Annual Financial Report

RNS Number : 0794N

London Stock Exchange Group PLC

04 June 2010

 



4 June 2010

London Stock Exchange Group plc Annual Report and Accounts, Notice of Annual General Meeting 2010 and related documents.

In compliance with Listing Rule 9.6.1, London Stock Exchange Group plc (the "Group") has today submitted to the Financial Services Authority ("FSA") two copies of each of the documents listed below:

1.       Annual Report and Accounts for the year ended 31 March 2010 (the "Annual Report")

2.       Notice of Annual General Meeting 2010 (the "AGM Notice")

3.       Form of Proxy for the Group's 2010 Annual General Meeting (the "AGM")

The Group is proposing to adopt new articles of association (the "New Articles") at the AGM and two copies of the New Articles have been sent to the FSA in accordance with DTR 6.1.2 of the FSA's Disclosure Rules and Transparency Rules.  Key changes to the Group's existing articles of association are set out in the AGM Notice.

Copies of the above documents will shortly be available for inspection at the

FSA's Document Viewing Facility, which is situated at:

The Financial Services Authority

25 The North Colonnade

Canary Wharf

London

E14 5HS

Further information is available from:

London Stock Exchange	Patrick Humphris - Media	020 7797 1222
	Paul Froud - Investor Relations	020 7797 3322

In compliance with DTR 6.3.5 the following information is extracted from the Annual Report and should be read in conjunction with the Group's preliminary results announcement of 21 May 2010 (the "Preliminary Results"). The information reproduced below and the Preliminary Results together constitute the material required by DTR 6.3.5 to be communicated in full, unedited text through a regulatory information service. This is not a substitute for reading the full Annual Report.  Page numbers and cross references in the extracted information below refer to page numbers and cross-references in the Annual Report.  The Annual Report and the Preliminary Results can be viewed and downloaded at http://www.londonstockexchangegroup.com/investor-relations/investor-relations.htm together with the AGM Notice.

The Annual Report contains the following statements regarding important events that have occurred during the year on pages 8 - 9:

Chairman's Statement

Over the course of the past year, we have seen a gradual re-emergence of more normalised markets and trends. Equity valuations, for instance, have risen throughout the year. And the volatility that characterised and drove trading volumes in the previous year has diminished significantly.

"The economic, competitive and regulatory environment in which we operate has been the subject of continued change in the past 12 months, a trend which is almost certain to continue for some time. The Group is responding quickly to these important challenges, and enacting a number of its own changes to contend with the new circumstances within our industry and to take advantage of the opportunities available to us."

Market and Operating Environment

The financial crisis has underlined the fundamental role of an exchange. Unlike other parts of the financial markets, we have continued to function well. Throughout the crisis, companies have raised unprecedented amounts of equity capital, and investors from around the globe have been able to trade in and out of assets on our markets. Moreover, our brand and the position of London as a primary market venue remain strong, as is clear from the recent increase in Initial Public Offering activity.

Nevertheless, the market and operating environment for our business has remained challenging. For instance, the rise in equity valuations has not yet been matched by an equivalent increase in client trading activity, and the pick up in volumes has not been consistent across all markets. In addition, we are contending with other trading platforms that offer services priced at levels which, on a standalone basis, currently appear economically unsustainable.

Regulatory Change

The Group operates in a market environment in which external factors weigh heavily, in particular the prospect of significant changes to regulation, at domestic and international levels. While we have gained some sense of the direction these changes may take, details are far from concrete.

Among the many regulatory reviews, both the effectiveness and unintended consequences of the Markets in Financial Instruments Directive (MiFID) will be the subject of a review during 2010. Alongside greater competition, the concomitant fragmentation has impeded market transparency and potentially market quality. These changes are likely to have a significant impact on the structure of the EU marketplace.

In the post trade arena, there is much debate about the regulation of clearing houses, the greater use of central counterparties (CCP) to reduce systemic risk and calls for greater interoperability among CCPs. As both a user and an owner of post trade services, we have an acute interest in the outcome of such discussions, which are likely to have a bearing on the quality, attractiveness and integrity of the wider services we provide. However, as one of Europe's most cost efficient providers of post trade services, with a track record of promoting post trade competition, including the introduction of interoperability between clearers in our trading services, we believe we have an authentic voice and are well positioned to lead reform in this part of the industry.

