Annual Financial Report
London Stock Exchange Group plc Annual Report and Accounts, Notice of Annual General Meeting 2016 and related documents.
The Annual Report and Accounts of the London Stock Exchange Group plc (the "Group") for the year ended 31 December 2015 (the "Annual Report"), Notice of Annual General Meeting 2016 (the "AGM Notice") and related form of proxy for the Group's 2016 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.
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London Stock Exchange Group plc |
Paul Froud - Investor Relations |
+44 (0) 20 7797 3322 |
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Gavin Sullivan - Media |
+44 (0) 20 7797 1222 |
In compliance with DTR 6.3.5, the following information is extracted from the Annual Report and should be read in conjunction with the Group's preliminary results announcement of 4 March 2016 (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 http://www.lseg.com/investor-relations.
The Annual Report contains the following statements regarding important events that have occurred during the year on pages 4 to 5:
"Overview
I welcome this first opportunity to communicate with shareholders since I became Chairman of London Stock Exchange Group in July last year. 2015 was a year of further development for the Group as it continued to expand its global presence and business footprint while delivering growth, both through acquisition and organically. Progress on the execution of our strategy and our financial performance are detailed in this Annual Report.
The Group remains a key facilitator of capital raising, helping companies from around the world raise a total of £42 billion in 2015 through new and further equity issues. It also provides a series of leading market data and benchmarking tools and produces systemically important balance sheet and risk management services. As announced in October 2015, the Group has agreed the disposal of Frank Russell Company's investment management business for gross proceeds of US$1,150 million. The sale followed the completion of a comprehensive review of the business and the transaction is expected to close in the first half of 2016.
The Russell Index business has been successfully combined with FTSE to create FTSE Russell, a leading global index player. We remain on track to deliver the targeted revenue and cost synergies.
Shortly after my appointment, the Board reviewed and endorsed the Group's strategy. As I have considered the Group, I see its strategy as having four distinct layers: excellent execution of our core business strategy in Capital Formation, Risk and Balance Sheet Management and Intellectual Property; the identification, development and delivery of innovative initiatives; continued expansion through partnership and acquisition; and developing a global relevance through our unique open access philosophy.
Since year end, the Group has also confirmed detailed talks of a potential all-share merger of equals with Deutsche Börse. Should the potential merger proceed, the Combined Group would be a UK plc, domiciled in London. The Board considers that the value creating opportunities of the combination are substantial and would create a leading European-based global markets infrastructure group with significant customer benefits. Discussions between the parties remain ongoing regarding the other terms and conditions and there can be no certainty a transaction will occur. We will keep shareholders updated and any transaction would be subject to LSEG shareholder approval, Deutsche Börse shareholder acceptance, as well as regulatory approvals and other customary conditions.
I have been impressed with the quality and depth of the executive team developed by Xavier Rolet and by the enthusiasm and dedication of all involved in the growth of the business. As a markets infrastructure provider, the Group has technology at the core of all its operations and is well equipped with the skills to ensure its technology remains both cost effective and fit for purpose in a rapidly changing environment.
Financial performance
The Group delivered a good financial performance with all businesses delivering growth on an underlying, organic constant currency basis. Total income rose to £2,381.5 million, up 72% on a continuing and discontinued basis. Adjusted operating profit increased 27% to £709.6 million and operating profit increased 44% to £499.9 million.
The Board has reviewed the Group's capital management, encompassing its debt position, investment needs and development opportunities. As a consequence of the Group's good ongoing financial performance, strong cash generation and financial position, the Board is proposing a step up in the final dividend, to 25.2 pence per share. This results in a total dividend for the year of 36.0 pence per share, an implied increase of 20%. The final dividend will be paid to shareholders on the register as at 6 May 2016. Please see the Financial Review section of this report for further commentary on our capital management considerations and dividend policy.
Corporate responsibility
As a global organisation, we understand that our responsibilities go beyond finance. We seek to encourage growth and expand opportunities - and we are committed to doing so through four channels:
--Our markets - promoting the dynamic companies and asset classes that will ensure long-term economic prosperity
--Our services - enabling investors to make informed and sustainable
investment decisions
--Our people - recruiting and supporting on the basis of talent
--And in our surrounding communities - we are helping young people develop the skills to drive positive change for themselves and those around them
In the past year, the Group donated over £2.1 million to charities with employees also participating in a number of events with our partner charities around the world. Our partner charities focus on helping to support the next generation and a full summary of our activities can be found on page 36 as well as in our standalone Corporate Responsibility Report, which can be accessed from our website: www.lseg.com/about-london-stock-exchange-group/corporate-responsibility.
Governance
Elsewhere in this report, I share my thoughts on the role governance plays in ensuring shareholders' assets are properly stewarded.
The foundations of governance are strong and I am delighted that the Board has been joined by Lex Hoogduin, Mary Schapiro and David Nish, whose 3 different geographic bases and nationalities reflect the changing footprint of the business. They bring, amongst many other skills, risk management, regulatory understanding and financial leadership to the Board.
My predecessor left big shoes to fill and I would like to record my gratitude to Chris Gibson-Smith for all his years of service to the Group. He had some very turbulent years through which to navigate and he leaves behind a Group whose strength and global relevance are hugely enhanced.
During 2015, we also lost the services of Robert Webb after 14 years as well as Joanna Shields on her appointment to government. Massimo Tononi also left the Board following his appointment as Chairman of Banca Monte dei Paschi di Siena SpA. They will each be missed for their positive contribution and wise counsel. On behalf of the Board, I thank them all.
Recognising the recent rapid expansion of the Group, the Board has agreed to strengthen the governance in 2016 by forming both Regulatory and Technology Advisory Groups to ensure the Board has access to the best possible advice. This will enable Directors to draw on experience from outside the Board in the important areas of technology and regulation.
The Board recognises the benefit throughout the Group of having access to the diversity of input from a wide range of backgrounds, nationalities and genders. This is reflected at Board level by the diverse backgrounds of the Directors.In 2015, the Group established a Women's Inspired Network (WIN) to support women globally across the Group, as well as to support women and girls in our local communities.
Conclusion
There are, of course, many risks in the global economy and uncertainty over Britain's place in Europe. And indeed the shape of Europe's risk profile is changing - the relative stability of the Cold War has given way to increased volatility and unpredictability in geo political events.
Under the able leadership of our Chief Executive, Xavier Rolet, the Group is in a strong position globally and all of us - with good reason - can look forward to a strong and vibrant future. I thank all those who contributed to the success in 2015 through their dedication and hard work.
Donald Brydon
4 March 2016"
The Annual Report contains the following statements regarding principal risks and uncertainties facing the business, with respect to principal strategic, financial and operational risks, on pages 46 to 53, and, with respect to financial risk management, on pages 108 to 112:
OVERVIEW OF PRINCIPAL RISKS:
Strategic Risks Financial Risks Operational Risks
Global economy Market risk Technology
Regulatory change Liquidity risk (clearing) Change management
Competition Settlement and custodial risks (clearing) Investment Management (operations)
Compliance Capital risk Investment Management (consulting)
Transformation Security threats
Reputation/Brand Employees
STRATEGIC RISKS
Risks related to our strategy (including the implementation of strategic initiatives and external threats to the achievement of our strategy). The category also includes risks associated with reputation or brand values.
