PolskiMacroeconomic Situation, the Government’s Economic Policy, Conditions on the Exchange
GPW’s results will be driven in equal measure by the activity of investors on the capital market and by the overall economic conditions.
According to European Commission forecasts, GDP growth should rise up to 3.2 percent in 2017 and stabilise at 3.1 percent in 2018. The recovery will be driven by domestic demand. The Commission expects private consumption to grow sharply in 2017 and to stabilise in 2018 with the end of the temporary effect of higher social transfers. Employment will also stop growing.
In its report, the Commission expects public investments to rise in 2017 and 2018 owing to improved absorption of EU funding. Private investments should grow gradually, driven by solid domestic demand and an expected increase in exports.
According to the Commission, inflation should rise sharply in early 2017 to ca. 2 percent in the first months of the year, driven mainly by growing energy and food prices. Price pressures should drive inflation even further in the following months but the Commission expects inflation to remain below 2.5 percent until the end of 2018. Commission economists expect the growth of employment to slow down in 2017 due a shrinking working age population combined with legislative disincentives for occupational activity including a significant reduction of the retirement age as of October 2017 and the 500+ programme active since April 2016. The Commission sees some risks in its projection, including prevailing political and regulatory uncertainty, affecting investments and private consumption.
In 2017, the global capital markets will be impacted by a shift from quantitative easing (including US rate hikes) to fiscal expansion. According to general expectations, this will boost inflation expectations and accelerate capital transfers from bond markets to equity and commodity markets. With rising GDP and higher commodity prices, aggregate profits of public companies should improve, bolstering exchange indices.
Competition of Multilateral Trading Platforms (MTF)
In October 2015, a European multilateral trading facility started to offer trade in Polish stocks participating in WIG30. Until the date of this report, trades on the MTF reached PLN 39 thousand (at trading sessions on 8 and 9 October 2015; source: Reuters). The figure is negligible compared to trade on GPW within that period; however, trade in GPW listed stocks on the MTF may increase in the future. Likewise, other European MTFs may also offer trade in Polish stocks.
The launch of trade in Polish stocks on MTFs could grow the overall value of trade in such stocks, including among others arbitrage and trade by investors active on MTFs with no access to GPW. However, it is not unlikely that MTFs could also attract part of the trade currently handled by GPW.
Final Shape of the Pension System Reform in Poland.
In July 2016, the Government published a proposal of a further reform of the pension system involving the nationalisation of a part of savings in open-ended pension funds and a transfer of 25% of liquid assets (cash, foreign stocks, bonds) to a Demographic Reserve Fund. The remaining 75% of the assets (Polish stocks) would remain in open-ended pension funds, which would eventually be transformed into traditional investment funds. The changes are expected to take effect in early 2018 and the details will be disclosed in early 2017.
Although the details of the reform have not yet been defined, the very announcement of such reform was welcomed by participants of the Polish capital market and foreign investors. First, the announcement of the reform partly eliminated investors’ uncertainty about the future of open-ended pension funds and assets, which in early 2016 largely affected their activity on GPW’s equity market and resulted in lower turnover. Second, the announcement of transformation of open-ended pension funds into investment funds may release some of the free float on GPW and improve the liquidity of securities locked in open-ended pension fund portfolios. For many years, open-ended pension funds have been rather passive investors on GPW, and their share in the turnover in equities was ca. 5-6 percent. Meanwhile, investment funds are much more active investors and compete with their peers, which opens prospects of better liquidity on GPW’s stock market. Thus, the final shape of the reform and especially the structure of and potential limitations and investment restrictions imposed on the entities which will receive 75% of existing pension fund assets (Polish stocks) will impact liquidity on the GPW stock market, the value of trade and the valuation of companies listed on GPW.
In 2016, the value of Polish shares in open-ended pension fund portfolios increased by 9.4% to PLN 116.2 billion (Source: KNF).
Financial and Commodity Market Regulation
- MiFID II and the financial market - The European exchange industry and trading platforms will be largely impacted by amendments of European legislation under MiFID II, which will take effect in January 2018 following transposition to national law and enactment of implementing regulations. The new legislation defines among others the requirements for the publication of data on pre/post-trade transparency and exemptions from the publication obligation. MiFID II modifies the detailed requirements for the provision of investment services, the organisational requirements for investment firms and trading systems, providers of market data services, and access rights of supervision authorities. It imposes additional standards on algo trading and direct market access. From the perspective of GPW, the new legislation requires a regulatory, technological and operational realignment entailing capital expenditures.
