Annual Financial Report

RNS Number : 7224T

London Stock Exchange Group PLC

22 March 2019

 

London Stock Exchange Group plc Annual Report and Accounts, Notice of Annual General Meeting 2019, Corporate Sustainability Report, UK Gender Pay Gap Report and related documents.

The Annual Report and Accounts of London Stock Exchange Group plc (the "Group") for the year  ended 31 December 2018 (the "Annual Report"), Notice of Annual General Meeting 2019 (the "AGM Notice") and related form of proxy for the Group's 2019 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 http://www.morningstar.co.uk/uk/NSM.

London Stock Exchange Group has also published today its Corporate Sustainability Report 2018, which is available on https://www.lseg.com/about-london-stock-exchange-group/corporate-responsibilty and its UK Gender Pay Gap Report 2018, which is available on https://www.lseg.com/about-london-stock-exchange-group/corporate-responsibilty.

London Stock Exchange Group plc	Paul Froud - Investor Relations	[phone]
	Gavin Sullivan/Lucie Holloway - Media	[phone]

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 1 March 2019 (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:

"Chairman's Statement

Overview

By any standards 2018 was an extraordinary year with a confluence of major events and trends in world affairs creating a complex backdrop against which business operated. Trade wars, rising US interest rates, a slowdown in Chinese and European growth, growing populism and, of course, the uncertainties around the process of the UK planning to leave the European Union provided a challenging macroeconomic and political backdrop for all business leaders throughout the year.

I am pleased to report that London Stock Exchange Group successfully managed through this environment with income up 9%, adjusted earnings per share up 17% and a proposed dividend of 60.4 pence per share up 17%.

As the Group continued to deliver strong results, it also pursued strategic initiatives. In December, the Group increased its interest in LCH to 82.6%, while maintaining its customer partnership approach. I am pleased to report also that LCH skilfully navigated the complexities of the risk of a no-deal Brexit in a way that put its clients' interests first, as well as supporting financial stability of the market as a whole. As a result, LCH informed its members that it intends to continue to offer all clearing services for all products and services to all members and clients after 29 March 2019. Our members and clients will continue to benefit from the capital efficiencies of a global service.

LSEG continues to believe that enhanced regulatory supervision and regulation on a global scale will far outweigh any short-term political benefits of fragmenting financial markets, which would introduce unnecessary risk into the financial system and undo much of the global regulation which was introduced post 2008 to make our markets more efficient, stable and safe.

Governance

During the first half of the year, the Group was led by David Warren, who combined his role as CFO with that of interim CEO. His collegiate approach and personal flexibility ensured that the Group lost no momentum and I should like to record my gratitude and that of the Board to him for his excellent work. We were joined by David Schwimmer in August as our new CEO. He was chosen by the Board from a selection of excellent candidates after an extensive search. The Board was impressed by David's deep knowledge of market infrastructure, his evident intellect and clarity of thought and his understated style and collaborative mindset. His first months in post have validated the Board's choice and he has provided excellent leadership during this complex time period.

During 2018, we also welcomed several new Non-Executive Directors to our Board. Marshall Bailey was appointed Chairman of LCH Group, succeeding Professor Lex Hoogduin, who remains Chairman of LCH's two operating subsidiaries. Marshall joined the boards of LCH Group and LSEG,  and brings banking and regulatory skills to the roles. We also welcomed Ruth Wandhöfer, with a background in banking and regulation and a deep interest in emerging technologies, and Professor Kathleen DeRose, who brings experience in both asset management and FinTech.

Mary Schapiro and David Nish both left the Board in 2018 and on behalf of the Board, I would like to thank them for the valuable roles they both performed during a busy time for the Board.

I am delighted that the Board is once again appropriately reflective of the gender balance consistent with our commitment to the UK's HM Treasury Women in Finance Charter and the Hampton Alexander Review, reflecting our wider commitment to supporting a culture that reflects the diversity of our customers and communities in which we operate around the world.

I will retire from the Board this year. It has been a privilege to chair this excellent Group, and it is with considerable regret that I stand down after the AGM. However, it is important to honour the promise I made in 2017 to our shareholders. Don Robert has joined the Board as a Non-Executive Director in January 2019 and will succeed me as Chairman of the Group from May 2019 after the AGM. I wish the Group and all my colleagues well under Don Robert's leadership.

Corporate Sustainability

The Group recognises its wider purpose supporting financial stability and sustainable economic growth by enabling businesses and economies to fund innovation, manage risk and create jobs. The Group is in a privileged position at the heart of financial markets and we are pleased to help corporates, issuers and investors integrate sustainability and diversity as a core part of the capital raising and investment decisions. We also continue to work with global and regional charities which help disadvantaged young people in the communities in which we operate. In 2018, the Group's Foundation donated £1.3 million to various charities and our colleagues also were encouraged to volunteer through two paid volunteer days offered to every employee.

Culture

In the last year, there have been a number of initiatives in the area of corporate governance culminating in the publication of the revised UK Corporate Governance Code. The Code makes reference to the need for boards to consider carefully the culture of the company. During the past year, we have worked with the executive team to develop ways to ensure that we set the tone for appropriate collaboration and customer-focused behaviours, as well as monitor our culture on an ongoing basis. We have had excellent support from the CEO in this endeavour and have introduced a 360-degree appraisal process, as well as other feedback mechanisms detailed elsewhere in this report.

Conclusion

London Stock Exchange Group is in robust health, in a sector with much opportunity. There will be a need to remain selective in the opportunities the Group pursues to ensure a continuing focus on shareholder returns, while also recognising the wider role the Group plays in the financial system. With its strong presence in the EU, sitting also at the heart of the world's major international financial market, and with its focus on customer partnership, open access and innovation, I believe the Group faces a very bright future. It has excellent people with which to capitalise on the opportunities ahead and I thank them for their support and wish them continued success.

Sir Donald Brydon CBE

Chairman

1 March 2019"

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 48 to 57, and, with respect to financial risk management, on pages 133 to 137:

"The management of risk is fundamental to the successful execution of our Strategic Plan and to the resilience of our operations. During 2018 the Group successfully adapted its systems, processes and controls, adjusting to several significant changes in the regulatory environment including MiFID II and the introduction of the EU Benchmark Regulations. The Group continues to support its key markets and deliver stable and resilient services that meet our clients' needs. In prior years, within this section, we have included descriptions of our strategic risk objectives, our current risk focus, a narrative description of our risk appetite, how LSEG's risk management framework operates, as well as an overview of the CCPs risk management and operations. As LSEG's risk culture, objectives, appetite, governance and operations are well established, these descriptions naturally do not significantly change from year to year. 

