Annual Financial Report

RNS Number : 9796G

London Stock Exchange Group PLC

13 June 2013

 



 London Stock Exchange Group plc Annual Report and Accounts, Notice of Annual General Meeting 2013 and related documents.

 The Annual Report and Accounts of the London Stock Exchange Group plc (the "Group") for the year ended 31 March 2013 (the "Annual Report"), Notice of Annual General Meeting 2013 (the "AGM Notice") and related form of proxy for the Group's 2013 Annual General Meeting (the "AGM") are being mailed to shareholders today and, in accordance with paragraph 9.6.1 of the FCA Listing Rules, have been submitted to the National Storage Mechanism where they will shortly be available for inspection at www.hemscott.com/nsm.do.

London Stock Exchange Group plc	Paul Froud - Investor Relations	[phone]
	Victoria Brough - Media Relations	[phone]

In compliance with DTR 6.3.5 and Listing Rule 9.6.3, the following information is extracted from the Annual Report and should be read in conjunction with the Group's preliminary results announcement of 15 May 2013 (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, the Preliminary Results and the AGM Notice can be viewed and downloaded at www.londonstockexchangegroup.com/investor-relations/investor-relations.htm.

 The Annual Report contains the following statements regarding important events that have occurred during the year on pages 12 to 13:

 "Chairman's Statement

" Our diversification strategy has radically transformed the Group and we have achieved much in a relatively short period of time. We are now a more international, diversified, multi-asset class, multi-market business."

Overview 
Experience, stability and trust are cornerstones of our industry and London Stock Exchange Group has a long and distinguished history of operating systemically important financial infrastructure. Our role has been unequivocal and unwavering: it remains our belief that strong capital markets infrastructure is fundamental to any thriving and successful economy. Throughout our history, we have facilitated the raising and allocation of capital, and the promotion of efficient markets that support growth and economic prosperity. The impact of the financial crisis continues to be felt across the world, and with it there is a renewed focus on the need for systemically sound, strong financial infrastructure to support the global financial markets, business development and growth. Many of the changes we are seeing in global policy and regulation reflect this landscape, and the Group has never been more certain of the critical role it can play in these changing times.

Our diversification strategy has radically transformed the Group and we have achieved much in a relatively short period of time. We are now a more international, diversified, multi-asset class, multi-market business. The traditional notion of the Group as a domestic equities business is outmoded. Yet, our core function of matching buyers with sellers and providing access to funding remains: we have simply added to it.

Supporting the long term development of the whole funding ecosystem, particularly for SMEs, remains a passion for us. Only when small and medium sized, fast growing businesses can successfully and efficiently tap into the means by which to fuel their growth, will we see real economic prosperity. Equity capital is often the most suitable form of finance for these fast growing companies, be it seed capital, business angel investment, venture capital or the public markets. It is critical to get the whole funding chain working better. The Group put together a package of its own measures to support SMEs across Europe, and we very much welcome recent moves by the UK Government, in particular, to create an environment to support our best and brightest businesses, including policies to help facilitate increased investment in AIM-listed companies through the abolition of stamp duty on AIM shares. This will help mobilise a wider pool of capital dedicated to SMEs and we remain committed to working with policymakers and market participants to ensure the future of these innovative and high-growth companies.

Strategic delivery

In May 2013, we completed the acquisition of a majority stake in LCH.Clearnet, which received the overwhelming support of both sets of shareholders. The strategic rationale for the deal is very clear and delivers against many of our goals, and specifically to develop our post trade offering. The transaction is a crucial step in securing the enlarged Group's long term role in the operation of international capital markets and delivers opportunities for further international expansion, especially in the US and Asia.

The first full-year benefits of the FTSE transaction are reflected in our financial performance. This is an example of how the Group is expanding its global footprint.

Our wider role

The Group's scale and reach continue to grow, and with it we are acutely aware of the role we play in the communities in which we operate. The Group donated £1,193,000 in the past year, of which £716,000 was donated through the Group's charitable Foundation. The opportunity to create a lasting legacy through the work of the Foundation is reflected in a focus on youth development. In addition to the ongoing support of the Group's partner charities Friendship Works, In-Presa, UNICEF and Habitat for Humanity, London Stock Exchange recently joined Ladder for London's apprenticeship scheme and has welcomed its first intake of apprentices. This is in addition to the Group's successful graduate recruitment scheme. We summarise our Corporate Responsibility activities on page 33 and in a fuller corporate report which can be accessed from our website.

Financial performance and dividend

The transformation of the Group is reflected in our financial performance. Despite the prevailing challenges of current market conditions, we delivered a good financial performance. Another measure of the successful delivery of our strategy has been our sustained strong share price performance, both relative to our global peer group and to the FTSE 100 index.

The Group is therefore proposing a four per cent increase in the final dividend to 19.8 pence per share, resulting in a full year dividend of 29.5 pence per share, a four per cent rise. The final dividend will be paid to shareholders on the register as at 26 July 2013.

