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T2S Polish Market Adaptation Plan Warsaw, 2 June 2010

Document designated for the Eurosystem as a part of KDPW’s obligation arising from the signing of the Unilateral Undertaking (MoU) within the T2S Project


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Table of contents

1. Background ....................................................................................................................... 3

2. Conditions of Polish Market Entry to T2S .................................................................... 3

2.1. Polish Law amendments to adapt to T2S .................................................................. 3

2.2. Euro Adoption Date Set by the Polish Government ................................................. 4

2.3. KDPW’s Execution of FWA ........................................................................................ 4

3. KDPW Assumptions for IT System Integration with the T2S System ........................ 5

4. Initial Assessment of T2S Impact on KDPW IT System and Processes ...................... 6

4.1. Impact on KDPW System Functionalities .................................................................. 6

4.2. Assessment of Modification of kdpw_stream IT Modules ........................................ 6

5. Timetable of Adjusting KDPW to T2S ........................................................................... 7

5.1 Assumptions of the Framework KDPW Action Timetable ........................................ 7

5.2. Initial KDPW Action Timetable .................................................................................. 8 5.2.1. Preparations to Sign the Framework Agreement (until April 2011) ...................... 8 5.2.2. Functional Specification Phase (June 2010 – March 2012) ................................... 9 5.2.3. KDPW System Adjustment Phase (March 2012 - December 2013) ..................... 9 5.2.4. Testing on the T2S Platform (July 2013 – December 2015) .................................. 9 5.2.5. Migration from the kdpw_stream System to the T2S Platform (January 2013 – January 2016) ................................................................................................................... 10

6. Project Management Organisation ............................................................................... 10

6.1. Internal T2S Project Organisation ............................................................................ 11

6.2. External T2S Project Organisation ........................................................................... 13

Appendix 1. List of KDPW System Functionalities Adjusted to T2S .......................... 16

Appendix 2. Comparison of the Timetable of the KDPW and the T2S Operational Day ....................................................................................................................................... 21

Appendix 3. T2S Initial KDPW Project Plan ................................................................. 22


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1. Background The purpose of this study is to conduct an initial analysis of the process of adaptation of the National Depository for Securities (“KDPW”) and indirectly the participants of the Polish capital market, to the migration of securities settlement functions from the kdpw_stream system to the TARGET2-Securities platform projected by the Eurosystem. This study is prepared under the Unilateral Undertaking signed by KDPW on 10 February 2010 as equivalent to the Memorandum of Understanding signed by 27 European central depositories in July 2009.

This document presents the external conditions of Polish market entry to the T2S system, a general description of the expected scope of change in the organisation and execution of KDPW settlement functions, the expected impact on existing IT systems, and an initial timetable of KDPW’s preparation for the migration to T2S.

The initial assessment of the impact and scope of KDPW’s expected adaptation process to T2S is based on the assumption that the platform offers the settlement functionalities listed in the User Requirements Document v. 5.0.

2. Conditions of Polish Market Entry to T2S The implementation of the project of KDPW’s entry to the T2S platform is exposed to external risks, which will require ongoing monitoring and action in co-operation with external institutions in order to plan the elimination of such risks before KDPW decides to sign a Framework Agreement (FWA) with the Eurosystem.

2.1. Polish Law amendments to adapt to T2S The migration of the entire Polish market to T2S is conditioned by legislative amendments of the Act of 29 July 2009 on Trading in Financial Instruments by means of:

• The introduction of regulations enabling the outsourcing of settlement functions to an entity independent of KDPW, including the provision of information classified as confidential data to such an entity;

• The introduction of omnibus accounts and tax regulations enabling the opening of such accounts for foreign KDPW participants;

• The amendment of the existing rules of operating registration accounts within the depository-settlement system operated by KDPW (as a consequence of the introduction of omnibus accounts).

In the absence of draft regulations which would allow for the outsourcing of settlement functions and lay down the rules for supervision of a such a system by the Polish regulator (Polish Financial Supervision Authority, “KNF”), it is currently not possible to make an initial assessment of whether the T2S platform and the solutions set out in the Framework Agreement are in compliance with future Polish legislative requirements. The outsourcing of settlement functions to T2S will require amendments to KDPW regulations. Likewise, system modifications, changes to the scope of services, and the


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introduction of new functionalities will require amendments to these regulations. Any such amendments must be approved by the KNF. This creates the risk that KDPW regulations will not be consistent with T2S rules (e.g., due to a potential conflict with future legal regulations or due to the KNF’s different position on a specific issue). KDPW will minimise legal risks by doing the following:

1. It will provide the Polish Financial Supervision Authority (“KNF”) and the Ministry of Finance with draft agreements between central securities depositories (“CSD”) and the Eurosystem concerning the use of the T2S platform;

2. It will co-operate with the KNF and the Ministry of Finance to identify gaps between Polish law and T2S requirements;

3. It will draft legal amendments and their implementation plan, and monitor potential barriers to the implementation of such amendments to Polish legislation.

