External drivers

Macroeconomic Situation, the Government’s Economic Policy, Conditions on the Exchange

GPW’s results will be driven in equal measure by the activity of investors on the capital market and by the overall economic conditions.

According to European Commission forecasts, GDP growth will be 4.2% in 2018, slowing down to 3.6% in 2019. Growth is expected to be driven mainly by growing domestic demand and favourable trends on the labour market. Growth of private consumption will be driven among others by an inflow of migrants to the Polish job market. Investments should rise in early 2018 owing to available EU funds and growing production capacity. Exports are expected to continue rising as well. The economy will be supported by record-strong consumer sentiment. However, the Commission expects consumption to slow down at the end of the time horizon of the forecast (2019) as higher inflation will reduce disposable incomes of households while growth of employment will slow down.

The situation on the labour market will be largely impacted by the pension system reform implemented in October 2017 and by growth of wages which started in 2017 and will continue in 2018.

The improving labour market will boost inflation, including mainly prices of services. According to the Commission forecast, inflation will rise to 2.5% in H2 2018. Price pressures will mainly affect the service industry, largely driven by the general conditions on the job market.

The Commission expects the risks of the forecast to be balanced. The risks include a shortage of skilled labour, which could slow down further growth of investments. Continued wage growth could boost inflation. Uncertainty about the legal environment could adversely impact growth expected in 2018. Positive drivers could include less uncertainty about economic legislation (including the energy industry), which could accelerate private investments. Continued growth of employment and more stable migration to Poland could bolster private consumption.

The European Commission affirmed its assessment of stable and strong growth of Poland’s economy, taking into account economic policy measures and their implications within the time horizon of the forecast. External risks include the future trade and economic policy of the USA as well as broader geopolitical tensions. Economic developments in China, the weak condition of the European banking industry, and on-going negotiations with the UK concerning Brexit are among the potential risks that could adjust the forecast.

Competition of Multilateral Trading Platforms (MTF)

Trade in Polish stocks participating in WIG30 on the pan-European trading facility Turquoise present on the European market is possible since October 2015. No trades in Polish stocks were made on the MTF in 2017. However, trade in GPW-listed stocks on the MTF may increase in the future. Likewise, other European MTFs may also offer trade in Polish stocks.

The launch of trade in Polish stocks on MTFs could grow the overall value of trade in such stocks, including among others arbitrage and trade by investors active on MTFs with no access to GPW. This would make the Polish stock market more popular and facilitate access to the market. However, it is not unlikely that MTFs could also attract part of the trade currently handled by GPW.

Final Shape of the Pension System Reform in Poland

In July 2016, the Government published a proposal of a further reform of the pension system involving the nationalisation of a part of savings in open-ended pension funds and a transfer of 25% of liquid assets (cash, foreign stocks, bonds) to a Demographic Reserve Fund. The remaining 75% of the assets (Polish stocks) would remain in open-ended pension funds, which would eventually be transformed into traditional investment funds. The details of the planned pension system reform are still unknown. According to the original plan, the reform was expected to take effect in 2018 but the date has been delayed.

In 2017, the work on the pension system reform included the planned development of employee capital plans (PPK). The project promotes long-term pension savings. Unlike investments in pension funds, PPK savings would be held privately by individuals. Participation in the programme will be voluntary but each employer will be required to set up a plan for employees. Payments to employee capital plans will originate from three sources. One of them are basic contributions paid by the employer at 1.5% of the salary with the option of an additional contribution at 2.5%. Another source are contributions paid by employees at 2% with the option of an additional contribution at 2%. The total contributions will thus range from 3.5% to 8% of the salary. The government will contribute to the programme with one-off initial contributions of PLN 250 and annual contributions of PLN 240. PPK resources will be paid into investment funds whose risk profile will change depending on the members’ time to retirement. Early withdrawals will be allowed for individuals taking mortgage loans or in the event of a serious illness (25% of savings). The project aims to support further development of the Polish capital market. As an alternative to bank loans, the programme will generate new cash flows to the stock market. The rotation of assets of converted pension funds will also generate additional capital for the stock market. The planned conversion of pension funds into investment funds could release part of the free float on GPW thanks to improved liquidity of securities now locked in pension fund portfolios.

