The goal of GPW risk management is to ensure that all material risks of GPW’s activity are properly measured, reported and controlled and do not pose a threat to the operational stability and continuity of the Company. The risk management system includes a range of processes, organisational solutions, technology tools and documented rules for risk management. The key assumptions and principles of the Company’s risk management system derive from the GPW Risk Management Strategy approved by the GPW Management Board and regularly reviewed to bring it in line with changes of the GPW risk profile and the market environment.

The key role in the risk management system is that of the Exchange Supervisory Board supported by the Audit Committee in supervising the GPW risk management system through on-going monitoring and assessment of the GPW risk management system. Risk management is a responsibility of the Exchange Management Board supported by the Risk Management Committee. The Company’s Management Board drafts and implements GPW’s risk management strategy and takes the key decisions affecting the risk levels. The GPW risk management process is monitored and controlled by the Compliance and Risk Department. Business process owners and participants are responsible for on-going risk management, including identification of risks in the area of their responsibility, monitoring, controlling and taking actions to mitigate such risk. Effective operations and assessment of the effectiveness of the risk management system as well as its adequacy for the GPW risk profile are regularly reviewed by the Internal Audit Department.

GPW builds an organisational culture which focuses on effective risk management, compliance with procedures, as well as enforcement of the rules of conduct. For this purpose, steps are taken in order to raise GPW employees’ awareness of risk management responsibilities at each level of the GPW organisation, including training, a dedicated risk management section of the corporate portal available to employees, and on-going advice.

GPW risk management process

The GPW risk management process is continuous and includes the following elements:

• Risk identification – identification of existing and potential sources of risk which impact or may impact GPW’s financial position.
• Risk assessment – analysis of internal and external threats to GPW’s operation in order to determine the risk profile.
• Risk prevention or acceptance – application of any of the following strategies:
  • risk mitigation,
  • risk transfer, e.g., transfer of risks of a threat in whole or in part to a third party,
  • risk avoidance by taking no action involving the threat,
  • risk acceptance.
• Risk review – periodic review of the effectiveness of the existing risk management system and its adequacy for the GPW risk profile.
• Risk monitoring – monitoring the gap between risks and projections or benchmarks. Risk monitoring is an early warning system and triggers management actions when adverse change to the GPW risk profile is identified.
• Risk reporting – regular reporting of risk measurements, taken or recommended actions to the GPW authorities.

GPW’s risk management strategy covers the following risks:

• Non-financial risks:
  • business risk, including: economic environment risk, strategic risk, competition risk, project risk,
  • operational risk, including legal risk,
  • compliance risk,
  • reputation risk.
• Financial risks:
  • credit risk,
  • liquidity risk,
  • market risk.

Risks related to the market environment

The Company believes that the following risks presented in the sections below are objectively most material; however, the order in which they are presented does not reflect their relative importance or impact for the Company. Additional risks, which are not yet identified or which are considered immaterial at this point, may also have an adverse impact on the activity of the Company, its financial position and results.

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The Group’s business depends on conditions on the global financial markets. Economic trends in the global economy, especially in Europe and the USA, as well as the geopolitical situation in neighbouring countries impact investors’ perception of risks and their activity on financial and commodity markets. As global investors evaluate geographic regions from the perspective of potential investment, their perception of Poland and GPW may decline in spite of a relatively stronger macroeconomic situation compared to other countries of the region. Less active trading by international investors on the markets operated by the GPW Group could make the markets less attractive to other participants and reduce the amount of charged trading fees, which are the main source of the Group’s revenue. Also the conditions in the Polish economy impact strongly investors’ activity and sentiment on the Polish market and consequently the level of turnover on the markets of the Group. Changes in the state of the Polish economy affect the business and investment activities of issuers. Changes of investors’ activity and sentiment on the Polish market have a direct impact on the GPW Group’s trading revenue. In periods of economic instability and under conditions of risk aversion, the Company’s revenue may decrease, even combined with a strict cost discipline, this could reduce the GPW Group’s profits. Furthermore, perception of higher risks of investment in Polish assets could restrict access to capital which could be invested on GPW and could adversely impact prices of assets traded on the markets organised and operated by the Group. Changing FX rates could have an adverse impact on investment decisions and their frequency, which could affect the volume, value and number of transactions on GPW and consequently also the Group’s revenue.

