ICAP plc 2013 Half-yearly Financial Report For the six months ended 30 September 2013

Transcription

1 ICAP plc 2013 Half-yearly Financial Report For the six months ended 30 September 2013

2 Contents Page Highlights 1 Interim Management Report: Operating and Financial Review 3 Directors Statement of Responsibilities 17 Financial Statements 18 Notes on the Financial Statements 23 Independent Review Report 30 Presentation of information This document comprises the half year results to 30 September 2013 for ICAP plc ( ICAP ) and its subsidiary undertakings (together ICAP or the Group ). It contains the Interim Management Report, Directors Statement of Responsibilities and Financial Statements together with the Independent Review Report, as required by the Financial Conduct Authority s ( FCA ) Disclosure and Transparency Rules ( DTR ). The Financial Statements and related notes are prepared in accordance with IAS34, Interim Financial Reporting. Cautionary statement regarding forward-looking statements This Half-yearly Financial Report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Group. Certain statements that are not historical facts, including statements about the Group s beliefs and expectations, are forward-looking statements. Words such as expects, anticipates, intends, plans, believes, seeks, estimates, potential and reasonably possible, variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and it should not be assumed that they have been revised or updated in the light of new information or subsequent events. Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. Analysts and investors briefing There will be a briefing for analysts and investors at 8:30am (GMT) on Wednesday 13 November 2013 at 2 Broadgate, London EC2M 7UR. A webcast of the presentation made to analysts will be available at Contacts Brigitte Trafford Director of Corporate Affairs +44(0) Alex Dee Head of Investor Relations +44(0) Neil Bennett Maitland +44(0) About ICAP ICAP is a leading markets operator and provider of post trade risk mitigation and information services. The Group matches buyers and sellers in the wholesale markets in interest rates, credit, commodities, FX, emerging markets and equity derivatives through voice and electronic networks. Through our post trade risk and information services we help our customers manage and mitigate risks in their portfolios. For more information go to

3 Highlights m Half year to 30 September 2013 Half year to 30 September 2012 Change (%) Revenue (1) Operating profit Profit before tax Profit before tax (statutory) (41) EPS (adjusted basic) p 15.4p 5 EPS (statutory basic) 3.0p 7.8p (62) Interim dividend per share 6.60p 6.60p Highlights for the period Group revenue at 736 million was marginally (1%) down on the prior year Operating profit at 153 million was 6% higher than the prior year reflecting the benefit of the continuing cost reduction programme Group operating profit 1 margin increased by 2ppt to 21% (H1 2012/13-19%) Profit before tax 1 ( PBT ) of 139 million was 1% higher than the prior year EPS (adjusted basic) 2 up 5% to 16.2p; statutory EPS (basic) down 62% to 3.0p principally driven by settlement payments and associated legal fees in connection with the Libor-related investigations Interim dividend payment to shareholders 6.60p per share (H1 2012/ p per share) Successful launch of ICAP s Swap Execution Facility ( SEF ) and the commercial launch of EBS Direct Michael Spencer, Group Chief Executive Officer, said: We have made good progress despite the subdued market conditions over the summer and uncertainty created by the implementation of new financial markets regulations in the US. Notwithstanding the decline in revenue and the continued investment in the business, our operating margin has improved, demonstrating the positive impact of the cost saving initiatives implemented across the Group. The launch of our SEF in October 2013 was an important milestone and early signs are promising. We are working closely with our customers to help them through the transition to this new trading environment and are pleased with the positive feedback we have received so far. We have also strengthened the management team through the appointment of Laurent Paulhac as CEO of ICAP s SEF. ICAP s portfolio of post trade assets continues to lead the market in offering innovative pre and post trade solutions to meet the new regulatory requirements. The number of customers using triresolve, TriOptima s reconciliation service, has more than doubled during the past year to over 500. Traiana s new real time service for monitoring and managing pre and post trade credit across trading venues, CreditLink, has become the market leading solution for pre-trade screening of transactions on SEFs. 1

4 Highlights continued The service is now supported by 15 Future Commission Merchants ( FCM ) and is connected to or being implemented to a wide range of SEFs and designated contracts markets. EBS Direct, our new relationship-based disclosed liquidity service, has now moved into full commercial operation. It is seeing steady growth in volumes and we already have more than 325 customers signed up. I am particularly pleased with the performance of BrokerTec which has increased its market share following last year s technology upgrade and has seen a 10% increase in volumes to $633 billion per day. The cost effectiveness and efficiency of the organisation remains a key priority. At the same time, we are investing in our risk and compliance systems and processes and the training and development of our people. Capital expenditure has increased by 18 million to 30 million in the first six months of this year as we build new electronic and post trade solutions to serve our customers changing needs as the regulatory environment evolves. Footnotes: 1 Before acquisition and disposal costs and exceptional items 2 Adjusted basic EPS is based on earnings before acquisition and disposal costs and exceptional items 2