The announced reform was welcomed by participants of Poland’s capital market and foreign investors. The legislative process of employee capital plans is expected to launch in 2018. The programme is expected to open in early 2019.

The value of Polish stocks in pension fund portfolios increased by 22.1% to PLN 141.9 billion as at the end of 2017 (source: PFSA).

Promotion of Poland as Developed Market in FTSE Russell Ranking

FTSE Russell, the leading global index provider, announced the upgrade of Poland from Advanced Emerging Markets to Developed Markets in late September 2017. Poland’s promotion to Developed Markets is a reward for the development of the Polish economy and the local capital market. The promotion puts Poland among the world’s 25 developed economies including Germany, France, Japan, Australia, and the USA. Poland is the first Central and Eastern European economy to be named a Developed Market. The decision takes effect in September 2018, which is when new investors are likely to join GPW. Poland’s share in the Developed Markets index as of September 2018 is still unknown but it is likely to trigger new capital flows to the Polish capital market.

Financial and Commodity Market Regulation

  • MiFID2 and the financial market – Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (EU Official Journal L 173 of 12.06.2014 p. 349) (MiFID2) took effect on 2 July 2014. The Member States were required to harmonise national laws with the Directive by 3 January 2018. The draft amendment of the Act on Trading in Financial Instruments, currently in the legislative process, implements MiFID2 in Polish law.

The draft Act requires the Company to implement detailed rules for outsourcing contracts and to comply with additional regulations concerning members of the Company’s authorities including a limitation on the number of positions held on the authorities of other companies. The amended Act will require operators of regulated markets to appoint a nomination committee of adequate size, structure and scope, responsible among others for recommending candidates to the management board and for regular assessments of the management board.

The draft Act largely increases the minimum financial penalties that could be imposed on the Company or persons responsible for infringements of regulations applicable to the Company to EUR 5 million. From the perspective of GPW, such heavy financial penalties, which are incommensurate with the conditions of business on the local market, could increase the costs and risks of the Company’s business. The financial penalties could also have an adverse impact on recruitment for positions in companies which operate a regulated market.

  • MiFID2 and the commodity market – MiFID2 introduces a new system of trading in financial instruments: Organised Trading Facility (OTF). According to MiFID2, all multilateral systems of trade in financial instruments must operate as an MTF, OTF or regulated market. The preparation of TGE and market participants for the implementation of MiFID2 in Polish law in 2017 included the following key initiatives:
    • consultations with market participants concerning proposed modifications to the planned implementation of MiFID2 in Polish national law applicable to the energy and gas market;
    • consultations with market participants concerning the development of a model of transformation of the Commodity Forward Instruments Market to become an Organised Trading Facility (OTF). Following the effective date of the law implementing MiFID2, TGE has 12 months to apply to the Polish Financial Supervision Authority for a licence to operate an OTF ;
    • development, in communication with the Polish Financial Supervision Authority, of the concept of discretion, approved by PFSA and implemented on 29 December 2017 on the Commodity Forward Instruments Market;
    • development and implementation, in communication with market participants and the Polish Financial Supervision Authority, of modifications to TGE markets necessary to harmonise them with the MiFID2 requirements including the following initiatives:
      • Listing of TGe24 futures on the regulated market was discontinued on 29 November 2017;
      • Trade in emission allowances on the TGE commodity market stopped on 30 December 2017 as those became financial instruments under MiFID2. Efforts are underway to move trade in such instruments to the regulated market following the implementation of MiFID2 in Poland;
      • Trade in RES futures on the TGE commodity market stopped on 28 December 2017 as those also became financial instruments. Work is underway to reopen trade in RES futures as a financial instrument on the transformed Commodity Forward Instruments Market following the implementation of MiFID2;
      • Amendment of the TGE Rules;
      • Far-reaching IT work necessary to prepare the technical infrastructure for the requirements of MiFID2 and its implementing regulations, including the requirements for trading facilities under the new regulations and overall reporting to supervisory authorities.

The developed solutions ensure harmonisation with the requirements of MiFID2 that is optimal for market members in line with national and EU law. With a view to transformation of the markets and traded instruments under the new legal requirements, and as agreed between TGE and PFSA, Izba Rozliczeniowa Giełd Towarowych does not need to become a CCP in order to clear instruments currently traded on TGE.