Detailed information can be found in our risk management oversight supplement. Please visit: www.lseg.com/about-london-stock-exchangegroup/risk-management-oversight.

LSEG Risk Governance

OVERVIEW OF PRINCIPAL RISKS:

Strategic Risks                                                    Financial Risks                                                    Operational Risks

Global economy                                                  Credit risk                                                             Technology

Regulatory change & Compliance                 Market  risk                                                         Model risk

Competition                                                         Liquidity risk                                                         Security threats - Physical

Transformation                                                   Capital risk                                                           Security threats - Cyber

Reputation/Brand/IP                                                                                                                         Change management

                                                                                                                                                                Settlement and custodial risks

                                                                                                                                                                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.

Risk Description	Mitigation	Risk level
Global economy As a diversified markets infrastructure business, we operate in a broad range of equity, fixed income 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 revenue. Economic data and inflation concerns have dominated central bank official rate actions. The Federal Open Market Committee (FOMC) increased the Fed Funds target rate 4 times during 2018. In November the Bank of England (BoE) increased the Bank Rate to 0.75%. Meanwhile the European Central Bank (ECB) has left rates unchanged at zero and has announced that its quantitative easing programme will end by the end of 2018. The expected economic growth could fail to materialise and higher rates could lead to a slowdown. Ongoing geopolitical tensions continue to add uncertainty in the markets which may impact confidence and activity levels. This is being be monitored closely.	The footprint of the Group continues to broaden, further improving the geographical diversification of the Group's income streams which serves to mitigate the risks of a localised economic downturn. Furthermore, income streams across the business divisions of the Group comprise annuity and fee based recurring revenues to balance against more cyclical and market driven activity. The Group performs regular analysis to monitor the markets and the potential impacts of market price movements on the business. Activities include Key Risk Indicator tracking, stress testing, and hedging. We continue to actively monitor the ongoing developments following the result of the UK referendum on leaving the EU. Committees have been established to assess and address areas of impact on our operations and the Group has formulated contingency plans with the objectives of continuity of market function and customer service in the event of a hard no deal Brexit. 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 stress scenarios are regularly reviewed and updated in response to changes in macroeconomic conditions. Additional ad hoc analysis such as special credit reviews of counterparties are presented to the Financial Risk Committee for consideration where events dictate.	Increasing
For more information, see Market trends and our response, pages 14-17, and Note 3 to the accounts: Financial Risk Management on pages 133-137.
Regulatory change and compliance The Group and its exchanges, other trading venues, CCPs, index administrators, central securities depositories, trade repositories and other regulated entities operate in areas that are highly regulated by governmental, competition and other regulatory bodies. Brexit - The UK vote in 2016 to leave the EU introduced significant uncertainty concerning the political and regulatory environment, the UK's future relationship with the EU, and the overall impact on the UK and European economies both in the short and medium term. Negotiations between the UK and the EU continue but the UK's final exit terms are unclear. The lack of agreement between the UK and the EU increases the risk of a 'no deal' scenario. The effects of Brexit (including those that may follow an extension to the Article 50 process) are uncertain, and could adversely affect the Group's businesses, operations, financial condition and cash flows. LSEG companies conducting regulated activities in the EU or with customers in the EU are subject to EU regulation. The Group is executing contingency plans to maintain continuity of service to customers and orderly functioning of its markets, including incorporation of new entities in the EU27 and applications for authorisation within the EU27 for certain Group businesses. The Group also has a structured Brexit programme to engage with UK, EU and US Brexit policy leads to advise on financial market infrastructure considerations. However, the complexity and the lack of clarity of the application of a hard Brexit may decrease the effectiveness or applicability of some of these contingency plans. As is the case with all change, these contingency plans introduce some execution risk. Regulation Impacting CCPs - Regulatory initiatives with the potential to impact cleared derivatives markets and CCPs continue through international standard setters and regulators in the EU and US and other major jurisdictions. Our primary focus remains on development of a coherent, cross-border regulatory framework for market access to global CCPs, including appropriate access rules under the EMIR review, likely to be finalised in H1 2019. As part of this review, EMIR 2.2 introduces the option to impose enhanced supervision or deny the recognition of third country CCPs that are of systemic importance for the EU, which could have implications for the Group's CCPs. Proper calibration of EU rules on CCP Recovery and Resolution and harmonisation with other key jurisdictions is also a key priority and could likely have an impact on the Group's CCPs. MiFID II/MiFIR - Together with MiFIR, its accompanying regulation, MiFID II came into force on 3 January 2018. LSEG delivered a series of key technological and procedural changes to prepare for smooth implementation. ESMA has signalled that reviewing the implementation of MiFID II/R is a priority and it is likely to propose amendments with potential impacts on the Group, particularly in the areas of trading transparency and market data. The third country access rules for trading venues and market participants continue to be evaluated in 2019 and could also have a potential to impact access to our trading venues in the UK and EU. Prudential Capital Rules - In December 2017, the Basel Committee on Banking Supervision (BCBS) published final recommendations on the Basel III Framework, which as currently drafted could adversely impact the cleared derivatives industry. One area of primary importance is the treatment of customer margin under the Leverage Ratio. BCBS is considering reviewing its approach on this issue which would be a positive development for market participants and therefore the Group. The European Commission also proposed a prudential regime for investment firms which may affect the ability of proprietary trading firms to provide liquidity on LSEG markets. However, the nature of final political agreement on the proposal is highly uncertain. Regulatory change and compliance (continued) Benchmark Regulation - Regulatory focus on the role of benchmarks in the market and regulation of benchmark providers continues to increase in several major jurisdictions around the world. FTSE International Limited, was authorised by the UK's Financial Conduct Authority (FCA) in 2018 as a Benchmark Administrator, under the European Benchmark Regulation. In May 2018, the European Commission proposed several sustainable finance legislative proposals, which could potentially impact sustainable indices. Benchmark Administrators located outside of the EU will likely have to elect an established method for EU users to access their benchmarks after the BMR transitional period ends this year. Financial Transactions Tax (FTT) - Some EU member states are considering a possible Financial Transaction Tax (FTT), which could adversely impact volumes in financial markets. During 2018 little progress was made, but efforts continue to finalise the measure. Information and cyber security standards - In many of our key regulatory jurisdictions, there is an increasing legislative and regulatory focus on cyber security and data protection which could impact our operations and compliance models. LSEG supports the regulatory efforts on these issues, as they increase the standards for clients, vendors and other third parties with whom we interact. We continue to support regional and global efforts to harmonise these standards to avoid conflicting or duplicative requirements for market infrastructure providers and our market participants. Regulation of Emerging Technology - Regulators are considering the application of existing or new frameworks around the development of innovative financial services technologies, which are important for maintaining the resilience in the market and allowing innovation with emerging technology. We are monitoring these efforts closely as they have potential to impact industry behaviour and potential application of emerging technology to our businesses. Changes in the regulatory environment form a key input into our strategic planning, including the political impact on our growth strategies, both organic and inorganic. We monitor regulatory developments continually and engage directly with regulatory and governmental authorities at local, regional and national levels. The Group has developed contingency plans to address the UK's exit from the EU and monitors developments closely. We continue to develop our relationships with the key government and regulatory stakeholders in all relevant jurisdictions. Potential impacts from regulatory change are assessed and, depending on the impact, opportunities are developed, and mitigating strategies and actions are planned and executed. As the various regulatory initiatives progress, there will be greater certainty with regard to 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 including those linked with the departure of the UK from the EU. 