Supervision of the Management of a Securities Registry by KDPW Participants

One of the principal responsibilities of KDPW is supervising the securities registry systems of its participants to ensure that they are being properly managed, as well as monitoring to ensure that the participants are meeting the terms and conditions of their participation according to the principles described in the KDPW Rules, which define the rights and responsibilities of the participants of the depository-settlement system, determine the scope of supervision of how these responsibilities are being met and how this supervision is to be performed, and what sanctions may be imposed in the event of any breaches of the rules being discovered.

The management of a securities registry system by KDPW and its participants is performed by taking the principles of securities registration as defined in the KDPW Rules and applying them accordingly at the level of the participants' internal regulations; it is also carried out by identifying the scope and terms of performing other activities relating to the registration of securities, as defined by the KDPW Rules. The supervision of whether participants manage their securities register in accordance with the provisions of the KDPW Rules and Resolutions of the KDPW Management Board, as well as provisions of general law, is performed by analysing documents, information and reports sent by participants and by carrying out inspections at the participants' premises. KDPW verifies whether participation requirements necessary for performing activities within the depository-settlement system are being met by participants, including requirements for clearing members, and verifies whether entities seeking to gain participation status in KDPW meet these requirements as well, on the basis of documents sent with their application for entering into a participation agreement. Verification involves ensuring the following requirements are met:

• Financial requirements by participants with the participation status of clearing member relating to minimal capital adequacy standards and other similar capital norms, described in the relevant legislation,
• Material and technical requirements by direct participants, which ensure the proper connectivity with the KDPW depository-settlement system and the safe and secure exchange of data sent into and received from that system,
• Material and technical requirements by participants managing securities accounts ensuring that book entries made in the securities accounts are secure and that they meet legal requirements, as well as the processing and storage of data about these book entries and retrieval of documents on the basis of which these entries were made.
• The recruitment by direct participants of the proper number of qualified "securities registration specialists" to manage the securities register (the title is accorded following an exam performed by the Examination Commission at KDPW).

The aforementioned activities are the responsibility of the Participant Audit Department in KDPW.

Market supervision performed of derivatives market participants is the responsibility of the Derivatives Clearing House in KDPW.

Selected responsibilities of the Participants' Audit Department

Supervision of participants commences from the moment an application is made by an entity seeking to conclude a participation agreement with KDPW, until the termination of the agreement and closing of the accounts managed for that participant. There are detailed responsibilities related to the following supervisory activities:

1. Verification of whether individual securities holdings are properly registered in the securities book entry systems managed by participants and whether the global amount of all the holdings presented in daily reports sent by those participants correspond to the holdings in their accounts managed by KDPW,
2. Performance of on-site inspections on the premises of the participants - performed as part of so-called direct inspections, which cover the following main areas: managing a securities register in general terms (inspection of internal regulations describing how the register is organised, the account structure and registration procedures, the register system, register reporting, etc.), archiving of registration documents and register data on electronic data-storage devices and the security of the registration systems and activities related to securities registration to ensure business recovery in the event of an emergency, including following internal regulations to this effect; in the event that any irregularities are discovered that are in breach of the principles of KDPW participation, the Participants' Audit Department imposes disciplinary measures of which the most serious are requesting the KDPW Management Board to impose special sanctions. Any irregularities discovered in the course of an inspection relating to activities described in Points 1 and 2 are reported to the national regulator.
3. Examining applications from entities seeking participation status in the KDPW system and providing opinions on applications for extending participation status to include new activities. An entity seeking participation in KDPW sends an application together with required documents, and once verified whether the documents are complete, the documents are used to determine whether the participant meets the appropriate financial requirements (where an applicant is at the same time seeking to become a clearing member - this is assessed on the basis of financial statements) and the appropriate material and technical requirements (depending on the scope of the participation agreement, or its extension),
4. Verification of whether the balances and volumes of State Treasury securities are correct on the basis of monthly reports sent in by participants, prepared according to the provisions of an Ordinance of the Minister of Finance,
5. Analysis of incorrectly executed sales transactions (without a valid order, or not corresponding to a valid client order) leading to a temporary increase in the securities issue volume. The analysis is performed on the basis of information sent monthly,
6. Preparing periodic information on participant ranking presented to the KDPW Management Board on the basis of statistical data from the KDPW system relating to the proper performance of their functions in the depository-settlement system, data provided by the participants themselves and results of daily report monitoring and sending specific data on this addressed to each direct participant with the participation status of brokerage office, showing their position in the ranking.