2.2. Euro Adoption Date Set by the Polish Government A key risk to the migration of settlement functions to T2S derives from the fact that the Polish Government has not set a binding date of adopting the Euro as the national currency. The earliest theoretical date is 2015 or 2016. However, it is very likely that, considering the current macroeconomic situation in the Eurozone, Poland may decide to join the Eurozone after the Framework Agreement is signed between the Eurosystem and the CSDs. Until then, the expected date of Poland’s adoption of the Euro will remain unknown. Following consultation with the National Bank of Poland (“NBP”), in this study KDPW assumes that it will join the T2S platform after Poland’s adoption of the Euro. As stated above, the assumed theoretical date of the introduction of Euro is 1 January 2016. These decisions will have a significant impact on the signature of the Framework Agreement (“FWA”) by KDPW. KDPW’s actions to eliminate the risk of signing the Framework Agreement in the absence of a set date of Poland’s adoption of the Euro: 1. It will draft FWA provisions enabling a safe exit from the FWA or migration to T2S at a

later date if Poland adopts the Euro after 2016; 2. Before the end of 2010, it will prepare in co-operation with the NBP and NUG_PL

members, an analysis of opportunities and threats of KDPW joining T2S while retaining PLN, not having adopted the Euro. The analysis will be presented to the NBP Management Board for a decision on the execution of the Currency Agreement between NBP and the Eurosystem and the migration to T2S with PLN before Poland’s adoption of the Euro.

2.3. KDPW’s Execution of FWA In view of the barriers described in sections 2.1 and 2.2, KDPW’s execution of the Framework Agreement with the Eurosystem is exposed to external risks outside of the control of KDPW. KDPW will on a best effort basis undertake to minimise the risks by acting in co–operation with authorised institutions (including the Ministry of Finance and the KNF) in order to remove the barriers described in section 2.1. KDPW will also endeavour to


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make arrangements with the NBP concerning the organisation of cash settlement in T2S. In addition, KDPW actively takes part in the drafting and negotiations of the FWA to ensure that its provisions envision a level of protection forKDPW and accord KDPW the right not to sign the FWA if the barriers indicated above are not removed. It should be stressed that KDPW will be in a position to sign the FWA after all uncertainties have been clarified, including the scope of services provided by T2S, the governance of the T2S system, and the liability of the FWA parties .

3. KDPW Assumptions for IT System Integration with the T2S System KDPW has adopted boundary business assumptions concerning potential migration of settlement functions from the kdpw_stream system to T2S system: - Settlement functions should be migrated from the kdpw_stream system to the T2S platform

while retaining within the kdpw_stream system, to the broadest extent possible, those functionalities where a business case for them exists,which are well suited to support national depository-settlement processes and which are compatible with the IT systems of KDPW participants. It is assumed that the modification of the communication interface between the kdpw_stream system and the participants’ systems will minimise T2S’s impact on those participants’ systems.

- KDPW settlement functions will be migrated to T2S after the adoption of the Euro as

Poland’s national currency. This assumption is consistent with the new timetable of the T2S project, where the T2S platform will become fully operational in Q4 2015. Cash payments in Euro will be made by payment/settlement banks using the functionalities of the large-value payment system TARGET2, which KDPW will join in late 2011. This assumption relating to joining T2S with the Euro is subject to change depending on the NBP’s decision following consultations with NUG_PL users concerning a potential entry to T2S while retaining the Polish zloty, not having adopted the Euro.

- The migration of settlement functions to T2S will be preceded by the separation of the

CCP clearing house functionalities within the kdpw_stream system in Q1 2011. The securities netting functionality will be implemented in late 2011. It is assumed that clearing accounts will eventually be operated by the CCP while settlement accounts will be operated by KDPW on the T2S platform. With a view to cost synergies, communication between the CCP and the T2S platform will be performed by kdpw_stream directly connecteded to T2S. The option of direct connectivity for the CCP and separation of the CCP system from the kdpw_stream system may be considered at a later stage depending on the scale of activity of the CCP and potential strategic alliances.

- It is assumed that a complete database will be maintained in kdpw_stream in the first phase

of co-operation with T2S, including reference data for the T2S system, mainly for the purpose of providing support to the CCP. T2S data will be updated by means of an


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immediate transfer of reference data from kdpw_stream to T2S. The feasibility of separating the databases and maintaining only a settlement database on the T2S platform will be considered in the future.

4. Initial Assessment of T2S Impact on KDPW IT System and Processes In May 2010, KDPW prepared and presented to depository participants a document entitled Initial impact analysis of T2S on KDPW’s system and processes. It discusses the areas of potential change in KDPW’s system and process organisation. The KDPW document is aimed at assisting the market participants in preparing similar impact assessments of planned changes in their internal systems.

