Is the Polish CCP structure more advanced than Western Europe s? Brian Taylor Managing Director, BTA Consulting

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1 Consulting

2 Is the Polish CCP structure more advanced than Western Europe s? Brian Taylor Managing Director, BTA Consulting Consulting

3 Agenda Hypothesis What is a CCP? Current CCP issues Comparison of the so called advanced Western European CCPs with KDPW? Conclusion - is KDPW more advanced? Consulting 3

4 Hypothesis At a continental level CCPs operate in oligopolistic markets, where barriers to new CCP entrants are too high. CCPs are efficient for derivative markets but for cash markets CCPs are unable to reach an optimal structure because: CCP methodologies build on inefficient trading and settlement infrastructures; CCPs allocate excessive amounts of capital into default funds. Consequently, CCPs do not innovate as fast as more competitive markets Consulting 4

5 What is a CCP? A regulated financial services organisation Novation (the seller to the buyer and the buyer to the seller) Settlement guarantees End to end anonymity Risk Measurement, Monitoring and Management: Counterparty risk Systemic risk Investor protection SELL BUY EXCHANGE TRADE BUY FROM CCP SELL TO CCP CCP BUY/SELL INSTRUCTION CSD CCP DELIVERS TO BUYER DELIVER TO CCP Consulting 5

6 Current CCPs London Clearing House UK + Deutsche Börse Clearing Germany Clearnet SA Euronext zone ECCP Nasdaq Europe (DTCC / NSCC US market) Independent, not for profit Part of Deutsche Börse Group listed, for profit Part of the Euronext Group listed for profit DTCC owned, not for profit. (Member owned, not for profit) Consulting 6

7 Current CCP issues Ownership options: Private v a utility For profit or not for profit Stand alone or vertically integrated Is there competition: Not really CCPs are national or product monopolies Users do not change portfolio decisions based on CCP performance, cost or risk management No successful new entrants dislodging existing incumbents Expansion is via a parent company or into new products No universal CCP business model and no CCP inter-operability Breadth of services securities, OTC products, energy, B2B CCPs are dependent on finality (pipeline liquidity risk) Consulting 7

8 CCPs for Cash Markets - A New Model 1.Seller 2. Buyer Trading = Settlement = Finality = Zero Margin CCP is only a provider of anonymity Releasing c. 1bn of capital in Europe alone 4. Pre-validation 9 Depository (e.g KDPW) 3 & 7 Market (e.g WSE, CTO) 8 CCP 9 RTGS - Central Bank 6. Pre-validation 10 Update 5. Pre-validation Consulting 8 Asset Borrowing/ lending algorithm Collateral algorithm

9 Comparison of the so called advanced Western European CCPs with KDPW? EACH (European Association of Clearing Houses) standards: Membership Standards (entry level and on-going) Western Europe: Single Passport under the ISD Polish CCP Membership is limited to Domestic Participants Consulting 9

10 Comparison of the so called advanced Western European CCPs with KDPW? EACH (European Association of Clearing Houses) standards: Valuation and Margining: Western Europe: Real time margin valuations and daily calls for initial and variation margins Not universally used in cash markets (e.g MTS, SETS) Polish CCP: T-1 pre-margining, plus daily calls for initial and variation margins Not used at all cash markets No use of international securities as collateral Consulting 10

11 Comparison of the so called advanced Western European CCPs with KDPW? EACH (European Association of Clearing Houses) standards: Money Settlement: Western Europe: Via national RTGS (final, irrevocable) Polish CCP Via national RTGS (final, irrevocable) Consulting 11

12 Comparison of the so called advanced Western European CCPs with KDPW? EACH (European Association of Clearing Houses) standards: Physical Delivery: Western Europe: Some CCPs provide CCP services for commodities Polish CCP Not used for commodities probably a good business opportunity Consulting 12

13 Comparison of the so called advanced Western European CCPs with KDPW? EACH (European Association of Clearing Houses) standards: Custodial arrangements: Western Europe: Only use high quality custodians e.g Central Banks, and historically AAA rated banks Global (G7) quality collateral Polish CCP KDPW does not have a credit rating High Emerging Market Quality Collateral Consulting 13

14 Comparison of the so called advanced Western European CCPs with KDPW? EACH (European Association of Clearing Houses) standards: Default resources: Western Europe: Much larger scale e.g LCH 600mn (75% derivatives: 25% cash markets) Continental European CCPs do not publish scale of default resources Challenges: Legal Risk/Finality No Uniform Securities Code or Insolvency Laws across EU; the impact of the Zero Hour Rule has not been truly tested on CCPs Polish CCP Default resources not published Consulting 14

15 Comparison of the so called advanced Western European CCPs with KDPW? EACH (European Association of Clearing Houses) standards: Non Default Risk Management: Western Europe: Assume CCPs have the infrastructure Polish CCP Assume KDPW has the infrastructure DTCC: Successful in 9/11 SEC is not planning to re-engineer the market structure to eliminate pipeline liquidity risk / default risk Consulting 15

16 Conclusion - is KDPW s CCP more advanced? KDPW is is different from Western European CCPs: KDPW s CCP CCP is is a pragmatic implementation of of CCP CCP ideas ideas KDPW s CCP CCP is is not not a separate legal legal entity entity (risk (risk may may not not be be ring ring fenced) KDPW KDPW is is not not wholly wholly owned owned by by the the private private sector sector KDPW s CCP CCP is is smaller smaller than than Western European CCPs CCPs Offers Offers different risk risk management models models KDPW is is consistent with Western European CCPs: Official Official market market and and OTC OTC products Access Access to to central central bank bank funds funds Management and and IT IT frameworks Conclusion the the KDPW CCP is is probably appropriate for for Poland We We urge all allccps to to change the the model for for cash markets Consulting 16

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