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Appendix to KDPW Supervisory Board ResolutionNo 25/258/06 of 13 September 2006

KDPW Strategy2006-2010

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CONTENTS• Planning methodology……………………………………………………….…………………………..3• KDPW responsibilities...…………………………………………………..…………………………….5• KDPW Mission statement ………………………………………………………...……...……………..7• KDPW Vision……………………..………………….. ……………………...……………………...…..8• Internal and external conditions necessary for the realisation of KDPW’s Mission and Vision ..…9• Strategic goals:

Goal 1 – Support in building a regional capital market centre …………………...………...………14

Goal 2 – System harmonisation ……...…………………………………………...…….….…………16

Goal 3 – Achieving actual interoperability with other European systems and remote membership of foreign financial institutions………………………………………………………………………...18

Goal 4 – Changes to the KDPW ownership structure ……………………………………………….21

Goal 5 - Consolidating the KDPW financial model as a not-for-profit oriented organisation .…22

Goal 6 – Adding new functionality …………………………………………………….……………...26

- Modernising services through improvements to the IT system…………...…..27

- Membership in foreign clearing houses……………………………….…….….28

Goal 7 – Adapting the current central counterparty model to a CCP model based on legal responsibility for obligations ………………………………………………………………….....……29

Goal 8 Changes to the KDPW corporate structure ……………………..…………...………...……31 Principal time horizon and interdependence for achieving strategic goals …………………...…...33

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Planning Methodology (I)

• The strategic goals, which are part of the development strategy, may be achieved within various KDPW ownership structures. Most of them could be implemented within the current ownership structure, although it would seem that the degree and form of the implementation of some of the goals depend on the ownership model. For this reason, this document contains a definition of ownership model conditions that need to be satisfied (see “Internal conditions”), as well as a definition of the strategic goal relating to the transformation of the KDPW ownership structure (Goal 4: Changes to the KDPW ownership structure).

• The planning described in this document contains an overview of the essential steps that need to be taken to ensure that KDPW is more fully able to fulfil its mission.

• Owing to the far-reaching and intensive discussions on the direction of evolution of European depository-settlement infrastructures, which will at least to a certain extent lead to regulatory resolutions, proposals for solutions that cannot be reversed should be avoided.

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Planning Methodology (II)

The timeline adopted is based on the following factors:

• The timeline set out in the KDPW development strategy mirrors the timeline defined in the Polish

government strategy for the Polish capital market, presented in the „Agenda Warsaw City 2010” paper, as

well as the timeline envisaged by the EU Commission as part of its Lisbon Strategy, as presented in its

„White Paper on Financial Services 2005-2010”.

• There is a direct link between the ownership restructuring and strategic deliberations on the future of the

Warsaw Stock Exchange, and the KDPW strategy and its future position. Certain solutions applied to the

WSE may influence solutions applied to KDPW.

• Were any measures implemented to change the WSE ownership structure, an analysis would be made to

examine the impact on the KDPW strategy.

• The scope of functionality of infrastructure institutions acting as central depositories for financial

instruments and performing settlement of transactions will be impacted by decisions on a European level.

Around 2007 and over the following years there will be changes in the relationship between various

infrastructure institutions, based on these decisions.

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KDPW Responsibilities

• To maintain a secure and reliable securities registration system,

• The clearing and settlement of transactions in all markets - regulated and non-

regulated, as well as performing settlement risk management in selected markets,

• Providing corporate actions processing for investors.

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Extending its range of responsibilities following incorporation as a separate entity: 1994-2005

Extending its responsibilities in custody and clearing and transaction settlement:

• Risk management and clearing and settlement of derivatives.

Responsibilities, which may be considered value added services according to current EU

terminology:

• Management of the Investor Compensation Scheme,

• Processing of transfer payments between pension funds and management of the Pension

Guarantee Fund

• Providing certain tax agent services for investors,

• Providing information on the ownership structure of portfolios (for Treasury bonds).

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KDPW Mission Statement

The Mission of KDPW is the creation and provision of new services, essential for the development of the Polish capital

market, as well as raising the quality of existing services while maintaining overall business efficiency including offering

services at competitive rates, within the scope of KDPW’s core responsibilities, i.e.:

• The maintenance of a secure and reliable system for the registration of dematerialised securities,

• The clearing and settlement of transactions on all markets - regulated and non-regulated, as well as performing settlement risk

management in selected markets,

• Providing corporate actions processing for investors,

in order to :

- Maintain the best possible environment for raising capital in the market through the issue of financial instruments by entities

domiciled in Poland or by foreign entities in the Polish market,

- Maintain the best possible environment for domestic and foreign investors to be able to purchase these instruments.

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KDPW Vision

The vision of KDPW is the creation of a central securities depository and settlement institution

which will become a permanent fixture in the European depository-settlement environment,

ensuring at the same time the best possible conditions for the evolution of the Polish capital

market as part of the EU market as a whole.

This vision is in line with the long-term interests of the participants of the depository-settlement

system, acting as trading intermediaries, providing services to investors and issuers alike in the

scope of their activities in the Polish and international financial markets.

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Internal and external conditions necessary for the realisation of KDPW’s Mission and Vision (I)

Internal conditions:

• The KDPW ownership structure, owing to the manner in which the company was founded,

differs from the more commonly found ownership structures of CSDs in Western Europe.

• The shareholders do not represent the majority of core KDPW service users, including whole

categories of stakeholders.

• At the same time, the current KDPW ownership structure minimises the risk of putting short

and medium term interests before the long term interests of the capital market (including

KDPW participants), as the market for the allocation of instruments and capital.

• In situations where the National Bank of Poland has no statutory rights of supervision of the

KDPW system, the NBP carries out supervision as shareholder. The NBP believes that one of

the conditions for potential flexible changes to the KDPW shareholder structure in this scope is

for the NBP to acquire statutory rights to perform effective supervision over securities clearing

and settlement systems.

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Internal and external conditions necessary for the realisation of KDPW’s Mission and Vision (II)

• KDPW is not and will not be in future a typical business structure, owing primarily to its not-for-profit status. This is the chief limitation when considering the reality (and not just the theoretical possibility) of various privatisation models, in particular aimed at investors that are not core KDPW service buyers.

External conditions:

• A single capital market will emerge in the EU, as regards regulations, standards and the manner in which financial services are provided.

• The flow of capital will be increasingly liberalised. Barriers that protect the business activities of national institutions will be removed. This may have a significant impact on KDPW’s competitive advantage and that of the Polish depository-settlement infrastructure in the event that its strategic goals are not realised, goals which would in principle protect the depository-settlement system against the negative effects of increased competition. At the same time, however, the predicted changes will provide new growth opportunities.

• Limitations, restrictions and monopolies, as well as local differences will continue to disappear. As regards the situation in Poland, this will also affect KDPW’s current monopoly on the provision of depository and clearing and settlement services in the regulated market. The end of monopoly rights will mean that there will be increasing choice (in line with the progress of harmonisation in the capital markets) of depository and clearing and settlement service providers. It is in KDPW’s interest that the process of adapting to future European regulations does not exceed (in the scope of the pace and form of changes), the limits of requirements set out in European legislation, while obviously maintaining general compliance with the provisions of that legislation.

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Internal and external conditions necessary for the realisation of KDPW’s Mission and Vision (III)

• The ending of monopoly rights before achieving interoperability at a European level, which

ought also to be a method for eliminating cost differences between systems, may pose risks for

the role of the company as provider of depository-settlement services across the whole range

of its activities, not just within the provision of services for the regulated market.

• Measures to raise efficiency and safety in the European capital market will lead to

consolidation in the agency sector and infrastructure institutions, including CSDs and clearing

houses.

• Competition will increase (as consolidation progresses) between capital markets and the role

of central infrastructure institutions will increase, as institutions which through the quality of

the services they provide and their accessibility for participants of the international markets,

may influence the result of this competition and the final effect in the form of consolidation.

External conditions (cont.):

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Internal and external conditions necessary for the realisation of KDPW’s Mission and Vision (IV)

External conditions (cont.):

• Competition will intensify between CSDs and banks and credit institutions providing services in the

securities market, in particular against a background of trade internalisation (this relates to transaction

settlement), cross-border settlement and certain types of value added services. Competition will above all

remain in activities related to the provision of access by investors to depository-settlement services

performed at the central level, in non-domestic capital markets (from the point of view of the investor) so

will in reality enable investment in these markets.

• EU institutions are intensifying their oversight of competition and user protection in the financial sector.

• The principle obstacles to the operation of a single market are mainly legal and regulatory barriers

(legislation, SRO (self regulatory organisations) regulations, ”soft law”, market practices etc) – these will

slowly be removed; harmonisation will increase, along with unification of laws (in particular the effect of

progress as part of the Securities Account Certainty Project). It is also probable that with the evolution of

the market, new barriers will appear, meaning that harmonisation will need to be a constantly evolving

process, although one that will become less intense.

