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National Depository for Securities (KDPW) and Clearing House KDPW_CCP

National Depository for Securities (KDPW) and Clearing House KDPW_CCP. Warsaw, January 2013. Agenda. KDPW and KDPW_CCP on the Polish Capital Market National Depository for Securities (KDPW) Clearing House KDPW_CCP New European Regulations. Impact on KDPW and KDPW_CCP.

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National Depository for Securities (KDPW) and Clearing House KDPW_CCP

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  1. National Depository for Securities (KDPW)and Clearing House KDPW_CCP Warsaw, January 2013

  2. Agenda KDPW and KDPW_CCP on the Polish Capital Market National Depository for Securities (KDPW) Clearing House KDPW_CCP New European Regulations. Impact on KDPW and KDPW_CCP

  3. KDPW and KDPW_CCP on the Polish Capital Market

  4. Institutions of the Polish Capital Market Financial Supervision Authority (KNF) KDPW KDPW_CCP WSE Main Market, Bondspot, Catalyst, New Connect, OTC National Bank of Poland Financial institutions and intermediaries Institutional investors Issuers Individual investors

  5. Shareholders of KDPW and KDPW_CCP • History • 1991 - 1994 • Integral part of the Warsaw Stock Exchange • 1994 – now • Independent institution, joint stock company • Current shareholders(since 1999) • State Treasury 1/3 of shares • WSE 1/3 of shares • National Bank of Poland 1/3 of shares • KDPW_CCP (July 2011) • KDPW 100% of shares. 33% 33% 100 % 33%

  6. Functionalities of KDPW_CCP (CCP) / KDPW (CSD)

  7. Market Infrastructure WSE BondSpot OTC Trade KDPW_CCP Clearing Clearing Risk Management System KDPW NBP Settlement Settlement CSD Trade Repository

  8. National Depository for Securities (KDPW)

  9. Polish Central Securities Depository • The functions and tasks of KDPW are set out in the Act on Trading in Financial Instruments of 29 July 2005. • Main task: To organise, operate and supervise the depository-settlement system for trade in financial instruments in Poland • Pursuant to Article 48.7 of the Act on Trading…, KDPW may outsource, under a contract, the performance of specific tasks to a subsidiary. In line with this provision, KDPW has outsourced to the clearing house KDPW_CCP the performance of tasks including trade guarantees and clearing.

  10. Main Tasks of KDPW • ManagingParticipants’ depository accounts in which securities are registered as electronic records • Registration and safekeeping of dematerialisedfinancial instrumentsinParticipants’ depositoryaccounts • Settlement of transactions executed on regulated markets (WSE and BondSpot) and transactionsexecutedoutside of regulatedmarkets (NewConnect, BondSpot) • Monitoring the number of securities in trading to ensure it corresponds with the number of securities issued • Corporateactions – performance of issuers’ obligations to securities holders(e.g., dividendpayment, merger of shares) • Assigning ISIN (International Securities IdentifyingNumbers) to Polishissues of financial instruments (KDPW isthe national institutionresponsible for assignment of ISIN)

  11. Financial Instruments Registered in KDPW • All securities admitted to trading on theregulated market must be registeredin KDPW • Thefollowing securities areregisteredin KDPW: • Shares(Polish and foreign) • Bonds(Treasurybonds, NBP (central bank) bonds, corporatebonds (Polish and foreign), municipalbonds, convertiblebonds, EIB bonds, preferredbonds, non-public bonds, mortgagebonds) • Investment certificates of investment funds • Futurescontracts(WIG20indexfutures, currencyfutures, stockfutures) • Indexparticipationunits • Options(European), (WIG20 indexoptions, stockoptions) • Exception: Treasurybills:safekeeping, clearing and settlementinthe National Bank of Poland system