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Risk Description |
Mitigation |
Risk level |
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Global economy As a diversified markets infrastructure business, we operate in a broad range of equity, bond and derivative markets servicing clients who increasingly seek global products and solutions. If the global economy underperforms, lower activity in our markets may lead to lower fee revenue.
The improving economic environment in the UK has had a positive impact on the Group's business, and has increased the activity on our Primary Markets. Stronger economic data from the US has resulted in the first rate hike by the Fed in a decade and there is potential for further rate increases next year, indicating potential for a more upbeat 2016 outlook. There is, however, currently considerable uncertainty in economic outlook and apparent growth could fail to materialise.
The outlook for the Eurozone improved somewhat towards the end of 2015, although growth remains fragile and deflationary headwinds still pose a risk to recovery and uncertainty over the future direction of Europe could also impact our European businesses. The UK referendum on the future of EU membership could add uncertainty in markets. This could increase the level of market volatility with unpredictable impact on our business.
As the number of possible scenarios facing the Group in the event of a decision to leave following the referendum, is impossible to model today, we will closely monitor the situation and ensure proper and timely analysis of the ramification of such a decision.
Ongoing geopolitical tensions continue to add uncertainty in the markets and may impact investors' confidence.
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The widening geographical footprint of the Group has improved the geographical diversification of the Group's income streams. The Group mitigates the FX translation exposure created by ownership of overseas businesses by matching, to the extent possible, the currency of the Group's debt to the currency of its income streams. This is supplemented by a programme of active hedging using derivative instruments. Material foreign currency transactions relate mainly to M&A and dividend related payments and are hedged as required by Policy.
The Group performs regular analyses to monitor the markets and the potential impacts on the business. Activities include Key Risk Indicator tracking, stress testing, and hedging. We also monitor very closely the ongoing developments surrounding the UK referendum.
The Financial Risk Committee closely monitors and analyses multiple market stress scenarios and action plans in order to minimise any impacts stemming from a potential deterioration of the macroeconomic environment. The Group is well positioned to respond to variations in client demand as a result of the outcome of the referendum.
Group Treasury risk is monitored daily, is managed within the constraints of a Board approved policy by the Group Treasury team, and is overseen by the Group Treasury Committee (a sub-Committee of the Financial Risk Committee chaired by the CFO). An update on Group Treasury risks and actions is provided monthly to the Financial Risk Committee and to each Board Risk Committee.
The Group has appropriate contingency plans in place to ensure key operations are resilient. Business Continuity Management (BCM) and crisis management procedures would be invoked to manage the response to an unexpected event.
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Increasing |
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For more information, see Market trends and our response, pages 12-15, and Note 2 to the accounts: Financial Risk Management on pages 108-112. |
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Regulatory change
The Group and its exchanges, other trading venues, clearing houses, index administrators, central securities depositories, trade repository and other regulated entities operate in areas that are highly regulated by governmental, competition and other regulatory bodies at European federal and national levels.
There is a range of measures which may impact our business directly or indirectly including MiFID/MiFIR, EMIR, third country recognition, CSDR, the Benchmark Regulation, SFTR and BRRD. In addition, the European Commission published its Capital Markets Union Action Plan in September 2015, including proposals to amend the Prospectus Directive. Revisions are designed to make it easier for companies to raise capital through the EU and lower associated costs. Regarding MiFID and MiFIR, the rule-making work for secondary legislation is expected to complete in 2016. Rule makers began discussing the possibility of a 1-year delay to implementation from 3 January 2017, although the terms of a delay were not agreed by the end of 2015. Implementation delay could impact revenue opportunities for the Group.
Negotiations also continue on a possible Financial Transaction Tax (FTT).During 2015, it again proved difficult for participating Member States to reach agreement, and the proposed implementation of 1 January 2016 did not come to fruition. Negotiations are still pending however a FTT could adversely impact volumes in financial markets.
In 2016, the European Commission is planning to propose a framework for recovery and resolution of CCPs. This work will be conducted in parallel with the development of international standards from CPMI-IOSCO. This year, the European Commission is also expected to confirm the areas of EMIR that will be modified as part of the official review of the regulation. The Basel III rules on capital requirements for banks' exposure to CCPs and BCBS leverage ratio need to be adjusted to mitigate any impact on our CCP clearing volumes, with implications for the Group's revenues.
During 2016, secondary legislation setting out CSD requirements is expected to come into force. CSDs will be required to apply for reauthorisation under the new CSDR regime within 6 months after entering into force of this secondary legislation. ESMA delayed publishing draft secondary legislation containing the rules on settlement discipline during 2015. Industry responses to the 2015 consultation requested a delay to the implementation of these rules, and the ESMA rule proposal is expected to include a transitional period of 18 to 24 months following the entry into force of the relevant secondary rules however this uncertainty adds to regulatory risk. |
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 monitor regulatory developments continually and engage directly with regulatory and governmental authorities at national, EU and international levels.
We continue to develop our relationships with the key political stakeholders, particularly at EU and national 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 focus on remaining well positioned to respond to regulatory developments and further opportunities exist for the Group to deliver solutions to help the market address the changing regulatory environment.
The Group's CCPs are actively engaged in the public debate on CCP capitalisation, the appropriate level of "skin-in-the game" in the risk waterfall, general access and management of liquidity, the implications of capital requirements on clearing members and level playing field when deeming third country CCPs equivalent. |
Increasing |
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For more information on regulatory changes see Market trends and our response on pages 12-15.
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Competition
We operate in a highly competitive industry. Continued consolidation has fuelled competition including between groups 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 and capital raises from other global exchanges and regional centres.
In Post Trade Services, competition will continue to intensify as we see a shift towards open access and interoperability of CCPs and legislative requirements for mandatory clearing of certain OTC derivative products. While this may create new business opportunities for the Group, competitors may respond more quickly to changing market conditions or develop products that are preferred by customers.
The Group's Information Services business faces competition from a variety of sources, notably from other venues that offer market data relating to securities that are traded on the Group's equity markets, as well as from index providers which offer indices and other benchmarking tools which compete with those offered by the Group. Furthermore, if the Group's share of equity trading on its exchanges were to come under pressure, the Group's market data offering might be seen by current and prospective customers as being less valuable, which may adversely affect the Group's business, financial condition and operating results.
In Technology Services, there is intense competition across all activities and there are strong incumbents in some of our growth areas. |
Competitive markets are, by their very nature, dynamic, and the effects of competitor activity can never be fully mitigated. Senior management actively engages with clients and the Group undertakes constant market monitoring and period pricing revision to mitigate risks. Commercial initiatives are aligned with our major clients and this is complemented by an ongoing focus on technology.
The Group's track record of innovation and diversification ensures the Group offers best-in-class services with a global capability. The Group is focused on integrating acquisitions and delivering tangible synergies. This is supported by robust governance and programme management structures.
We maintain a dedicated international marketing team who promote the benefits of listing on our markets to international issuers, the global advisory community and other stakeholders.
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Increasing |
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Compliance
There is a risk that one or more of the Group's entities may fail to comply with the laws and regulatory requirements to which it is, or becomes, subject. In this event, the entity in question may be subject to censures, fines and other regulatory or legal proceedings. |
The Group continues to maintain systems and controls to mitigate compliance risk. Compliance policies and procedures are regularly reviewed to ensure that Group entities and staff are compliant with applicable laws and regulations and uphold our corporate standards. Staff are subject to mandatory compliance training.
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Increasing |
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Transformation
The Group is exposed to transformation risks (risk of loss or failure resulting from change/transformation) given the current levels of change and alignment activity taking place across the Group. As part of the alignment processes, the Group targets specific synergy deliveries.
A failure to successfully align the businesses of the 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, regulatory relationships and management time.
The additional work related to M&A and alignment activities could have an adverse impact on the Group's day-to-day performance and/or key strategic initiatives which could damage the Group's reputation.
The size and complexity of the recent acquisitions and the recent merger proposal have increased the Group's change management and transformation risks. However, it has also increased its opportunities to compete on a global scale. |
The LSEG Enterprise-wide Risk Management Framework (ERMF) ensures appropriate Risk Management across the Group, and the governance of the enlarged Group is aligned and strengthened as appropriate. The Group performs regular reporting of change performance, including ongoing alignment activity.
Each major initiative is overseen by a Steering Committee which monitors the associated risks closely and is typically chaired by the Chief Financial Officer or the Director of Corporate Strategy and includes Executive Committee members. Regular reports are submitted to the Executive Committee, the Board Risk Committee and the Board. |
Increasing |
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Reputation/Brand
A number of the Group's businesses have iconic national brands that are well-recognised at international as well as at national levels. The strong reputation of the Group's businesses and their valuable brand names are a key competitive strength. Any events or actions that damage the reputation or brands of the Group could adversely affect its business, financial condition and operating results. Failure to protect the Group's Intellectual Property rights adequately could result in costs for the Group, negatively impact the Group's reputation and affect the ability of the Group to compete effectively.
Further, defending or enforcing the Group's Intellectual Property rights could result in the expenditure of significant financial and managerial resources, which could adversely affect the Group's business, financial condition and operating results. |
LSEG has policies and procedures in place which are designed to ensure the appropriate usage of the Group's brands and to maintain the integrity of the Group's reputation.
LSEG actively monitors the usage of its brands and other Intellectual Property in order to prevent or identify and address any infringements. The Group protects its Intellectual Property by relying upon a combination of trade mark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other contractual arrangements with its affiliates, clients, customers, suppliers, strategic partners and others. |
Risk Level Static |
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 results, taxation or regulatory information.
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Risk Description |
Mitigation |
Risk level |
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Market risk Non-Clearing Foreign Exchange Risk The broader geographical footprint of the Group has increased the complexity of foreign exchange risk. Interest Rate Risk Interest rate risk arises through the Group's borrowings and the Group's treasury investment activities. Clearing The Group's clearing providers assume the counterparty risk for all transactions that are cleared through their markets. In the event of default of their clearing members, therefore, credit risk will manifest itself as market risk. As this market risk is only present in the event of default this is referred to as "latent market risk". This risk is greater if market conditions are unfavourable at the time of the default.
Our clearing services guarantee final settlement of trades and manage counterparty risk for a range of assets and instruments including cash equities, derivatives, energy products, agricultural derivatives, interbank collateralised money loans and government bonds. The latent market risk therefore includes interest rate risk, foreign exchange risk, equity risk and commodity price risk as well as country risk, issuer risk and concentration risk.
Default by a clearing member could adversely affect the Group CCPs' revenues and its customers' goodwill and, in extreme circumstances, with certain clearing providers, could lead to a call on the Group CCPs' own capital.
In addition, certain CCPs within the Group have interoperability margin arrangements with other counterparties requiring collateral to be exchanged in proportion to the value of the underlying transactions involved. The relevant clearing provider entities within the Group are therefore exposed to the risk of a default of such counterparties under such arrangements. |
This is managed via a programme of monitoring and of hedging where desired via foreign exchange trades or cross-currency swaps.
The risk is monitored closely and managed through a combination of local operating company treasury units and a central Group Treasury function.
All our CCPs are compliant with the appropriate regulatory requirements regarding margin calculations, capital and default rules.
Under the ERMF, CCP latent market risk must be managed in compliance with the Group CCP Financial Risk Policy as well as policies of the CCPs themselves.
There has been a very significant strengthening of CCP members' balance sheets over recent years, reducing the risk to LSEG CCPs of a member default. The banks' own recovery and resolution plans also provide a degree of protection to the CCP in the event of a bank becoming troubled. The financial risks associated with clearing operations are further 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 deposits margins, computed at least daily, to cover the theoretical costs which the clearing service would incur in order to close out open positions in the event of the member's default. Clearing members also contribute to default funds --Regular 'Fire Drills' are carried out to test the operational soundness of the CCPs' default management processes
A centralised risk oversight dashboard with associated VaR model has been implemented by LSEG, covering key clearing services. This model consolidates the underlying risk by member across the services in the engine, enabling LSEG to assess cumulative counterparty risks across the CCPs. This information is consolidated with CCP liquidity management balances and is available daily to the Executive Committee and Board, including limits and RAG ratings.
Committees overseeing latent market and member risks meet on a regular basis.
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Risk Level Static |
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Liquidity risk (clearing)
There are 2 distinct types of risk commonly referred to as liquidity risk - market liquidity risk and funding liquidity risk. The former is the risk that it may be difficult or expensive to liquidate a large or concentrated position.The latter is the risk that the CCP may not have enough cash to pay for physically settled securities delivered by a non-defaulter that cannot be on-sold to a defaulter.
The Group CCPs collect clearing members' margin and/or default funds contributions in cash and/or in highly liquid securities. To maintain sufficient ongoing liquidity and immediate access to funds, the Group CCPs deposit the cash received in highly liquid and secure investments, such as sovereign bonds and reverse repos, as mandated under EMIR; securities deposited by clearing members are therefore held in dedicated accounts with CSDs and/or ICSDs. The Group CCPs also hold a small proportion of their investments in unsecured bank and money market deposits. The successful operation of these investment activities is contingent on general market conditions and there is no guarantee that such investments may be exempt from market losses.
Furthermore, there is a risk that a counterparty default could lead to losses to the Group. Such a loss may occur due to the default of an issuer of bonds in which funds may be invested or the default of a bank in which funds are deposited. The Group CCPs manage their exposure to credit and concentration risks arising from such investments by maintaining a diversified portfolio of high quality issuers and of banking counterparties.