Board changes

Doug Webb stepped down as Chief Financial Officer after four busy years in the role. He played a significant part in the recent strategic diversification, strong financial performance and growth of the organisation, and the Board is grateful for his contribution over this time. David Warren joined the Group as CFO in July 2012, bringing a wealth of senior level experience both in finance and in running exchanges, including nine years as CFO at Nasdaq OMX.

We welcome Jacques Aigrain to the Board of Directors, following the completion of the acquisition of a majority stake in LCH.Clearnet. Jacques brings extensive experience, particularly in risk management, and I look forward to working with him more closely in the coming months.

During the period, a number of senior management changes and appointments were announced, details of which are included in the Chief Executive's statement.

Conclusion

This year marks the tenth anniversary of my chairmanship of the Group. It has been an exciting decade. I am incredibly proud of the business we are today and I believe that our core values have never been more relevant. We are an international company, diversified and ambitious. We remain firmly focused on executing our strategy, capitalising on the many opportunities that are available to us, particularly with regard to LCH.Clearnet, and on creating long term value. We are looking forward to another rewarding year ahead.

Chris Gibson-Smith

Chairman"

The Annual Report contains the following statements regarding principal risks and uncertainties facing the business, with respect to principal market and operational risks, on pages 42 to 47, and, with respect to financial risks, on pages 84 to 87:

"Overview of Principal Risks:

Corporate Risks	Financial Risks	Operational Risks
Global economy New products and markets Competition Regulatory change and compliance Acquisition of a majority stake in LCH.Clearnet	Investment risk (Clearing) Counterparty and market risk (Clearing) Settlement and custodial risks Capital management Treasury	Change management Employees Security threats Technology

Corporate Risks

Risks related to our strategy (including the implementation of strategic initiatives and external threats to the achievement of our strategy). Also risks associated with reputation or brand values.

Risk description	Mitigation
Global economy Within the Eurozone, the Group has significant operations in Italy, a country that has been severely affected by the financial crisis. As a result, the Group has a substantial proportion of its assets and liabilities denominated in euros and income arising from customers and products which are exposed to the Eurozone. Additionally, some of our technology operations are based in Sri Lanka. Low growth and high debt concerns characterised the whole FY 2013, which has affected the performance of both developed and emerging economies. The Eurozone crisis peaked last summer, prompting the intervention of the ECB president in August 2012. Since then, a series of actions by central authorities, such as the launch of the European Stability Mechanism (ESM) and the agreement over the banking surveillance system at European level, has stabilised the environment. There have been several credit downgrades of European countries; European countries remain exposed to adverse shocks and a weak banking sector.	The Group performs regular analyses to monitor the markets and the potential impacts on the business. Activities include tracking Key Risk Indicators, stress testing, currency hedging and frequent liaison with the Group's financial advisers. LSEG established a Eurozone working group that met regularly during the year and closely monitored and analysed multiple market scenarios and action plans in order to minimise the potential impacts stemming from a deterioration of the macro economic environment. The Eurozone crisis is now a standing item on the agenda of the newly formed Group Financial Risk Committee. To the extent possible by the Group, various mitigating actions were taken throughout the year. In Sri Lanka, the Group maintains regular contact with key governmental parties and has appropriate contingency plans in place to ensure key technology operations are not dependent on a single geography. Business Continuity Management (BCM) and crisis management procedures would be invoked to manage the response to an unexpected event.
For more information, see Market position and outlook, pages 8-11, and Financial risk management, pages 84-87.
Competition We operate in a highly competitive industry. Continued consolidation has fuelled competition including between companies in different geographical areas. In our Capital Markets operations, there is a risk that competitors will improve their products, pricing and technology in a way that erodes our businesses. There is increasing competition for primary listings from other global exchanges and regional centres. The financial crisis, made more severe by the possibility of default of certain peripheral countries, has generated market instability which potentially could have a negative impact on market trends, new listings and new products. In Post Trade Services, the consolidation of clients has led to a concentration of revenues. Any future loss of liquidity or reduction in volumes on exchanges may impact clearing revenues. In Information Services, FTSE is currently the third largest index provider and consolidation within the industry is expected over the next three to five years. Client migration to competitors could lead to a loss of revenue. In Technology Services, there is intense competition across all activities and there are strong and established market players in some areas where we are establishing a presence.	Competitive markets are, by their very nature, dynamic, and the effects of competitor activity can never be fully mitigated. Senior management are actively engaged with clients and the Group undertakes constant market monitoring to mitigate risks. Commercial initiatives are aligned with our major clients and this is complemented with an ongoing focus on new technology deployment and cost reduction. We maintain a dedicated international marketing team focused on key target markets. The team promotes the benefits of listing on our markets to international issuers, the global advisory community and other stakeholders.
Risk description	Mitigation
Regulatory change The Group and its exchanges, CCPs and other regulated entities operate in industries that are highly, and increasingly, regulated by governmental, competition and regulatory bodies at European, federal, national and provincial levels. Delivery of the G20 agenda in the EU has resulted in a large number of measures which may impact our business directly or indirectly. The European Commission has also brought forward (or is likely to) proposals for a variety of regulations in the future, including a Financial Transactions Tax and arrangements for resolving failed non-bank market infrastructure. In the UK, the financial services industry has been operating under a new regulatory structure since 1 April 2013 where the FSA has been replaced by three separate regulatory bodies. Also in April, legislation came into force in the UK making "the administering of, and providing information to, specified benchmarks" a regulated activity; the only specified benchmark is LIBOR. However, it is possible that more indices could be subject to similar measures under proposals due to be published by the European Commission in Q2 2013. Compliance There is a risk that one or more of the Group's regulated entities may fail to comply with the laws and regulatory and competition conditions to which it is, or becomes, subject. In this event, the regulated entity in question may be subject to censures, fines and other regulatory or legal proceedings.	Changes in the regulatory environment form a key input into our strategic planning, including the impact on our growth strategies, both organic and inorganic. We continually monitor regulatory developments and directly engage with regulatory and governmental authorities at a national, EU and international level. We continue to develop our relationships with the key political stakeholders, particularly at EU and UK level. Potential impacts from regulatory change are assessed and, depending on the impact, opportunities are developed and mitigating strategies and actions are planned. As the various regulatory initiatives progress, there will be greater certainty about their likely final form. The Group continues to consider that, balancing the potential negative and positive outcomes, the likelihood of major adverse regulatory developments is low. Indeed, further opportunities exist for the Group to deliver solutions to help the market address the changing regulatory environment. The Group continues to maintain governance controls to mitigate compliance risk. AIM has a strong governance framework including proactive market monitoring and support and education of NOMADs. Compliance policies are regularly reviewed to ensure that staff uphold our corporate standards.
For more information on regulatory changes see Market Position and Outlook on pages 8-11.
Acquisition of a majority stake in LCH.Clearnet The completion of the acquisition of a majority stake in LCH.Clearnet represents a significant increase in LSEG's operations including a material increase in the Group's balance sheet size (due to CCP assets and liabilities). As part of the alignment process, the enlarged Group is targeting specific cost savings and revenue increases. The acquisition of a majority stake will subject the Group to increased regulatory scrutiny and reporting complexity. A failure to successfully align the businesses of the enlarged Group may lead to: an increased cost base without a commensurate increase in revenue; a failure to capture future product and market opportunities; and risks in respect of capital requirements and regulatory relationships.		The acquisition of a majority stake in LCH.Clearnet included agreeing a governance framework with certain rights and controls for LSEG. The governance of the enlarged Group is aligned and strengthened with the additions of the CEO of LCH.Clearnet to the LSEG Executive Committee and the Chairman of LCH.Clearnet to the LSEG Board. LSEG has set up a programme management framework to deliver the transaction objectives, including the alignment of the governance and operations of LCH.Clearnet and LSEG. A Steering Committee has been created to provide strategic direction and to oversee progress against objectives. The new LSEG Enterprise-wide Risk Management Framework includes LCH. Clearnet, and was designed to ensure appropriate risk management across the whole of the enlarged Group.

For more details on LCH.Clearnet's business activities, see pages 26-27. See also the Chairman's statement on pages 12-13, and the Chief Executive's statement on pages 14-15, for more information on the Group's acquisition of a majority stake in LCH.Clearnet.

Financial Risks

The risk of financial failure, reputational loss, loss of earnings and/or capital as a result of investment activity, lack of liquidity, funding or capital, and/or the inappropriate recording, reporting and disclosure of financial taxation and regulatory information.

Risk description

Mitigation

Investment risk (clearing) The Group's clearing provider, CC&G, holds a significant amount of cash and securities deposited by clearing members as margin or default funds. To ensure optimum ongoing liquidity and immediate access to funds, CC&G deposits the cash received on both a secured basis (Government Bonds and central bank deposits) and on an unsecured basis (into the local bank market). With the latter, there is a risk of loss should a deposit-taking bank in which funds are deposited default. The European Market Infrastructure Regulation (EMIR) was adopted on 4 July 2012 and entered into force on 16 August 2012. On 15 March 2013 the regulatory technical standards entered into force and the transitional period will terminate on 15 September 2013. The final target, as specified in EMIR, is the investment of at least 95 per cent of the CCP collateral in secured instruments.

Under the ERMF, CCP investments must be made in compliance with the Group CCP Financial Risk Policy as well as policies issued under the governance of the CCP themselves. These policies stipulate a number of risk management standards including credit and concentration limits. In the course of 2012, CC&G started its alignment process to EMIR and will be fully compliant when the new technical standards take effect on 15 September 2013. As part of this process, CC&G has increasingly invested its resources in secured arrangements and decreased the exposure towards unsecured deposits with commercial banks. In addition, we maintain a close dialogue with the Bank of Italy, one of the regulators of CC&G and its deposit-taking counterparties. Committees overseeing CCP investment risk meet regularly. To date, CC&G has not experienced a capital loss as a result of the default of a member.

Counterparty credit and latent market risk (clearing) CC&G guarantees final settlement of trades and manages counterparty credit risk for a range of assets and instruments including cash equities, equity derivatives, energy products, agricultural products and corporate and Government bonds. As a consequence, the Group is exposed to counterparty credit risk and is also potentially exposed to market and liquidity risks if a member defaults. CC&G has an interoperability agreement with LCH.Clearnet SA for Italian Government bonds traded on wholesale markets. Under this arrangement, CC&G makes reciprocal deposits of margins with LCH.Clearnet SA to reflect the traded positions on Italian participants and is therefore exposed to counterparty credit risk on LCH.Clearnet SA.		The financial risks associated with clearing operations are mitigated by: ·       Strict CCP membership rules including supervisory capital, technical and organisational criteria ·       The maintenance of prudent levels of margin and default funds to cover exposures to participants. Each member pays margins, computed at least daily, to cover the theoretical costs which CC&G would incur in order to close out open positions in the event of the member's default. Clearing members also contribute to default funds managed by CC&G ·       CC&G maintains back-up credit facilities supporting daily liquidity. Committees overseeing counterparty credit and latent market risks meet on a regular basis. To date, CC&G has not experienced a capital loss as a result of the default of a member.
Settlement and custodial risks The Group offers post trade services and centralised administration of financial instruments through its CSD subsidiary, Monte Titoli. Monte Titoli offers pre-settlement, settlement and custody services. These activities carry counterparty risk (in particular asset commitment risk), operational risk and custody risk (including asset servicing risk). Monte Titoli does not provide intraday settlement financing to its members.	Asset commitment risk is mitigated through pre-positioning (availability of security) and pre-funding (availability of cash). Operational risk is minimised via highly automated processes reducing administrative activities and formalised procedures for all services. Monte Titoli mitigates IT risks by providing for redundancy of systems, daily back-up of data, fully updated remote recovery sites and agreed service levels with outsourcers. Liquidity for Monte Titoli's operations is provided by the Bank of Italy.
For more information on these risks see the Post Trade Services section of the Business Review pages 24-25), and Note 2 to the accounts, Financial Risk Management (pages 84-87). For information on LCH.Clearnet see section of the Business Review pages 26-27.
Risk description			Mitigation
Capital Risk The Group incorporates a number of regulated entities within its structure. Principal risks to managing this capital are: ·       Increases in the regulatory requirements of those companies and/or any extension to the Group as a whole) ·       A scarcity of debt or equity (whether specific to the Group or driven by general financial market conditions). The regulated entities in the Group ensure sufficient capital resources are maintained to meet regulatory requirements, particularly in Post Trade Services where capital requirements are increasing. Failure to do so could lead to loss of regulatory approvals.			The Group maintains an ongoing review of the capital positions of its regulated entities and operates within capital limits which are overseen by the Treasury Committee, the newly created Financial Risk Committee, the Executive Committee and the Board. The Group's Treasury Policy recognises the need to observe regulatory requirements in the management of the Group's resources. LSE plc has been subject to new regulations in terms of capital requirements. These new limits have been agreed with the regulator and are now effective. The Group can manage its capital structure by varying returns to shareholders, issuing new shares or increasing or reducing borrowings. The Board reviews dividend policy and funding capacity on a regular basis and the Group maintains comfortable levels of debt facility headroom. The Group makes regular assessments of debt and equity market conditions. To maintain sufficient financial strength to access new capital at reasonable cost, and meet its objective of maintaining an investment grade credit rating, the Group is mindful of potential impacts on its key metrics when considering changes to its capital structure.
For more information on financial risk see Note 2 to the accounts, Financial Risk Management (pages 84-87).

Operational Risk

The risk of loss or other adverse consequences to the business, resulting from inadequate or failed internal processes, people and systems, or from external events.

