Annual Financial Report

RNS Number : 5695F

London Stock Exchange Group PLC

18 June 2012

 



 London Stock Exchange Group plc Annual Report and Accounts, Notice of Annual General Meeting 2012 and related documents.

 The Annual Report and Accounts of the London Stock Exchange Group plc (the "Group") for the year ended 31 March 2012 (the "Annual Report"), Notice of Annual General Meeting 2012 (the "AGM Notice") and related form of proxy for the Group's 2012 Annual General Meeting (the "AGM") are being mailed to shareholders today and, in accordance with paragraph 9.6.1 of the FSA 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 18 May 2012 (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 - 13:

"Chairman's Statement

 "The strategy that we outlined almost three years ago of 'getting in shape, leveraging our assets, and developing opportunities' has delivered tangible operational and financial performance."

Market and operating environment

Market users, regulators and policy makers have grappled with the dynamics of an incredibly fluid and often difficult macro environment over the past twelve months. Growth, stability and transparency in different measures have been elusive characteristics. Against this backdrop the importance of neutral, trusted, well regulated and systemically important market infrastructure has perhaps never been more apparent. At London Stock Exchange Group, we are acutely aware of our responsibilities and the central role we play in market efficiency, through capital raising and distribution, market confidence and stability and in facilitating economic growth.

We are proponents of regulatory regimes that promote efficiency, competition and transparency, and we have actively contributed to the wealth of consultations and regulations that are currently in draft in the UK, Europe and internationally. Our commitment to promoting a better understanding of the markets in which we operate and the impact that these markets have on our society-wide economic prosperity has been unwavering.

In particular, the past year has reinforced our long-held belief that we must promote mechanisms that support entrepreneurship, job and wealth creation through diverse funding channels, moving away from the global over reliance on bank debt. In the UK, we have continued to actively lobby the Government on this, seeking tax and regulatory changes which will reinvigorate the UK's 4.8 million SMEs. With only three per cent of SMEs currently using equity as a funding mechanism due to the UK's punitive treatment of equity finance, we must urgently look at our whole ecosystem. If we are to create opportunities in the UK and throughout Europe, we must create an environment in which SMEs can thrive.

Strategic development

For the Group itself, this has been another busy and successful year. The strategy that we outlined almost three years ago of 'getting in shape, leveraging our assets, and developing opportunities' has delivered tangible operational and financial performance. We have been successful in driving growth and diversifying our organisation. Beginning with our successful merger with Borsa Italiana back in 2007, the last few years have seen a fundamental transformation of the Group. We have moved away from an over reliance on UK cash equities, and we are today an organisation that is not only a multi-asset, multi-platform international business, but also one that is very much 'looking out and inviting the world in'. We are making good progress on our ambition to become one of the world's leading global market infrastructure businesses. In partnership with our customers, we now offer a broad portfolio of products, services and platforms that extends far beyond just our traditional cash equity offering.

A key part of our strategy is the diversification of our business. In early 2011, we announced a proposed merger with TMX Group. Whilst the merger was an exciting opportunity for the Group, the transaction did not receive TMX shareholder approval, despite the overwhelming support from our own shareholders, for which I would like to extend my sincere thanks. We have always taken a disciplined approach to M&A and therefore concluded that the transaction was not to be done at any cost.

Since then, we have been successful in completing and progressing a number of significant transactions and partnerships.

In December we acquired the 50 per cent in FTSE that we did not already own. This high growth, highly innovative global index business is one we know well. FTSE is a global brand with a strong culture of customer focused delivery and an impressive track record of double digit growth. The acquisition also highlighted the value of our original share of this high quality business. Going forward, we think there are significant opportunities for collaboration across the Group, and we are already seeing tangible demonstrations of this.

During the year, we also completed the acquisition of the FSA's Transaction Reporting Service, secured a number of technology contract wins and agreed a high profile data deal with Google.

In September 2011, we announced that we were in exclusive discussions with LCH.Clearnet Group, a leading international multi-asset, multi-venue clearing and risk management business. We have been clear about our ambitions to develop our post trade business and the chance to partner with LCH.Clearnet and their customers presents a significant opportunity for the Group. We have made good progress on this and in April 2012, both the Company's shareholders and LCH.Clearnet shareholders gave their overwhelming support for the transaction. We are now seeking the necessary regulatory and antitrust approvals and expect to complete the transaction by the fourth quarter of 2012.

We continue to see significant organic growth opportunities across our Capital Markets, Post Trade Services, Information Services and Technology Services businesses. This breadth and balance across our business gives us a strong and resilient position from which to continue to drive the business forward, capitalising on the opportunities presented by the macro environment, however it presents itself.

Our conviction

We operate in a dynamic, competitive environment where we seek to maximise our own and our customers' success. Yet, we are also mindful that we play a pivotal role in the broader communities we work in. That transcends our financial performance, critical as it is, and extends to our wider corporate responsibilities, the relationships we have with our customers and our partners, as well as the role and functions we perform.

We champion a number of social policy initiatives and remain committed to supporting the communities in the locations in which we operate. Since its launch in 2010, our charitable Foundation has donated £1.0 million to charities across Italy, Sri Lanka and the UK. As well as individual donations, the Group Foundation also supports individual partner charities in each of our primary locations, chosen by staff from across the business. We look to build long term collaboration between London Stock Exchange Group and our employees with these charities as we seek to create a lasting legacy for the work of our Foundation.

Looking to champion the health of the wider economy, beyond our philanthropic activities this year, we have played host to a number of influential politicians, intellects and statesmen. These have included the UK Deputy Prime Minister, the Italian Prime Minister, the Governor of the Banque de France and through our UK Paternoster Talk Series, Nobel prize winning economist Amartya Sen, and economists, Jim O'Neill and Nouriel Roubini. Our role in connecting our communities and working to promote efficient and successful capital markets will continue to underpin our enthusiasm for hosting and engaging with such key influencers.

Financial performance and dividend

Against the backdrop of what have been uncertain and changing markets, the Group has delivered another strong financial performance during the year, reflecting the success of our diversification strategy, our focus on working with our customers and the incredibly hard work of management and staff throughout the business.

Reflecting this, the Board is proposing a six per cent increase in the final dividend to 19.0 pence per share, resulting in a dividend for the full year of 28.3 pence per share, a six per cent rise. The final dividend will be paid to shareholders on the register on 27 July 2012.

Conclusion

The Group is in very good shape and we are well positioned to build on the success of the last financial year. Working in partnership with customers on product development, delivering innovations that drive their, and our, success and remaining absolutely focused on the strong execution of our strategy will be pivotal to our continued success. More broadly, championing a market framework that promotes our international competitiveness and capitalising on the anticipated ongoing regulatory changes, the Group will seek new opportunities to further develop and strengthen its increasingly diversified business. We are looking forward to what no doubt will be another exciting year for London Stock Exchange Group.

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 38 - 43, and, with respect to financial risks, on pages 77-81:

"Principal risks and uncertainties

The Group is subject to a variety of risks and uncertainties which may have an impact on the Group's ability to execute its strategy and deliver its expected performance.

The identification, assessment and management of risks remain central to the Group's operating framework. The risk management framework is described in the Corporate Governance section on pages 50 to 51. The Report of the Audit and Risk Committee, on pages 52 to 53 provides details on the work carried out to assist the Board in fulfilling its oversight responsibilities for risk management and systems of internal control.

In addition, the Group's approach to financial risks are detailed on pages 77 to 81.

Overview of Principal Risks:
Market Risks	Operational Risks
Clients and competition	Change management
Changing regulatory environment	Employees
Fiscal regime and political environment	Security threats
	Ongoing operations
	Value of shares to be acquired in LCH.Clearnet
	Investment risk

Principal Market Risks

The risks arising from the economic, political, competitive and regulatory environment within which the Group operates.

Risk decreased  Risk increased  No change

Risk	Mitigating Factors and additional commentary	Change (from last year)
Clients and Competition We operate in markets that are characterised by increasing competition and choice for clients, as well as continued concentration of business from a relatively small customer base. Client alignment is paramount to the successful operation and growth of our business. Whilst regulatory changes removed some barriers to competition and afforded the Group the opportunity to compete for pan-European trading, it also resulted in increased competition, a consequential loss of market share and pressure on fee levels in the Group's existing markets. In our international primary markets business there is increasing competition from Asia, particularly Hong Kong, which is seeking to attract high profile international listings. The competition with New York remains significant.	Competitive markets are by their very nature dynamic and the effects of competitor activity can never be fully mitigated. The new, structured client engagement programme implemented last year in response to increasing competition has helped enhance our competitiveness. These efforts are complemented with an ongoing focus on new technology deployment and on cost reduction. Senior management are actively engaged with clients, the Group includes major customers as minority shareholders of certain businesses and aligns commercial initiatives with clients. We maintain a dedicated international marketing team focused on key target markets, promoting the benefits of listing on Group markets to international issuers, the global advisory community and other stakeholders. The Group considers that these efforts and the more certain nature of some of the proposed regulatory changes have, to an extent, counteracted the impact of increased competition. The proposed acquisition of a controlling interest in LCH.Clearnet is intended to substantially increase our footprint in the international clearing house market.	Risk decreased For more information, see the Business Review, pages 17 to 31
Changing regulatory environment The global policy makers and regulators, including the EU, continue with their programmes for introducing a range of measures intended to reduce risk in financial services. There are considerable similarities between many of regulatory initiatives, especially those of the EU and USA. The commitments to the G20 objectives by the EU and Member States, continue to be the driving imperative of most of these measures, which are likely to lead to closer and more intrusive regulation of all financial services firms and infrastructure providers. Politicians continue to press for increased central EU supervision and regulation in reaction to the financial crisis and as demanded by their constituents. The key measures directly affecting the Group are the MiFID review, implementation of European Market Infrastructure Regulation (EMIR), Central Securities Depository Regulation (CSDR) and the future TARGET2-Securities Europe settlement platform (T2S), and Crisis Management arrangements for infrastructure (particularly CCPs). There are also planned measures on capital requirements, securities law, corporate governance, market abuse and issuer transparency and the possible introduction of financial transactions/activity taxes. In the UK, the Government's Financial Services Bill is progressing through Parliament with its proposal to replace the FSA with two new regulators, the PRA, responsible for micro prudential regulation and FCA, responsible for conduct, markets and consumer protection, and a Financial Policy Committee to advise on macro systemic risk. The FSA has also recently consulted on the Financial Risk Requirements for Recognised Bodies (exchanges and clearing houses) and we are awaiting its proposals in this respect. The Group has regular, normal course discussions with its regulators in the UK and Italy regarding its capital and liquidity resources. Regulatory change creates a more uncertain environment for the Group to plan and execute its business strategy. Changes may occur that have an adverse effect on the Group's business but may also provide new growth opportunities. Associated direct risks include potentially increased capital requirements and higher operating and compliance costs. Indirect risks include a reduction in participation and trading/clearing activity and reduction in capital markets activity.	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 have direct engagement 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 actions are planned. As the various proposals take shape, there is often greater certainty about the proposed measures. The Group continues to consider that, balancing the negative and positive outcomes, the likelihood of major adverse regulatory developments remains reduced in the light of the Commission's proposals in MiFID and the final text of EMIR. Further opportunities exist for the Group to deliver solutions to help the market address the changing regulatory environment. The Group believes that it should be able to meet required capital resources from its strong operating cashflow, although it will need to monitor the development of the Level II measures under EMIR, consider the potential impact of the equivalent measures under the US Dodd-Frank provisions having regard to the proposed acquisition of a controlling interest in LCH.Clearnet, and respond to the regulators' requirements, including the FSA's updated requirements for Recognised Bodies, once finalised.	No change For more information see Market position and outlook, pages 8 to 11, Chairman's statement, pages 12 to 13, and Chief Executive's review, pages 14 to 15
Fiscal regime and political environment Public finances in Europe are under increasing pressure as Governments tighten the fiscal regime. The continued challenging economy and the impact of the fiscal rescue packages across some Eurozone members could expose the Group to an increased risk of disruption resulting from market instability and financial failure in our clients and suppliers. The Group has significant operations in Italy, which is one of the Eurozone countries impacted 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 and euro-denominated securities, and accordingly it is exposed to risks that could have a material adverse impact on the financial condition of the Group. The reduction in UK corporation tax over the next three years provides some certainty and benefit for the Group. While Sri Lanka is enjoying a period of stability, should this situation deteriorate, it could impact our technology strategy.	The Group liaises closely with Government bodies and maintains cross-party political relationships, playing an active role by sharing expertise and experience with policy makers on the impact of Government and regulatory decisions on financial markets. The Group has undertaken stress testing of market systems to ensure sufficient volume capacity to maintain orderly markets in the event of increased volatility as a result of the Eurozone debt crisis. However, the extent and related consequences of the crisis are difficult to predict and, given the uncertainty, the impact of a critical country leaving the Eurozone is difficult to mitigate in terms of financial consequences. Existing Business Continuity Management (BCM) and crisis management procedures would be invoked to manage the response to any sudden escalation of the Eurozone situation. The move away from corporate debt (and in particular bank) financing is positive for the Group's equity business. In addition, Government debt requirements can assist the Group's fixed income business. The Group maintains regular contact with key Governmental parties in Sri Lanka and has appropriate contingency plans in place to ensure key technology operations are not dependent on a single geography.	Risk Increased For more information, see Market position and outlook, pages 8 to 11, and Financial risk management, pages 77 to 81

Principal Operational Risks

The risks arising from the people, systems and processes through which the Group operates.

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 regard to the capability of the Group's MillenniumIT offering, losing the balance between key growth projects and on-going product development may impact the future competitiveness of the Group's technology platforms. 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, which has been further strengthened during the year, 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 project, including those in respect of M&A and integration, is 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 the Group can continue to deliver advanced trading and information technology to meet clients' needs. The risk has reduced as the Group has successfully implemented significant projects in the past year, including the further roll-out of Millennium Exchange for the Group's markets.	Risk decreased For more information see Chairman's statement, pages 12 to 13, and Chief Executive's review, pages 14 to 15
Employees The calibre, quality and retention of employees are 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 execute its change programme. The Group recognises the importance of retaining and developing employee skills and balancing resource allocation in the face of the changing nature of the Group's business environment. 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 and 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, although these have not realised significant value in recent years. Staff turnover is monitored and reported to the senior executives quarterly. A centralised training budget allows a co-ordinated approach to development across the Group.	No change For more information see Our wider responsibility, pages 36 to 37 and Remuneration Report, pages 54 to 63
Security threats The Group is dependent on having secure premises and uninterrupted operation of its IT systems and infrastructure. Potential security threats therefore 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 and operations. Similarly 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 due to the increasing sophistication of cyber crime.	The Group has well established business continuity and crisis management procedures. The Group takes security threats very seriously and has robust physical security arrangements in place, which have been further enhanced this year. Extensive information and IT security measures are in place. These include the monitoring of intelligence and close liaison with the police and Government agencies. The risk mitigation against both physical and IT threats is long and well established and as a result our residual risk remains unchanged.	No change
Ongoing operations The Group's businesses and major revenue streams are highly dependent on secure and stable technology performing to high levels of availability and throughput. Any technology failures will impact on 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 onto Millennium technology. Whilst 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 ensure a prompt response to any potential service interruption issues. The Group's Technology Services management team mitigates this risk by ensuring prioritisation of all development and operations activities, and resource utilisation and allocation is kept under constant review. The MillenniumIT systems are designed to be fault tolerant and in addition 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.	No change For more information see the Technology Services section of the Business Review, pages 30 to 31
The value of the LCH.Clearnet shares purchased by the Group may be less than the consideration paid The Group provides CCP services in a complex, multi-jurisdictional legal environment. CCPs face the risk that to successfully manage a default they may have to take action against insolvent members and, if a CCP's rights are restricted in any way or insufficient collateral has been posted by a member, such a default could adversely affect the CCP and its Group. Prior to completion of the proposed transaction with LCH.Clearnet Group Limited, it is possible that there could be a similar or equivalent adverse event affecting LCH.Clearnet Group Limited which would not give rise to a right to the Group to terminate the transaction. Such a risk is considered common for a transaction of this nature, however in such an event the value of the LCH.Clearnet shares purchased by the Group may be less than the consideration paid by the Group at completion of the transaction and, accordingly, the net assets of the Group could be reduced. This could have an adverse effect on the business, financial condition and operating results of the Group following completion.	Comprehensive due diligence was performed as part of the LCH.Clearnet Group Limited transaction. This covered operational risks, detailed review of margin methodology, default fund calculations and deposit counterparty risk. Under the terms of the implementation agreement between the Company, London Stock Exchange (C) Limited and LCH.Clearnet Group Limited in respect of the transaction, the Company is able to terminate the implementation agreement and cause the Company's offer for LCH.Clearnet to lapse, including in certain circumstances where a regulatory development occurs or a material regulatory licence is withdrawn, which would have (or would be reasonably likely to have) a material adverse effect in the context of the transaction on LCH.Clearnet Group Limited and/or where LCH.Group Clearnet Limited materially breaches the terms of certain customary pre-completion undertakings it has provided to LSEG.	New For more information see Chairman's statement, page 13, and Chief Executive's review, page 15
Investment risk The Group's clearing provider, CC&G, maintains a significant quantum of cash and securities deposited as margin or as default funds by clearing members. To ensure optimum on-going liquidity and immediate access to funds, it deposits the cash received into the local bank market on an unsecured basis. There is a risk of a partial loss of the funds should a deposit-taking bank in which funds are deposited default. CC&G guarantees final settlement of trades and manages counterparty risk in a range of assets and instruments including cash equities, derivatives, energy products and Government bonds. As such the Group is exposed to country risk, credit risk, issuer risk, market risk, liquidity risk, interest rate risk and foreign exchange risk.	To date, CC&G has not experienced a failure of one of its deposit counterparties nor any loss as a result of the default of a member. The financial risks associated with clearing trades are mitigated by: •strict membership rules; •the maintenance of prudent levels of margin and default funds to cover exposures to participants; and •back-up credit facilities supporting daily liquidity.    Committees overseeing membership, risk and financial risk meet on a regular basis.    Investments are made in compliance with the Financial Management Policy issued by the Financial Risk Committee of CC&G. This limits deposits of margin and default funds to investment grade banks or (if unrated) Italian listed banks that are appropriately capitalised.    During the year we have further expanded 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. We maintain a close dialogue with Bank of Italy, the regulator of CC&G and its deposit-taking bank counterparties. All deposits are callable at CC&G's option at sight or, for term deposits, with a maximum of two business days' notice. Positions are monitored daily and are subject to regular reporting to the Executive Committee.	No change For more information see the Post Trade Services section of the Business Review, pages 22 to 25, and Financial Risk management, pages 78 to 79

2. Financial risk management

The Group's approach to financial risk management seeks to protect its financial performance from exposure to capital, credit, market (including foreign exchange and fair value and cash flow interest rate) and liquidity 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 Treasury Committee, chaired by the Chief Financial Officer, meets regularly to ensure control is maintained and that the 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.

