OTC Derivatives Clearing in KDPW_CCP

Ph.D. Iwona Sroka, President & CEO, KDPW and KDPW_CCP FOW Derivatives World CEE Warsaw, 14 October 2014

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join the celebrations of the 25th anniversary of economic freedom in Poland

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was established in 1991

was separated in 1994, as an independent, join stock company

was created in 2011

KDPW and KDPW_CCP

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• Stable and credible shareholders • Main objective: safety and stability of financial system • Low risk profile - not-for-profit infrastructure

institution • Supervision by Polish FSA (KNF) and ESMA, oversight

by Polish central bank (NBP)

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• EU registration of KDPW Trade Repository – one of 4 first TRs registered in Europe

• LEI assigning (KDPW_LEI) • Services for energy market (KDPW_GIR) • Planned CSDR authorisation of KDPW

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100 %

NBP

Treasury

WSE

33%

33%

33%

KDPW_LEI

• EMIR authorisation of KDPW_CCP (3rd in Europe) • KDPW_CCP own capital: EUR 54 M (USD 70 M) • Central counterparty functionality through novation • Reporting to KDPW_TR (non mandatory)

KDPW_CCP Milestones

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2009 • New Development Strategy of KDPW

2010 • Creation of KDPW_CLEARPOOL Clearing Guarantor – first step to CCP

2011

•Establishing of KDPW_CCP clearing house:

• Separate legal entity

• New clearing guarantee system

• SPAN

• CCP’s own capital

2012

• Introducing novation to the Polish legal system

• Introduction of OTC clearing service

2013 • Application for authorisation

2014 • EU Authorisation of KDPW_CCP

July 2011

Nov. 2012

8.04.2014

CSD Services

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Numbering Agency (LEI, ISIN, FISIN)

Key functionalities:

Omnibus accounts for foreign investors

Collective securities accounts on the CSD level, with option to segregate by investor/group of investors

Hold/Release mechanism (optional)

Cash settlement in central bank money – PLN in Polish Central Bank, EUR in TARGET2

Agent for Securities lending & borrowing - automatic and negotiated

Settlement and collateral management for repo (Tri-party Repo Agent)

Partial settlement

CA: information, distribution of proceedings, tax services

GIR - clearing and settlement of energy market transactions

T+2 settlement cycle regarding to CSDR requirements

Ancilliary Services

Core Services

Commercial Services

Initial recording of securities in a book-entry system

Maintaining securities accounts at the top-tier level

Regulated market

Alternative Trading System

OTC cash market

Central Depository of Securities

Corporate Actions processing

Operational links to foreign CSDs

Trade Repository

Commodities Clearing House (GIR KDPW)

Securities settlement system

CSD authorisation process planned for 2015/2016

Tri-Party Repo

Maintaining securities accounts at the top-tier level

Initial recording of securities in a book-entry system

Regulated market ATS OTC

derivatives

Clearing of trades

Clearing risk management

Collateral management

SPAN VaR

T-bonds T-bills PLN WIG20 shares

Bank guarantees

OTC REPO

CCP Services

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Authorised in April 2014

Key functionalities:

Central counterparty functionality through novation

Netting in cash (obligatory) and securities (optional)

Segregation of accounts (individual and aggregated accounts)

OTC derivatives:

• Currently - PLN (FRA, IRS, OIS, Basis Swap, REPO)

• Planned - EUR (FRA, IRS, OIS, Basis Swap, FX instruments)

OTC clearing based on MarkitWire and SWIFT Accord instructions

Guarantee system for negotiated securities lending transactions

Margins calculated on intra-day and daily basis

STP with WSE trading system (UTP - NYSE Euronext)

Default waterfall and procedures compliant with EMIR

KDPW_CCP own capital: EUR 54 M (USD 70 M)

Derivatives trade reporting to KDPW_TR

Supplementary Services

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KDPW_CCP - Markets & Products

CASH MARKET DERIVATIVES MARKET

Regulated ATS OTC Regulated

- 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

At-a-Glance Statistics: September 2014

KDPW participants – 65 KDPW_CCP participants – 38 Number of KDPW_CCP’s Participants in OTC clearing – 14

Issuers – 1152 (of which 77 are foreign) Deposited equities issues – 1102 Deposited debt instrument issues – 1645 Capitalisation of equities in KDPW – PLN 611 billion (EUR 146 billion) Capitalisation of debt instruments in KDPW – PLN 588 billion (EUR 141 billion)

Number of cleared transactions – cash market: 11,91 million Value of cleared transactions – cash market: PLN 8 595 billion (EUR 2 058) billion

Number of cleared transactions – derivatives market: 2,28 million Value of cleared transactions – derivatives market: PLN 168 billion (EUR 40 billion)

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

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KDPW_CCP Participants Organised Market

General Clearing Members

BANK BPH S.A.

BANK HANDLOWY W WARSZAWIE S.A.

BANK POLSKA KASA OPIEKI S.A.