5 Interim Management Report: Operating and Financial Review Review of operations For the half year to 30 September 2013, the Group reported revenue of 736 million, 1% below the same period last year. Performance in the period has been mixed across both asset classes and operating segments. While increased volatility in USD markets drove strong growth in US Treasury and Interest Rate Derivatives volumes, more muted volatility in euro markets negatively impacted euro/usd activity on EBS, its largest currency pair, as well as euro interest rate volumes in Global Broking. Notwithstanding the 1% decline in revenue, the Group reported operating profit for the half year to 30 September 2013 of 153 million, 6% ( 9 million) higher than the prior period resulting in a 2ppt improvement in the overall operating margin to 21%. The increase in profitability of the business largely reflected the impact of 20 million of incremental cost savings attributable to the 2012/13 cost saving programme, partially offset by the elimination of US property grants ( 5 million credit within H1 2012/13 operating expenses). The majority of these cost savings were realised within Global Broking, which recorded a 16% increase in operating profit, with the remaining savings funding investment in new product initiatives within the Electronic Markets and Post Trade Risk and Information divisions. Profit before tax, acquisition and disposal costs and exceptional items of 139 million, 1% higher than the prior year. The 6% growth in operating profits was partially offset by an increase in the net finance charge. Statutory PBT for the period decreased to 40 million (H1 2012/13-68 million) as a result of higher one-off costs of 68 million for the period (H1 2012/13-32 million), which are principally driven by settlement payments and associated legal fees in connection with the Libor-related investigations. Regulatory landscape In 2009 G20 Leaders committed to an ambitious agenda for reform of the global OTC derivatives market. As a result, the market landscape has been changing, creating new opportunities for ICAP. The move towards more electronic trading of derivatives, central clearing and risk mitigation are positive drivers for the business and ICAP has invested in developing the technology and platforms that will be needed to enable our customers to meet these new requirements. The US is most advanced in its rulemaking. The requirements are in place for reporting and clearing and 2 October saw the launch of SEFs, a new category of trading venue created under the Dodd- Frank Act. Following Javelin s submission of the first Made Available to Trade ( MAT ) notification (in USD, euro and GBP interest rate swaps) mandatory trading is expected to begin on 18 February ICAP has already emerged as the market leader in SEF traded interest rate swaps and is well positioned to respond to the U.S. Commodity Futures Trading Commission s ( CFTC ) MAT determination. Although there remain some issues arising from the cross-border application of the CFTC rules, these are expected to be resolved over time through a combination of increased customer familiarity and further clarification of the new rules. In Europe, EMIR creates the regulatory framework for CCPs and Trade Repositories. Certain risk mitigation requirements, including portfolio reconciliation, compression and dispute resolution, are now in force and are proving positive for triresolve and trireduce. Trade reporting will begin next year and offers growth opportunities for Traiana. Consultations are underway on which products should be subject to mandatory clearing. 3

6 Interim Management Report: Operating and Financial Review continued Regulatory Investigations On 25 September 2013, ICAP Europe Limited ( IEL ), one of ICAP s Global Broking division's subsidiaries, reached settlement agreements with the FCA and the CFTC relating to the involvement of certain brokers in the attempted manipulation of yen Libor by bank traders between October 2006 and January Under the terms of the settlements, IEL agreed to pay penalties of 14 million to the FCA and $65 million to the CFTC, totalling 55 million ($87 million). The Company has also been working closely and co-operating fully with an ongoing investigation by the U.S. Department of Justice ( DOJ ). The DOJ has not taken action against IEL nor any other ICAP company to date. Based on ICAP's present assessment of this matter, no provision has been made. ICAP continues to respond to requests from several other government agencies in relation to the setting of yen Libor, including the European Commission. It is not practicable to predict the ultimate outcomes of these investigations or to provide an estimate of any potential financial impact on the Group. In addition, ICAP plc has been added as a named defendant to three civil litigations against various Libor and Tibor setting banks in the United States. It is not practicable to predict the ultimate outcomes of these litigations or to provide an estimate of any potential financial impact on the Group, but the Company intends to defend the claims vigorously. In October 2012, four former cash equity brokers of Link Brokers Derivatives LLC ( Link ), one of Global Broking subsidiaries, were charged with wrongdoing by the US Securities Exchange Commission ( SEC ) and DOJ, in respect of conduct that largely pre-dates ICAP s acquisition of Link in April Since then Link has continued to cooperate with the SEC s investigation. Link closed its cash desk in 2010, and ceased all commercial operations in April A provision of 8 million was recorded at 30 September 2013 in respect of any potential settlement by Link with the SEC as a result of the former brokers conduct. ICAP continues to cooperate with the CFTC s inquiries in to the setting of USD ISDAFIX rates. ICAP Capital Markets LLC is the collection agent for ISDAFIX panel bank submissions in USD, but is not a panel member itself. It is not practicable to predict the ultimate outcome of this investigation or to provide an estimate of any potential financial impact on the Group. From time to time the Group is engaged in litigation in relation to a variety of matters. It is also frequently required or requested to retain and/or provide transaction records and other information to regulators and other government agencies as part of informal and formal inquiries or market reviews. It is not practicable to quantify the extent of any potential liabilities in litigation, nor identify the purpose or outcome of any regulatory requests, but currently there are none expected to have a material adverse impact on the Group s consolidated results or net assets. Cost reduction programme In 2012/13 the Group undertook a cost reduction programme that delivered 60 million of savings in that year, annualised at 80 million. The results for this first half include the benefit of 40 million of the 80 million annualised savings. These cost savings were principally derived from headcount reduction, control over discretionary spend and renegotiation of broker compensation (which, as a proportion of revenue, has now reduced from 60% in H1 2012/13 to 57%). The Group remains committed to reducing its overall cost base (net of incremental investment) and improving its ongoing flexibility. In May 2013, we provided an indication of the quantum and the areas in which material savings in the fixed and variable cost base are being targeted over the next three years. Consistent with these long term savings targets and in addition to ongoing short term cost actions, a range of structural projects to enhance the efficiency and cost effectiveness of the organisation are being progressed. These multi-year projects include the consolidation and rationalisation of data networks, consolidation of infrastructure support services and simplification of the Group legal entity structure. The full year benefit in 2013/14 of the ongoing cost reduction initiatives will be approximately 5 million (net of one off costs) which on a gross annualised basis will equate to at least 15 million in the year ending 31 March