Events that may significantly affect the activity of GPW Group clients, contributing to a decrease in their activity and thus to a decrease in the GPW Group's profit include:

• general trends in the global and domestic economy and on financial markets,
• changes in monetary, fiscal and tax policies,
• the level and volatility of interest rates,
• inflation pressures,
• changes in foreign exchange rates,
• adoption of the euro as the currency of Poland (causing potential changes to monetary and fiscal policy or causing changes in the allocation of investor portfolios),
• change of Poland’s credit rating,
• institutional or individual investors’ behaviour,
• volatility in the prices of securities and other financial instruments,
• availability of short-term and long-term funding,
• availability of alternative investment opportunities,
• legislative and regulatory changes,
• unforeseen market closures or other disruptions in trading; and
• natural disasters and acts of god, epidemics, terrorist attacks, technical malfunctions and other events described in the State of Natural Disaster Act of 18 April 2002.

Risk of competition

The global exchange industry is strongly competitive. In the European Union, competition in the trade and post-trade sectors is amplified by legal amendments designed to harmonise legislation of the EU member states and integrate their financial markets. Hence, the Group is exposed to the risk of competition from other exchanges and alternative trading platforms whose presence on the Polish market could adversely impact the activity of GPW. In particular, the GPW Group may face competition of multilateral trading facilities (MTF) and other venues of exchange and OTC trade. Their activity on the Polish market could take away part of the trading volumes handled by the platforms operated by the Group. The trading cost on large foreign exchanges and MTFs is lower than on GPW, mainly due to the relatively small size of the market in Poland. Consolidations in the global exchange sector and the development of MTFs may increase pressures to reduce fees charged for trade on the financial markets. As a result, GPW clients could exert pressures on GPW to reduce listing and trading fees, affecting GPW’s revenue.

Competition risk in TBSP market

In January 2019, Treasury BondSpot Poland was appointed by Treasury Securities Dealers and approved by the Ministry of Finance as the electronic market which is the reference secondary trade platform for Treasury debt. Treasury BondSpot Poland is exposed to the risk that it may lose the status of operator of an electronic market if the Minister of Finance terminates the agreement with BondSpot S.A. (with a termination notice) upon initiating the procedure under Article 23(1) of the Treasury Securities Dealers Rules of 15 December 2018 at the request of more than 50% of Treasury Securities Dealers.

As a result, the Company has to take continuous measures necessary to ensure that TBSP remains an attractive market, mainly by providing a complete range of solutions typical of a Treasury bond market and by providing services of highest quality on competitive terms. Otherwise, if a new entrant offers more attractive market terms in Poland, BondSpot S.A. could no longer be entitled to operate the reference market, which would significantly affect the activities and financial position of BondSpot S.A. Furthermore, there is no guarantee that the Treasury Securities Dealers competition rules will not change in the future, which could directly or indirectly impact the volume of trade and, consequently, the revenue of the TBSP platform.

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Risk related to amendments of laws and regulations

The GPW Group operates primarily in Poland. The Polish legal system and regulatory environment can be subject to significant unanticipated changes and its laws and regulations may be subject to conflicting official interpretations. The capital market and the commodity market are widely subject to government regulation and may be subject to increasingly strict supervision. Regulatory change may affect the GPW Group as well as existing and prospective customers of its services. Furthermore, institutions other than the authorities (e.g., KDPW, KDPW_CCP) could impose rules which impact the Group similar to laws, affecting the competitiveness and attractiveness of the markets operated by the Group. Attrition of a significant proportion of clients for the Group’s services or less active investor trading on GPW could have an adverse impact on the activity of the Group, its financial position and results. Also European Union regulation increasingly impacts the GPW Group and adds to the costs of compliance, especially in the area of trading and post-trade services. It could hurt the competitiveness of smaller European exchanges, such as GPW, in favour of larger market players. Changes to regulations could require the harmonisation of the Group’s trading systems and operations, which could entail additional capital and operating expenditures, resulting in reduction of the Group’s profit. The ability of the Group to comply with the applicable laws and regulations largely depends on its ability to develop and maintain the adequate systems and procedures. There is no guarantee that the Group will be in a position to comply with future amendments of laws and regulations or that such amendments will have no adverse impact on the activity of the Group, its financial position and results.