Risk description				Mitigation
Technology The Group's businesses and major revenue streams are highly dependent on secure and stable technology performing to high levels of availability and throughput. Technology failures impact our clients and can potentially lead to a loss of trading volumes and adversely impact the Group's reputation and brand. The Group now increasingly provides its IT development and operations in-house, with particular reliance on MillenniumIT, following the successful migration of the Group's UK markets on to Millennium technology. While this gives the Group a greater degree of control in this area, there remains a risk of resource over-stretch to meet both the requirements of the Group and those of third parties. The Group also has dependencies on a number of third parties for the provision of hardware, software, communication and networks for elements of its trading, data and other systems.				The performance and availability of the Group systems are constantly reviewed and monitored to prevent problems arising where possible and to ensure a prompt response to any potential service interruption. The Group's Technology Services management team mitigates this risk by ensuring prioritisation of all developments and operations activities, and resource utilisation and allocation is kept under constant review. The MillenniumIT systems are designed to be fault tolerant and alternative standby computer facilities are maintained to minimise the risk of system disruptions. The Group actively manages relationships with key strategic IT suppliers to avoid any breakdown in service provision which could adversely affect the Group's businesses. Where possible, the Group has identified alternative suppliers that could be engaged in the event of a third party failing to deliver on its contractual commitments.
For more information see the Technology Services section of the Business Review, pages 30-31. For information on LCH.Clearnet see section of the Business Review pages 26-27.
Change management The Group has a number of major, complex projects and strategic actions underway concurrently, including implementation of new technology systems, cost management initiatives, and strategic development of the Group's post trade and derivatives businesses. If not delivered to sufficiently high standards and within agreed timescales, these could have an adverse impact on the operation of core services and revenue growth, as well as damaging the Group's reputation. The volume of simultaneous change could also lead to a loss of client goodwill. Synergies and cost benefits may not be delivered to anticipated levels. With regards to M&A and integration activities, the additional projects and workstreams could have an adverse impact on the day to day performance, key strategic initiatives and could damage the Group's reputation.	The senior management team is focused on the implementation of the Group's strategy and the project pipeline in view of their importance to the Group's future success. Each major project, including those in respect of M&A and integration, is managed via a dedicated project workstream overseen by a member of the Executive Committee. Rigorous software design methodologies, testing regimes and test environments are employed to minimise implementation risk. Product development teams are being strengthened to ensure the Group can continue to deliver advanced trading and information technology to meet clients' needs.
For more information see Chairman's statement, pages 12-13, and Chief Executive's statement, pages 14-15.
Risk description		Mitigation
Security threats The Group depends on having secure premises and uninterrupted operation of its IT systems and infrastructure. Potential security threats require continuous monitoring and assessment. Terrorist and cyber attacks and similar activities directed against our offices, operations, computer systems or networks could disrupt our markets, harm staff, tenants and visitors, and severely disrupt our business operations. Civil or political unrest could impact on companies within the Group. Long term unavailability of key premises or trading and information outages and corruption of data could lead to the loss of client confidence and reputational damage. Security risks have escalated in recent years due to the increasing sophistication of cyber crime.		The Group has well established and regularly tested business continuity and crisis management policies, procedures and guidelines in place. Security threats are taken very seriously and robust physical security arrangements are in place, including close liaison with Government agencies and police forces as required. Additionally, extensive IT security measures are in place to mitigate security risk. The Group's internet connections are pro-actively monitored at all times and, with the support of a third party, malicious traffic is blocked. There are also contingency procedures in place that can be invoked in the event of a threat against the Group's infrastructure. Furthermore, rigid security policies are enforced. The IT security team monitors intelligence and the Group is a member of the Centre for the Protection of National Infrastructure (CPNI).
Employees The calibre, quality and retention of employees is critical to the success of the Group. The loss of key members of staff could have an adverse impact on the Group's operations and ability to deliver its strategy. The Group's ability to attract and retain high quality individuals depends on the condition of recruitment markets and corresponding compensation packages of financial services, technology firms and regulators with which the Group competes for the same key staff.			The Group operates 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 performance related annual bonus and pay review process is in place for all employees. Regular benchmarking of reward and incentive systems is performed to ensure they are competitive. The Group also offers Long Term Incentive Plans for high performers and critical staff and turnover is monitored and reported to senior executives quarterly. A centralised training budget allows a coordinated approach to development across the Group. There are also plans to enhance talent management over the next 12 to 18 months, specifically enhancing Group succession planning and launching a new HR system.
For more information see Our wider responsibility, pages 36-37 and Remuneration Report, pages 54-63. For information on LCH.Clearnet see section of the Business Review pages 26-27.

2. Financial risk management

The Group seeks to protect its financial performance from exposure to capital, credit, liquidity and market (including foreign exchange and fair value and cash flow interest rate) risks.

Financial risk management is not speculative. It is performed at a Group level, where the treasury function identifies, evaluates and hedges financial risks from a Group perspective and also locally, where operating units manage regulatory and operational risks. The Financial Risk Committee (FRC), a sub-Committee of the Executive Committee, chaired by the Chief Financial Officer, meets monthly to oversee the consolidated financial risks of the Group. In addition, the Treasury Committee, a sub-Committee of the FRC which is also chaired by the Chief Financial Officer, meets regularly to ensure that the operational management of foreign exchange, interest rates, credit risks and the investment of excess liquidity are performed in accordance with Group Board approved policies and procedures. See 'Principal Risk and Uncertainties, pages 42-47, for further detail on the Group's risk framework.

