Slajd 1 - KDPW_CCP

Slajd 1 - KDPW_CCP

Project launching OTC derivative and repo clearing in KDPW_CCP using novation Project Environment Adverse impact of the financial crisis Adverse impact of the crisis on the stability of the financial sector Reduced liquidity on the OTC market Increased volaility of trade values Rising awareness of credit risk in the world after Lehman New regulations UE: EMIR Regulation on OTC derivatives, central counterparties and trade repositories pending approval of the European Parliament USA: Dodd-Frank Act - implemented 21/07/2010 Basel III, CRD IV in market consultation 2 Identifying the Legal Environment EMIR - Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on OTC derivative transactions, central counterparties and trade repositories. Central clearing of trades mandatory clearing via a CCP (central counterparty) of all standard derivatives traded outside the regulated market Reporting to trade repositories mandatory reporting of all trades, both cleared centrally and bilaterally, to trade repositories Rules for CCPs and trade repositories - authorisation and supervision of CCPs - capital requirements

- organisational requirements - precautionary requirements (risk guarantee system) - interoperability 3 Identifying the Legal Environment Basel Committee on Banking Supervision Consultative Document Capitalisation Of Bank Exposures To Central Counterparties Exposures to CCPs in respect of MtM and margins subject to low (2% risk weight) capital requirements owing to multilateral netting of liabilities and loss protection mechanisms offered by CCPs Bank exposure to the default fund determined on the basis of the current financial resources of the CCP in relation to hypothetical capital requirements. CCP hypothetical capital determined under CEM (Current Exposure Method). 4 List of Active and Planned CCP Services for OTC Derivatives Country Service Scope

Status Germany Eurex Clearing IRS Planned Japan JSCC IRS Planned Poland KDPW_CCP IRS, FRA Planned Sweden Nasdaq OMX IRS

Active UK CME Clearing E. IRS Planned UK LCH.Clearnet Ltd IRS Active France LCH.Clearnet SA IRS Active USA CME IRS

Active USA IDCG IRS Active USA NYPC IRS Planned Bank for International Settlement, CGFS Papers No 46 5 Why KDPW_CCP? Experience in clearing: new clearing guarantee model of the clearing house KDPW_CCP spun off from KDPW in July 2011 Technical and technological

infrastructure and existing communication infrastructure with participants KDPW_CCPs neutral position as a counterparty to market participants Clearing Model accepted by the Banking Expert Team Relations with PFSA, NBP, market participants KDPW_CCP ability to use collateral in securities, which greatly reduces the cost of collateral Own capital of KDPW_CCP 6

Consultations with the Banking Expert Team The Banking Expert Team has approved: Clearing model Scope of cleared instruments Instrument valuation model Staged implementation of the project Use of confirmation platforms Risk management All banks have been invited to participate in KDPW_CCP consultations; 64 representatives of 17 banks took part in the consultations. 7 Proposed OTC Clearing Model Termina tion Platfor m (TriOpti ma)

Thomso n Reuters market data transfer Trading Member A Clearing Member A KDPW Member A Payer Bank A External trading platform MarkitWire SWIFT Accord Trade validation Trade affirmation Trade matching KDPW_CCP Trade clearing Trade repository Clearing risk and position management Clearing guarantee system Processing settlement in thirdparty systems

KDPW (CSD) Cash settlement Collateral in securities Trading Member B Clearing Member B Clien t PFSA Clien t KDPW Member B additionally in payer bank function NBP Settlement in PLN 8 KDPW_CCP Clearing Model: Key Functionalities Third-party trading platform MarkitWire SWIFT Accord

KDPW_CC P Accepting trades for clearing Clearing Formal and substantive check of instructions Reporting Interpositioning KDPW_CCP as legal counterparty Calculating interest payments and MtM Prowadzenie Backloading Contributions to the clearing guarantee system(margi

ns and fund) Early termination (Auction) (Tri Optima automatic termination) Sending instruction s for settlement rozlicze Risk management Defining and calculating risk parameters HVar Price monitoring Back testing Stress tessting Exposure limits Collateral administration Securities register Collateral valuation Trade repository 9 Collateral Processing Model

