OTC Clearing in KDPW_CCP London, October 2012

Agenda  Market Infrastructure in Poland  About KDPW_CCP  OTC Clearing in KDPW_CCP

Market infrastructure in Poland

Market Infrastructure in Poland KDPW_CCP and KDPW

Market Infrastructure in Poland Clearing and Settlement Warsaw Stock Exchange BondSpot OTC Trading Settlement KDPW_CCP Settlement Clearing CSD Risk Management System National Bank of Poland Clearing KDPW Trade Repository

About KDPW_CCP

About KDPW_CCP Ownership Structure NBP ST WSE 100 % History of KDPW (the CSD)  Integral part of the Warsaw Stock Exchange  present Independent institution, joint stock company  Current shareholders (since 1999) State Treasury1/3 of shares WSE1/3 of shares National Bank of Poland1/3 of shares  KDPW_CCP (July 2011) KDPW100% of shares 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. SELLER KDPW_CCP as a BUYER KDPW_CCP as a SELLER BUYER About KDPW_CCP Novation

About KDPW_CCP Markets & Products CASH MARKET DERIVATIVES MARKET Regulated ATS OTC Regulated - Warsaw Stock Exchange (WSE) - BondSpot - Warsaw Stock Exchange (WSE) - BondSpot shares, bonds, subscription rights, allotment certificates, investment & structured certificates, index participation units, mortgage bonds, warrants, ETFs - NewConnect - Catalyst - BondSpot - 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_CCP Risk Management  SPAN® Methodology – regulated market & ATS  Value at Risk – OTC market

About KDPW_CCP Basic Statistics*  Number of KDPW_CCP’s Participants: 39  Number of cleared transactions – cash market:  Value of cleared transactions – cash market: EUR (PLN )  Number of cleared transactions – derivatives market:  Value of cleared transactions – derivatives market: EUR (PLN ) * From January 2012 till now

OTC Clearing in KDPW_CCP

 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) OTC Clearing in KDPW_CCP

 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 OTC Clearing in KDPW_CCP System Functions (2)

OTC Clearing in KDPW_CCP System Functions (3) Bank A Bank B Trade repository (KDPW or other) National Bank of Poland Confirmation platforms* Communication SWIFT or SWI CSD (KDPW) settlement for repo collateral safekeeping CSD (KDPW) settlement for repo collateral safekeeping * Repo transactions – confirmation in KDPW_CCP

OTC Clearing in KDPW_CCP Clearing Day Timetable (CET) Day 1:  09:00-17:00 – input of derivative and repo trades for clearing; - risk monitoring  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 bootstrapping The 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_CCP KDPW_CCP Clearing Guarantee System Margins OTC Default Fund KDPW_CCP own capital Participant financial and prudential requirements

OTC Clearing in KDPW_CCP Margins  Historical simulation model  5-day 99,5% VaR  500 days observation window

OTC Clearing in KDPW_CCP OTC Default Fund Contribution Calculations IM Stress IM Normal CM 1 IM Stress IM Normal CM 2 IM Stress IM Normal CM 3 UR 1 UR 2 UR 3 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_CCP Default 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_CCP Next steps

Marcin Truchanowicz Managing Director E: T: HelpDesk: Contact: Żaneta Skorupska-Świrska Deputy Managing Director E: T: All information, documents, regulations you can easily find on our website: