Risk Factors Relating to the Group

The Group faces competition from other exchanges and alternative trading platforms

The global exchange sector is highly competitive and, in the last few years, there has been increased consolidation and globalization of exchanges around the world. Consolidation in the sector could slow down the planned strengthening of WSE’s international position and limit development opportunities on the capital markets of the CEE Region, adversely impacting the implementation of the strategy of the Company which aspires to become the regional financial hub and the regional centre of trading in financial instruments.

As a result of regulatory changes introduced in the last few years, a number of alternative trading platforms, including multilateral trading facilities (MTFs) and electronic communication networks (ECN) have emerged in the exchange sector, which facilitated regulatory changes and technological advancement. In the CEE Region, competition from MTFs is currently limited. However, the establishment of MTFs in the Region could lead to a reduction in the volume of trading on incumbent stock exchanges in the Region, including WSE. The fees charged by MTFs are in general relatively low compared to those charged by WSE, and this could lead to fee pressure and a loss of market share, which in turn may materially and adversely affect the Group’s business, financial condition and result of operations.

In January 2012, Treasury BondSpot Poland – a market operated  by BondSpot S.A. within the WSE Group – was once again selected by Treasury Securities Dealers and approved by the Minister of Finance as the electronic market for the period from October 1, 2012 to September 30, 2014, which is a reference platform of secondary trading in Treasury debt where Treasury Securities Dealers perform their obligations concerning quotations of Treasury securities and daily fixing sessions are held for Treasury securities. Selection of a platform other than BondSpot for the following period starting October 1, 2014 may cause a material decrease of trading on TBPS and of the revenue of BondSpot.

The Polish Power Exchange faces the risk of competition, among others, from large foreign exchanges, especially in organising trading in electricity. With the development of cross-border connections, such exchanges may attempt to take over part of the trading operated by PolPX.

Price competition and changes to the pricing policy affecting the exchange sector at large may decrease WSE’s revenue

The trading cost on large foreign exchanges and MTFs is lower than on WSE. Consolidations in the global exchange sector and the development of MTFs may increase pressures to reduce fees charged for trade on the global financial markets. As a consequence, WSE clients may exert pressure to reduce WSE fees charged for listing and trading, which may cause a decrease of the revenue of the Group. The above factors may have a material adverse effect on the Group’s financial condition and results of operations.

The Group’s operations are dependent on its ability to attract and retain skilled employees

In order to effectively manage its operations, the Group must employ highly qualified personnel. The skills of the Group’s employees are scarce due to the unique nature of its operations. Any increase in the turnover of employees in key positions could lead to a temporary reduction in the Group’s operational efficiency due to the lengthy training processes required to train new employees in these positions. This could adversely affect the Group’s business, financial condition, results of operations, ability to achieve its strategic goals and development prospects.

The Group’s operations are dependent on third parties, over which the Group has limited or no control

The Group depends on a number of service providers, including in particular KDPW and KDPW_CCP as well as other third party service providers, mainly IT service providers. The IT systems operated by the Group for trading in financial instruments and exchange commodities are highly specialized and customized, 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 these providers will be able to continue to provide their services in an efficient manner, or at all, or that they will be able to adequately expand their services to meet the Group’s needs. An interruption or malfunction in or the cessation of an important service by any third party and the Group’s inability to make alternative arrangements in a timely manner could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Group’s trading systems may malfunction

The Group’s operations are 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. The Group’s electronic trading platforms, computer and communication systems and other systems of the Group are vulnerable to damage, interruption or failure. In the event that any of the 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 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 KNF, 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 condition or development prospects.

The Group’s electronic trading platforms involve the storage and transmission of its clients’ proprietary information. The secure transmission of confidential information is a crucial element of the Group’s operations. A failure of a platform, including a security breach, could expose the Group to a risk of loss of such information, and, in consequence, the risk of litigation and possible liability. If the Group’s security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, a third party obtains unauthorized access to trading or other confidential information, e.g., information of the Group’s clients, the reputation of the Group could be damaged, its business may suffer and the Group could incur significant financial liability. If an actual, threatened or perceived breach of the Group’s IT systems security occurs, the market perception of the effectiveness of its security measures could be harmed and could cause market members and clients to either reduce or stop use of its electronic trading platforms. The Group may be required to expend significant resources to protect against the threat of security breaches or to mitigate occurring problems, including reputational harm caused by any security breaches. The above factors may have a material adverse effect on the Group’s business, financial condition and results of operations.

The Company is working to implement a new trading system and to create a technological platform which will be equally effective as the solutions applied by other European stock exchanges and MTFs. Consequently, the Group could effectively compete with them in the field of technology. Such measures require additional capital and lead to an implementation risk which involves the system upgrade and training of staff on how to use and operate the new systems. If the Group fails to modernize its systems or use them effectively, it may have a material adverse effect on its business, financial condition and results of operations.

Failure to implement the new trading system could have an adverse effect on the Group’s business, results of operations and competitive position

In October 2010, WSE entered into IT Agreements with NYSE Technologies SAS concerning delivery of the Universal Trading Platform (UTP), UTP software licences and provision of maintenance services. Successful implementation of UTP is of critical importance to maintenance of WSE’s competitive position, enabling the Company to perform its business plan and achieve its strategic goals. If, for any reason, UTP is not implemented as planned, WSE may lose the benefits anticipated to be realized through its deployment, which could have a material adverse effect on the Group’s competitive position, development prospects and results of operations.

Reduced activity of issuers and investors could reduce the number and value of new securities offerings and the trading volume

The Group’s revenues and profits largely depend on the activity of investors on WSE, in particular the volume, value and number of financial instruments traded; the number and market capitalization of free float shares on markets organized and operated by the Group, especially the Main Market; the number and value of new issues and new issuers; and the number of market participants. A reduction in the number of listed financial instruments, a reduction in the number and value of offerings or investor activity could have a material adverse effect on the Group’s business, financial condition and results of operations.

Regulatory fees constitute a significant portion of the Company’s cost base, and the Company has minimal influence over the size of regulatory levies

WSE and KDPW are each required to contribute monthly payments to KNF’s annual capital markets supervision budget, which is based on the expected costs of supervision over the Polish capital market for a given year and estimated KNF revenues from market participants. WSE cannot predict the total amount it will be required to contribute to the KNF’s budget in a given year.

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