The Group relies on established policies with minimum counterparty credit criteria, instructions, rules and regulations, as well as procedures specifically designed to actively manage and mitigate credit risks. There is no assurance, however, that these measures will be sufficient to protect the Group's CCPs from a counterparty default. |
Group CCPs have put in place regulatory compliant liquidity plans for day-to-day liquidity management, including contingencies for stressed conditions. Group CCPs have multiple layers of defence against liquidity shortfalls including; intraday margin calls, minimum cash balances, access to contingent liquidity arrangements, and, for certain CCPs, access to central bank liquidity.
Under the ERMF, CCP investments must be made in compliance with the Group CCP Financial Risk Policy (as well as the Policies of the CCPs themselves). These Policies stipulate a number of Risk Management standards including investment limits (secured and unsecured) and liquidity coverage ratios. Committees overseeing CCP investment risk meet regularly.
Each CCP monitors its liquidity needs daily under stressed and unstressed assumptions and reports to the Group Financial Risk Committee each month.
CCP counterparty risk including liquidity management balances and counterparty disintermediation risk is consolidated daily at the Group level and reported to the Executive Committee, including limits and status rating. |
Increasing |
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Settlement and custodial risks (clearing)
The Group's CCPs are exposed to operational risks associated with clearing transactions and the management of collateral, particularly where there are manual processes and controls. While the Group's CCPs have in place procedures and controls to prevent failures of these processes, and to mitigate the impact of any such failures, any operational error could have a material adverse effect on the Group's reputation, business, financial condition and operating results.
In addition, the Group provides routing, netting and settlement services to ensure that cash and securities are exchanged in a timely and secure manner for a multitude of products. There are operational risks associated with such services, particularly where processes are not fully automated. A failure to receive funds from participants may result in a debiting of the Group's cash accounts which could have a material adverse effect on the Group's business, financial condition and operating results. |
Counterparty 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 while formalising procedures for all services. The Central Securities Depository (CSD) mitigates IT risks by providing for redundancy of systems, daily backup of data, fully updated remote recovery sites and SLAs with outsourcers. Liquidity for CSD operations is provided by the Bank of Italy. |
Risk Level Static |
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For more information on these risks see the "Post Trade Services" section of the Segmental Review (on pages 26-30), and Note 2 to the accounts, "Financial Risk Management" (on pages 108-112). |
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Capital risk Principal risks to managing the Group's capital are: --In respect of regulated entities, capital adequacy compliance risk (the risk that regulated entities do not maintain and report sufficient qualifying capital to meet regulatory requirements) and capital reporting compliance risk (the risk that regulated entities fail to comply with capital reporting and regulatory obligations). If a regulated entity in the Group fails to ensure sufficient capital resources are maintained to meet regulatory requirements, this could lead to loss of regulatory approvals and/or financial sanctions --In respect of regulated and unregulated entities, commercial capital adequacy and quality risk (the risk that Group and solo entities do not maintain both sufficient quantity and quality of capital to meet commercial requirements) and investment return risk (the risk that capital is held in subsidiaries or invested in projects that generate a return that is below the Group's cost of capital) --Availability of debt or equity (whether specific to the Group or driven by general financial market conditions) |
The Group's Capital Management Policy provides a framework to ensure the Group maintains suitable capital levels (both at Group and solo entity levels), and effectively manages the risks thereof. The Group's Treasury Policy recognises the need to observe regulatory requirements in the management of the Group's resources.
The Risk Appetite approved by the Board includes components related to the Group's leverage ratios and capital risks; Key Risk Indicators are monitored regularly. 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 Financial Risk Committee, the Executive Committee and the Board. 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 regularly assesses debt and equity markets to maintain access to new capital at reasonable cost. The Group is mindful of potential impacts on its key metrics when considering changes to its capital structure. |
Risk Level Static |
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For more information on this risk see Note 2 to the accounts, "Financial Risk Management" on pages 108-112. |
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OPERATIONAL RISKS
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.
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Risk Description |
Mitigation |
Risk level |
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Technology
Secure and stable technology performing to high levels of availability and throughput continues to be critical to the support of the Group's businesses. Technology failures may impact our clients, potentially leading to a loss of trading or clearing volumes or impacting our information services activities.
The Group continues to consolidate its IT development and operations in the MillenniumIT infrastructure to provide greater control and efficiency. This focus of activity means there is a risk of resource over-stretch to meet both the requirements of the Group and those of third parties. Continued innovation and investment in new trading/ information systems can lead to further resource stretch in coping with increased volumes and new product development.
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, clearing, settlement, 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 teams mitigate the risk of resource over-stretch by ensuring prioritisation of key development and operations activities, and resource utilisation and allocation are 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. The Group monitors new technological developments and opportunities such as Blockchain. |
Risk Level Static |
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For more information see the "Technology Services" section of the Segmental Review, on pages 34-35. For information on LCH.Clearnet see section of the Segmental Review on pages 28-30.
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Change management
The considerable change agenda is driven by both internal and external factors. Internal factors include the diversification strategy of the Group and its drive for technology innovation and consolidation. External factors include the changing regulatory landscape and requirements which necessitate changes to our systems and processes.
There are a significant number of major, complex projects and strategic actions underway concurrently, that, if not delivered to sufficiently high standards and within agreed timescales, 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 if the execution is not managed appropriately. Synergies and cost benefits may not be delivered to anticipated levels. |
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 is managed via a dedicated Programme Board overseen by members of the Executive Committee.
Software design methodologies, testing regimes and test environments are continuously being strengthened to minimise implementation risk. |
Risk Level Static |
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For more information, see the Chairman's statement on pages 4-5, and the Chief Executive's review on pages 6-7. |
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Investment Management (operations)
The Group is currently in the process of divesting Russell Investments. In the period through to completion of the proposed sale of Russell Investments (the Disposal), there are risks relating to the Disposal itself, as well as business risks during this transitional phase. This separation could take longer to complete than anticipated, increasing the risk of errors in the day-to-day operations of the business and/or result in higher than expected costs to the Group or such loss of customers. This could have an adverse effect on the business, financial condition, operating results and customer relationships of the Group.
Rising global demand for multi-managers/single sub-advisor products has resulted in increasing competitive pressures for our Investment Management (IM) business. The generally increasing use of ETFs and other passive investment products also drives competition, which could impact the growth of assets under management and fees thereof.
The IM business model is reliant on data and services provided by third-party suppliers in custody, and certain money managers and distributors. In North America, the IM business has established strong relationships with advisors at independent broker-dealers who distribute to individual retail clients and is reliant upon these third-party advisors to ensure that its products are being marketed properly and are well matched to the needs of the individual clients.
In most asset classes and some investment strategies there exist investment manager concentrations or situations where mandates represent a substantial portion of a manager's AUM. While the IM business faces little direct financial exposure to difficulties that a third-party supplier might experience, problems experienced by a supplier might expose the Group to reputational risk, regulatory risk, and potential litigation risk. |
We monitor key regulatory developments in each of the jurisdictions where the Investment Management operations and its advisory business are active. We also work closely with industry trade associations and State trade associations to promote the interests of our clients.