Risk of non-compliance with regulatory requirements and recommendations of the Polish Financial Supervision Authority applicable to the activity of the Group

The Group is supervised by the Polish Financial Supervision Authority. The Group may be unable to comply with all regulatory requirements and recommendations of the supervisory authority and thus it may be exposed to future proceedings and sanctions (including cash penalties) imposed due to the Group’s non-compliance or alleged non-compliance with its obligations under the applicable laws and regulations as well as recommendations of the supervisory authority. Any such proceedings against the Group and resulting sanctions could have a material adverse impact on the activity of the Group, its financial position and results. The Group has never before failed to comply with regulatory requirements and recommendations of the supervisory authority.

Risk of regulations governing open-ended pension funds in Poland

Open-ended pension funds are an important group of participants in the markets operated by the GPW Group. As at the end of 2019, open-ended pension funds generated approximately 6.7% of trading in shares on the GPW Main Market and held shares representing 21.3% of the capitalisation of domestic companies and 42.4% of shares traded on the Main Market (among shareholders holding less than 5% of the shares of a public company or classified as financial investors). Legislative amendments announced by the Ministry of Economic Development in July 2016, which would replace open-ended pension funds with other collective investment undertakings and restrict or eliminate cash flows to/from pension funds, could impair the activity of this investor group on GPW. They could also augment the risk of an excessive supply of shares listed on GPW and curb the interest of other investors in such shares. As a consequence, this could cause a decrease of trade in financial instruments including shares on GPW, a reduction of the number and value of shares and bonds admitted and introduced to trading on GPW, and consequently a reduction of the GPW Group’s revenue and profit.

Risks of application of the Energy Law

Changes to the mandatory public sale of electricity and natural gas may have an adverse impact on the activity of GPW’s subsidiary, TGE, and its financial standing. The Energy Law requires energy companies which generate electricity to sell no less than 100% of electricity produced within a year on commodity exchanges or via NEMOs (subject to certain exceptions). Energy companies trading in gas fuels are required to sell at least 55% of high-methane natural gas introduced to the transmission grid within the year on an exchange. Amendments to or cancellation of these requirements could reduce the activity of certain participants of TGE. This could restrict the liquidity of trade in electricity and natural gas and the attractiveness of the commodity market for other participants, affecting the volume of trade in such commodities and the resulting revenue.

Risk of the Renewable Energy Sources Act

TGE operates among other things trade in property rights to certificates of origin of electricity from renewable energy sources as well as the Register of Certificates or Origin. The Renewable Energy Sources Act implemented a new support scheme for the production of energy from renewable energy sources based on auctions, which is to replace the existing support system. The existing system of green certificates of origin will expire on or before 31 December 2035. The support scheme may be phased out even earlier as certificates of origin are available within 15 years after the first day of power generation in an installation. For RES installations which were the first to produce energy eligible for green certificates of origin in 2005, the period of 15 years under the Act will expire in 2020, after which the existing support scheme will be gradually phased out.

Risk of TGE’s alignment with the MiFID II package

TGE started trade in CO2 allowances on the Financial Instruments Market following authorisation by the Polish Financial Supervision Authority in July 2019 in alignment with MiFID II.

Efforts continued with a view to obtaining a licence to operate an OTF into which the Commodity Forward Instruments Market will be transformed in the alignment of the TGE markets with the requirements of the Directive. According to TGE, the launch of the OTF following the authorisation by the Polish Financial Supervision Authority expected in Q1 2020 will complete the alignment of the TGE markets with the requirements of MiFID II.

Risk of alignment of GPW and TGE with the requirements of the cybersecurity law

By decision of 8 November 2018 issued in connection with the National Cybersecurity System Act of 5 July 2018, the Polish Financial Supervision Authority nominated GPW and TGE as operators of key services: operation of regulated markets. A new Regulation of the Minister of Digital Affairs of 4 December 2019 concerning organisational and technical conditions for providers of cybersecurity services and internal organisation of operators of key services responsible for cybersecurity, published on 23 December, extends the requirements under the National Cybersecurity System Act. The Regulation defines the requirements and provides that they should be fulfilled following a risk analysis, which is expected to be carried out in Q2 2020. As a result, risks which require mitigation are likely to be identified. On 18 November 2019, the Polish Financial Supervision Authority initiated an inspection of TGE’s compliance with the requirements of the Act. The inspection was closed on 18 December 2019 and the inspection report is pending. Recommendations provided in the report will be analysed in connection with the solutions in place at GPW in order to take corrective measures across the GPW Group.