- MiFID II and the commodity market - MiFID II extends the definition of financial instruments to include commodity-based derivatives which can be cleared with physical delivery and are traded on regulated markets, MTFs and OTFs, other than energy products in wholesale trade (within the meaning of REMIT) which must cleared with a physical delivery and are traded on OTFs. For the first time ever, MiFIR requires that certain categories of derivatives (financial instruments which must be centrally cleared under EMIR and are considered to be sufficiently liquid) are barred from OTC trade and must be traded on organised trading platforms. Trading on OTFs should be fully transparent, including pre-trade and post-trade. Specific transparency requirements will apply to all trading systems and all financial instruments traded in such systems. MiFID II introduces a range of new regulations addressed exclusively to commodity-based derivatives.
These regulations may largely impact the future organisation of markets operated by POLPX. In view of the scale and importance of those changes to the organisation and security of trade and clearing as well as market transparency, POLPX took necessary measures to prepare for the requirements imposed on regulated markets. POLPX was involved in the consultations of all legislative drafts relevant to its activity and actively participates in EU working groups. All the aforementioned documents were reviewed by a dedicated project team within POLPX. On the one hand, considering that the position of the supervisory authorities suggests that the Commodity Forward Instruments Market operated by POLPX will be unable to continue operating in its current structure after the implementation of MiFID II, the Management Board of POLPX is considering the following solutions:
- application for authorisation as an operator of an organised trading platform (OTF) upon the issuance of regulations which provide a legal basis in the national legal system;
- extension of the product range of the Financial Instruments Market operated by POLPX to include futures (mainly on gas and electricity) with physical delivery or option of physical delivery.
- Renewable Energy Sources Act: The Renewable Energy Sources (RES) Act took effect on 1 July 2016. It implements a new support scheme for the production of energy from renewable energy sources be based on auctions. Auctions will be held by the Energy Regulatory Office. Auction winners who offer the lowest price for energy generation will receive support for a period of 15 years. The existing system of green certificates of origin will be phased out. All producers who generated electricity before 30 June 2016 are still eligible to receive certificates of origin. Generation of energy after 1 July 2016 allows producers to participate in auctions but they are not eligible to apply for certificates of origin. The potential impact of amendments to RES regulations on the business of POLPX is discussed in section II.7. Risks and Threats.
- CO2 Trading Act effective as of September 2015 enables POLPX to grow a new business segment by becoming the national platform authorised to organise CO2 primary market auctions (currently Poland sells them on the German exchange EEX). POLPX received the approval of the Polish Financial Supervision Authority to operate a CO2 allowances platform on 20 December 2016. In the next step, POLPX will participate in a tender for the operation of an auction platform for Polish emission allowances. As the last step, POLPX needs to be entered into the list of auction platforms in Annex III to Commission Regulation 1031/2010. Operation of an auction platform will help to develop the market operated by POLPX which offers trade in emission allowances and to improve liquidity of the market. With the launch of the auction platform, financial instruments on delivery of emission allowances will be introduced into trading.
- Energy Efficiency Act: The Energy Efficiency Act took effect on 1 October 2016. It modifies the white certificate system. Previously, the President of the Energy Regulatory Office opened tenders for white certificates. White certificates of origin were granted to tender winners. The new Act eliminates tenders: from now on, certificates of origin of energy efficiency will be issued by the President of the Energy Regulatory Office on the same terms as other types of certificates of origin. Furthermore, the new Act imposes limits on the performance of the obligation to acquire white certificates by the payment of a substitution fee as follows: 30% of the obligation for 2016, 20% of the obligation for 2017, 10% of the obligation for 2018. The new regulations provide for a gradual increase of the unit substitution fee (the unit substitution fee is 1,000 PLN/toe for 2016, 1,500 PLN/toe for 2017, and will be increased by 5% of last year’s unit substitution fee for 2018 and each subsequent year). Those market players which previously met the obligation by paying the substitution fee exclusively, will start to operate on POLPX. Under the new Act, the obligation may be fulfilled by paying a substitution fee above the caps only if the market player demonstrates that it has placed buy orders for property rights on the exchange but was unable to buy property rights in the absence of trade or because the price of property rights exceeded the substitution fee. The new solutions will boost investments in energy efficiency and improve liquidity of trade in white certificates on POLPX.