There are in place a number of processes and governance practices that focus on the prudent management of third-party exposure. Russell's Operational Risk processes include a formalised review of third-party vendors. Contracting and negotiation are centralised to ensure all relationships are properly contracted.
Service level agreements, key performance indicators and reviews of the independent control attestations of strategic vendors (SSAE16s) are important elements in the third-party supplier control framework.
The third-party advisors who distribute our investment products to individual retail clients are subject to numerous, increasingly stringent regulations aimed at improving transparency and ensuring that clients are being well served, including applying the more demanding fiduciary standards to the relationship between financial advisors and their clients. Risk Management of key vendors for our IM business includes centralised teams for credit, market and operational risk along with compliance/Risk Management personnel in each of its key operating regions.
In addition, there is monthly monitoring and reporting to senior management of investment manager concentrations, and regular reviews with third party investment managers by both the business units and Russell's Risk Management team. |
Risk Level Static |
|
Investment Management (consulting)
The IM business includes a consulting business, the clients of which are generally very large and sophisticated institutional pension funds or Sovereign Wealth Funds, and also a business offering financial services directly to retail investors in the UK. Adverse investment experience for clients of either of these businesses could expose the Group to reputational risk or litigation risk. |
The IM business has a number of policies and processes in place to manage the risks associated with its consultancy activities and the activities of the retail facing business.
The consultancy business benefits from access to the same tools and expertise as the core IM business. Russell's Risk Management team is represented in the governance process which oversees key investment models utilised by the Investment Management group and by its consultants in developing investment strategy recommendations. |
Risk Level Static |
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Security threats
The Group is reliant upon secure premises to protect its employees and physical assets as well as appropriate safeguards to ensure uninterrupted operation of its IT systems and infrastructure.
The threat of cyber crime requires a high level of scrutiny as it may have an adverse impact on our business. Terrorist 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. |
Security threats are treated very seriously. The Group has robust physical security arrangements, and extensive IT measures are in place to mitigate technical security risks. The Group is supported by the Centre for the Protection of National Infrastructure (CPNI) in the UK, with both physical and IT security teams monitoring intelligence and liaising closely with police and global Government agencies.
A third party security monitoring service is retained to assist with monitoring global physical security events with the potential to impact Group operations.
The Group has well established and regularly tested business continuity and crisis management procedures. The Group risk function assesses its dependencies on critical suppliers and ensures robust contingency measures are in place. |
Increasing |
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Employees
The calibre and performance of senior management and other key employees, taken together, is critical to the success of the Group. The Group's ability to attract and retain key personnel is dependent on a number of factors. This includes (but not exclusively) prevailing market conditions, compensation packages offered by competing companies and any regulatory impact thereon. These factors also encompass the Group's ability to continue to have appropriate variable remuneration and retention arrangements in place, which help drive strong business performance and impact the size of the local labour force with relevant experience and the number of businesses competing for such talent.
There can be no assurance that the Group will be successful in attracting and retaining the personnel it requires, which may adversely affect the Group's ability to conduct its business through an inability to execute business operations and strategies effectively. |
The Group operates a performance management and appraisal system. Executive development opportunities are provided and the Nominations Committee is responsible for considering succession plans for key senior positions. In addition, a programme of succession planning is operated by the Group to minimise the impact of the loss of key staff critical to the operation of the business. 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 closely monitored. A centralised training budget allows a coordinated approach to development across the Group.
We continue to enhance our talent management approach and maintain a rigorous recruitment and selection process. This process is managed by a new in-house team that reports to the Group Head of Talent. |
Risk Level Static |
|
For more information see "Our wider responsibility", on pages 36-37 and Remuneration Report, on pages 70-87.
|
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Financial Risk Management
The Group seeks to protect its financial performance and the value of its business from exposure to capital, credit, concentration, country, liquidity and market (including foreign exchange, fair value and cash flow, interest rate and other price) risks.
Financial Risk Management is not speculative. It is performed both 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 their regulatory and operational risks. This includes clearing operations at the Group's CCPs (at LCH.Clearnet Group and CC&G) and investment management activities at the Frank Russell Company that adhere to local regulation and operate under locally approved risk and investment policies.
The Group Chief Risk Officer's team provides assurance that the Group's Risk Management, governance and internal control processes are operating effectively. The Financial Risk Committee, a sub-committee of the Group Executive Committee and 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 Financial Risk Committee (which is also chaired by the Chief Financial Officer),meets regularly to monitor the management of and controls around foreign exchange, interest rates, credit and concentration risks and the investment of excess liquidity in addition to its oversight of the Group's funding arrangements. Both committees provide the Group's senior management with assurance that the treasury and risk operations are performed in accordance with Group Board approved policies and procedures.
Regular updates, on a range of key criteria as well as new developments, are provided through the Enterprise Risk Management Framework to the Group Risk Committee. See Risk Management oversight, pages 44-45, for further detail on the Group's risk framework.
Capital risk
|
Risk description |
Risk management approach |
|
The Group is profitable and strongly cash generative and its capital base comprises equity and debt capital. However, the Group recognises the risk that its entities may not maintain sufficient capital to meet their obligations or they may make investments that fail to generate a positive or value enhancing return.
The Group comprises regulated and unregulated entities. It considers that: --increases in the capital requirements of its regulated companies; or --negative yields on its investments of cash; or --a scarcity of debt or equity (driven by its own performance or financial market conditions) either separately or in combination are the principal risks to managing its capital. |
The Group focuses upon its overall cost of capital as it seeks, within the scope of its risk appetite, 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.
As at 31 December 2015, the book value of the Group's consolidated equity before non-controlling interests was £2,743.9 million (31 December 2014: £2,526.5 million) and the book value of its consolidated debt was £1,608.9 million (31 December 2014: £1,726.4 million). The Group can manage its capital structure and react to changes in economic conditions 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.
Whilst the Company is unregulated, the regulated entities within the Group continuously monitor compliance with the capital requirements set by their respective competent authorities and the terms of reference of the Financial Risk Committee includes oversight of the Group's Capital Management Policy. The Capital Management Policy seeks to ensure that compliance with local regulations is maintained and that there is a robust evaluation, undertaken by the Group's Investment Committee, of the impact of new investments, across the Group, on its capital position.
Regulated entities within the Group have to date predominantly issued equity and hold cash to satisfy their local regulatory capital requirements. At 31 December 2015, £952.8 million was held to meet regulatory and operational requirements across these entities. This amount has remained relatively stable through the year and includes cash, cash equivalents and liquid investments classified as financial assets held at fair value and comprises the Frank Russell Company's cash and cash equivalents held to meet the regulatory requirements of its investment management business, the LCH.Clearnet Group's regulated cash and cash equivalents, and the £200.0 million generally set aside by other Group operations. £719.1 million of this amount has been included in cash and cash equivalents from continuing operations (31 December 2014: £1,011.3 million). We believe that amounts held by Group companies are sufficient to comfortably support current regulatory frameworks. The level of amounts set aside by the Group for these purposes remains subject to on-going review with regulators, particularly in Europe and the USA.
