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 2018, open-ended pension funds generated approximately 3.7% of trading in shares on the GPW Main Market and held shares representing 21.5% of the capitalisation of domestic companies and 41.5% 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 a large surplus 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 issues 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 necessary upgrades of GPW’s trading system

The trading system UTP was implemented by the Company on 15 April 2013. The Company has recently implemented a major system upgrade to align it with applicable regulatory requirements (MiFID 2/MiFIR). Although UTP now represents the highest global standard and meets growing requirements of market participants, there is no guarantee that it need not be upgraded in the next five years. This could require material investments of the Company.

There can be no guarantee that the capital expenditures of the Company required to upgrade UTP or replace IT hardware will have no material adverse impact on the activity of the Group, its financial position and results.

Risk of the economic situation of other countries

The economic situation and market conditions in other countries could impact the perception of the Polish economy and its financial markets. Although the economic situation of other countries could be materially different from the economic situation in Poland, investors’ risk aversion caused by the economic situation of other countries could reduce the volume of trade in financial instruments on GPW. In particular, an economic slowdown or crisis in Europe or unexpected economic crises in other parts of the world, especially caused by difficulties of some countries with the repayment of debt, could affect the assessment of investment risk in European economies and consequently cause a shift to safe havens, which could have an adverse impact on investors’ activity and sentiment and consequently an adverse impact on the activity of the Group, its financial position and results.

Risks of the geopolitical and economic situation globally

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. Combined with a stable cost level, this could reduce the GPW Group’s potential profit.

Risk of market and political events beyond the GPW Group’s control

The volume of trading, the number of new listings and demand for the GPW Group’s products and services are affected by economic, political and market developments, both domestic and global, that are beyond the Group’s control, including in particular:

• 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.

These events could have a significant impact on the activity of GPW Group clients, mainly issuers and investors. Their low activity could affect the Company’s trading and listing revenue, revenue from introduction of financial instruments, and consequently information services, and it could affect the GPW Group’s profit.

Risk related to amendments of national 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 increasingly strict supervision. Regulatory change may affect the GPW Group as well as existing and prospective customers of its services. For instance, regulatory changes may affect the attractiveness of listing or trading on the markets organised and operated by the Group or the attractiveness of services provided by the Group. Such changes could also encourage companies listed on GPW to transfer to other markets which offer competitive listing costs or more flexible listing or corporate governance requirements. 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.

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.

Regulatory risk related to EU law

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.

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 at least 100% of electricity produced within a year among others on commodity exchanges (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 implements 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 over the years. Furthermore, the Renewable Energy Sources Act allows market players eligible for support under certificates of origin to move to the auction system earlier than after 15 years. Consequently, some of them may move to the auction system early, which could affect the results of the Group.

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. The Act lays down requirements for operators of key services as well as their implementation deadlines: within 3, 6 and 12 months after the decision nominating them as operators of key services. Consequently, GPW and TGE are working to align with the legal requirements. The measures addressing the requirements to be met within 3 months have been largely completed (although some of them are continuous). The requirements to be met within 6 months (by 8 May 2019) may generate the following material risks:

• risk of the requirement of having in place a “continuous monitoring system covering the IT system used to provide the key service.” GPW and TGE do not have the human resources necessary to meet the requirement internally. The companies are planning to use a third- party service of a special provider to meet the requirement. GPW is running a procedure to appoint a SOC (Security Operation Center) provider for GPW and TGE. The timeline of GPW’s alignment with the requirement of continuous monitoring depends among others on such third-party provider. Furthermore, the organisation of work must be modified to ensure that GPW and TGE employees can react to incidents reported by the SOC. This requires amendments to the GPW Work Rules and the TGE Work Rules necessary to ensure that the incident follow-up function can be performed outside the business hours and on bank holidays;
• risk of the requirement of “drafting, implementing and updating documentation concerning cybersecurity of the IT system used to provide the key service.” Since such documentation should include “documentation concerning the information security management system produced in compliance with PN-EN ISO/IEC 27001”, far- reaching measures are necessary in order to review the existing documentation and to produce new documentation compliant with the norm.