4.1. Impact on KDPW System Functionalities The analysis suggests that the expected impact of T2S on KDPW’s system and processes will include most of the key processes of the central depository. The main changes will include:

1. adjustment of the execution and optimisation of securities and cash settlement in batch sessions and in the RTGS system to the T2S operations timetable ; the gaps between the KDPW and the T2S day timetable are presented in Appendix 2;

2. adjustment of KDPW’s databases maintaining procedures – some data will have to be maintained and updated only for T2S;

3. development of a communication interface between the kdpw_stream system and T2S and modification of the interface between the kdpw_stream system and KDPW participants;

4. operation of a securities depository. This process is expected to be indirectly impacted by T2S; the completion of work and publication of the T2S User Detailed Functional Specification (“UDFS”) by 4CB will allow for a more detailed impact assessment of T2S on KDPW’s custody functions including:

• registration of issues; • forced buy-out of shares; • cash compensation (market claims) in case of suspended settlement on the

record date; • penalty interest for delayed settlement of Treasury bond auctions; • confirmation of depository account balances; • issuance of depository certificates and votes statements for General

Meetings; • corporate actions and securities benefits execution; • pledge on depository accounts;

as well as interaction with other external systems, e.g., trade systems.

4.2. Assessment of Modification of kdpw_stream IT Modules The adjustment of KDPW’s existing IT system - kdpw_stream will require many changes in current IT modules, in particular settlement modules, i.e., the SDR Module (Depository-Settlement System) and the Cash Settlement Module, as well as the Instructions Support


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Module, the Communication Module, and the Local Database Module and the statistics it generates. The process of adaptation to T2S will also impact other modules, although indirectly and to a lesser extent than the settlement modules, including the DNS Module (Treasury Securities Reporting), the Billing Module, and the Collateral Registration Module. The scope of change to the Clearing House Module is more difficult to assess; the Module will be modified in the planned separation of the CCP Clearing House in 2011. The Information Exchange System (SWI) will also need to be modified, in particular, the communication interface and the data exchange system. KDPW has grouped necessary changes to the kdpw_stream system in the following four categories:

1. functionalities migrated from the kdpw_stream system to the T2S platform; their use in the kdpw_stream system will be limited, it is assumed that they can be used by kdpw_stream in some rare instances, however the decision to phase them out and migrate them to T2S will be made gradually on the basis of the observed performance of the T2S system;

2. functionalities performed by the kdpw_stream system but modified to adjust the system to the settlement procedures on the T2S platform;

3. new functionalities added to the kdpw_stream system in order to use T2S settlement products effectively if there is business demand from KDPW participants and the National Bank of Poland;

4. functionalities dormant in the kdpw_stream system following the migration to T2S.

A detailed list and description of changes to KDPW functionalities is presented in Appendix 1.

5. Timetable of Adjusting KDPW to T2S The starting point for the framework timetable of preparing KDPW for joining the T2S platform is the draft of the T2S plan Eurosystem – CSD Master Plan of 10 April 2010. As the document is subject to change before the Framework Agreement is signed, the deadlines presented in this timetable are preliminary and subject to change depending on changes of the Master Plan

.

5.1 Assumptions of the Framework KDPW Action Timetable The plan for the Polish market is based on the following assumptions:

1. The KDPW plan is harmonised with the Synchronisation Points (SP) set in the Master Plan.

2. It is assumed that KDPW will join T2S with the Euro in the second and last migration wave. The deadline is currently set as mid-December 2015. Following discussions with other CSDs, it was proposed to move the migration deadline from the end of the


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year to November 2015 or January 2016. It is assumed for planning purposes that the deadline of the last migration wave will be moved to Saturday, 2 January 2016. This is KDPW’s preferred deadline due to the potential adoption of the Euro by the Polish government as from the beginning of 2016 (Poland has not yet set the date of Euro adoption) and the three subsequent bank holidays between 1 and 3 January 2016. If the last migration wave takes place in late 2015 and Poland adopts the Euro as from the beginning of 2016, KDPW’s migration to the T2S platform will only be possible on the contingency date set by the Eurosystem sometime in 2016 for those CSDs which are unable to join T2S in earlier migration waves.

3. KDPW participants connected directly to T2S by KDPW will send settlement instructions using the existing interfaces of the kdpw_stream system. Those user interfaces will in principle not be modified or else any modifications that will be made will be minor. This will depend on the final structure of messages currently being developed by T2S and the scope of implementation of new functionalities of the T2S platform which are currently not developed in the kdpw_stream system. It is assumed that the modifications necessary to adapt the kdpw_stream system to T2S will have no impact on those users.

5.2. Initial KDPW Action Timetable The KDPW action plan includes five main phases (see Appendix 3 for details):

1. Preparations to sign the Framework Agreement (until April 2011); 2. Functional specification phase (June 2010 – March 2012); 3. KDPW system adjustment phase (March 2012 - December 2013); 4. Testing on the T2S platform (July 2013 – December 2015); 5. Migration from the kdpw_stream system to the T2S platform (January 2013 – January

2016).

5.2.1. Preparations to Sign the Framework Agreement (until April 2011) This phase started with the signing of the Unilateral Undertaking with the Eurosystem in February 2010. KDPW’s main actions in this phase will focus on:

• Participation of KDPW and other European CSDs in negotiations of contractual documents (FWA) with T2S;

• Preparation of the Initial impact assessment of T2S on KDPW’s system and processes and consultation with NUG_PL users on the document (completed).

• Preparation of the Polish Market Adaptation Plan and its submission to the Eurosystem (completed).