7 Outlook Since the period end, ICAP s trading performance has been broadly consistent with the first half. There are a number of factors that make predicting performance in the second half difficult including the impact of the next phase of regulatory reform implementation, the ongoing US fiscal debate and uncertainty over customers trading appetite as they continue to scale back their businesses in certain products. SEFs were launched six weeks ago and whilst it is too early to form a definitive view of how the financial markets will respond to the new regulatory environment, we remain confident that ICAP will be a long term beneficiary of these market changes. On the assumption that market conditions do not materially change, it is our expectation that PBT for the full year to 31 March 2014 will be marginally ahead of the prior year. 5

8 Interim Management Report: Operating and Financial Review continued ICAP provides services in a wide range of geographies and asset classes, with the breadth of its market coverage being a key strength of the Group. We report on our business segments externally in the same way that we manage and report them internally. The major segments are Global Broking, Electronic Markets and Post Trade Risk and Information. Consolidated Group revenue by asset class m Half year to 30 Half year to 30 September 2013 September 2012* Change (%) Rates FX and money markets (3) Emerging markets Commodities (10) Equities Credit (24) Total revenue (1) Global Broking The Global Broking business is active in wholesale markets across all asset classes as show below: Revenue by asset classes m Half year to 30 Half year to 30 September 2013 September 2012 Change (%) Rates (4) Emerging markets Commodities (10) Equities FX and money markets (9) Credit (26) Total revenue (4) The geographic performance of Global Broking is shown below: Revenue m Half year to 30 Half year to 30 September 2013 September 2012 Change (%) Half year to 30 September 2013 Operating profit Half year to 30 September 2012 Change (%) EMEA (5) (7) The Americas (3) Asia Pacific (4) n/m Total (4) Margin (%) ppt For the six months ended 30 September 2013, Global Broking s revenue decreased by 4% reflecting a decline in Credit, Commodities, FX and money markets revenues partly offset by growth in Equities and Emerging markets revenues and broadly consistent performance in Rates. Despite the reduction in overall revenues, operating profits grew by 16% principally reflecting the benefit of cost saving initiatives implemented during the prior year. The improvement in the profitability of the business translated into a higher operating margin, which increased by 2ppt from 9% to 11%. 6

9 Interim Management Report: Operating and Financial Review continued Global Broking continued Rates The rates business comprises interest rate derivatives, government bonds, repos and financial futures. During the period, revenue decreased by 4% as trading activity was muted by the low interest rate environment, flat yield curves, and economic and regulatory uncertainty. These factors contributed to flat revenue growth in interest rate derivatives notwithstanding the impetus provided to trading activity in the US by the ongoing speculation around the tapering of the Federal Reserve s quantitative easing programme. Lower trading activity in repo reflected compressed repo rates and balance sheet constraints arising from more stringent capital adequacy requirements. Activity in the US mortgage market is expected to remain sluggish until the US Federal Reserve withdraws its support of new issuance. UK Gilts has performed well, particularly in longer maturities. FX and money markets The FX and money markets business comprises spot and forwards, cash products and a joint venture in FX options. During the period, revenue decreased by 9% reflecting reduced exchange rate volatility, the low interest rate environment and bank internalisation of FX flows. The lower volatility in G10 interest rates particularly affected volumes in FX forwards while smaller currency pairs were less affected either by lack of volatility or internalisation. Trading activity in money markets improved over the prior period as expectations of higher interest rates drove increased activity. Commodities The commodities business comprises energy (including power and electricity, oils, natural gas, coal, and alternative fuels), shipping, metals, intellectual property and other products (including cotton, wool and sugar). During the period revenue decreased by 10% reflecting a number of factors including reduced volatility in US power, oversupply and unusually warm temperatures impacting consumption in the gas market and the decision by a number of investment banks to curtail commodities trading. Despite lower industry volumes, the metals business has improved its market share and continues to increase activity in options. Whilst market conditions remain tough in shipping, especially in dry, revenue has increased and the derivatives business continues to build market share. Emerging Markets ICAP is active in emerging markets across Asia Pacific, Latin America, Central and Eastern Europe and Africa. Emerging market revenue includes domestic activity in local markets and cross border activity in globally traded emerging market money and interest rate products. During the period, revenue increased by 10% reflecting a strong performance across all regions. Trading in Asian emerging markets was strong with good growth in Thailand, the Philippines and in Hong Kong (specifically in CNH and rates) partly offset by weaker activity in Indonesia and Korea. The Singapore office benefitted from increased regional NDF and NDS activity. The Latin American businesses benefitted from volatility in local interest rates which also helped drive NDF volumes. In Brazil, despite difficult markets, revenue continues to grow. The Brazilian NDF desk was restructured to achieve a lower cost base and was relocated from Miami to Jersey City. Immediately following the 2 October launch of the new SEF regulatory regime, NDF volumes fell below the year-to-date average reflecting the decision by certain bank customers not to trade with US counterparties. In recent weeks, NDF volumes have improved and over time are expected to return to pre-sef levels as the market adapts to the new regulatory environment. 7

