Participants of the UAIB conference in Odessa discussed the challenges and prospects of asset management in Ukraine

Adaptation of the Ukrainian legislation in the field of asset management of institutional investors to the requirements of the EU Directives, problems and prospects of accumulative pension provision, urgent issues of regulation of asset management, development of investment infrastructure and instruments were among the key topics discussed by the participants of the annual scientific and practical conference of the Ukrainian Association of Investment Business "Professional AssetManagement", which was held in Odessa on 9-10^thJune 2017.

During the first plenary session titled "Ukrainian legislation in the field of asset management ofinstitutional investors: on the way of adaptation to the requirements of the EU Directives", which opened theconference, NSSMC Commissioner Olexandr Panchenko noted that the transposition of European law in Ukrainian legislation will take place through the adoption of separate law (concerning UСITS and AIFMD). During the transitional period, both regimes – under the current CII Law and the new law – will be operating. Separate asset management licenses will be provided under the CII Law and for UCITS asset management activities, AIF asset management activities (including management of ELTIF, EuVECA, EuSEF) and asset management activities of UCITS and AIF investment companies.

Furthermore, after the entry into force and application of the new law, the possibility of creating new funds will only be available under the new legislation on CII and AMC, in accordance with the European rules. According to Mr. Panchenko, the Commission considers the deadline for the adoption of such legislation to be 31^st December 2019 based on the date of the beginning of the provisional application of the Association Agreement between the EU and Ukraine – 1^st January 2016 – and the maximum period of 4 years stipulated by the Agreement with regard to implementation of requirements on legal approximation in the field of CII.

Agathi Pafili (EFAMA, Brussels) was speaking about the Single European market, the role of managementcompanies and the vast regulatory framework developments. She briefed the conference participants on the obstacles facing the Single Market for financial services and capital movement, and at the same time stressed the growing role of funds and AMCs in attracting capital to the EU economy (asset management industry reached 138% of EU GDP in 2016).

The number of cross-border products has also been gradually increasing, facilitated by the changes in regulation of the sector that have occurred since the global financial crisis. Among the new initiatives aimed at further deepening the sector's integration process, Ms. Pafili named the planned creation of the Capital Markets Union (CMU) by 2019, the common rules for the provision of investment and insurance products for retail investors (PRIIPs), the creation of a pan-European personal pension Product (PEPP) et al. Regarding the key EU Directives governing AMC and investment funds in the EU – AIFMD and UCITS – review of the implementation of this legislation is scheduled and possible further amendments are expected in 2017-18.

Dr. Armin Kammel (VÖIG, Vienna) focused on aspects of bringing the rules of Ukrainian funds in line with EUnorms. In particular, in his presentation, he emphasised that the AIFMD is a directive governing a management company that manages assets of alternative funds, and not the funds themselves, and there are practically no restrictions on the type, legal form, size or structure of assets. At the same time, the AIFMD is focusing on institutional investors of funds (as opposed to the UCITS Directive, which is intended to regulate the market of funds for retail investors).

Speaking about the experience of the EU member states, which Ukraine should take into account in the process of approximation to the EU law, Dr. Kammel noted that the implementation of the EU legislation by different member states varies both in terms of deadlines and the content of the adopted rules. The reasons for the differences are legal (Directives must be transposed into national legislation, while the Regulations are directly applicable), national (both deliberate delays and lack of time due to a large number of legislative acts requiring implementation practically at the same time). Moreover, there are also delays at the EU level with the adoption of implementing acts, challenges in meeting the requirements in terms of developing necessary new IT products and solutions, etc.

The implementation of the Association Agreement is likely to lead to a significant consolidation both in the banking system of Ukraine and in the stock market, although it is necessary to "calibrate" the EU requirements to the conditions of Ukraine. The main recommendation of Dr. Kammel as for the most promising way forward is to introduce changes one step after the other, and not all at once.

