Description
London Stock Exchange Group is a diversified international market infrastructure and capital markets business that sits at the heart of the worlds financial community.
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Delivering
Growth
Annual Report
31 March 2014
© May 2014
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales No. 5369106
www.lseg.com
AIM, London Stock Exchange, the London Stock Exchange coat of arms device, NOMAD, RNS,
SEDOL, SEDOL Master?le, SETS, TradElect, UnaVista, and IOB are registered trade marks of London
Stock Exchange plc. Main Market, Specialist Fund Market, SFM and ORB, High Growth Segment,
Professional Securities Market, PSM are trade marks of London Stock Exchange plc.
Borsa Italiana, MTA, MIB, MOT, AGREX and IDEX are registered trade marks of Borsa Italiana S.p.A.
IDEM is a trade mark of Borsa Italiana S.p.A.. CC&G is a trade mark of Cassa di Compensazione e
Garanzia S.p.A.. Monte Titoli S.p.A. and X-TRM are registered trade marks of Monte Titoli S.p.A..
EuroMTS, MTS and BOND VISION are registered trade marks of Mercato dei Titoli di Stato S.p.A.
Proquote is a registered trade mark of Proquote Limited.
FTSE is a registered trade mark of subsidiaries of London Stock Exchange Group plc and is used by
FTSE International Limited under licence.
MillenniumIT and Millennium Exchange are registered trade marks of Millennium Information
Technologies (Private) Limited and MillenniumIT Software and NewClear are registered trade marks
of Millennium IT Software (Private) Limited.
Millennium Surveillance and Millennium CSD are trade marks of MillenniumIT Software
(Private) Limited.
Turquoise is a registered trade mark of Turquoise Global Holdings Limited.
SwapClear, ForexClear and CDSClear are registered trade marks of LCH.Clearnet Limited.
LCH.Clearnet is a trade mark of LCH.Clearnet Limited.
Other logos, organisations and company names referred to may be the trade marks of
their respective owners.
Designed by Addison Group www.addison-group.net
Board and Executive Committee photography by
Paul Hackett (www.paulhackett.net) and Nick Sinclair (www.nicksinclair.com)
Printed in England by CPI Colour, CPI Colour is a certi?ed CarbonNeutral company.
Welcome to our
annual report
Further information on London Stock
Exchange Group can be found at:
www.lseg.com
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales
No. 5369106
Who we are
London Stock Exchange Group is a diversi?ed international market
infrastructure and capital markets business that sits at the heart of
the world’s ?nancial community.
The Group operates a broad range of international equity, bond and derivatives
markets, including London Stock Exchange; Borsa Italiana; MTS, one of
Europe’s leading ?xed income markets; and Turquoise, the pan-European
equities MTF. Through its various platforms, the Group offers international
businesses and investors unrivalled access to Europe’s capital markets.
Post trade and risk management services are a signi?cant part of the Group’s
business operations. LSEG operates CC&G, the Italian clearing house, and
Monte Titoli, the European settlement business. The Group is also a majority
owner of leading multi-asset global clearing service, LCH.Clearnet Group.
The Group offers customers an extensive range of real time, reference
data and news products, including SEDOL, UnaVista, Proquote and RNS,
as well as access to over 250,000 international equity, bond and alternative
asset class indices, through its world leading index provider, FTSE.
The Group is also a leading developer of high performance trading platforms
and capital markets software for customers around the world.
Headquartered in London, with signi?cant operations in Italy, France,
North America and Sri Lanka, the Group employs approximately 2,900 people.
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London Stock Exchange Group plc Annual Report 2014
STRATEGIC REPORT
An overview of our business, the markets and
regulatory environment in which we operate,
our vision and strategy and statements from our
Chairman and our Chief Executive. More detail on
each of our divisions, our performance, how we
consider our wider responsibilities and the
principal risks that could affect our business.
Financial highlights 2
Operational highlights 3
Group at a glance 4
What we do: our business model 6
Market position and outlook 8
Chairman’s statement 14
Chief Executive’s statement 16
Strategy in action 18
Executive management team 20
Introduction to segmental review 23
Capital Markets 24
Post Trade Services 28
Information Services 32
Technology Services 34
Our wider responsibility 36
Financial review 38
Risk management oversight 44
Principal risks and uncertainties 48
Sign-off for the Strategic Report is provided
in the Directors’ Report on page 98
GOVERNANCE
An introduction to our Board of Directors, our
approach to corporate governance and how we
reward performance, along with other statutory
and regulatory information.
Board of Directors 54
Corporate governance 56
Report of the Nomination Committee 65
Report of the Audit Committee 66
Report of the Risk Committee 69
Directors’ remuneration report 70
Directors’ report 98
Statement of directors’ responsibilities 101
Independent Auditors’ report to the members
of London Stock Exchange Group plc 102
GROUP FINANCIAL STATEMENTS
Detailed ?nancial information setting out our
performance for the year and ?nancial position
at year end, together with the report thereon by
our independent auditors.
Consolidated income statement 106
Consolidated statement of
comprehensive income 106
Balance sheets 107
Cash ?ow statements 108
Statements of changes in equity 109
Notes to the ?nancial statements 110
SHAREHOLDER INFORMATION
An explanation of how trading markets are
structured, a glossary of terms used in this
report and other information for shareholders.
Market structures 142
Glossary 144
Financial calendar 146
Investor relations 147
Investor relations contacts 148
2010 2014 2013 2012 2011
514.7
430.2
441.9
341.1
280.3
Adjusted operating pro?t
*
£ million
2010 2014 2013 2012 2011
353.1 348.4
358.5
283.0
182.0
Operating pro?t
£ million
2010 2014 2013 2012 2011
1,213.1
852.9
814.8
674.9
628.3
Adjusted total income
*
£ million
2010 2014 2013 2012 2011
107.1
105.3
100.6
73.7
60.1
Adjusted earnings per share
*
pence
2010 2014 2013 2012 2011
63.0
80.4
193.6
56.4
33.8
Basic earnings per share
pence
2010 2014 2013 2012 2011
30.8 29.5
28.3
26.8
24.4
Dividends per share
pence
2 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial highlights
Year ended 31 March 2014 2013 Variance %
Adjusted total income* £1,213.1m £852.9m 42%
Adjusted operating pro?t* £514.7m £430.2m 20%
Operating pro?t £353.1m £348.4m 1%
Adjusted pro?t before tax* £445.9m £380.7m 17%
Pro?t before tax £284.3m £298.9m -5%
Adjusted basic earnings per share* 107.1p 105.3p 2%
Basic earnings per share 63.0p 80.4p -22%
* London Stock Exchange Group uses non-GAAP performance measures as key ?nancial indicators as the Board believes these
better re?ect the underlying performance of the business. Adjusted operating pro?t, adjusted total income, adjusted pro?t
before tax and adjusted basic earnings per share all exclude amortisation of purchased intangibles, non-recurring items and
unrealised losses/gains.
Group Adjusted Total Income by segment
£ million
Capital Markets 309.5
Post Trade Services
CC&G and Monte Titoli 146.0
Post Trade Services LCH.Clearnet 325.2
Information Services 348.7
Technology Services 64.0
Other 19.7
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Strategic report Highlights 3
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Operational highlights
The Group is delivering on its strategy, leveraging its range
of products and services and further diversifying its offering
through new product development and strategic investments.
A few examples of the progress being made are highlighted below:
Capital Markets
— Primary markets saw a six year high in new issue activity with 188
companies admitted
— In equity trading, UK value traded increased eight per cent;
Italian number of trades increased six per cent
— In ?xed income trading, MTS cash and BondVision value traded
increased 48 per cent; MTS Repo increased two per cent
— Turquoise widened its stock universe and added functionality;
value traded increased 68 per cent
— Following success in Italy, the ELITE programme was launched in the UK
in April 2014 – providing ambitious, high growth private businesses from a
wide variety of sectors with access to a unique package of education,
business support and investors to enhance their growth prospects
— The Group acquired a majority stake in EuroTLX, an Italian MTF
operating in the European retail ?xed income market
— MTS announced agreement to acquire Bonds.com Group, a US based
platform for the electronic trading of US corporate and emerging
market bonds
Post Trade Services – CC&G and Monte Titoli
— Monte Titoli is the largest CSD entering the ?rst wave of TARGET2-Securities
— The new international CSD in Luxembourg (globeSettle), utilising Monte
Titoli’s expertise, is on track to commence operation in Summer 2014
having received regulatory approval from the CSSF – J.P. Morgan has
already signed up as the ?rst user of settlement, custody and asset
servicing services
Post Trade Services – LCH.Clearnet
— The Group completed the acquisition of a majority stake in
LCH.Clearnet Group in May 2013
— SwapClear, the world’s leading interest rate swap clearing service,
cleared $526 trillion notional
— Fixed income nominal value cleared increased one per cent;
equity trades cleared increased 17 per cent
— LCH.Clearnet was named Risk Magazine’s 2014 Clearing House of
the Year after ful?lling criteria which included risk management,
customer satisfaction, responsiveness to new regulations,
engagement with regulators, liquidity provision and creativity
— LCH.Clearnet Limited launched clearing for NASDAQ OMX’s NLX,
a new multilateral trading facility (MTF) offering a range of both
short-term interest rate (STIRs) and long-term interest rate (LTIRs)
euro and sterling-based listed derivatives
— Enhanced its compression offering via SwapClear to include multilateral
compression, which enables customers to reduce outstanding positions
and lower their counterparty exposure and capital costs
Information Services
— In April 2013, FTSE and Canada’s TMX combined their ?xed income
businesses in a new joint venture, FTSE TMX Global Debt Capital Markets.
MTS bond indices also became part of the FTSE TMX venture
— Vanguard in the United States completed the move of $209 billion of assets
to FTSE benchmarks, one of the largest ever switches of benchmarks
— FTSE increased its China offering, with continued development of the
FTSE China Index series, widely regarded as the leading benchmark for
Chinese ETFs, and the launch of the FTSE BOCHK Offshore RMB Bond
Index series in partnership with Bank of China (Hong Kong)
— UnaVista increased its user base to over 30,000 (2013: 9,000), becoming
the largest approved reporting mechanism in Europe by trade volumes
and client numbers
— UnaVista launched an EMIR Trade Repository solution, approved by ESMA
as a repository across all asset classes and geographies, and the UnaVista
Rules Engine to help clients meet their wider regulatory reporting needs
Technology Services
— Millennium PostTrade was selected by Singapore Stock Exchange (SGX)
to support its clearing, settlement and depository services
— Millennium Smart Order Router (SOR) went live on Canada’s TMX to aid
compliance with Canadian regulation; it is also supporting the Orion
Central Gateway platform for Hong Kong Exchanges and Clearing Limited
— MillenniumIT successfully launched the Compliance Monitoring Systems
(CMS) for the London Metal Exchange, and extended Millennium
Exchange to Burgundy, the Nordic MTF owned by Oslo Børs
— The Group was selected as the business development and technology
partner by the Argentinian Central Securities Depository (CSD), Caja de
Valores S.A. (CVSA)
4 Strategic report London Stock Exchange Group plc Annual Report 2014
Group at a glance
TOTAL
INCOME CONTRIBUTION
SUB-SEGMENT
MAIN TYPES OF
REVENUE
Capital Markets
At the heart of what we do are our
multi-asset markets providing capital
formation for companies trading in
London and Italy – and increasingly
throughout Europe.
Group total income: 26%
Primary
Secondary
Other
£309.5
m
2013: £267.5m
Clearing
Interest
Settlement
& Custody
£146.0
m
2013: £208.5m
Post Trade Services
CC&G and Monte Titoli
We offer open access and ef?cient
clearing, settlement and custody services.
These post trade businesses support cash
equity, derivative, commodity and ?xed
income markets, mostly in Italy.
Group total income: 12%
Clearing OTC
Clearing non OTC
& other
Interest
£325.2
m
2013: N/A
Post Trade Services
LCH.Clearnet
We provide clearing services through
which counterparty risk is mitigated
across multiple asset classes for sell-side
clearing members and buy-side clients in
conjunction with trading venues globally.
Group total income: 27%
FTSE
Real time data
Other information
£348.7
m
2013: £306.3m
Information Services
We sell real time price information
and a wide range of other
information services from
indices to post trade analytics.
Group total income: 29%
MillenniumIT
Technology
£64.0
m
2013: £56.1m
Technology Services
Our businesses and customers
depend on our secure technology
that performs to high levels of
availability and throughput.
Group total income: 5%
London Stock Exchange Group is a diversified international
infrastructure business, incorporating Borsa Italiana,
London Stock Exchange, FTSE International, MillenniumIT
and LCH.Clearnet. The information below and on pages 6-7
provides an outline of our business model and core activities.
Primary
— Admission fees for initial listing or raising
further capital
— Annual fees for securities traded on our markets
Secondary
— Fees based on value traded (UK equities and
Government bonds) or number of trades
(Italian equities, retail bonds and derivatives)
Other
— Membership fees to access our trading markets
CC&G – Clearing
— Fees based on trades or contracts cleared, and
Central Counterparty (CCP) services provided
— Net interest on cash and securities held for margin
and default funds
Monte Titoli – Settlement & Custody
— Revenue mostly from the settlement of equity and
?xed income trades
— Custody fees are charged on the issuance of an equity
or ?xed income instrument, when dividend and interest
payments are made and on any corporate action
Clearing and other
— Fees based on trades or contracts cleared and CCP
services provided
— Fees for SwapClear interest rate swap service and
other OTC derivative clearing primarily based on
membership fees
— Fees for managing non-cash collateral
Interest
— Net interest on cash held for margin and
default funds
FTSE
— Subscription fees for data and analytic services
— Licence fees for passive funds tracking indices
Real time data
— Fees primarily based on number of terminals taking
our real time price and trading data
Other information
— Fees vary based on the nature of service provided,
mostly subscriptions and licence fees
MillenniumIT
— Sales of capital markets software, including trading,
market surveillance and post trade systems
— Provision of enterprise sales and IT infrastructure
services in Sri Lanka and to international capital
markets customers
Technology
— Fees for network connections, server hosting and
systems supplied by Group businesses
Note: Other income £19.7m, one per cent Group total income (2013: £14.5m, two per cent). Group total income of £1,213.1m is shown on an adjusted basis.
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Strategic report Group at a glance
CUSTOMER
PROFILE
HIGHLIGHTS KPIs
Primary
188 new companies joined our markets in the
year, including 34 international companies
CC&G
Clearing of equity and derivatives volumes increased by
three per cent
Clearing services
The Group acquired a majority stake in LCH.Clearnet
in May 2013
LCH.Clearnet was named Risk Magazine’s 2014
Clearing House of the Year
SwapClear obtained US approval as a Derivatives
Clearing Organisation (DCO) as mandatory client
clearing was implemented
FTSE
FTSE China is widely regarded as the leading benchmark
for Chinese ETFs. Developed new partnerships in Australia
and Mexico
MillenniumIT
Launched MillenniumIT’s Smart Order Router
technology, which is now in use by Canada’s TMX
and Hong Kong Exchanges and Clearing Limited
Primary
Companies from 70 countries around the world have
come to our markets to raise money for growth, together
with issuers of bonds, ETFs and other instruments
Secondary
Banks and brokers worldwide, trading on the Group’s
equities, derivatives and ?xed income trading platforms
Other
Banks and brokers worldwide
CC&G
150 members, mainly banks and brokers,
over 40 per cent of which are based outside Italy
Monte Titoli
Wide range of Italian and international banks
and brokers for both on market and OTC trades.
Issuers of equity and ?xed income products
(Italian and international)
Clearing services
A wide base of banks, brokers and fund manager
?rms worldwide for OTC derivatives and listed equity,
derivatives, ?xed income and commodities
FTSE
Asset managers, active and passive buy-side ?rms
and trading venues
Real time data
Direct to trading ?rms and via service providers,
such as Bloomberg and Thomson Reuters, that
incorporate our data with other information
Other information
Our customers vary based on the service provided,
including fund managers, traders, retail brokers and
market makers
MillenniumIT
London Stock Exchange Group divisions, other exchange
groups and capital market clients, banks, IT and large
Sri Lankan companies
Technology
Banks, trading ?rms and depositories in Europe,
North America, Africa and Asia-Paci?c region
Number of companies on our markets
2,740 2013: 2,746
Capital raised by new and further issues
£34bn 2013: £18bn
Number of equity and derivative contracts cleared
97.3m 2013: 94.7m
Average initial margin held
€11.9bn 2013: €10.1bn
Number of customers using MillenniumIT
capital markets software
37 2013: 35
Nominal value of ?xed income cleared
€72.3tr 2013: €71.5tr
Number of SwapClear members
103 2013: 78
Average cash collateral held
€40.3bn 2013: €43.9bn
Average number of equity order book trades
per day in Italy
235,000 2013: 223,000
Average order book equity value traded per
day in London
£4.3bn 2013: £4.0bn
ETF assets benchmarked to FTSE indices
$186bn 2013: $143bn
Settlement instructions handled
58.3m 2013: 55.3m
Monte Titoli’s custody assets under management
€3.32tr 2013: €3.23tr
Availability of UK equity market during the year
100% uptime 2013: 100%
Number of professional terminals taking Group
data (79,000 London data; 126,000 Italian data)
205,000 2013: 221,000
UnaVista number of transaction reports processed
1,179m 2013: 879m
Monte Titoli
International CSD, globeSettle, to commence operations
in Summer 2014 having received regulatory approval
from the CSSF
Settlement rate of 99.2 per cent of trades
Government and corporate bond issuance remained
at high levels
Real time data
Direct billing, enterprise licence and non-display
tariff initiatives
Other information
UnaVista increased its user base from 9,000 to over
30,000 in the last year
Technology
Will be launching FTSE Low Latency based on
the lowest latency calculation performed by
our Group Ticker Plant
Secondary
Share of order book trading remained stable during
the year at 64.7 per cent in UK equities and 84.6 per
cent in Italian equities
MTS cash and BondVision ?xed income volume
traded up 48 per cent
Turquoise increased value traded by 68 per cent
6 Strategic report London Stock Exchange Group plc Annual Report 2014
What we do:
our business model
26% Capital Markets
12% Post Trade Services – CC&G Monte Titoli
27% Post Trade Services – LCH.Clearnet
29% Information Services
5% Technology Services
1% Other*
Key
Contribution to Group adjusted income
CAPITAL FORMATION
INTELLECTUAL PROPERTY
Need help?
Like any industry, capital markets have their own
language. For that reason, we have included a
glossary on pages 144-145.
We provide services to a broad range of customers on an
international basis, across a diverse range of asset classes.
Our business activities fall into three categories:
– Capital formation
– Risk and balance sheet management
– Intellectual property
How we add value
— Our markets, post trade operations and information services
are connected to a wide range of issuers, traders and investors,
creating a valuable network that provides deep liquidity,
informs trading and investment decisions and provides market
ef?ciencies, including capital allocation and risk management.
— We provide a range of connected market services on an open
access basis, which offers customers the choice of using our
services but does not impose or restrict use.
— We have proven expertise in operating transparent, well governed
market infrastructure in highly regulated capital markets, providing
market services that are trusted, independent and resilient.
* Other income includes sub-let rental income and a gain from disposal of shares in a
non-core asset.
Information Services
We supply real time price and trading data, as well
as indices through FTSE.
Capital Raising – Primary Markets
Our central function is to bring together companies
and others seeking capital with investors from
around the world. Companies raise ?nance through:
— Equity
— Debt
Markets:
London – Main Market; Professional Securities
Market; Specialist Fund Market; AIM; Order Book for
Retail Bonds (ORB);
Borsa Italiana – MTA Main Market; AIM Italia –
MAC; MOT
Services:
Indices/analytics
Real time data
(prices/trading data)
Specialist services:
Reference data
Transaction reporting/
trade matching
News
Provided by:
FTSE
LSE, Borsa Italiana,
Proquote
SEDOL
UnaVista
Proquote
RNS
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Strategic report What we do: our business model
RISK and BALANCE SHEET MANAGEMENT
Technology Services
All of our businesses depend on technology that is
secure, stable and performs to high levels of availability
and throughput. MillenniumIT is a developer of ?exible,
low cost, high performance trading platforms and
?nancial markets software serving the Group’s own
business and third parties. Technology services include:
— Trading systems
— Post trade software
— Market surveillance and order routing
— Data centre and network services
Trading – Secondary Markets
Our systems provide fast and ef?cient trading, giving
investors and institutions access to a range of markets.
Products:
Cash equities & ETFs
Derivatives
Fixed income
Commodities, power
and specialist products
Markets and trading platforms:
LSE, Borsa Italiana, Turquoise
LSE Derivatives, IDEM
MTS, MOT, ORB, EuroTLX
IDEM, IDEX, AGREX
Post Trade
The Group offers a full range of post trade services, providing
risk management and ef?ciency for counterparties.
Process:
Clearing, central
counterparty services
Settlement
Custody, central securities
depository services
Services offered:
LCH.Clearnet (UK, France and US )
CC&G (Italy)
Monte Titoli, globeSettle
(international CSD in Luxembourg)
8 Strategic report London Stock Exchange Group plc Annual Report 2014
Market position and outlook
Capital Formation
— Access to primary sources of equity and debt ?nance for companies
of all sizes from all over the world
— Secondary markets for price formation and trading
Risk and Balance Sheet Management
— Post trade services to mitigate counterparty risk, maximise capital
ef?ciencies for customers, support the safe transfer of securities
and optimise cash ?ows for ef?cient collateral management
— Technology and analytics to support ef?cient processes and meet
regulatory requirements
Intellectual Property
— Market data, indices, analytics and information services to increase
knowledge and transparency in support of trading and investment
decision making
— Technology solutions to enable customers and markets to operate
reliably, securely and ef?ciently
The markets in which we operate are affected by a wide range of factors,
including structural shifts in the global economy, demographic trends,
the geopolitical landscape and ongoing regulatory changes.
Economic conditions
Economic recovery in advanced economies is expected to continue in 2014.
Economists widely anticipate a gradual end to quantitative easing (QE)
in the US with tapering having already commenced on a modest scale.
Should the reduction in QE continue, we can expect upward pressure on
interest rates in the medium term and increased bond yields. Economic
activity in the Eurozone is gradually stabilising as the region emerges from
recession. However, the recovery is not broad based and is slower than in
some other developed markets. Consequently, any tightening of Eurozone
monetary policy is expected to lag behind that of the US. Other risks remain,
including slowing growth in China and tensions around Ukraine.
The gradual turnaround in sentiment and overall economic activity in
the past year was re?ected in a 27 per cent global increase in the capital
raised (aggregate value of $163 billion). Such improved opportunities for
investment combined with growing consumer con?dence, excess liquidity and
continued GDP growth in developed markets are creating an “equity-friendly”
environment which is likely to prevail throughout 2014. Equity funding is,
therefore, likely to remain attractive and to support primary market activity.