10 Interim Management Report: Operating and Financial Review continued Global Broking continued Credit The credit business primarily comprises corporate bonds (representing approximately 80% of total credit revenues) and credit derivatives. Consistent with the ongoing trend over the past three years, revenue declined during the period by 26% following a particularly quiet summer with low interest rates, minimal issuance and the ongoing shift in secondary market trading to the buyside, all negatively impacting trading activity. An increase in issuance in September from borrowers looking to lock in low borrowing costs was a positive development. We continue to actively manage down the cost base of this business principally through the control of staffing levels. Equities The equities business principally comprises equity derivatives. During the period, revenue increased by 12%, as a result of a general improvement in equity market activity levels which had a more pronounced impact in the US. Across all regions, ICAP s equity businesses have been restructured to better align with their customer base, deliver efficiency gains and enhance the flexibility of the cost base. In the US, the Link and ICAP corporate equity businesses now operate under a unified management team with a single equity offering for customers. In Asia, increased volatility in Japan led to greater activity on the Nikkei 225 but this was largely offset by reduced trading in single stock equity derivatives. 8

11 Interim Management Report: Operating and Financial Review continued Electronic Markets ICAP operates EBS and BrokerTec, the world s leading electronic trading platforms in spot FX and government fixed income. The platforms offer efficient and effective exchange-like trading solutions to more than 2,800 customers in over 50 countries across a range of instruments including spot FX, US Treasuries, European government bonds and EU and US repo. The platforms are built on ICAP s bespoke networks connecting participants in wholesale financial markets. m Revenue Half year to 30 September 2013 Half year to 30 September 2012 Change (%) BrokerTec EBS (4) Other Total revenue Operating profit Margin (%) For the six months ended 30 September 2013 revenue increased by 5% to 141 million (H1 2012/ million) reflecting strong growth in US Treasury volumes traded on the BrokerTec platform partly offset by the weaker performance of EBS. Combined average daily volumes for the BrokerTec fixed income platform and the EBS spot FX platform for the period was $737 billion, an increase of 7% on the previous year. As a result of the reduced activity on EBS, the ongoing investment in EBS Direct and the Group cost reduction programme, the operating margin remained flat at 39% resulting in an operating profit of 55 million (H1 2012/13 53 million). BrokerTec BrokerTec is the leading electronic trading platform for the fixed income markets, providing innovative technology solutions across a wide range of products delivering efficient, transparent, anonymous and orderly electronic fixed income trading opportunities. For the six months ended 30 September 2013 revenue increased by 15% to 69 million (H1 2012/13-60 million) reflecting a 42% increase in US Treasury volumes to $161 billion, a 2% increase in US repo to $221 billion and a 2% increase in European repo to $250 billion. BrokerTec has benefited from an increase in its market share in US Treasuries following the technology upgrade completed last year. The debate over the possible timing of the tapering of the quantitative easing programme in the US further boosted trading of US Treasuries on the platform and the ongoing speculation continues to fuel activity levels. In addition, increased volatility has resulted in reduced internalisation in the US Treasury markets and more hedging activity in the inter-bank market. Trading activity in European Government Bonds slowed as dealers became more cautious, closely monitoring risk and balance sheet usage and sovereign debt inventory at many dealers fell back. Trading activity in US and European repo volumes marginally improved but was held back by the diminishing supply of collateral and higher levels of bank reserves. EBS The EBS platform provides efficient and fair access to global markets for spot FX, precious metals and NDF traders around the world. For the six months ended 30 September 2013 revenue decreased by 4% to 66 million (H1 2012/13-69 million) principally reflecting a 9% decrease in volume to $105 billion per day. Changes to Japanese monetary policy drove yen activity on EBS during the first quarter. However, overall volumes were subdued due to a number of cyclical factors including a historically narrow trading range in euro/usd, EBS s most significant currency pair, and the ongoing low interest rate environment depressing carry trade activity. Structural factors including the ongoing internalisation of FX flows by 9

