Domestic Treasury Bills (T-bills) are a new instrument of the Ukraine financial market. First appearing in 1995, since 1996 they have become full right participants. Nowadays, T-bills are one of the main sources of covering the state budget deficit and the basic instrument to adjust money supply.

The Ministry of Finance issues these T-bills which, on behalf of the Cabinet of Ministers, is a guarantor of their timely redemption. The face value of a single T-bill amounts to 100 hryvnias. Both legal entities and individuals can be holders of T-bills. Starting from the second half of 1996, T-bills are issued on a discount price basis with maturities of 91, 182, 273, 364 and 546 days. They are issued in book entry form with ownership records maintained in depo-accounts at the Treasury Depository of the National Bank of Ukraine. The general issuing and paying agent is the National Bank of Ukraine (NBU) which conducts auctions for T-bills two or three times a week.

According to Ukrainian law, profits from transactions in T-bills were not subject to taxation up to 1 July 1997. Since 1 July 1997, profits including those received in the secondary market are subject to taxation according to generally accepted provisions, usually 30 per cent. Additionally, T-bill transactions on the secondary market are charged a fee of 0.2 per cent of the sum stated in the agreement.

In 1995, an amount of T-bills issued in Ukraine was equal to 304 million hryvnias and in 1996 it was 3.7 billion hryvnias.

In 1995, the yield of T-bills fluctuated from 150 per cent to 90 per cent annually (as a whole the inflation index was 281.6 per cent per annum, reducing from 121.2 per cent in January to 104.6 per cent in December). In 1996, the average yield of T-bills was 70 per cent per annum (in forex, $). For some particular issues it exceeded 100 per cent annually.

In 1997, the plan is to issue T-bills of over nine billion hryvnias. During six months of the current year, issued volume equals 89.3 billion hryvnias (at face value).

During 1997, a gradual reduction of the T-bills yield was observed in the primary auctions. However, currently the yield is still rather subtantial. Thus, at the auctions conducted on 9 September 1997 the yield of T-bills was as follows:

T-bills with a maturity of

182 days	19.7%
273 days	20.3%
364 days	22.5%
546 days	24.0%

The average yield of T-bills with maturities of 182 days issued of late on 21 May 1997 amounted to 21.2 per cent. Currently, all of them have been repaid and withdrawn from circulation. In 1997, the inflation rates in Ukraine are expected to be about 15 per cent and predicted figures for 1998 are ten to 12 per cent.

In Ukraine there are both primary and secondary markets for T-bills. On the primary market (auctions conducted by the NBU), Ukrainian resident banks and their clients, including non-residents, may participate. On the secondary market, transactions are executed through exchanges, and the over-the-counter secondary market has no limits on types and volumes of operations.

Exchange trades are conducted electronically on the Ukrainian Inter-bank Currency Exchange (UICE). Through UICE, between one and two per cent of the total transaction volume on the secondary market is performed. The main business volume is made in the over-the-counter market (in the amount of five to 30 million hryvnias daily).

According to Ukrainian law, non-residents are allowed to deal with state securities of Ukraine through resident banks. Nowadays, more than 100 non-resident banks operate in the market and the major part of them through First Ukrainian International Bank, Societe Generale, commercial bank Privat-bank, banks Ukraina, Prominvestbank, Va-bank, etc.

It should be noted that until September of the current year, any commercial bank which is resident of Ukraine had the right to deal with non-residents in the securities market. However, since 2 October 1997, according to the 'Regulations on the Procedure of Performing Operations with Treasury Bills for Non-Residents' which will become effective after the mentioned date, a certain number of authorised banks will be picked out of all the Ukrainian banks. A status of the authorised bank to be permitted to deal with non-residents in the Ukrainian securities market will be granted to commercial banks by a commission established purposely from the representatives of the Ministry of Finance and the National Bank of Ukraine. Main requirements for banks to receive the above status shall be a tenure of corresponding licences (licences for transactions with foreign currency and with securities) and sound financial state. Therefore, custodial risks for non-residents in the market of public liabilities which are currently observed in Ukraine will be considerably reduced.