The Group is responding to this trend with innovations such as the
introduction of the High Growth Segment on London Stock Exchange.
In other asset classes, trading levels remain uncertain due to proposed
regulatory changes and the impact of bank de-leveraging. Regulatory factors
in Europe such as MiFID/MiFIR requirements on controls for dark pools
and high frequency trading (HFT), as well as the potential for a widespread
?nancial transaction tax (FTT), could have a negative impact on capital
markets activity. Regulation continues to in?uence the shape of ?nancial
infrastructure more broadly (see more details on pages 10-13). At the
same time, such trends create opportunities for the Group’s clearing,
post trade and information services operations where our open access
principles are aligned with the demand for greater transparency and
improved, cost effective services. In particular, LCH.Clearnet is responding
to customer needs in respect of the Basel III Capital Requirements and is
seeing increased clearing volumes of OTC derivatives as a result. LCH.Clearnet,
UnaVista and Monte Titoli are also developing a range of solutions for EMIR
compliance including globeSettle, our new international central securities
depository. Requirements affecting ?nancial benchmarks in MiFID II,
from IOSCO and other national and supranational bodies, will likely create
new opportunities for globally focused index providers such as FTSE with
established strong governance standards and transparency in the provision
of index services.
With its three core business activities: capital formation,
risk and balance sheet management and intellectual property,
the Group helps to underpin global economic growth by offering
a wide range of services to support the effective functioning
of global capital markets and the creation of innovative new
?nancial and investment products.
FTSE 100
7,000
6,800
6,660
6,400
6,200
6,000
5,800
5,600
Mar
2014
Mar
2013
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
London Stock Exchange order-book value traded
and share of trading
?LSE daily value traded LSE share of lit trading
6
5
.
9
%
6
4
.
7
%
6
5
.
4
%
6
2
.
4
%
6
3
.
2
%
6
4
.
3
%
6
3
.
7
%
6
3
.
2
%
6
4
.
1
%
6
4
.
5
%
6
6
.
1
%
6
7
.
3
%
A
v
e
r
a
g
e
d
a
i
l
y
v
a
l
u
e
t
r
a
d
e
d
£
b
n
7
6
5
4
3
2
1
0
Mar
2014
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
4
.
3
4
.
34
.
7
3
.
7
3
.
84
.
2
3
.
8
3
.
8
3
.
5
4
.
5
5
.
3
5
.
5
London Stock Exchange money raised – new and further issues
£ billion
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
M
o
n
e
y
r
a
i
s
e
d
£
b
n
F
T
S
E
1
0
0
35
30
25
20
15
10
5
0
2004
Q
1
Q
2
Q
3
Q
4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1
?new issues – money raised ?further issues – money raised
FTSE 100 (RH scale)
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Strategic report Market position and outlook
Global socio-demographic trends such as increasing wealth in emerging
economies, the ageing population in developed markets and the consequent
implications for state funding of health and pension bene?ts, are driving
investment globally and increasing competition among investment product
providers. These trends favour low cost passive investment and create
opportunities for innovative new index products, such as alternative-weighted
indices, and licensing of fund and ETF products.
Market position
The Group had a market capitalisation of £5.0 billion (as of 9 May 2014)
and ranks among the top ?ve global exchange groups by income. In FY
2014, all of our main business segments recorded good performances,
both through organic development and as a result of successful additions
to the Group’s portfolio of businesses. Income is increasingly diversi?ed by
asset class and geography, with cash equities trading accounting for just
11 per cent of total income. Information Services and Post Trade businesses
contributed 29 per cent and 39 per cent of adjusted income respectively.
The Group saw a signi?cant increase in both the number of IPOs and the
value of capital raised. On the back of a series of large IPOs, equity capital
raised during the year was £34.2 billion (vs £18.0 billion in 2013). The FTSE
100 ?nished the ?nancial year up three per cent and the FTSE MIB ?nished
up 41 per cent. LSEG trading venues between them captured almost 30 per
cent of European equity trading volume, more than any other group (2013:
28 per cent).
Exchange traded fund (ETF) assets under management tracking FTSE indices
increased. This was largely driven by the decision of Vanguard to adopt FTSE
benchmarks for its global emerging markets funds. FTSE now ranks fourth
globally among index providers for ETFs in terms of benchmarked assets.
Global regulatory momentum led to increased demand for risk management
and OTC clearing services through LCH.Clearnet. Strengthening its position
as a leading OTC clearing provider, SwapClear’s notional value cleared
increased over the past year by 18 per cent to $526 trillion, with its clearing
membership increasing by 25 to 103 members. There were also a number
of service enhancements, including the expansion of compression services.
ForexClear built on its existing inter-dealer service with the launch of
client clearing and cleared $832 billion in notional throughout the year.
CDSClear, which extended its reach to include European clients and US
clearing members, cleared €154 billion in notional value. Derivatives
clearing volumes decreased, while the ?xed income clearing services
business maintained market share, clearing €72 trillion in nominal value.
The commodities and cash equities clearing businesses experienced steady
growth in volumes.
FTSE MIB
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
Mar
2014
Mar
2013
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
Global ETP assets
Source: BlackRock
assets US$ billion
3,000
2,500
2,000
1,500
1,000
500
0
Mar
2014
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
7
91
0
9
1
4
6
2
1
8
3
1
9
4
2
8
5
9
88
5
1
7
7
2
1
,
1
5
6
1
,
4
8
3
1
,
5
2
51
,
9
4
4
2
,
3
9
6
2
,
4
4
7
79
109
146
218
319
428
598
851
772
1156
1483
1525
1,944
2,396
2,447
10 Strategic report London Stock Exchange Group plc Annual Report 2014
Market position and outlook
continued
Outlook
Our diversi?cation strategy and strong customer relationships will continue
to enable us to respond to emerging customer requirements in multiple
product and service areas. The need for clients to maintain cost control,
ef?cient capital management and a strong focus on risk management
will remain as their business models evolve. This increases the demand for
ef?cient clearing solutions as well as technology and services supporting
automation and overhead reduction. The Group is well positioned to respond
to these needs through both organic and inorganic initiatives.
In the year ahead, signi?cant focus will remain on the integration of
LCH.Clearnet through a number of detailed programmes targeted at
delivering the broad bene?ts of the transaction. Elsewhere, our focus is on
expanding our global footprint and developing further growth opportunities
across the Group. Evolving and improving market conditions, regulatory
changes and customer demand will continue to shape our business and
create new opportunities throughout 2014 and beyond. The Group will
bene?t from the value we provide to customers through service expansion
and innovative solutions.
Regulatory landscape
The regulatory landscape continues to evolve, with the introduction of further
regulation in ?nancial markets by national regulators and international
policymakers. As a global group, most of our activities are subject to regulation
on a domestic and/or supranational basis.
Most of the regulatory changes discussed have been implemented; others are
drawing closer to the implementation phase. However, their impact has yet to
be fully realised and it remains dif?cult to predict the eventual effect on the
markets with any certainty.
Whether as a result of, or in spite of the numerous regulatory initiatives
discussed within this review, capital markets are beginning to emerge more
positively from the downturn, with increasing IPO activity and trading
interest in many market areas. Looking ahead, there is a sense that, in Europe
at least, the regulatory reform agenda is moving into a phase of consolidation
and review, allowing for a focus on economic growth, jobs and stability.
Global notional outstanding of exchange traded vs OTC derivatives
US$ trillion Source: BIS
D
e
c
9
8
D
e
c
9
9
D
e
c
0
0
D
e
c
0
1
D
e
c
0
2
D
e
c
0
3
D
e
c
0
4
D
e
c
0
5
D
e
c
0
6
D
e
c
0
7
D
e
c
0
8
D
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0
9
D
e
c
1
0
D
e
c
1
1
D
e
c
1
2
J
u
n
1
3
?exchange traded ?OTC
0
100
200
300
400
500
600
700
800
SwapClear OTC interest rate swaps –
total notional cleared and number of clearing members
US$ trillion
?cleared volume number of members
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
93
64
104
67
106
72
147
78
127
83
114
100
120
103
165
103
79
109
146
218
319
428
598
851
772
1156
1483
1525
1,944
2,396
2,447
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G20 goals
Efforts continue to implement the G20 commitment to strengthen
the regulatory framework for OTC derivatives. In Europe and the US,
derivatives transactions are now subject to trade reporting obligations;
mandatory clearing of certain derivatives contracts has been introduced
in the US and Japan, and mandatory trading has begun under CFTC rules.
European Union
Relevant Regulatory Developments
The MiFID/MiFIR, MAD/MAR and CSDR dossiers have reached political
agreement at Level I in the EU; 2014 will require a substantial effort by
regulators and the market for the development of the Level II measures
(so-called Technical Standards and Delegated Acts) under these key
pieces of legislation, leading to implementation of most in 2016.
— MiFID/MiFIR (Markets in Financial Instruments Directive/Regulation)
contains a broad range of market structure measures, aimed at
promoting the integration, competitiveness and ef?ciency of EU ?nancial
markets. Key changes include non-discriminatory open access to trading
venues and CCPs; non-exclusive licensing of benchmark indices; the
introduction of SME Growth Markets; the extension of pre and post
trade transparency to non-equity asset classes, including bonds and
derivatives; and increased regulatory requirements for high frequency
trading strategies and algorithmic trading.
— CSDR (Central Securities Depository Regulation) brings in measures
to harmonise the authorisation and operation of central securities
depositories and certain aspects of securities settlement in the EU,
including settlement periods and settlement discipline. A shorter
settlement cycle of T+2 is expected to be introduced in the UK and EU
in October 2014, with full dematerialisation expected by 2025. CSDs will
bene?t from uniform requirements for licensing and from an EU-wide
passport, which will help remove existing barriers of entry and promote
competition, presenting both opportunities and risks to the Group.
— MAD/MAR (Market Abuse Directive/Regulation) has been expanded
to include securities and derivatives traded on any trading venue and
platforms, and will now cover the manipulation of both benchmarks
and carbon emission allowances.
12 Strategic report London Stock Exchange Group plc Annual Report 2014
Market position and outlook
continued
Banking Union
There has been progress in establishing a Banking Union in the EU which will
consist of: (1) a Single Supervisory Mechanism (SSM) to monitor the health of
eurozone banks; (2) a Deposit Guarantee Scheme (DGS) to protect depositors;
and (3) a Single Resolution Mechanism (SRM) to take action where a bank
must be closed or restructured. The details of the SSM have been agreed
(implementation date is November 2014). However, negotiations continue
on the SRM, which is expected to be agreed in mid-2014.
Ongoing Measures
The EU Commission’s proposed regulation of benchmarks continues to
be negotiated in the European Parliament and Council of Ministers.
The Commission also adopted proposals seeking to address potential
issues in the system of credit intermediation that exists outside the regular
banking system (so called “shadow banking”), with proposed regulations on
Money Market Funds (MMFs) and Securities Financing Transactions (SFTs).
Negotiations continue on the introduction of a Financial Transaction Tax
(FTT). This is being progressed by 11 Member States under a procedure
known as “Enhanced Cooperation”. To date it has proved dif?cult to reach
agreement on a number of areas, including the scope, and the proposed
implementation timeframe which has now moved out to 2016. At this stage,
it is dif?cult to predict the likely outcome or scope of any ?nal measure that
may be agreed, nor its potential impact beyond the 11 Member States.
France and Italy have both implemented a domestic FTT.
Future Measures
During 2014 the European Commission plans to bring forward proposals
for Recovery & Resolution for CCPs, measures aimed at facilitating the
long-term ?nancing of the EU economy (including proposals for regulation
of crowdfunding) and amendments to the Shareholders’ Rights Directive.
All these measures may affect Group activities to some extent.
T2S
T2S (TARGET2-Securities), a project led by the ECB (European Central Bank),
aims to facilitate cheaper cross-border settlement across Europe. The testing
phase is expected to start in Q2 calendar year 2014, with delivery of the T2S
application to CSDs for the user-testing phase scheduled for 1 October 2014.
Migration to T2S will take place in phases, with Monte Titoli participating in
the ?rst phase in June 2015.
Regulatory Structure
US
In the US, implementation of the Dodd-Frank Act continues, with rules on
regulatory structures, bringing OTC derivatives on to trading venues and into
clearing and, increased regulation on the establishment and operation of
CCPs. These rules will apply to LCH.Clearnet LLC, Ltd and SA registered as
Derivatives Clearing Organisations (DCOs) in the US. In addition, the CFTC
applies heightened regulatory standards to systemically important DCOs
(SIDCOs), which include the requirement to have recovery and wind-down
plans in place. LCH.Clearnet LLC is not a SIDCO but has decided to opt in to
the regime for SIDCOs for Basel capital treatment purposes.
UK
The UK regulators (PRA, Bank of England and FCA) are now well established
and developing their forward-looking, pre-emptive approach to supervision
and regulation. The FCA has recently consulted on its new remit in relation
to competition law, giving new impetus to its consumer focused approach.
In the Principal Risks and Uncertainties section (page 48), we set out the
potential implications for the expanded Group of the key measures we
have identi?ed.
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Overview of regulatory landscape
The increasing scope of regulation and the breadth of the operations of the Group mean that regulation inevitably has a growing impact on the Group
and its activities. Set out below are some of the key areas where there is likely to be some impact or opportunity:
LSEG DIVISION &
BUSINESS AREA LEGISLATION/MEASURE SCOPE
Capital Markets
Primary markets MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— SME (Small and Medium-Sized Enterprises) Growth Market proposals to support SME
funding and markets
Secondary (trading)
markets
FTT non UK but in Italy, France.
Commission proposal under
negotiation
— To impose transaction tax on equity, bond and derivatives trades that involve one
?nancial institution with its headquarters in the EU FTT zone
MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— Non-discriminatory open access to trading venues and CCPs, and non-exclusive
licensing of benchmark indices
— Extension of pre and post trade transparency to non-equity asset classes, including
bonds and derivatives
— Increased regulatory requirements for high frequency trading strategies and
algorithmic trading
— Additional organisational, transparency and market surveillance requirements
for trading venues
— Platform trading obligation for shares and OTC derivatives
MAD/MAR (political agreement
reached at Level I; work on technical
aspects, Level II – underway)
— Index manipulation and non-listed issues within Market Abuse regime
Post Trade
CCPs EMIR (Level II under implementation) — Mandates CCP clearing for a wide range of eligible derivatives contracts
— Mandates the reporting of derivative trades to Trade Repositories
— Establishes harmonised requirements for CCPs and Trade Repositories, so that they
can demonstrate safety, soundness and ef?ciency
EC regime for recovery and resolution
for CCPs (awaiting Commission
proposal)
— Commission likely to propose recovery and resolution measures in Q4 2014 for CCPs
— May provide regulators with expanded powers to intervene at an early stage, including
the power to require an entity to implement measures under its recovery plan
— Authorities will also be provided with wide range of resolution tools
Settlement
Monte Titoli
CSDR (political agreement reached at
Level I agreed; work on technical
aspects, Level II – under way)
— Measures to harmonise:
– the authorisation and operation of central securities depositories
– certain aspects of securities settlement in the EU, including settlement periods
and settlement discipline
T2S (ECB project) — In November 2011, the ECB agreed the Framework Agreement, which sets out the
contractual rights and obligations of the Eurosystem and each contracting CSD. Monte
Titoli has already signed the Framework Agreement, recon?rming its positioning in the
‘?rst wave’ of the project
— The implementation date for phase 1 of the European Central Bank’s T2S project, aimed
at facilitating cheaper cross-border settlement across Europe, has now been set for
June 2015
Information Services
FTSE Index Regulation – (Commission
proposal under negotiation)
— Regulation of speci?ed benchmarks/indices
MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— Access under MiFIR Art 30 requires non-exclusive licensing of benchmarks
Market data MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— Post trade consolidated tape (CT) – introduction of requirements for harmonised post
trade data reporting to enable “consolidated tape” and data provision on a “reasonable
commercial basis”
14 Strategic report London Stock Exchange Group plc Annual Report 2014
Chairman’s statement
“ WE NEVER LOSE
SIGHT OF THE
WIDER ROLE OUR
BUSINESS PLAYS
IN SOCIETY”
Chris Gibson-Smith
Chairman
Overview/Execution of strategy
London Stock Exchange Group continued to expand its global footprint and
strengthen its position as one of the world’s leading, diversi?ed exchange
groups. Our portfolio of market infrastructure businesses was further
strengthened with the completion of the acquisition of a majority stake
in LCH.Clearnet Group, a leading provider of clearing services. We have
been pleased with the progress made to date to realise the bene?ts of the
transaction and this will be a major focus in the year ahead. We also made
further progress realising the bene?ts of previous transactions through the
global growth of businesses such as FTSE and MTS.
Over the past 12 months, there has been a sense of renewed optimism in
capital markets. We have seen companies returning to the IPO markets
to raise equity capital, with the highest number of ?otations since 2007.
188 companies joined our markets and total money raised was over
£34 billion across our equity markets in the past year. The Group provides
markets that help a broad range of companies to access equity and debt
capital; in particular, we support efforts to help small and medium-sized
enterprises (SMEs) access ?nance to enable their growth and development.
The recent launch of ELITE in the UK, a programme dedicated to supporting
high growth private companies, builds upon the success of a similar
initiative run by Borsa Italiana which has 150 participants. In April, the ?rst
19 companies signed up to the scheme, which will run in partnership with
Imperial College Business School, and is a good example of the Group’s
ongoing commitment to SMEs across Europe.
Our wider role
We ?rmly believe that the Group’s open access business model, which drives
a partnership approach with our customers, helps facilitate the operation of
stable ?nancial markets which bene?t our customers, regulators and society
at large. The model also promotes ?exibility, transparency and choice which,
in turn, helps drive our business forward. LCH.Clearnet Group shares our
open access philosophy, and provides its customers with risk management
services across a broad range of asset classes, helping them to manage their
own risk positions and capital ef?ciencies. This contributes to a safer and
more stable ?nancial system.
We never lose sight of the wider role our business plays in society. Our support
for companies of all sizes, for open access and fair and transparent markets,
has a signi?cant impact on economic business activity, as well as job and
wealth creation, and is core to our approach to corporate social responsibility.
In addition, the Group donated £1.66 million to charity in the past year, of
which £1.01 million was donated through the Group’s charitable Foundation.
To celebrate our third annual charity trading day, held in March, the Group
invited representatives from our partner charities Habitat for Humanity,
In-Presa, Friendship Works and UNICEF to open trading in London.
2010 2014 2013 2012 2011
30.8
29.5
28.3
26.8
24.4
Dividends per share
pence
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London Stock Exchange Group continues to look for ways to reduce its carbon
footprint and to improve its CSR activities through Group-wide initiatives such
as Green Week. We summarise our Corporate Responsibility activities on
pages 36 and 37 and in a fuller corporate report, which can be accessed
from our website.
Strengthened board/risk management
As a trusted, global ?nancial infrastructure provider, we must ensure that
we continue to meet the highest standards of corporate governance and due
process. As reported last year, the Group has split its Risk and Audit operating
functions and made senior appointments within both teams. We have also
operated separate Audit and Risk committees of the Board, both bene?ting
from contributions from Non-Executive Directors with considerable and
specialist experience in these areas.
Following the Group’s AGM in July 2013, Baroness (Janet) Cohen,
Sergio Ermotti and Gay Huey Evans stepped down as Non-Executive
Directors. The Board appreciates the valuable contributions that all three
made to the successful strategic development of the business.
In June 2013, Stephen O’Connor and Stuart Lewis were appointed
as Non-Executive Directors. Stephen and Stuart bring considerable
experience in credit and market risk, re?ecting the signi?cant and
growing proportion of the Group’s overall business that post trade and
risk management now represent. In January 2014, we also welcomed
Sherry Coutu and Joanna Shields to the Board, both of whom bring
broad international management expertise and a strong track record
of entrepreneurship and building businesses.
Financial performance and dividend
The Group delivered a good ?nancial performance, with adjusted income up
42 per cent to £1.21 billion, including contribution from LCH.Clearnet for the
?rst time. Successful delivery on our stated strategy is also re?ected in the
strong share price performance over the last year.
The Group is therefore proposing a 4.5 per cent increase in the ?nal dividend
to 20.7 pence per share, resulting in a full year dividend of 30.8 pence per
share, a 4.4 per cent rise. The ?nal dividend will be paid to shareholders
on the register as at 25 July 2014.
Accounting reference date
In order to create alignment of the ?nancial years of LSEG plc and
LCH.Clearnet, the Board has approved a change to the Group’s accounting
reference date, moving from 31 March to 31 December, with effect from
1 April 2014.
Conclusion
It has been a strong year for the Group. We have further expanded our
global business, building best in class capabilities as we grow. We expect
the substantial bene?ts of the LCH.Clearnet transaction to continue to work
through over the coming year and the improving economic outlook and
evolving regulatory landscape present further opportunity to develop our
business. We look forward to further growth in the year ahead.
Chris Gibson-Smith
Chairman
16 Strategic report London Stock Exchange Group plc Annual Report 2014
Chief Executive’s statement
Overview
This has been another year of achievement as we continued to grow and
diversify the Group on an increasingly global basis, most notably through
the successful completion of our transaction with LCH.Clearnet Group.
The environment in which we operate has also evolved. We have been
encouraged by regulation emerging out of Europe, which will promote
competition, empowering investors through enhanced choice, lower costs
and greater capital ef?ciency. The provisions for open access in clearing and
access to benchmarks will help reduce the fragmentation of risk in closed
silos and promote lower cost, more ef?cient and robust competitive markets.
As the economic recovery continues, we have also seen a return of investors
to our equity markets. The Group helped companies raise over £34 billion in
new and further equity issues across our markets. Providing companies with
the ability to access capital to grow their businesses is a fundamental part
of what we do and we continue to develop products and services across
asset classes, as well as initiatives such as ELITE, to support small and
medium-sized enterprises (SMEs) across Europe to grow and attract investors
along the funding ladder. This is also a core underpinning of our approach
to corporate responsibility.
LCH.Clearnet
One of the key landmarks for the Group during the past year was the
completion of the acquisition of a majority stake in the global clearing
house, LCH.Clearnet Group. Risk management is a vital component
of stable ?nancial markets and LCH.Clearnet has a strong record of
helping its members and customers manage their risk. The business
embraces an open access model, which also makes it well positioned
to bene?t from regulatory change being implemented across the world.
By operating a multi-asset global platform, across multiple geographies,
LCH.Clearnet provides customers with enhanced collateral ef?ciency
opportunities through services such as portfolio netting and compression.
LCH.Clearnet is also particularly well positioned to meet the needs of
OTC clearing across a range of asset classes.
Suneel Bakhshi joined as CEO of LCH.Clearnet Group in February 2014, bringing
a wealth of risk and change management experience in ?nancial services.