12 Interim Management Report: Operating and Financial Review continued Electronic Markets continued EBS continued banks has further impacted activity in the inter-bank market. In partnership with Global Broking, a combined Asian NDF offering is being developed that will leverage both ICAP s electronic and voice liquidity to provide customers with the most efficient global execution. There is no comparable mix of hard-match electronic, hybrid and voice liquidity anywhere in the market. Over the past 18 months the cost base has been actively managed principally through the control of staffing levels in the established business while investing in a wider skills base and other resources to fuel growth in new products. EBS Direct, the new relationship based disclosed liquidity service, represents an important strategic initiative for ICAP which will leverage EBS s extensive customer base, global networks and geographic reach. The product has recently moved from a pilot programme into a full commercial launch with more than 325 customers signed up to the service, including 30 non-bank customers. A significant initial and ongoing investment has been made largely funded by cost saving initiatives from within the business. Other platforms i-swap, ICAP s global electronic trading platform for IRS continues to attract interest from market participants. In November 2013, Morgan Stanley took an equity stake in iswap Limited by diluting the other shareholding banks. ICAP retains a 40.2% stake in iswap Limited. i-swap continue to enhance its functionality and is now SEF compliant. In June 2013 sterling swaps were added to its existing euro and dollar swaps offering. The next stage in the development of i-swap will be the extension of the platform to the Australian dollar (targeted Q1 2014) followed by other currencies. 10

13 Interim Management Report: Operating and Financial Review continued Post Trade Risk and Information The Post Trade Risk and Information ( PTRI ) business comprises the portfolio risk services businesses (Reset, ReMatch and TriOptima), the transaction processing business, Traiana, and the information business which provide services to more than 3,000 customers. m Revenue Half year to 30 September 2013 Half year to 30 September 2012 Change (%) Reset and ReMatch (16) TriOptima Traiana Information (2) Total revenue Operating profit Margin (%) For the six months ended 30 September 2013 revenue of 103 million (H1 2012/ million) was 1% ahead of the prior year. Operating profit at 43 million and the operating margin at 42% both remained flat given the change in mix and the continued investment in Traiana and TriOptima. Reset and ReMatch Reset is the market leading provider of risk mitigation services that reduces the basis risk within portfolios from fixings in the interest rate, FX and inflation markets. This risk results from the structure of the instruments traded and a mismatch of exposure over time. It also addresses structural imbalances within trading portfolios. ReMatch rebalances the illiquid basis and market risk inherent in credit derivative portfolios. For the six months ended 30 September 2013, revenue decreased by 16% to 21 million (H1 2012/13-25 million). The demand for the risk mitigation services continues to be held back by the low interest rate volatility and flat short term yield curves. Going forward, any anticipated change to the interest rate outlook is expected to increase basis risk in customers portfolios and therefore increase demand for risk mitigation and portfolio rebalance services. ReMatch continues to expand its position in the CDS market for both western European and emerging market sovereigns and has now extended its coverage into the corporate CDS markets in the UK and the rest of Europe. The unfavourable market conditions under which Reset and Rematch currently operate in have been further exacerbated by the convergence of regulatory deadlines for SEF implementation and ongoing market uncertainty over the application of the new extraterritoriality provisions within the SEF regulations. TriOptima TriOptima, through trireduce and triresolve, is the market leader in risk termination and risk mitigation solutions for OTC derivatives, primarily through the reconciliation and elimination of outstanding transactions. Regulations in the US and Europe contain provisions for trade compression and portfolio reconciliation and TriOptima s offerings are strategically aligned with G20 policy objectives of reducing risk in the financial system. 11

