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 2
KDPW and KDPW_CCP on the Polish Capital Market
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 Institutional investors Financial institutions and intermediaries Issuers Individual investors 4
Shareholders of KDPW and KDPW_CCP History 1991-1994 Integral part of the Warsaw Stock Exchange 33% WSE NBP 100 % Treasury 33% 33% 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. 5
Functionalities of KDPW_CCP (CCP) / KDPW (CSD) CCP CSD Clearing risk management Operating the CSD Clearing Settlement Collateral administration Corporate Actions Asset management 6
Market Infrastructure Trade WSE BondSpot OTC KDPW_CCP Clearing Clearing Risk Management System Settlement KDPW Settlement CSD Trade Repository NBP
National Depository for Securities (KDPW)
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.
Main Tasks of KDPW Managing Participants depository accounts in which securities are registered as electronic records Registration and safekeeping of dematerialised financial instruments in Participants depository accounts Settlement of transactions executed on regulated markets (WSE and BondSpot) and transactions executed outside of regulated markets (NewConnect, BondSpot) Monitoring the number of securities in trading to ensure it corresponds with the number of securities issued Corporate actions performance of issuers obligations to securities holders (e.g., dividend payment, merger of shares) Assigning ISIN (International Securities Identifying Numbers) to Polish issues of financial instruments (KDPW is the national institution responsible for assignment of ISIN)
Financial Instruments Registered in KDPW All securities admitted to trading on the regulated market must be registered in KDPW The following securities are registered in KDPW: - Shares (Polish and foreign) - Bonds (Treasury bonds, NBP (central bank) bonds, corporate bonds (Polish and foreign), municipal bonds, convertible bonds, EIB bonds, preferred bonds, non-public bonds, mortgage bonds) - Investment certificates of investment funds - Futures contracts (WIG20 index futures, currency futures, stock futures) - Index participation units - Options (European), (WIG20 index options, stock options) Exception: Treasury bills: safekeeping, clearing and settlement in the National Bank of Poland system 11
Main Rules of Clearing in KDPW KDPW only clears dematerialised securities Securities are transferred by means of booking entries in the KDPW depository, clearing and settlement system Transfers are made between KDPW Participants accounts Obligatory segregation of assets (proprietary assets, clients assets) Holding balances are changed at the time of a booking entry 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 the regulated market WSE, BondSpot T+0 to T+n transactions outside the regulated market OTC Two clearing modes: RTGS DVP (8:00 17:00), FOP (8:00 18:30) Multi-batch mode (7:30 19:00)
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. 13
Number of Securities Accounts 1 600 000 1 477 419 1 497 609 1 528 692 1 132 602 853 333 908 926 996 565 1 028 962 800 000 0 2005 2006 2007 2008 2009 2010 2011 2012 Source: KDPW, based on information reported by Participants. Year-end data for 2005-2011; end of November data for 2012. 14
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 15
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.
Clearing House KDPW_CCP
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
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. 19
Role of the Central Counterparty - CCP The central counterparty (CCP) becomes a buyer to the seller and a seller to the buyer. Typical trade: SELLER BUYER CCP as a counterparty: SELLER CCP as BUYER CCP as SELLER BUYER 20
Clearing House KDPW_CCP: Benefits for the Market Reduced counterparty risk thanks to guarantees of cleared transactions Novation: KDPW_CCP takes over rights and obligation of original parties More effective risk management Capital of the clearing house as a part of the clearing guarantee system New categories of entities eligible as clearing members Improved perception of the Polish capital market infrastructure by Polish and foreign financial institutions 21
Clearing Guarantee System Financial and precautionary requirements for participants Margins Clearing fund Capital of KDPW_CCP 22
KDPW_CCP Participants Local financial institutions: investment firms, banks Foreign financial institutions: investment firms, foreign entities performing functions of clearing transactions in financial instruments Companies operating a clearing house 23
Order of Using the Resources of the Clearing Guarantee System Organised Trading ca. EUR 50 million 24
New European Regulations: Impact on KDPW and KDPW_CCP
EMIR Main Goals Response to the crisis: G-20 summit in Pittsburg (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 26
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 27
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) 28
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: gross operational expenses during an appropriate time span for restructuring; the capital necessary to cover operational risk; the capital necessary to cover credit, counterparty credit and market risks of nonclearing activities; the capital necessary to cover legal risk and business risk. 29
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 30
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) 31
Cleared Instruments List of instruments cleared in KDPW_CCP: Phase 1 2 January 2013: Forward Rate Agreements Interest Rate Swaps Overnight Index Swap PLN Basis Swaps REPO Phase 2 January 2014 : FX swaps FX options Interest rate options PLN and other currencies Currency Interest Rate Swaps (CIRS) 32
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. 33
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. 34
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