OTC Clearing in KDPW_CCP London, October 2012. Agenda Market Infrastructure in Poland About KDPW_CCP OTC Clearing in KDPW_CCP

OTC Clearing in KDPW_CCP

London, October 2012

Agenda

Market Infrastructure in Poland

About KDPW_CCP


Market infrastructure in Poland

Market Infrastructure in PolandKDPW_CCP and KDPW

Market Infrastructure in PolandClearing and Settlement

Warsaw Stock Exchange

BondSpot OTCTrading

Settlement

KDPW_CCP

Settlement

Clearing

CSD

Risk Management System

NationalBank of Poland

Clearing

KDPW

Trade Repository

About KDPW_CCP

About KDPW_CCPOwnership Structure

NBP

ST

WSE

100 %

History of KDPW (the CSD)

1991 - 1994 Integral part of the Warsaw Stock Exchange

1994 - presentIndependent institution, joint stock company

Current shareholders (since 1999) State Treasury 1/3 of sharesWSE 1/3 of sharesNational Bank of Poland 1/3 of shares

KDPW_CCP (July 2011) KDPW 100% of shares

33%

33%

33%

KDPW_CCP own capital: PLN 200 M (ca. EUR 50 M)

About KDPW_CCP International Cooperation

KDPW_CCP:

Membership of international organisations and working groups

EACH – European Association of Central Counterparties Clearing Houses

EACH Risk Management Committee EACH Derivatives Working Group

CCP12 – Global Association of Central Counterparties

CCP12 Working Group 2 – Review of CPSS-IOSCO Standards and key recent regulatory publications

CCP12 Working Group 3 – Default Contact List and Information Sharing

4 August 2012 – entry into force of new provisions of the Act on Trading in Financial Instruments, which

introduce the concept of clearing novation to the Polish legal system.

Thanks to novation, KDPW_CCP becomes the central counterparty, i.e. the buyer for every seller and

the seller for every buyer, taking over the mutual rights and obligations of the original parties to a trade.

This applies to all trades cleared by KDPW_CCP, including OTC.

SELLERKDPW_CCP as

a BUYER

KDPW_CCP as a SELLER

BUYER

About KDPW_CCPNovation

About KDPW_CCP Markets & Products

CASH MARKET DERIVATIVES MARKET

Regulated ATS OTCRegulated

- Warsaw Stock Exchange (WSE)

- BondSpot

shares, bonds, subscription rights, allotment certificates, investment & structured certificates, index participation units, mortgage bonds, warrants, ETFs

- NewConnect- Catalyst- BondSpot

shares, allotment certificates, bonds, mortgage bonds

- Warsaw Stock Exchange (WSE)

futures contracts, options, index participation units

Forward Rate Agreements, Interest Rate Swaps, Overnight Index Swaps, Basis Swaps

- OTC (MarkitWire, SWIFTAccord)

OTC

- Matching Engine for REPO

T-bonds

About KDPW_CCPRisk Management

SPAN® Methodology – regulated market & ATS

Value at Risk – OTC market

About KDPW_CCPBasic Statistics*

Number of KDPW_CCP’s Participants: 39

Number of cleared transactions – cash market: 9 944 174

Value of cleared transactions – cash market: EUR 36 206 826 079 (PLN 152 039 788 310)

Number of cleared transactions – derivatives market: 2 650 286

Value of cleared transactions – derivatives market: EUR 41 433 470 415 (PLN 174 370 104 624)

* From January 2012 till now


19 November 2012 – KDPW_CCP is preparing to launch the clearing & guarantee of OTC trades in derivatives & repos

The new service is a response to market demand and to EU regulations (EMIR) which require clearing of standardised derivative products on the interbank market via CCP clearing houses

Higher standards of safety for clearing of trades executed outside the organised market following the implementation of OTC derivatives trade clearing and guarantee functionality

Guaranteed reporting of trade data by KDPW_CCP to KDPW’s Trade Repository (non mandatory)


Access to the Polish market

Liquidity in PLN (in central bank money; National Bank of Poland)

Collateral in Polish Treasury Bills, Bonds, local currency and WIG20 shares

Effective collateral management

Stable banking system

Effective and efficient clearing system

High risk management standards

Reduced risk for cash, derivatives and OTC trades

Standard default procedures

OTC Clearing in KDPW_CCP Why KDPW_CCP?