More broadly, following the financial markets crisis it remains to be seen what new restrictions may be imposed on banks' capital requirements, or indeed the types of activities in which certain institutions may be allowed to engage.

We remain actively engaged in these debates, as their outcome will affect our clients and therefore our business, in potentially both positive and negative ways. However, we are also critically focused on those actions over which we have control.

Strategic Development

The Board is focused on the development of the Group's strategic capability and operational efficiency as ways of dealing with, and ultimately benefiting from, this climate.

Since his appointment as Group CEO last year, Xavier Rolet has been implementing a number of changes in a short period to reposition your business to meet both today's challenges and the opportunities we see in the future. Chief amongst these milestones, Xavier has put in place an international management team of experienced capital markets and technology specialists with track records of delivery.

The primary focus of the Group's executive management has been to improve our competitiveness in this changing environment. Consequently, we have looked at our product mix, our technical capabilities, our operational efficiency and the quality of our client relationships, and assessed them alongside those of our main competitors, existing and emerging.

During the year, we took a number of actions to improve our efficiency and competitiveness. We reduced our headcount by 12 per cent during the summer of 2009. We also committed to upgrading our in-house technology capabilities with the acquisition of MillenniumIT, an innovative software development company based in Sri Lanka, which will provide new trading technology to the Group, as well as to third parties in the capital markets.

Our decision to partner with 12 of our leading banking clients, to develop pan-European services through our acquisition of Turquoise, was an important milestone in improving a number of often complex relationships with our clients. We believe that our ability to deliver long-term shareholder value depends on creating and maintaining deep, constructive relationships with those clients with whom we collectively serve investors and issuers.

Financial Performance

The financial performance of the Group reflects the ongoing headwinds facing our business together with some delayed effects of the financial crisis.

Despite these challenges, we have remained strongly profitable. Moreover, while the financial performance in 2009/10 reflects much of the cost of actions taken to improve our competitive position and put in place the building blocks of future growth, it does not yet reflect the benefits.

The Board believes it is right to maintain a conservative approach to the dividend by maintaining it at last year's level. Consequently, we propose to pay a final dividend of 16p per share in August, bringing the total for the year to 24.4p per share.

Board Changes

At the year end, Massimo Capuano, Group Deputy CEO, resigned from the Company. Massimo leaves with the best wishes of the Board and staff for his years of service leading Borsa Italiana, and his role in the enlarged group following the merger.

We have also reviewed the composition of the Board (see Governance Section) and expect to announce the appointment of new Non-Executive Directors in the near future.

Conclusion

The market, economic and regulatory environment in which our business operates is going through a period of significant change. We continue to take steps to ensure the business remains central to capital markets, competing for business as an efficient, low cost and client focused organisation with a clear strategy to deliver growth and value. We remain deeply focused on our strategic capabilities - at the Board and Management levels - and continue to engage in our pursuit of sustainable shareholder value that benefits the broad range of clients and stakeholders we serve.

Chris Gibson-Smith

Chairman

The Annual Report contains the following statements regarding principal risks and uncertainties facing the business on pages 32 - 35:

Principal risks and uncertainties

The following section covers the principal risks and uncertainties which may have an impact on the Group's ability to execute its strategy. Whilst not principal risks per se, the financial risks the Group is exposed to are detailed on pages 68 to 72.