  12. Main Rules of Clearing in KDPW KDPW onlyclearsdematerialised securities Securities aretransferred by means of bookingentriesinthe KDPW depository, clearing and settlement system Transfersaremadebetween KDPW Participants’ accounts Obligatorysegregation of assets (proprietary assets, clients’ assets) Holding balancesarechangedatthe time of a bookingentry Clearing transactions for: WSE, BondSpot, New Connect (ATS), MTS Poland DvP clearing model: BIS model I, BIS model II Clearing: T+2, T+3 – transactions on theregulated market – WSE, BondSpot T+0 to T+n – transactionsoutsidetheregulated market – OTC Two clearing modes: RTGS DVP (8:00 – 17:00), FOP (8:00 – 18:30) Multi-batchmode (7:30 – 19:00)

  13. Clearing Cycle The clearing cycle for transactions in shares, allotment certificates, certificates concluded on the regulated market is three business days (T+3), the cycle for bonds is two business days (T+2). This means that the buyer becomes the owner of shares on the third clearing day after the transaction date, or on the second clearing day in case of bonds.

  14. Number of Securities Accounts Source: KDPW, based on information reported by Participants. Year-end data for 2005-2011; end of November data for 2012.

  15. Operational Links with Other Depositories KDPW maintains 20 operational links with foreign depositories: 10 direct links between KDPW and a foreign depository and 10 indirect links via an international depository (Clearstream Banking Luxembourg, Euroclear Bank) or a custodian bank (Bulgaria). KDPW has both a direct and an indirect link with Slovakia. New operational links 2012: – Romania (Sibex Depository) – Latvia

  16. Investor Compensation Scheme • Supervision of the Investor Compensation Scheme and the functions of licensing and potentially penalising brokerage businesses that are scheme participants are performed by the Financial Supervision Authority. • The function of the Investor Compensation Scheme is to provide additional protection of investor assets managed by licensed investment firms where all investment firm precautionary procedures and supervision systems fail in offering full protection to investors. • KDPW administers and manages the resources of the system. • The Investor Compensation Scheme pays out 100% of covered investors’ assets up to the PLN equivalent of EUR 3 thousand plus 90% of any surplus over that limit, however, not more than the PLN equivalent of EUR 22 thousand. • In practice, the maximum compensation now available is EUR 20,100 as the Investor Compensation Scheme pays out only 90% of any surplus over EUR 3,000.

  17. Clearing House KDPW_CCP

  18. Inception of KDPW_CCP • Pursuant to Article 48.7 of the Act on Trading…, KDPW may outsource, under a contract, the performance of specific tasks to a subsidiary. In line with this provision, KDPW has outsourced to the clearing house KDPW_CCP the performance of tasks including: • clearing of trade on the regulated market • clearing of trade in dematerialised securities in the alternative trading system • maintenance of a clearing liquidity guarantee system including a regulated market trade clearing guarantee system

  19. KDPW_CCP KDPW_CCP is a modern clearing house, which clears transactions using a range of mechanisms ensuring systemic mitigation of counterparty default risk. CHARACTERISTICS: Separate legal entity In line with international standards, due to the different risks of CCP clearing house services and risks of the core business of the central securities depository (KDPW), a separate legal entity had to be set up to provide clearing house services: KDPW_CCP. Guarantee of the clearing of trade based on CCP capital An important feature of KDPW_CCP is that its capital can be used in the clearing guarantee system, which improves the safety of clearing. KDPW_CCP has a capital of PLN 200 million, which can be used in the clearing guarantee system as one of its resources.

  20. Role of the Central Counterparty - CCP The central counterparty (CCP) becomes a buyer to the seller and a seller to the buyer. Typical trade: CCP as a counterparty: SELLER BUYER SELLER CCP as BUYER CCP as SELLER BUYER

  21. Clearing House KDPW_CCP:Benefits for the Market • Reducedcounterpartyriskthanks to guarantees of clearedtransactions • Novation: KDPW_CCP takes over rights and obligation of original parties • More effectiverisk management • Capital of the clearing house as a part of the clearing guarantee system • New categories of entitieseligible as clearing members • Improvedperception of thePolish capital market infrastructure by Polish and foreign financial institutions

  22. Clearing Guarantee System Financial and precautionary requirements for participants Margins Clearing fund Capital of KDPW_CCP