To maintain the financial strength to access new capital at reasonable cost and sustain an investment grade credit rating, the Group monitors its net leverage ratio which is operating net debt (i.e. net debt after 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 in considering increases to its borrowings.
As at 31 December 2015, net leverage had reduced back to 1.7 times (31 December 2014: 2.1 times), and is within the Group's target range. The Group is comfortably in compliance with its bank facility ratio covenants (net leverage and debt service) and these measures do not inhibit the Group's operations or its financing plans. |
Credit and concentration risk
|
Risk description |
Risk management approach |
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The Group's credit risk relates to its 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
In their roles as central counterparty (CCP) clearers to financial market participants, the Group's CCPs guarantee final settlement of transactions acting as buyer towards each seller and as seller towards each buyer. They manage substantial credit risks as part of their operations including unmatched risk positions that might arise from the default of a party to a cleared transaction. For more information see Principal risks and uncertainties, pages 46-53.
Notwithstanding regulations in Europe and the US that require CCPs to invest predominantly in secured instruments or structures (such as government bonds and reverse repos), CC&G and the LCH.Clearnet Group CCPs continue to be able to maintain up to 5% of their total deposits at commercial banks on an unsecured basis. Through this potential for its CCPs to invest on an unsecured basis (as well as by certain other regulated and unregulated operations observing agreed investment policy limits), the Group will continue to face the risk of direct loss from a deterioration or failure of 1 or more of its unsecured investment counterparties.
Concentration risk may arise through Group entities having large individual or connected exposures to groups of counterparties whose likelihood of default is driven by common underlying factors. This is a particular focus of the investment approach at the Group's CCPs. |
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, the recurring nature of billing and collection arrangements and, historically, a low incidence of default. Furthermore, the Group is exposed to a large number of customers and so concentration risk on its receivables is deemed by management as low.
Non-CCP entities Credit risk of cash and cash equivalents is managed by limiting exposure to counterparties with credit rating levels below policy minimum thresholds, potentially overlaid by a default probability assessment. Except where specific approval is arranged to increase this limit for certain counterparties, a maximum of £50.0 million may be invested for up to 12 months with counterparties rated long term AAA (or equivalent), through to a maximum £25 million overnight with counterparties rated short term A-2 (or equivalent). Derivative transactions and other treasury receivable structures are undertaken or agreed with well capitalised counterparties and are authorised by policy, to limit the credit risk underlying these transactions.
CCPs To address the market participant and latent market risk, the Group's CCPs have 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 and collected at least daily, to cover the exposures and theoretical costs which the CCP might incur in order to close out open positions in the event of the member's default. Margins are calculated using established and internationally acknowledged risk models and are debited from participants' accounts through central bank accounts and via commercial bank payment systems. Minimum levels of cash collateral are required and non-cash collateral is re-valued daily.
Clearing members also contribute to default funds managed by the CCPs 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 the risk committees of the respective CCPs. Furthermore, each of the Group's CCPs reinforces its capital position to meet the most stringent relevant regulatory requirements applicable to it, including holding a minimum amount of dedicated own resources to further underpin the protective credit risk framework in the event of a significant market stress event or participant failure. An analysis of the aggregate clearing member contributions to default funds across the CCPs is shown below:
Investment counterparty risk for CCP margin and default funds is managed by investing the cash element in instruments or structures deemed "secure" by the relevant regulatory bodies including through direct investments in highly rated, "regulatory qualifying" sovereign bonds and supra-national debt, investments in tri-party and bi-lateral reverse repos (receiving high quality government securities as collateral) and, in certain jurisdictions, deposits with the central bank. The small proportion of cash that is invested unsecured is placed for short durations with highly rated counterparties where strict limits are applied with respect to credit quality, concentration and tenor.
Associated liquidity risks are considered in the investment mix and discussed further below.
To address concentration risk, the Group maintains a diversified portfolio of high quality, liquid investments and uses a broad range of custodians, payment and settlement banks and agents. The largest concentration of treasury exposures as at 31 December 2015 was 24.8% of the total investment portfolio to the French Government (31 December 2014: 11.4% to the US Government).
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Country risk
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Risk description |
Risk management approach |
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Distress can result from the risk that certain governments may be unable or find it difficult to service their debts. This could have adverse effects, particularly on the Group's CCPs, potentially impacting cleared products, margin collateral, investments, the clearing membership and the financial industry as a whole. |
Specific risk frameworks manage country risk for both fixed income clearing and margin collateral and all clearing members are monitored regularly against a suite of sovereign stress scenarios. Investment limits and counterparty and clearing membership monitoring are sensitive to changes in ratings and other financial market indicators, to ensure the Group's CCPs are able to measure, monitor and mitigate exposures to sovereign risk and respond quickly to anticipated changes. Risk Committees maintain an on-going watch over these risks and the associated policy frameworks to protect the Group against potentially severe volatility in the sovereign debt markets. The Group's sovereign exposures of £1 billion or more at the end of either of the financial reporting periods shown below are:
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Liquidity, settlement and custodial 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, the Group's CCPs, the Frank Russell Company investment management businesses and certain other subsidiary companies are required to maintain a level of liquidity (consistent with regulatory requirements) to ensure the smooth operation of their respective markets and to maintain operations in the event of a single or multiple market stress event or member failure. This includes the potential requirement to liquidate the position of a clearing member under a default scenario including covering the associated losses and the settlement obligations of the defaulting member.
The Group is exposed to the risk that a payment or settlement bank could fail or that its systems encounter operational issues, creating liquidity pressures and the risk of possible defaults on payment or receivable obligations.
The Group uses third party custodians to hold securities and is therefore exposed to the custodian's insolvency, its negligence, a misuse of assets or poor administration. |
The combined 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. With the exception of regulatory constraints impacting the Group's CCPs, the Frank Russell Company investment management businesses and certain other regulated entities, funds can generally be lent across the Group or remitted through dividend payments and this is an important component of 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 cover its expected funding requirements and ensure a minimum level of headroom for at least the next 24 months.
The financial strength of lenders to the Group is monitored regularly. During the year ended 31 December 2015, new committed 5 year revolving credit facilities totalling £600 million were arranged by the Company to underpin the Group's financial flexibility and replace the £700 million facility arranged in 2013. The new facility bolsters facility headroom over the medium term and represents the first phase of a review of current facilities in conjunction with a refinancing of the next scheduled debt maturity in July 2016. At 31 December 2015 £518.3 million of the Group's facilities were unutilised.
The Group's CCPs maintain sufficient cash and cash equivalents and, in certain jurisdictions, have access to central bank refinancing or commercial bank liquidity support credit lines to meet the cash requirements of the clearing and settlement cycle. Revised regulations require CCPs to ensure that appropriate levels of back up liquidity are in place to underpin the dynamics of a largely secured cash investment requirement, ensuring that the maximum potential outflow under extreme market conditions is covered (see Credit and concentration risk section above).
The Group's CCPs monitor their liquidity needs daily under stressed and unstressed assumptions.
