasichnyk, Director of the Deposit Guarantee Fund (DGF), at the opening of the workshop "Resolution of Troubled Banks: The Experience of Turkey’s Savings Deposit Insurance Fund.” The three-day seminar was held on 15-17 February 2011 by the Deposit Guarantee Fund (Ukraine) and Savings Deposit Insurance Fund (Turkey), with the support of USAID’s Financial Sector Development Project (FINREP). The main task of FINREP is to increase confidence in the Ukrainian financial sector. One of the project’s key components is to provide technical assistance to the Deposit Guarantee Fund. In close cooperation with other donors, FINREP is assisting the DGF in the development of its new functional structure, staff training and education, and drafting laws and regulations governing the deposit insurance scheme in Ukraine and the DGF’s powers. This training exercise was made possible after the deposit guarantee funds of Turkey and Ukraine signed a memorandum of cooperation. "The work of the Turkish fund is very similar to our realities and we can borrow a lot from them," the DGF Deputy Executive Director Andriy Olenchyk said at the workshop. Last December the DGF experts traveled to Turkey to study the experience of Turkey’s Savings Deposit Insurance Fund. According to the DGF representatives, the workshop was very helpful, as their colleagues from Turkey had shared their own "recipes" to create a successful deposit insurance system. The most interesting topic for discussion was the issue of reshaping the Fund’s powers during the financial and currency crisis. The lecturers were the key managers of the Savings Deposit Insurance Fund of Turkey. Fatih Deniz, Director of the Fund’s Department on Strategy Elaboration, presented in detail the current strategy of the Turkish fund for the coming years. He also reviewed the current Turkish banking legislation in the area of deposit insurance issues. His colleagues from Turkey, including Haluk Ersoy and Bulent Navruz, also reported on the current organizational structure of their fund and its Human Resources and Public Relations strategies. The workshop’s participants were keenly interested in the presentation by Cigdem Akdag, a specialist of the fund. She described the fund's direct work with the troubled banks and the practice of insolvent banks’ withdrawal from the financial services market. The lecturer told in detail about the proceedings of the fair assessment and sale of the troubles banks’ assets, as well as all the legal and court proceedings done by the fund with the assets and liabilities of the troubled banks. The further development of the DGF’s work will depend on how fast the new version of the Law "On the System of Guaranteeing Private Deposits” will be passed. The law’s draft was the topic of active discussion at the workshop. Vasyl Pasichnyk told the participants that the draft law has been prepared jointly by the Deposit Guarantee Fund, the National Bank, the Presidential Administration and the Cabinet of Ministers. The main innovation which is incorporated in the draft law is the DGF’s exclusive right to set up temporary administration of a bank. "Now this is being dealt with by the National Bank only, so the decisions to withdraw banks from the market are not made timely. We must find a new way, where the main objective is to learn how to work successfully with the troubled banks and troubled assets,” said Vasyl Pasichnyk. With the help of such workshops FINREP will continue to assist the Deposit Guarantee Fund in understanding best international practices. "We hope that this team can make the quick and effective reform of the fund using new knowledge gained at the workshop. We also feel that confidence in the soundness of the financial sector will be increased by early passage of the new law”, said Vern McKinley, FINREP’s Senior Financial Sector Lawyer. "This meeting could hardly have been possible were not the help by FINREP’s management. We are grateful to USAID for their support and hope that our cooperation will continue in future,” Vasyl Pasichnyk said. Seminar Materials