BANK ZACHODNI WBK S.A.

BNP PARIBAS SECURITIES SERVICES S.K.A ODDZIAŁ W POLSCE

DEUTSCHE BANK POLSKA S.A

ERSTE SECURITIES POLSKA S.A.

ING BANK ŚLASKI S.A.

RAIFFEISEN BANK POLSKA S.A.

SOCIETE GENERALE S.A. ODDZIAŁ W POLSCE

Ordinary Clearing Members

BANCO ESPIRITO SANTO DE INVESTIMENTO S.A. ODDZIAŁ W POLSCE

BANK MILLENNIUM S.A.

BIURO MAKLERSKIE ALIOR BANK S.A.

BIURO MAKLERSKIE BANKU BGŻ S.A.

BIURO MAKLERSKIE BANKU BPH S.A.

CENTRALNY DOM MAKLERSKI PEKAO S.A.

COPERNICUS SECURITIES S.A.

DB SECURITIES S.A.

DOM INWESTYCYJNY XELION SP. Z O.O.

DOM INWESTYCYJNY XELION SP. Z O.O.

DOM MAKLERSKI BANKU BPS SPÓLKA AKCYJNA

DOM MAKLERSKI BANKU HANDLOWEGO S.A.

DOM MAKLERSKI BANKU OCHRONY ŚRODOWISKA S.A.

DOM MAKLERSKI BDM S.A.

DOM MAKLERSKI BZ WBK S.A.

DOM MAKLERSKI mBANKU S.A.

DOM MAKLERSKI PEKAO S.A.

DOM MAKLERSKI PKO BP S.A.

DOM MAKLERSKI RAIFFEISEN BANK POLSKA S.A.

ING SECURITIES S.A.

IPOPEMA SECURITIES S.A.

KBC SECURITIES N.V. ODDZIAŁ W POLSCE

MILLENNIUM DOM MAKLERSKI S.A.

NOBLE SECURITIES DOM MAKLERSKI S.A.

OPERA DOM MAKLERSKI SP. Z O.O.

PGE DOM MAKLERSKI S.A.

TRIGON DOM MAKLERSKI S.A.

UNICREDIT CAIB POLAND S.A.

X-TRADE BROKERS DOM MAKLERSKI S.A.

RAIFFEISEN BANK POLSKA S.A.

MBANK S.A.

BANK GOSPODARKI ŻYWNOŚCIOWEJ S.A.

BANK GOSPODARSTWA KRAJOWEGO S.A.

BANK HANDLOWY W WARSZAWIE S.A.

BANK MILLENNIUM S.A.

BANK OCHRONY ŚRODOWISKA S.A.

BANK PEKAO S.A.

BZ WBK S.A.

CREDIT AGRICOLE BANK POLSKA S.A.

DEUTSCHE BANK POLSKA S.A.

GETIN NOBLE BANK S.A.

ING BANK ŚLĄSKI S.A.

POWSZECHNA KASA OSZCZĘDNOŚCI BANK POLSKI S.A.

OTCMarket

KDPW_CCP is a modern clearing house, which clears transactions using a range of mechanisms ensuring systemic mitigation of counterparty default risk. It was separated from KDPW structure as of July 1, 2011.

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 223 million (ca. EUR 54 million), which can be used in the clearing guarantee system as one of its resources.

KDPW_CCP Clearing House

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KDPW_CCP operates as a CCP (central counterparty) within the meaning of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, performing the clearing of transactions executed in the cash and derivatives markets, both in on-exchange and off-exchange (OTC) markets.

In accordance with KDPW_CCP regulations (the Rules of Transaction Clearing (Organised Trading) and the Rules of Transaction Clearing (Non-Organised Trading)) KDPW_CCP becomes the counterparty for all transactions accepted for clearing.

This is performed using the mechanism of clearing novation, introduced on the basis of the Law on Trading in Financial Instruments.

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Authorised CCPs in UE (as of 10.10.2014)

No. CCP Country Date

1 Nasdaq OMX Clearing AB Sweden 18.03.2014

2 European Central Counterparty N.V. Netherlands 1.04.2014

3 KDPW_CCP Poland 8.04.2014

4 Eurex Clearing AG Germany 10.04.2014

5 Cassa di Compensazione e Garanzia S.p.A. Italy 20.05.2014

6 LCH.Clearnet SA France 22.05.2014

7 European Commodity Clearing Germany 11.06.2014

8 LCH.Clearnet Ltd United Kingdom 12.06.2014

9 Keler CCP Hungary 4.07.2014

10 CME Clearing Europe Ltd United Kingdom 4.08.2014

11 CCP Austria, Abwicklungsstelle für Börsengeschäfte GmbH

Austria 14.08.2014

12 LME Clear Ltd United Kingdom 3.09.2014

13 BME Clearing Spain 16.09.2014

Registered TRs in UE (as of 10.10.2014)

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1. DTCC Derivatives Repository Ltd. (DDRL) 14 November 2013