Together with his team, he is aiming to further develop opportunities through
product innovation and geographic expansion designed to support its global
customer base in an evolving regulatory landscape. He is also focused on
realising the bene?ts of the relationship with LSEG and we are very pleased
that our work on the integration now means that we are able to extend
the expected cost synergies. These are now expected to reach €60 million/
£49 million per annum by the end of 2015. In addition, further changes to the
operation of the OTC clearing businesses, particularly SwapClear, have resulted
in additional revenues for the Group, as well as changes to the share of costs.
“ THE GROUP’S
DIVERSIFICATION
STRATEGY IS
DELIVERING
TANGIBLE SUCCESS,
REFLECTED IN
CONSISTENTLY
GOOD FINANCIAL
PERFORMANCE AND
RETURNS TO OUR
SHAREHOLDERS”
Xavier Rolet
Group Chief Executive
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Strategic report Chief Executive’s statement
Building best in class capabilities
Our portfolio of products and brands enables us to offer our customers
innovative solutions across the trading cycle from technology to post trade.
In February, UnaVista Trade Repository went live helping customers to
meet their obligations under EMIR, receiving approximately ten million
reports on behalf of over 2,500 counterparties on day one. In ?xed income,
we completed the acquisition of a 70 per cent stake in EuroTLX, a retail
bond platform, which will enable Borsa Italiana to extend the range of
trading services for retail investors. MTS, the European ?xed income market,
announced plans to launch a new platform, which will give buy-side
institutions the ability to trade interest rate swaps electronically.
Turquoise, the Group’s pan-European trading platform, expanded its stock
universe to include a number of the mid-tier securities, previously only
available to trade via domestic exchanges. Turquoise has seen its overall share
of trading improve signi?cantly throughout the year with the platform now
regularly accounting for more than eight per cent of all volume traded across
Europe. The Group also continued to enhance its technology offering with
a series of product upgrades to allow improved functionality for users.
Creating a global business
The Group’s global reach was further increased during the year with FTSE
reinforcing its position as a leading international index provider. FTSE
continued to consolidate its leading position in China with $18 billion of
assets under management linked to ETFs tracking the FTSE China Index
series, as of the end of March 2014. FTSE also made good progress in
expanding its operations in North America and further enhanced its ?xed
income offering with the launch of a new offshore RMB Bond Index Series,
in partnership with Bank of China, as well as the recent acquisition of the
MTS indices business through its joint venture with TMX.
MTS began trading in the US following the launch of MTS Markets
International and took further steps to grow its customer base in the
region through the acquisition of Bonds.com, an electronic platform
for the trading of US corporate and emerging market bonds.
MillenniumIT recorded a number of wins throughout the year, such as the
signing of an agreement to provide post trade technology to SGX, as well
as extending existing contracts with London Metal Exchange and TMX.
Developing opportunities
The Group has taken further positive steps to diversify its business. In July
2013, the Group con?rmed plans to launch a new central securities depository
(CSD) business, based in Luxembourg. The new CSD, globeSettle, has received
regulatory approval from CSSF and is on track to commence operations
in Summer 2014. It has previously been announced the CSD will provide
settlement, custody and asset servicing for J.P. Morgan’s international
collateral management business.
The Group launched a number of new derivative products, including the
introduction of Single Stock Options both in Italy and the UK as well as FTSE
UK Large Cap Super Liquid index futures. As noted above, we believe that
we are well positioned to bene?t from a number of the MiFID II regulations,
which promote an open access, competitive model for customers across
many of our businesses, including indices and post trade services.
In the UK, we welcomed the Government’s decision to abolish stamp duty
for AIM-listed stocks, which followed an earlier move to allow AIM securities
to be included in ISAs. Initiatives aimed at encouraging greater investment
in SMEs among retail investors are vital and we remain ?rmly committed to
supporting high growth, entrepreneurial companies, which are the lifeblood
of our economy. In November 2013, we published our inaugural report titled
‘1000 Companies to Inspire Britain’, a landmark study that identi?ed some
of the UK’s most exciting and dynamic SMEs and, last month, the Group
launched ELITE in the UK, based on the success of a similar programme
in Italy, which helps small and medium-sized enterprises access ?nance
to enable their future growth and development.
The landscape for global capital markets infrastructure continues to evolve
and consolidation remains a key theme. We will continue to seek to expand
the Group’s global offering, as value-enhancing opportunities arise.
Outlook
I joined the Group ?ve years ago. During this period, the business has
transformed through control of the cost base, investment in high
performance technology, organic development, innovation and strategic
acquisitions. The Group’s expansion in capital markets infrastructure is
delivering tangible success, re?ected in consistently good ?nancial
performance and returns to our shareholders. I am particularly pleased
how colleagues across the business have embraced the opportunities
brought through diversi?cation, working together to identify opportunities
and realise the bene?ts of being part of a global group. We have accelerated
our cost savings targets at LCH.Clearnet Group and we see opportunity for
growth as the regulatory landscape evolves. I am more optimistic than
ever that our truly unique position – as the only global, open access market
infrastructure player which works in close partnership with its customers
across all of our businesses – will position us well for the future.
Xavier Rolet
Group Chief Executive
18 Strategic report London Stock Exchange Group plc Annual Report 2014
Strategy in action
The last year has seen the Group take
signi?cant steps forward in all areas
of strategic focus. As our clients become
increasingly sophisticated and their
needs evolve in response to factors such
as regulatory change, we are expanding
our offering into new asset categories,
geographies and client segments.
The completion of the LCH.Clearnet
acquisition built momentum in the
diversi?cation of both client base
and revenue and our programme to
integrate FTSE has similarly generated
new opportunities throughout the
Group as well as increased ef?ciencies.
Both of these acquisitions are key drivers
for future innovation, service expansion
and growth.
Underpinning the business are the capabilities
of our people and the infrastructure which drive our
services. For the Group, the ef?ciencies that we are
able to bring through low cost, high performance
technology and strong cost control throughout the
business mean that our people can focus on what
they do best: listen, respond to and deliver on the
promises we make to our customers, seek out new
opportunities and realise the value in the Group’s
assets. At the heart of our business and key to our
success in the future are the strong partnerships
that we build with our customers and the highest
standards of performance and integrity which we
apply to our business globally.
STRATEGY ACTION PROGRESS
Building best in
class capabilities
— We develop the people and skills we need to create
innovative solutions and to service our customers
around the world
— We aim to continuously improve our infrastructure
and technology capabilities
— We prioritise the highest levels of governance and
integrity across our businesses
— We deliver value from acquisitions through
ef?cient integration
— We follow strong cost discipline
We have built a strong and ef?cient business
— Implementation of our Risk Management Framework across the Group
— Implementation of our Group-wide strategic client management programme
— Integration programme for LCH.Clearnet delivering tangible cost savings
— Realignment of LCH.Clearnet management to position this key asset for growth
— Bene?ts derived from FTSE; synergies programme on target
— Corporate responsibility strategy approved by the Group Board and implementation plan agreed
Creating a
global business
— We engage with the leading participants in ?nancial
markets worldwide to understand their needs and
provide solutions
— We seek new opportunities to provide services
and build our footprint in key geographies
— We develop partnerships around the world to
extend our customer servicing capabilities
Our footprint is global
— 34 international new issues raising £4.1 billion
— Creation and success of the FTSE TMX Debt Capital Markets venture in Canada, now the third largest ?xed income & ETF
benchmark provider by assets under management
— Acquisition of Bonds.com by MTS
— FTSE TMX Debt Capital Markets partnership with Bank of China in Hong Kong
— UnaVista Trade Repository ahead of target on EMIR implementation and offering full trade reporting to LCH.Clearnet members
and other clients
— Successful launch on LSE of the ?rst direct European-listed China ETF, a FTSE China A50-benchmarked ETF and the world’s ?rst
RMB bond in FY 2014
— Continued global expansion of MillenniumIT via new contracts with LME, SGX, HKEx and Argentinian CSD
— SwapClear business expansion in the United States and Australia
Developing
opportunities
— We anticipate customers’ evolving needs
— We deliver market leading innovation
— We capitalise on our assets of intellectual property,
?nancial markets expertise and our global customer
and partner network to diversify our offering
— We continue to seek new organic and inorganic
opportunities to grow our business
We are successfully diversifying to take advantage of growth opportunities
— Development of MTS credit platform offering trading on MTS BondVision distribution technology
— Newly formed LSE Derivatives Market launched and FTSE SuperLiquid index futures trading successfully
— New products and services identi?ed through co-operation between LCH.Clearnet, Capital Markets,
Information Services and Post Trade divisions
— Innovative clearing services speci?cally for OTC derivatives developed by LCH.Clearnet
— Elite platform of integrated services for Italian SMEs, now extended to the UK
— UnaVista and NetOTC partner to provide an innovative clearable derivatives risk model
— Establishment of a CSD in Luxembourg, globeSettle, providing custody, settlement and post trade services
for international collateral management
— Successful acquisition of EuroTLX; plans in place for integration of Group corporate functions and migration to
MillenniumIT technology
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Strategic report Strategy in action
STRATEGY ACTION PROGRESS
Building best in
class capabilities
— We develop the people and skills we need to create
innovative solutions and to service our customers
around the world
— We aim to continuously improve our infrastructure
and technology capabilities
— We prioritise the highest levels of governance and
integrity across our businesses
— We deliver value from acquisitions through
ef?cient integration
— We follow strong cost discipline
We have built a strong and ef?cient business
— Implementation of our Risk Management Framework across the Group
— Implementation of our Group-wide strategic client management programme
— Integration programme for LCH.Clearnet delivering tangible cost savings
— Realignment of LCH.Clearnet management to position this key asset for growth
— Bene?ts derived from FTSE; synergies programme on target
— Corporate responsibility strategy approved by the Group Board and implementation plan agreed
Creating a
global business
— We engage with the leading participants in ?nancial
markets worldwide to understand their needs and
provide solutions
— We seek new opportunities to provide services
and build our footprint in key geographies
— We develop partnerships around the world to
extend our customer servicing capabilities
Our footprint is global
— 34 international new issues raising £4.1 billion
— Creation and success of the FTSE TMX Debt Capital Markets venture in Canada, now the third largest ?xed income & ETF
benchmark provider by assets under management
— Acquisition of Bonds.com by MTS
— FTSE TMX Debt Capital Markets partnership with Bank of China in Hong Kong
— UnaVista Trade Repository ahead of target on EMIR implementation and offering full trade reporting to LCH.Clearnet members
and other clients
— Successful launch on LSE of the ?rst direct European-listed China ETF, a FTSE China A50-benchmarked ETF and the world’s ?rst
RMB bond in FY 2014
— Continued global expansion of MillenniumIT via new contracts with LME, SGX, HKEx and Argentinian CSD
— SwapClear business expansion in the United States and Australia
Developing
opportunities
— We anticipate customers’ evolving needs
— We deliver market leading innovation
— We capitalise on our assets of intellectual property,
?nancial markets expertise and our global customer
and partner network to diversify our offering
— We continue to seek new organic and inorganic
opportunities to grow our business
We are successfully diversifying to take advantage of growth opportunities
— Development of MTS credit platform offering trading on MTS BondVision distribution technology
— Newly formed LSE Derivatives Market launched and FTSE SuperLiquid index futures trading successfully
— New products and services identi?ed through co-operation between LCH.Clearnet, Capital Markets,
Information Services and Post Trade divisions
— Innovative clearing services speci?cally for OTC derivatives developed by LCH.Clearnet
— Elite platform of integrated services for Italian SMEs, now extended to the UK
— UnaVista and NetOTC partner to provide an innovative clearable derivatives risk model
— Establishment of a CSD in Luxembourg, globeSettle, providing custody, settlement and post trade services
for international collateral management
— Successful acquisition of EuroTLX; plans in place for integration of Group corporate functions and migration to
MillenniumIT technology
20 Strategic report London Stock Exchange Group plc Annual Report 2014
Executive management team
The Executive Committee manages the
business on a day-to-day basis. The team
meets regularly to review a wide range
of business matters, including ?nancial
performance, development of strategy,
setting performance targets, reviewing
projects and other developments.
This year, Diane Côté, Group Chief Risk Of?cer,
and Suneel Bakhshi, the newly appointed Chief
Executive Of?cer of LCH.Clearnet, joined the
Executive Committee. Both bring a wealth of skills
to the team; Diane has many years of experience
in senior ?nance, audit and risk positions, and
Suneel has spent over 30 years in international
trading, banking and risk management roles.
For further information on Xavier Rolet, David
Warren and Raffaele Jerusalmi, who are also
members of the Board of Directors, see their
biographies on page 54.
Xavier Rolet
Group Chief Executive Of?cer
Raffaele Jerusalmi
Chief Executive Of?cer of Borsa Italiana
and Director of Capital Markets
David Warren
Group Chief Financial Of?cer
Alexander Justham
Chief Executive Of?cer, London Stock Exchange
plc. Joined the Group in 2012 from the Financial
Services Authority where he was Director of
Markets. Prior to this he worked at J.P. Morgan for
17 years, where he held a number of roles, latterly
as a Managing Director at J.P. Morgan Cazenove.
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Suneel Bakhshi
Chief Executive Of?cer, LCH.Clearnet Group.
Joined in February 2014 from Citigroup with over
30 years of experience in trading, banking and risk
management. Most recently, he was President
and CEO, Citigroup Global Markets, Japan. Prior to
this, he held several senior risk roles, including
leading Citigroup’s Emerging Markets Corporate
Bank. He also held a number of senior banking
and markets roles, including Sales and Trading
in CEMEA, Fixed Income Derivatives Trading for
Europe and Derivatives in Japan.
Diane Côté
Group Chief Risk Of?cer. Diane Côté was appointed
Chief Risk Of?cer and joined the Executive
Committee on 1 June 2013. Diane was previously
Aviva Plc’s Chief Finance Operations Of?cer. Prior to
this, Diane held the position of Aviva’s Chief Audit
Of?cer. Diane has many years’ experience holding
senior positions within Aviva and other leading
organisations, including Standard Life Assurance.
David Lester
Group Director of Corporate Strategy. Joined the
Group in 2001. He has over 23 years’ experience
in ?nancial markets including with Thomson
Financial, Accenture and KPMG.
Mark Makepeace
Group Director of Information Services and Chief
Executive Of?cer of FTSE Group. He was a founding
Director of FTSE Group in 1995 and joined the
Group in 2012. Mark has over 15 years’ experience
of developing successful joint ventures and has
forged alliances with stock exchanges, academics
and leading industry groups.
Tony Weeresinghe
Director of Global Development and Chairman of
MillenniumIT. Joined the Group in 2009. Prior to
founding MillenniumIT in 1996 he was Head of
the Open Systems Division of ComputerLand
and Country Manager of Oracle in Sri Lanka.
Antoine Shagoury
Group Chief Operating Of?cer and Chief Information
Of?cer. Joined in 2010 from the American Stock
Exchange where he was CIO. Over the preceding
10 years Antoine held several executive technology
positions at Instinet, most recently as CTO of Instinet
Services. He has over 20 years of technology and
?nancial services experience.
London Stock Exchange Group plc Annual Report 2014 22 Strategic report
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Adjusted total income
£ million
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Introduction to
segmental review
Year ended 31 March 2014
Capital Markets £m
1 Annual fees 41.2
2 Admission fees 39.9
3 Cash equities trading UK & Turquoise 94.5
4 Cash equities trading Italy 36.1
5 Derivatives trading 19.6
6 Fixed income trading 68.1
7 Other capital markets 10.1
309.5
Post Trade Services CC&G & Monte Titoli
8 Clearing – CC&G 40.0
9 Settlement & Custody – Monte Titoli 58.4
10 Net interest income – CC&G 47.6
146.0
Post Trade Services LCH.Clearnet
11 Clearing – LCH.Clearnet 263.0
12 Net interest income – LCH.Clearnet 62.2
325.2
Information Services
13 FTSE 174.0
14 Real time data 90.8
15 Other information 83.9
348.7
Technology Services
16 MillenniumIT 31.5
17 Technology 32.5
64.0
Other
18 Other income 19.7
19.7
Adjusted total income* 1,213.1
* Adjusted total income excludes unrealised gain/loss.
24 Strategic report London Stock Exchange Group plc Annual Report 2014
Capital Markets
Primary
Secondary
Other*
Revenues
£309.5
m
2013: £267.5m
Introduction
London Stock Exchange Group provides access to capital for a wide range
of domestic and international businesses.
Our range of primary markets provides a choice for issuers and investors,
enabling companies to raise capital ef?ciently depending on their individual
?nancing needs, as well as increasing their visibility with a wide group of
customers and investors. Our secondary markets create a deep pool of
liquidity and allow active and ef?cient trading through our highly competitive
trading platforms.
Primary Markets
In the last year, we have seen a six year high in new issue activity with 188
new companies listing or being admitted to trading on our markets (2013:
121). Among the notable high pro?le businesses were Royal Mail, the largest
UK capital raising, and Moncler in Italy. In addition, our markets continue to
be at the forefront of international issuance, with listings including Al Noor
from United Arab Emirates, Damac from Dubai, Coca-Cola HBC from Greece,
and Romgaz, the ?rst Romanian privatisation on the London market.
Italy welcomed 20 new companies (2013: seven) including World Duty
Free, the global retailer. In January 2014, the Bank of China successfully
issued £253 million in Chinese bonds, the largest RMB issue outside China.
This last year also saw a vibrant market for private equity-backed IPOs on
the London market, with 20 businesses successfully joining our markets,
including Merlin Entertainments and Foxtons Group plc, raising a combined
£6.5 billion. These companies have performed well in the secondary market,
and these successful transactions have helped reinforce investor appetite
for sponsor-backed issuance and bodes well for other future deals in the
pipeline. LSE saw 54 per cent of all ?nancial sponsor-backed IPOs by volume
in calendar year 2013 on European exchanges – almost three times that of
any other exchange.
The total amount of capital raised across our equity markets, both through
IPOs and additional ?nancing, increased 90 per cent to £34.2 billion (2013:
£18.0 billion), with the second half of the year showing a strong uptick in
activity. Looking ahead, the pipeline of companies looking to hold IPOs
remains encouraging. At year end there were a total 2,740 companies on
our markets (2013: 2,746), re?ecting the new companies joining our markets
and the normal attrition through M&A activity.
Our Exchange Traded Funds (ETF) and Exchange Traded Products (ETP)
markets continue to develop. We have seen new products coming to the
market which offer exposures to asset classes that were not accessible
previously. For example, we listed a new ETF this year that tracks the Russian
corporate bond market and, for the ?rst time, an ETF that directly tracks
China A-shares. The total number of ETFs and other ETPs listed remained
stable at 1,880 (2013: 1,883).
AIM is one of the world’s leading growth markets for small and mid-cap
companies. Since its launch in 1995, almost 3,500 companies have joined AIM,
raising over £85 billion to fund their growth. This year, 110 companies were
admitted to AIM in the UK (2013: 72) and 17 to AIM Italia – MAC (2013: six).
Key Summary
— Revenues increased by 16 per cent to £309.5 million (2013:
£267.5 million).
— Primary markets saw a six year high in IPO activity with revenues
up 15 per cent to £81.1 million and 188 companies admitted
including Royal Mail, the largest UK capital raising IPO of the year.
— Secondary market revenues increased by 15 per cent on higher
cash equity and ?xed income trading volumes.
— Turquoise widened its stock universe and added functionality.
Value traded increased 68 per cent.
— The Group strengthened its position as the leading venue for
ETF trading in Europe by value traded.
— Following a slowdown in some international markets, the value
traded on IOB declined six per cent, and derivative contracts
traded are down 11 per cent.
— In ?xed income, MTS Cash and BondVision volumes increased
48 per cent to €3,580 billion (2013: €2,426 billion).
* Other revenue includes Entrance and Membership fees.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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2,938
3,046
Number of companies listed – Group
2010 2014 2013 2012 2011
2,743
2,509
2,263
2,440
2,330
Market capitalisation – Group
£ billion
2010 2014 2013 2012 2011
34
18
34
40
77
Equity money raised – Group
£ billion
2010 2014 2013 2012 2011
1,880 1,883
1,661
1,345
861
Exchange Traded Products – Group
number listed
25
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We continue our drive to improve access to equity ?nance for small and
medium-sized enterprises and have engaged with policymakers. The UK
Government’s decision to abolish stamp duty for companies quoted on
growth markets, such as AIM and the High Growth Segment, came into effect
on 28 April 2014, and companies admitted to AIM are now eligible for stocks
and shares ISAs. We believe these moves will help boost investment in
companies admitted to growth markets, and reduce the cost of capital for
the UK’s fast growing, job-creating businesses. Our AIM and AIM Italia –
MAC markets, High Growth Segment and STAR the Italian mid size company
segment are of signi?cant importance to economic growth in terms of
providing funding opportunities, particularly at a time when bank credit
remains restricted.
As part of our continuing focus on promoting growth and supporting the
capital raising environment for SMEs, we released the publication of “1000
Companies to Inspire Britain”, a celebration of some of the fastest growing
and most dynamic SMEs in the UK.
In Italy, our SME offering is further enhanced by our ELITE programme.
The programme is aimed at providing support to high quality Italian SMEs,
allowing them to boost their appeal and visibility to potential investors.
ELITE provides growth companies with a dedicated team of advisors from
its 80 partners, including banks, lawyers, auditors and other specialist
advisors, including those specialising in public relations and private equity.
Launched in April 2012, ELITE now has 150 members with an average
revenue of €105 million (as of 7 May 2014). Following completion of the
programme in Italy, should they choose to, SMEs are given a fast-tracked
access to IPO or bond issuance. So far, three members have issued bonds
and several are planning IPOs.
Following the success of ELITE in Italy, the service was also launched in the
UK in April 2014. ELITE provides a selection of ambitious, high growth private
businesses, drawn across a wide variety of sectors, with access to a unique
package of education, business support and supportive investors in order
to enhance their growth prospects. Partnering with Imperial College and
50 other partners across the City of London, 19 high growth UK SMEs were
admitted in the ?rst cohort of companies to participate in the programme.
STAR is the market segment of Borsa Italiana’s equity market (MTA) dedicated
to mid size companies. The companies listed on STAR are leaders in their
industry and represent Italy’s economic diversity and strong competitiveness.
The FTSE Italia STAR index has outperformed the Main Market indices in the
last year. There are currently 68 companies listed on the STAR segment,
which represent 24 per cent of Borsa Italiana’s MTA listed companies.
Each year, the annual STAR Conference is a chance for companies listed
on the STAR segment to showcase their performance and gain exposure to
international investors and the ?nancial community. This year the 12th STAR
Conference was held in Milan, with 57 companies meeting 175 international
investors for a total of more than 1,200 one-to-one meetings.
We continue to help issuers gain access to a large and diverse range of
institutional investors and private client brokers in order to boost their capital
raising potential. In the past year, we have held a number of Capital Markets
Days, including events focusing on Pakistan, Russia and Asia, highlighting
the opportunities for investing in companies based in these countries.