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External conditions: Conclusions

The effect of these processes will be a growth in the volume of cross-border

transactions.

The beneficiaries of this growth may also include new markets, such as the Polish

market. Conditions may develop to maintain trading liquidity at proper levels for

instruments issued by Polish issuers. At the same time, were KDPW not to join the

integrationary process, the Polish capital market would risk losing its opportunity to

evolve and would suffer regression (shrinkage of the investor base in Poland and

Polish companies seeking capital in foreign markets).

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Strategic goalsGoal 1: Support in building a regional

capital market centre (I)

Conditions:

• Reaching a critical mass for regional securities issues and improvements in market results (as regards liquidity and

capitalisation) will help ensure that regional investment by foreign investors will concentrate on the Polish market,

which should also mean that the Polish depository-settlement infrastructure will be increasingly in demand.

• Building a regional capital market centre in Warsaw over the next few years – i.e. within the time-frame set out for

strategic planning in this document, will be a difficult goal to achieve; however, efforts should still be made to achieve

this goal.

Actions already performed:

• At present, KDPW is strengthening its position, and supporting the role of the market in Warsaw as an international

hub, by building, developing and operating Free of Payment links with other CSDs in Europe to enable foreign issued

securities to be listed in the Polish market (current links are operating with KELER, OeKB, Clearstream and

Euroclear).

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• Work is being carried out to harmonise and standardise products and services in order to create improved conditions for entry to the Polish market for foreign issuers.

Actions to be performed

• The transformation of the Polish market into a regional hub may to a certain extent be the result of the realisation of a program of integration with other European systems, used to process cross-border transactions – this solution may increase demand in the Polish market and attract new issues from regional companies to Poland.

• The situation will need to be actively monitored and opportunities would need to be sought and created in order to ensure that the Polish capital market can become a trading centre for regional companies (though not limited to the region), concentrated around core infrastructure institutions, i.e. the WSE and KDPW.

Strategic goalsGoal 1: Support in building a regional

capital market centre (II)

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Strategic goalsGoal 2: System harmonisation (I)

Principles:

One of the pre-conditions of Poland being able to attract foreign investments is:

System harmonisation (law, institutional procedures and rules, standards and best practice).

When this condition is met, the link between the separate systems would work in practice (processing of cross-border transactions in all financial instruments). This is not a pre-condition in itself for encouraging investment, however it is essential. System harmonisation is a serious undertaking and even slight incompatibilities between the markets may create barriers to the formation of a single market for financial services, including services provided by institutions from the depository-settlement infrastructure.

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Strategic goalsGoal 2: System harmonisation (II)

Actions to be performed:

• One priority is to harmonise the operational rules for the Polish market, in the scope of management of a CSD, clearing and settlement and closely related areas (e.g. for this last category, nominee relationships should be introduced to Polish law in the scope of trading in financial instruments).

• This plan should be realised by amending the law, regulations and standards; this process should be initiated by KDPW, which has essential resources and competence in this field.

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Strategic goalsGoal 3: Achieving actual interoperability with other European systems

and remote membership of foreign financial institutions (I)

Principles:

• Achieving interoperability for KDPW, meeting efficiency and safety standards, will have a significant

influence on the development opportunities of the Polish capital market. This includes not only the

interoperability of KDPW as a company, but of the whole system itself (including its participants) – this is

carried out by improving efficiency and ensuring standard processing for international investors investing

their assets in the Polish market,

• Difficulties arising when planning and implementing interoperability and remote membership is associated

above all with CSDs, since this relates to the custody of assets and their safekeeping. To a lesser degree, in

particular owing to a smaller degree of legal complications, this relates to securities clearing. However, in

this particular area, the management of settlement risk is a major problem

• Achieving interoperability is time and cost consuming. This is why it is important to perform a cost-benefit

analysis before starting any co-operation between institutions.

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and remote membership of foreign financial institutions (II)


• Progress on achieving interoperability between KDPW and other European CSDs should

continue in order to improve the access of foreign investors to the Polish market and create the

conditions for remote membership of financial institutions in KDPW.

• This work will be the best way of drawing up harmonisation plans, since many problems will

only become apparent following the actual building of a link between systems.

• Efforts should be made to eliminate legal and tax barriers.

• The principle feature of interoperability is the ability for systems working together to perform

transaction settlement on a delivery versus payment basis (DvP) with the simultaneous transfer

of cash and financial instruments.

• Building a DvP link increases the opportunities for access to a given market by foreign

investors, and may at the same time increase liquidity in the local market.

