FINANCIAL SUPERVISORY COMMISSION

Warsaw, July 21, 2015

Department of Investment Firms and Capital Market Infrastructure DRK/WRM/485/33/4/2015/46/PT

Dear Sir/Madam

President of the Board of the Brokerage House Foreign Investment Firm Director Brokerage Office

In connection with the entry into force on July 16 of this year of the provision of Article 1 point 14a of the Act of December 5, 2014 on amending the Act on trading in financial instruments and certain other laws (hereinafter: the Amending Act - Journal of Laws 2015, item 73), as well as in view of questions arising from investment firms regarding the scope of application of the aforementioned provision, the Department of Investment Firms and Capital Market Infrastructure (hereinafter: DRK, Department) presents its opinion regarding the required level of margin deposit for a financial instrument.

In light of the newly introduced provisions of Article 73 paragraphs 2a-2c of the Act of July 29, 2005 on trading in financial instruments (hereinafter referred to as the "Act on Trading"), an investment firm executes orders for the acquisition or disposal of financial instruments referred to in Article 2 paragraph 1 point 2 letter c-i of the Act on Trading, which are not settled by a CCP, submitted by a retail client, provided that the margin deposit required for a given financial instrument is not less than 1% of the nominal value of that financial instrument.

An exception to the established rule was introduced in Article 73 paragraph 2b of the Act on Trading - in the case of disposal orders resulting in the issuance of options. In such a situation, the required margin deposit should be not less than the value of the premium calculated using an option valuation model recognized by the investment firm, disclosed to the retail client, increased by 1% of the nominal value of that option.

When analyzing and subsequently interpreting the content of the cited regulations, one must take into account the specialized nature of the provisions. The provisions of Article 73 paragraphs 2a-2c of the Act on Trading are, after all, dedicated exclusively to a particular type of financial instrument, namely derivatives. This circumstance has significant implications for the correct reading of legal norms resulting from them. In the interpretation of these provisions, one must indeed take per se into account the specificity of trading

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in this category of financial instruments, which, among other things, in terms of order execution, differs from trading whose subject matter is other financial instruments, e.g., securities.

Additionally, one must take into account the purpose resulting from the introduction of specific regulations. One of the main assumptions was to limit the risk of the retail client regarding investments in highly leveraged derivative instruments, including the risk associated with the loss, often total, of the allocated capital, even in the event of minimal price volatility of the underlying instruments. The aforementioned ratio legis – protection of the client against loss – undoubtedly also influences the manner of interpretation.

Taking into account the circumstances presented above, it should be indicated that the legislator in the content of Article 73 paragraph 2a of the Act on Trading clearly distinguished the issue of the requirement to possess a specific value of margin deposit from the activity of implementing investment decisions made by the client. Moreover, the regulation regarding the method of executing orders takes into account the specificity of trading in derivative instruments. Therefore, the requirement to possess a margin deposit of a specific amount, in conjunction with the formulation "an investment firm executes orders for the acquisition or disposal of financial instruments listed in Article 2 paragraph 1 point 2 letter c-i submitted by a retail client," should be related to three factual situations, namely: submission by a retail client of:

a) an order to acquire a financial instrument, or b) an order to dispose of a financial instrument, or c) orders to acquire and dispose of a financial instrument, whereby – in accordance with the content of the provision, such a sequence of client activities should refer to that specific financial instrument and apply if the investment firm allows in contractual terms the provision of this brokerage service of this type of solution.

Accepting the variant of client activity provided for in letter c) is a consequence of reflecting in the regulatory sphere the practice of investment activity of investors regarding derivative instruments. Investors, seeking primarily to reduce investment risk, submit besides orders to open positions in derivative instruments, orders closing positions on a given derivative instrument in the event of specific price parameters ("stop loss", "take profit" orders) or, which is also encountered in trading, submit opposing orders on a given derivative instrument.

The above conclusion regarding the catalog of factual situations and the accepted goal of risk limitation has an impact on the value of the held margin deposit. The condition that the margin deposit required for a given financial instrument (upon opening and further maintaining the position) is not less than 1% of the nominal value of that financial instrument should be related to each, individual situation highlighted in letters a-c.

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In connection with the above, consistently referring to the highlighted situations, the Department indicates that:

Ad. a) An investment firm executes an order to acquire financial instruments referred to in Article 2 paragraph 1 point 2 letter c-i of the Act on Trading – the requirement for a retail client to possess a margin deposit of not less than 1% of the nominal value of the acquired financial instrument.

Ad. b) An investment firm executes an order to dispose of a financial instrument referred to in Article 2 paragraph 1 point 2 letter c-i of the Act on Trading – the requirement for a retail client to possess a margin deposit of not less than 1% of the nominal value of the disposed financial instrument.

Ad. c) An investment firm executes an order to acquire (dispose of) a financial instrument referred to in Article 2 paragraph 1 point 2 letter c-i of the Act on Trading, and then accepts for execution an order to dispose of (acquire) the same financial instrument.

In the above factual situation, we can distinguish further categories of behavior, namely:

1. An investment firm executes an order to acquire (dispose of) a financial instrument and simultaneously accepts for execution an order to dispose of (acquire) the same financial instrument, in which price parameters for its future execution were specified by the client at the stage of submitting this order – the maximum level of loss possible to be realized on a given financial instrument (stop loss), or the expected level of profit from investment in this financial instrument (take profit).

2. An investment firm executes an order to acquire (dispose of) a financial instrument and accepts for execution or executes at a later time an order to dispose of (acquire) the same financial instrument, in which price parameters for its execution were specified by the client – the maximum level of loss possible to be realized on a given financial instrument, or the expected level of profit from investment in this financial instrument.

In such a situation, taking into account the fact that the execution of the opposing order closes the position and thus eliminates from trading the individualized derivative instrument to which the requirement to possess a margin deposit is attached (maintained as a result of the first order), it is not required to deposit an additional margin deposit of not less than 1% of the nominal value of the financial instrument.

In the scenarios listed in points 1-2, a margin deposit is not collected from the nominal value of financial instruments covered by the order closing positions on derivative instruments, provided, however, that the value of the closing order does not

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exceed the value of the positions being closed. If the value of financial instruments covered by the order, e.g., disposal of financial instruments, exceeds the value of open positions that are being closed by this order, then a margin deposit should be collected in the amount of 1% of the difference between the nominal value of financial instruments covered by the order closing positions and the sum of values of positions closed by this order. In such a situation, a specific position is closed, and additionally, a new position is opened with a size exceeding the value of the closed position.

3. An investment firm executes one or more client orders to acquire a financial instrument referred to in Article 2 paragraph 1 point 2 letter c-i of the Act on Trading. Subsequently, the client submits opposing orders on a given financial instrument, which, however, do not lead to the closure of the originally opened position.

In such a situation, due to the retail client hedging the risk of incurring losses by the fact of the existence of an (orders) opposing order, the statutory condition of possessing a margin deposit of not less than 1% of the nominal value of the financial instrument should be understood as possessing a deposit of not less than 1% of the nominal value of the financial instrument calculated from the order with the higher value.

Sincerely,

DIRECTOR OF THE DEPARTMENT Investment Firms and Capital Market Infrastructure Marek Szuszkiewicz

Pl. Powstańców Warszawy 1, P.O. Box No. 419, 00-950 Warsaw 1, tel. +48 22 262 50 00, fax +48 22 262 51 11, www.knf.gov.pl