Member of the UAIB Board Grigoriy Ovcharenko (Investment Capital Ukraine LLC AMC) noted that the implementation of the EU legislation under the framework of the Association Agreement between Ukraine and the EU stipulates significant changes in the conditions of work of stock market participants – including collective investment institutions (investment funds) as well as asset management companies. These changes relate to disclosure requirements, risk management, conflict of interest, business conduct, and document (information) exchange between the authorities.

Taking into account the complexity and variety of planned changes, it is necessary to analyse their influence on the activities of today's market participants in order to minimise the negative consequences before the way and timing of the changes are determined, G. Ovcharenko emphasised.

Mindaugas Bakas (National Depositary of Ukraine, NDU) in his speech drew attention to the fact that updatingof the legislative framework and implementation of new Directives takes place on the basis of the regulation adopted by other markets that have already been working somewhere, tested by time and changing market conditions.

But what is the most important is that it corresponds to certain practices of those markets with which we seek to integrate. Implementation of the tested international standards not only improves the quality of our products and services, but also makes them understandable and usual to investors from international markets. Another important point of this process is that bringing the new legislation in line with the realities of the business practice is only possible through the business’s own initiative. Separately, or through the trade associations, the business must propose how exactly to reflect the mechanisms of its work in the updated regulatory framework, and not to ask the regulator how to work under the new legislation.

Anastasiia Gavryliuk, Director of international relations of UAIB stressed that in the process of adapting Ukrainianlegislation in the field of collective investment and asset management to EU law, the (Ukrainian) business should look for opportunities to enter the EU markets to attract both retail and institutional (professional) European investors. At the same time, she noted that the Association Agreement provides for some flexibility, in particular regarding the deadlines for implementation (the beginning of application of new requirements), as well as the forms and methods of legal approximation (adoption of laws or bylaws, the degree of strictness of the requirements, etc.).

Member of the UAIB Board Svitlana Konstantynova spoke about the criteria for assessing independence of financial regulators, the scientific methodology for its determination, and the results of the study of the independence of banking supervision. The latter have demonstrated the lack of a causality between the degree of independence of the regulator and the effectiveness of its activities in terms of contribution to overcoming crises and stimulating market growth. "Each country can choose different levels of independence for different regulatory bodies, guided by the state policy in the regulated market, the institutional capacity of the regulator, the state of development of the regulated market and the state of the economy," she said.

Another relevant topic that was actively discussed by the conference participants was reforming ofthe pension system, in particular, the priorities in forming the basis of the mandatory pension provision, thestatus, problems and prospects of the non-state pension provision, and the need to ensure effective investment of retirement savings.

As Verkhovna Rada (the parliament pf Ukraine) MP Yurii Solovei noted, pension reform can be a key driver for the development of the Ukrainian economy. Unfortunately, the government's initiatives relate only to the reform of the solidarity system. The “modernisation” (indexation) of pensions is important, because since 2011 the size of pensions has not been revised, but the need for systematic reform of the pension system is still not being discussed enough. Mr. Solovei also said that within four months Verkhovna Rada has been working on a multi-faction union, which aims to develop an appropriate package of legislation so that Ukraine will have a substantially reformed pension system as from 2018 that would envisage the introduction of a mandatory accumulative component.

Introducing the main provisions of the Draft Law "On amendments to some legislative acts of Ukraine regardingthe introduction of a pension insurance system," Mr. Solovey emphasised that because the state did not introducea mandatory accumulation pillar ten years ago, we have lost UAH 82.3 bn, which equals to some USD 7 bn of lost investment. It is very difficult to talk about attracting investment if the state does not have its own domestic investor, the deputy stressed.

The representatives of almost all stakeholders on the part of the state – the NSSMC, the National Financial Services Commission, the Ministry of Social Policy, and the Pension Fund of Ukraine – took part in the discussion. Confirming that the government's initiatives only concern the solidarity system and that without the introduction of the second pillar of the mandatory accumulation system, the pension reform will be inadequate, they pointed out the problems and risks faced by the pension system.