26 Strategic report London Stock Exchange Group plc Annual Report 2014
Capital Markets
continued
The London Investor Show and Trading Online Expo in Milan were held
in October 2013, continuing our commitment to further the understanding
of ?nancial markets by retail investors. Additionally, we have a quarterly
Private Investor magazine, launched in 2012, which has a wide distribution
to retail investors.
In February 2014, LSE welcomed GF Financial Markets (UK) Ltd, one of the
largest integrated securities brokerage ?rms in China, to its markets as the
?rst Chinese member ?rm focusing on both equity and derivatives trading.
Listed products
The Group has strengthened its position as the leading venue for ETF and
other ETP trading in Europe by value traded. Total ETP value traded in the
past year increased 11 per cent to £113 billion (2013: £102 billion). There are
23 registered market makers and over 100 other member ?rms trading ETFs.
In December, we launched a new trading service for ETFs which offers our
clients the choice of trading in a wide range of currencies and settlement on
different venues.
Derivatives
Global derivatives volumes decreased in the last year, largely as a result
of lower volatility. Over the past year, the number of contracts traded on
LSE Derivatives reduced by 22 per cent to 18.7 million (2013: 24.0 million).
This was largely due to the uncertainty in dividend policies in Russian markets.
IDEM, the Group’s Italian derivatives market, saw volumes decline by three per
cent to 34.8 million contracts (2013: 35.9 million). This was in line with other
European exchanges and was driven by reduced volumes on single name
products. FTSE MIB index products continued to grow, with volumes up nine
per cent on last year and FTSE MIB index futures reaching a new monthly all
time record in March 2014.
In May 2013, IDEM launched the Pan-European Single Stock Dividend
Futures, allowing intermediaries and investors to gain exposure to, or hedge
their dividend risk on the main issuers across Europe. Since their introduction,
dividend futures on IDEM have traded over 164,000 contracts.
In October 2013, LSE Derivatives launched the FTSE UK Large Cap Super
Liquid index (FTSE UK SLQ) futures. This innovative index tracks the
performance of the UK equity market through 35 highly liquid stocks offering
new opportunities to reduce frictional trading and maintenance costs as well
as a tool for new trading opportunities. Since its launch FTSE UK SLQ has
traded over 35,500 contracts with a nominal value of nearly £1.7 billion.
This year, Trading Technologies International, Inc. announced the connectivity
agreement to the Group’s derivatives markets to provide their clients with the
ability to view and trade products across both IDEM and LSE Derivatives
through a single gateway.
Fixed income
MTS is a leading regulated electronic trading platform for intermediaries
trading European wholesale Government Bonds and other types of ?xed
income securities. MTS Cash and BondVision volumes have grown
signi?cantly, up 48 per cent on last year to €3,580 billion (2013: €2,426
billion), with a record year for BondVision. MTS Repo volumes increased by
two per cent to €70.2 trillion (2013: €69.1 trillion). In March 2014, MTS also
announced its merger agreement to acquire Bonds.com Group, a US based
platform for the electronic trading of US corporate and emerging market
bonds. This transaction enhances MTS’ position as a global provider of ?xed
income trading platforms and enables them to meet the ongoing drive
Secondary Markets
Equity trading
Both UK and Italian cash equity trading activity increased on last year. In the
UK, the average daily value traded was up eight per cent to £4.3 billion (2013:
£4.0 billion); in Italy, the average daily number of trades was up ?ve per cent
to 235,000 (2013: 223,000). The FTSE 100 rose three per cent and the FTSE
MIB showed strong recovery up 41 per cent.
Turquoise is our majority owned European cash equities MTF in partnership
with the user community. With a single connection to Turquoise, users can
trade equities from 18 countries across Europe as well as US stocks and IOB
Depositary Receipts. Turquoise offers access to two discrete order books for
complementary liquidity, an Integrated Lit book as well as a dark pool.
Turquoise Midpoint Dark features size priority and two distinct functionalities:
continuous matching at mid-point and Turquoise Uncross, an innovation that
provides randomised mid-point uncrossings during the trading day. Average
daily value traded increased 67 per cent to €2.8 billion (2013: €1.7 billion).
Turquoise’s share of European equity trading has risen from 3.0 per cent
when acquired to an average of 8.2 per cent for the year.
In the second half of the year, we branded Turquoise Uncross and widened
our stock universe by more than 800, including small caps. We enhanced
Turquoise by enabling customers to trade the second line of dual-listed
securities, i.e. where a security is listed on more than one European exchange,
and we enabled the trading of European rights issues. We optimised post
trade clearing of internationally traded Spanish equities. We migrated to the
latest version of LSEG’s MillenniumIT technology, and we introduced several
functional improvements to our lit and dark order books. We were delighted
to welcome new trading members from continental Europe, Switzerland and
the Nordic communities.
Since the branding of Turquoise Uncross in September 2013, values matched
using this service increased more than three times (see page 143 for more
detail on dark pools and Turquoise Uncross). Turquoise members traded €83.3
billion in March 2014, the largest monthly value since Turquoise launched in
2008. March 2014 saw a Turquoise record 17.9 million trades in 1965 stocks.
The International Order Book (IOB) enables investors to unlock the potential
of some of the world’s fastest growing markets through a single central
electronic order book. It offers easy and cost ef?cient direct access to
securities via depositary receipts from 40 countries, including those in
Central and Eastern Europe, Asia and the Middle East. During the year,
we saw increased share of trading in Asian stocks, with Samsung Electronics
from South Korea remaining the most liquid Asian name. In February
2014, we made changes to the tick size in the IOB to support the increased
liquidity of some stocks, changed the opening time to match the rest of
LSE, and extended the post closing auction CPX session by 15 minutes.
Globally, during the year there has been a widespread slowdown across
many emerging markets. This is re?ected in IOB value traded which
declined six per cent to US$190 billion (2013: US$202 billion).
In London and Italy, we are working with industry initiatives to shorten
the standard securities settlement cycle from T+3 to T+2 in October 2014.
This means that the cash and securities components of a trade will be
exchanged within two days of the trade.
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London Stock Exchange –
average order-book daily value traded
£ billion
2010 2014 2013 2012 2011
235
223
260 257 252
Borsa Italiana –
average order-book daily number of trades
thousands
2010 2014 2013 2012 2011
3,580
2,426 2,444
2,719
2,404
MTS cash and BondVision
volume traded € billion
Turquoise – European equity trading
value traded € billion and share of European equity trading
?Turquoise value € billion Turquoise share
3
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Q4
FY
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FY
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FY
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FY
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FY
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4 Q1 Q2 Q3
6
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9
International Order Book
value traded US$ billion
2014 2003 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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42
6
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Strategic report Capital Markets
towards transparency and ef?ciency in ?xed income markets. Its new US
subsidiary, MTS Markets International offers US buy-side participants the
ability to directly access real time pricing from one of the deepest liquidity
pools in Europe and to trade electronically with all the major European dealers
via its BondVision platform. 2014 will see the launch of MTS Swaps, a platform
for trading swaps products, with clearing provided by LCH.Clearnet’s
SwapClear. In April 2014, MTS announced that its bond indices are joining
FTSE and TMX in their combined ?xed income venture FTSE TMX Global Debt
Capital Markets.
Our electronic LSE Order Book for Retail Bonds (ORB), which celebrated its
fourth anniversary in February, has 178 bonds (2013: 176), including 69 gilts.
Since the launch of the market, £3.9 billion has been raised through 41 new
issues and six secondary issues. Our on-book liquidity grew signi?cantly
in the past 12 months, from £112 million to £347 million. We now have 35
specialist retail brokers as ORB members (2013: 30), with 11 dedicated ORB
market makers providing continuous two-way tradable prices.
MOT is the most liquid and heavily traded retail ?xed income platform in
Europe. It is the only Italian regulated market dedicated to the trading of
Italian and non-Italian Government securities, domestic and international
bank and corporate bonds, supranational securities and asset-backed
securities. This year, the Italian Treasury issued further BTP Italia Bonds
with subscription through MOT. The fourth issue raised €18 billion in April
2013, with the ?fth issue raising €22.3 billion in November 2013, an all time
record in Europe for a direct placement. We also introduced a CCP service,
managed by CC&G, for bonds denominated in euros that settle through
ICSDs. This year saw an increase in the number of bonds listed in ExtraMOT
PRO (the professional segment of MOT). MOT has a total of 1,206 bonds listed
which saw a nine per cent decline in the number of trades to 5.64 million
(2013: 6.22 million).
In September 2013, the Group acquired a majority stake in EuroTLX, an Italian
multilateral trading facility (MTF) operating in the European retail ?xed income
market. Over the next 12 months, EuroTLX will be fully migrating to MillenniumIT
technology and will complement the ?xed income part of the Group.
28 Strategic report London Stock Exchange Group plc Annual Report 2014
Post Trade Services
CC&G and Monte Titoli
Clearing
Interest
Settlement & Custody
Income
Introduction
Post Trade Services in Italy are crucial to the securities trading industry.
Our post trade businesses in Italy, Monte Titoli and CC&G, provide the
markets with settlement, depository, custody, risk and collateral
management, clearing and central counterparty (CCP) services in order
to mitigate risk and ensure the ef?cient running of capital markets.
The post trade regulatory landscape is undergoing signi?cant changes,
emphasising the importance of the role of clearing houses and Central
Securities Depositaries (CSDs) in post-crisis ?nancial markets. It also creates
opportunities for growth in this area, as more reliance is placed on post trade
infrastructure providers. Our continued strong service in volatile market
conditions emphasises the high quality of our risk management and post
trade processes.
CC&G
CC&G provides risk management, open access clearing and CCP services for
14 markets, including services to non-Group markets, and has 150 clearing
members. CC&G eliminates counterparty risk, acting as buyer toward the
seller and vice versa, becoming the guarantor of the ?nal settlement of the
contracts. CC&G provides services across a diverse range of asset classes
including cash equities, derivatives, closed-end funds, ?xed income, energy
products and, most recently, agricultural commodity derivatives. CC&G has
an interoperability agreement with LCH.Clearnet SA for European Bond and
Repo markets.
As a result of increased trading volumes in equities and ?xed income,
clearing revenues increased by 11 per cent to £40.0 million (2013: £36.1 million).
CC&G generates net treasury income by investing the cash margin it holds.
Average daily initial margin rose by 18 per cent to €11.9 billion for the period
(2013: €10.1 billion). As we entered the year CC&G had started to change its
investment policy in terms of where the cash margin it holds is invested.
This change was made to meet new regulatory technical standards for the
European Market Infrastructure Regulation (EMIR). By September 2013
CC&G met these standards with 95 per cent of cash invested on a fully
collateralised basis. In last year’s report we stated that we expected a
reduction in net treasury income, and income for the year amounted to
£47.6 million, down 59 per cent on the previous year (2013: £116.7 million).
CC&G has been increasing the range of international services and markets
it serves. In October 2013, we extended our CCP service to clear bonds
denominated in euros settled via international CSDs, offering a pan-European
settlement system. The service offers clients a more ef?cient post trade
management process, allowing CC&G operators and customers to bene?t
from signi?cant savings on settlement commissions.
Given the importance of the role of CCPs in post-crisis ?nancial markets,
CCPs have come under scrutiny with increased regulatory requirements.
CC&G received recerti?cation authorisation under EMIR in May 2014.
This process will lead to increased minimum capital requirements which
CC&G will meet through existing capital resources.
£146.0
m
2013: £208.5m
Key Summary
— Revenues grew by seven per cent to £98.4 million.
— Total income (including net treasury income) fell by 30 per cent
to £146.0 million, re?ecting a change of investment policy.
— CC&G clearing revenues grew by 11 per cent to £40.0 million as a
result of increased trading volumes in equities and ?xed income.
— Monte Titoli processed 58.3 million settlement instructions, up
5.4 per cent on the previous year re?ecting higher trading levels
in Italian equity and ?xed income markets.
— Monte Titoli is the largest CSD entering the ?rst wave of
TARGET2-Securities from June 2015. In addition, from October
2014, settlement of contracts executed on the Italian market
will move to T+2.
— The new international CSD in Luxembourg (globeSettle), utilising
Monte Titoli’s expertise, is on track to commence operation in
Summer 2014 having received regulatory approval from the CSSF
– J.P. Morgan has already signed up as the ?rst user of settlement,
custody and asset servicing services.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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Trades and contracts cleared
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2010 2014 2013 2012 2011
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10.1
9.4
6.8
4.6
Initial margin held
average € billion
2010 2014 2013 2012 2011
58.3
55.3
68.2 69.8
83.9
Settlement instructions
million
2010 2014 2013 2012 2011
3.32
3.23
3.08 3.02
2.87
Assets under custody
€ trillion
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Monte Titoli
Monte Titoli, our Central Securities Depository (CSD), is a leading provider
of ef?cient and secure pre-settlement, settlement, custody, asset servicing
and collateral management services. It is a leader in the post trade industry
with an AA rating from Thomas Murray, the specialist custody rating,
risk management and research ?rm, and has €3.32 trillion in assets
under custody.
Monte Titoli processed 58.3 million settlement instructions, up ?ve per cent
on the previous year re?ecting higher trading levels in the Italian equity and
?xed income markets (2013: 55.3 million). Monte Titoli continued to provide a
low cost and ef?cient settlement system, with a settlement rate of 99.2 per
cent of trades (2013: 99.4). Monte Titoli’s settlement rate exceeds the
European settlement standards.
Monte Titoli has signed the TARGET2-Securities (T2S) Framework Agreement
and will participate in the ?rst wave of T2S, scheduled to go live in June 2015.
T2S will be the new centralised settlement platform for securities, developed
and operated by the Eurosystem (the European Central Bank and the national
central banks of the Eurozone), created to provide settlement services for any
type of transaction in Central Bank money. In March 2014, 13 institutions
signed a declaration to become Directly Connected Participants (DCP) of
Monte Titoli in Wave 1, signalling strong interest for the Monte Titoli offering
since the launch of the T2S platform.
Monte Titoli is the largest CSD entering in the ?rst wave of T2S and will be able
to offer major European players access to settle cross-border contracts as if
they were domestic, eliminating problems such as delays and errors in the
interaction of different settlement systems. In the past year, Monte Titoli has
been working to harmonise its processes in view of T2S. As part of this, in
October 2014, settlement of contracts executed on the Italian market will
move from T+3 to T+2, meaning that the intended settlement date shall be no
later than the second business day after a trade takes place.
Monte Titoli has an extensive customer base, comprising 232 banks, brokers,
CCPs, trading venues and 2,174 issuers and provides asset servicing in relation
to a wide range of ?nancial instruments. Assets held under custody at Monte
Titoli increased by 2.8 per cent to €3.32 trillion (2013: €3.23 trillion).
In July 2013, the Group con?rmed plans to launch globeSettle, a new central
securities depository (CSD) business, based in Luxembourg. The new CSD is on
track to commence operation in Summer 2014, having received approval from
the CSSF. It has already con?rmed that it will provide settlement, custody and
asset servicing for J.P. Morgan’s international collateral management business.
30 Strategic report London Stock Exchange Group plc Annual Report 2014
Post Trade Services
LCH.Clearnet
Clearing OTC
Clearing non-OTC & other
Interest
Adjusted income*
£325.2
m
Introduction
On 1 May 2013, the Group completed the acquisition of a majority stake
in LCH.Clearnet. LCH.Clearnet is a leading multinational clearing house,
with clearing operations in the UK (LCH.Clearnet Limited), the Eurozone
(LCH.Clearnet SA), the US (LCH.Clearnet LLC) and an expanding presence in the
Asia-Paci?c region. LCH.Clearnet provides services to mitigate counterparty
risk across multiple asset classes for sell-side clearing members and buy-side
clients operating on major exchanges and platforms as well as a range of
OTC markets.
As central counterparties (CCPs), LCH.Clearnet operating companies sit in
the middle of a trade as the buyer to every seller and the seller to every buyer.
If either party defaults on the trade, the relevant CCP owns the defaulter’s risk
and becomes accountable for its liabilities. During the life of a trade, or that of
a portfolio of trades, the LCH.Clearnet operating companies process all cash
?ows and mark the trade or book to market, calling variation and initial
margin in relation to prevailing risk of the overall portfolio.
The Group’s revenue base continues to diversify across its products and services.
Fundamental to LCH.Clearnet’s risk process is its collection of quality collateral
from clearing members and clients as insurance to recover or replace
defaulted risk.
Suneel Bakhshi was appointed as the Group Chief Executive Of?cer for
LCH.Clearnet, joining in February 2014. Upon taking up his position,
Mr Bakhshi also became a member of LSEG’s Executive Committee.
LCH.Clearnet was named Risk Magazine’s 2014 Clearing House of the Year
after ful?lling criteria which included risk management, customer satisfaction,
responsiveness to new regulations, engagement with regulators, liquidity
provision and creativity.
OTC derivatives
SwapClear, the world’s leading interest rate swap clearing service, led the
move to mandatory central clearing, delivering high levels of ef?ciency
and liquidity to an increasing roster of members and clients. At year end,
SwapClear cleared $526 trillion total notional and compressed a further
$168 trillion of interest rate derivatives. During the year, SwapClear cleared
$67.5 trillion of client notional, bringing the total to date to $95 trillion client
notional, nearly four times the level of its nearest competitor.
During the year, membership increased by 25 members to 103, with 142
market makers now using the service. Total clearing revenue for the 11 month
period was £91.5 million.
SwapClear introduced real time trade registration, currency and tenor
extensions to its Overnight Index Swap (OIS) offering, and a timely initial
margin recalibration to ensure optimal risk management performance
in a range of interest rate environments.
In the US, SwapClear expanded its global footprint with the launch of
LCH.Clearnet LLC, a US-domiciled Derivatives Clearing Organisation (DCO)
and the new SwapClear US-domiciled service.
In the coming months, SwapClear plans to expand and adapt its service
globally to cater for more time zones, develop its proprietary compression
offering, and introduce in?ation-linked swaps and other product extensions.
On recerti?cation of LCH.Clearnet, SwapClear will be rolling out more customer
protection offerings under EMIR.
Key Summary
— The Group acquired a majority stake in LCH.Clearnet in May 2013.
— LCH.Clearnet’s income for the 11 month period was £325.2
million, with OTC clearing revenues of £109.6 million, non-OTC
revenues of £153.4 million, and net treasury income of
£62.2 million.
— SwapClear, the world’s leading interest rate swap clearing service,
cleared $526 trillion notional.
— SwapClear obtained a license to provide OTC rate clearing services
to Australian member banks, and will be further expanding its
service globally to cater for different timezones.
— RepoClear, one of Europe’s largest ?xed income clearers, cleared
€72.3 trillion in nominal value.
— EquityClear clearing volumes increased to 384.7 million trades
due to increases in trading activity, as well as an increase in
venues and customers. It also became the ?rst CCP to offer OTC
Equity Contracts for Difference (CFDs).
— In May 2013, LCH.Clearnet began clearing for NASDAQ OMX NLX,
the new London-based single market for trading the full European
interest rate curve.
— Enhanced its compression offering via SwapClear to include
multilateral compression, which enables customers to reduce
outstanding positions and lower their counterparty exposure
and capital costs.
* Adjusted income excludes unrealised gain/loss.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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Q3
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Q4
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Q1
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Q2
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Q3
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Q4
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100
103
72
78
83
67
64
SwapClear
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2013
Q1
2013
Q2
2013
Q3
2013
Q4
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Q1
2014
Q2
2014
Q3
2014
Q4
17.9
18.3
17.5 17.6
18.4 18.6
18.1
17.5
Fixed Income
nominal value cleared € trillion
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
165
114
120
106
147
127
104
90
SwapClear total notional cleared
US$ trillion
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CDSClear offers industry leading default management provisions and clears
the broadest set of European credit indices. In July 2013 CDSClear extended
its reach to offer clearing to European clients and US clearing members.
In December 2013, the CFTC granted LCH.Clearnet SA registration as a
Derivatives Clearing Organisation (DCO), enabling the service to provide US
client clearing for broad based indices. In the same month, CDSClear’s
product set was expanded with the introduction of 187 single-name CDS.
CDSClear cleared €153.8 billion notional value in the last year, with open
interest standing at over €28.3 billion. CDSClear has 11 members and over the
next year will expand the product offering to include the new ISDA
de?nitions, CDX/US Single names and Financials.
ForexClear is LCH.Clearnet’s market-leading service clearing interbank foreign
exchange (FX) non-deliverable forwards (NDF) in multiple currencies. During
the year ForexClear cleared US$832 billion. The service offers the only 24-hour
OTC FX clearing service for 20 members. In 2013, the service became fully
US compliant through the implementation of real time trade registration, and
launched client clearing. In the upcoming year, ForexClear will be working with
industry participants to de?ne settlement solutions to expand the clearing
of FX products in line with regulatory requirements and will look
to expand its global offering.
In April 2014, the SwapClear, ForexClear and CDSClear services’ arrangements
were amended (with effect from 1 January 2014) to ensure they met EMIR
and other regulatory requirements for clearing houses, as well as recognising
the changing economics and increased regulatory capital for running OTC
derivatives clearing services. The surplus share arrangements in the SwapClear
and ForexClear services have been replaced with revenue share arrangements.
Non-OTC Clearing
Fixed Income
LCH.Clearnet is the leading clearer of European repo and cash bond markets,
clearing €72.3 trillion in nominal value in the last year (2013: €71.5 trillion),
comprising 15 European government repo and cash bond markets.
LCH.Clearnet SA has an interoperability agreement with CC&G for Italian
Government Bond and Repo markets. Total revenue for the 11 month period
was £31.8 million.
In March, LCH.Clearnet SA launched €GCPlus, a central clearing services for
the tri-party repo market, in collaboration with Euroclear and Banque de
France. The new service enables ?xed income trading desks, treasurers and
other market participants to ef?ciently manage Eurosystem eligible collateral
and to generate liquidity in a cleared environment.
RepoClear is LCH.Clearnet Limited’s market leading service clearing cash
bond and repo trades across a number of European markets. RepoClear is
one of Europe’s largest clearers of ?xed income and plays an important role
in the facilitation of interbank liquidity.
RepoIQ, a new Value at Risk (VaR) margin methodology with a margin
simulator, was introduced to all RepoClear members during April 2014.
Additionally, RepoCalc, the new margin monitoring and simulation tool has
been launched, providing greater margin requirement visibility and
simulation capabilities.
Commodities and Listed Derivatives
LCH.Clearnet provides clearing services for interest rate and equity derivatives
as well as a range of commodities markets, including power and associated
energy markets, base and precious metals and agricultural products. It also
provides clearing for OTC forward freight agreements for the most actively
traded routes. Total revenue for the 11 month period was £82.1 million.
Clearing for the London Metal Exchange, a major part of the commodities
clearing performed by LCH.Clearnet, is expected to cease from September
2014, as this business is migrated to LME’s own clearing house.