• Submission of the draft T2S contract documentation to the Polish regulator (MF) and supervisor (KNF) for identification of legal risks involved in KDPW’s conclusion of the FWA with the Eurosystem (July-October 2010). Until March 2011, KDPW will work jointly with the KNF and MF in order to prepare an action plan for amendments to Polish legislation enabling KDPW to sign the FWA relating to the outsourcing of services to the T2S platform.


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• Co-operation between KDPW and NBP and NUG_PL users in order to prepare an opinion for the NBP Management Board concerning potential entry of the Polish market to the T2S platform while retaining Polish currency (PLN);

• Initial identification of KDPW participant names planning direct connectivity to the T2S platform;

• Preparation of a detailed KDPW action plan for entry to the T2S platform.

5.2.2. Functional Specification Phase (June 2010 – March 2012) This phase will begin following the submission of the Plan of adaptation of the Polish market to T2S to Eurosystem in June 2010. The phase will comprise the following actions:

• Elaboration of the Initial impact assessment of T2S on KDPW’s system and processes. The new document will present a more detailed description of the main changes in the kdpw_stream system and the impact of such changes on functionality of all kdpw_stream modules and data flows. The analysis will be performed on the basis of URD v. 5.0 and the initial versions of the UDFS to be available to the CSDs between Q4 2010 and mid-2011.

• Preparation of a detailed functional specification of changes in the kdpw_stream system on the basis of the official UDFS v. 1.2. Development of the technical specification of future changes in the kdpw_stream system (between September 2011 and March 2012). In March 2012, KDPW will give the Eurosystem its confirmation of feasibility of changes in its IT systems.

5.2.3. KDPW System Adjustment Phase (March 2012 - December 2013) Main actions:

• Development work adapting the kdpw_stream IT system for integration with T2S on the basis of the technical specification documents.

• Setting the connectivity conditions for connection to T2S via a licensed network provider.

• Development of an interface between the kdpw_stream system and T2S. • Internal testing of the kdpw_stream system and the communication interface with

T2S. This phase will close with a declaration of readiness of KDPW’s internal systems for testing in the T2S environment in December 2013. The completion of the internal tests may be postponed until March 2014, i.e., the start date of interoperability tests on the T2S platform.

5.2.4. Testing on the T2S Platform (July 2013 – December 2015) Main actions:

• Preparation of test scenarios to verify the T2S functionalities and interaction between the kdpw_stream system and T2S, test scripts to verify the cross border connections between KDPW and foreign CSDs, and test scripts simulating operations of a regular exchange trading day. Fulfilment of obligations set out in the FWA Appendix T2S User Testing Schedule.


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• Setting up connections and connectivity to the T2S system by a network provider selected by KDPW. T2S system connectivity testing.

• Interoperability tests of first and second migration wave users. • KDPW certified as T2S system user. • KDPW user community testing. • Business day testing with full co-operation of KDPW, NBP, Polish and foreign

market users, including payment banks and foreign CSDs. Simulating migration from the kdpw_stream system to the T2S system.

• Free testing under test scenarios with the participation of KDPW users directly connected to the T2S system and indirect users.

• Training will be offered in the test phase to the Polish users of the T2S system. Training will cover among others: communication with the kdpw_stream system and T2S (sending and receiving messages), new timetable of the settlement day, FOP cross border transfers to foreign CSDs, corporate actions using settlement instructions in T2S, use of new T2S functionalities.

5.2.5. Migration from the kdpw_stream System to the T2S Platform (January 2013 – January 2016)

Main actions: • This phase will begin with the planning of migration tests and other actions set

out in the FWA appendix Schedule 4 – Migration. Test scripts prepared for the migration will be performed during business day testing.

• KDPW reference databases will be migrated to the T2S testing environment in December 2014. They will be maintained in the T2S system and modified on a daily basis to enable business day testing under real market conditions.

• The date of KDPW’s migration to T2S is planned for Saturday, 2 January 2016. Dynamic data will be migrated to the T2S system on that date together with all pending settlement instructions after the date of the migration to T2S.

The main actions of the timetable of the KDPW adaptation to the T2S system as listed above are presented in a timeline diagram in Appendix 3. The actions will be refined before the execution of the Framework Agreement as specific resources are allocated to specific tasks. The detailed action plan will be presented for implementation by the KDPW Management Board before signing the Framework Agreement.

6. Project Management Organisation With a view to participating in the T2S project, KDPW has established a project management organisation and dedicated resources necessary for the work within the company and externally in T2S groups.