Capital risk

Risk description

Risk management approach

The Group incorporates a number of regulated entities within its structure. It considers that increases in the regulatory requirements of those companies (including any extension to the Group as a whole) and/or a scarcity of debt or equity (driven by its own performance or financial market conditions) are the principal risks to managing its capital. The Group is profitable and its capital base comprises equity capital and debt capital.

The Group focusses upon its overall cost of capital as it seeks to provide superior returns to its shareholders, fulfil its obligations to the relevant regulatory authorities and other stakeholders and ensure that it is not overly dependent upon short and medium term debt that might not be available at renewal. Maintaining the flexibility to invest for growth is a key capital management consideration. The Group can manage its capital structure by varying returns to shareholders, issuing new shares or increasing or reducing borrowings. The Board reviews dividend policy and funding capacity on a regular basis and the Group maintains comfortable levels of debt facility headroom. To maintain the financial strength to access new capital at reasonable cost and meet its objective of maintaining an investment grade credit rating, the Group monitors its leverage ratio which is operating net debt (ie excluding cash and cash equivalents set aside for regulatory and operational purposes) to adjusted EBITDA (Group consolidated earnings before net finance charges, taxation, impairment, depreciation and amortisation and non-recurring items) against a target range of 1-2 times. The Group is also mindful of potential impacts on the key metrics employed by the credit rating agencies (including gross debt to EBITDA and EBITDA coverage of interest expense) in considering increases to its borrowings. At 31 March 2013 net leverage was 1.2 times (2012: 1.4 times). Considering its recent investments, in particular the acquisition of a further 55.5 per cent of the shares of and subsequent subscription for additional capital in LCH.Clearnet Group, and the investment in the TMX Datalink JV, the Group's net leverage on a pro forma basis would have been a little above the top end of its target range at 2.1 times. Performance against the Group's bank facility ratio covenants (net leverage and debt service - ratio covenants that are unchanged during the financial year) remains very comfortable and does not inhibit the Group's operations or financing plans. As at 31 March 2013, £200 million of cash and cash equivalents was set aside to cover regulatory and operational requirements. This amount increased during the year primarily as a result of an agreement with the regulators of CC&G, Bank of Italy, to retain earnings and associated cash in that company to meet forthcoming regulatory requirements under EMIR. The level of cash set aside by the Group remains subject to on-going review with regulators in the UK and Italy including the potential to vary the amounts set aside, in particular, given the implications on cash holdings of the FCA's requirement that LSE plc recognises profit in its regulatory capital calculation only upon external audit sign off.

Credit risk

Risk description

Risk management approach

CC&G, in its role as central counterparty clearer to Italian financial market participants, guarantees final settlement of transactions acting as buyer towards each seller and as seller towards each buyer. It manages substantial credit risks as part of its operations. For more information see 'Principal Risk and Uncertainties', pages 42-47. Notwithstanding revised regulations in Europe that will require CCPs to invest 95 per cent of their cash collateral in secured instruments or structures, to maintain liquidity (and in addition to the potential to deposit cash securely with the central bank), CC&G will continue to invest the balance of up to five per cent of its margin and default fund cash unsecured, within the Italian financial market, with banks regulated by Bank of Italy. Whilst the five per cent threshold of un-secured investment will considerably reduce its credit risk, it will continue to face the risk of direct loss from a deterioration or failure of one or more of these unsecured deposit counterparties. Furthermore, to cover the risk of trades executed by its members on international markets, CC&G has an interoperability arrangement with LCH.Clearnet SA, based in Paris. CC&G will make reciprocal deposits of collateral to reflect the traded positions of Italian participants under this arrangement and therefore will be exposed to credit risk on LCH.Clearnet SA as a deposit counterparty. More broadly, credit risk relates to the Group's customers and counterparties being unable to meet their obligations to the Group either in part or in full, including: ·       customer receivables ·       repayment of invested cash and cash equivalents ·       settlement of derivative financial instruments