In 2013, LCH.Clearnet Limited launched clearing for NLX, a new Nasdaq OMX
MTF offering a range of both short-term interest rate (STIRs) and long-term
interest rate (LTIRs) euro and sterling-based listed derivatives. As expected,
the clearing of derivatives on the LIFFE market by LCH.Clearnet ceased in
June 2013, while a Euronext continental derivatives agreement was signed
to extend clearing of listed derivatives until December 2018.
Cash Equities
LCH.Clearnet provides equity clearing services for a wide coverage of
European regulated exchanges and MTFs including LSE, Turquoise, Euronext,
SIX Swiss Exchange, Oslo Børs, BATS Chi-X Europe, AQUIS and other venues.
LCH.Clearnet is uniquely positioned to provide risk management and clearing
services from Asian market hours through European Trading to the close of
the US markets. It has been at the forefront of industry initiatives to introduce
competition and provide cost ef?ciencies for users of the European cash
equities markets through the implementation of interoperable arrangements
with other CCPs. Total revenue for the 11 month period was £32.4 million.
In the last year, clearing volumes increased to 384.7 million trades (2013:
327.9 million). This is due to increases in trading activity, as well as an
increase in venues and customers. In October 2013, LCH.Clearnet became
the ?rst CCP to offer clearing of OTC Equity Contracts for Difference (CFDs),
helping investors to access the best market price for a trade while bene?ting
from reduced counterparty risk, collateral ef?ciencies and cross-margining
opportunities between cash equities and CFDs.
LCH.Clearnet also provides interoperability with three other clearers (SIX,
EuroCCP NV and Oslo Clearing). Clearing members bene?t from margin
off-sets and collateral ef?ciencies from centralised clearing. Also members
will bene?t from reduced clearing costs with increased volumes through the
global incremental tariff.
Net Treasury Income
Net treasury income is the result of revenue earned on assets posted to the
clearing house, less interest paid to the members on their initial margin and
default fund contributions. The primary role of the investment function is
the protection of client assets. Prudent investment and robust liquidity risk
management remain at the core of LCH.Clearnet’s investment strategy
with risk parameters set by independent risk committees and regulatory
requirements. Total income from Net Treasury Income for the 11 month
period was £62.2 million.
Revenues
32 Strategic report London Stock Exchange Group plc Annual Report 2014
FTSE
Data charges
Other information
Information Services
Introduction
Our Information Services division meets the needs of ?nancial market
participants for fast, reliable and accurate market information. We offer
a wide range of other services, including real time trading data, global indices
and post trade con?rmation and reporting services.
This year, we have continued integrating FTSE, our global index business,
into the Group. We have seen continued growth in North America and
emerging markets, with an increase in ETF assets linked to FTSE benchmarks.
FTSE
FTSE is a leading worldwide provider of information solutions. It is a high
growth, high quality global index business with over 250,000 indices
calculated across 80 countries and is the number three provider of indices
worldwide by revenue. FTSE earns around 60 per cent of revenue from annual
subscription fees and 40 per cent from licensing for index-based products.
Clients include both active and passive fund managers, consultants, asset
owners, sell-side ?rms and data vendors. FTSE’s products are used extensively
by market participants worldwide for investment analysis, performance
measurement, asset allocation and hedging. Leading pension funds, asset
managers, ETF providers and investment banks work with FTSE to benchmark
their investment performance and use FTSE’s indices to create world-class
ETFs, index tracking funds, structured products and index derivatives. FTSE
also provides many exchanges around the world with their domestic indices.
Total revenue for the last year increased 30 per cent to £174.0 million (2013:
£134.1 million).
FTSE’s presence in the US continues to grow, with a signi?cant portion of its
revenue coming from operations in North America. There has been continued
development of the FTSE China Index Series, with launches of ETFs based
on the FTSE China A50 Index on various exchanges including London
Stock Exchange.
In April 2013, FTSE and TMX combined their ?xed income businesses in
a new venture, FTSE TMX Global Debt Capital Markets. FTSE TMX ?xed
income indices are used as benchmarks for more than $1 trillion in assets.
Additionally, MTS bond indices have become part of the FTSE TMX venture,
and these indices will be rebranded in the coming months. This year FTSE
launched the FTSE BOCHK Offshore RMB Bond Index series, in partnership
with the Bank of China (Hong Kong).
FTSE products cover a range of asset classes and vary from traditional market
capitalisation weighted indices to an expanding range of thematic and
alternatively weighted indices.
In 2013, FTSE won the titles of Index Provider of the Year at the European
Pensions Awards and Most Recognised ETF Brand (Asia) at the Global ETF
Awards for China A50.
FTSE expects to issue a statement with respect to its compliance with IOSCO’s
Principles for Financial Benchmarks, by July 2014.
Real Time Data
Our Real Time Data service provides the primary reference data for UK and
Italian equities, delivered by our advanced market data platform. This real
time, tick by tick data is used by traders, brokers and fund managers around
the globe. Total revenue for the last year declined six per cent to £90.8 million
(2013: £96.9 million).
The number of professional users accessing real time data across our direct
network, or through our network service providers and market data vendor
partners, decreased by six per cent to 79,000 professional terminals for
Key Summary
— Revenues increased by 14 per cent to £348.7 million,
representing growth in North America and Asia, and the
completion of Vanguard’s $209 billion benchmark switch
to FTSE, one of the largest ever switches of benchmarks.
— FTSE entered into an agreement with TMX to create FTSE
TMX Global Debt Capital Markets in April 2013.
— FTSE also increased its China offering, with continued
development of the FTSE China Index series, the leading
benchmark for Chinese ETFs, and the launch of the FTSE
BOCHK Offshore RMB Bond.
— Real time data revenue declined six per cent to £90.8 million.
Other Information Services products performed well, with
revenues up by 11 per cent to £83.9 million.
— UnaVista increased its user base to over 30,000 (2013: 9,000).
It became the largest approved reporting mechanism in Europe
by trade volumes and client numbers.
£348.7
m
2013: £306.3m
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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ETF assets under management
benchmarked to FTSE indices
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London Stock Exchange (2013: 84,000) and by eight per cent to 126,000
professional terminals for Borsa Italiana (2013: 137,000). These declines were
largely the result of headcount reductions and general cost cutting in the
sector. Declining terminal revenue is to some extent offset by increasing use
of real time data by many non-display applications, including algorithmic/
black-box trading. Private investor appetite for real time data continues to
grow, with increasing interest in LSEG data on digital platforms such as Google.
This year our focus has been on increasing customer accessibility and
promoting harmonisation between data services. We have been progressing
with our Group Ticker Plan project, which will offer access to all of our markets
via a single feed. LSE sits on the Market Model Typology (MMT) steering
committee which, in collaboration with other exchanges and data distributors
and trading participants, is promoting the design of a new data standard to
enable clearer comparisons to be made between post trade equity data from
trading venues across Europe.
Other Information Services
UnaVista is the Group’s secure platform for all matching, validation and
reconciliation needs. It offers services for regulatory reporting, trade
con?rmations, reconciliations and reference data. In the last 12 months,
UnaVista has increased its user base to over 30,000 (2013: 9,000).
Our multi-asset class MiFID Transaction Reporting service processes
over 1.5 billion trades annually, making it the largest Approved Reporting
Mechanism in Europe by trade volumes and client numbers.
This year, we launched our EMIR Trade Repository solution, approved by
ESMA as a repository across all asset classes and geographies. We also
launched the UnaVista Rules Engine to help clients meet their wider
regulatory reporting needs. In February, the Hellenic Exchanges Group
selected UnaVista Rules Engine and Trade Repository solutions to assist
it with EMIR trade reporting. Over the next year, UnaVista plans to launch
other solutions to assist clients manage their evolving regulatory reporting
needs including the Alternative Investment Fund Managers Directive (AIFMD)
and the Regulation on Energy Market Integrity and Transparency (REMIT).
SEDOL is our global, multi-asset class numbering system, providing reference
data and unique identi?cation codes for global equity, derivatives and ?xed
income securities. The SEDOL Master?le Service database provides clients
with access to reference data on over ?ve million live and almost 50 million
historical instruments. In an extension to its duties as a national numbering
agency, London Stock Exchange was sponsored by the Financial Conduct
Authority (FCA) to be a Local Operating Unit (LOU) for the global allocation of
the new Legal Entity Identi?er (LEI), which uniquely identi?es every
legal entity or structure, in any jurisdiction, which is party to a ?nancial
transaction. The LEI is mandatory for a number of global regulations and
UnaVista technology is being used to allocate and maintain the codes.
Since launch in mid 2013, we have become the third largest LOU and have
allocated over 20,000 LEIs globally across six continents.
Proquote is our cost effective, global market data provider and offers a
wide range of trading services through its trading platform and electronic
execution gateway. Proquote has a partnership programme with companies
including Factset, SunGard, Liquid Metrix and Digital Look, offering solutions
for mobile services, risk, surveillance, and best execution. This year, Proquote
also partnered with Web Financial Group to form Obsidian IR Ltd, which will
deliver content and technology speci?cally tailored to meet companies’
increasing demand for sophisticated investor relations solutions. In October,
Proquote launched a global order routing network for retail brokers, allowing
them to route care orders and direct market access instructions through a
community of 170 sell-side brokers by connecting into the LSE hub.
RNS is a leading high quality service for UK regulatory news announcements
and global press releases. RNS helps companies and their intermediaries
to ful?l their UK and other global regulatory disclosure obligations in the
most effective and time-ef?cient way. Over 70 per cent of all regulatory and
potentially price-sensitive UK company announcements are published using
RNS. Our 2013 customer survey found that over 99 per cent of RNS customers
were either satis?ed or very satis?ed with the service. Of the 120 IPOs in 2013,
118 registered to become RNS customers. Over 265,000 announcements were
processed by RNS during FY 2014 (2013: 256,605), covering the majority of
UK company announcements. RNS operates as a Primary Information
Provider and is regulated by the FCA.
Total revenue for the last year increased 11 per cent to £83.9 million (2013:
£75.3 million).
34 Strategic report London Stock Exchange Group plc Annual Report 2014
MillenniumIT and Global
Business Development
Exchange Technology
Revenues
Technology Services
Introduction
The Group’s Technology Services provides high speed trading platforms,
post trade platforms, real time market data and infrastructure products
and services to our own markets and to a wide range of customers including
banks, specialist trading ?rms and other exchanges.
Exchange Technology
All of our cash equity and retail bond markets have now been migrated and
upgraded to the latest version of the Millennium Exchange trading platform.
This migration has helped reduce our cost base and increased opportunities
for customers to bene?t from enhanced functionality and further expansion
of our co-location services. As a consequence of technology upgrades, we are
able to modernise and develop at lower costs and have seen a 100 per cent
uptime for all markets. The next stage will be to further improve ef?ciency
for other Group platforms.
Our UK cash equity and Turquoise platforms continue to exhibit excellent
technical performance attributable to our Millennium Exchange technology.
Our Turquoise markets have an average latency of 102 microseconds,
remaining one of the fastest operating trading platforms in the world.
On the UK cash equities platform, average latency is 111 microseconds,
slightly higher than Turquoise due to the more diverse range of customers
and the advanced functionality that it offers.
In Post Trade Services, our IT systems and processes are on track for the
migration to TARGET2-Securities (T2S), with testing due to commence later
this year. T2S is a project of the European Central Bank, which aims to
facilitate cheaper cross-border settlement across Europe. Phase 1 of T2S,
of which the Group is a participant, is due to start in June 2015.
Our Group Ticker Plant (GTP) project launched this year. This high speed
technology platform provides a single, normalised real time market data
protocol for broadcast of market data from across the Group, regardless
of asset class, trading platform or geography. The launch represents a
signi?cant step in our technology strategy. It will allow customers to connect
to our markets or data products including indices via a single interface.
The FTSE Low Latency Index Series will introduce the lowest latency
calculation of the leading FTSE UK Series indices. Driven by client requests
following consultation, the FTSE 100 Low Latency and FTSE 250 Low Latency
indices will initially be calculated by the GTP, directly at the creation of the
underlying data in the Group’s data centres.
£64.0
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2013: £56.1m
Key Summary
— Revenues increased 14 per cent to £64.0 million.
— Our cash equity markets use the Millennium Exchange trading
platform, Turquoise, which has an average latency of 102
microseconds (2013: 99 microseconds), remaining one of the
fastest operating trading platforms in the world. LSE has average
latency of 111 microseconds (2013: 106 microseconds), slightly
higher than Turquoise due to the more diverse range of products,
customers and the advanced functionality that it offers.
— MillenniumIT increased revenue by 17 per cent to £31.5 million
(2013: £26.9 million).
— Canada’s TMX went live with MillenniumIT Smart Order Router
to aid compliance with Canadian regulation. It was also recently
rolled out as the Orion Central Gateway platform for Hong Kong
Exchanges and Clearing Limited.
— MillenniumIT also successfully launched the Compliance
Monitoring System (CMS) for the London Metal Exchange, and
extended Millennium Exchange to Burgundy, the Nordic MTF.
— In July 2013, the Group was selected as the business development
and technology partner by the Argentinian Central Securities
Depository (CSD), Caja de Valores S.A.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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Our Sponsored Access service allows non members a direct technical
connection to the LSEG’s equity order books under the trading codes of
a Sponsoring Firm.
GATElab, our Italian and UK based technology company supplies advanced
trading, market access and post trade technology globally.
GATElab’s multi-asset cross-markets suite of components, MiFID compliant,
ful?ls the needs of buy-side, sell-side and hedge-fund partners: from
a fast single-click trading front-end to a ?exible and easily-programmable
automated trading and quoting engine, from a dealer-to-broker ?x
interconnection and a fast Execution Management System (EMS) and Order
Management System (OMS), to a real time forwarding of captured trades/
orders to position and back-of?ce systems.
EuroTLX, a European Retail Bond trading platform, which joined the Group
in September 2013, will be migrated to Millennium Exchange in Italy later
this year.
In 2014, Exchange Technology revenue increased by 11 per cent to
£32.5 million (2013: £29.2 million).
MillenniumIT
MillenniumIT offers pre- to post trade, multi-asset, ultra-low latency,
agile capital market solutions. MillenniumIT technology powers trading
venues, banks, broker dealers and post trade institutions and its systems
are live in over 30 organisations around the world. The MillenniumIT model
is to invest in technological innovation to give clients a competitive
advantage. MillenniumIT has been part of the Group since 2009 and this
year opened a new state-of-the-art, 40,000 sq ft software development
building on its existing Sri Lanka campus, to better support the building
of best in class technology.
MillenniumIT’s suite of capital market products includes Millennium
Exchange, our ?agship low latency multi-asset trading engine; Millennium
SOR an intelligent smart order router and gateway solution; Millennium
Surveillance, providing powerful multi-market, multi-asset class market
monitoring; Millennium MarketData, providing ultra-fast and ef?cient data
for ?nancial markets; and Millennium PostTrade, offering multi-asset clearing,
settlement, risk and depository solutions in real time. MillenniumIT also
provides enterprise systems integration and low latency infrastructure
services to customers in Sri Lanka and beyond.
In 2014, MillenniumIT revenue increased by 17 per cent to £31.5 million
(2013: £26.9 million).
Highlights this year include:
— Millennium PostTrade was selected by Singapore Stock Exchange (SGX) to
support its clearing, settlement and depository services. The new system
will allow SGX to clear, settle and safe-keep assets in a quicker and easier
way in multiple currencies and across asset classes, allowing SGX to
improve customer access and roll out new products much faster.
— Millennium SOR went live in Canada’s TMX to aid compliance with
Canadian regulation. It is also supporting the Orion Central Gateway
platform for Hong Kong Exchanges and Clearing Limited.
— Millennium Surveillance went live in the London Metal Exchange,
powering the Compliance Monitoring System (CMS).
— Millennium Exchange was rolled out in Burgundy, the Nordic MTF
owned by Oslo Børs.
Global Business Development
The Global Business Development team develops and implements business
opportunities with other exchanges and business partners, leveraging the
assets of the Group to generate new revenues and establish long term
strategic partnerships.
In July 2013, the Group was selected as the business development and
technology partner by the Argentinian Central Securities Depository (CSD),
Caja de Valores S.A. (CVSA). CVSA acts as the technology provider to the newly
formed Bolsa & Mercados Argentinos exchange (B&MA). MillenniumIT, will
supply capital markets technology across asset classes, including its ultra low
latency, highly scalable trading platform, Millennium Exchange. London
Stock Exchange Group will also provide a range of ancillary services alongside
the trading technology agreement to help further develop the Argentinian
capital markets.
We continue to assist the Mongolian Stock Exchange’s (MSE) project to
modernise the country’s capital markets infrastructure. We are currently
working with the Ghanaian Central Securities Depository (CSD (Gh)) and
Ghana Stock Exchange to help develop their ?ve year strategic plans and help
contribute to the economic growth in Ghana and its sub region.
Interest from markets worldwide is strong, including from frontier and
emerging markets looking to develop and promote their capital markets.
36 Strategic report London Stock Exchange Group plc Annual Report 2014
Our wider responsibility
The Group plays a vital economic and social role in enabling
companies to access funds for growth and development.
As such, integrity and trust in our markets, and across the
Group, are at the core of what we do.
Below, we summarise our approach to corporate responsibility and outline
some of our key achievements during the year. We have also produced a
detailed corporate responsibility (CR) report, which can be downloaded at
www.lseg.com/corporate-responsibility/corporate-responsibility.htm.
Managing the business in an effective and sustainable manner
Integrity and trust are at the core of what we do. For more than 200 years,
we have operated under the banner of ‘My word is my bond’. This overriding
principle is still relevant today as a provider of open, trusted, reliable,
independent and user-neutral services. Exchanges underpin global economic
growth and ful?l an important social purpose by supporting funding and
development of SMEs, encouraging market transparency, benchmarking
investments and by advocating sustainable best practice in corporate
behaviour. Environmental, social and governance (ESG) factors are core
to ef?cient, transparent, resilient and well governed capital markets.
Environment
Over the last three years, we have achieved considerable improvements
in our approach to environmental sustainability. The Group’s primary GHG
emissions arise from energy, waste and water in our of?ces and data centres
around the world, from staff travel, and indirectly from our supply chain
(please see the Environment section of our CR report for details on emissions
and targets).
We are taking an active approach to emissions management, with our global
Environmental Management Group measuring GHG impacts across our
51 location property portfolio, including managed of?ces where possible.
We report performance quarterly via our Intranet, and annually disclose
to the Carbon Disclosure Project, DJSI, FTSE4Good and on our website.
Global FY14 GHG Emissions (1 April 2013 to 31 March 2014)
(tCO
2
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Total Scope 1 & 2 Emissions (as per below) 22,843
per m
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0.26
per FTE 7.20
per £m Revenue 20.99
Combustion of fuel and operation of facilities
2
1,392
Purchase of electricity, heat, steam and cooling
by the Group for its own use
3
21,451
1 Total building ?oor space, including data centres.
2 Scope 1 including Natural Gas, Diesel, LPG and Fleet Vehicles.
3 Scope 2 (the Group does not purchase heat, steam or cooling).
Note: FY2014 GHG emissions will form the new baseline for GHG emissions due to signi?cant
changes in the LSEG, incorporating FTSE and LCH.Clearnet.
Our emissions are calculated using GHG Protocol and UK Government
Environmental Reporting Guidelines, including mandatory greenhouse
gas emissions reporting guidance. We use DEFRA UK Government
GHG Conversion Factors, US Environmental Protection Agency eGrid,
and International Energy Agency factors.
The emissions stated above are all of the emissions sources required under
the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations
2013. These sources fall within our consolidated ?nancial statement. We do
not have responsibility for any emissions sources that are not included in our
consolidated statement.
Social
People
Our people are at the heart of what we do and drive the success of our
business. Attracting, developing and retaining the skills we need to deliver on
our strategy of being the most trusted market expert is a key imperative for
the Group. We are dedicated to unifying our growing company and supporting
our employees’ talent in an environment built on partnership, integrity,
innovation and excellence.
This year, we invested signi?cantly in implementing our Group Behavioural
Framework, which underpins our values, Code of Conduct and Group CR policy
by driving behaviours that are key to our long term success. Further information
on our approach to developing and retaining our people is detailed in the
CR report.
Diversity/Equal Opportunities
We value diversity as a driver for development and innovation. Our operations
span four continents, with of?ces in Canada, France, Hong Kong, India,
Italy, Japan, Sri Lanka, the UK and the US. We have employees of 51 different
nationalities, re?ecting both the growing international scale of our business
and the diversity of our customer base. Six nationalities are represented on
our Executive Committee.
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Gender Diversity
Female Male
LSEG plc Board
1
2 12
LSEG Subsidiary Boards
1,3
10 126
Executive Commitee and Leadership Teams
2,3
19 94
All staff 898 1,869
Total 917 1,963
1 Mix of staff and Non-Executive Directors.
2 Executive Committee and leadership teams in LSEG and LCH.Clearnet.
3 The LSEG Subsidiary Board members and the Executive Committee and Leadership
Teams together comprise the “Senior Managers” for the purposes of 414C(10)(b)
Companies Act 2006.
Human Rights
London Stock Exchange Group prides itself on its high standards of social
responsibility. To that effect, the Group respects and seeks to adhere to the
principles covered by the Universal Declaration of Human Rights together
with the International Labour Organisation Conventions and the Voluntary
Principles on Security and Human Rights within its working environment
in each location where it operates. The Group strongly supports these
conventions which aim to abolish forced labour and child labour and promote
freedom of association and equality. Human rights considerations are
included in our Group-wide Code of Conduct.
Community
Our global presence continues to expand, both in terms of the companies
that join our markets and the countries in which we operate. As part of this
progression, we are dedicated to engaging with the growing number of
communities that we become a part of. Whether through our charitable
programmes, reducing our environmental footprint, or encouraging an open
dialogue with our stakeholders, we are committed to serving our communities.
The Group established the London Stock Exchange Group Foundation in
2010 which provides a single channel for the Group’s charitable giving and
for promoting and facilitating staff engagement with the community.
The Community section of the Group CR report outlines some of the work
that the Foundation supports.
This year, the Group donated £1,661,000 to charity (2013: £1,193,000),
an increase of 39 per cent on last year (excluding charitable donations
made through LCH.Clearnet, the increase in donations was 17 per cent).
This year’s total donations are equivalent to £577 per employee, in line
with £593 last year. Our donation per employee is 16 per cent higher than
the level calculated in research by the London Benchmarking Group,
which showed that the average amount donated per employee by leading
UK corporate donors in 2013 was £499.
Governance
We are committed to the highest standards of corporate governance.
Given our central role in a constantly evolving global economic landscape,
it is important to us that we foster con?dence in our markets and in the
services we provide. Our Group-wide Code of Conduct sets out the ethical
and behavioural framework governing the Group’s activities and the
behaviours we expect from our directors and staff. Complying with the
framework ensures that we maintain our reputation and that our employees
apply the highest standards when dealing with our stakeholders. The Group
also complies with the UK Corporate Governance Code (see page 57 for
further details).