Discretion, which is a specific property of OTFs under MiFID2, was introduced on the Commodity Forward Instruments Market on 29 December 2017. Cases where orders may be executed on a discretionary basis are defined in the Directive. From 3 January 2018 until TGE is authorised as an OTF operator, the Commodity Forward Instruments Market will operate as a PreOTF offering trade in the same instruments that were traded on the Commodity Forward Instruments Market. Trading will follow the same rules as previously applicable on the Commodity Forward Instruments Market subject to discretion. Trade on PreOTF will be recognised for the purpose of fulfilment of the obligation to sell production on the exchange. Following the effective date of the law implementing MiFID2 (amendment of the Act on Trading in Financial Instruments, UC86), TGE has 12 months to apply to PFSA for a licence to operate an OTF which will replace the Commodity Forward Instruments Market.

Considering that the Ministry of Finance expects MiFID2 to be implemented in Polish law at the turn of March to April 2018, TGE will have the legal and technical preparedness for the implementation of MiFID2 in Poland.

  • Benchmarks Regulation and the financial market Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 took effect on 1 January 2018.

For GPW Benchmark, the Regulation provides detailed rules of administration of WIBID and WIBOR reference rates including the mandatory authorisation by PFSA as administrator of WIBID and WIBOR reference rates by the end of 2019. From 1 January 2018 to 31 December 2019, GPW Benchmark will use the transitional period allowed under the Regulation for WIBID and WIBOR reference rates and take steps to fully comply with the regulatory requirements and to obtain the necessary authorisation from PFSA.

The Regulation provides for administrative penalties that may be imposed on individuals for infringements of the Regulation. Sanctions will apply only after PFSA issues the authorisation. This will generate financial risks for the Company’s business.

  • Renewable Energy Sources Act: The Renewable Energy Sources (RES) Act took effect on 1 July 2016. It implements a new support scheme for the production of energy from renewable energy sources be based on auctions. Auctions will be held by the Energy Regulatory Office. Auction winners who offer the lowest price for energy generation will receive support for a period of 15 years. The existing system of green certificates of origin will be phased out. All producers who generated electricity before 30 June 2016 are still eligible to receive certificates of origin. Generation of energy after 1

July 2016 allows producers to participate in auctions but they are not eligible to apply for certificates of origin. The Renewable Energy Sources Act was amended in 2017. The amendment changed the rules of calculation of the unit substitution fee, replacing a fixed fee of 300.03 PLN/MWh with a fee linked to an index based on EOB transactions in the previous calendar year. The amendment impacted the prices of non-EOB transactions indexed to the unit substitution fee but it had no impact on the revenue of the TGE Group. The potential impact of amendments to RES regulations on the business of TGE is discussed in section II.7. Risks and Threats.