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and remote membership of foreign financial institutions (III)

The problem of cash settlement:

• One of the most important pre-conditions for the implementation and effective use by market participants

of a DvP link built between KDPW and other infrastructure institutions or remote members, is their ability

to perform certain cash payment operations in the same way that banks perform these activities.

• This solution allows the parties to the cross-border transaction to settle on the basis of DVP.

• The Access and Interoperability Guideline, which contains detailed principles of access and

interoperability between European infrastructure institutions and was drawn up on the basis of the Code of

Conduct, which was signed in 2006 by all European infrastructure institutions, highlights the importance

for competition of CSDs holding limited banking status, as regards their interaction with other

infrastructure institutions.

• This solution may however incur costs and create new types of risks, which need to be analysed closely

prior to any implementation of the aforementioned functions.

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Strategic goalsGoal 4: Changes to the KDPW ownership structure (I)

Recognising the issues presented in “internal conditions”, it is important to be able to strengthen the number and profile of the representation of the users of core system services provided by KDPW, within its ownership structure.

The aforementioned solution may have the following advantages:

1. Retention of control over key market services by national institutions, which are first and foremost concentrated on the development of the local capital market in their necessary integration with the European market,

2. Improving interaction between the service provider and service users,

3. Lowering of potential risks related to the entry of a foreign strategic capital investor.

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Strategic goalsGoal 5: Consolidating the KDPW financial model as a not-

for-profit oriented organisation (I)

Principles:• KDPW should be an institution which makes a profit, however its goal, owing to

the mission it performs in the capital market, should not be profit maximisation – it should remain a not-for-profit oriented institution.The definition of a financial-business model as not-for-profit oriented determines decisions made in relation to the policy of maintaining a structure of fees for services restricting excessive profits.

• The principle factors governing the fee policy, as well as a policy on profits generated by the company should include the following:– The need to use operational income to cover running costs,– The need for KDPW as the operator of the depository-settlement system to

finance research and development,– The need to meet capital adequacy requirements for financial institutions, in

particular related to membership of clearing houses and establishment of a CCP,

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– The need to avoid situations where KDPW services are more expensive than services provided by similar institutions (in terms of business functions) operating in similar markets, as well as avoiding situations where setting the level of fees for services would restrict the realisation of the requirements listed above.

Actions already performed

1. Fee reductions at the beginning of the year, conditionally following operational profits in the previous year.

2. Having the fee policy reflect the amount and type of fees charged in similar foreign institutions, processing markets of a similar size, on the basis of the appropriate reference criteria and regular monitoring thereof.

Strategic goalsGoal 5: Consolidating the KDPW financial model as a not-for-

profit oriented organisation (II)

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3. Monitoring changing regulations relating to capital adequacy (in

particular in the light of the approach already seen in the EU of

identifying requirements depending on the type of risk and financial

institution functionality).


• Having the fee policy reflect real costs of each service (financial

controlling plan).

• Adhering to the principle of setting fees for all services provided.


profit oriented organisation (III)

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profit oriented organisation (IV)

Summary:With a consistent application of the aforementioned measures, the fee policy will be based on economic criteria, in relation to the financial-business model adopted.The policy for setting fees and generating profits according to the not-for-profit oriented model also allows KDPW to provide services that are not directly related to KDPW’s core responsibilities, although there is a relationship through the generation of value for capital market participants in order to diversify sources of income that are essential in a competitive market and required for optimising cost and earnings management.

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Strategic goalsGoal 6: Adding new functionality (I)

Principles:

It is in the interest of the company and the system participants to raise the quality and scope of services offered as part of the KDPW Mission.

This may be ensured through:

• Modernising the way services have been provided until now,

• Adding new procedures and methodology, significantly extending the value of services provided,

• Making new services available, including value added services, in relation to core services provided, bringing advantages for the participants of the capital market.

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Strategic goalsGoal 6: Adding new functionality:

Modernising services through improvements to the IT system

Principle:• Avoiding situations where lack of technological changes, reflecting changing

expectations of market participants as to how operations are performed, become a barrier to growth in the market.

Actions to be performed:• Changes to the procedures currently applied in the IT system, in order to achieve

the highest possible standards of core operational service.• Providing an essential stable and integrated development of the whole KDPW

system, i.e. the system responsible for custody and settlement operations both in KDPW and its participants.

• Adapting technological requirements to individual business needs of KDPW participants.

• Modernising the technical and technological infrastructure in strict relation to achieving interoperability allowing for remote membership in the KDPW system.