List of instruments cleared in KDPW_CCP:

Phase 1: November 19, 2012 Forward Rate Agreements Interest Rate Swaps Overnight Index Swaps Basis Swaps REPO

Phase 2: January 2014 (in line with market demand) FX Swaps FX Options Interest Rate Options Cross-Currency Interest Rate Swaps

OTC Clearing in KDPW_CCP Cleared instruments

PLN

PLN and other currencies

KDPW_CCP operates an OTC derivatives clearing system, including a transaction clearing liquidity guarantee system.

Main functions of the OTC trade clearing system:

central counterparty (CCP) functionality through novation clearing trades accepted to the OTC clearing system and intermediation

in settlement arising from clearing clearing risk management collateral management reporting to a trade repository (service offered by KDPW, non

mandatory)

OTC Clearing in KDPW_CCP System Functions (1)

MarkitWire

OTC Clearing in KDPW_CCP Confirmation Platforms

KDPW_CCP clears trades on the basis of clearing instructions delivered by an electronic platform operator (MarkitWire, SWIFT Accord or proprietary matching solution for REPO).

SWIFT Accord

Communication with KDPW_CCP will be possible through the information exchange system (SWI) operated by KDPW based on proprietary or SWIFT solutions.

KDPW_CCP clears trades in central bank money.

Trades cleared by KDPW_CCP can be reported on behalf of a clearing member to the trade repository operated by KDPW or another registered trade repository.

Daily reporting to KDPW_CCP participants



Bank A

Bank B

Trade repository (KDPW or other)

National Bank of PolandConfirmation

platforms*Communication

SWIFT or SWI

CSD (KDPW)• settlement for repo• collateral safekeeping

* Repo transactions – confirmation in KDPW_CCP

OTC Clearing in KDPW_CCPClearing Day Timetable (CET)

Day 1: 09:00-17:00 – input of derivative and repo trades for clearing;

- risk monitoring

9.00-15.30 - input of repo trades for clearing – settlement in T+0

17:15 – netting session - calculating debits and credits for each clearing member

Day 2: 08:00-08:45 – transfers to and from clearing members as a result of the

calculations from the preceding day

Methods broadly used by market participants

4 separate forecasting curves which correspond to instrument tenor• OIS curve (OIS contracts)• 1M curve (FRA, IRS, Basis Swap)• 3M curve (FRA, IRS, Basis Swap)• 6M curve (FRA, IRS, Basis Swap)

Master curve 3M - for discounting future cashflows

Fixed leg bootstrappingThe final fixed coupon is derived from all the previous known fixed coupons for the swap

Forward rates source – fixing to be performed by ACI Polska* (the Polish Financial Markets Association)

* ACI Polska is an organization of people with a professional interest in the international and domestic monetary-currency.

OTC Clearing in KDPW_CCP Instruments Valuation Rules

OTC Clearing in KDPW_CCPKDPW_CCP Clearing Guarantee System

Margins

OTC Default Fund

KDPW_CCP own capital

Participant financial and prudential requirements

OTC Clearing in KDPW_CCPMargins

Historical simulation model 5-day 99,5% VaR 500 days observation window

OTC Clearing in KDPW_CCP OTC Default Fund Contribution Calculations

IM S

tress

IM S

tress

IM N

orm

al

IM N

orm

al

CM 1CM 1

IM S

tress

IM S

tress

IM N

orm

al

IM N

orm

al

CM 2CM 2

IM S

tress

IM S

tress

IM N

orm

al

IM N

orm

al

CM 3CM 3 UR 1

UR 1

UR 2

UR 2

UR 3

UR 3

DF=UR2 DF=UR2

Mutual default fund Covers highest risk not covered by initial margin (highest uncovered risk).