Valentyna Kudin (Ministry of Social Policy) urged not to break the concept of solidarity insurance, but to waitand see how the (state) accumulation fund will work, and after two years, if the non-state pension funds (NPFs) show better performance on the quality of services, they will be able to qualify for these contributions.

Vladyslav Mashkin (Pension Fund of Ukraine) stressed the importance of adopting infrastructure solutions, whichwill bring implementation of the accumulation pillar closer. If the accounting system in the accumulative pension fund does not work, there will be nothing. Since these are personal savings, each person should have access to information on their account, the amount of money accumulated, the investment income, and only then decide what to do next, who can be entrusted management of their contributions. He also said that the Pension Fund is now completing the formation of the Register of Insured Persons, in which – according to the law – there will be all information about salary, pension, other payments received by the person. As part of this system, the PFU is ready to introduction of personal savings (accumulation) accounts. While the law is not yet adopted, Mr. Mashkin proposed to work out the respective mechanism for interaction with the IT systems of NPFs.

The Draft Law is now under discussion, there are many controversial issues, but those are mainly myths that the market participants need to refute, said Grigory Ovcharenko. It is critical that a bill that provides for changes in the system of calculations and payment of pensions, unfortunately, does not solve the long-term demographic problem. According to calculations by demographers, by 2050, there will be 1.5 pensioners per one employee. The difficulty is that without the appropriate subsidies from the state, it will be difficult to balance the budget itself, and the replacement rate from today's 35-40% will be 22% or less.

Our common cause is to ensure that the next generation has the opportunity to receive a pension from different sources, and only then will we really implement the European directives, the member of the National Financial Services Commission Olexandr Zaletov stressed. If we are not ready to “release” these services into the market, so that people can choose where to put their retirement savings, this problem will continue for another 10-20 years. Pension funds, which started more than ten years ago, today operate under difficult conditions, but are already making pay-outs and have accumulated some positive experience.

Mr. Zaletov called an attempt to concentrate everything in one’s hands a step back, which would create additional risks. He also called on participants in the non-banking financial market to develop partnerships before the mandatory accumulation pillar is introduced. For only the united market can find and provide arguments for a complex decision of various branches of power, introduction of market mechanisms for raising social standards, he noted.

Olexandr Panchenko called the introduction of the second compulsory accumulative pillar a very important partof the pension reform, and, at the same time, stressed the need to introduce appropriate control and change the principles of regulation.

Tetiana Shevkun, Director of the National Association of Pension Funds and Administrators (NAPFA), spokeabout the problems and risks that today's non-state pension funds have to address, including the threat of loss of their non-profit status due to failure to be included in the new Register of non-profit organisations. She also stressed the need to create new incentives for employers and employees to motivate their participation in the pension accumulation system.

During the discussion of topical issues of asset management regulation, the Head of the Department of Economic Policy of the Administration of the President of Ukraine Oleg Kantsurov addressed the participants. He briefed on legislative changes aimed at ensuring the transparency of the activity results: audit and accounting reform, taking into account the terms of the Association Agreement and the requirements of the EU Directives. Mr. Kantsurov, in particular, focused on the introduction of a new concept – public interest entities. It is envisaged that non-state pension funds and other financial institutions will fall under the scope of the definition. He also spoke about the introduction of taxonomy of financial statements, which will be mandatory for use by entities that prepare those according to IFRS. Answering the questions of the conference participants, Mr. Kantsurov also informed about the introduction of a new system of oversight of audit activity in Ukraine.

Nataliia Zelenetska, Director of Financial and Tax Policy of UAIB, devoted her speech to the impact of thelegislative changes in the audit and accounting system on the market participants. She also focused on the new register of audit firms provided for in the Draft Law on audit of financial statements and auditing activities. She drew attention to the fact that as of 1^st June 2017, the International Auditing Standards, the edition of 2015, are mandatory for application. Changes to these standards include, inter alia, increased accountability of auditors and the need to increase the amount of time spent on auditing. The revision of the IAS requires the amendment of the regulatory acts of the NSSMC, which set the requirements for the audit opinion submitted to the NSSMC.