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 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.

Risk of the economic situation in Poland

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 whose securities are listed on the markets operated by the Group, including their financial results, which in turn may affect the prices of these securities, the volume of transactions, as well as activities related to issuing new securities. 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. GPW’s listing revenue depends directly on the prices of listed instruments. 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.

Risk of competition from other exchanges and alternative trading platforms

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. The launch of active trade in Polish stocks by MTFs could impact the value of trade in stocks on GPW. Their activity on the Polish market could take away part of the trading volumes handled by the platforms operated by the Group and exert additional pressures on the level of transaction fees, adversely impacting the activity of the Group, its financial position and results.

Risk of price competition

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.

Risk of the take-over of the functions of fixing organiser

The GPW Group acting through the subsidiary GPW Benchmark S.A. took over the preparation of WIBID and WIBOR reference rates from the existing organiser of the fixing, the ACI Polska Association, on 30 June 2017. GPW Benchmark S.A. continues to harmonise with Regulation (EU) No 2016/1011 of the European Parliament and of the Council. GPW Benchmark applies for the authorisation as administrator within the meaning of the Regulation. GPW Benchmark S.A. is required to apply to the Polish Financial Supervision Authority for the authorisation as administrator of WIBID and WIBOR reference rates within the transitional period of harmonisation with the Regulation until the end of 2019. GPW Benchmark continues the alignment of GPW Group reference rates subject to the transitional period, including WIG indices, with the Regulation. GPW Benchmark has developed the concept of a Warsaw Repo Rate. The initiative is implemented in partnership with BondSpot S.A. Potential disputes or reservations concerning the preparation of reference rates by the Group company could have an adverse impact on its perception by market participants and on its reputation, and entail third-party liability of the Group. Once the status of administrator is granted in connection with the application of Regulation 2016/2011 as of the beginning of 2018, any breach of the administrator’s obligations could lead to civil, administrative or criminal liability.

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.

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 activity, revenue, results or 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 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.

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 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 requires 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.

Business risk of TBSP’s loss of reference Treasury securities market status

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. upon initiating the procedure under § 23 (1) of the Treasury Securities Dealers Rules at the request of more than 50% of Treasury Securities Dealers.

TBSP generates most of the Group’s revenue from trade in Treasury securities. The Group’s revenue from trade in Treasury securities depends among others on the terms of trade in Treasury securities compared to competitive trading venues and OTC trade and on TBSP’s reference market status. The Group has no direct control of the volume, value and number of transactions in Treasury securities on TBSP but it takes steps to make the market more attractive, including the provision of a broad range of functionalities and quality services offered on competitive terms. There can be no guarantee that the terms and conditions of the Treasury Securities Dealers competition will not change, directly or indirectly affecting the volume of trading on TBSP and consequently the revenue from TBSP.

In January 2019, Treasury BondSpot Poland was once again appointed by Treasury Securities Dealers for an undetermined period of time and approved by the Ministry of Finance as the electronic market which is the reference trading platform of Treasury debt.

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 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 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 trading system 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 system and other integrated IT systems could delay 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 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

According to the GPW Articles of Association, the voting rights of shareholders who hold more than 10% of votes at the General Meeting are capped. However, the limitation does not apply to the Company’s dominant shareholder, the State Treasury, which 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 51.76% of the total vote as at the end of 2018. Furthermore, the limitation on the voting rights does not apply to shareholders who hold more than 10,493,000 series A preferred shares (i.e., more than 25% of all preferred shares of the Company). Consequently, the State Treasury controls the Company and any other shareholder may use the exemption if it acquires more than 10,493,000 preferred shares (i.e., more than 25% of all preferred shares of the Company) from the State Treasury.

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 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 the 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 and organisational parameters 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, the initiative is unlikely to provide financial benefits. 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 market.

Market solutions under implementation follow from the applicable regulations (CACM) and project documentation (MCO PLAN, MNA). The expected completion date of the current phase is 2020, including third-wave XBID and CORE. It should be noted that the key beneficiaries of an integrated market are market participants, especially energy consumers. Hence, the EU has agreed to respect a socially acceptable cost base, including under CACM. As a result, the key objective of TGE in the next few years is to defend its existing revenue base, which does not ensure that the company will deliver profitability at levels satisfactory to the owner.

As an important factor impacting TGE’s activity on the spot market, the nomination as NEMO implies a new strategic and business dimension and consequently new challenges and risks. Challenges faced by TGE include the following objectives:

• to ensure appropriate operating and safety procedures of the spot electricity market under the European models PCR and XBID and their efficient implementation;
• to ensure good relations with market participants and other stakeholders (administration, regulators, supervisory authorities, transmission network operators);
• to review conformity of IT software and hardware with the qualitative and quantitative standards of the European projects and quickly respond to changing need of the projects;
• to monitor the operation of other NEMOs and secure information impacting TGE’s business decisions;
• to train staff, learn from companies with longer seniority in the projects, arrange examinations.

The objectives of TGE on the European spot electricity market include:

• to implement a strategy of maintaining TGE’s position as a reliable, professional electricity exchange;
• to safeguard conditions of TGE’s survival and efficient operation as an energy exchange on the domestic and European spot market in view of competition among exchanges;
• to perform the functions defined in the Guarantee Letter issued by the President of the Energy Regulatory Office, including TGE’s full membership of PCR and performance of NEMO functions based on a guarantee of refinancing of investments;
• to ensure contractual and technical capabilities of active full-fledged participation in market development projects and implementation of the EU market mechanisms jointly with other European exchanges.

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 indicating whether the marketing and capital expenditures will pay off. At this point, all suggests that seeking the status of NEMO on other markets will mainly entail additional costs to TGE, including participation in NEMO costs on other markets, additional licensing costs, as well as HR costs.

International project management is a responsibility of steering committees and work groups. As a party to international market agreements and a participant of projects, TGE is required to delegate its representatives to work groups and project steering committees.

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. In 2015, the fees paid by the GPW Group and KDPW represented close to 100% of the capital market supervision budget of the Polish Financial Supervision Authority. The Act of 12 June 2015 amending the Act on Capital Market Supervision and certain other Acts extended the group of entities which finance market supervision and modified the amount of fees contributed by different institutions. As a result, the fees paid by the GPW Group decreased substantially (by about one half) as of January 2016 but reached PLN 12.5 million in 2018, the highest since the amendment took effect. 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 interest rate hikes

The Company is exposed to a risk of interest rate changes due to debt instruments issued by GPW with variable interest maturing on 31 January 2022. A sharp increase of the interest rates including the base 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 2018 (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 20 Exchange Members had a share between 1% and 9%. Furthermore, there were four Exchange Members that had a share of more than 10% each in the volume of trade in futures, jointly representing 62.2% 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 27.1% of the Group’s total sales revenue in 2018. In that period, the top five companies with the biggest share in trade on GPW generated 45.6% of the average monthly value of trade in shares on the electronic order book on the Main Market while the top 10 companies generated 62.6%. 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 dependence of a large part of the Group’s revenue from derivatives on trade in WIG20 futures

Trade in derivatives is the Group’s second largest source of revenue from trading on the financial market and accounted for 9.7% of the Group’s sales revenue from trading on the financial market and 3.5% of the Group’s total revenue in 2018. The vast majority of the Group’s revenue from trade in derivatives was generated by trade in a single product: WIG20 futures. A large decrease in trade in WIG20 futures could have an adverse impact on the revenue from trade in derivatives, which could have a material adverse impact the activity of the Group, its financial position and results.

trade in commodities on the propensity of producers to sell energy and gas on the exchange

The 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. The mandatory sale on the exchange currently applies to 100% of produced energy (subject to certain exceptions) and 55% of gas. 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, impacting the ability of the Company to pay for and redeem the bonds and impacting the value of the bonds.