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. All staff across the Group are subject to mandatory compliance training. Compliance Risk - There is a risk that one or more of the Group's entities may fail to comply with the laws and regulatory requirements (incl. GPDR) 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.	Changes in the regulatory environment form a key input into our strategic planning, including the political 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. The Group has developed contingency plans to address the UK's exit from the EU and monitors developments closely. We continue to develop our relationships with the key political stakeholders in the EU, North America and Asia. Potential impacts from regulatory change are assessed and, depending on the impact, opportunities are developed and mitigating strategies and actions are planned. The Group has executed the following contingency plans for its business. Following the EC Implementing decision for UK CCPs on 19 December 2018, it was announced on 18 February 2019 that LCH Ltd has been recognised by ESMA as a third country CCP under Article 25 of EMIR. This recognition will apply from 30 March 2019 until 30 March 2020 in the absence of a withdrawal agreement with the UK in accordance with Article 50(2) of the Treaty on European Union. This recognition confirms LCH Ltd's ability to continue to offer all clearing services for all products and services to all members and clients after 29 March 2019 in a no-deal Brexit scenario. LCH reserves its right to take any action it considers appropriate at any time, should there be a material change in circumstances. In addition, LCH SA and CC&G are allowed under the Bank of England Temporary Recognition Regime (TRR) to clearing services and activities in the UK for up to 3 years in a 'no deal' scenario. In June 2018, Turquoise Global Holdings Europe B.V. submitted an application for authorisation as an investment firm to operate a multilateral trading facility (MTF) in the Netherlands. Similarly, also in June 2018, UnaVista TRADEcho B.V. submitted an application for authorisation as a Data Reporting Services Provider (DRSP) in the Netherlands, under which it will operate an approved reporting mechanism (ARM) and an approved publication arrangement (APA). Both applications are in advanced stages and we anticipate receiving regulatory authorisations imminently. In addition, MTS has established 2 MTF markets in Italy to replace certain markets operated by EuroMTS in the UK. Potential impacts from regulatory change are assessed and, depending on the impact, opportunities are developed, and mitigating strategies and actions are planned and executed. LSEG's key objectives are maintaining London's position as a global financial hub and providing continuity of stable financial infrastructure services. As the various regulatory initiatives progress, there will be greater certainty with regard to 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 including those linked with the departure of the UK from the EU. 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. All staff across the Group are subject to mandatory compliance training.	Increasing
For more information on regulatory changes see Market trends and our response on pages 14-17.
Competition The Group operates in a highly competitive and global industry. Continued consolidation has fuelled competition including between peers and service providers in different geographical areas. The Group's Information Services business faces competition from a variety of sources, notably from index providers which offer indices and other benchmarking tools which compete with those offered by the Group as well as from other venues that offer market data relating to securities that are traded on the Group's equity markets. As the Information Services offering diversifies and seeks to meet customer needs for new data sources, segments and asset classes, it is facing a broader range of competitors. In Post Trade Services, we continue to see increased clearing activity of OTC derivative products across a number of asset classes, reflecting the attractiveness of the Group's current customer offering and open access philosophy, however competitors may be able to respond more quickly to changing market conditions or develop products that are preferred by customers. The Group's track record of working with customers and other financial market infrastructure providers, including the user focused model in LCH, will help us to continue to deliver innovative new products and services to seek to meet evolving customer needs. Our Capital Markets operations face continuing risk from competitors' commercial and technological offerings. There is strong competition for primary listings and capital raises from other global exchanges and regional centres. Private equity, venture capital and new options such as crowd-funding and crypto-currencies are increasingly being considered as alternatives methods of capital formation for issuers. We maintain a dedicated international team who promote the benefits of listing on our markets to international issuers, the global advisory community and other stakeholders. The Group will need to continue strong and collaborative dialogue with customers and other relevant industry stakeholders to ensure it remains responsive to changing requirements and is able to react in a timely manner. If competitors are quicker to access and deploy technology innovations such as artificial intelligence (AI), machine learning and analytics, they may achieve a valuable advantage which may impact the attractiveness of the Group's offering and its relative profitability. Our integrated and business-led approach to technology innovation help us to manage this risk and the Group is well advanced in investigating and applying numerous new technology innovations across its business portfolio. In Technology Services, there is intense competition across all our current activities and in some of our growth areas, in addition to strong incumbent providers. New entrants are increasing from both within and outside of our traditional competition base and some consolidation is evident. Start-ups, which may be sponsored by existing LSEG competitors or customers, are introducing new technology and commercial models to our customer base to which we need to respond with new products and services of our own. Continual client dialogue, facilitated through our partnership approach and investment in product management and innovation are critical to understanding and managing the impact of changing customer requirements in our technology and other business lines.	Competitive markets are, by their very nature, dynamic, and the effects of competitor activity can never be fully mitigated. Senior management and a broad range of customer-facing staff in all business areas are actively engaged with clients to understand their evolving needs and motivations. We have established a Group Relationship Programme to co-ordinate this across Group businesses globally. The Group undertakes constant market monitoring and pricing revision to mitigate risks and ensure we are competitive. Commercial initiatives are aligned with our clients and this is complemented by an ongoing focus on technology operations and innovation.	Static
Transformation The Group is exposed to transformation risks (risk of loss or failure resulting from business/integration transformation or integration). This derives from internal (organic) change and change required by the integration of acquisitions whereby the Group targets specific synergy benefits, necessitating change to operating models, business models, technology and people. 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 effort related to M&A and post-transaction 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 and financial performance. The size and complexity of acquisitions in the past 6 years have increased the Group's change management and transformation risks. However, it allows the Group to compete on a global scale and it has diversified its revenue footprint by industry / product and customer base.	The Group's exposure to transformation risk is mitigated through the application of the Group's Enterprise Risk Management Framework (ERMF) to deploy consistent, appropriate Risk Management across the Group, both during and post-acquisition. The governance of the Group following a merger or acquisition is aligned and strengthened as appropriate. Oversight during transformation is provided by a Steering Committee comprising Executive Committee members and chaired by the Chief Financial Officer with reports to the Board Risk Committee and the Board. The Group has an effective track record of integrating acquisitions and delivering tangible synergies, supported by robust governance and programme management structures through the Group's Change Framework to mitigate change-related risks.	Increasing
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 selling point. Any events or actions that damage the reputation or brands of the Group, such as those propagated via social media or caused by its misuse, could adversely affect the Group's 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 use of the Group's brands and to maintain the integrity of the Group's reputation. LSEG actively monitors the use of its brands and other intellectual property, including monitoring for internet brand impersonation and social media sentiment, in order to prevent, identify and address any infringements. The Group protects its intellectual property by relying upon a combination of trademark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other contractual arrangements with its affiliates, clients, customers, suppliers, strategic partners and others.	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.

Risk Description	Mitigation	Risk level
Credit risk Clearing CCPs in the Group are exposed to credit risk as a result of their clearing activities. A default by a CCP clearing member that could not be managed within the resources of the defaulted clearing member, could adversely affect that CCP's revenues and its customers' reputation. CCPs authorised in the EU are required to make a proportion of their regulatory capital available to cover default losses after the defaulter's resources have been exhausted and prior to allocation of losses to non-defaulters and so, in extreme circumstances, a default could lead to a call on the Group CCPs' own capital 'skin-in-the-game'. CCPs may also be exposed to credit exposure to providers of infrastructure services such as Central Securities Depositaries (CSDs) and commercial banks providing investment and operational services. In addition, certain CCPs within the Group have interoperability margin arrangements with other CCPs requiring collateral to be exchanged in proportion to the value of the underlying transactions. The relevant clearing provider entities within the Group are therefore exposed to the risk of a default of other CCPs under such arrangements. Non-Clearing CCPs and other parts of LSEG Group are also exposed to credit risk as a result of placing money with investment counterparties on both a secured and unsecured basis. Losses may occur due to the default of either the investment counterparty or of the issuer of bonds bought outright or received as collateral. The Group's credit risk also relates to its customers and counterparties being unable to meet their obligations to the Group either in part or in full.	Clearing As CCP members continue to work towards strengthening of their balance sheets, the risk to LSEG CCPs of a member default reduces, although continuing geopolitical uncertainty continues, and the banking sectors of some countries remain stressed. The financial risks associated with clearing operations are further mitigated by: - Strict CCP membership rules including supervisory capital, financial strength and operational capability - The maintenance of prudent levels of margin and default funds to cover exposures to participants. Members deposit margin, computed at least daily, to cover the expected costs which the clearing service would incur in closing out open positions in a volatile market in the event of the member's default. A default fund sized to cover the default of the 2 members with the largest exposures in each service using a suite of extreme but plausible stress tests mutualises losses in excess of margin amongst the clearing members - Regular 'Fire Drills' are carried out to test the operational soundness of the CCPs' default management processes - Infrastructure providers are regularly assessed in line with policy Non-Clearing Policies are in place to ensure that investment counterparties are of good credit quality, and at least 95% of CCP commercial bank deposits are secured. CCP and non-CCP counterparty concentration risk is consolidated and monitored daily at the Group level and reported to the Executive Committee and to the Board Risk Committee, including limits and status rating. 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.	Static
For more information on this risk see the Post Trade Services section of the Segmental Review on pages 26 - 28, and Note 3 to the accounts, Financial Risk Management on pages 133 - 137.
Market risk Clearing The Group's CCPs 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'. The latent market risk includes interest rate risk, foreign exchange risk, equity risk and commodity price risk as well as country risk, issuer risk and concentration risk. This risk is greater if market conditions are unfavourable at the time of the default. Non-Clearing The Group is exposed to foreign exchange risk as a result of its broadening geographical footprint. There are, however, also benefits of global diversification including reduced exposure to local events such as the UK Brexit vote and the geopolitical tensions. The Group is exposed to interest rate risk through its borrowing activities and treasury investments. Further changes in interest rates in 2019 may increase the Group's exposure to these risks.	Clearing The margins and default funds referred to previously are sized to protect against latent market risk. The adequacy of these resources is evaluated daily by subjecting member and customer positions to 'extreme but plausible' stress scenarios encapsulating not only historical crises, but theoretical forward-looking scenarios and decorrelation events. All our CCPs are compliant with the appropriate regulatory requirements regarding margin calculations, capital and default rules. Latent market risk is monitored and managed on a day-to-day basis by the risk teams within the clearing services. Committees overseeing market risks meet on a regular basis. Non-Clearing Foreign exchange (FX) risk is monitored closely and translation risk is managed by matching the currency of the Group's debt to its earnings to protect key ratios and partially hedge currency net assets. FX derivatives including cross-currency swaps are used -under a control framework governed by LSEG Board approved policy. The split between floating and fixed debt is managed to support the Group's target of maintaining an interest coverage ratio that underpins a good investment grade credit rating. Authorised derivatives can be used to transform fixed rate bond debt, to supplement a mix of short dated commercial paper and floating rate loan borrowings, to achieve the Group's policy objective.	Static
For more information on this risk, see Note 3 to the accounts, Financial Risk Management on pages 133 - 137.
Liquidity risk Clearing There are 2 distinct types of risk to which the Group's CCPs are exposed to that are 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 and is addressed under market risk. The latter is the risk that the CCP may not have enough cash to pay variation margin to non-defaulters or to physically settle securities delivered by a non-defaulter that cannot be on-sold to a defaulter and this is the subject of this section. The Group's 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's 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 International Central Securities Depositaries (ICSDs). The Group's CCPs also hold a small proportion of their investments in unsecured bank and money market deposits subject to the limitations imposed by EMIR. 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. Non-Clearing Liquidity risk in a non-clearing context is the risk that the firm may be unable to make payments as they fall due.	Clearing The Group's CCPs have put in place regulatory compliant liquidity plans for day-to-day liquidity management, including contingencies for stressed conditions. The Group's 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. Non-Clearing Requirements for liquidity including headroom requirements are set out in the Group's Board approved Treasury Policy. The Group maintains appropriately sized liquidity facilities and monitors its requirements on an ongoing basis. Stressed facility headroom is assessed using plausible downside business projections. Group Treasury risk is monitored daily and is managed within the constraints of a Board approved policy by the Group Treasury team and is overseen by the Treasury Committee (a sub-Committee of the Financial Risk Committee, both chaired by the CFO). An update on Group Treasury risks and actions is provided monthly to the Financial Risk Committee and to each meeting of the Board Risk Committee.	Static
For more information on this risk, see Note 3 to the accounts, Financial Risk Management on pages 133 - 137.
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 that 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 capital (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 to ensure that they operate within capital limits which are overseen by 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.	Static
For more information on this risk, see Note 3 to the accounts, Financial Risk Management on pages 133 - 137.

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.

Risk Description	Mitigation	Risk level
Technology Robust, secure and stable technology performing to high levels of availability, continues to be critical to the Group's businesses. Technology failures may impact our clients and the orderly running of our markets, potentially leading to a loss of trading or clearing volumes or impacting our information services activities. The Group continues to consolidate its technology delivery and operation capabilities through its LSEG Technology and LSEG Business Services companies respectively. Continued efforts to consolidate to LSEG Technology solutions and a homogeneous technology stack may increase systemic technology risk as components and development are shared or similar in build. Furthermore, increased demand on LSEG Technology as a mission-critical supplier may result in over-stretch resources 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 and networks for elements of its trading, clearing, settlement, data and other systems.	The performance and availability of the Group's systems are constantly reviewed and monitored to prevent problems arising and where possible, ensure a prompt response to any potential service-impacting incident. The Group continues actively to identify, manage and mitigate risks associated with the consolidation of technology development and operations. Regular rigorous business impact and operational risk scenario analysis are performed in conjunction with the Group Risk Group Business Continuity and Crisis Management functions to identify, assess and remedy potential system and governance vulnerabilities. In addition, all technology solutions are comprehensively tested by both LSEG Technology and third-party quality assurance providers as appropriate; functional, non-functional, user-acceptance and other testing is performed across a number of technical environments to ensure products are ready for deployment. 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 LSEG Technology systems are designed to be software and hardware fault tolerant and alternative systems are available in the unlikely event of multiple failures from which the system is unrecoverable. The Group actively manages relationships with key strategic technology 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 actively monitors new technological developments and opportunities such as blockchain and Artificial Intelligence (AI).	Static
For more information, see the Technology Services section of the Segmental Review on pages 35.
Model Risk The Group defines model risk as the risk that a model may not capture the essence of the events being modelled, or inaccuracies in the underlying calculation potentially resulting in adverse consequences resulting from decisions based on incorrect or missed model outputs.	The Group defines model risk as the risk that a model may not capture the essence of the events being modelled, or inaccuracies in the underlying calculation potentially resulting in adverse consequences resulting from decisions based on incorrect or missed model outputs.	Static
Security threats - Physical 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. 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 companies within the Group. Long-term unavailability of key premises could lead to the loss of client confidence and reputational damages.	Security threats are treated very seriously. The Group has robust physical security arrangements. The Group is supported by relevant governmental organisations in our key areas of operation. Security teams respond to intelligence received and liaise closely with police and global government agencies. Across major hubs covering the UK, Europe, the Americas and Asia, the Group maintains close monitoring of geopolitical threats through a third-party security monitoring service. Where events are detected, response support services are mobilised to support as required. The Group has well established and regularly tested business continuity and crisis management procedures. The Group assesses its dependencies on critical suppliers and ensures robust contingency measures are in place.	Static
Security threats - Cyber The threat of cybercrime has the potential to have an adverse impact on our business. Public and private organisations continue to be targeted by increasingly sophisticated cyber-attacks. Threats such as ransomware, theft of customer data and distributed denial of service attacks were increasingly significant to the financial industry as a whole in 2018. Such threats could result in the loss of data integrity or disruption to our operations and client-facing services. Additionally, new emerging technologies for the Group such as cloud computing could impact our cyber security risk profile. The Group's technology and operational support providers, internal and third-party, could suffer a security breach resulting in the loss or compromise of sensitive information (both internal and external) or loss of services. Such a breach could materialise as a result of weaknesses in system controls or processes, or through the inadvertent or malicious actions of employees, contractors or vendors. A major information security breach that results in data and intellectual property loss, system unavailability or sensitive data leakage, could have a significant negative impact on our reputation, financial results and the confidence of our clients and could lead to fines and regulatory censure.	The Group continues to invest in and enhance its information security control environment, cyber defences and operational processes, including its recovery capability, as it delivers its Board approved Cyber Security Strategy. Extensive IT measures aligned to the National Institute of Standards and Technology (NIST) control framework are in place to prevent, detect and respond to cyber security threats such as third-party risks, sophisticated malware, system vulnerabilities and access control, as well as enhancing our security event detection and incident response processes. Security training and awareness of our people remains a key component of the control framework. Regular testing of security controls and incident response processes is undertaken, both internally and externally to provide assurance over the effectiveness of cyber security controls and recovery processes. Information Security teams monitor intelligence and liaise closely with global Government agencies as well as industry forums and regulators to help improve our ability to respond to the evolving threats faced by us and our industry.	Increasing
Change management The considerable change agenda exposes the Group to the risk that change is either misaligned with the Group's strategic objectives or not managed effectively within time, cost and quality criteria. In turn this could lead to 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 execution is not managed appropriately and supported with adequate operating models to operationalise new services. Synergies and cost benefits may not be delivered to anticipated levels. The volume of change is driven by both internal and external factors. Internal factors include the diversification strategy of the Group and its drive for technology innovation, consolidation and operational resilience. External factors include the changing regulatory landscape and requirements which necessitate changes to our systems and processes.	The risks associated with change are mitigated by effective implementation of the Group's Change framework. This includes Board oversight across the Group's change portfolio and project pipeline, to ensure these align to the Group and Divisional strategies and support our financial plans. Appropriate governance and executive oversight is exercised over individual programmes and projects based on the scale, complexity and impact of the change to confirm compliance with the approved project management policy and to manage budget, resource, escalations, risks, issues and dependencies. For software specific development, software design methodologies, testing regimes and test environments are continuously being enhanced to minimise implementation risk.	Static