Given the size and scope of our businesses, we face a wide and expanding
universe of risks. In particular, our presence in post trade services increases our
direct and indirect exposure to the volatility of ?nancial markets. We also face
technology risks such as cyber threats, systems resilience, and technological
innovation; and political, regulatory and macro-economic risks, which include
the impact of the actions of our competitors. To pursue our growth strategy
in this dynamic environment requires best in class risk management.
Our governance and risk management structures have evolved to meet
this need (see pages 61 and 62 for further details).
Looking ahead
As our business expands and diversi?es, we continue to review our approach to
corporate responsibility. In the coming year, we plan to promote sustainable,
responsible and effective business management through each of our core
business activities. In addition to quantitative environmental, social and
governance targets, we are dedicated to achieving the following aims:
Our Markets — Continue to support the development of SMEs
on our markets, including cleantech companies.
— Encourage further good governance practices
on our markets.
Our Services — Further develop our offering of tools to help
investors incorporate ESG considerations within
their investment process and across all assets.
— Further integrate our services to increase
ef?ciencies for market participants.
Our People — Focus on innovation through collaboration
by leveraging our Group’s talent and business
diversity and promoting staff engagement.
— Further embed our values and ethical behaviours
within our business globally.
Our
Communities
— Increase the impact of our charitable
giving approach.
— Focus on our short- and long-term
environmental targets.
Adjusted total income
2
£ million
?increased ?decreased
1,500
1,300
1,100
900
700
500
2013
852.9
FX
13.3
2013 Organic
and constant
currency
866.2
NTI
74.3
Organic
76.5
Acquisitions
344.7
2014
1,213.1
38 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial review
Highlights
— Adjusted total income up 42 per cent at £1,213.1 million (2013: £852.9
million) and total revenue rose 50 per cent to £1,088.3 million (2013:
£726.4 million), including eleven months’ contribution from LCH.Clearnet.
On an organic constant currency basis adjusted total income was ?at
with increases in revenue from the core business segments offset by
a reduction in net treasury income.
— Operating expenses increased 65 per cent to £698.4 million (2013:
£422.7 million) including £245.2 million of costs relating to businesses
acquired of which LCH.Clearnet was £240.6 million. On an organic
constant currency basis costs were up six per cent (including in?ation
and growth in cost of sales) re?ecting continued good cost control.
— Adjusted operating pro?t up 20 per cent at £514.7 million (2013:
£430.2 million).
— Operating pro?t rose one per cent to £353.1 million (2013: £348.4 million).
— Adjusted basic earnings per share increased by two per cent to 107.1
pence. This included the bene?t of one-time items of 2.4 pence relating
to the release of provisions for Lehmans debtors and the exit from a
leasehold property and 2.2 pence from the sale of a non-core asset
(2013: 105.3 pence which included the bene?t of 5.4 pence from a
one-time prior years’ tax adjustment).
— Basic earnings per share fell 22 per cent to 63.0 pence (2013: 80.4
pence) as a result of increased amortisation, transaction costs and
interest payments following the acquisition of a majority stake in
LCH.Clearnet Group and higher tax charges mainly due to a ?nancial
industry surcharge in Italy.
— Cash generated from operations increased six per cent to £515.4 million
(2013: £487.5 million).
— Year end operating net debt to adjusted EBITDA at 1.9 times (2013:
1.2 times), within the Group’s normal target range of one to two times
following the debt ?nancing of the acquisition of a majority stake in
LCH.Clearnet and its subsequent capital raise.
David Warren
Group Chief Financial Of?cer
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
3
%
Capital Markets 309.5 267.5 16 12
Post Trade Services – CC&G and
Monte Titoli 98.4 91.8 7 4
Post Trade Services – LCH.Clearnet
1
263.0 – – –
Information Services 348.7 306.3 14 10
Technology Services 64.0 56.1 14 12
Other 4.7 4.7 0 (2)
Total revenue 1,088.3 726.4 50 10
Net treasury income
– CC&G 47.6 116.7 (59) (61)
– LCH.Clearnet 62.2 – – –
Other income 11.5 9.8 17 19
Total income 1,209.6 852.9 42 0
Adjusted total income
excluding unrealised losses
2
1,213.1 852.9 42 0
Operating expenses
2
(698.4) (422.7) 65 6
Adjusted operating pro?t
2
514.7 430.2 20 (6)
Operating pro?t 353.1 348.4 1 (12)
Adjusted basic earnings
per share
2
107.1p 105.3p 2
Basic earnings per share 63.0p 80.4p (22)
1 LCH.Clearnet results represent 11 months ended 31 March 2014.
2 Before amortisation of purchased intangibles, non-recurring items and unrealised net
investment gains/losses at LCH.Clearnet.
3 Organic growth is calculated in respect of businesses owned for at least 12 months in
either period and so excludes EuroTLX, FTSE TMX Global Debt Capital Markets, GATElab
and LCH.Clearnet. The Group’s principal foreign exchange exposure arises from translating
our European based euro reporting businesses into sterling.
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Capital Markets
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
%
Primary Markets
Annual Fees 41.2 38.5 7 6
Admission Fees 39.9 32.3 24 21
Total Primary Markets 81.1 70.8 15 13
Secondary Markets
Cash equities: UK & Turquoise 94.5 86.0 10 10
Cash equities: Italy 36.1 32.7 10 7
Derivatives 19.6 19.1 3 0
Fixed income 68.1 51.8 31 17
Total Secondary Markets 218.3 189.6 15 10
Other 10.1 7.1 42 38
Total revenue 309.5 267.5 16 12
Operating expenses (164.8) (148.6) 11
Operating pro?t 144.7 118.9 22
Capital Markets revenue, which comprises primary and secondary market
activities, increased 16 per cent to £309.5 million (2013: £267.5 million).
Primary markets revenue was up 15 per cent to £81.1 million (2013: £70.8
million) following the highest IPO activity seen in the last six years, and
secondary market revenues increased by 15 per cent on higher equity
and ?xed income trading volumes and the inclusion of revenue from
EuroTLX in which a majority stake was acquired in September 2013.
In primary markets, the total amount of capital raised across our equity
markets, both through new and further issues, increased by 90 per cent to
£34.2 billion (2013: £18.0 billion). This re?ected a strong recovery, particularly
in the second half of the year, in equity issuance for both domestic and
international companies across our markets. In total, 57 issuers (2013: 40)
joined our main markets in London, 20 companies (2013: seven) came to
market in Italy and 111 companies (2013: 74) were admitted to trading on
AIM. Looking ahead, the pipeline of companies looking to join our markets
remains encouraging.
In secondary markets, both the UK and Italian equity trading activity increased
on last year with average order book daily value traded in the UK up eight per
cent to £4.3 billion (2013: £4.0 billion) and order book volume in Italy up ?ve
per cent to 235,000 trades per day (2013: 223,000). Trading on Turquoise,
our pan-European equities platform, delivered a 67 per cent rise in average daily
equity value traded to €2.8 billion (2013: €1.7 billion). Global derivatives volumes
decreased in the last year, with 23 per cent and four per cent declines in the UK
and Italy respectively, largely as a result of lower market volatility.
Fixed Income produced a good performance despite MOT volumes down nine
per cent, while MTS grew strongly with MTS Repo volumes up two per cent
and MTS Cash and BondVision value traded up 48 per cent. In September,
the Group acquired a majority stake in EuroTLX, an Italian MTF operating in
the European ?xed income market, and six months of revenue (£6.6 million)
is included in Fixed Income (£5.8 million) and Admission Fees (£0.8 million).
Other capital markets revenues of £10.1 million (2013: £7.1 million) primarily
comprise fees for membership of and connectivity to our markets.
Operating expenses (including cost of sales and Euro TLX costs) were up 11 per
cent to £164.8 million (2013: £148.6 million) in line with increasing revenue and
operating pro?t was up 22 per cent to £144.7 million (2013: £118.9 million).
Post Trade Services – CC&G and Monte Titoli
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
%
Clearing (CC&G) 40.0 36.1 11 7
Settlement (Monte Titoli) 16.4 15.5 6 2
Custody & other 42.0 40.2 4 1
Total revenue 98.4 91.8 7 4
Net treasury income 47.6 116.7 (59) (61)
Inter-segmental income 0.9 –
Total income 146.9 208.5 (30) (33)
Operating expenses (63.4) (64.2) (1)
Operating pro?t 83.5 144.3 (42)
Post Trade Services – CC&G and Monte Titoli, saw an expected sharp decline
in net treasury income following completion of the migration to a minimum
95 per cent secured investment portfolio, partially offset by a modest
increase in revenue resulting in total income decreasing to £146.9 million
(2013: £208.5 million).
Clearing revenues grew by 11 per cent to £40.0 million, following the recovery
in trading volumes in equities and ?xed income. Similarly settlement
revenues increased by six per cent with Monte Titoli processing 58.3 million
settlement instructions, up ?ve per cent on the previous year.
In the Monte Titoli CSD business the average value of assets under custody
grew by three per cent, leading to an increase in year on year revenues from
Custody on a constant currency basis. The main increase in assets under
custody came in Government Bonds and Equity, the latter mainly due to
increases in market capitalisation.
100
80
60
40
20
0
Secured investments
(excludes cash deposited with LCH.Clearnet SA through CC&G’s
interoperability arrangement)
%
?secured cash investments ?unsecured cash deposits
Sep
2012
100
24
Oct
76
50
Nov
50
53
Dec
47
53
Jan
2013
47
57
Feb
43
61
Mar
39
70
Apr
30
74
May
26
73
Jun
27
83
Jul
17
83
Aug
17
97
Sep
3
100
Oct
0
99
Nov
1
99
Dec
1
100
Jan
2014
0
100
Feb
1
99
Mar
1
40 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial review
continued
CC&G generates net treasury income by investing the cash margin it holds,
retaining any surplus after members are paid a return on their cash collateral
contributions. The average daily initial margin rose 18 per cent to €11.9 billion
for the period (2013: €10.1 billion). CC&G completed the move to a minimum
95 per cent secured investment level for cash margin, required to meet EMIR
regulatory standards, with a subsequent reduction in yields. Net treasury
income, as a result of this change, decreased by £69.1 million to £47.6 million
(2013: £116.7 million).
Operating expenses were down one per cent to £63.4 million and combined
with the decline in net treasury income resulted in a 42 per cent decrease in
operating pro?t to £83.5 million (2013: £144.3 million).
Post Trade Services – LCH.Clearnet
Year ended 31 March (eleven months)
Revenue
2014
£m
OTC 109.6
Non-OTC 146.3
Other 7.1
Total revenue 263.0
Net treasury income 62.2
Other income (3.5)
Total income 321.7
Operating Expenses (240.6)
Operating Pro?t 81.1
The Post Trade Services – LCH.Clearnet segment comprises the Group’s
majority owned global clearing business which was acquired on 1 May
2013. In the 11 month period as part of the Group, the division contributed
revenue of £263.0 million and net treasury income of £62.2 million, offset by
operating expenses of £240.6 million and resulted in an operating pro?t of
£81.1 million.
OTC revenue of £109.6 million includes revenue from SwapClear, the world’s
leading interest rate swap clearing service, CDS Clear, which clears European
credit indices and ForexClear, clearing interbank foreign exchange non-
deliverable forwards in multiple currencies. SwapClear membership increased
to 103 members in 2014 (2013: 78 members) while CDSClear had 11 members
and ForexClear 20 members, an increase in the year of three members and
?ve members respectively.
In April 2014, the SwapClear, ForexClear and CDSClear services’ arrangements
were amended (with effect from 1 January 2014) to ensure they met EMIR
and other regulatory requirements for clearing houses, as well as recognising
the changing economics and increased regulatory capital for running OTC
derivatives clearing services. The surplus share arrangements in the SwapClear
and ForexClear services have been replaced with revenue share arrangements.
The impact for the period to 31 March 2014, including changes to CDSClear,
has been to increase OTC revenues by £14.0 million with a corresponding
increase in operating expenses of £10.2 million; this re?ects the move to a
revenue share and LCH.Clearnet is now recognising in full the assets and their
associated amortisation relating to these businesses. In 2014, it is expected
that LCH.Clearnet’s overall share from the three OTC services in aggregate
will be over 50 per cent, while SwapClear will be over 60 per cent. The new
arrangements will become increasingly bene?cial as the cost base is controlled
and the OTC businesses continue to grow, through fee increases for new
services and products, geographic expansion and an increased number of
customers using the services.
Non-OTC revenue contributed £146.3 million in 11 months including
£82.1 million from clearing services for interest rate and equity derivatives
as well as a range of commodities markets, £32.4 million from cash equities
which provides clearing services for a wide coverage of European regulated
exchanges and multilateral trading facilities and £31.8 million from clearing
cash bond and repo trades across a number of European markets.
Net treasury income is earned by investing the cash margin held, retaining any
surplus after members are paid a return on their cash collateral contributions.
This income for the 11 month period was £62.2 million with LCH.Clearnet
investments remaining at over 95 per cent secured throughout the period.
The Group has identi?ed signi?cant additional cost savings as part of the
integration process that commenced following completion of the acquisition.
We have increased the cost synergies from the original €23 million (£19 million)
target, to €60 million (£49 million) to be achieved in 2015 (from an expected
annualised 2013 cost base of €306 million (£251 million), just prior to last
year’s acquisition). One-time costs to achieve the savings are expected to
be €43 million (£35 million), with €31 million (£26 million) of this included
in non-recurring items in the Group’s March 2014 results.
These savings are being achieved through a number of measures, including
restructuring of operations, procurement ef?ciencies, combination of group
functions and other headcount reductions. These savings will more than
offset expected cost increases over the same period, principally from higher
depreciation charges from investment in systems and processes necessary
to meet EMIR requirements and other operational needs.
Information Services
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
%
FTSE revenues 174.0 134.1 30 22
Real time data 90.8 96.9 (6) (7)
Other information services 83.9 75.3 11 11
Total revenue 348.7 306.3 14 10
Operating Expenses (179.0) (159.2) 12
Operating Pro?t 169.7 147.1 15
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400
300
200
2013
422.7
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Impact
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and constant
currency
426.9
In?ation
4.2
Organic
22.1
Acquisitions
245.2
2014
698.4
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Information Services provides fast, reliable market information including
global indices products, trade processing operations, desktop and work?ow
products. In the last year Information Services revenue rose 14 per cent to
£348.7 million (2013: £306.3 million) re?ecting a strong performance from
FTSE as well as growth in other products.
FTSE’s revenue increased 30 per cent to £174.0 million (2013: £134.1 million)
driven by an increase in subscription revenues from net new business and
the completion of Vanguard’s benchmark switch to FTSE. Growth was boosted
from the inclusion of the new FTSE TMX ?xed income indices joint venture in
April 2013. We remain on track to achieve the three year aggregate target of
£28 million set for FTSE global revenue and cost synergies, with the SEDOL
business bene?ting in particular through the FTSE sales network.
Real time data revenue declined six per cent year on year as a result of
fewer users in both the UK and Italy, down six per cent and eight per cent
respectively. These falls were largely the result of headcount reductions and
general cost cutting in the sector. Other Information Services performed well,
in particular UnaVista which increased its user base to over 30,000 in the last
year (2013: 9,000). UnaVista also launched its EMIR trade repository solution
to assist clients manage their evolving regulatory and reporting needs.
Operating expenses of £179.0 million (2013: £159.2 million) are up 12 per cent
on 2013 levels re?ecting increased cost of sales, up 25 per cent, and staff
costs following strong growth in the FTSE business. Operating pro?t rose
15 per cent to £169.7 million (2013: £147.1 million).
Technology Services
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
%
MillenniumIT 31.5 26.9 17 21
Technology 32.5 29.2 11 3
Total revenue 64.0 56.1 14 12
Intersegmental revenue 10.9 21.3 (49) (45)
Total income 74.9 77.4 (3) (2)
Operating expenses (63.1) (57.2) 10
Operating pro?t 11.8 20.2 (42)
Technology Services comprises technology connections and data centre
services, along with the MillenniumIT business, based in Sri Lanka, which
provides technology and enterprise services for the Group and third parties.
Revenues for Technology Services increased by 14 per cent to £64.0 million
(2013: £56.1 million).
MillenniumIT third party revenue rose 17 per cent to £31.5 million (2013: £26.9
million) mostly relating to growth in the Enterprise Service Provision (ESP)
operation. The business continued to perform well, launching new technology
and building new relationships with Singapore Stock Exchange and Canada’s
TMX among others.
Revenue from other technology services grew by 11 per cent to £32.5 million
(2013: £29.2 million) including a full year’s contribution from the GATELab
business (acquired in December 2012), which supplies advanced trading and
post trade technology globally.
Operating expenses were up 10 per cent to £63.1 million (2013: £57.2 million),
primarily due to an increase in cost of sales relating to growth in ESP revenues,
and operating pro?t was down 42 per cent to £11.8 million (2013: £20.2 million).
Operating expenses before amortisation of purchased intangibles and
non-recurring items rose 65 per cent to £698.4 million (2013: £422.7 million),
mainly re?ecting the inclusion of £240.6 million of costs relating to 11
months of LCH.Clearnet and costs of £4.6 million from other acquired
businesses (FTSE TMX, EuroTLX and GATELab) for a full year.
Organic costs on a constant currency basis remained well controlled, up six per
cent (including in?ation), mainly attributable to investments in staff, higher
project-related professional fees and an increase in cost of sales. Offsetting
these cost increases were one-time items of £8.4 million for the release of
provisions relating to Lehmans debtors and the exit from a leasehold property.
We remain committed to maintaining high levels of cost control, including
realising synergies as part of the LCH.Clearnet acquisition, where we have
increased annualised target cost savings from €23 million (£19 million) to
€60 million (£49 million) by the end of 2015.
Finance income and expense and taxation
Net ?nance costs were £68.8 million, up £19.3 million on the prior year,
principally re?ecting the full year cost of the £300 million retail bond (issued
in November 2012), the drawing of credit facilities to fund the acquisition of
the majority stake in LCH.Clearnet in May 2013 (and its subsequent capital
raise), 11 months’ interest cost on the LCH.Clearnet Preferred Securities and
also arrangement fees totalling £3 million for new bank facilities, signed in
July 2013.
Debt maturity pro?le
£ million
?drawn ?undrawn
600
500
400
300
200
100
0
2016
500
2017
149
2018
450
2019
250
2020 2021
300
42 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial review
continued
The Group’s effective tax rate on pro?t before amortisation of purchased
intangibles and non-recurring items was 28.2 per cent, which is slightly lower
than last year (2013: 29.0 per cent). This re?ects the ongoing reduction in the
UK statutory corporation tax rate of 23.0 per cent (2013: 24.0 per cent) and a
slight change in the taxable pro?t mix towards the UK following the majority
acquisition of LCH.Clearnet. This downward move is offset by a temporary
increase in the Italian corporate tax rate for certain of the Group’s Italian
entities and the expansion of the Group into new markets (France and
Canada) following the majority acquisitions of LCH.Clearnet and FTSE TMX
Global Debt Capital Markets. Both of these jurisdictions have higher statutory
rates of corporate tax than the UK.
Cash flow and balance sheet
The Group’s business continued to be strongly cash generative during the
year, with cash generated from operations up six per cent to £515.4 million.
Total investment in the year, net of dividends received, was £28.0 million
principally due to the Group investing £376.5 million in the majority acquisitions
of LCH.Clearnet, EuroTLX and FTSE TMX along with £90.9 million on capital
expenditure offset by acquired cash from acquisitions of £432.0 million.
The Group purchased shares for £28 million to cover long term incentive
plan commitments; however, in future years it is expected that we will issue
shares in combination with cash purchases to meet these requirements.
At 31 March 2014, the Group had net assets of £1,956.9 million (2013: £1,599.0
million). Intangible assets increased by £426.7 million, mainly re?ecting
goodwill and purchased intangibles recognised from the purchase of LCH.
Clearnet. The central counterparty clearing business assets and liabilities
within LCH.Clearnet and CC&G largely offset each other but are shown gross
on the balance sheet as the amounts receivable and payable are with
different counterparties.
Net debt, facilities and credit rating
2014
£m
2013
£m
Gross borrowings 1,223.7 796.8
Cash and cash equivalents (919.2) (446.2)
Net derivative ?nancial liabilities/(assets) 0.7 (0.7)
Net debt 305.2 349.9
Regulatory and operational cash 803.6 200.0
Operating net debt 1,108.8 549.9
At 31 March 2014, the Group had operating net debt of £1,108.8 million
after adjusting for £803.6 million of cash and cash equivalents held to
support regulatory and operational requirements, including cash and cash
equivalents held by LCH.Clearnet together with a further £200 million
covering requirements at other LSEG companies.
The Group’s gross borrowings increased by £426.9 million re?ecting the
?nancing of the acquisition of the majority stake in LCH.Clearnet including
our participation in its subsequent capital raise to fund increased regulatory
capital needs, the consolidation of the LCH.Clearnet Group Preferred
Securities, the investment in the FTSE TMX Debt Capital Markets joint
venture and the acquisition of a 70 per cent interest in EuroTLX.
In July 2013, the Group took advantage of favourable market conditions
and signed a new £700 million unsecured, committed revolving bank facility
package, on improved terms, to replace its existing credit lines. The new
facility comprises a mix of three and ?ve year commitments which extend
the Group’s debt maturity pro?le and underpin its ?nancial ?exibility. At 31
March 2014, the Group had drawn debt and committed credit lines totalling
£1.65 billion, with maturities extending to July 2016 or beyond. With £422
million of undrawn bank lines available, together with continuing strong cash
generation, the Group remains well positioned to fund future growth.
The Group’s interest cover (the coverage of net ?nance expense by earnings
before interest, taxation, depreciation and amortisation, both before
non-recurring items) reduced to 8.6 times (2013: 9.5 times) due to the
increase in net ?nance costs during the year being only partially covered
by the growth in EBITDA. However, the Group’s cash generation remained
strong, which resulted in an improvement in leverage in the second half of
the year following the material increase in borrowings in the ?rst half. As at
31 March 2014, operating net debt to adjusted EBITDA of 1.9 times (2013: 1.2
times) is back within the Group’s target range for leverage of one to two times.
The Group’s long term credit ratings remained unchanged during the year.
Standard & Poor’s concluded its watch reviews over both LSEG and LCH.Clearnet
on 3 May 2013, following the majority acquisition of LCH.Clearnet, by af?rming
its A- rating for LSEG, and moving the A+ rating of LCH.Clearnet back to a stable
outlook. However, following the introduction of new global criteria published
later in 2013 (that examines the risks to LSEG around its businesses in Italy –
given that the sovereign state is rated lower than LSEG, at BBB) and re?ecting
its caution, in the short term, around the achievement of key ?nancial metric
targets set for the Group Standard & Poor’s has placed LSEG on credit watch
with negative implications. This credit watch also applies to the A+ rating of
LCH.Clearnet with the watch review period to the end of May 2014.