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6.1. Internal T2S Project Organisation At the current stage, the KDPW Project Team is multidisciplinary and comprises experts from the Operations Department, the IT Systems Development Department, the IT Systems Department, the Legal Department, and project managers from the lead department, the Strategy and Business Development Department. The Vice President of the KDPW Management Board is the Project Sponsor. In the course of KDPW’s increased involvement in the T2S project, upon signing the FWA, KDPW plans to set up the target project structure including a Steering Committee, an Executive Committee, and specialised project teams based on the departmental structure of the company’s organisation. KDPW is initially planning to appoint several teams with the following skills: Team Skills Settlement & CA Team /Operations Department/

• analyse and provide opinions on UDFS and other settlement and CA documents

• define new user functional requirements within the change management procedure

• define detailed functional changes of the kdpw_stream system required by the outsourcing of settlement functions to the T2S system

• define new rules, procedures, timetables, message flows in the kdpw_stream system adapted to the T2S timetable

• monitor and assess the implementation of European and national settlement and CA standards in T2S

• prepare KDPW positions on issues covered by NUG_PL

• prepare test scripts to test settlement processes and CA execution in the kdpw_stream system

• prepare training for kdpw_stream system users in settlement and CA using the T2S system

Interface Team /IT Systems Department/

• analyse and assess communication and technology aspects of the migration of settlement functions to T2S

• give opinions on the rules of selection and co-operation with the T2S network provider

• analyse and prepare a technical model of KDPW connectivity to the T2S system

• build a T2S communication interface • develop rules and ensure KDPW governance of

participant connectivity to T2S • give opinions on test and migration process

documentation drafted for T2S • prepare test scenarios and test the communication

interface between kdpw_stream systems and T2S • collaborate with potential KDPW participants

planning direct connectivity to T2S


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Database & kdpw_stream System Modification Team /IT Systems Development Department/

• consult, analyse, and provide opinions on the detailed functional specification of changes in the kdpw_stream system

• prepare detailed technical documentation of changes in the kdpw_stream system on the basis of detailed functional specification

• analyse and give opinions on the T2S database model • assess proposals and gaps between T2S messages and

ISO15022 / 20022 and user requirements in the URD and UDFS

• assess the feasibility of maintaining and synchronising reference databases, operating and supporting securities accounts and matching procedures both in T2S and kdpw_stream

• adapt the kdpw_stream system to: - the new T2S message structure - maintenance of databases both in kdpw_stream

and T2S - presentation of data and statistics of the

kdpw_stream system • internal testing of changes introduced to the

kdpw_stream system

Testing and Migration Team /interdepartmental team/

• co-ordination of: - preparation of plans for testing the interaction

between kdpw_stream and T2S - preparation of test scenarios for testing - performance of migration tests of the kdpw_stream

system and T2S - migration of settlement functions to the T2S system

Legal and Contracts Team /Legal Department/

• analyse and provide opinions on FWA draft provisions • assess KDPW’s compliance with T2S eligibility criteria • collaborate with the Polish regulator and supervisor in

order to eliminate legal barriers to KDPW’s participation in the T2S system

• prepare amendments to the Act on Trading in Financial Instruments and KDPW regulations necessary for KDPW’s participation in T2S

• draft amendments to KDPW regulations

Market Participant Communication Team

• organise meetings with market participants • manage the NUG_PL website • co-ordinate the exchange of information between the

KDPW project team and market participants


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Fees, Accounting and Reporting Team

• co-ordinate changes in: - the billing module - the accounting system - the reporting module

Figure 1: KDPW T2S Project Management Organisation

6.2. External T2S Project Organisation As regards the external organisation of the T2S project, KDPW co-operates with market participants, the central bank (NBP), and ECB task forces. KDPW acting jointly with the NBP has appointed the T2S National Users Group NUG_PL as a forum for consultation and presentation of opinions of local market users concerning T2S before the Framework Agreement is signed. Standing members of the Group include


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representatives of the NBP, banks and brokerage houses, as well as observers: representatives of the Ministry of Finance, the Polish Financial Supervision Authority, and the Warsaw Stock Exchange. The work of the Group follows the adopted NUG_PL Rules. Two meetings have been held to date, on 4 March and 11 May, 2010 which initiated internal preparations by Polish market participants for integration with T2S. NUG_PL members and market participants communicate via a dedicated section of the KDPW website. The agenda of NUG_PL meetings will be changed as of August 2010 from education and information meetings to discussions of issues within the Group’s mandate, i.e., the key issues discussed in the Advisory Group and the preparation of the position of the Polish market. Before the FWA is signed, in the autumn of 2010 and in the spring of 2011, KDPW is planning jointly with the NBP to hold two information and education meetings on the T2S system for all participants of the Polish capital market (T2S_PL MARKET FORUM). KDPW and the NBP co-operate in NUG_PL and in bilateral meetings. Consultations and discussions in 2010 will focus on the organisation of T2S cash leg settlement and the NBP’s potential entry to T2S with the Polish zloty. KDPW representatives have been invited to work in T2S groups: the Advisory Group, the CSD Contact Group, the Project Managers Subgroup, and TCI. Its participation in those groups allows KDPW to monitor the process of preparation of the Framework Agreement between the Eurosystem and the CSDs and to take part in discussions on T2S governance, migration, and tariff structure. Figure 2: KDPW Representatives in the T2S Project

On signing the FWA, KDPW is planning to change the principles of co-operation with market participants. In view of the different levels of changes that need to be made, co-operation with


