The stock market index in Ukraine known as the PFTS can be compared to the Dow Jones in New York or the German Dax. PFTS stands for the First Stock Trading System.In Ukraine the dynamics of forced growth in the PFTS stock index is being observed. As of March 1, 2006 its indicators have reached 433.89 points. At first glance, this may look like a huge positive phenomenon or trend. However, the paradox in the situation on any given stock market is in the fact that a rise in the value of securities occurs in tandem with a cooling down of a country’s economic growth. Naturally, one can explain this trend by the same Russian or European companies. However, this argument is not all that convincing.

In reality, many experts have a tendency to interpret the galloping growth of the local stock market based on loud and premature declarations of government officials about the plans for the privatization of certain state enterprises, in particular LuhanskTeplovoz and Ukrtelecom.

Background

The history of the securities market in Ukraine began in 1991, when one of the first legislative documents on the stock market - the Law of Ukraine On the Securities and Stock Market - was approved.

In 1995-96 the PFTS was opened (First Stock Trading System). This is an organization of professional players on the stock market and its own unique "electronic exchange" of securities in Ukraine, which covers all of the largest provincial centers and supports the operation of a national electronic system of securities in an online regime.

The PFTS simultaneously conducts two (first and second) listings of the most attractive emitters of stock in Ukraine. Meanwhile, the PFTS stock index is considered to be the yardstick of the Ukrainian securities market. There are total of 8 stock exchanges, 2 information trading systems and 794 licensed securities market. There are a total of 8 stock exchanges, 2 information trading systems and 794 licensed securities traders in Ukraine.

Ukraine’s Economy Minister Arseniy Yatseniuk warned that such an undesirable development of events could entail serious risks in conditions of political and economic destabilization. The proposed taking radical measures, namely liquidating the securities market in Ukraine altogether.

Such views of the minister basically contradict the content of the instructions of President Viktor Yushchenko concerning the development of the stock market. Meanwhile, many Ukrainian stock market players consider the minister to be a retrograde and a dilettante.

Here many economic analysts managed to find the logic in Yatseniuk’s position, referring to the “strange” peculiarities of the stock market in Ukraine. From the inpoint of view, practically all initial placements of the stocks of domestic enterprises are performed either on foreign trading floors or the buyers are western institutional investors. The share of funds from Ukrainians invested in the stock market in Ukraine is less than 1%.

On Febraury 22,2006, theVerkhovna Rada of Ukraine ratified the Law On Securities and the Stock Market in its revised edition, which permitted the PFTS to formally be given the status of a full-fledged stock market. This means that it will now be very difficult for other organizers of stock trading to compete with the PFTS (the largest trading floor in Ukraine) as a result of the absence of the necessary technology and a sufficient customer base.

The new law also raises the requirements to the statutory capital of professional players on the stock market, which the State Securities and Exchange Committee (SSEC) had been striving towards for some time.

Specifically, dealers are obligated to have a statutory capital of no less than UAH 120,000 (approx. 20,000 euro) (under the new law - UAH 17,000), brokers-no less than UAH 300,000 (around 50,000 euro) (now - UAH 3,400) and underwriters - no less than UAH 600,000 (approx. 100,000 euro). Meanwhile, stock exchanges should have no less than UAH 3 mn (nearly 500,000 euro) and those exchanges engaged in clearings and settlements - no less than UAH 6 mn (around 1 mn euro).

Some of the new features in the law concern the emissions of corporate bonds. According to the legislation that was in effect, a joint stock company had the right to issue bonds in an amount that did not exceed 25% of its statutory capital. Now any legal entity (regardless of the form of ownership) can conduct emission of bonds in an amount that does not exceeded three times the amount of its own capital (which can considerably differ from statutory capital) or financial security granted to third parties.

Here there exists a loophole in the emission of bonds in excess of the norm currently being used. An emitter of bonds may issue them in the amount backed by a third party, but so far there are no limits placed on the party offering such backing.

Securities trading in Ukraine are often accompanied by the abuse of confidential information (known more commonly as "insider trading"). The parliamentarians attempted to implement the notion of "insider information" and expand the powers of the financial regulators, end law enforcement bodies, and judge in counteracting illegal acts on the stock market.

In Ukraine, practically all trading is built upon insider information, particular in the process of company takeovers. As a rule, buying stocks begins the day before official information about a takeover is rleased. Managers that have an "inside take" on the negotiations processes inform those interested about the results of the talks. In turn, they decide what is more advantageous: buying or selling stocks. In this way insiders that depend on the market climate (konyunktura???) are the instigators of a false rise or fall in the value of securities.

Clearly, the new law will also not prevent the use of confidential information with benificial aims. First of all, the SSEC and market players do not have a clear understanding of inside information, while the new law only proposes criteria for defining such information. Secondly, it is not clear how one can secure inside information during changes in quotes of securities. After all, the majority of deals are closed "over the phone", not in the PFTS or the stock exchanges.

Finally, the fight against the use of insider information will only be effective when all "phone conversations" are transferred to an organized exchange at the legislative level.

According to experts' forecasts this year we can expect an increase in the stock market by up to 60%. It is certain re-dividing of interests of stock investors systemic sectors (chemicals, metallurgy, machine-building) to newcomers on the stock market the food-processing industry, retail trade, real estate, banking and stock investment funds.

At the end of febraury, the SSEC gave the right to authoritative international agencies such as Standard& Poor's, and Fitch and Moody's, to rate Ukrainian securities and their emmitters.

"The main factors that had a negative impact on the development of the stock market in Ukraine include the privatization program calling for the sale of large stock packages investors and the unfair judicial system that failed to defend the interests of small owners. The conceptual accents on the development of the securities market must be immediately changed through the sale of state property exclusively on organized stock markets, the system of taxation and the mechanism of holding privatization tenders must be improved, and, finally, a demonstrative sale of state-owned share packages on the organized market should be done and the activity of public companies whose shares will be placed and listed on the stock market should be presented."

"Development of the securities market in Ukraine will help "draw" the money of citizens and businesses from the consumer market, create conditions for the emergence of another area for foreign investments, will serve as the best example of measuring the effectiveness of the work of the executive branch of power, and foster the authenticity and transparency in the process of preparing for corporate audits."