Risk of amendments to and interpretations of tax regulations

The Polish tax system is not stable. Tax regulations are frequently amended, often to the disadvantage of taxpayers. Interpretations of regulations are also changed frequently. Such changes could not only raise the tax rates but also add new specific legal instruments, extend the scope of taxation, or even impose new tax burdens. Changes of tax laws could also be driven by the implementation of new rules under EU legislation following the interpretation of new tax regulations or amendments of existing tax regulations. Frequent amendments of laws governing corporate taxation and different interpretations of applicable tax regulations by tax authorities could be to the disadvantage of the GPW Group, adversely impacting its activity and financial position.

Risk of inconsistency between Polish and Union tax regulations, for instance concerning VAT

The risk of inconsistency between local (Polish) tax regulations and the Union’s VAT Directive concerns doubts as to the accounting policy of a taxpayer where invoices for purchases are recognised and input VAT is deducted on the basis of such invoices in a given financial period if they include invoices received after the end of the period but before the deadline for the submission of tax receipts, i.e., in practice, by the 25th day of the following month. That policy could generate the risk that tax authorities will follow the literal wording of Polish regulations and challenge the date of input VAT deductions under Article 85(10b)(1) of the VAT Act (i.e., one of the conditions for input VAT deductions would not be met).

Risk of internal regulations of the Company

The ability of the Group to comply with all applicable laws in a changing regulatory environment is largely dependent on the implementation and maintenance of a compliance, audit and reporting system as well as on the ability to attract and retain qualified staff responsible for the processes. The Group’s policies and procedures of identification, monitoring and management of compliance risk could be insufficiently efficient. Management of legal and regulatory risk requires among other things that the rules and procedures applicable in the Group support adequate monitoring, registration and verification of many transactions and events. The Group can give no guarantee that its policies and procedures will be effective at all times or that it will be able at all times to adequately monitor and property assess compliance risks to which it is or may be exposed. Non-compliance with laws and standards could reduce the activity of participants, issuers and investors, adversely impacting the activity of the Group, its financial position, results and outlook.

Risk of potential litigation due to the Group’s infringement on intellectual property rights of third parties

The Group’s competitors and other legal and natural persons were likely to obtain and are likely to obtain in the future intellectual property rights in products or services related or similar to the types of products or services which the Group offers or intends to offer. The Group may be unaware of all protected intellectual property rights which may be at risk of infringement by the Group’s products, services or technologies. Furthermore, the Group cannot be certain that its products and services do not infringe on the intellectual property rights of third parties and that third parties will raise no claims against the Group due to such infringement. If the Group’s trading system or at least one of its other products, services or technologies is considered to infringe on the rights of third parties, the Group may be forced to discontinue the development or introduction into trading of such products, services or technologies, to obtain a necessary licence from the holders of intellectual property rights, or to modify such products, services or technologies to avoid infringement of such rights. If the Group is forced to discontinue the development or introduction into trading of some products or is unable to obtain a necessary licence, it may have a material adverse impact on its activity, financial position and results.

Risk of ineffective protection of intellectual property

The Group protects its intellectual property under agreements concerning trademarks, copyrights, protection of trade secrets, non-disclosure agreements and other agreements with its suppliers, subsidiaries, associates, clients, strategic partners and others. The measures implemented by the Group may be insufficient, for instance, to prevent appropriation of information. Furthermore, protection of intellectual property rights of the Group may require significant investments of funds and human resources, which could have an adverse impact on the Group’s activity, financial position and results.

Risk of potential breach of competition laws by the Company

GPW has a dominant position on the Polish market. Consequently, the Company is subject to certain limitations including the prohibition of abusing the dominant position and using anti-competitive practices under Polish and EU competition laws. Competition authorities (President of the Office of Competition and Consumer Protection (UOKiK), Commission) may monitor compliance with such limitations. If the Company is found to be in breach of any such limitations, the competition authorities may require the Company to take specific measures in order to discontinue an anti-competitive practice or to discontinue abusing the dominant position, and impose sanctions including cash penalties on the Company up to 10% of revenue earned in the year preceding the year when the penalty is imposed. Such measures could have a material adverse impact on the Group’s activity, financial position and results.