MARKET RISKS

RISK AREA                                    CONTEXT                                     MITIGATION

changing regulatory environment Increasing focus on the securities markets following the global economic crisis and the potential for significant changes in our regulatory environment	This risk has increased in the current year as the regulatory agenda has developed and also in the context of our wider product offering over a broader range of jurisdictions. There is a marked trend towards regulation imposed at an EU level, potentially affecting our ability to influence change from London and Milan. National and EU regulators are increasing the scope of their interest following the credit crisis and increasing their scrutiny of market participants, practices and infrastructure. A number of initiatives including the MiFID review in 2010/11 and the review of OTC derivatives and the post trade arena are likely to change the competitive environment. Some may reduce our profitability and market share but others will provide us with new growth opportunities. Regulatory restrictions on the risk taking activities of major clients and other trading companies through higher capital requirements and/or restrictions on proprietary trading may lead to a curtailment of trading volumes, although they may also provide potential opportunities in the form of, for example, a move to trading on exchange or clearing through a CCP. Regulators may likewise impose higher capital requirements on entities within the Group.	We continually monitor developments and engage in direct dialogue with regulatory and government authorities at both the national and EU level, as well as in the US. Our strategic planning takes account of the uncertain regulatory environment and our plans are flexible, with alternative options dependent on how the regulatory environment develops. We work closely with our clients to best align our services to their needs in the context of emerging regulation.
Clients and competition Maintaining good relationships with our clients is essential to the successful operation and growth of our business	Our business is reliant on a relatively small number of clients, who also maintain close relationships with our primary competitors and may be direct competitors in their own right as market providers. Competitive pressure, including the creation of competing venues with economic models which are unprofitable on a stand alone basis, coupled with the concentration of market participants, may lead to further strain on both our market share and pricing. Clients may be able to influence our strategic direction, while loss of market share could have an adverse impact on the value of our market data. The changing regulatory environment may also result in changes in the commercial strategies of major clients, including the reduction of/withdrawal from certain activities leading to an adverse impact on our revenues.	A key element of our strategy is "Getting in Shape", with a focus on cost reduction, new technology deployment and client engagement designed to increase our competitiveness. We operate a structured client engagement programme, meeting with major clients on a regular basis to provide and solicit feedback. In addition, we aim to align our commercial initiatives with the interests of our major clients. Through Turquoise, we are working in partnership with 12 global investment banks to grow the market for pan-European equity trading. Appropriate management structures are in place to ensure the delivery of the projected benefits.
Counterparty/credit risk As a central counterparty for equity, fixed income and derivative products	Our counterparty/credit risk is predominantly limited to our clearing operations, through which we closely monitor our exposure to clearing members. We address this exposure by holding collateral in the form of member margin deposits and maintain default funds of member contributions which are held with Italian banks (for further details refer to note 2 to the financial statements). There is a risk that the quantum of the margin deposits and default funds could be insufficient in the event of the failure of one or more of the clearing members. A failure of one or more of the deposit banks could result in a direct financial loss to the Group.	To date, no clearing members of CC&G have defaulted and it has never had to utilise the default funds held. CC&G maintains a Financial Risk Committee which is responsible for managing the risks connected to the placement of the funds held by the company and of the operational limits concerned. Assets are only deposited with banks which are investment grade or (if unrated) Italian listed banks that are appropriately capitalised. We have a close and ongoing dialogue with the Bank of Italy, the regulator and supervisor of both domestic Italian banks and central counterparties.
Macro economic risk Unfavourable tax regimes or the changing regulatory environment in the UK may reduce the attractiveness of London as a major financial centre	London's status as a global financial centre could be diminished by tax regimes that are less attractive than alternative locations and by increasing regulatory pressures, thereby reducing its ability to retain/attract investment. This could have a significant impact on our revenues.	We maintain cross party political relationships and play an active role by sharing expertise and experience with policy makers on the impact of government and regulatory decisions on financial markets.
Political risk With the acquisition of MillenniumIT in October 2009 the Group has become exposed to increased political risk in the form of a return to political instability in Sri Lanka where it is located	Recent presidential and parliamentary elections in Sri Lanka could result in new legislation that destabilises or erodes the current working environment. Client investment may be limited until the political environment is stabilised, limiting expansion potential.	We maintain regular meetings with key governmental parties in Sri Lanka.