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Strategic goalsGoal 6: Adding new functionality:

Membership in foreign clearing houses


It is essential to ensure that KDPW is linked to foreign markets on the basis of its membership in foreign clearing houses as a clearing member, if this is confirmed in an analysis of the opportunities and threats for KDPW of such a link and therefore for the growth opportunities of the Polish capital market. This will in particular involve the need to meet institutional requirements, which is in turn dependent on such relations existing with a foreign clearing house. In this context, it will also be important for KDPW to acquire limited purpose banking functions

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Strategic goalsGoal 7: Adapting the current central counterparty model to a

CCP model based on legal responsibility for obligations (I)

Principles:

• European standards – drawn up by ESCB-CESR – for clearing services are in the process of being finalised. Should these standards, which define the safe provision of clearing services, be directed at all clearing houses, not just those which are CCPs performing novation, then meeting these standards should be sufficient to reflect the reliability of a clearing house.

• Should these standards apply only to CCPs performing novation, then in order to ensure that KDPW is seen as a reputable and reliable clearing house by international trading institutions, KDPW should transform its clearing house into a CCP that performs novation.

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Strategic goalsGoal 7: Adapting the current central counterparty model to a CCP model based on legal responsibility for obligations (II)


• This change should be implemented in the most effective way possible, allowing at the same time for KDPW to be recognised as a CCP in the international markets. The problem of a CCP, even following its formal implementation, is also a problem of changes of perception. There is no problem though in making any changes to the rules or procedures of clearing and risk management.

• A cost-benefit and risk analysis needs to be performed for the abovementioned proposals.

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Strategic goalsGoal 8: Changes to the KDPW corporate structure (I)

• Taking into account work currently underway by the EU Commission on the Code

of Conduct document, where one of the elements under review is unbundling of

services, as well as an issue raised by the ECB in the past as regards the separation

of custody services from risk sensitive CCP functions, were the Code of Conduct to

be adopted, it could lead to a legal separation of depository and clearing functions.

• All future organisational models should maintain the principle that one single

corporate body (or the same bodies) should decide on the strategic direction for

regulations and technology as regards the registration and clearing of financial

instruments, as well as the maintenance of operational integrity for clearing and

settlement in the cash market. This suggests the potential implementation of a

holding structure.

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Strategic goalsGoal 8: Changes to the KDPW corporate structure (II)

• Should the ECB not insist on the need for a legal separation of the risks of a CCP operating on the basis of legal responsibility for obligations arising from custody functions, and should legal separation not be required for entities providing „bundled” services, it would be worth aiming for maintaining the status quo in the scope of the organisational framework of depository-settlement activities, i.e. retain the current single model structure, where one institution is responsible for performing both custody and transaction clearing and settlement functions.

• Any conclusive position on both the decision of KDPW taking on responsibility for transaction settlement using its own capital, as well as organisational and capital restructuring, will need to be made on the basis of finalised European standards on clearing and an interoperability framework created as part of the Code of Conduct – however, this should not be earlier than before the end of 2007. In order to implement these decisions effectively, the legal framework for this restructuring will need to be established before then through changes to the rules defining KDPW activities.

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Principal time horizon and interdependence for achieving strategic goals (I)

Strategic goals, which are currently being realised and on which work should continue to progress and be extended in scope:

• Goal 1: Support in building a regional capital market centre. Implementation deadline: continuous process

• Goal 2: System harmonisation. Implementation deadline: continuous process• Goal 3: Achieving actual interoperability with other European systems and remote

membership of foreign financial institutions. Implementation deadline: in the scope of building DvP links, this goal should be achieved before the end of 200continuous process (the relevant legal changes being made are an external condition).

• Goal 5: Consolidating the KDPW financial model as a not-for-profit oriented organisation. Implementation deadline: continuous process, however, at the same time: optimising the process through the introduction of financial controlling before the end of 2006.

• Goal 6: Adding new functionality – Modernising services through improvements to the IT system. Implementation

deadline: according to separate timetable,– Membership of foreign clearing houses. Implementation deadline: work will

commence once a need has been identified by Polish financial institutions.

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Principal time horizon and interdependence for achieving strategic goals (II)

Strategic goals, which according to their strict definition would need to be

achieved/realised depending on progress in achieving the relevant

solutions and standards being currently defined in Europe, however, not

earlier than before the end of 2007:

•Goal 7: Adapting the current central counterparty model to a CCP model

based on legal responsibility for obligations

•Goal 8 Changes to the KDPW corporate structure

•Decisions relating to acquiring certain types of banking functions (like

banks) i.e. as described in Slide 20 as an element of Strategic Goal 3.

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