For more information, see the Chairman's statement on pages 4 - 5, and the Chief Executive's statement on pages 6 - 9.
Settlement and custodial risks 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. The Group provides routing, netting and settlement and custody services through its CSD to ensure that securities are settled in a timely and secure manner. There are operational risks associated with such services, particularly where processes are not fully automated.	In addition to the technology, model and change management risks, the Group's CCPs are also exposed to Operational risk. Operational risk is minimised via highly automated processes reducing administrative activities while formalising procedures for all services. The operations of the settlement service are outsourced to the European Central Bank (TARGET2-Securities). The CSD mitigates IT risks by providing for redundancy of systems, daily backup of data, fully updated remote recovery sites and SLAs with outsourcers. Monte Titoli Business Continuity Plan covers all the critical operational processes and related activities.	Static
Employees The calibre and performance of our leaders and colleagues is critical to the success of the Group. The Group's ability to attract and retain key personnel is dependent on several factors. This includes (but not exclusively) organisational culture and reputation, 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 alignment to long-term shareholder value and returns, impact the size of the local labour force with relevant experience, and the number of businesses competing for such talent. Whilst the Group focuses very carefully on the attraction and retention of talent, if unsuccessful it may adversely affect the Group's ability to conduct its business through an inability to execute business operations and strategies effectively. Whilst our preparations are comprehensive in relation to Brexit, a common risk across the Group is the uncertainty surrounding the status of the EU citizens in the UK and UK citizens in the EU. Employee-related risks are assessed and monitored as sustainability risks within our Enterprise Risk Management Framework. Please see also Our Wider Responsibility for details regarding employee matters.	We focus on a number of strategic initiatives to ensure we attract and retain the right calibre of talent for our business and continue to facilitate a culture of high performance. We have a rigorous in-house recruitment and selection process, to ensure that we are bringing the best possible talent into the organisation, in terms of their skills, technical capabilities, cultural fit and potential. We aim to remove barriers to our colleagues' overall sense of engagement, proactively measuring how satisfied they are with their working experience at LSEG, and the extent to which they would recommend it as a place to work, via our bi-annual engagement 'Have Your Say' survey. We also measure colleague sentiment when they join the organisation via our joiners' survey and via an exit survey for those who choose to move on. We use this feedback to inform our plans for improvement, and to identify and resolve any barriers to performance and engagement in the workplace. We recognise that the overall wellbeing of our colleagues is vital for our continued performance and have introduced a proactive approach to wellbeing in the UK, which we are in the process of rolling out globally. This looks to improve wellbeing across 5 dimensions: physical, mental, financial, social purpose, and work-life balance. In 2018 we also launched the new Speak Up campaign, designed to provide our colleagues with the confidence to speak up and raise concerns when they witness or suspect inappropriate behaviour, misconduct or wrongdoing that conflicts with our values. Career development remains a key enabler for success, and we have a carefully managed learning and development budget which enables us to take a coordinated approach and focus investment in the development of colleagues. We provide colleagues with a range of courses, materials and tools to support them in owning their development. In 2018 we launched our global career framework, Futures, which outlines all roles in our organisation, helping our colleagues understand how to navigate the opportunities that exist across the Group and the development steps they need to take to progress. We also offer additional investment to identified key talent and executives, for instance, by providing coaches for key senior successors. In terms of talent management, we always look to promote internally where possible. We undertake a comprehensive annual review of critical roles, and ensure we have succession plans in place to minimise the impact of losing critical personnel. We monitor the attrition in each division and country, in addition to any critical colleague turnover, so that appropriate mitigation can be taken where needed. Performance management plays a key role in mitigating retention and performance risk at LSEG, and the Group operates a robust performance management and appraisal process for all colleagues, which links to how we utilise incentives and compensation to drive organisational performance. This assesses performance against financial objectives, strategic deliverables, and the extent to which colleagues' role model the Group's values and behaviours. In terms of other reward approaches, critical high performers are offered Long Term Incentive Plans, aligned with the fulfilment of the Group's strategic goals and increases in shareholder value. We also regularly benchmark our reward, benefits and incentive systems to ensure they are competitive. LSEG continuously engages with the EU and the UK regulators to minimise the impact of Brexit on our colleagues.	Static
For more information, see Our wider responsibility on pages 36 - 40 and Remuneration Report on pages 82 - 100.

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, settlement, custodial and market (including foreign exchange, cash flow and fair value interest rate) risks.

The Group's financial risk management approach is not speculative and adopts a '3 lines of defence' model. 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 Group and CC&G) that adhere to local regulation and operate under approved risk and investment policies.

The Group Chief Risk Officer's team provides assurance that the governance and operational controls are effective to manage risks within the Board approved risk appetite, supporting a robust Group risk management framework. 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 rate, 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-wide Risk Management Framework to the Group Risk Committee. See 'Risk Management Oversight Supplement' for further detail on the Group's risk framework on our website at: www.lseg.com/about-londonstock-exchange-group/risk-management-oversight.

On 23 June 2016 the UK voted to exit the EU. The UK companies within the Group, as members of the EU or European Economic Area (EEA), rely on a number of rights that are available to them to conduct business with other EU or EEA members. This includes, without limitation, the right for UK CCPs to offer clearing services to EU regulated firms under EMIR, and the right for UK trading venues to offer services to members in the EU or EEA. The Group companies have analysed the potential impacts and considered contingency plans that they may choose to execute should these rights not be replaced by rights that persist outside EU membership.

