OTC Derivatives Clearing in KDPW_CCP

Ph.D. Iwona Sroka, President & CEO, KDPW and KDPW_CCP

FOW Derivatives World CEE Warsaw, 14 October 2014

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

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KDPW and KDPW_CCP 33%

33% WSE

• • •

NBP

Treasury

KDPW_LEI

33%

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)

•

*** •

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

• • •

100 % • • • •

*** 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)

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KDPW_CCP Milestones

2009 2010

• New Development Strategy of KDPW

• Creation of KDPW_CLEARPOOL Clearing Guarantor – first step to CCP

•Establishing of KDPW_CCP clearing house: • Separate legal entity

2011

July 2011

• New clearing guarantee system • SPAN • CCP’s own capital

2012 2013 2014

• Introducing novation to the Polish legal system • Introduction of OTC clearing service

Nov. 2012

• Application for authorisation

• EU Authorisation of KDPW_CCP

8.04.2014 4

CSD Services

Core Services

Key functionalities:

Securities settlement system Regulated market

Alternative Trading System

OTC cash market

Central Depository of Securities Maintaining Maintaining securities securities accounts accounts at at the the top-tier top-tier level level

Initialrecording recordingof ofsecurities securities Initial in a book-entry system in a book-entry system

Ancilliary Services Corporate Actions processing Operational links to foreign CSDs Commercial Services Trade Repository

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Omnibus accounts for foreign investors

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

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Hold/Release mechanism (optional)

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

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Agent for Securities lending & borrowing - automatic and negotiated

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Settlement and collateral management for repo (Triparty Repo Agent)

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Partial settlement

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CA: information, distribution of proceedings, tax services

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GIR - clearing and settlement of energy market transactions

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T+2 settlement cycle regarding to CSDR requirements

Numbering Agency (LEI, ISIN, FISIN) Commodities Clearing House (GIR KDPW) Tri-Party Repo

CSD authorisation process planned for 2015/2016

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CCP Services Key functionalities:

Clearing of trades Regulated market

ATS

OTC derivatives

OTC REPO

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Central counterparty functionality through novation

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Netting in cash (obligatory) and securities (optional)

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Segregation of accounts (individual and aggregated accounts)

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OTC derivatives:

Clearing risk management SPAN

VaR

Collateral management PLN

T-bonds

T-bills

WIG20 shares

Bank guarantees

Supplementary Services Derivatives trade reporting to KDPW_TR

•

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

•

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

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OTC clearing based on MarkitWire and SWIFT Accord instructions

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Guarantee system for negotiated securities lending transactions

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Margins calculated on intra-day and daily basis

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STP with WSE trading system (UTP - NYSE Euronext)

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Default waterfall and procedures compliant with EMIR

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

Authorised in April 2014

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KDPW_CCP - Markets & Products

CASH MARKET

Regulated

- Warsaw Stock Exchange (WSE) - BondSpot

shares, bonds, subscription rights, allotment certificates, investment & structured certificates, index participation units, mortgage bonds, warrants, ETFs

ATS

- NewConnect - Catalyst - BondSpot

shares, allotment certificates, bonds, mortgage bonds

DERIVATIVES MARKET

OTC

Regulated

- Matching Engine for REPO

- Warsaw Stock Exchange (WSE)

T-bonds

futures contracts, options, index participation units

OTC

- OTC (MarkitWire, SWIFTAccord)

Forward Rate Agreements, Interest Rate Swaps, Overnight Index Swaps, Basis Swaps

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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 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)

(of which 77 are foreign)

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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.

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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.

OTCMarket              

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. 9

KDPW_CCP Clearing House 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. 

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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. 10

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 11

Registered TRs in UE (as of 10.10.2014)

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

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OTC Clearing in KDPW_CCP 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)

EMIR compliant

Bank A

Confirmation platforms*

Communication SWIFT

National Bank of Poland (NBP) Trade Repository

(KDPW)

Bank B

SWI CSD (KDPW) • repo settlement • safekeeping

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OTC Clearing: Cleared Instruments

    

FRA IRS OIS Basis Swaps REPO

PLN

KDPW_CCP has focused on OTC derivatives denominated in PLN

 Nov. 2014: KNF (Polish FSA) application for instruments denominated in EUR  Other currencies – with regard to market demand

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Acceptable Collateral 

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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 15

KDPW_CCP Clearing Guarantee System

Participant financial and prudential requirements

Margins

OTC Default Fund

KDPW_CCP own capital

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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

EMIR compliant

(not more than 50% of the last existing contributions according to the lates update)

Remaining own funds of KDPW_CCP 17

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.

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Capital Requirements for Clearing Members

Organised Trading:  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;

OTC Market:  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).

 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).

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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 20

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

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

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

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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.

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Future Developments 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

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

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OTC multicurrency instruments

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

KDPW  Strengthening the position of the Trade Repository

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Further development of securities lending and Tri-Party Repo services

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Creation of securities central valuation service

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Introducing ISO20022 messaging with participants

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Enhanced operational co-operation with other markets in the area of clearing and settlement 22

www.kdpwccp.eu