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the participants will take place in two separate groups: participants with direct connectivity to T2S, and users connected via KDPW. For users with direct connectivity, the KDPW Project Team will co-operate closely with project teams of this user group including consultations of functional and technical solutions of the T2S system. KDPW will define rules for exchange of information, preparation of a detailed action timetable for adapting market participant IT systems to T2S, for KDPW monitoring of the implementation of actions by market participants, and testing and migration of participant systems. For users with indirect connectivity to T2S, KDPW is planning to work with a group of co-ordinators appointed by each participant and directly responsible for the preparation of the adaptation process of the participant. KDPW will regularly inform participants of the progress of the T2S project. For the testing phase, KDPW will provide test scripts and prepare a testing timetable for Polish participants synchronised with the Eurosystem plan. KDPW will work with the participants to initiate projects implementing new T2S functionalities (which are currently not available in the kdpw_stream system), which will require changes in market participants’ systems. KDPW will work with IT system providers in order to support preparation for future changes in market participants’ systems. Appendices

1. List of KDPW System Functionalities Adjusted to T2S. 2. Comparison of the KDPW and the T2S Timetable. 3. T2S Initial KDPW project plan.


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Appendix 1. List of KDPW System Functionalities Adjusted to T2S


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1. Functionalities Migrated from the kdpw_stream System to the T2S Platform: a. accounts handling: settlement accounts of participants and issue accounts in the T2S environment, which will require KDPW to adapt

to the T2S account structure and procedures, instruction structures, and the T2S timetable of operating such accounts; b. validation and management (enrichment, modification, cancellation) of settlement instructions entered to the T2S system; the

functions will also be performed in the kdpw_stream system for instructions entered to T2S via KDPW; c. matching instructions for which matching is mandatory in T2S – instructions of direct connected KDPW participants , instructions for

cross border settlement with other CSDs, and matching on request of a KDPW participant/ settlement counterparty; this means that the matching of FOP, DWP and DVP settlement instructions in the kdpw_stream system will be limited to matching instructions for participants outside T2S;

d. provision check, final blocking of operations in T2S settlement accounts, including: • blocking accounts, changing account status; • settlement DVP/RVP, FOP, DWP, PFD instructions, including complex instructions – relations: WITH, AFTER, BEFORE and

standing instructions; • settlement corporate actions instructions (the scope of instructions executed in T2S will be limited to the cash benefits payments

into payment banks accounts in T2S and FOP, DVP settlement instructions, CA instruction such as event notification, subscription for a corporate action);

e. cash settlement and the payments of CA cash service will take place in T2S via payment banks dedicated cash accounts, this means that KDPW will migrate cash leg settlement from the CB payment system (NBP) to the T2S fed by T2 or RTGS systems of non-euro countries CBs;

f. queries and reporting to T2S including balances, settlement instruction status, statistics, and the reference database will be performed via the kdpw_stream system; KDPW will intermediate in providing statements and subscribed reports to participants indirectly connected to T2S.

2. Functionalities Modified in the kdpw_stream System: a. adding T2S calendars, adapting kdpw_stream system operating days to T2S; this will have a significant impact on KDPW work

organisation procedures on Polish bank holidays which are business days in T2S and the calendars of unavailability of European currencies other than the euro for settlement on bank holidays of the currency’s central bank;


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b. adjusting the settlement process of the Polish market to the T2S timetable; this will require the introduction of overnight settlement in several batches and the adjustment to RTGS intraday window; in the opinion of KDPW, the delivery of securities and cash for overnight settlement and intraday liquidity management may generate extra costs to KDPW participants due to the modification of asset management procedures; in addition the adaption to the T2S timetable (timely submission of settlement instructions) may cause the adaptation of non-settlement KDPW functions , including the timing of securities valuation, the dates of some corporate actions, and the preparation of CA settlement instructions for T2S;

c. reference databases in the kdpw_stream system will be maintained to ensure simultaneous feed of settlement dictionary data to the KDPW database in T2S; participant data, ISIN numbers, account parameters, and system authorisation will be of key importance to the settlement process; kdpw_stream will be adapted to generate messages in the T2S database structure; as a result, only some data will be stored simultaneously in two independent IT systems: T2S and kdpw_stream;

d. modification of the settlement instructions enrichment functionality in kdpw_stream accommodating new T2S data structures; the enrichment of instructions will also be used in T2S for fields not subject to matching;

e. adjustment of the matching rules in kdpw_stream to the matching rules required in T2S for KDPW participants who submit settlement instructions via the kdpw_stream system to T2S; considering that T2S solutions comply with ECSDA/ESF standards, also used by kdpw_stream, we do not expect major modifications of bilateral matching in the KDPW system, while the functionality of trilateral matching developed by kdpw_stream for BondSpot and TTM Max markets will be subject to major system modifications; continued matching in the kdpw_stream system over a longer period will be subject of a business study following entry to T2S;

f. modification of the settlement optimisation process: T2S does not offer automatic lending/borrowing functionality during a settlement batch; the shortage of assets for settlement will be covered as follows: for cash by means of auto-collateralised loans, and for securities, both in batch and RTGS systems, through a mechanism of recycling settlement instructions, technical netting of a set of instructions, collateral substitution, and partial settlement;

g. improvement and development of the kdpw_stream functionalities of: ‘on request lending/borrowing and collateral management; counterparty matching of lending transaction and lending and collateral instructions should allow opening and closing of loans by T2S settlement instructions processed in RTGS or in batch; relevant project work is ongoing at KDPW;

h. modification of message exchange interfaces for KDPW participants; only where necessary for the functionalities currently supported by the kdpw_stream system; it is the intention of KDPW to cut the cost and timeline of the adaptation of participants’ systems to T2S; a


