Central Securities Depository of Poland (KDPW)

Warsaw, 30 September 2014

KDPW – Ownership

1991 - 1994

An integral part of the Warsaw Stock Exchange

1994 - Present

Independent joint - stock company

Current shareholders

KDPW (CSD) - (since 1999)

The State Treasury - 1/3

The Warsaw Stock Exchange - 1/3

The National Bank of Poland - 1/3

KDPW_CCP - (from 1 July 2011 )

KDPW - 100%

2

NBP

WSE

Treasury

Overview of the Polish Capital Market

3

4

Trade execution

Clearing

Markets (regulated & OTC)

Clearing

Risk Management system

Settlement

Custody Central Bank system Settlement

Clearing & Settlement (from July 2011)

Trade Repository (Nov 2012)

5

KDPW – New business model

Registration of Trade Repository in ESMA

Authorised CCP on basis of EMIR

Auditing of KDPW - Internal

6

Internal Audit Department:

Internal processes oversight, compliance with internal organisational rules

10-12 audits/year, full audit of all KDPW business processes over 3 years

Corporate Security Department:

Operational risk monitoring and mitigation, procedures to lower operational risk, preparing proposals for Operational Risk Committee

Compliance officer:

Monitoring compliance with all laws, internal and external regulations and procedures in force

Business continuity

7

KDPW operational risk management model

Monitoring and management of operational risk for all business activities

Risk register maintenance

Updated every 4 months

Business continuity system

Core processes reactivated within 2 hours

Non-core processes reactivated on next business day

Insurance

PLN 100 million (EUR 25 million) operational liability (AIG Europe)

Disaster recovery site

20 kms from Warsaw

On-line data replication via dedicated fibre-optic cable, additional daily data copy, back-up power supply,

Auditing of KDPW - External

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External independent certified auditor:

Financial audit (annual)

Audit of 3-year KDPW business process audit prepared by Internal Audit Department

Polish FSA:

Discretionary audit (including on-site), usually at request of participants (no request since 2009)

Approval of Operational Rules

Compliance with ECSB-CESR recommendations for securities settlement systems (2012)

Other:

Shareholder oversight (National Bank of Poland, WSE, State Treasury)

National Audit Office (in extreme cases, all areas)

National Bank of Poland: operational areas, compliance with ECSB-CESR recommendations for securities settlement systems (2012)

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KDPW statistics

Central Securities Depository of Poland (KDPW)

At-a-Glance Statistics: August 2014

KDPW participants – 65

KDPW_CCP participants – 38

Issuers – 1152 (of which 77 are foreign)

Deposited equities issues – 1099

Deposited debt instrument issues – 1099

Options – 980

Futures – 130

Capitalisation of equities in KDPW – PLN 582 billion (EUR 138 billion)

Capitalisation of debt instruments in KDPW – PLN 580 billion (EUR 139 billion)

Value of all operations cleared and settled in 2013: PLN 12 trillion (EUR 2.9 trillion)

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Capitalisation of securities

Capitalisation of shares, bonds and other securities registered in KDPW (bln EUR)

0

20

40

60

80

100

120

140

160

180

12-2002 12-2003 12-2004 12-2005 12-2006 12-2007 12-2008 12-2009 12-2010 12-2011 12-2012 12-2013

EUR

bln

shares bonds other securities

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Regulated market trades turnover

Regulated market cash and derivatives turnover (bln EUR)

0

20

40

60

80

100

120

140

160

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

EU

R b

ln (

sin

gle

co

un

t)

cash market derivatives market

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OTC trades turnover

0

500

1 000

1 500

2 000

2 500

3 000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

EUR

bln

(si

ngl

e co

un

t)

interbank transactions repo transactions - between the NBP and a bank

Treasury BondSpot Poland transactions Alternative Trading System

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Number of transactions settled

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mil

ion

s (

sin

gle

co

un

t)

derivatives market cash market

15 15

Foreign investors in Polish market (share of cash market turnover) – Stock Exchange (1H 2014)