Moody’s af?rmed its rating of Baa2 during the year and assigned a stable
outlook following completion of the LCH.Clearnet Group acquisition.
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Foreign exchange
2014 2013
Spot £/€ rate at 31 March 1.21 1.18
Average £/€ rate for the year 1.19 1.23
The Group’s principal foreign exchange exposure arises as a result of translating
the Group’s euro earnings, assets and liabilities from our European based euro
reporting businesses into sterling. A €5c movement in the average £/€ rate
for the year would have changed the Group’s operating pro?t for the year
before amortisation of purchased intangibles and non-recurring items by
approximately £12 million.
The acquisition of a majority stake in LCH.Clearnet has increased the
exposure the Group has to the euro. In addition, the growth of LCH.Clearnet
and the FTSE businesses during the year has also increased, but to a lesser
extent, our foreign exchange exposure to the US dollar. The Group manages
its translation risk exposure by matching the currency of its debt (including
debt effectively swapped from sterling into currency) to the currency of its
earnings, where possible, to ensure its key ?nancial metrics are protected
from material foreign exchange rate volatility.
Earnings per share
The Group recorded an adjusted basic earnings per share, which excludes
amortisation of purchased intangible assets, non-recurring items and
unrealisable gains/losses on investments, of 107.1 pence, up two per cent
including an increase of one-time items of 2.4 pence from the £8.4 million
release of provisions relating to Lehmans debtors and the exit from a leasehold
property and 2.2 pence from £6.9 million sale of a non-core asset (2013: 105.3
pence including 5.4 pence relating to the one-time prior years’ tax adjustment).
Basic earnings per share decreased by 21 per cent to 63.0 pence (2013: 80.4
pence) as a result of increased amortisation, transaction costs and interest
payments following the acquisition of a majority stake in LCH.Clearnet and
higher tax charges mainly due to a ?nancial industry surcharge in Italy.
LSEG Board
Risk
Committee
Audit
Committee
Executive
Financial Operational New Products
Treasury
Business
Continuity Board
L.O.B. & Risk Champions Group Functions Risk Internal Audit
FIRST LINE SECOND LINE THIRD LINE
44 Strategic report London Stock Exchange Group plc Annual Report 2014
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Group Committees
Functions
Line of Business (L.O.B.)
LSEG Governance structure
The components of the ERMF are as follows:
— The Board is responsible for determining the Group Risk Appetite
(see Risk Management and Internal Control Section page 62).
This de?nes the nature and extent of the risks LSEG is willing to take
to achieve its strategic objectives while reinforcing the risk culture.
— The Board Risk and Audit Committees have been separated to
strengthen the oversight provided over Group risk management
following the acquisition of LCH.Clearnet.
— The ERMF de?nes roles and responsibilities for risk management
oversight and activities, including for the Board, the Executive
Committee (ExCo) and sub-Committees thereof.
— There are three Executive Risk sub-Committees covering ?nancial,
operational and new product (and market) risk to provide the appropriate
level of risk oversight across the organisation.
— The Financial and Operational Risk Committees monitor and report
on the ?nancial and operational risk pro?le of the Group, review and
challenge the application of the Group risk framework, recommend risk
appetite statements to the Executive Committee and monitor compliance
with the relevant risk policies.
— The New Product (and Market) Committee reviews and recommends
business cases to the Executive Committee ensuring product innovation
and new market risks are appropriately identi?ed and assessed.
— LSEG’s risk control structure is based on the ‘three lines of defence’ model:
The First line, management, is responsible and accountable for
identifying, assessing and managing risk.
We are subject to a variety of risks, the management of which
is fundamental to the successful execution of our Strategic Plan.
As our Group has grown we have continually enhanced our risk
management capabilities to ensure that we maintain our
trajectory while protecting the value of our business.
The LSEG Enterprise-wide Risk Management Framework
During FY2014 the Group has further embedded its Enterprise-wide Risk
Management Framework (ERMF). This Framework is designed to allow
management and the Board, as part of our business model, to identify
and assess LSEG principal risks and ensure better decision taking by
informing the Board and other key stakeholders of the key risks related
to the execution of our strategy.
The ERMF also enables the Board and executive management to maintain,
and attest to the effectiveness of, the systems of internal control and risk
management as set out in the UK Corporate Governance Code.
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Risk Identification
The Group is subject to a variety of risks and uncertainties which may impact
its ability to execute its strategy and deliver its expected performance.
Group-wide risks are classi?ed into the following three categories:
— Strategic Risks: Risks related to our strategy (quality of the strategy,
the implementation of strategic initiatives and external threats to the
achievement of our strategy). This category also includes the risks
associated with reputation or brand values.
— Financial Risks: The risks of ?nancial failure, reputational loss, loss of
earnings and/or value as a result of investment activity, lack of liquidity,
funding or capital, and/or the inappropriate recording, reporting and
disclosure of ?nancial results, taxation and regulatory information.
— Operational Risks: The risk of loss, regulatory censure, or other adverse
consequences to the business, resulting from inadequate/non-compliant
or failed internal processes, people and systems, or from external events.
The Group promotes a risk culture that identi?es and manages risk at all
levels of the business. We set out clear roles and responsibilities for our
people within our risk policies to ensure risks are consistently identi?ed and
captured across the Group.
Risks are identi?ed at source and recorded in each business unit and division
by “Risk Champions”. These are employees in the business responsible for
facilitating the application of the Group risk management framework. Risk
identi?cation is regularly reviewed and challenged by the risk function to
ensure completeness. For high velocity, high impact risks, Key Risk Indicators
(KRIs) are established to enable the business to monitor the risk on an
ongoing basis.
The Second line (Risk Management and Compliance functions),
is responsible for de?ning the risk management process and policy
framework, and providing challenge to the ?rst line on risk management
activities, assessing risks and reporting to the Group Board Committees
on risk exposure.
The Third line of defence (Internal Audit) provides independent
assurance to the Board and other key stakeholders over the effectiveness
of the systems of controls and the Risk Framework.
— Group-wide risk policies have been enhanced across the whole business.
These policies contain the level of risk we are willing to take against our risk
appetite statements. They also set out the principles, minimum standards
and risk management activities LSEG requires the Group’s businesses
and functions to follow to manage their business within risk appetite.
The Group CCPs are independently managed and have risk policies
aligned to the high level requirements set in the Group-wide polices.
Strategic Risk Objectives
The Strategic Risk Objectives of the Group have been de?ned as follows:
— Maintaining stable earnings growth: ensuring the strategic growth
of the business is delivered in a controlled manner with long term value
enhancement and low volatility to the underlying pro?tability of the Group.
— Maintaining capital requirements: ensuring the Group has suf?cient
capital resources to meet regulatory requirements, to cover unexpected
losses and to meet the Group’s strategic ambitions.
— Maintaining liquidity: the Group retains or has adequate access
to funding to meet its obligations taking into account the availability
of funds.
— Adhering to regulatory requirements: the Group conducts activities at
all times in full compliance with its regulatory obligations.
— Maintaining operational stability, facilitating orderly market
operations: the Group’s operations are delivered in a secure and ef?cient
manner without disruption.
— Maintaining stakeholder con?dence: to ensure that stakeholders have
con?dence in the ability of the Group to deliver its strategic objectives with
robust and effective governance and operational controls.
— Maintaining a risk aware culture throughout the Group: ensuring the
risk management framework is embedded within Divisions and Functions
engendering a risk aware culture.
Risk Appetite
LSEG de?nes Risk Appetite as the level of risk that the Group is prepared
to sustain in pursuit of its Strategic Objectives. The Group Risk Appetite
Statement is proposed by the Executive Committee, is approved by the
Board on at least an annual basis and is determined in conjunction with
the Group’s overall business strategy.
The risk appetite can be modi?ed by the Board at any time (details on page 62).
Risk Culture
Capital Liquidity Regulation Operational Stability
Earnings & Stakeholder Con?dence
STRATEGIC RISK
FINANCIAL RISK OPERATIONAL RISK
46 Strategic report London Stock Exchange Group plc Annual Report 2014
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continued
LSEG Risk Pillars
Risk Assessment
The risk identi?cation and assessment process allows for the monitoring of risk
trends and management actions at all levels and also facilitates the decision
making process. Management is required to escalate and take mitigating
actions in respect of incidents, control failures and policy breaches as and
when they are identi?ed. In addition, the Group regularly performs bottom-up
and top-down risk assessments, with risks identi?ed at legal entity, divisional
and Group levels. Divisional and entity level risk reports are reviewed by the
Operational Risk Committee; Group risk reports are reviewed by the Executive
Committee each quarter and are also reviewed by the Risk Committee (RC) at
least three times a year and by the Board at least twice a year.
Financial risks are monitored and managed on a frequent basis (daily for
key risks) at the Business Unit level and across the Group in aggregate.
Thresholds for capital suf?ciency, capital commitments and limits in respect
of various aspects of treasury management are set out in the Group Capital
and Treasury policies.
CCP risks are assessed according to the metrics determined both by the
CCPs and also by the Group, including Group-level risk appetite and key risk
indicators for clearing related activities.
Signi?cant new products, and proposed initiatives in new markets, are now
reviewed by the New Product/Market Committee prior to approval by the
Executive Committee.
The Reports of the Audit and of the Risk Committees, on pages 66-69,
provide details on the work carried out to assist the Board in ful?lling its
oversight responsibilities for risk management and systems of internal control.
Risk Management
Each Group-level risk is owned by a member of the Executive Committee who
is responsible for managing or mitigating the risk in order to remain within
risk appetite. The Board and the Risk Committee receive presentations on
material risks and related mitigants as appropriate.
Risk Reporting/Monitoring
The risk pro?le of the Group is reported to the Board via the Risk Committee
quarterly. Risk reporting across the Group is aligned to the Risk Committee
governance structure and is divided between ?nancial and operational risk.
Quantitative and qualitative risk limits and tolerances, identi?ed within the
overarching Group Risk appetite statement, form the basis of the key
reporting metrics used across the Group.
— Financial Risk Reporting – CCP liquidity management balances and
counterparty disintermediation risk is consolidated daily at the Group level
and reported to the Executive Committee and Board, including limits and
Risk Appetite. An enhanced weekly report including market commentary
and member health monitoring is distributed to the Executive Committee
and to certain Board members.
— Extensive ?nancial risk reports are produced for the Financial Risk
Committee on a monthly basis.
— Operational Risk Reporting – Business units produce a risk register on a
quarterly basis considering the key residual risks facing their business
area. Group risk consolidates and reports this information to the Group’s
Operational Risk Committee on a quarterly basis.
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— The Group Risk Report is produced on a quarterly basis and presents the
Group’s aggregate risk pro?le (Operational and Financial) to the Board via
the Risk Committee. This report considers the key residual risks facing the
Group, aggregated across all the Group’s subsidiaries.
— CCP ?nancial risks are monitored both at the CCP level and centrally
according to the speci?c quantitative metrics set out in the CCP Financial
Risk Policy, including Group-level risk appetite and key risk indicators for
clearing related activities. Reporting requirements for capital suf?ciency,
capital commitments and various aspects of treasury management are
set out in the Group Capital and Treasury policies.
Business Continuity Management (BCM)
The Group has a BCM framework in place which is managed and maintained
through a fully established Business Continuity Programme. The Business
Continuity Programme is overseen by the Business Continuity Board,
a sub-committee of the Operational Risk Committee. The Business
Continuity Board receives the self certi?cation results of all the Group’s
Business areas which de?ne the status of Business Continuity within each
business area. The BCM Board regularly challenges the request from all the
business areas. The Risk Committee and the Audit Committee are regularly
updated as to the status and progress of the Business Continuity Programme.
48 Strategic report London Stock Exchange Group plc Annual Report 2014
Principal risks and uncertainties
Overview of Principal Risks:
Strategic Risks Financial Risks Operational Risks
Global economy
Competition
Regulatory change and compliance
Transformation risk
Liquidity risk (Clearing)
Latent market risk (Clearing)
Settlement and custodial risks
Capital management
Technology
Change management
Security threats
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
Global economy
The improving economic environment in the UK has had a positive impact on
the Group’s business, and has increased the activity on our primary markets.
There are concerns caused by persistently low in?ation levels in the
Eurozone and mixed economic indicators. Ongoing geopolitical tensions
are introducing additional uncertainty in the markets and may impact
investors’ con?dence.
The Group performs regular analyses to monitor the markets and the
potential impacts on the business. Activities include Key Risk Indicator
tracking, stress testing, and a hedging strategy.
The Financial Risk Committee closely monitors and analyses multiple
market scenarios and action plans in order to minimise the potential
impacts stemming from a potential deterioration of the macroeconomic
environment. The Eurozone crisis and geopolitical concerns are regular
items on the agenda of the Financial Risk Committee and the Group’s
exposure to these risks is closely monitored.
In Sri Lanka the Group maintains regular contact with key Governmental
parties, and has appropriate contingency plans in place to ensure key
technology operations are not dependent on a single geography. Business
Continuity Management (BCM) and crisis management procedures would
be invoked to manage the response to an unexpected event.
For more information, see Market Position and Outlook, pages 8-13, and note 2 to the accounts: Financial Risk Management on pages 113-117.
Competition
We operate in a highly competitive industry. Continued consolidation
has fuelled competition including between groups in different
geographical areas.
In our Capital Markets operations there is a risk that competitors will
improve their products, pricing and technology in a way that erodes
our businesses. There is increasing competition for primary listings
from other global exchanges and regional centres.
In Post Trade Services the consolidation of clients has led to a
concentration of revenues. Any future loss of liquidity or reduction in
volumes on exchanges may impact clearing revenues.
In Information Services, consolidation within the industry is expected
over the next three to ?ve years. Client migration to competitors could
lead to a loss of revenue.
In Technology Services, there is intense competition across all activities
and there are strong market players in some areas where we are
establishing a presence.
Competitive markets are, by their very nature, dynamic, and the effects
of competitor activity can never be fully mitigated. Senior management
actively engages with clients and the Group undertakes constant market
monitoring and period pricing revision to mitigate risks. Commercial
initiatives are aligned with our major clients and this is complemented
by an ongoing focus on new technology deployment and cost reduction.
The Group’s track record of innovation and diversi?cation ensures
the Group offers best in class services with a global capability.
We maintain a dedicated international marketing team focused on key target
markets who promote the bene?ts of listing on our markets to international
issuers, the global advisory community and other stakeholders.
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RISK DESCRIPTION MITIGATION
Regulatory change
The Group and its exchanges, CCPs and other regulated entities operate in
industries that are highly, and increasingly, regulated by governmental,
competition and regulatory bodies at European, federal, national and
provincial levels.
Delivery of the G20 agenda in the EU has resulted in a large number of
measures which may impact our business directly or indirectly. The European
Commission has adopted proposals for the regulation of ?nancial benchmarks;
to address potential issues in the system of credit intermediation (“shadow
banking”), by issuing Regulations on Money Market funds (MMFs) and securities
?nancing transactions (“SFTs”). Towards the end of 2014, it is planning to
propose measures for resolving CCPs. Following political agreement of MiFID
and MiFIR, the rule-making work will continue through much of 2014.
In the UK, the ?nancial services industry has been operating under a new
regulatory structure since 1 April 2013 with the FSA being replaced by three
separate regulatory bodies: the Bank of England, the Prudential Regulation
Authority (PRA) and the Financial Conduct Authority (FCA). These bodies
are now well-established and are pursuing a policy of proactive regulation.
For example the FCA has recently consulted on its new remit in relation to
Competition Law.
The CCPs have focused on the analysis of the potential impact of the
new Basel III rules on capital requirements for banks’ exposure to CCPs.
This could have an impact on the clearing volumes, with implications for
the Group’s revenues.
Compliance
There is a risk that one or more of the Group’s entities may fail to comply
with the laws and regulatory requirements to which it is, or becomes,
subject. In this event, the entity in question may be subject to censures,
?nes and other regulatory or legal proceedings.
Regulatory change
Changes in the regulatory environment form a key input into our strategic
planning, including the impact on our growth strategies, both organic and
inorganic. We monitor regulatory developments continually and engage
directly with regulatory and governmental authorities at a national, EU and
international level.
We continue to develop our relationships with the key political stakeholders,
particularly at EU and national level. Potential impacts from regulatory
change are assessed and, depending on the impact, opportunities are
developed and mitigating strategies and actions are planned.
As the various regulatory initiatives progress, there will be greater certainty
about their likely ?nal form. The Group continues to focus on remaining well
positioned to respond to regulatory developments and further opportunities
exist for the Group to deliver solutions to help the market address the
changing regulatory environment.
The implications of capital requirements on clearing members have been
analysed and future actions put in place.
The CCPs have performed analytical work to test the methodologies proposed
by the Basel framework and have contributed to the consultations launched
by the BCBS.
Compliance
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.
For more information on regulatory changes see “Market Position and Outlook” on pages 10-13.
Transformation risk
The Group is exposed to transformation risks (risk of loss or failure resulting
from change/transformation) given the current levels of change and alignment
activity currently taking place across the Group. As part of the alignment
processes the Group targets speci?c cost savings and revenue increases.
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.
With regards to M&A and alignment activities, the additional projects and
workstreams could have an adverse impact on day-to-day performance
and/or key strategic initiatives and could damage the Group’s reputation.
The scale and complexity of the LCH.Clearnet business as part of the Group
has contributed to an increase in the risk pro?le associated with change
management and transformation risk.
The governance of the enlarged Group is aligned and strengthened as
appropriate. The Group performs regular reporting of change performance,
including ongoing alignment activity. LSEG has set up a programme
management framework to deliver the LCH.Clearnet transaction objectives
which includes close implementation oversight by an executive team
representative of LSEG and LCH.Clearnet; this steering group includes the
LSEG Group CFO, CRO and COO as well as the LCH Group CEO, CFO and CRO.
The LSEG Enterprise-wide Risk Management Framework covers the whole
Group, including LCH.Clearnet, and was designed to ensure appropriate risk
management across the whole of the enlarged Group.
50 Strategic report London Stock Exchange Group plc Annual Report 2014
Principal risks and uncertainties
continued
Financial Risks
The risk of ?nancial 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 ?nancial results, taxation and regulatory information.
RISK DESCRIPTION MITIGATION
Liquidity risk (clearing)
The Group’s clearing providers hold a signi?cant amount of cash and
securities deposited by clearing members as margin or default funds.
To ensure optimum ongoing liquidity and immediate access to funds,
the CCPs deposit the cash received in highly liquid and secure investments,
as mandated by the EMIR regulations.
Potential liquidity risks faced by the Group CCPs include:
— Margin payments: Margins (Initial and Variation) are settled at least
daily. The CCPs must ensure that suf?cient funds are available to ful?l
their obligations.
— Collateral switches and excess cash margin cover: Members can choose
whether to post margin in cash or securities, and may choose to
over-collateralise.
— Market disruptions: Such as unusual market volatility driving large
margin movements; liquidity squeezes in the cash or securities
markets and central bank actions.
— Failed cash settlements: Arising, for instance, from mismatches in
settlement dates for the CCPs’ own activities.
Under the ERMF, CCP investments must be made in compliance with the
Group CCP Financial Risk Policy as well as Policies issued pursuant to the
governance of the CCPs themselves. These Policies stipulate a number of
risk management standards including concentration limits and minimum
ratings. Committees overseeing CCP investment risk meet regularly.
Group CCPs have put in place EMIR compliant liquidity plans for day-to-day
liquidity management, including contingencies for stressed conditions.
Group CCPs have multiple layers of defence against liquidity shortfall
including minimum cash balances, access to contingent liquidity
arrangements and for certain CCPs, access to central bank liquidity.
CCP liquidity management balances and counterparty disintermediation
risk is consolidated daily at the Group level and reported to the Executive
Committee and Board, including limits and status rating. An enhanced
report including market commentary and member health monitoring is
produced each week and distributed to the LSEG Executive Committee
and Board.
All four group CCPs report their liquidity position via the Group Financial
Risk Committee each month. Each CCP monitors liquidity needs daily
under stressed and unstressed assumptions. Breaches, if any, are reported
and discussed monthly at the Committee.
Latent market risk (clearing)
Our clearing services guarantee ?nal settlement of trades and manage
counterparty risk for a range of assets and instruments including cash
equities, derivatives, energy products and Government bonds. Therefore
the Group is exposed to country risk, credit risk, issuer risk, market risk,
liquidity risk, interest rate risk and foreign exchange risk.
There is a risk that one of the parties to a cleared transaction defaults on
their obligation; in this circumstance the CCP is obliged to honour the
contract on the defaulter’s behalf and thus an unmatched risk position
arises. The CCP may suffer a loss in the process of work-out (the ‘Default
Management Process’) if the market moves against the CCP’s positions.
Under the ERMF, CCP latent market risk must be managed in compliance
with the Group CCP Financial Risk Policy as well as policies issued pursuant
to the governance of the CCPs themselves. Latent market risk is part of the
agenda of the CCP risk Committees.
The ?nancial risks associated with clearing operations are mitigated by:
— Strict CCP membership rules including supervisory capital, technical
and organisational criteria.
— The maintenance of prudent levels of margin and default funds
to cover exposures to participants. Each member pays margins,
computed at least daily, to cover the theoretical costs which the
clearing service would incur in order to close out open positions in
the event of the member’s default. Clearing members also contribute
to default funds.
CCP liquidity management balances and counterparty disintermediation
risk is consolidated daily at the Group level and reported to the Executive
Committee and Board, including limits and RAGs. An enhanced report
including market commentary and member health monitoring is
produced each week and distributed to the Executive Committee
and Board.
Committees overseeing latent market and member risks meet on a
regular basis.
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RISK DESCRIPTION MITIGATION
Settlement and custodial risks
The Group offers post trade services and centralised administration of
?nancial instruments through its CSD subsidiary, Monte Titoli. Monte Titoli
offers pre-settlement, settlement and custody services. These activities
carry counterparty risk (in particular asset commitment risk), operational
risk and custody risk (including asset servicing risk).
Monte Titoli does not provide intraday settlement ?nancing to
its members.
Asset commitment risk is mitigated through pre-positioning (availability
of security) and pre-funding (availability of cash).
Operational risk is minimised via highly automated processes reducing
administrative activities and formalised procedures for all services. Monte
Titoli mitigates IT risks by providing for redundancy of systems, daily
backup of data, fully updated remote recovery sites and SLAs with
outsourcers. Liquidity for Monte Titoli’s operations is provided by the
Bank of Italy.
For more information on these risks see the “Post Trade Services” section of the Segmental Review (on pages 28-31), and Note 2 to the accounts,
“Financial Risk Management” (on pages 113-117).
Capital Risk
The Group incorporates a number of regulated and unregulated entities
within its structure. Principal risks to managing its capital are:
— In respect of regulated entities, capital adequacy compliance risk
(the risk that regulated entities do not maintain and report suf?cient
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 suf?cient capital resources are
maintained to meet regulatory requirements this could lead to loss
of regulatory approvals.
