The trading cost on large foreign exchanges and MTFs is lower than on WSE, mainly due to the size of the market in Poland and the rules of financing supervision.

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 globalisation 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) in Europe and electronic communication networks (ECN) in the USA have emerged in the exchange sector, which facilitated regulatory changes and technological advancement. In the CEE Region, competition from MTFs is limited; however, its future increase could lead to a reduction in the volume of trading on incumbent stock exchanges, including WSE. The entry of MTFs to a market could result in a significant outflow of trading from exchanges to the OTC market. The fees charged by MTFs are in general relatively low compared to those charged by exchanges, and this could lead to price pressure and a loss of market share, which in turn may materially and adversely affect the exchanges’ business, financial condition and result of operations.

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, mainly due to the size of the market in Poland and the rules of financing supervision. 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 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 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 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 or services 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 unauthorised 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.

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 capitalisation of free float shares on markets organised 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 Group’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.

The Group may be unable to implement its strategy

The WSE strategy is to build by 2020 a strong and diversified organisation able to achieve, either independently, via strategic alliance or partnership-like cooperation with significant entities from the capital markets, a dominant role in the CEE Region and an important position on the European capital markets. Therefore, the WSE strategy provides for maximisation of the existing sources of WSE Group growth potential (in particular local investors and issuers potential) and further diversification of income sources and internationalisation of business activities. For this purpose, WSE wants to make WSE and the Group more attractive to a broader group of market participants. The attainment of these objectives depends on a number of factors which are beyond the Group’s control, including in particular market conditions, the overall economic and regulatory environment. Furthermore, the Group may incur significant costs of introduction of new products and services from which the Group may eventually be unable to earn significant revenues. If the introduction of such products or services does not generate additional revenue, the resultant cost may be greater than revenues, affecting the working capital of the Group and its operating profit. The Group’s inability to achieve the strategic goals could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Group may selectively seek acquisition targets or enter into strategic alliances in relation to business, products or technologies

In order to implement its strategy, WSE and its Group may selectively seek and use acquisition opportunities and other means of strengthening and developing their business in order to remain competitive against other exchanges, to generate better economies of scale and to apply good practice and technologies based on mergers and acquisitions or strategic alliances. However, the Group may be unable to identify or use such potential strategic opportunities, negotiate favourable conditions, finance future acquisitions, reduce costs or generate other synergies and advantages. The integration process may cause unforeseen regulatory and operating difficulties and costs and divert the Management Board from the current business of the Group.

Furthermore, as a result of future acquisitions or strategic agreements, the Company may issue additional shares which could dilute the existing shareholding, incur significant expenses, increase its debt, assume contingent liabilities or incur other costs, which could have a material adverse effect on the Group’s business, financial condition and results of operations and on its share price.