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study will review how KDPW can support participants in adjusting to communication with T2S (XML ISO 20022); it will be necessary to review all external interfaces and their processes, including interfaces with foreign CSDs outside T2S;

i. adaptation of the KDPW collateral register on the basis of relevant T2S messages on settlement instruction status and collateral account balances for the KDPW Clearing House; in future, consideration will be given to how the KDPW Clearing House can use valuation of securities eligible as collateral provided by Eurosystem’s developed platform CCBM2 (Correspondent Central Bank Money 2);

j. modification of the processing of FOP cross border transfers – kdpw_stream will simplify this function in view of T2S feature as a platform for direct cross border CSDs settlement. The kdpw_stream will retain those system functionalities which enable KDPW co-operation with CSDs outside T2S;

k. adaptation to T2S of functionalities resulting from those KDPW development projects which will be implemented before KDPW enters T2S, including: Separation of kdpw_CCP, Hold-Release, On request Lending/Borrowing, and Adaptation of the kdpw_stream system to the new WSE trade system; in the case of new projects, an analysis of the impact of and interrelations with the T2S functionalities will be required;

j. the following will be adapted: a. billing and reporting module – to the dates and data structures of reports received by KDPW from T2S; b. external reporting module, including securities reporting to GIIF (Chief Inspection of Financial Information), KNF, MF, and

NBP generated by kdpw_stream on the basis of T2S account balances; c. corporate actions module and the execution of benefits attached to securities – generating settlement instructions for such CA; d. statistics collection system – new sources of data.

3. New T2S Settlement Functionalities: The list of settlement functionalities provided by the T2S platform has been developed on the basis of practice and harmonisation work done by European CSDs. The main part includes ‘settlement products‘ supporting cross border transactions which require the exchange and booking of instructions in two or more CSDs and in payment banks accounts for DVP settlement. For the Polish market this is a new functionality, currently not supported by KDPW. T2S will also offer a group of products new to the Polish market, which can be used optionally only for local settlement. The adaptation of KDPW’s system and processes to effective use of T2S platform functionalities will require:


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a. set-up of a new communication interface between the kdpw_stream system and T2S. It is assumed that participants used T2S via KDPW will send instructions and messages to the kdpw_stream system just as they do now. The kdpw_stream system will process, convert, and forward instructions and messages to T2S;

b. KDPW enabling and managing direct and indirect connectivity of KDPW participants to T2S; c. realignment of ISINs for which KDPW acts as issuer CSD; significant adaptation to this function will take place in the area of cross border

trading (settlement of automatic realignment instructions received from T2S – notification of settlement in another CSD on T2S); d. ‘investor CSD settlement - according to the mutuality principle expressed in T2S eligibility criteria for CSDs ; e. cash settlement in dedicated accounts in T2S, a settlement system with limited options of payment netting and execution of payment orders

other than T2S clean payments; f. introduction of the settlement of DVP cross border instructions in central bank money; the cash leg of settlement in T2S will be mainly the

Euro; settlement in other European currencies available to T2S from respective central banks is also expected, therefore, kdpw_stream should be adapted to settlement in multiple currencies;

g. use of new settlement optimisation methods (optional on T2S, depending on the choice of participants, NBP, and KDPW): i. auto-collateralisation;

ii. partial settlement (introduction in the kdpw_stream system planned in Q4 2011 together with securities netting in CCP); h. use of new tools and procedures in the Polish market:

i. diverse blocking/reserving/ear-marking; ii. settlement investment fund units – registration of changes of the size of issue and settlement of fractional amounts;

iii. separating coupons and bonds – conversion of a coupon bond into two securities: no-coupon bond and coupon as linked “all-or-non” instractions;

iv. creating a collateral basket – transfer of several ISINs against a single payment; v. blocking/reserving cash;

vi. conditional delivery of securities – transferring and reserving cash in T2S and final settlement upon a CSD’s notification of a condition external to T2S being met.


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Appendix 2. Comparison of the KDPW and the T2S Timetable