Member Credits and debits in respect of contributions to the clearing guarantee fund CASH Collateral valuation Determining the haircut Accepting collateral securities: a) Treasury bonds b) W20 index shares NBP KDPW_CCP settlement in PLN 10 in Instruments: List Approved with Banks Phase 1 01 January 2013 Forward Rate Agreements Interest Rate Swaps

Overnight Index Swaps Basis Swaps Repos Phase 2 01 January 2014 Cross Currency Interest Rate Swaps Options Other 11 Proposed Introduction of Clearing Novation to Regulations Clearing novation means that the clearing house takes over the rights and obligations of a counterparty to a trade. Once a trade has been accepted for clearing, the rights and obligations arising from the trade expire in the relations between the trade counterparties and are replaced by new legal relations. Clearing novation will be used on the organised market and outside the organised market. 12 Novation Trade #1 Member A Member B BUY SELL

KDPW_CCP Trade #2 SELL BUY Trade #2 If a counterparty to a trade is a clearing member and has committed itself to the clearing house to perform obligations arising from the clearing of its trades, it is entitled to receive or liable to provide a benefit resulting from the clearing of the trade vis-a-vis KDPW_CCP. 13 Consequences of Clearing Novation to KDPW_CCP Rights and obligations arising from the trade expire while new legal relations arise, to which the clearing house is a party.

The clearing house is entitled to claim the benefits arising from the trade with regard to the trade counterparty (if it is a member) or a member which is a party to clearing. Once a trade has been accepted for clearing, a member which is a party to clearing and the clearing house may only raise claims arising from the legal relations which have replaced the original trade. A member which is a party to clearing cannot raise claims against the clearing house arising from the legal relation between the member and the entity which concluded the trade. Collateral established by the entity concluding the trade subject to clearing by the CCP is excluded from the liquidation assets of the member. 14 Legislative Amendments As a result of consultations initiated by KDPW with market institutions (PFSA, NBP, WSE, Chamber of Brokers, Polish Banks Association, BondSpot, Custodian Banks Council), a draft has been submitted to the Finance Ministry, requesting an amendment of the Act on Trading in Financial Instruments. Key amendments include: Act on Trading in Financial Instruments: Art. 45b - amendment of the definition of trade clearing: addition of the clearing house as entitled to receive or liable to deliver cash and non-cash benefits arising from concluded trades; Art. 45e - amendment excluding collateral established by the entity concluding the trade outside of organised trading subject to clearing by the clearing house from the liquidation assets of the member Art. 45g-45i - amendment introducing clearing novation. Art. 50, Art. 68b - amendment adding new functionalities in the clearing house and KDPW regulations Art.68 - amendment concerning guarantee funds, including establishment of guarantee funds for trades concluded outside the organised market Harmonising amendments of the Act on Public Offering (Art. 67,90) and the Act on Civil Law Transaction Tax (Art. 9).

15 KDPW_CCP Clearing Guarantee System Participant requirements Price monitoring Monitoring exposures / concentratio n Margins Back Testing MTM Default fund + additional margins Stress Testing CCP capital 16 State-of-the-art Risk Management System

Valuation instrument valuation model customised to market specificity Calculating risk based on HVaR (historical VaR) 5-day risk calculation horizon Confidence level 99.9% 500 days look back period Default fund covers stress-test risk Additional margins cover individual participant exposure between default fund updates Stress-tests test the adequacy of resources pooled in the clearing guarantee

system Back-tests test the adequacy of the risk estimation model and its parameters 17 Guarantee System Resources I. Individual margins II. Default fund III. Additional margins IV. KDPW_CCP capital 18 Staged Project Implementation 1.Establish co-operation with Banking Expert Team 2.Jointly develop OTC trade clearing model 3.Approve standards of OTC instruments covered by phase 1 4.Develop risk management methodology and valuation rules 5.Develop functional and technical specification of the new IT solution 6.Select IT solution vendor 7.Initiate Design Study with selected vendor DONE 8.Implementation work

Jan-Jun 2012 9.Present technical documentation and draft regulations to participants Mar 2012 10.Expected introduction of novation to Polish regulations Apr-Jun 2012 11.Amendment of KDPW_CCP regulations Jan-Jun 2012 12.Signing agreements with participants Dec 2012 13.Testing the system with participants Aug-Nov 2012 14.Increase of KDPW_CCP capital Q2-3 2012 15.Production rollout Jan 2013 PLANNE 19

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