CC&G To address the market participant risk, CC&G has established financial safeguards against single or multiple defaults. Clearing membership selection is based upon supervisory capital, technical and organisational criteria. Each member must pay margins, computed at least daily, to cover the theoretical costs which CC&G would incur in order to close out open positions in the event of the member's default. Margins are calculated using established international risk models and are debited by CC&G directly from participants' accounts held with Bank of Italy. Clearing members also contribute to default funds managed by CC&G to guarantee the integrity of the markets in the event of multiple defaults in extreme market circumstances. Amounts are determined on the basis of the results of periodic stress testing examined by CC&G's risk committee and exceed standards agreed by the European Association of Central Counterparty Clearing Houses. To date, no default of a direct participant has occurred. Deposit counterparty risk for CC&G margin and default funds is managed by investing cash with counterparties that are rated investment grade or who, if not rated, are publicly quoted and have a minimum level of capital. CC&G liaises closely with the regulator of its counterparty banks, Bank of Italy, and to ensure liquidity, funds are generally placed as overnight deposits and in all cases can be accessed within 2 business days if required. During the year we have further extended the number of counterparties that take CC&G's deposits to diversify this risk including the introduction of Italian-based branches of major international banks. To mitigate the price risks associated with certain secured investments CC&G will, working with its regulator, consider increasing the levels of security it receives, linked to these investments. Associated liquidity risks are considered in the investment mix and discussed further in the section below. Group Credit risk is controlled through policies developed at a Group level. Group companies make a judgement on the credit quality of their customers based upon the customer's financial position, a low concentration of credit risk across a large number of customers, the recurring nature of the billing and collection arrangements and, historically, a low incidence of default. Credit risk of cash and cash equivalents is managed by limiting the exposure to up to £50 million for 12 months with counterparties rated long term AAA (or equivalent) through to a maximum £10 million overnight with counterparties rated short term A-2 (or equivalent). Derivative transactions are undertaken with well-capitalised counterparties, authorised by policy, to limit the credit risk underlying these transactions. The Group maintains a heightened focus on sovereign risk in its counterparty selection.

Liquidity risk

Risk description			Risk management approach
The Group's operations are exposed to liquidity risk to the extent that they are unable to meet their daily payment obligations. In addition, CC&G and certain other subsidiary companies are required to maintain a level of liquidity to meet the requirements of their regulators to ensure the smooth operation of their respective markets and to maintain operations in the event of a single or multiple market or member stress.			Group businesses are profitable, generate strong free cash flow and operations are not significantly impacted by seasonal variations. The Group maintains sufficient liquid resources to meet its financial obligations as they fall due and to invest in capital expenditure, make dividend payments, support acquisitions or repay borrowings. Funds can generally be lent across the Group without limitation (other than by regulatory requirements in certain companies) and this is encouraged through the Group Treasury cash management policy and approach. Management monitors forecasts of the Group's cash flow and overlays sensitivities to these forecasts to reflect assumptions about more difficult market conditions. Treasury policy requires that the Group maintains adequate credit facilities provided by a diversified lending group to at least cover its expected funding requirements for the next 24 months. The financial strength of lenders to the Group is monitored regularly. During the year, a new, nine year, £300m bond was issued to UK retail market investors to underpin liquidity resources. The bond extended the Group's average drawn debt maturity profile to over six years and frees up its revolving credit facilities to support the proposed acquisition of LCH.Clearnet Group and to provide comfortable facility headroom over the medium term. At 31 March 2013, the Group's facilities were unutilised and totalled £850 million. CC&G maintains cash and cash equivalents and has access to bespoke committed and uncommitted lines of credit with intra-day financing from the Bank of Italy to meet the cash requirements of the clearing and settlement cycle that it manages in association with Monte Titoli. Revised regulations will require CCPs to arrange appropriate levels of back up liquidity facilities (including enhanced liquidity support facilities at the central bank) that adequately support the dynamics of a largely secured cash investment requirement (see Credit Risk section above). In addition to CC&G's requirements, certain Group companies maintain operational support facilities from banks to manage intraday and overnight liquidity. The table below analyses the Group's financial liabilities into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
At 31 March 2013	Less than 1 year	Between 1 and 2 years			Between 2 and 5 years		Over 5 years
£m		£m				£m		£m
Borrowings	0.4	-			499.2		297.2
Trade and other payables	230.0	3.2			0.2		-
CCP liabilities	146,088.1	-			-		-
Derivative financial instruments	0.1	-			1.1		2.4
146,318.6		3.2				500.5		299.6
At 31 March 2012	Less than 1 year	Between 1 and 2 years			Between 2 and 5 years		Over 5 years
£m		£m		£m				£m
Borrowings	10.5	235.7			263.2		247.7
Trade and other payables	237.5	-			-		-
CCP liabilities	99,747.2	-			-		-
Derivative financial instruments	-	-			0.1		2.0
99,995.2		235.7				263.3		249.7

Market risk - Foreign Exchange

Risk description

Risk management approach

The Group operates in the UK, Italy and Sri Lanka and, through its FTSE International Limited subsidiary, has growing businesses in the USA and Asia. With the exception of MillenniumIT, which invoices a material proportion of its revenues in US dollars, Group companies generally invoice revenues, incur expenses and purchase assets in their respective local currencies. As a result, foreign exchange risk arises mainly from the translation of the Group's foreign currency earnings, assets and liabilities into its reporting currency, sterling, and from occasional, large intercompany transactions. The Group faces less significant foreign exchange exposures from transaction risk on dividends that are remitted in currencies other than the currency of the recipient operation. However, the Group may be exposed from time to time by strategic investments in currencies other than sterling.