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Risk of loss of the Group’s reputation and client trust necessary to process exchange transactions 

The Group operates in a sector where strong reputation and trust of clients (including issuers, financial intermediaries, and investors) are particularly important. The Company has achieved a relatively high volume of trade and a high number of IPOs among others owing to its reputation and clients’ trust. In view of the role of the Group on the Polish capital market, its reputation could be harmed by any malfunctions of the trading system, trading interruptions, operational errors, disclosure of client information, litigation, press speculations and other adverse events. Unexpected changes of regulations governing the capital market and the commodity market in Poland, as well as actions of other participants of the exchange market, including issuers, financial intermediaries, competitive trading platforms and the media, in breach of accepted standards of conduct or good practice, could undermine overall trust in the Polish capital market and the Group. Furthermore, there is a risk that employees of the Group could be in breach of the law or procedures while measures taken by the Group to identify and prevent such behaviour could in certain cases be ineffective, resulting in sanctions and causing a serious harm to the reputation of the Company. No events have ever had a material adverse impact on the reputation of the Group or trust of clients.

Risk of attracting and retaining qualified staff of the Group

Effective management of the GPW Group’s business requires recruitment of highly qualified employees. The skills of the Group employees are scarce due to the unique nature of the GPW Group’s operations. Any increased turnover of key employees could temporarily affect the GPW Group’s effectiveness in view of the lengthy training process necessary to prepare new staff for such positions. This could have an adverse impact on the activity of the Group, its financial position, results, ability to achieve strategic targets, and outlook.

Risk of industrial disputes

Most of the employees of the Company are members of the Trade Union of Exchange Employees, the sole trade union active in GPW since 2005. Trade unions are entitled to coordinate and consult opinion-making activities (including those related to restructuring of the Company). No industrial action has ever been filed by Group employees. However, there is no guarantee that the Group will not be involved in a future dispute which could have an adverse impact on its reputation, activity, revenue, results or financial position.

Risk of trading systems malfunction

Safety and continuity of trading are among the key functions of GPW. The Group’s operations are strongly dependent on the effective functioning of its trading systems, which are subject to the risk of outages and security breaches. The reliability of the Group’s trading systems is as important as their efficiency. In the event that any of the GPW Group’s systems, or those of its third-party service providers, fail or operate slowly, it may cause any of the following to occur: unanticipated disruptions in services provided to the Group’s market members and clients; slower response times or delays in trade executions; incomplete or inaccurate recording or processing of trades; financial losses and liability to clients; litigation or other claims against the Group, including formal complaints with the Polish Financial Supervision Authority, proceedings or sanctions. Malfunctions in the trading systems and other integrated IT systems could disrupt a trading session and therefore cause a reduction in the volume of trading and affect confidence in the market, which could have a material adverse effect on the Group’s results, its financial position or development prospects. Furthermore, the Group may be forced to make additional material investments in security in order to improve security measures or mitigate existing issues, or to improve its reputation harmed by a potential security breach. Such factors could have an adverse impact on the Group’s activity, financial position or results.

Risk of technological changes

The exchange industry has experienced and will continue to experience fast technological progress, evolving requirements and preferences of clients, launches of products and services integrating new technologies, as well as the emergence of new industry standards and practices. To remain competitive, the Group must continue to strengthen and improve its ability to respond to changes combined with the productivity, availability and functionality of automatic trading and communication systems. This will require the Group to continue attracting and retaining highly qualified staff and to invest heavily in continuous upgrades of its systems. Otherwise, the Group’s systems may become less competitive, causing client attribution and reduction of the volume of trade, which could have an adverse impact on the activity of the Group, its financial position and results.

Risks of necessary upgrades of GPW’s trading system

Following an analysis of development scenarios for GPW and the GPW Group, in view of fast changing information technology, including an evolution of trading system technology, GPW took measures to replace its technology within no more than 4-5 years. In September 2019, GPW initiated a research and development project aiming to develop a proprietary, modular, scalable trading system dedicated to GPW and its subsidiaries and to foreign exchanges of Central and Eastern Europe (CEE) seeking IT solutions matching their needs and specificity. According to the development strategy for the Polish capital market, on which the Exchange is a key institution, a proprietary IT solution allows to optimise operating costs and risks of the platform. The Project may generate significant capital expenditures of the Company, partly to be refinanced with a grant from the National Centre for Research and Development (NCBR). The project aims to replace the legacy system UTP, which has been in operation for 7 years.