Speaking about the importance of accounting policy for companies, Ms. Zelenetska analysed the issues that most frequently arise during the preparation of notes to financial statements and also mentioned the possible changes with regard to prudential supervision.

Liudmyla Pidgorodetska (State Financial Monitporing Service of Ukraine, SDFM) noted in her presentation titled"Risk-Oriented Approach in the Work of the SFM" that during the period from 1^st Jan 2014 to 6^th June 2017, SDFM has received 28,236 suspicious transaction reports from AMCs, which amounts to 61.6% of the reports of all stock market participants. At the same time, the share of communications on transactions subject to internal financial monitoring for the same period fell from 35.3% to 3.5%.

Ms. Pidgorodetska focused on the components of the risk-oriented approach and gave examples of the use of securities transactions and AMCs in the schemes of withdrawal of capital and cashing.

Igor Andrusyk, Director of the Rating Agency "IBI Rating", told about the changes that are expected in regulationof rating agencies' activity in order to increase their responsibility and quality of work. He noted that, despite the abolition of mandatory rating, credit ratings remain an important tool for assessing investment risks. While testing your risk mechanisms, you do not have to rely solely on the rating, at least two instruments should be used to objectively assess the risks of investing, he stressed.

The conference concluded with a panel discussion of tools and infrastructure for investment.

Characterizing the current market situation, Sergii Biriuk, Advisor to the Director General of UAIB, presented statistics showing a significant decrease in the volume of trading over the past three years, noting that the stock exchanges today comprise only 11.8% of the total stock market. Government bonds are the most traded securities, while equities, corporate bonds and derivatives are traded in the smallest volumes.

There are changes in the depository system underway, while, because of distrust, domestic investor does not come in the market, and foreign investor is in no hurry, too. There are different views on how to change the situation and which model to introduce. It is only clear that reforms are needed and their outcome will depend on the efforts of all stakeholders, he emphasised.

Speaking about his vision of the situation, Vyacheslav Korol (ART Capital Management LLC AMC) focused on the consequences that could arise with the adoption of the Draft Law No. 5592-d "On Amendments to CertainLegislative Acts of Ukraine (Concerning Simplification of Business and Investment Attraction by Securities Issuers)".He stressed the impossibility of fulfilling the diversification requirements for the assets of CIIs and NPFs, and proposed to develop and implement amendments to the relevant (draft) laws as soon as possible in order to resolve the situation.

Andriy Moroz (Secretariat of the Verkhovna Rada Committee on Finance and Banking) assured the conferenceparticipants that the Committee was open to cooperation with the market. He spoke about the status of passing Draft Laws, which are currently under consideration in the parliament and directly affect the stock market of the country.

Addressing the prospects for new instruments, Mindaugas Bakas noted that the Central Depository (NDU) was one of those initiating changes in legislation on simplifying the admission of foreign securities in Ukraine and is ready to provide market participants with their services in this regard.

Oleg Tkachenko (Ukrainian Exchange, UX) noted that there are many prohibitions in the Ukrainian securitiesmarket and there are no opportunities for development. In his opinion, the normal development of new technologies in the market is hindered because of the monopoly. He is convinced that the regulator should direct market participants in the process of their development, rather than go ahead of them. Mr. Tkachenko also informed that stock exchanges are ready to offer new opportunities, in particular, UX offers high-quality services in the market of government bonds.

Maksym Libanov (NSSMC) focused on the main aspects of the Draft Law No. 5068 "On amendments to certainlegislative acts of Ukraine regarding certain types of bonds", noting that it will promote the development of thecorporate bonds market and create conditions for the effective protection of the rights of owners of corporate bonds, state bonds as well as municipal bonds, bonds of international financial organisations and mortgage bonds.

See more in the materials of the conference(for UAIB members).

The conference was held with the support of the USAID Financial Sector Transformation (FST) Project.

The information partners of the conference were the League of Insurance Organisations of Ukraine, the Professional Association of Corporate Governance, the Association "Ukrainian Stock Traders", the Internet portal FinPost.com.ua.