The Group seeks, where it can, to match the currency of its debt liabilities with its EBITDA generation in the same currency whilst endeavouring to balance the currency of its assets with the currency of its liabilities. The Group reinforces this methodology by regularly distributing its currency cash earnings in dividends and by absorbing currency earnings through interest payments on sterling debt, re-denominated through the use of cross-currency swaps or by drawing debt in the same currency, where this is practicable. A proportion of the Group's debt is effectively held in euro. At 31 March 2013, £255.5 million (2012: £250.2 million) of this was designated as a hedge of the net investment in the Italian Group and a profit of £5.7 million for the financial year (2012: loss of £27.8 million) on foreign currency borrowings was recognised in equity. The hedge was fully effective. Whilst transactional foreign exchange exposure is limited, the Group hedges material transactions in accordance with Group Treasury policy which requires that cash flows of more than £1 million or equivalent per annum should be hedged. Hedge accounting is considered in each case to mitigate material levels of income statement volatility. The Group reviews sensitivities to movements in exchange rates which are appropriate to market conditions. As at 31 March 2013, the Group has considered movements in the euro over the last year including recent volatility affecting this currency and has concluded that a 10 per cent movement in rates is a reasonable level to measure the risk to the Group. At 31 March 2013, if sterling had weakened/strengthened by 10 per cent against the euro with all other variables held constant, post tax profit for the year would have been £0.4 million higher/£0.3 million lower (2012: £0.3 million higher/£0.3 million lower); however, equity would have been £5.7 million lower (2012: £14.4 million lower)/£7.0 million higher (2012: £8.6 million higher). This reflects foreign exchange gains/losses on translation of euro denominated trade receivables, financial assets at fair value through profit or loss and of euro denominated borrowings. If, on the other hand, the average £/€ rate for the year had moved €5c, this would have changed the Group's operating profit for the year before amortisation of purchased intangibles and non-recurring items by approximately £9.0 million.

Market risk - Cash Flow and Fair Value Interest Rate Risk

Risk description

Risk management approach

The Group's interest rate risk arises through the impact of changes in market rates on cash flows associated with cash and cash equivalents, investments in financial assets and borrowings held at floating rates.

To provide a degree of income statement stability, the Group seeks to maintain a proportion of its net debt at fixed rates of interest over the medium term. The Group has issued a significant amount of its debt at fixed rates of interest with the floating rate element being repaid as the Group generates cash. As at 31 March 2013, following the issue of the £300m fixed rate retail bond in November 2012 and strong cash generation during the year, fixed rate borrowings represent 227 per cent of net debt. During the year, the Group considered swapping a portion of its fixed rate debt into floating rates but did not execute any transactions due to a preference to increase floating rate borrowings naturally through imminent strategic investments (for example the proposed acquisition of LCH.Clearnet Group). This position was maintained based on a view that the risk of rates moving materially lower was limited and given the protection an over-fixed rate profile gives should rates increase. The interest rates objective will continue to be reviewed as the Group moves through its rates re-positioning following the completion of the above acquisition. In its review of the sensitivities to potential movements in interest rates, the Group has considered interest rate volatility over the last year and prospects for rates over the next 12 months and has concluded that a 2 percentage point upward movement (and no downward movement) reflects a reasonable level of risk to current rates. At 31 March 2013, if interest rates on sterling-denominated and euro-denominated cash and borrowings had been 2 percentage points higher with all other variables held constant, post-tax profit for the year would actually have been £6.3 million higher (2012: £1.5 million lower) mainly as a result of higher interest income on floating rate cash and cash equivalents.

"

The Annual Report contains the following statements regarding responsibility for financial statements on page 75: 

"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. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of the affairs of the Group and the Company.

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

·       select suitable accounting policies and then apply them consistently ;

·       make judgements and accounting estimates that are reasonable and prudent;

·       state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; 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 adequate accounting records that are sufficient to show and explain the Company's transactions and 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 Directors' 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. 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 Overview and Business Review sections of the Annual Report on pages 2-47. In particular, the current economic conditions continue to pose a number of risks and uncertainties for the Group and these are set out in Principal Risks and Uncertainties on pages 42-47.

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 84-87. 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 term funding at 31 March 2013 increased to £1,650 million (2012: £1,350 million) £1,450 million of which is committed until December 2014 or beyond (2012: £1,350 million committed until July 2013 or beyond), described further in the Financial Review on pages 34-39.

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 pages 48-49 of this Annual Report, confirm that, to the best of their knowledge and belief:

·       the Group 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 Company and the Group taken as a whole; 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 the 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
15 May 2013"

 The Annual Report contains the following statements regarding details of certain related party transactions on page 108:

 "29. Transactions with Related Parties

Key management compensation

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

2013		2012
£m		£m
Salaries and other short term benefits	8.9	9.0
Pensions	0.5	0.4
Share based payments	4.6	0.2
14.0			9.6

"

 

END

 

 

ACSUOORRORANAAR