14 Interim Management Report: Operating and Financial Review continued Post Trade Risk and Information continued TriOptima continued For the six months ended 30 September 2013 revenue increased by 7% to 21 million (H1 2012/13-20 million) driven by the accelerated uptake of the subscription based portfolio reconciliation service, triresolve, in response to the EMIR reforms. The number of individual reconciliations performed increased by 62% over the same period last year reflecting a doubling of triresolve s customer base to over 500 sell- and buy-side firms. During the period, the number of compression cycles undertaken by trireduce declined, as trade terminations within LCH.Clearnet s SwapClear service were temporarily suspended to allow the clearing platform to complete systems upgrades to comply with new regulatory requirements. trireduce compressions for SwapClear members are scheduled to resume towards the end of the calendar year with improved capacity to cater to the expanding number of clearing members seeking to terminate cleared trades. The leverage ratio, being part of the Basel III rules, has created unprecedented interest among dealers for compressions. Since its launch in 2003 more than $356 trillion in total notional volume has been eliminated from the OTC derivatives markets using the trireduce service. TriOptima continues to innovate and provide its customers with new solutions. A new centralised service for the calculation of counterparty credit risk metrics, will be used as a benchmarking and validation tool for banks and is expected to launch during Q4 2013/14. Traiana Traiana operates the leading market infrastructure for pre-trade risk management and post-trade processing across multiple asset classes, and provides risk and regulatory solutions throughout the financial sector. The company s robust and proven product suite automates trade processing across the lifecycle for FX, cash equities, equity swaps, futures, OTC derivatives and fixed income. Traiana s Harmony network connects more than 550 global banks, broker/dealers, buyside firms and trading platforms. For the six months ended 30 September 2013 revenue increased by 18% to 24 million (H1 2012/13-20 million) as the average number of FX transactions processed by Harmony increased to 1.7 million per day (H1 2012/ million per day), an increase of 34%. In addition, Traiana s trade aggregation joint venture with CLS Group, CLSAS, processed on average more than 400,000 transactions per day an increase of 14% on the prior period resulting in an 11% increase in revenue. Traiana continues to expand the breadth of its offering, with an increased focus on the opportunities created by financial regulatory reform in the US and Europe. Ahead of 1 November 2013 regulatory deadline for pre-trade screening of trades conducted on SEFs, the majority of SEFs, FCMs and clearing houses lent their support to the Traiana-led industry initiative to create a central limit hub using the CreditLink service. This service provides customers with the ability to monitor and manage pre and post-trade credit in real-time across multiple trading venues in a consolidated view. CreditLink is now the established central infrastructure for managing limits on cleared swaps across asset classes with 15 FCMs signed up to the service. Traiana is also looking at addressing new regulatory requirements arising from EMIR. Information ICAP Information Services ( IIS ) delivers independent data solutions to market participants and professionals, enabling them to meet the needs of the evolving, modern trading and investment environment. The division operates a subscription based charging structure for a diversified global suite of products and services. During the period IIS revenue decreased by 2% to 37 million (H1 2012/13-37 million) attributable to the reduction in EBS-related data sales. Excluding the EBS related sales, IIS revenue increased by 9%. The IIS product offering has expanded to incorporate innovative services and advanced solutions across asset classes including credit, shipping and indices as well as transaction based products for valuations. All IIS product offerings are subject to formal policies and controls over data distribution. 12

15 Interim Management Report: Operating and Financial Review continued Summary consolidated income statement m Half year to 30 September 2013 Half year to 30 September 2012 Change (%) PBT before acquisition and disposal and exceptional costs Acquisition and disposal costs (31) (37) (16) Exceptional items (68) (32) 113 PBT (statutory) (41) Tax (21) (18) 17 Profit for the period (statutory) (62) PBT before acquisition and disposal costs and exceptional items increased by 1% to 139 million reflecting a 9 million improvement in operating profit, which was partially offset by a 6 million increase in net finance costs (H1 2013/14-16 million; H1 2012/13-10 million). The increase in net finance costs was primarily driven by lower dividends received from equity investments (H1 2013/14-2 million; H1 2012/13-6 million). The full year net finance costs is expected to fall within the range 34 million to 36 million, higher than H1 2013/14 principally as a result of phasing of dividend income. The statutory PBT and the statutory profit for the period declined by 41% and 62% respectively, primarily driven by the impact of exceptional items, partially offset by a 5 million gain resulting from the revaluation of deferred consideration. Acquisition and disposal costs The Group s acquisition and disposal costs comprise 36 million in amortisation of intangibles arising on consolidation offset by a 5 million gain relating to the revaluation of deferred consideration as noted above. There were no impairment charges recognised in the period. Exceptional items The Group s policy is to separately disclose items in its income statement as exceptional which are non-recurring and material in both size and nature. For the six months to 30 September 2013 exceptional items before tax were 68 million principally relating to the Libor settlements. For the six months to 30 September 2012 exceptional items before tax were 32 million, relating to the implementation of the cost reduction programme, a write down of certain technology assets for the electronic business and legal and professional fees. Tax The overall objective continues to be to plan and manage the tax affairs of the Group efficiently while complying with local tax regulations. The Group s effective tax rate for the six months to 30 September 2013, excluding acquisition and disposal costs and exceptional items, is 25% (30 September %). The 3ppt reduction in the effective tax rate to 25% was driven by a combination of lower headline corporation tax rates, the geographical mix of profits and a reduction in non-deductible expenses. The full year effective tax rate (excluding acquisition and disposal costs and exceptional items ) is expected to fall within the range 24% to 26%. Earnings and EPS Adjusted basic EPS improved by 5% to 16.2p reflecting the increase in profit before tax of 1% and 3ppt improvement in the effective tax rate. The Group s basic EPS fell from 7.8p to 3.0p reflecting higher one-off exceptional items in this period. The weighted average number of shares outstanding during the period was 641 million. Dividend Consistent with previous practice, ICAP s interim dividend has been calculated at 30% of the prior year s full year dividend. An interim dividend of 6.60p per share (H1 2012/ p per share) covering the six month period to 30 September 2013 will be paid on 7 February 2014 to shareholders on the register at 3 January The shares will be quoted ex-dividend from 31 December