Uncovered risk (UR) = IM Stress – IM Normal

• IM Stress – stress-test initial margin• IM Normal – normal conditions initial margin

OTC Clearing in KDPW_CCP Acceptable Collateral

Polish Treasury Bonds

Polish Treasury Bills

Cash PLN

Shares (WIG20)

Planned:

Eurozone Treasury Bonds

Cash EUR

OTC Clearing in KDPW_CCPDefault Waterfall

Remaining KDPW_CCP own capital

OTC Default fund contributions of the non-defaulting members

KDPW_CCP own capital

(proportionate part of 25% of the min. required capital*)

OTC Default fund contributions of the defaulting entity

Individual margins of the defaulting entity

* According to EMIR Regulation

OTC Clearing in KDPW_CCP How to Become a Clearing Member

Preliminary (test) phase Possibility to conduct tests before becoming participant Concluding membership agreement Membership application (with required documents enclosed) Meeting financial requirements (maintaining adequate levels of

equity and prudential requirements) Meeting technical requirements (e.g. setting up connection with

KDPW_CCP IT system used to clear OTC trades, signing contract with SWIFT or MarkitSERV)

After signing membership agreement Contributing to OTC Default Fund Paying initial margin Opening clearing account in OTC clearing system

The following types of participation status are admitted:

1. general clearing member – where the clearing member is responsible in the OTC clearing system for trades executed and confirmed:

a/ by itself on an electronic platform, on its own account or on its clients’ account, and

b/ by another entity, including another participant, on an electronic platform, on the own account of that entity or on its clients’ account;

2. individual clearing member – where the clearing member is liable in the OTC clearing system for trades executed or confirmed by itself on an electronic platform, on its own account or on its clients’ account;

3. clearing house

4. non-clearing member - where the participant executes trades outside organised trading which are cleared in the OTC clearing system, while at the same time not being a clearing member acting with the participation type referred to in point 1, 2 or 3.

OTC Clearing in KDPW_CCP Types of Participation

Main conditions for KDPW_CCP clearing members:

to hold a depository account or securities account with a settlement institution responsible for the settlement of transactions, or to have a settlement agent with the settlement institution (applicable to foreign financial institutions);

to hold a bank account with the relevant settlement bank in the currency of the planned clearing of transactions handled by KDPW_CCP or to have a payment agent holding such an account with the settlement bank.

Capital requirements for KDPW_CCP Participants in OTC clearing:

general clearing member – PLN 100 M (ca. EUR 25 M) individual clearing member – PLN 50 M (ca. EUR 12.5 M) clearing house – PLN 100 M (ca. EUR 25 M)

OTC Clearing in KDPW_CCP Conditions and Capital Requirements

What’s next?:

First membership agreements – November 2012

Launch of trade repository by KDPW – 2nd November 2012

Launch of kdpw_otc production system – 19th November 2012

Application for registration of trade repository – January 2013

Application for authorisation of KDPW_CCP – January 2013

OTC Clearing in KDPW_CCPNext steps

Marcin Truchanowicz

Managing Director

E: [email protected]

T: +48 22 537 95 64

HelpDesk: [email protected]

Contact:

Żaneta Skorupska-Świrska

Deputy Managing Director

E: [email protected]

T: +48 22 537 93 25

All information, documents, regulations you can easily find on our website:

www.kdpwccp.eu

mailto:[email protected]

mailto:[email protected]

http://www.kdpwccp.eu/

Documents

OTC Clearing in KDPW_CCP London, October 2012. Agenda Market Infrastructure in Poland About KDPW_CCP OTC Clearing in KDPW_CCP