Foreign investors in Polish market (ownership) – Treasury bonds (May 2014)

Foreign investors in Polish market

Source: Warsaw Stock Exchange

Source: Polish Ministry of Finance

68 billion EUR

46 billion EUR

13%

49%

38% Individual investors

Foreign investors

Institutional investors

40%

60% Foreign investors

Domestic investors

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Clearing & Settlement

Central Securities Depository of Poland (KDPW)

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Securities registered in KDPW

All securities admitted to trading in the organised market must be registered in KDPW

Currently, the following securities are recorded in the KDPW system: Shares (foreign and domestic) Bonds (Treasury, Corporate, Municipal, Convertible, EIB, with priorities rights,

non-public bonds, mortgage bonds, structured certificates) Exchange Traded Funds (ETFs) Investment Fund Certificates Warrants (WIG 20 index) Derivatives

Futures Contracts (WIG20 index, currency, share, interest rate) Index Participation Units Options (European style), (WIG20 index, single stock - 2015)

Exception: Treasury bills - custody, clearing and settlement

in the National Bank of Poland system

Safekeeping

Settlement

Corporate Actions

Asset Management

Database Administration

KDPW CSD and KDPW_CCP - Separation of functionality

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Clearing of guaranteed

trades

KDPW (CSD)

Risk Management

KDPW_CCP

Collateral Management

Trade Repository

Main KDPW_CCP responsibilities

KDPW_CCP – (authorised as being EMIR Compliant from April 2014) Clearing of transactions executed on:

Regulated markets: Warsaw Stock Exchange, BondSpot Non-regulated, organised markets: New Connect, Bondspot ASO OTC derivatives – swaps, FRAs, repo

Novation Anonymity Netting (cash and securities side – full netting or directional netting) Reporting of derivatives trades to KDPW Trade Repository

Risk management :

On-line monitoring of risk exposure Margining for cash and derivatives market

SPAN VaR (OTC derivatives clearing)

Marking-to-market (end of day) Collateralisation of security loans in automatic securities lending - borrowing

system Buy-in/Sell-out Clearing Funds covering regulated markets, ATS, OTC derivatives Own capital (PLN 218 million)

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Default Waterfall (Organised market) – Order that funds in the guarantee system are initiated in KDPW_CCP

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Total KDPW_CCP

capital: PLN 218 million

Credits of the defaulting member

Margins:

initial deposit > initial margin > additional margin

Resources of the relevant default fund

Contributed by the defaulting member

Dedicated resources of KDPW_CCP

(in the amount corresponding to at least 25% of the capital requirements taking into account the allocation of the resources in relation to the size of the fund)

Contributions of other KDPW_CCP clearing members to the relevant default fund

Own funds of KDPW_CCP

(up to 110% of the capital requirements)

Additional contributions of other KDPW_CCP clearing members to the relevant default fund

(not more than 50% of the last existing contributions according to the lates update)

Remaining own funds of KDPW_CCP

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KDPW_CCP Capital Structure

KDPW_CCP’s capital

PLN 218 M =

ca. EUR 52 M

Share capital

PLN 190 M =

ca. EUR 45 M

Skin in the Game PLN 13 M = ca. EUR 3 M

Other PLN 15 M =

ca. EUR 3.5 M

Notification Threshold

PLN 48 M =

ca. EUR 11 M

Minimum capital as required by EMIR Art. 16

PLN 43 M =

ca. EUR 10 M

OTC_clearing

Bank A

Bank B

KDPW Trade

Repository

Polish Central Bank Confirmation

platforms Messages

SWIFT

CSD (KDPW)

• settlement of repo

• margins

SWI

Instruments:

currently FRA, OIS, IRS, Basis Swap, FX instruments in PLN

planned FRA, IRS, OIS, Basis Swap in EUR

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Main KDPW Responsibilities

KDPW (CSD) Safekeeping and custody of all securities admitted to trading following public issue Reconciliation and monitoring Settlement of transactions executed on:

Regulated markets Non-regulated, organised markets OTC

Processing of corporate actions Asset management Agent for tri-party repo Negotiated securities lending and borrowing service (October 2014) Assigning ISIN codes for Polish issues (National Numbering Agency), LEI Trade repository (registered by ESMA on Nov 2013)

Additional Services: Management of the Investor Compensation Scheme

For the Polish Social Security System:

Transfer payments between open-end pension funds Management of the Pension Guarantee Fund

Other:

Membership of European and international associations and working groups Education, promotion, sponsorship

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Corporate Actions processed by KDPW

All CAs for securities traded on organised market

Distributions

Cash distributions (e.g. dividends, interest payment)

Securities distributions (e.g. stock dividends)

Reorganisations, e.g.:

redemption of bonds

share split and share reverse split

assimilations and conversions of securities

pre-emptive rights

General Meetings

Notifications

Shareholders list

Proxy voting (only for foreign issuers)

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25

Settlement Principles

Central Securities Depository of Poland (KDPW)

Basic principles

All securities cleared (KDPW_CCP) and settled (KDPW) are dematerialised

All securities transfers are made by book-entry in KDPW depository & settlement system between KDPW participant depository accounts

Mandatory asset segregation (own assets, client assets)

Change of ownership at the moment of book-entry on securities account

KDPW_CCP clearing & KDPW settlement service for transactions from: - WSE, BondSpot, New Connect (ATS), Treasury BondSpot Poland

SFI DVP: Simultaneous, Final, Irrevocable Delivery vs Payment

DvP Settlement model: - BIS model I, BIS model II, BIS model III

Settlement : - T+2, T+3 - for regulated - market trades – WSE, BondSpot - T+0 to T+n - for non-regulated market transactions – OTC

Two settlement channels: - RTGS DVP 8.00-17.00 (PLN), DVP 8.00-16.00 (EUR), FOP 8.00-18.30 - multiple batch system 7.30-18.45

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Daily settlement schedule : multibatch and RTGS

6 settlement sessions a day with intra-day finality after each session

Basic principles

BATCHES

7.30

10.30 (PLN)

13.00 (PLN/EUR)

15.30 (PLN/EUR)

18.30

18.45 Technical

DVP FOP

FOP FOP

Technical

16.00 (EUR)

18.30

17.00 (PLN)

8.00

RTGS

DVP FOP

Cash leg settlement Central Bank Money:

National Bank of Poland for PLN TARGET 2 system for Euro

Commercial Bank Money for other currencies

Liquidity facilities KDPW

securities L&B automatic and on-request partial settlement repo

KDPW_CCP Netting (cash & securities side) buy-in, sell-out transactions from regulated market guaranteed by Clearing Guarantee Fund,

margining system (for cash and derivatives market) and capital of KDPW_CCP transactions from ATS (non-regulated market) guaranteed by special ATS

guarantee fund, margining system and capital of KDPW_CCP OTC derivatives transactions guaranteed by margining system, OTC guarantee

fund and capital of KDPW_CCP

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Basic principles

Cash settlement side (CBM)

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Agreement between Central Bank (CB) and KDPW

Authorisation for KDPW to debit Payment Bank (PB) accounts

Cash Settlement on PB accounts in CB

Payment banks: banks having status of KDPW participant and holding cash account in CB PAYMENT SYSTEM

Payment bank responsible for settlement of:

its own and its clients transactions

transactions executed by Clearing Members (CMs) which are not allowed to have a cash account in CB

KDPW informs PB about net cash positions to be paid on SD

KDPW sends payment instructions to CB using CB interface

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KDPW in the Polish capital market