  • CO2 Trading Act effective as of September 2015 enables TGE to grow a new business segment by becoming the national platform authorised to organise CO2 primary market auctions (currently Poland sells them on the German exchange EEX). TGE received the conditional approval of the Polish Financial Supervision Authority to operate a CO2 allowances platform on 20 December 2016. In the next step, TGE will participate in a tender for the operation of an auction platform for Polish emission allowances opened by the Ministry of Environment. As the last step, TGE needs to be entered into the list of auction platforms in Annex III to Commission Regulation 1031/2010. Operation of an auction platform will help to develop the market operated by TGE which offers trade in emission allowances and to improve liquidity of the market. With the launch of the auction platform, financial instruments on delivery of emission allowances will be introduced into trading.
  • Energy Efficiency Act: The Energy Efficiency Act took effect on 1 October 2016. It modifies the white certificate system. Previously, the President of the Energy Regulatory Office opened tenders for white certificates. White certificates of origin were granted to tender winners. The new Act eliminates tenders: from now on, certificates of origin of energy efficiency will be issued by the President of the Energy Regulatory Office on the same terms as other types of certificates of origin. Furthermore, the new Act imposes limits on the performance of the obligation to acquire white certificates by the payment of a substitution fee as follows: 30% of the obligation for 2016, 20% of the obligation for 2017, 10% of the obligation for 2018. The new regulations provide for a gradual increase of the unit substitution fee (the unit substitution fee is 1,000 PLN/toe for 2016, 1,500 PLN/toe for 2017, and will be increased by 5% of last year’s unit substitution fee for 2018 and each subsequent year). Those market players which previously met the obligation by paying the substitution fee exclusively, will start to operate on TGE. Under the new Act, the obligation may be fulfilled by paying a substitution fee above the caps only if the market player demonstrates that it has placed buy orders for property rights on the exchange but was unable to buy property rights in the absence of trade or because the price of property rights exceeded the substitution fee. The new solutions will boost investments in energy efficiency and improve liquidity of trade in white certificates on TGE.
  • CACM Regulation – TGE as NEMO in the market competition model: The Third Energy Package of September 2009 is a key element of EU legislation governing the European electricity markets. Under these regulations and the 2011 decisions of the European Council, the governments of the EU Member States made commitments to jointly develop a spot electricity market. The CACM Regulation published in July 2015 specifies the obligations of exchanges and operators and the powers of regulators. For TGE, its authorisation as NEMO on 2 December 2015 triggered focused involvement in international intraday and day-ahead market projects. With the publication of the CACM Regulation, TGE is subject to specific requirements to implement the new market solutions according to a predefined timeline. As a NEMO on the spot electricity market and an authorised commodity exchange, TGE is supervised by the Polish Financial Supervision Authority. On the other hand, as a NEMO, TGE and IRGiT are supervised by the Energy Regulatory Office, which may revoke the authorisation. The CACM Regulation requires NEMOs to prepare a range of spot market documents and submit them for approval of regulators. The Interim NEMO Committee (INC) was appointed under the Interim NEMO Co-operation Agreement (INCA) in 2017. The first and most fundamental document to be prepared jointly was the Market Coupling Operations Plan (MCO Plan). The MCO Plan, which was approved by the Regulators’ Forum with the participation of the Energy Regulatory Office in June 2017, defines the operating rules of single electricity markets: SDAC (Single Day Ahead Coupling) under the PCR model and SIDC (Single Intraday Coupling) under the XBID model. The INC platform has developed other documents for the day-ahead and intraday markets including the specifications and requirements for algorithms, minimum and maximum prices, commercial products, and operating procedures. TGE prepared the Polish version of the documents and submitted them to the Energy Regulatory Office. The European spot market is to be launched by June 2018, i.e., within 12 months following the approval of the MCO Plan by the regulators, but the exchanges are expecting to continue joint work in the INC at least in 2019.
  • Energy Law of 10 April 1997, consolidated text effective as of 18 January 2018 incorporating amendments under the Capacity Market Act of 8 December 2017 (Journal of Laws of 2018, item 9), requires energy operators which produce electricity to sell at least 30% of electricity produced within the year (previously 15%) among others on commodity exchanges. Energy companies trading in gas fuels are required to sell at least 55% of natural gas on an exchange. The amendments will impact the activity of certain participants of TGE. This could restrict the liquidity of trade in electricity and the attractiveness of the commodity market for other participants, affecting the volume of trading in such commodities and the resulting revenue.

Internal Energy Market

The objective of integration of the European market as a coherent harmonised internal market (Internal Electricity Market – IEM) is to enable all market players to participate in cross-border trade in electricity. The target market coupling (MC) solution for day-ahead markets is the Price Coupling of Regions (PCR) developed by Western European exchanges while the Cross-border Intra-day model (XBID) is the MC solution for the intraday market.

TGE started PCR production on the European Day-Ahead market on 15 November 2016 and became an MRC operator/co-ordinator. TGE is an active market broker as one of five exchanges: TGE, EPEX SPOT, OMIE, GME, NORD POOL. This allows TGE to work as NEMO on the markets with no NEMO monopoly in the multi-NEMO functionality. As a result, TGE may expand to foreign markets. At the same time, other NEMOs may enter the Polish electricity market. It is expected that two new NEMOs will launch operations competitive to TGE on the Polish spot electricity market in October 2018.

The European intraday electricity market XBID is expected to launch in Q2 2018. TGE participates in the work of XBID Accession Stream, a group of companies preparing to join the project, and is an XBID observer. The final decision on the format and date of TGE’s XBID accession will follow consultations with the Energy Regulatory Office and the Polish Financial Supervision Authority. TGE is working locally with the exchanges NORD POOL and EPEX SPOT and with the operators PSE, SvK and LITGRID to open a cross-border intraday market on the border with Lithuania and Sweden in the Local Implementation Project in order to create the technical capacity of TGE to join XBID in 2019.