OPERATIONAL RISKS

RISK AREA                                    CONTEXT                                     MITIGATION

Change Management The Group has a number of major, complex projects underway concurrently	We have a large number of projects and initiatives underway including implementation of new technology, cost management initiatives, a client engagement programme and strategic development of our post trade and derivatives businesses. If not delivered to sufficiently high standards and agreed timescales, certain initiatives could have an adverse impact on the operation of core services, revenue and revenue growth, as well as damaging our reputation. The volume of simultaneous change could also lead to a loss of client goodwill, and the projects are not certain to deliver the anticipated synergies and cost benefits. With regard to the capability of our MillenniumIT offering, losing the balance between key growth projects and on-going product development may undermine the future competitiveness of our technology platforms.	Senior management are focused on the implementation of our strategy and the project pipeline in view of their critical importance to our future success. We have strong project and programme management disciplines, with each project being managed via a dedicated project workstream, overseen by senior management. Rigorous software design methodologies, testing regimes and test environments are employed to minimise implementation risk. Product development teams are being strengthened to ensure that we can continue to deliver advanced trading and information technology to meet clients' needs.
Migration of IT platforms Technology is fundamental to the Group's major revenue streams and migration to the MillenniumIT platform is a core component of its strategy in terms of leveraging our assets and reducing our cost base. Failure to deliver a sufficiently robust or competitive trading system and/or excessively late delivery could jeopardize client goodwill and damage the Group's reputation	We are reliant on the recently acquired MillenniumIT to deliver our new trading platform, and inevitably face a learning curve in moving away from our established technology. The timetable is necessarily challenging, and there is a risk that a critical mass of clients may be unable to make the required changes to their respective systems and processes in time. This may impact our programme of work leading to increased costs and schedule congestion with other initiatives.	MillenniumIT products are tried and tested in existing markets. We have recruited a number of key individuals to facilitate and ensure execution of the migration and bolster our existing experienced project management capability. Continuous contact is being maintained with clients in respect of the project timelines to ensure that they are able to adhere to the proposed timetable.
Employees The calibre of our employees is critical to the success of the Group. The Group's ability to attract and retain high quality individuals depends on the condition of recruitment markets and corresponding compensation packages of banks and regulators with whom we compete for the same key staff	This risk has increased in the current year in the context of increasing recruitment activity, particularly in the financial services sector in London, Long Term Incentive Plan (LTIP) awards not vesting in recent years and a streamlined organisation post the restructuring. The loss of key members of staff could have an adverse impact on our operations and our ability to execute our change programme. We recognise the importance of retaining and developing employee skills and balancing resource allocation in the face of the changing nature of our business environment.	A performance related annual bonus and pay review process is in place for all employees and regular benchmarking of reward and incentive systems is performed to ensure they are competitive. We also offer LTIPs for high performers and critical staff (see note 35 to the financial statements and the Remuneration Report). Staff turnover is monitored and reported to the Executive Committee on a monthly basis. We operate a performance management and appraisal system, and Executive development opportunities are provided with the Nominations Committee responsible for considering succession plans for key senior positions. A centralised training budget allows a co-ordinated approach to development across the Group.
Ongoing operations The Group's businesses are dependent on secure and stable technology which performs to high levels of availability and throughput	If our systems fail to perform we could experience unanticipated disruptions in service as has happened in the recent past. Any such technology failures can potentially lead to a loss of trading volumes and adversely impact our reputation and brand.	The performance and availability of our systems are constantly reviewed and monitored to prevent problems arising where possible and ensure a prompt response to any potential service interruption issues. A disconnection policy has also recently been implemented in respect of clients who exhibit repeated erratic or erroneous connectivity behaviour. Alternative standby computer facilities are maintained to minimise the risk of system disruptions.

The Annual Report contains the following statements regarding responsibility for financial statements on page 58:

Directors' responsibilities in respect of the Annual Report, the Directors' Remuneration report and the financial statements

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period.

In preparing those financial statements, the Directors are required to:

·      Select suitable accounting policies and then apply them consistently;

·      Make judgements and estimates that are reasonable and prudent;

·      State that the financial statements comply with IFRSs as adopted by the European Union; and

·      Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business.

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the company's website and legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Going Concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Introduction, Business Review and in the Market Position and Outlook, on pages one to 35. In particular, the current economic conditions have created a number of risks and uncertainties for the Group and these are set out in Principal Risks and Uncertainties on pages 32 to 35.