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. 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. A summary of the Group's capital structure is presented below: 31 December 2018 31 December 2017 Book value of capital £m £m Total shareholders' funds 3,343 3,227 Group consolidated debt 2,203 1,953 Whilst the Company is unregulated, the regulated entities within the Group 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 held cash to satisfy their local regulatory capital requirements. We believe that capital held by Group companies is 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. A summary of the Group's regulatory and operational capital is shown below: 31 December 2018 31 December 2017 Regulatory and Operational Capital £m £m Total regulatory and operational capital 1,203 1,147 Amount included in cash and cash equivalents 1,120 1,042 The total capital amounts have increased year on year reflecting strong cash generation at regulated entities and to meet the requirements of MiFID II regulation and IFRS 15 accounting changes. 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 proforma adjusted EBITDA (Group consolidated earnings before net finance charges, taxation, impairment, depreciation and amortisation, foreign exchange gains or losses and non-underlying items, prorated for acquisitions or disposals undertaken in the period) 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 2018, net leverage was 1.8 times (2017: 1.7 times), but remains well within the Group's target range. The Group is comfortably in compliance with its bank facility ratio covenants (net leverage and interest cover) and these measures do not inhibit the Group's operations or its financing plans.

Credit and concentration risk

Risk description

Risk management approach

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 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 48 - 57. Notwithstanding regulations that require CCPs to invest predominantly in secured instruments or structures (such as government bonds and reverse repos), CC&G and the LCH 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 one 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. Limits and thresholds for credit and concentration risk are kept under review. 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 associated with 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, investment limits of between £100 million and £25 million apply for periods between 12 months and 1 week depending on counterparty credit rating and default probability risk. 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 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 a 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 revalued daily. 31 December 2018 31 December 2017 £bn £bn Clearing Members' margin ability (175) (151) Collateral security Cash 81 73 Non-cash 94 78 Maximum aggregate margin liability for the year (181) (161) 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: Clearing members contributions to default funds 31 December 2018 31 December 2017 £bn £bn Aggregate at year 17 16 Maximum during the year 19 18 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. 31 December 2018 31 December 2017 £bn £bn Total investment portfolio 94 87 Maximum portfolio size during the year 103 95 Additional portfolio information: Weighted average invested securely 98% 99% Overall maturity (days) 49 74 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 2018 was 17% of the total investment portfolio to the French Government (2017: 24% to the French Government).

Country risk      

Risk description

Risk management approach

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 £1billion or more at the end of either of the financial reporting periods shown below are: Group Aggregate Sovereign Treasury Exposures 31 December 2018 31 December 2017 Country £bn £bn France 16 21 USA 9 12 Netherlands 7 7 UK 4 6 Switzerland 3 1 EU 3 - Italy 2 3 Germany 1 -

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 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.			Group 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, meet its pension commitments, support acquisitions or repay borrowings. With the exception of regulatory constraints impacting certain entities, funds can generally be lent across the Group or remitted through dividend payments. 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 or stress events. Non- CCP entities 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 2018, the Group extended the maturity of its 2017 arranged, 5-year, £600 million committed revolving credit facility by another year to 2023 and issued a €500 million bond due in 2027, further extending its debt maturity profile. It also issued Euro commercial paper under its newly established £1 billion programme, further diversifying its sources of liquidity, with €300 million in issuance at the end of the financial year. At 31 December 2018, £1,159 million (2017: £675 million) of the Group's bank facilities were unutilised, providing swingline backstop coverage for the €300 million Euro commercial paper in issuance and financing flexibility more broadly for the Group. CCPs 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 normal and stressed market conditions. 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. In addition, certain Group companies, including the CCPs, maintain operational facilities with commercial banks to manage intraday and overnight liquidity. 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 future interest on debt that is not accrued for in relation to bonds that are not yet due.
As at 31 December 2018	Less than 1 year	Between 1 & 2 years		Between 2 & 5 years	Over 5 years	Total
	£m	£m		£m	£m	£m
Borrowings	601	34		373	1,435	2,443
Trade & other payables	509	-		-	-	509
Clearing member business liabilities	835,508	-		-	-	835,508
Derivative financial instruments	30	-		-	17	47
Other non-current liabilities	-	7		3	1	11
	836,848	41		376	1,453	838,518
As at 31 December 2017	Less than 1 year	Between 1 & 2 years		Between 2 & 5 years	Over 5 years	Total
	£m	£m		£m	£m	£m
Borrowings	556	299		364	951	2,170
Trade & other payables	471	-		-	-	471
Clearing member business liabilities	734,981	-		-	-	734,981
Derivative financial instruments	-	29		-	-	29
Other non-current liabilities	-	34		12	3	49
	736,008	362		376	954	737,700

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. 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. Exceptions exist including at MillenniumIT (a Sri Lankan Rupee reporting entity) which invoices a material proportion of its revenues in US Dollars, and at certain operations of the LCH Group (a Euro reporting subsidiary), which generate material revenues in Sterling and US Dollars and incur material costs in Sterling. Intragroup dividends and the currency debt interest obligations of the Company 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 FX risk associated with strategic investments in, or divestments from operations denominated 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 which, to an extent, protects its key ratios (net leverage and interest coverage) and balances the currency of its assets with its liabilities. In order to mitigate the impact of unfavourable currency exchange rate 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 redenominated through the use of cross-currency swaps. A material proportion of the Group's debt is held in or swapped into Euros and US Dollars as noted below. 31 December 2018 31 December 2017 Currency of debt £m £m Euro- denominated drawn debt 1,631 921 Euro- denominated cross-currency interest rate swaps (361) (355) US Dollar- denominated drawn debt - - US Dollar denominated cross - currency interest rate swaps 631 622 The cross-currency interest rate swaps are directly linked to Sterling fixed debt. The Euro and USD denominated debt, including the cross-currency swaps, provides a hedge against the Group's net investment in Euro and USD denominated entities. As at 31 December 2018, the Group's designated hedges in its net investments 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 £5 million or equivalent per annum should be hedged) with appropriate derivative instruments or by settling currency payables or receivables within a short timeframe. Where appropriate, 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 2018 and year ended 31 December 2017, and based on actual market observations between its principal currency pairs, has concluded that a 10% movement in rates is a reasonable level to illustrate the risk to the Group. The impact on post tax profit and equity for the years ended 31 December is set out in the table below:
31 December 2018                                            31 December 2017                                                                                    Post tax profit            Equity                              Post tax profit            Equity                                                                                            £m                           £m                                 £m                                 £m Euro                              Sterling weaken                           (2)                            (16)                                 4                                 21                                       Sterling strengthen                       2                               15                                 (3)                               (19) US Dollar                     Sterling weaken                             7                             (45)                                  6                                (39)                                       Sterling strengthen                      (7)                             41                                 (5)                                35 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 2018                                            31 December 2017                                                                                    £m                                                                     £m Euro                              Sterling weaken                    27                                                                          25                                       Sterling strengthen              (23)                                                                       (21) US Dollar                     Sterling weaken                     31                                                                         26                                       Sterling strengthen              (27)                                                                       (22)

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 predominantly secured investment activities.