If the Project fails, it will likely be necessary to reopen the option of replacing the system with a new trading system acquired from a foreign vendor. There can be no guarantee that the capital expenditures of the Company required to replace the trading system will have no material adverse impact on the activity of the Group, its financial position and results.

Risk of the Group’s risk management methods

The Group is exposed to market risk, regulatory risk, and financial risks including credit risk and liquidity risk of the Group’s investment portfolio, market risk generated by changes in prices of financial assets, as well as operational risk of its activity. The Group has a property insurance cover against risks including natural disasters, theft and burglary, vandalism, improper use of electronic equipment and inadequate power parameters. Furthermore, the Group has third-party liability insurance covering members of the Management Boards and Supervisory Boards (D&O). The Company has no third-party liability insurance for its operations, including potential damage incurred by Exchange Members and participants of trading due to IT system malfunctions. The Company believes that it has sufficient protection under the agreements signed with Exchange Members and participants of trading. These risk management measures and insurance policies may be insufficient to protect the Group against all risks to which it is exposed. The Group may not be in a position to effectively manage its risks, which could have an adverse impact on the activity of the Group, its revenue, results and financial position.

Risk of dependence of the Group’s activity on third parties over which the Group has limited or no control

The GPW Group’s activity depends on third parties, including KDPW, KDPW_CCP, as well as several third-party service providers including mainly IT service providers. The ICT systems operated by the GPW Group for trading in financial instruments and commodities are highly specialised and customised, and are not widely used in Poland or elsewhere. Consequently, there is limited choice in service providers for such systems. There can be no assurance that any of the GPW Group’s providers will be able to continue to provide their services in an efficient manner, or that they will be able to adequately expand their services to meet the GPW Group’s needs. System interruption or malfunction or the cessation of important services by any third party in whole or in part and GPW Group’s inability to make alternative arrangements in a timely manner could strongly affect the Group’s operation, financial position and results.

Risk of failure to implement the Group’s strategy

The strategy of the Group provides among other things for improved attractiveness of GPW for a growing group of market participants, in particular by investing in state-of-the-art technologies, diversification and expansion of GPW’s activity by adding new products and services. The achievement of these goals depends on a range of factors which are beyond the Group’s control, in particular market conditions and the overall economic and regulatory environment. Furthermore, the identification and implementation of development initiatives takes time and requires higher operating costs and capital expenditures which could impact financial results. GPW is looking for ways to strengthen its business and leverage opportunities of further development. As a result, the Group is in a position to launch new products and grow its presence on other markets. If development solutions prove ineffective, this could adversely impact the Group’s financial results.

Risk of actions taken by the Company’s dominant shareholder where such actions are not in the interest or go against the interest of the Company or its other shareholders

The Company’s dominant shareholder, the State Treasury, holds 14,688,470 preferred shares of GPW with voting rights (each share confers two votes according to the GPW Articles of Association). The State Treasury held 51.77% of the total vote as at the end of 2019. A shareholder holding the majority of votes at the General Meeting may elect most of the members of the Exchange Supervisory Board and may control the composition of the Management Board. With its corporate rights, the State Treasury or another dominant shareholder that acquires shares of the Company from the State Treasury may directly influence resolutions passed by the authorities of the Company. The State Treasury has, and a dominant shareholder that buys shares from the State Treasury may have, material influence over the activity of the Company, including the development of its strategy and directions of growth, the election of members of the Supervisory Board (subject to the regulations concerning the election of independent members) and of the Management Board. The Company is unable to anticipate how the State Treasury or another dominant shareholder will exercise its rights and how their actions may impact the activity of the Company, its revenue and financial results, and its ability to implement the strategy. The Company is unable to anticipate whether the policies and actions of the State Treasury or another dominant shareholder will be aligned with the interests of the Company. It should be noted that changes of shareholders of GPW could result in a change of the entity which has material influence over the Company or a situation where GPW has no dominant shareholder.

Risk of provision of Reference Rates WIBID and WIBOR

In 2017, the GPW Group acting through the subsidiary GPW Benchmark S.A. took over the provision of the interest-rate benchmarks WIBID and WIBOR and initiated alignment of the methodology with the requirements of Regulation (EU) No 2016/1011 (BMR). In the process, GPW Benchmark carried out open consultations with financial market participants and key institutions, including regular consultations with Fixing Participants. Following the alignment, GPW Benchmark submitted on 6 December 2019 an application to the Polish Financial Supervision Authority requesting authorisation as an administrator of interest-rate benchmarks including the key interest-rate benchmark WIBOR.