Seller Buyer

Trade feed = Already matched for settlement

Cash account of the Buyer/ Buyer’s custodian cash clearer

in NBP

Cash account of the Seller/ Seller’s custodian cash

clearer in NBP

Trade Trade

Trade execution

Markets

Trade execution

Post-trading processing flow

Securities accounts of the Seller / Seller’s

custodian

Securities accounts of the Buyer /

Buyer’s custodian

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INPUT CCP CLEARING

(KDPW_CCP)

T S

Locked-in TRADES

WSE

BondSpot

New Connect

INPUT

INPUT

Treasury BondSpot

Poland

POST- TRADE SETTLEMENT

MA

TCH

ING

VALIDATION & MATCHING OTC

INSTRUCTIONS

S T+2

T+3

T+2

T+n

T+n

Hold-release mechanism

T+ V

ALID

ATIO

N

INP

UT

INSTRUCTIONS

INSTRUCTIONS

S

SETTLEMENT

SETTLEMENT

SETTLEMENT

Life cycle of settlement instruction

VALIDATION & MATCHING

TRADES

PRE- SETTLEMENT

PRE- SETTLEMENT

PRE- SETTLEMENT

CLEARING (NON_CCP)

CLEARING (NON_CCP)

kdpw_stream – System architecture

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Processing of Cash leg

Data flow

External communication

Processing of Securities leg

Asset Management

Transfer payments Collateral register Corporate actions Static data

RTGS MB

Clearing banks

KDPW_CCP Participants Markets WWW SWIFT

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Cross Border Settlement

Central Securities Depository of Poland (KDPW)

Links with foreign CSDs

Links created with foreign CSDs (FOP links) in connection with the dual listing of shares on the WSE. Currently there are 9 direct links and 9 indirect links into 18 foreign markets

34

EVK

Euroclear Sweden

Euroclear Netherlands

LCD

Principles of cross-border transfers

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• Transfer executed between investor’s account in one country and the same investor’s securities account in the second country before trading can take place – there is no change of ownership,

• KDPW acts as „investor CSD” - shares need to be registered on KDPW account in foreign intermediary to be traded on the WSE,

• Transfers are free of payment (FOP),

• Foreign shares quoted on WSE in PLN,

• Clearing and settlement in KDPW in PLN,

• Dividends paid to Polish shareholders in foreign currency or PLN following f/x conversion,

• Transfer based on SWIFT (ISO 15022 messaging standards),

• The transfer is settled intra-day (RTGS in KDPW).

Free of Payment cross-border links between KDPW and foreign CSD – Share transfer

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Transfer of shares prior to a Warsaw Stock Exchange transaction executed between

a Polish and foreign investor using a FOP link

Foreign investor wishing to sell shares on the

Warsaw Stock Exchange

Entity managing foreign investor’s securities account in Poland

Instruction to receive shares

Instruction to receive shares

Investor’s Account

KDPW Account

Foreign “issuer” CSD Instruction to receive shares FOP (MT540)

Transfer order

1

2

3

4 5

Instruction to deliver shares FOP

6 Transfer of shares to KDPW omnibus account following matching

Receive FoP Transfer confirmation (MT544)

7

Matching of instructions (1&4) in Foreign CSD

KDPW as investor CSD

Strategic Projects for the KDPW Group

to 2014

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38

• KDPW_CCP

• Introduction of novation

• Development of SPAN methodology

• Development of CCP OTC derivative services and repo

• Compliance with EMIR regulations, CCP authorisation

• Introduction of securities netting in cash market clearing

• Introduction of anonymous negotiated securities lending (together with KDPW)

• KDPW (CSD)

• Trade repository

• Omnibus accounts at KDPW level for foreign CSDs and foreign financial intermediaries

• Harmonisation of kdpw_stream with the new WSE trading system (UTP)

• Standardisation of corporate actions processing based on ISO 20022 (to 1 H 2015)

• Introduction of a collateral management service for tri-party repo transactions

• Introduction of partial settlement

KDPW - New Services

2012

2013/2014

2Q 2014

2013

3Q 2014

3Q 2014

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www.kdpw.pl/en

www.kdpwccp.pl/en