The financial risk management objectives and policies of the Group and the exposure of the Group to capital risk, credit risk, market risk and liquidity risk are discussed on pages 68 to 72. The Group continues to meet Group and individual entity capital requirements and day-to-day liquidity needs through the Group's cash resources and available credit facilities. Committed funding at 31 March 2010 increased to £975 million (2009: £905 million) of which £950 million is committed until February 2012 or beyond, described further in the Financial Review on pages 26 to 29.

The Directors have reviewed the Group's forecasts and projections, taking into account reasonably possible changes in trading performance, which show that the Group has sufficient financial resources. On the basis of this review, and after making due enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Directors' Responsibility Statement

Each of the Directors, whose names and functions are set out on page 37 of this Annual Report, confirm that, to the best of their knowledge and belief:

·      The financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

·      The Directors' report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Company and Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board

Lisa Condron

Group Company Secretary

21 May 2010

The Annual Report contains the following statements regarding details of certain related party transactions on page 99:

36. Transactions with related parties

FTSE International Ltd

Details of transactions with FTSE International Ltd are included in note 14. 

For the purposes of this Announcement, note 14 to the Group financial statements provides these details as follows:

"The Group is entitled, under a shareholders' agreement, to receive royalties from FTSE. The amount receivable by the Group from FTSE for the year ended 31 March 2010 was £9.6m (2009: £8.2m).

During the year the Group received dividends of £2.3m (2009: £3.5m) from FTSE. The final dividend for 2009, of which the Group's share is £1.5m (2008: £1.3m), was approved by the shareholders and paid after the publication of FTSE's 31 December 2009 results."

Key management compensation

Compensation for Directors of the Company and key personnel who have authority for planning, directing and controlling the Group:

                                                                                       2010            2009

                                                                                                            £m              £m

Salaries and other short term benefits                                               7.1               6.8

Pensions                                                                                            0.5               0.2

Share based payments                                                                          -               2.0

                                                                                                            7.6               9.0

Inter-company transactions with subsidiary undertakings

The Company has loan agreements with some of its subsidiary companies. Details as at 31 March 2010 are shown in the table below:

                        Amount due/(owed)                                                    Interest
                                    as at 31 March                                                          credit/(charge)

                                                                                      Interest rate as at
Loan counterparty            2010        2009      Term            31 March 2010         2010        2009

LSE plc	£(178.5)m	£(198.2)	25 years from May 2006 with five equal annual repayments commencing in May 2027.	LIBOR plus 2% per annum	£(6.7)m	£(12.0)m
London Stock Exchange Employee Benefit Trust	£21.0m	£60.5m	Repayable on demand.	Non-interest bearing	nil	nil
London Stock Exchange Group Holdings (Italy) Limited – Italian Branch	€450.0m	€450.0m	5 years from March 2009, repayable in full on maturity in March 2014.	EURIBOR plus 4.0% per annum	€26.6m	nil
London Stock Exchange Group Holdings (Italy) Limited – Italian Branch	€89.5m	nil	20 years from January 2008 with 5 equal repayments commencing in January 2024.	EURIBOR plus 1.2% per annum	€1.2m	nil
Borsa Italiana S.p.A.	nil	€109.0m	20 years from January 2008 with 5 equal repayments commencing January 2024.	EURIBOR plus 1.2% per annum	€1.2m	€7.3m
London Stock Exchange Group Holdings Limited	£33.8m	nil	Fifth anniversary of the initial utilisation date which was October 2009.	LIBOR plus 4.0% per annum	£0.5m	nil
MillenniumIT Limited	nil	nil	First anniversary of the initial utilisation date.	LIBOR plus 4.0% per annum	nil	nil

 

During the year the Company charged in respect of employee share schemes £2.1m (2009: £4.9m) to the London Stock Exchange plc, £1.1m (2009: £4.7m) to London Stock Exchange Group Holdings (Italy) Ltd and £0.1m to Millennium Information Technologies Ltd. The Company received dividends of £109.0m (2009: £117.9m), €51.1m (2009: nil) and nil (2009: €56.6m) respectively from its subsidiaries London Stock Exchange plc, London Stock Exchange Group Holdings (Italy) Ltd and Borsa Italiana S.p.A..

 

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