In addition, certain Group companies, including the CCPs, maintain operational support facilities from banks to manage intraday and overnight liquidity. Where possible, the Group employs guaranteed delivery versus payment settlement techniques and manages CCP margin and default fund flows through central bank or long-established, bespoke commercial bank settlement mechanisms. Monies due from clearing members remain the clearing members' liability if the payment agent is unable to effect the appropriate transfer.
Custodians are subject to minimum eligibility requirements, ongoing credit assessment, robust contractual arrangements and are required to have appropriate back-up contingency arrangements in place.
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 reflect the contractual undiscounted cash flows. The borrowings line includes interest on debt that is not yet accrued for.
|
|
As at 31 December 2015 Less than 1 year Between 1 & 2 years Between 2 & 5 years Over 5 years £m £m £m £m Borrowings 973.8 178.3 338.4 314.3 Trade & other payables 463.6 - - - CCP liabilities 456,663.3 - - - 458,100.7 178.3 338.4 314.3
|
|
|
As at 31 December 2014 Less than 1 year Between 1 & 2 years Between 2 & 5 years Over 5 years £m £m £m £m Borrowings 832.3 107.9 728.6 314.3 Trade & other payables 727.4 - - - CCP liabilities 451,467.5 - - - 453,027.2 107.9 728.6 314.3
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|
Market Risk - Foreign Exchange
|
Risk description |
Risk management approach |
|
The Group operates primarily in the UK, Europe and North America, but also has growing and strategically important businesses in Asia, and other alliances and investments across the globe. Its principal currencies of operation are sterling, euro and US dollars.
With the exception of MillenniumIT (a Sri Lankan Rupee reporting entity), which invoices a material proportion of its revenues in US dollars, and LCH.Clearnet Limited (a euro reporting entity), which incurs a majority of its costs in sterling, 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, high value intragroup transactions.
Intragroup dividends may create short term transactional FX exposures but play their part in controlling the level of translational FX exposures the Group faces.
The Group may be exposed from time to time to strategic investments in currencies other than sterling. |
The Group seeks to match the currency of its debt liabilities to the currency of its earnings and cash flows while endeavouring to balance the currency of its assets with its liabilities. In order to mitigate the impact of unfavourable currency exchange movements on earnings and net assets, non-sterling cash earnings are centralised and applied to matching currency debt and interest payments, and where relevant, interest payments on sterling debt re-denominated through the use of cross-currency swaps.
A proportion of the Group's debt is held in or swapped into euro and a proportion is held in US dollars. As at 31 December 2015, £132.2 million of drawn debt was euro denominated (31 December 2014: £140.2 million) and £368.5 million (31 December 2014: £389.5 million) of cross-currency swaps, directly linked to sterling debt, were designated as a hedge of the net investment in the Italian Group. As at 31 December 2015, £591.6 million of drawn debt was US dollar denominated (31 December 2014: £662.1 million) and provided a hedge of the net investment in the Frank Russell Company. A profit of £12.5 million for the year ended 31 December 2015 (period to 31 December 2014: profit of £13.0 million) on foreign currency borrowings, inter company loan assets and liabilities and cross-currency swap hedges was recognised in equity. The net investment hedges were 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) with appropriate derivative instruments or by settling currency payables or receivables within a short timeframe. Where possible, hedge accounting for derivatives is considered in order to mitigate material levels of income statement volatility.
In addition to projecting and analysing its earnings and debt profile by currency, the Group reviews sensitivities to movements in exchange rates which are appropriate to market conditions. The Group has considered movements in the euro and the US dollar over the year ended 31 December 2015 and period ended 31 December 2014, and has concluded that a 10% movement in rates is a reasonable level to measure the risk to the Group. The impact on post tax profit and equity for the year/period ended 31 December is set out in the table below: |
|
31 December 2015 31 December 2014
Post tax profit Equity Post tax profit Equity £m £m £m £m Euro Sterling weaken 3.5 17.7 4.3 14.2 Sterling strengthen (3.1) (16.0) (3.9) (12.4)
US Dollar Sterling weaken 3.8 (51.2) 2.8 (58.7) Sterling strengthen (3.4) 46.4 (2.6) 53.3
This reflects foreign exchange gains or losses on translation of euro and US dollar denominated trade receivables, trade payables, financial assets at fair value through profit or loss including euro and US dollar denominated cash and borrowings. The impact on the Group's operating profit for the year before amortisation of purchased intangible assets and non-recurring items, of a 10 euro cent and 10 US dollar cent movement in the sterling-euro and sterling-US dollar rates respectively, can be seen below: 31 December 2015 31 December 2014 £m £m
Euro Sterling weaken 24.5 19.1 Sterling strengthen (21.2) (15.2)
US Dollar Sterling weaken 5.5 12.6 Sterling strengthen (6.3) (11.1) |
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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.
The Group's CCPs face interest rate exposure through the impact of changes in the reference rates used to calculate member liabilities versus the yields achieved through their investment activities. |
Group interest rate management policy focusses on protecting the Group's credit rating and maintaining compliance with bank covenant requirements. To support this objective, a minimum coverage of interest expense by EBITDA of 7 times, and a maximum floating rate component of 50% of total debt are targeted.
This approach reflects: (i) a focus on the Group's cost of gross debt rather than its net debt given the material cash and cash equivalents held specifically for regulatory purposes; (ii) the short duration allowed for investments of cash and cash equivalents held for regulatory purposes which, by their nature, generate low investment yields; (iii) a view that already low market yields are unlikely to move materially lower; and (iv) the broad natural hedge of floating rate borrowings provided by the significant balances of cash and cash equivalents held effectively at floating rates of interest.
As at 31 December 2015, consolidated net interest expense cover was measured over the 12 month period at 11.7 times (31 December 2014: 9.4 times) and the floating rate component of total debt was 42% (31 December 2014: 46%).
In the Group's CCPs, interest bearing assets are generally invested for a longer term than interest bearing liabilities, whose interest rate is reset daily. This makes investment revenue vulnerable to volatility in overnight rates and shifts in spreads between overnight and term rates.
Interest rate exposures (and the risk to CCP capital) are managed within defined risk appetite parameters against which sensitivities are monitored daily.
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 1 percentage point upward movement (with a limited prospect of material downward movement) reflects a reasonable level of risk to current rates. At 31 December 2015, at the Group level, if interest rates on sterling-denominated, euro denominated and US dollar-denominated cash and borrowings had been 1 percentage point higher with all other variables held constant, post-tax profit for the year would actually have been £2.8 million higher (31 December 2014: £1.5 million higher) mainly as a result of higher interest income on floating rate cash and cash equivalents partially offset by higher interest expense on floating rate borrowings.
At 31 December 2015, at the CCP level (in aggregate), if interest rates on the common interest bearing member liability benchmarks of Eonia, Fed Funds and Sonia, for euro, US dollar and sterling liabilities respectively, had been 1 percentage point higher, with all other variables held constant, the daily impact on post-tax profit for the Group would have been £1.0 million lower (31 December 2014: £1.0 million lower). This deficit would be recovered as investment yields increase as the portfolio matures and is re-invested. |
Market Risk - Other Price Risk
|
Risk description |
Risk management approach |
|
The Frank Russell Company investment management business has material funds under management.