It should also be noted that the depository accounting of T-bills in Ukraine is carried out in such a way that non-residents can make use of extra facilities:

• the National Bank of Ukraine registers each non-resident and gives him an individual code;
• deposit accounts of non-residents with a sub-depository are transparent for the central depository which gives NBU the possibility of monitoring volumes of purchasing T-bills by non-residents and, in case of redemption/flat yield payment of T-bills, to foresee the probability of ohanges in the exchange rate of the national currency against the foreign one;
• the transparency of non-resident accounts for the central depository makes it possible to block these accounts by the National Bank in the event of financial position deterioration of an authorised bank and even to transfer them, by a non-resident's request, from one authorised bank to another;
• the non-resident is entitled to hold T-bills on the blocked account of a sub-depository while no operation of this account is carried out by the central depository up to the T-bill maturity. Only after the maturity date, provided the financial position of the authorised bank is satisfactory, are they transferred to the redemption account and the yield is paid.

It is also expected that starting with putting into force the 'Regulations on the Procedure of Performing Operations with Treasury Bills by Non-Residents in Full Measure' (2 October of the current year) non-residents will be entitled to conclude forward contracts with the banks servicing their operations with T-bills; this will enable foreign investors to minimise their foreign exchange rate risks in the course of such operation conducting.

The settlement of T-bills is made in the Ukrainian national currency (hryvnia). The conversion of the client's currency into the hryvnia can be made on boh the Ukrainian Inter-Bank Currency Exchange (UICE) and the over-the-counter market.

The mode of operation of the UICE for a currency purchase/sale is as follows:

1. the foreign exchange trades are held every day at 11.00 am Kyiv time;
2. the daily average trade volume at the Exchange amounts to seven to eight USD million (minimum - USD1 million , maximum - up to 30 USD million);
3. the valuation terms: a client transfers the currency a day prior to any trade and on the day of the trade receives Ukrainian hryvnias.

When operating on the over-the-counter market, a client may carry out the conversion at the rate proposed by a bank with settlement for a 'today' value date - from 9.00 to 12.00 Kyiv time or for a 'tomorrow' value date - from 14.00 to 16.30 Kyiv time.

When purchasing/selling treasury bills the non-resident clients have to proportion the volume of funds invested to the volumes of T-bills location and to those of the foreign exchange market.

The daily volume of the foreign exchange market (the Exchange + over-the-counter transactions) totals 70 to 85 USD million in equivalent. The volume of transactions of non-residents amounts to 30 per cent of the total volume of this market.

One should consider that transactions in the amount of USD 5 million are able to move the foreign exchange market by 15 to 25 points while those of 20 USD million can change market quotations by 100 points or more. When converting USD into UAH, it is necessary to consider the low liquidity in the event of daily market movements of more than 100 points.

The market for forward transactions USD-UAH does not exist in practice; its capacity is USD 2 to 3 million per day, the maximum duration of a transaction being equal to one month.

One of the directions in the further development of the securities market in Ukraine concerns the introduction of new types of securities. Thus, beginning in June of the current year, treasury bills of the domestic savings loan (TBDSL) of 1997 were initially issued. The Ukraine's Ministry of Finance is the issuer and guarantor. These bills are distributed in separate issues, the first of which amounts to 50 million hryvnias. The par value of a savings bill is 50 hryvnias. The life of the first issue TBDSLs equals six months (from the 2nd of April to the 2nd of October). The issue form is a documentary, bearer security and pays a coupon every three months. The TBDSL yield is calculated as the consumer price index plus one per cent per annum. Both individuals and legal entities, residents and non-residents may purchase TBDSLs. The profits from investments in TBDSLs are exempted from taxation for individuals.