The authorisation request was filed in December 2019, ensuring continued application of the Reference Rates WIBID and WIBOR after 1 January 2020, i.e., after the end of the transitional period for non-key benchmarks (WIBID). In connection with the activities of GPW Benchmark S.A. concerning interest-rate benchmarks, the GPW Group is exposed to a risk of potential delays in the proceedings before the Polish Financial Supervision Authority and of delayed alignment of Fixing Participants with the new requirements. The risk that the authorisation for the Reference Rates WIBID and WIBOR will be refused is largely mitigated by the alignment of the benchmark methodology and the implementation of new requirements defined in the reviewed documentation; however, the Company continues to monitor that risk. The next steps in the alignment and review of the methodology of the Reference Rates WIBID and WIBOR will follow the requirements of the Regulation and will include public consultations. As a part of analytical work, GPW Benchmark published in 2019 the benchmark methodology as well as the results of simulations of alternative interest-rate benchmarks. Provision of alternative benchmarks mitigates systemic risks generated by concentration of contracts and financial instruments which are mainly use the Reference Rates WIBID and WIBOR.

Risk of provision of capital market indices and benchmarks

On 27 November 2019, GPW Benchmark S.A. was authorised by the Polish Financial Supervision Authority as an administrator of significant and non-significant regulated data and non-interest-rate benchmarks and was entered in the ESMA register. As of the beginning of December 2019, GPW Benchmark took full control of the provision of indices of the GPW Main Market, NewConnect and TBSP including WIG20, mWIG40 and sWIG80.

Risks of Administrator

The authorisation to operate as an administrator imposes the obligation to review and validate the methodology of benchmarks under BMR. As a result, GPW Benchmark will be exposed to operational risk and compliance risk due to oversight and control of the provision of benchmarks.

As a supervised entity, GPW Benchmark is exposed to the risk of non-compliance with the provisions of Regulation (EU) No 2016/1011 (BMR) which lay down the obligations of benchmark administrators, and to the risk of resulting supervisory sanctions. If such risks materialise, they could have an adverse effect to the reputation of the entire GPW Group.

Risk of reduced benefits of the Company’s investment in KDPW

The Company holds 33.33% of KDPW equity. The KDPW Group (with KDPW as the parent entity and KDPW_CCP as its subsidiary) is responsible for the operation and supervision of the depository, clearing and settlement system for financial instrument trade in Poland, with the exception of trade in Treasury bills where clearing and settlement are operated by the National Bank of Poland. As a minority shareholder, GPW has limited strategic and operational influence over the activity of KDPW. KDPW’s business model may be adversely impacted by a range of factors reducing its profits, including price pressures or reduced trading. Lower profits of the KDPW Group including lower dividend paid out by KDPW could have an adverse impact on future profits of the Group, which could in turn have a material adverse impact on the financial position and results of the Group.

Risks of TGE’s participation in European electricity market projects

TGE’s strategy for the spot electricity market follows from the decision of the European Council of February 2011 and the obligation defined by the EU Member States’ governments to jointly build an integrated market. Unfortunately, according to the analysis of the financial impact of the participation of exchanges, including TGE, in the European market integration projects, their refinancing is exposed to risks.

However, TGE needs to engage in the European market projects in view of the political and regulatory decisions. In the absence of TGE’s action or investment, TGE could suffer adverse market effects including declining trading on electricity markets, obstacles to the operation of the forward market and, in the longer term, also the financial market. TGE could miss the opportunity to grow, especially that big exchanges such as EPEX SPOT and NordPool will operate as competitive NEMOs on the Polish energy market.

Poland is the only CEE country to adopt a competitive NEMO model. Risks to TGE materialise with competitive operation of other exchanges on the Polish electricity market. The scale of risks to TGE is augmented by the fact that TGE is supervised by the Polish Financial Supervision Authority as a licensed commodity exchange while being supervised together with IRGiT by the Energy Regulatory Office as a NEMO.

TGE may also consider expanding to other markets. TGE will decide whether to launch as a NEMO on foreign markets following an in-depth financial analysis and risk analysis, for instance, return on investment in trade on new markets. Activity on other markets will require additional expenditures, including participation in NEMO costs on foreign markets, additional licence costs and HR expenses.

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Financial risks, such as price risk, credit risk, cash flow risk, liquidity risk to which the entity is exposed, are discussed in the notes to the GPW Group’s consolidated financial statements.