Capital risk
Risk description					Risk management approach
The Group considers that an increase in regulatory requirements 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's capital base comprises equity capital, debt capital and retained profits, details of which are set out in the Consolidated Statement of Changes in Equity and in note 23.					The Group is mindful of 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 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. At 31 March 2012 leverage was 1.4 times (2011: 1.0 times) on a pro forma basis assuming the Group had owned 100 per cent of FTSE for the whole year. Performance against the Group's bank facility ratio covenants (net leverage and debt service) remains very comfortable and does not inhibit the Group's operations or financing plans. As at 31 March 2012, £165 million of cash and cash equivalents was set aside to cover regulatory and operational requirements. This amount increased during the year as a result of a revised approach taken by the FSA in its regulatory oversight of LSE plc and is subject to on-going review with regulators in the UK and Italy.
Credit risk
Risk description					Risk management approach
CC&G, in its role as central counterparty clearer (CCP) to Italian financial market participants, guarantees final settlement of transactions acting as buyer towards each seller and as seller towards each buyer. It faces the risk of losses from the deterioration in the creditworthiness, or the default, of a participant. To maintain liquidity, CC&G invests significant amounts of margin and default fund cash with Italian banks but faces the risk of direct loss from a deterioration or failure of one or more deposit counterparties. 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 two business days if required. During the year we have further expanded 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. 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 has increased focus on sovereign risk as a criteria 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 within their own legal entities to meet regulatory requirements and/or ensure the smooth operation of their respective markets.					Group businesses are profitable and generate strong free cash flow. Other than the collection of annual equity market membership fees in the first quarter of each financial year, the Group's cash flows 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). 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. During the year, a new £350 million committed revolving credit facility extending up to 3 years was arranged to underpin liquidity resources. It provides additional headroom to fund the potential acquisition of LCH.Clearnet Group but falls away one month following any formal announcement by the Company to cancel the acquisition. At 31 March 2012, £603 million of the Group's facilities (excluding FTSE's local facilities) were unutilised (2011: £500 million), with committed lines of credit (including bond issues) having an average life to maturity of almost 4 years. 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. In addition, 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 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
At 31 March 2011	Less than 1 year			Between 1 and 2 years		Between 2 and 5 years				Over 5 years
	£m		£m		£m				£m
Borrowings	0.1			-		-				500.0
Trade and other payables	156.5			-		-				-
CCP liabilities	116,104.5			-		-				-
Derivative financial instruments	0.3			-		-				12.9
		116,261.4		-			-					512.9

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 and FTSE International Limited, which invoice a material proportion of their 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 cash earnings through interest payments on sterling debt, re-denominated through the use of cross-currency swaps or by drawing debt in the same currency. A significant majority of the Group's debt effectively held in currency is in euro. At 31 March 2012, £250.2 million (2011: £265.1million) of this was designated as a hedge of the net investment in the Italian Group and a loss of £27.8 million for the financial year (2011: gain of £6.5million) 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 £1million or equivalent per annum should be hedged. Hedge accounting is considered in each case where material levels of income statement volatility might result. The Group reviews sensitivities to movements in exchange rates which are appropriate to market conditions. As at 31 March 2012, 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 benchmark. At 31 March 2012, 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 £0.3 million higher/£0.3 million lower (2011: £0.8 million higher/£0.6 million lower); however, equity would have been £14.4 million lower (2011: £10.8 million lower)/£8.6 million higher (2011: £8.8 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 foreign exchange gains/losses on translation of euro denominated borrowings, measuring the impact of a change in rate on the balance sheet date. 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 £12 million. The Group monitors its exposure to the sovereign debt crisis in the Eurozone and the impact of austerity measures being adopted, specifically in respect of our operations in Italy and more generally because of the potential impacts on other areas of our business.
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 2012, fixed rate borrowings represent 92 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 unfavourable economics and a preference to increase floating rate borrowings naturally through strategic investments (for example the proposed acquisition of LCH.Clearnet Group). 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 two percentage point upward movement (and no downward movement) reflects a reasonable level of risk to current rates. At 31 March 2012, if interest rates on sterling-denominated and euro-denominated cash and borrowings had been two percentage points higher with all other variables held constant, post-tax profit for the year would have been £1.5 million lower (2011: £2.2 million higher) mainly as a result of higher interest expense on floating rate net borrowings (2011: interest income on floating rate cash and cash equivalents). "

The Annual Report contains the following statements regarding responsibility for financial statements on page 68: 

"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

• 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 Annual Report, 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 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 Overview and Business Review sections of the Annual Report on pages 2 to 43. 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 38 to 43.

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 77 to 81. 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 2012 increased to £1,350 million (2011: £1,000 million) all of which is committed until July 2013 or beyond (2011: £1,000 million committed until July 2013), described further in the Financial Review on pages 32 to 35.

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 44 to 45 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

• 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
18 May 2012"

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

"32. 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:

2012			2011
£m			£m
Salaries and other short term benefits	9.0	8.6
Pensions	0.4	0.4
Share based payments	0.2	0.7
9.6		9.7"

 

END

 

 

ACSUWARRUWANAAR