In April 2008 the National Bank of Ukraine abandoned its policy of a (de facto) fixed exchange rate to the US dollar. The change towards a flexible exchange rate was the right move for fighting inflation back in April 2008 and has since November 2008 become an indispensable and effective instrument for combating the negative effects of the global financial crisis in Ukraine. Thus, the move to a flexible exchange rate has been a crucial and necessary measure of macroeconomic policy.
At the same time, a flexible exchange rate implies by definition higher exchange rate volatility and thus higher currency risks for economic agents, such as exporters, importers and investors. Consequently, the need and the demand for instruments to hedge against currency risks have increased dramatically in recent months. Despite this strong demand, economic agents have practically no possibility to hedge against currency risks in Ukraine as of today. The reason for this is quite clear: The existence of highly restrictive state regulations, which in fact makes the development of this market impossible. In turn, these restrictive regulations can be explained by the fear of regulators that foreign exchange derivatives can be used by speculators in a manner that could destabilise the currency market.
In this paper we conclude that despite the fears cited above, there are ways to develop the market for foreign exchange derivatives which would be highly beneficial for the country. In particular, it is necessary to properly regulate and supervise banks with respect to such instruments to achieve maximum transparency with respect to such offbalance sheet titles. Besides, it should be kept in mind that if the instruments do no develop in Ukraine, than off-shore markets will continue to develop, most notably in London.
Once the current turmoil on the currency market is settled, we recommend the implementation of the following measures. First, it is crucial to abolish the foreign currency pension tax, since this tax is an obstacle for the spot foreign exchange market, which is tightly linked to a potential market for foreign exchange derivatives. Second, debt managers at the Ministry of Finance should secure the existence of a yield curve through the issuance of state securities, since such a curve is a precondition for an effective pricing of derivatives. Third, a gradual approach ("sequencing") is needed for the introduction of derivatives. In the first phase, only over-the-counter (OTC) instruments should be allowed. Futures should only be introduced at a later stage. This also applies to the participation of non-resident at the derivates market.