Group interest rate management policy focuses 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 set aside 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 currently maintained 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 2018, consolidated net interest expense cover by EBITDA was measured over the 12 month period at 16.1 times (2017: 15.5 times) and the floating rate component of total debt was 14% (2017: 27%). In the Group's CCPs, interest bearing assets are generally invested in secured instruments or structures and for a longer term than interest bearing liabilities, whose interest rate is reset daily. This makes net 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 2018, 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 have been £8 million higher (2017: £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 2018, 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 £2 million lower (2017: £2 million lower). This deficit is expected to be recovered as investment yields increase as the portfolio matures and is reinvested.

"

The Annual Report contains the following statements regarding responsibility for financial statements on page 105: 

"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. The Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and applicable law.

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 and estimates 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 and the Company's financial position and financial performance

--state whether the Group and the Company financial statements have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and

--prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group and the Company 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 Group and 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 Guidance 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 corporate and financial information on 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 2-57. 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 48.

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 53-54. 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 2018 was £3,103 million (2017: £2,638 million), with first maturing due in October 2019, described further in the Financial Review on pages 41-47.

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 59-61 of this Annual Report confirms that, to the best of their knowledge and belief:

--the Group and the Company 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; and

--they consider that the Annual Report and Accounts 2018, taken as a whole, is fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and the Company's performance, business model and strategy.

By Order of the Board

Lisa Condron

Group Company Secretary

1 March 2019"

"36. 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 2018		Year ended 31 December 2017
£m		£m
Salaries and other short term benefits	11	13
Pensions	1	1
Share based payments	14	21
26			35

Other directors' interests

One director has a 40.5% (2017: 45%) equity interest in Quantile Technologies Limited who are an approved compression service provider for the Group's LCH Limited subsidiary. The Group operated a commercial arrangement with Quantile Technologies Limited and all transactions were carried out on an arm's length basis. During the year there was no income or expenses recognised as part of the agreement (2017: nil).

Inter-company transactions with subsidiary undertakings

The Company has loans with some subsidiary undertakings. Details as at 31 December 2018 are shown in the table below:

	Amount in millions due       (owed to)/from as at				Interest (charge)/credit
Loan counterparty	31 December 2018	31 December 2017	Term	Interest rate as at 31 Dec 2018	2018	2017
London Stock Exchange plc	£(198)m	£(130)m	25 years from May 2006 with five equal annual repayments commencing in May 2027.	LIBOR plus 2% per annum	£(5)m	£(3)m
London Stock Exchange Employee Benefit Trust	£25m	£37m	Repayable on demand.	Non-interest bearing	-	-
London Stock Exchange Group Holdings (Italy) Limited	€(11)m	-	Fifth anniversary of the initial utilisation date which was April 2018.	EURIBOR plus 1.5% per annum	€(1)m	-
London Stock Exchange Group Holdings Limited	£226m	£240m	Tenth anniversary of the initial utilisation date which was October 2009.	LIBOR plus 4.0% per annum	£12m	£10m
London Stock Exchange Group Holdings Limited	-	-	Tenth anniversary of the initial utilisation date which was October 2009	LIBOR plus 4.0% per annum	-	$(1)m
London Stock Exchange Group Holdings Limited	-	€(1)m	Tenth anniversary of the initial utilisation date which was October 2009.	EURIBOR plus 4.0% per annum	-	-
LSE Reg Holdings Limited	-	€1m	Fifth anniversary of the initial utilisation date which was July 2018.	EURIBOR plus 1.2% per annum	-	-
LSE Reg Holdings Limited	£20m	£20m	Fifth anniversary of the initial utilisation date which was July 2018.	LIBOR plus 1.2% per annum	-	-
London Stock Exchange (C) Limited	-	€19m	Fifth anniversary of the initial utilisation date which was May 2017.	EURIBOR plus 1.5% per annum	-	-
LSEGH (Luxembourg) Ltd	US$(24)m	US$(4)m	Fifth anniversary of the initial utilisation date which was December 2014.	LIBOR plus 1.5% per annum	US$(3)m	-
LSEG Employment Services Limited	£137m	£111m	Fifth anniversary of the initial utilisation date which was January 2015.	LIBOR plus 1.2% per annum	£2m	£1m
London Stock Exchange Group (Services) Limited	£71m	£67m	Fifth anniversary of the initial utilisation date which was January 2016.	LIBOR plus 0.9% per annum	£2m	-

During the year, the Company charged in respect of employee share schemes £9 million (2017: £10 million) to LSEG Employment Services Limited, £5 million (2017: £6 million) to LCH Group, £5 million (2017: £6 million) to the London Stock Exchange Group Holdings Italia S.p.A. group of companies, £3 million (2017: £2 million) to the FTSE Group, £7 million (2017: £5 million) to London Stock Exchange Group Holdings, Inc. £5 million (2017: £8 million) to London Stock Exchange plc, £1 million (2017: £1 million) to Millennium Group and £1 million (2017: £nil million) to other subsidiaries of the Group.

During the year the Company received dividends of £163 million from LSE Group Holdings (Italy) Ltd and £157 million from LSEGH (Luxembourg) Ltd. The Company recognised £7 million income (2017: £32 million) and £61 million expenses (2017: £49 million) with Group undertakings in relation to corporate recharges. At 31 December 2018, the Company had £67 million (2017: £106 million) other receivables due from Group companies and other payables of

£144 million (2017: £116 million) owed to Group undertakings.

Transactions with associates

In the year ended 31 December 2018, the Group recognised £1 million revenue (2017: £4 million) from its associates and as at 31 December 2018, the Group had £1 million receivable from its associates (2017: nil).

All transactions with subsidiaries and associates were carried out on an arm's length basis."

 

END

 

 

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