- CACM Regulation – POLPX as NEMO in the market competition model: The Third Energy Package of September 2009 is a key element of EU legislation governing the European electricity markets. Under these regulations and the 2011 decisions of the European Council, the governments of the EU Member States made commitments to jointly develop a spot electricity market. The CACM Regulation published in July 2015 specifies the obligations of exchanges and operators and the powers of regulators. For POLPX, its authorisation as NEMO on 2 December 2015 triggered focused involvement in international intraday and day-ahead market projects. In December 2016, POLPX successfully completed PCR acceptance tests confirming POLPX’s full organisational operational and technological readiness for participation in the European energy market. POLPX and the Polish Power Grid Company (PSE) signed an operational agreement under the European PCR MRC standard. According to a financial analysis of POLPX’s participation in the European market integration projects, including POLPX’s full participation in the PCR project, the efforts are not profitable for the exchange; however, in the absence of POLPX’s involvement and investment in the development and integration of the market, POLPX would suffer adverse market consequences, leading to a decrease of turnover in electricity and hindering the operation of the financial market. As a result, POLPX could be unable to grow or to maintain growth of revenue across its business segments, especially that exchange giants competing with POLPX such as EPEX SPOT and NORD POOL will be active as NEMOs on the Polish energy market under CACM. Thus, POLPX will compete with two peers to attract clients and volumes of trade in electricity.The financial impact of the new regulations on the energy market under the CACM Regulation will probably materialise for POLPX already in 2017, coinciding with other factors including the phasing out of the obligation to trade on the exchange and the limitation of trading on the commodity forward instruments market. The presence of competitive exchanges on the Polish energy market could reduce the projected volume and value of turnover.
Internal Electricity Market
The objective of integration of the European market as a coherent harmonised internal market (Internal Electricity Market – IEM) is to enable all market players to participate in cross-border trade in electricity. The target market coupling (MC) solution for day-ahead markets is the Price Coupling of Regions (PCR) developed by Western European exchanges while the Cross-border Intra-day model (XBID) is the MC solution for the intraday market. In July 2015, POLPX became a full member of the Multi Regional Coupling market and signed the Day-Ahead Market Operations Agreement, which supports the co-operation of 12 energy exchanges and 25 transmission system operators. The Day-Ahead Market in electricity on the Polish-Lithuanian connection LitPol Link opened in December 2015.
Gas Hub
The implemented and planned projects which diversify the supplies of natural gas into the national market should ensure lasting security of the Polish market in natural gas. As a result, the expanded Polish gas transport system could play a key role in the development of the national market in gas and in the integration of the gas markets in Central and Eastern Europe and in the Baltic region. The existing supplies of gas from the Świnoujście LNG Terminal and a future transmission link with Norway combined with new interconnectors on the borders with the Czech Republic, Slovakia, Lithuania, and Ukraine will turn the Polish market into the most diversified market in V4 and a potential source of gas supplies to the countries of Central Europe and the Baltic region.
The first commercial transactions and supplies of natural gas from Poland to Ukraine took place in 2016. Ukraine’s gas market is estimated at 40 bcm per year. The aforementioned infrastructure investments will create conditions to develop a gas hub in Poland, dedicated among others to the participants of the gas market in Central and Eastern Europe and in the Baltic region. The project creating a gas hub in Poland, understood as a gas distribution and trade centre, is defined in the “Strategy for Responsible Development” published by the Ministry of Economic Development. The launch of a gas hub in Poland and the completion of initiated infrastructure investments will improve market liquidity by integrating the markets in Central and Eastern Europe and create pressures to reduce wholesale prices. POLPX initiated conceptual work on the gas hub project in 2016.
Reappointment of TBSP as the Reference Platform for Trade in Treasury Debt
In January 2016, TBSP was once again appointed the electronic market within the Treasury Securities Dealer System, a reference platform of secondary trade in Treasury debt, for another three periods until 30 September 2019.