Risk of interest rate hikes

The Company is exposed to a risk of interest rate changes due to debt instruments issued by GPW at variable interest rates maturing on 31 January 2022. A sharp increase of the interest rates including the reference rate of the bonds could boost the cost of servicing the liabilities under the bonds and have an adverse effect on GPW’s financial position and results.

Risk of material periodic volatility of revenue and profits due to unforeseeable revenue levels and relatively high fixed costs

The Group’s sales revenue and net profit are strongly dependent on a range of external factors which are beyond the Group’s control, including the activity of investors and the prices of financial instruments listed on the markets organised and operated by the Group; consequently, the Group’s sales revenue could vary from period to period. A decrease in the value of IPOs on GPW could have an adverse impact on revenues from fees for admission and introduction to trading on the exchange and listing revenues. If its sales revenue decreases, the Group may be unable to reduce its operating expenses, which could have a material adverse impact on its operating profit.

Risk of dependence of a large part of the Group’s sales revenue on trade in shares of a limited number of issuers and trade in futures by a limited number of Exchange Members

The Group is exposed to the risk of concentration of trade among a small number of investment firms operating on GPW. In 2019 (according to GPW data), only one Exchange Member had a share of more than 10% of trade in stocks on the electronic order book on the Main Market and 21 Exchange Members had a share between 1% and 8.5%. Furthermore, four Exchange Members had a share of more than 10% each in the volume of trade in futures, jointly representing 58% of the volume of trade in futures. The loss of one or more of such Exchange Members could have a material adverse impact on the activity of the Group, its financial position or results.

Furthermore, the revenue from trade in equities and other equity-related securities represented 26% of the Group’s total sales revenue in 2019. In that period, the top five companies with the biggest share in trade on GPW generated 47.5% of the average monthly value of trade in shares on the electronic order book on the Main Market while the top 10 companies generated 67.1%. The concentration of a large part of the Group’s revenue in the context of a small number of issuers and securities generates material risks. In particular, if those and other major issuers decide to have their shares delisted, it could have an adverse impact on the activity of the Group, its financial position, results and outlook.

Risk of regulatory fees

GPW and KDPW are required to pay contributions towards the annual budget of the Polish Financial Supervision Authority in respect of capital market supervision. The amount of the fees is defined on the basis of the expected cost of supervision over the Polish capital market within the year and the estimated revenue of the Polish Financial Supervision Authority from market participants. GPW has no control of the amount of the fees and it is unable to anticipate the exact amount to be paid to the Polish Financial Supervision Authority in a given year; consequently, it cannot predict the impact of the fees on the cash flows of the Group. An increase of the fees may have an adverse impact on the activity of the Group, its financial position and results.

Risk of trade in electricity and gas outside the exchange

The GPW Group’s revenue from trade in commodities depends among other things on the propensity of producers to sell energy and gas on the exchange above the required mandatory level and on the activity of traders. The mandatory sale on the exchange currently applies to 100% of produced energy (subject to certain exceptions) and 55% of high-methane natural gas introduced to the transmission grid. Trading on the exchange above the required mandatory volumes is up to energy and gas producers to decide. The Group has no direct control of the volume, value and number of transactions on the exchange. The Group’s revenue depends among other things on the attractiveness of trade in commodities compared to other exchanges and trading platforms. Reduced supply of energy or activity of trading participants could have a material adverse impact the activity of the Group, its financial position and results.

Risk of insufficient insurance cover

In view of the insurance cover held by the Group, certain types of damage may not be covered by insurance or may be covered by partial insurance only. Furthermore, the Group could incur material losses or damage covered by no insurance or by limited insurance only. Consequently, the Group may have insufficient insurance cover against all damage that it could potentially incur. In the event of damage that is not covered by insurance or damage exceeding the sum insured, it may erode the Group’s capital. Furthermore, the Group may be required to redress damage caused by events not covered by insurance. The Group may also have liability for debt and other financial commitments related to such damage. Furthermore, the Group cannot guarantee that there will be no future material damage exceeding the Group’s insurance cover. Any damage not covered by insurance or damage exceeding the sum insured could have an adverse impact on the activity of the Group, its financial position and results.

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Other risks, which are unknown or considered irrelevant at this time, may also have a material negative effect on the GPW Group’s operation, financial position and results.

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