  23. KDPW_CCP Participants • Localfinancialinstitutions: investment firms, banks • Foreignfinancialinstitutions: investment firms, foreignentities performing functions of clearing transactions in financialinstruments • Companiesoperating a clearing house

  24. Order of Using the Resources of the Clearing Guarantee System – Organised Trading ca. EUR 50 million

  25. New European Regulations: Impact on KDPW and KDPW_CCP

  26. EMIR – Main Goals Response to thecrisis: • G-20 summitinPittsburg (September 2009): All standardised OTC derivative contracts should be cleared through central counterparties (CCP) by the end of 2012 at the latest and OTC derivative contracts should be reported to trade repositories. Focus on: • reducing counterparty risk including strengthening clearing requirements, • reducing operational risk including greater standardisation and electronic processing, • increasing transparency including through trade repositories

  27. EMIR - Implications • Article 4 • Clearing obligation for OTC derivative contracts • Article 9 • Reporting obligation: derivative contracts are reported to a trade repository • Article 14 • Authorisation of a central counterparty (CCP) • Article 55 • Registration of trade repositories by ESMA

  28. Harmonisation of KDPW_CCP with EMIR • Harmonisation of KDPW_CCP with EMIR requirements: • Harmonisation with the definition of CCP (Article 2): Novation • Harmonisation with the capital requirement (Article 16) • Authorisation of a CCP (Article 14)

  29. Capital Requirement Increase of the share capital of KDPW_CCP S.A. in view of the implementation of clearing of OTC trade to PLN 200 million (ca. EUR 50 million) – Resolution of the General Meeting of June 2012. Minimum capital requirement: at least EUR 7.5 million (under Article 16 of EMIR) According to the EBA technical standards, the capital of a CCP should be at least equal to the sum of: grossoperationalexpensesduring an appropriate time span for restructuring; the capital necessary to coveroperationalrisk; the capital necessary to cover credit, counterparty credit and market risks of non-clearing activities; the capital necessary to cover legal risk and business risk.

  30. Clearing OTC Derivatives Trade.Why KDPW_CCP? Access to the Polish capital market Liquidity in PLN in central bank (NBP) money Option of contributing collateral in Polish Treasuries, WIG20 stocks and PLN Stability of the Polish banking sector Reduced risk of cash, derivatives and OTC trade Effective trade guarantee and clearing system Settlement in central bank money Application of high standards of risk management Standard default procedures

  31. System Functionalities KDPW_CCP will operate an OTC derivatives trade clearing system including a clearing liquidity guarantee system. Main functionalities of the OTC trade clearing system: clearing of trade accepted to the OTC clearing system and intermediation in settlement arising from clearing management of clearing risk administration of collateral function of central counterparty (CCP) through novation reporting to a trade repository (service offered by KDPW)

  32. Cleared Instruments List of instruments cleared in KDPW_CCP: Phase 1 – 2 January 2013: Forward Rate Agreements InterestRate Swaps Overnight Index Swap Basis Swaps REPO Phase 2 – January 2014 : FX swaps FX options Interest rate options Currency Interest Rate Swaps (CIRS) PLN PLN and other currencies

  33. Trade Repository in Polish Legislation • According to the amendment of the Act on Trading in Financial Instruments effective as of 4 August 2012 (Article 48.5a), the National Depository for Securities may – under the rules set out in separate regulations – operate a trade repository, i.e., activities involving the collection and storage of information concerning trade in financial instruments and information concerning such instruments.

  34. KDPW Trade Repository • A trade repository is a set of information which fulfils the requirements of the Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories. • The KDPW Trade Repository became operational on 2 November 2012. • It operates under the Trade Repository Rules approved by the KDPW Management Board. • Once the European Commission has approved the technical standards, the trade repository’s regulations and IT tools will be harmonised with the requirements of the standards. • At the turn of Q1 and Q2 2013, KDPW will file for the registration of the trade repository by ESMA (European Securities and Markets Authority) under the requirements of EMIR.

  35. www.kdpw.euwww.kdpwccp.eu

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