The Polish Experience with the creation of the Central Counterparty

• Poland began working on the Central Counterparty (CCP) more than two years ago, whereas the Romanian exchanges can't seem to agree on a local counterparty

In the interview she gave to BURSA, Iwona Sroka spoke about the Polish approach in authorizing the Central Counterparty (CCP), an institution which is a European requirement for the settlement of derivatives.

The domestic stock exchanges - BVB and Sibex - have recently begun discussing the creation of a local Central Counterparty, which requires a minimum capital of 7.5 million Euros, but in order for this project to succeed, aside from money there is also a need for maximum efficiency.

In contrast, the Poles have begun working on their central counterparty two years ago, and they have now reached the stage of submitting the documents for authorization, a process which is expected to take approximately six months.

Reporter: How did the Polish Stock market approach the obligation of a central counterparty authorized on a European level? What will be the solution applied in the case of Poland?

Iwona Sroka: In 2011, the KDPW has created an independent clearing house: KDPW_CCP. In line with the international standards, we have separated two types of risks: the risks of a central depository (CSD) and the risk of clearing and guaranteeing the trades (CCP).

Meanwhile the EU was working on the regulations called EMIR (ed. note: European Market Infrastructure Regulation (EMIR) - the EU regulation no. 648/2012 concerning over the counter derivatives, central counterparties and trade repositories), which concerns both the authorization of central counterparties, as well as the obligation to clear OTC derivatives through a central counterparty and to report the derivative trades to a central trade repository.

Together with the participants on our market, we have consulted the regulations and we have developed solutions that cover the EMIR, on one hand, and are tailored to the needs of the financial institutions, on the other.

This is how we have created the service for the settlement of the OTC derivatives offered by the KDPW_CCP and the central trade repository at the KDPW.

Reporter: When did you begin the preparations and what steps did you implement?

Iwona Sroka: We were already preparing for the authorization of the KDPW_CCP, while the European Commission was working on the EMIR and the technical standards. I need to emphasize that aside from the authorization of our Central Counterparty, we have also developed the service for the settlement of the OTC derivatives and the central trade repository.

The preparations and the authorization of the KDPW_CCP have required a sustained effort and have lasted almost two years. Meanwhile, we have drafted amendments to the regulations, which have introduced the concept of novation (ed. note: a convention by which the parties of an agreement which generates obligations extinguish the old commodity and replace it with a new obligation) in the national legislative system; as a result, KDPW_CCP could become a central counterparty and take over the initial rights and obligations of the initial parties in the trades sent in for settlement.

In the following step, we have increased the equity of our own clearing house: it is now 212 million Zlotys (about 52 million Euros) and it exceeds by far the requirement of the EU regulations, of 7.5 million Euros.

Still, our clearing house serves the biggest market in the region and, furthermore, offers the settlement of the OTC derivatives. Furthermore, the capital makes us more attractive as central counterparty, by considerably strengthening the entire system for the guarantee of the system for guaranteeing the settlement, for which the Central Counterparty represents the material segment.

The preparations for the authorization of the KDPW_CCP have also required an amendment of our regulations, including the bylaws and an entire series of domestic procedures. We had to setup a Risk Commission, to separate the clearing accounts, as was required, to restructure the development of the activation and the total system of the guarantee system, including the margins, the default fund and the capital of the KDPW_CCP.

Reporter: Did you have talks with our representatives of the other markets in the region that asked for your services?

Iwona Sroka: We offer services of the highest international standards and in accordance with the EU regulations. The authorization of the CCP and the registration of the central trade repository open the path to the European market; what is important is that the KDPW_CCP, or our depository is far cheaper than the ones of the major clearing houses or the central repositories of Western Europe.

We have presented central repository service to our colleagues of the Sibiu Exchange, among others. The obligation of reporting all the derivatives trades will come into force in the beginning of next year.

Our Central Counterparty services could be very attractive for the financial institutions in our region.

KDPW_CCP settles cash and derivatives trades on the regulated market, as well as OTC trades.

We currently have over 40 participants on the regulated market and on the alternative trading system.

In the OTC sector, we already have six participating Polish banks (the biggest). And we have other banks that are testing our KDPW_OTC system.

We are also attracting banks located in London. We had meetings with representatives of the major international dealers, and they told us that our service is interesting.

The Polish stock market has a modern and effective settlement and clearing infrastructure, which we will also present at the IPO Summit Warsaw 2013, on June 6th-7th this year. The investors and foreign companies, including those in Romania, will have the opportunity to meet experts from the institutions of our stock market.

Reporter: How long does it take to authorize a Central Counterparty under the EMIR?

Iwona Sroka: We are currently finalizing the gathering of the documents necessary for the authorization of the KDPW_CCP for the local supervisory authority. We expect to submit the application in the second quarter of 2013. The authorization process could take approximately six months.

The derivatives which can be settled through the KDPW_CCP will be registered upon authorization. We are positioning ourselves as a clearing house specializing among others on the settlement of derivatives in the Polish currency.

We are prepared to settle forward contracts on interest rates denominated in Zlotys, IRS (Interest Rate Swap - swap on the interest rates) and OIS (term overnight indexed swap), as well as swap and repo operations.

We will also be prepared for instruments in other currency, next year.

We are also completing the application for the registration of the central depository, which needs to be submitted with the ESMA (European Authority for Securities and markets) directly.