1. Krajowy Depozyt Papierów Wartościowych S.A. (KDPW)

14 November 2013

1. Regis-TR S.A. 14 November 2013

1. UnaVista Limited 14 November 2013

2. CME Trade Repository Ltd. (CME TR) 5 December 2013

2. ICE Trade Vault Europe Ltd. (ICE TVEL) 5 December 2013

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

Main functionalities of the OTC trade clearing system:

clearing of trades accepted to the OTC clearing system and intermediation in settlement arising from clearing

risk management

collateral management

function of central counterparty (CCP) through novation

reporting to the Trade Repository (service offered by KDPW)

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OTC Clearing in KDPW_CCP

Bank A

Bank B

Trade Repository

(KDPW)

National Bank of

Poland (NBP) Confirmation

platforms* Communication

SWIFT

CSD (KDPW)

• repo settlement

• safekeeping

SWI

EMIR

compliant

FRA

IRS

OIS

Basis Swaps

REPO

Nov. 2014: KNF (Polish FSA) application for instruments denominated in EUR

Other currencies – with regard to market demand

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PLN

OTC Clearing: Cleared Instruments

KDPW_CCP has focused on OTC

derivatives denominated in PLN

Acceptable Collateral

Accepted assets: – cash – the only currency accepted as collateral – PLN, – Polish Treasury Bills and Bonds, – shares of companies participating in WIG20 WSE index.

Shares issued by the clearing member or a member of its group are not accepted from this clearing member.

Review of assets accepted as collateral is performed once per year. Valuation is performed on an on-going basis and based on the current closing

price and the current haircut rate. Monitoring of prices and turnover of securities accepted as collateral The following risks are captured in haircut calculations:

– market risk, – liquidity risk, – wrong way risk, – credit risk of the issuer.

Next steps: – Eurozone Treasury Bonds – Cash EUR

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KDPW_CCP Clearing Guarantee System

Margins

OTC Default Fund

KDPW_CCP own capital

Participant financial and prudential requirements

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Clearing Guarantee System – Default Waterfall

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

EMIR

compliant

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KDPW_CCP Participants

Investment firms

Banks

Foreign investment firms

Other financial institutions

Entities established outside the Republic of Poland performing clearing of trades in financial instruments

Companies operating a clearing house

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.

General clearing member:

the amount of PLN 50 M (ca. EUR 12 M) and the sum of PLN 5 M (ca. EUR 1.2 M) for each entity represented by the clearing member in any scope for the clearing of transactions performed by KDPW_CCP – for banks;

the amount of PLN 15 M (ca. EUR 3.5 M) and the sum of PLN 2 M (ca. EUR 0.5 M) for each entity represented by the clearing member in any scope for the clearing of transactions performed by KDPW_CCP – for brokerage houses;

Ordinary (direct) clearing member:

PLN 25 M (ca. EUR 6 M) for banks;

PLN 4 M (ca. EUR 1 M) for brokerage houses;

Clearing house:

PLN 15 M (ca. EUR 3.5 M).

Capital Requirements for Clearing Members

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Organised Trading:

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 Market:

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OTC Clearing - How to Become a Clearing Member

Preliminary (test) phase Potentially 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 Contributions to OTC Default Fund Payment of initial margin Opening clearing account in OTC clearing system

All information regarding membership you can find on our website: www.kdpwccp.eu Rules OTC trading

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Netting in KDPW_CCP

Optional securities netting

Choice of securities settlement methods for each clearing account:

- gross

-netting

-directional netting

All instructions from KDPW_CCP sent to KDPW to settlement sessions

Cash market netting of all trades on the market covered by settlement guarantees.

Introduction of the netting mechanism in co-ordination with the automatic partial settlement functionality.

ISO 20022 clearing reports

Gross securities settlement – settlement instructions are generated for each transaction (clearing

instruction).

Securities netting – for all guaranteed transactions for a clearing account indicated by the Participant. One settlement instruction is generated for each clearing position.

Directional netting – for all guaranteed transactions for a clearing account indicated by the Clearing Member. Settlement instructions are generated separately for the buy and the sell clearing position.

Future Developments

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The KDPW Group conducts its business operations on the basis of the Development Strategy for 2014-2016, reflecting international trends in financial markets. The strategy defines a diverse business model for the KDPW Group, while leveraging the specific strengths and potential of the Polish financial market.

Key Strategic Projects of the KDPW Group for the near future:

KDPW_CCP

Integration of transaction clearing from diverse financial markets in Poland: regulated, interbank and commodity

OTC multicurrency instruments

Extending eligible collateral (EURO, EURO BONDS, according to the market demand)

KDPW

Strengthening the position of the Trade Repository

Further development of securities lending and Tri-Party Repo services

Creation of securities central valuation service

Introducing ISO20022 messaging with participants

Enhanced operational co-operation with other markets in the area of clearing and settlement

www.kdpwccp.eu