Id. Nazwa zadania Cz. trw. Rozpoczęcie Zakończenie

1 Initial KDPW Project Plan 1528 dn? pon, 10-03-01 pon, 16-01-04

2 KDPW's PREPARATIONS TO SIGN FWA 286 dn? pon, 10-03-01 pon, 11-04-04

8 SP1 - Commitment of KDPW to T2S 0 dn wto, 11-04-05 wto, 11-04-05

9

10 KDPW FUNCTIONAL SPECIFICATION PHASE 467 dn? wto, 10-06-01 śro, 12-03-14

11 Detailed Analysis of T2S impact on systems and processes of

KDPW based on URD v.5 and other related documents

327 dn? wto, 10-06-01 śro, 11-08-31

13 SP2 - End of Specifications (Eurosystem) 0 dn wto, 11-09-06 wto, 11-09-06

14 Deliverable T2S - UDFS v.1.2 0 dn wto, 11-09-20 wto, 11-09-20

15 Preparation of Detailed Specification Documentation for

modification of kdpw_stream system

126 dn? śro, 11-09-21 śro, 12-03-14

19 SP3 - Feasibility confirmation of KDPW 0 dn śro, 12-03-14 śro, 12-03-14

20

21 KDPW SYSTEM ADJUSTMENT PHASE 457 dn? czw, 12-03-15 pon, 13-12-16

22 Adjustment of kdpw_stream system 362 dn czw, 12-03-15 pią, 13-08-02

26 Internal testing of kdpw_stream system 88 dn pon, 13-08-05 śro, 13-12-04

30 Preparation of Interfaces with T2S 214 dn? wto, 13-02-19 pon, 13-12-16

31 Arrangements of connectivity conditions with Network

Provider

90 dn wto, 13-02-19 pon, 13-06-24

35 Development and internal testing of Intefaces 124 dn? wto, 13-06-25 pon, 13-12-16

37 KDPW ready for T2S testing 0 dn wto, 13-12-31 wto, 13-12-31

38

39 TESTING ON THE T2S PLATFORM 654 dn? pon, 13-07-01 śro, 15-12-30

40 KDPW testing preparation 120 dn pon, 13-07-01 pon, 13-12-16

60 SP5 - Eurosytem ready for ConnectivityTests 0 dn pią, 13-12-13 pią, 13-12-13

61 SP4 - Eurosytem ready for User Testing 0 dn pon, 13-12-30 pon, 13-12-30

62 Connectivity testing 60 dn pon, 13-12-16 pią, 14-03-07

63 Connectivity setup with T2S 12 dn pon, 13-12-16 wto, 13-12-31

64 Connectivity testing with T2S 10 dn pon, 14-02-24 pią, 14-03-07

65 SP6-Ready for interoperability testing Wave 1-2 0 dn pon, 14-03-03 pon, 14-03-03

66 Interoperability testing Wave 1-2 137 dn? pon, 14-03-10 pon, 14-09-15

67 Execution of T2S Verification tests 90 dn? pon, 14-03-10 czw, 14-07-10

70 Execution of KDPW Certification tests 47 dn? pią, 14-07-11 pon, 14-09-15

75 Training of KDPW participants 274 dn pon, 14-03-10 śro, 15-03-25

77 Go live Group 0 0 dn śro, 14-09-24 śro, 14-09-24

78 SP7-Ready for community and Business Day Testing Wave 1-2 0 dn pon, 14-08-25 pon, 14-08-25

79 Community testing Wave 1-2 138 dn? pon, 14-09-15 śro, 15-03-25

85 Business day test Wave 1-2 70 dn śro, 15-04-08 wto, 15-07-14

87 SP8 - End of testing of Wave 1-2 0 dn czw, 15-07-16 czw, 15-07-16

88 SP13 - Closing Group 1-2 0 dn czw, 15-10-15 czw, 15-10-15

89 Free KDPW and participants testing 121 dn? śro, 15-07-15 śro, 15-12-30

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92 MIGRATION FROM kdpw_stream SYSTEM TO T2S 1029 dn pią, 12-01-27 pon, 16-01-04

93 Deliverable - Standard Migration Plan 0 dn pią, 12-01-27 pią, 12-01-27

94 Preparation of Migration Plans 275 dn wto, 13-01-01 pon, 14-01-20

97 SP9 -Eurosystem ready for production 0 dn pią, 14-05-02 pią, 14-05-02

98 SP10 - Eurosystem ready to connect to production environment 0 dn sob, 14-06-14 sob, 14-06-14

99 SP11 - Eurosystem ready to load static data 0 dn pią, 14-06-20 pią, 14-06-20

100 Go live Group 1 0 dn czw, 15-09-17 czw, 15-09-17

101 Static data input by CSD and NCB 2 dn pon, 14-12-15 śro, 14-12-17

102 Static data maintenance - Group 2 257 dn śro, 15-01-07 czw, 15-12-31

103 SP12- Ready to for change Over WE and to operate Group 2 0 dn pią, 16-01-01 pią, 16-01-01

104 KDPW dynamic data upload 2 dn sob, 16-01-02 pon, 16-01-04

105 Go live Group 2 0 dn pon, 16-01-04 pon, 16-01-04

04-05

09-06

09-20

03-14

12-31

12-13

12-30

03-03

09-24

08-25

07-16

10-15

01-27

05-02

06-14

06-20

09-17

01-01

01-04

Kw 4 Kw 1 Kw 2 Kw 3 Kw 4 Kw 1 Kw 2 Kw 3 Kw 4 Kw 1 Kw 2 Kw 3 Kw 4 Kw 1 Kw 2 Kw 3 Kw 4 Kw 1 Kw 2 Kw 3 Kw 4 Kw 1 Kw 2 Kw 3 Kw 4 Kw 1 Kw 2 Kw 32010 2011 2012 2013 2014 2015 2016

Appendix 3. T2S Initial KDPW's Project Plan

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