Other price risk arises if, as a result of changes in market prices, the fair value or cash flows associated with Frank Russell Company's managed financial instruments fluctuates (and potentially decline in value). |
The Group announced on 8 October 2015 that it has agreed the sale of the investment management business of the Frank Russell Company in its entirety, subject to customary regulatory and other necessary approvals. The Group continues to progress well with the sale process.
At 31 December 2015, 67% of the Frank Russell Company investment management business's assets under management was invested in equities and alternatives (31 December 2014: 67%). If the value of these assets had decreased by 10%, Frank Russell Company's total Net Investment Management Revenue for the year to 31 December 2015 would have seen a corresponding fall of approximately £24 million (period ended 31 December 2014: £29 million).
Russell is well diversified in terms of geography, client type and products and strategies. It maintains a balanced approach across these criteria as shown below: |
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31 December 2015 31 December 2014 Geography Assets under management US Based 47% 47% Clients Non - US based 53% 53% Number of countries 35 35
Client Client type Institutional 65% 64% US based retail 23% 24% Non-US based retail 12% 12%
Product/ No. of institutional clients and retail partners 1700 1800 Strategy No. of funds and separate accounts >400 >400 Assets under management represented in top 20 30% 32% Products
The Frank Russell Company does not guarantee the performance of its investment management business.
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The Annual Report contains the following statements regarding responsibility for financial statements on page 91:
"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 and of the profit or loss for that year.
In preparing those financial statements, the Directors are required to:
--select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently
--present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
--make judgements that are reasonable
--provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance
--state whether the Group financial statements have been prepared in accordance 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 adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and
the Group and to enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006, other applicable laws and regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules, and, as regards the Group financial statements, Article 4 of the IAS Regulation. The Directors are also responsible for safeguarding the assets of the Company and the Group and 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.
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 Strategic Report sections of the Annual Report on pages 44-53. 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 page 46.
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 49-51. 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 December 2015 was £2,132.2 million which is committed until July 2016 or beyond (Period ended 2014: £2,240 million), described further in the Financial Review on page 43.
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.
Each of the Directors, whose names and functions are set out on pages 54-56 of this Annual Report confirms that, to the best of their knowledge and belief:
--the Group financial statements, which have been 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
--the report of the Directors 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
--they consider that the Annual Report and Accounts 2015, taken as a whole, is fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model
and strategy
By Order of the Board
Lisa Condron
Group Company Secretary
4 March 2016"
"The Annual Report contains the following statements regarding details of certain related party transactions on pages 145-156:
"33. 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:
|
Period ended 31 December 2015 |
Year ended 31 March 2014 |
||
|
£m |
£m |
||
|
Salaries and other short term benefits |
13.0 |
9.7 |
|
|
Pensions |
0.9 |
0.8 |
|
|
Share based payments |
13.1 |
7.9 |
|
|
27.0 |
18.4 |
||
Inter-company transactions with subsidiary undertakings
The Company has loans with some subsidiary undertakings. Details as at 31 December 2015 are shown in the table below:
|
|
Amount in millions due (owed to)/from as at |
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|
|
Interest in millions (charge)/credit |
||
|
Loan counterparty |
31 December 2015 |
31 December 2014 |
Term |
Interest rate as at 31 Dec 2014 |
Period ended 31 December 2015 |
Period ended 31 December 2014 |
|
|
London Stock Exchange plc |
£(170.9)m |
£(158.0)m |
25 years from May 2006 with five equal repayments commencing in May 2027 |
LIBOR plus 2% per annum |
£(4.4)m |
£(3.4)m |
|
|
London Stock Exchange Employee Benefit Trust |
£21.0m |
£13.2m |
Repayable on demand |
Non-interest bearing |
nil |
nil |
|
|
London Stock Exchange Group Holdings (Italy) Limited |
€97.7m |
€201.2m |
Fifth anniversary of the initial utilisation date which was April 2013 |
EURIBOR plus 1.5% per annum |
€2.4m |
€1.0m |
|
|
London Stock Exchange Group Holdings Limited |
£340.0m |
£416.3m |
Tenth anniversary of the initial utilisation date which was October 2009 |
LIBOR plus 4.0% per annum |
£18.3m |
£16.0m |
|
|
LSE Reg Holdings Limited |
€13.5m |
€2.7m |
Fifth anniversary of the initial utilisation date which was December 2013 |
EURIBOR plus 1.2% per annum |
- |
- |
|
|
LSE Reg Holdings Limited |
£(1.0)m |
£0.4m |
Fifth anniversary of the initial utilisation date which was December 2013 |
LIBOR plus 1.2% per annum |
- |
- |
|
|
London Stock Exchange (C) Limited |
€48.4m |
€55.7m |
Fifth anniversary of the initial utilisation date which was April 2012 |
EURIBOR plus 1.5% per annum |
€0.7m |
€0.6m |
|
|
London Stock Exchange (C) Limited |
£12.2m |
£8.6m |
Fifth anniversary of the initial utilisation date which was April 2012 |
LIBOR plus 1.5% per annum |
£0.2m |
£0.1m |
|
|
London Stock Exchange Group Holdings (Luxembourg) |
$17.4m |
$5.8m |
Fifth anniversary of the initial utilisation date which was December 2014 |
LIBOR plus 1.5% per annum |
£0.1m |
nil |
|
|
LSEG Employment Services Limited |
£11.0m |
nil |
Fifth anniversary of the initial utilisation date which was January 2015. |
LIBOR plus 1.2% per annum |
£0.1m |
nil |
|
During the period, the Company charged in respect of employee share schemes £3.7 million (period ended 31 December 2014: £1.5 million) to London Stock Exchange plc, £5.0 million (period ended 31 December 2014: nil) to LSEG Employment Services Limited, £0.7 million (period ended 31 December 2014: £0.1 million) to London Stock Exchange Group Holdings Inc, £0.3 million (period ended 31 December 2014: £0.1 million) to SSC Global Business Services Limited (previously London Stock Exchange (OV) Limited), £0.2 million (period ended 31 December 2014: £0.1 million) to Turquoise Global Holdings Limited, £0.2 million (period ended 31 December 2014: nil) to UnaVista Limited, £3.1 million (period ended 31 December 2014: £0.7 million) to London Stock Exchange Group Holdings (Italy) Ltd, £1.1 million (period ended 31 December 2014: £0.2 million) to Millennium Group, £1.9 million (period ended 31 December 2014: £0.2 million) to FTSE Group, £4.3 million (period ended 31 December 2014: £1.4 million) to LCH.Clearnet Group and £0.7 million (period ended 31 December 2014: nil) to the Frank Russell Group.
The Company received dividends of £125.2 million (period ended 31 December 2014: £156.0 million) from its subsidiary London Stock Exchange plc.
The Group had £0.2 million (31 December 2014: nil) receivable from associates."
This information is provided by RNS
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