16 Interim Management Report: Operating and Financial Review continued Balance sheet The Group s net assets at 30 September 2013 were 995 million, 161 million lower than the 31 March 2013 position ( 1,156 million) principally reflecting the payment of the 2012/13 final dividend of 99 million, retranslation at 30 September 2013 of foreign currency net assets ( 84 million) offset by the profit for the period of 19 million. Net debt m As at 30 September 2013 As at 31 March 2013 As at 30 September 2012 Long-term borrowings (298) (506) (486) Short-term borrowings (301) (71) (213) Total gross borrowings (599) (577) (699) Cash and cash equivalents Net (debt)/cash (87) 25 (158) Restricted funds Net debt at 30 September 2013 of 87 million compares to a net cash position of 25 million at 31 March 2013 and a net debt position of 158 million at 30 September The main components of the 112 million increase in net debt from 31 March 2013 were the payment of the final dividend of 99 million in July 2013 together with the adverse impact on net cash arising from the retranslation of foreign currency balances partly offset by the generation of 14 million of free cash flow. The Group s overall funding position at 30 September 2013 remains strong. The Group refinanced certain of its borrowing arrangements in the period and increased its gross debt position, net of fees, by 22 million to 599 million at 30 September The Group refinanced its $880 million revolving credit facility ( RCF ) with a new 425 million RCF, which matures in December 2016, and increased its short term liquidity with a new 50 million term loan facility for one year. At 30 September 2013, the Group had committed undrawn headroom under its core credit facilities of 379 million (31 March 2012/ million). At 30 September 2013, the earliest debt maturity date was on 300 million ( 251 million equivalent) of senior notes due in July 2014; the Group continues to review its options in the international bond markets as it considers the most appropriate refinancing of these notes. As at 30 September 2013 the Group s long-term issuer default rating on senior debt was BBB with Fitch and Baa2 with Moody s. Fitch lowered its rating one notch from BBB+ on 28 June 2013 as a result of a review of the wider industry. Moody s concluded its downgrade review on 17 June 2013 by taking no action and affirming the Group s rating, maintaining the negative outlook. Cash conversion m Half year to 30 September 2013 Half year to 30 September 2012 Cash from ongoing operations Interest and tax (63) (40) Cash flow from ongoing operating activities Capital expenditure (30) (12) Dividends from associates and investments 6 7 Ongoing free cash flow

17 Interim Management Report: Operating and Financial Review continued Balance sheet continued Cash conversion continued Cash generated from ongoing operations of 101 million was 9 million higher than the prior year ( 92 million), in line with the absolute growth in operating profits. After deduction of cash outflows relating to interest, tax and capital expenditure, ongoing free cash flow generated during the period was 14 million, a conversion rate of 13%. This reflects the reversal of short-term positive movements in working capital in H2 2012/13, which resulted in a comparatively high conversion rate of 203%. This seasonality of cash conversion is consistent with historical phasing. The increase in cash outflow of 19 million relating to tax (H1 2013/14-42 million; H1 2012/13-23 million) reflected refunds relating to earlier years received in H1 2012/13, which reduced the net cash tax paid in that period. The 18 million increase in capital expenditure is primarily driven by investment in the Electronic Markets and Post Trade Risk Information divisions to build and enhance our service offerings to customers. We are expecting to make similar level of investment in technology in the second half of the year. Regulatory capital At 30 September 2013, the Group s Pillar 1 regulatory capital headroom remained stable at 0.9 billion. The Group continues to benefit from the BIPRU Investment Firm waiver. The Group will be subject to CRD IV with effect from 1 January 2014, and the FCA have confirmed, in their published consultation papers in particular, that the BIPRU Investment Firm waiver will continue to apply under the new regime until the originally agreed expiry date. The Group s waiver will fall due for renewal in April

18 Interim Management Report: Operating and Financial Review continued Risk Details of the Group s risk management and its risk profile were set out on pages 40 to 45 of the Group s 2013 Annual Report. As of 30 September 2013, the directors have reviewed these risks in the context of current market conditions and the outlook for the remaining six months of the financial year. In addition, they have reconsidered previous statements made on risk appetite, risk governance and internal control and do not consider there to be any significant changes since the report. The Group continues to consider operational, liquidity and strategic to be the principal risks. Risk Rating Appetite Half-yearly update Strategic High Proactive Whilst the Dodd-Frank act changes have had a material effect on certain activities of the financial markets and other significant global regulatory tightening such as CRD IV, MiFiD etc are in progress, we have yet to alter our fundamental view of the nature of these risks on the Group albeit that they are clearly influencing our clients and operating environment more broadly. Despite these challenges, our appetite for taking strategic risk remains unchanged. Operational High Cautious The fundamental risks inherent in our people, processes, and systems remain the same. Whilst the recent regulatory settlement around Libor has highlighted the inherent operational risks in certain of our businesses, we continue to improve our management of these risks which are a structural part of our activities and environments. Liquidity High Cautious Our liquidity risk profile remains broadly unchanged. Risk outlook ICAP is clearly subject to the changing financial market environment resulting from global regulatory reforms. As this moving legislative background influences our clients, markets and operating approaches, it is clear that these play a part in the strategic direction of the Group. In certain aspects, the exchange like characteristics of swap execution facilities, central clearing and move away from historically OTC activity reduces our operational risk profile albeit at the increased exposure to a differing type of risk such as the possibility of bifurcating liquidity pools. However, our overall risk profile remains fundamentally unchanged. ICAP retains its belief in the level of Strategic risk the Group is exposed to being materially unaltered and continues to proactively look for strategic opportunities in these dynamic environments. 16

19 Directors Statement of Responsibilities The directors confirm that, to the best of their knowledge, this condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union, and that the interim management report and the condensed set of financial statements herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely: an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and material related-party transactions in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report. Going concern basis The financial statements are prepared on the going concern basis, as the directors are satisfied that the Group has the resources to continue in business for the foreseeable future. In making this assessment, the directors have considered a wide range of information relating to present and future conditions, including Group s profitability, liquidity requirements, plans and financing arrangements. Changes in directors Hsieh Fu Hua retired from the board in his capacity as an independent non-executive director at the Annual General Meeting on 10 July 2013 and Ivan Ritossa was appointed as an independent nonexecutive director on 10 July A list of current directors is maintained on the ICAP plc website By order of the board Michael Spencer Group Chief Executive Officer 13 November 2013 Iain Torrens Group Finance Director 17

20 Consolidated Income Statement Half year to 30 September 2013 m Before acquisition and Acquisition Exceptional disposal costs and and disposal items Note exceptional items costs (Note 3) Total Revenue Operating expenses (588) (36) (68) (692) Other income 5 5 Operating profit 153 (36) (68) 49 Finance income Finance costs (20) (20) Share of profits of associates after tax 2 2 Profit before tax 139 (31) (68) 40 Tax 6 (35) 11 3 (21) Profit for the period 104 (20) (65) 19 Attributable to: Owners of the Company 104 (20) (65) 19 Non-controlling interests - Earnings per ordinary 4 basic 3.0 diluted 2.9 Half year to 30 September 2012 m Before acquisition and disposal costs and Acquisition and disposal Exceptional items Note exceptional items costs (Note 3) Total Revenue Operating expenses (608) (36) (32) (676) Other income 6 6 Operating profit 144 (36) (32) 76 Finance income 8 8 Finance costs (18) (1) (19) Share of profits of associates after tax 3 3 Profit before tax 137 (37) (32) 68 Tax 6 (38) (18) Profit for the period 99 (27) (22) 50 Attributable to: Owners of the Company 99 (27) (22) 50 Non-controlling interests Earnings per ordinary share 4 The accompanying notes form an integral part of these consolidated Financial Statements. 99 (27) (22) 50 basic 7.8 diluted

21 Consolidated Statement of Comprehensive Income m Half year to 30 Half year to 30 September 2013 September 2012 Profit for the period Other comprehensive income/(loss) Items that may be reclassified subsequently to profit or loss when specific conditions are met: Net movement on cash flow hedges 7 2 Net exchange adjustments on investments in overseas subsidiaries (84) (17) Net exchange gain on investment in associate (5) Income tax relating to items that may be reclassified (5) (1) Other comprehensive loss for the period (87) (16) Total comprehensive (loss)/income for the period (68) 34 Total comprehensive (loss)/income attributable to: Owners of the Company (68) 34 Non-controlling interests (68) 34 The accompanying notes form an integral part of these consolidated Financial Statements. 19

22 Consolidated Balance Sheet m *As disclosed in page 121 in ICAP plc Annual Report for the year ended 31 March 2013, certain matched principal trade receivables and payables were recorded on a net basis from 31 March 2013 onwards. The accompanying notes form an integral part of these consolidated Financial Statements. The consolidated Financial Statements, including accompanying notes, were approved by the board on 13 November 2013 and were signed on its behalf by: Note As at 30 September 2013 As at 31 March 2013 As at 30 September 2012 Assets Non-current assets Intangible assets arising on consolidation 998 1,080 1,143 Intangible assets arising from development expenditure Property and equipment Investment in associates Deferred tax assets Trade and other receivables Available-for-sale investments ,243 1,322 1,394 Current assets Trade and other receivables* 17,949 16,898 69,462 Restricted funds Cash and cash equivalents ,513 17,537 70,091 Total assets 19,756 18,859 71,485 Liabilities Current liabilities Trade and other payables* (17,939) (16,880) (69,374) Borrowings 8 (301) (71) (213) Tax payable (111) (134) (116) Provisions (10) (1) (1) (18,361) (17,086) (69,704) Non-current liabilities Trade and other payables (17) (29) (46) Borrowings 8 (298) (506) (486) Deferred tax liabilities (68) (66) (93) Retirement benefit obligations (4) (3) (1) Provisions (13) (13) (16) (400) (617) (642) Total liabilities (18,761) (17,703) (70,346) Net assets 995 1,156 1,139 Equity Capital and reserves Called up share capital Share premium account Other reserves Translation Retained earnings Equity attributable to owners of the Company 942 1,103 1,098 Non-controlling interests Total equity 995 1,156 1,139 Michael Spencer Group Chief Executive Officer Iain Torrens Group Finance Director 20