— In respect of regulated and unregulated entities, commercial capital
adequacy and quality risk (the risk that Group and solo entities do not
maintain both suf?cient quantity and quality of capital to meet
commercial requirements) and investment return risk (the risk that
capital is held in subsidiaries or invested in projects that generate a
return that is below the Group‘s cost of capital).
— Availability of debt or equity (whether speci?c to the Group or driven
by general ?nancial 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 Group maintains an ongoing review of the capital positions of its
regulated entities and operates within capital limits which are overseen
by the Treasury Committee, the Financial Risk Committee, the Executive
Committee and the Board.
The Group can manage its capital structure by varying returns to
shareholders, issuing new shares or increasing or reducing borrowings.
The Board reviews dividend policy and funding capacity on a regular basis
and the Group maintains comfortable levels of debt facility headroom.
The Group makes regular assessments of debt and equity market
conditions. To maintain suf?cient ?nancial strength to access new capital
at reasonable cost, and meet its objective of maintaining an investment
grade credit rating. The Group is mindful of potential impacts on its key
metrics when considering changes to its capital structure.
For more information on this risk see Note 2 to the accounts, “Financial Risk Management” (on pages 113-117).
52 Strategic report London Stock Exchange Group plc Annual Report 2014
Principal risks and uncertainties
continued
Operational Risk
The risk of loss, or other adverse consequences to the business, resulting from inadequate or failed internal processes, people and systems,
or from external events.
RISK DESCRIPTION MITIGATION
Technology
Secure and stable technology performing to high levels of availability
and throughput continues to be critical to the support of the Group’s
businesses. Technology failures impact our clients and can potentially
lead to a loss of trading and clearing volumes and adversely impact the
Group’s reputation and brand.
The Group continues to consolidate its IT development and operations in
the MillenniumIT infrastructure to provide greater control and ef?ciency.
This focus of activity means there is a risk of resource over-stretch to meet
both the requirements of the Group and those of third parties. Continued
innovation and investment in new trading/information systems can lead
to further resource stretch in coping with increased volumes and new
product development.
The Group also has dependencies on a number of third parties for the
provision of hardware, software, communication and networks for
elements of its trading, clearing, data and other systems.
The performance and availability of the Group systems are constantly
reviewed and monitored to prevent problems arising where possible and
ensure a prompt response to any potential service interruption issues.
The Group’s technology teams mitigate this risk by ensuring prioritisation
of all development and operations activities, and resource utilisation and
allocation are kept under constant review.
The MillenniumIT systems are designed to be fault tolerant and alternative
standby computer facilities are maintained to minimise the risk of
system disruptions.
The robust change management procedures and capacity monitoring
provide assurance that Group technology changes are effectively managed.
The Group actively manages relationships with key strategic IT suppliers to
avoid any breakdown in service provision which could adversely affect the
Group’s businesses. Where possible the Group has identi?ed alternative
suppliers that could be engaged in the event of a third party failing to
deliver on its contractual commitments.
For more information see the “Technology Services” section of the Segmental Review, on pages 34 and 35.
For information on LCH.Clearnet see section of the Segmental Review on pages 30 and 31.
Change management
The considerable change agenda is driven by both internal and external
factors. Internal factors include the diversi?cation strategy of the Group
and its drive for technology innovation and consolidation. External factors
include the changing regulatory landscape and requirements which
necessitate changes to our systems and processes.
There are a signi?cant number of major, complex projects and strategic
actions underway concurrently, that, if not delivered to suf?ciently high
standards and within agreed timescales, could have an adverse impact on
the operation of core services, and revenue growth, as well as damaging
the Group’s reputation. The volume of simultaneous change could also lead
to a loss of client goodwill if the execution is not managed appropriately.
Synergies and cost bene?ts may not be delivered to anticipated levels.
The senior management team is focused on the implementation of the
Group’s strategy and the project pipeline in view of their importance to
the Group’s future success. Each major project is managed via a dedicated
project of?ce overseen by members of the Executive Committee.
Software design methodologies, testing regimes and test environments
are continuously being strengthened to minimise implementation risk.
For more information see the Chairman’s statement, on pages 14 and 15, and the Chief Executive’s review, on pages 16 and 17.
Security threats
The Group is reliant upon secure premises to protect its employees and
physical assets as well as appropriate safeguards to ensure uninterrupted
operation of its IT systems and infrastructure. The threat of cyber crime
requires a high level of scrutiny as it may have an adverse impact on our
business. Terrorist attacks and similar activities directed against our
of?ces, operations, computer systems or networks could disrupt our
markets, harm staff, tenants and visitors, and severely disrupt our business
operations. Civil or political unrest could impact on companies within
the Group.
Long-term unavailability of key premises or trading and information
outages and corruption of data could lead to the loss of client con?dence
and reputational damage. Security risks have escalated in recent years
due to the increasing sophistication of cyber crime.
Security threats are treated very seriously. The Group has robust physical
security arrangements, and extensive IT measures are in place to mitigate
technical security risks. The Group is a member of the Centre for the
Protection of National Infrastructure (CPNI), with both physical and IT
security teams monitoring intelligence and liaising closely with police
and global Government agencies.
The Group has well established and regularly tested business continuity
and crisis management procedures. The Group risk function assesses its
dependencies on critical suppliers and ensures robust contingency
measures are in place.
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Strategic report Principal risks and uncertainties
RISK DESCRIPTION MITIGATION
Employees
The calibre, quality and retention of employees are critical to the success
of the Group. Failure to adequately manage and retain staff resulting in
unacceptable levels of staff turnover leads to increased costs of attracting
replacement staff and undue distraction of senior management time in
recruiting replacements. The loss of key members of staff could have an
adverse impact on the Group’s operations and ability to deliver its strategy.
The Group’s ability to attract and retain high quality individuals depends on
the condition of recruitment markets and corresponding compensation
packages of ?nancial services, technology ?rms and regulators with which
the Group competes for the same key staff.
The Group operates a performance management and appraisal system,
and Executive development opportunities are provided with the
Nominations Committee responsible for considering succession plans
for key senior positions.
A performance related annual bonus and pay review process is in place
for all employees. Regular benchmarking of reward and incentive systems
is performed to ensure they are competitive. The Group also offers Long
Term Incentive Plans for high performers and critical staff and turnover is
monitored. A centralised training budget allows a co-ordinated approach
to development across the Group.
A programme of succession planning is operated by the Group to minimise
the impact of the loss of key staff critical to the operation of the business.
We have also enhanced our talent management approach in the last year
and will keep doing so while rolling out our succession plans and HR
systems to LCH.Clearnet during the next 12 months.
For more information see “Our wider responsibility”, on pages 36 and 37 and Remuneration Report, on pages 70-97.
London Stock Exchange Group plc Annual Report 2014
Chris Gibson-Smith
Chairman of the Company and of the Nomination
Committee (age 68)
Appointed to the Board in May 2003
Committee membership: Remuneration, Nomination (Chair)
Skills and experience: Chairman of Partnership Assurance Group.
He was Chairman of The British Land Company plc from 2007 until
2012, and he was also previously Non-Executive Director of Qatar
Financial Centre Authority from 2006 to 2012, Chairman of National
Air Traffic Services Ltd from 2001 to 2005, Non-Executive Director of
Lloyds TSB plc from 1999 to 2005, Group Managing Director of BP plc
from 1997 to 2001, and a past Trustee of the Institute of Public Policy
Research and the arts charity Arts & Business.
Other current appointments: Chris is Chairman of the Advisory
Board of Reform Research Trust.
Xavier Rolet
Group Chief Executive Officer (age 54)
Appointed to the Board in March 2009 and appointed
Chief Executive in May 2009
Committee membership: Group Executive
Skills and experience: Xavier was a senior Executive at Lehman
Brothers from 2000 to 2008 and, latterly, Chief Executive Officer of
Lehman in France. Prior to Lehman Brothers, he held senior positions
at Dresdner Kleinwort Benson from 1997 to 2000, Credit Suisse First
Boston from 1994 to 1996 and Goldman Sachs from 1984 to 1994.
Other current appointments: Xavier is a member of the HM Treasury
Financial Services Trade and Investment Board, a member of the
Columbia Business School Board of Overseers and an Honorary Fellow
of the Chartered Institute for Securities and Investments, FSCI (Hon).
Raffaele Jerusalmi
Executive Director (age 53)
Appointed to the Board in June 2010
Committee membership: Group Executive
Skills and experience: Chief Executive Officer of Borsa Italiana
S.p.A., Vice Chairman of Monte Titoli and Director of Capital Markets
of London Stock Exchange Group. He is also Vice-Chairman of MTS
and CC&G, a Director of Monte Titoli and Institore of the LSEGH (Italy)
group of companies. Prior to joining Borsa Italiana in 1998, he was
Head of Trading for Italian Fixed Income at Credit Suisse First Boston
from 1993 to 1998. From 1996, he was a member of their proprietary
trading group in London. From 1997 to 1998, he was a Director of MTS
S.p.A., representing Credit Suisse First Boston, and from 1989 to 1993
he was head of trading for the fixed income and derivatives divisions
at Cimo S.p.A. in Milan.
Other current appointments: Raffaele is a venture partner of the
Advisory Committee of Atlantic Capital Partners GmbH.
Paolo Scaroni
Non-Executive Deputy Chairman and Senior
Independent Director (age 67)
Appointed to the Board in October 2007
Committee membership: Remuneration, Nomination
Skills and experience: Paolo was CEO of eni from May 2005 to May
2014 and was also previously CEO of Pilkington plc from 1997 to 2002,
Non-Executive Director of BAE Systems plc from 2000 to 2004 and of
Invensys plc from 2001 to 2002. He was also CEO of Enel from 2002 to
2005, Non-Executive Director of Alliance Unichem plc from 2002 to
2005 and then Chairman from 2005 to 2006.
Other current appointments: Paolo is currently Non-Executive
Director of Assicurazioni Generali, Veolia Environnement, Fondazione
Teatro alla Scala and Member of the Board of Overseers of Columbia
Business School.
David Warren
Group Chief Financial Officer (age 60)
Appointed to the Board in July 2012
Committee membership: Group Executive
Skills and experience: Prior to being appointed Chief Financial Officer
of London Stock Exchange Group, David was CFO of NASDAQ OMX from
2001 to 2009 and Senior Advisor to the NASDAQ CEO from 2011 to 2012.
He was Chief Financial Officer at Long Island Power Authority of NY from
1998 to 2001, Deputy Treasurer of the State of Connecticut from 1995 to
1998 and a Vice President at CS First Boston from 1988 to 1995.
Other current appointments: None.
Board structure
The Board comprised:
— Non-Executive Chairman, who was
independent on appointment
— Non-Executive Deputy Chairman, who
is also the Senior Independent Director
— Nine other independent
Non-Executive Directors
— Three Executive Directors.
Board and Committees
Meetings in FY 2014 FY 2013
Board 9 15
Supporting committees
– Audit and Risk
1
1 5
– Audit 3 n/a
– Risk 2 n/a
– Remuneration 5 4
– Nomination 1 1
1 The Board appointed separate audit and risk committees on 18 July 2013.
Prior to that date, the Board operated a combined Audit and Risk Committee.
54 Governance
Board of Directors
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Jacques Aigrain
Non-Executive Director (age 60)
Appointed to the Board in May 2013
Committee membership: Audit
Skills and experience: Chairman of LCH.Clearnet Group Limited and
a director of Qatar Financial Centre Authority. Previously, he was a
Non-Executive Director at Resolution from 2010 to 2012 and CEO
of Swiss Re from 2006 to 2009, having joined in 2001 as Head of
Financial Services, New York. Prior to this, he spent 20 years, from
1981 to 2001, with J.P. Morgan Chase, working in the New York, London
and Paris offices and holding a number of senior roles including Head
of Global Health & Chemicals, Co-Head of Global M&A and Co-Head,
Client Management.
Other current appointments: He is a Supervisory Board Member
of Deutsche Lufthansa and Swiss International Airlines. He is also
a Supervisory Board Member of LyondellBasell NV, a Non-Executive
Director of WPP plc and serves as a Senior Advisor at Warburg Pincus.
Stephen O’Connor
Non-Executive Director and Chairman of the Risk Committee (age 52)
Appointed to the Board in June 2013
Committee membership: Risk (Chair)
Skills and experience: Chairman of the International Swaps and
Derivatives Association, a position held since 2011, having been
appointed as a Non-Executive Director in 2009. Previously, he worked
at Morgan Stanley in London and New York from 1988 to 2013,
where he was a member of the Fixed Income Management
Committee and held a number of senior roles including Global Head
of Counterparty Portfolio Management and Global Head of OTC Client
Clearing. Stephen was a member of the High Level Stakeholder Group
for the UK Government’s review of the Future of Computer Trading in
Financial Markets. He was a Non-Executive Director of OTC DerivNet
Ltd from 2001 to 2013 and was Chairman from 2001 to 2011.
Other current appointments: Member of the US CFTC Global Markets
Advisory Committee and Vice-Chairman of the Financial Stability
Board’s Market Participants Group on Financial Benchmark Reform.
Sherry Coutu CBE
Non-Executive Director (age 50)
Appointed to the Board with effect from 17 January 2014
Committee membership: None
Skills and experience: Non-Executive Director of Cambridge
Temperature Concepts, Cambridge Assessment, Cambridge University
Press, Raspberry Pi, and Artfinder. Sherry was an investor and a
Director of New Energy Finance from 2006 to 2009, and was a
Non-Executive Director and Senior Independent Director of RM Plc
from 1998 to 2007, where she also served as Chairman of the
Remuneration Committee and as a member of the Audit Committee.
From 2006 to 2010, Sherry was a Trustee of NESTA National
Endowment for Science, Technology and Arts. In 1995, Sherry
founded Interactive Investor International and served as CEO and
Chairman from 1995 to 2001.
Other current appointments: Sherry currently serves on the
Advisory Boards of Linkedin.com, Care.com and is an external
member of the University of Cambridge finance committee.
Paul Heiden
Non-Executive Director and Chairman of the
Audit Committee (age 57)
Appointed to the Board in June 2010
Committee membership: Audit (Chair), Risk
Skills and experience: Non-Executive Chairman of Intelligent Energy
Holdings plc and was previously Chairman of Talaris Topco Limited
from 2009 to 2012, Non-Executive Director of United Utilities Group
plc from 2006 to 2013 and Chief Executive Officer of FKI plc from
2003 to 2008. Paul was an Executive Director of Rolls-Royce plc from
1997 to 1999 and Group Finance Director from 1999 to 2003. He has
also had previous senior finance roles at Hanson plc and Mercury
Communications and was a Non-Executive Director of Bunzl plc
from 1998 to 2005 and Filtrona plc from 2005 to 2006.
Other current appointments: Paul is a Non-Executive Director of
Meggitt plc.
Stuart Lewis
Non-Executive Director (aged 48)
Appointed to the Board in June 2013
Committee membership: Risk
Skills and experience: Chief Risk Officer and Member of the
Management Board at Deutsche Bank AG, where he previously
held senior roles. From 1992 to 1996, he worked at Credit Suisse
Financial Products in Credit Risk Management and, from 1990
to 1991, at Continental Illinois National Bank.
Other current appointments: None.
Joanna Shields OBE
Non-Executive Director (aged 51)
Appointed to the Board with effect from 17 January 2014
Committee membership: None
Skills and experience: Veteran technology executive and
entrepreneur. In October 2012, she was appointed by the Prime Minister
to lead the UK Government’s Tech City UK, previously served as its CEO
and is now Chairman. She is also UK Ambassador for Digital Industries.
Prior to this, she led international expansion for Facebook as Vice
President and Managing Director, and she held executive positions at
Time Warner/Aol, Inc. including President of People Networks after the
acquisition of Bebo, where she served as CEO. She was also Managing
Director at Google EMEA, Vice President and Managing Director at
Decru, Inc., VP and Managing Director, EMEA at RealNetworks and
CEO of Veon Inc, a start-up she built and led to its acquisition by Philips
NV. Joanna started her career in Silicon Valley in 1989 at EFI, Inc and,
over the next decade, held various executive roles.
Other current appointments: Joanna is a Non-Executive Director
of TalkTalk Telecom Group Plc and serves on the Mayor’s London
Smart Board.
Andrea Munari
Non-Executive Director (age 51)
Appointed to the Board in October 2007
Committee membership: Risk
Skills and experience: CEO of Credito Fondiario SpA. Andrea was
previously General Manager of Banca IMI, the investment arm of
Intesa Sanpaolo Group from March 2006 to December 2013. He was
also previously Managing Director of Morgan Stanley Fixed Income
Division and CEO and General Manager of Banca Caboto (now Banca
IMI). In addition, he was a Director of MTS S.p.A. from 2003 to 2005
and of TLX S.p.A. from January to September 2007.
Other current appointments: None.
Massimo Tononi
Non-Executive Director (age 49)
Appointed to the Board in September 2010
Committee membership: Audit, Nomination
Skills and experience: Chairman of Borsa Italiana S.p.A. and was
previously Partner and Managing Director in the investment banking
division of Goldman Sachs from 2008 to July 2010. While at Goldman
Sachs, he played a senior role in business development and the
execution of investment banking transactions throughout Europe.
From 2006 to 2008, he was Treasury Undersecretary at the Italian
Ministry of Economy & Finance in Rome.
Other current appointments: Massimo is currently a Non-Executive
Director of Sorin S.p.A. and Chairman of Prysmian S.p.A.
Robert Webb QC
Non-Executive Director and Chairman of the
Remuneration Committee (age 65)
Appointed to the Board in February 2001
Committee membership: Remuneration (Chair), Nomination
Skills and experience: General Counsel of Rolls-Royce plc.
Robert was Chairman of Autonomy Corporation plc from 2009 to
2011 and of BBC Worldwide from 2009 to 2012. He served as General
Counsel of British Airways from September 1998 to April 2009 where
he was responsible for law, Government affairs, safety, security and
risk management. Robert was a Non-Executive Director of Argent
Group plc from 2009 to 2012 and of the Emerging Health Threats
Forum from 2006 to 2012. He was also Chairman of Sciemus Ltd
from 2010 to 2011. He was Head of Chambers and a practising QC
at 5 Bell Yard, London from 1988 to 1998.
Other current appointments: Non-Executive Director of the
Holdingham Group Ltd. He is also a Bencher of the Inner Temple,
a Trustee of Comic Relief and of the Migratory Salmon Fund.
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Governance Board of Directors
London Stock Exchange Group plc Annual Report 2014
The Corporate Governance Report which follows is intended to
give shareholders an understanding of the Group’s corporate
governance arrangements and how they operated during the
year ended 31 March 2014, including how the Group complied
with the principles of the Code.
Changes to the Board and succession planning
I and the Board have continued to work to ensure that the balance of skills
and experience on the Board remains appropriate.
During the ?nancial year ended 31 March 2014, the Company made a number
of appointments to the Board. Jacques Aigrain, Chairman of LCH.Clearnet
was appointed on the completion of the acquisition of a majority stake in
LCH.Clearnet and con?rmed by shareholders at the AGM on 18 July 2013.
Stuart Lewis, Stephen O’Connor, Sherry Coutu CBE and Joanna Shields OBE
were all appointed as Non-Executive Directors during the year following the
engagement of external recruitment consultants. A shortlist of candidates met
with the Chairman, Chief Executive and a selection of Non-Executive Directors.
Mr Lewis and Mr O’Connor each have experience in credit and market
risk and their appointments re?ect the signi?cant and growing proportion
of the Group’s overall business that post trade and risk management
now represent. Additionally, both Ms Coutu and Ms Shields have broad
international management experience and, in particular, deep knowledge
of the information technology sector, re?ecting the Group’s continued focus
on delivering innovative technology solutions to its customers around
the world, as well as its ongoing commitment to supporting entrepreneurs
and small and medium-sized businesses (SMEs) to ?nd appropriate and
sustainable ?nancing solutions. The collective experience of our new
Non-Executive Directors deepens the overall skills, experience and diversity
of the Board. Con?rmation of each of their appointments will be sought at
this year’s AGM.
Baroness (Janet) Cohen, Sergio Ermotti and Gay Huey Evans have stepped down
from the Board. The Board is grateful to each of them for their contribution.
Board focus
The Board has continued to oversee the Group’s strategy, risk framework,
?nancial performance and Board succession planning. Further detail on
matters considered by the Board can be found on page 58.
The Board has also continued its programme of visiting its overseas
businesses and meeting local management. The Board carried out a trip
to Milan (the main of?ce of Borsa Italiana) in September and March to hold
its regular meetings and meet with customers and stakeholders.
Diversity
I stated last year that the Board was focused on ensuring the balance of
its membership re?ected diversity of experiences, business backgrounds,
nationalities and gender, recognising the bene?ts this brings to the Group.
The Board appointments made during the year re?ect this focus. The female
appointments also re?ect the Board’s ongoing commitment to strengthening
female representation at Board level, including requesting headhunters to
ensure that a signi?cant proportion of Board candidates are female.
Board effectiveness
This year, the Board carried out an internal review of its own effectiveness.
The process and ?ndings are described on page 61. Following this review,
I am satis?ed that the Board continues to perform well.
Investor engagement
Shareholder engagement and support remain central to our planning and
thinking. This was again particularly important in another year of corporate
activity. We have a comprehensive investor relations programme, which is
described in more detail elsewhere in the Corporate Governance Report.
The Board receives regular updates on shareholder feedback at each of
its meetings so that it is aware of shareholders’ views and concerns.
Shareholders are also offered the opportunity to meet with the Senior
Independent Director, the Chairman of the Remuneration Committee
and the Chairman, as appropriate.
Chris Gibson-Smith
Chairman
56 Governance
Corporate governance
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Corporate governance report
Complying with the provisions of the Code
The Group is committed to high standards of corporate governance
and business integrity in all of its activities. Throughout the year ended
31 March 2014, the Company has complied with all provisions of the
UK Corporate Governance Code (“the Code”), other than for a period
following the resignations of Sergio Ermotti and Gay Huey Evans when
the Remuneration Committee comprised two Independent directors and
the Chairman. Sherry Coutu has since the year end been appointed to
the Committee.
The Code sets out guidance in the form of main principles and more speci?c
provisions for good governance in relation to Board leadership, effectiveness,
accountability, remuneration and relations with shareholders. The Code
applies to all companies with a premium listing of equity shares in the UK
and requires companies to disclose, in relation to the Code, how they have
applied its main principles and whether they have complied with all relevant
provisions throughout the year. Where the relevant provisions have not
been complied with, companies must provide an explanation for their
non-compliance. Further information on the UK Corporate Governance Code
can be found on the Financial Reporting Council’s website, at www.frc.org.uk.
This Corporate Governance Report forms part of the Corporate Governance
Statement on pages 98 and 99 of the Directors’ Report.
Board of Directors
Role of the Board
The Board is the principal decision-making forum for the Group and is
responsible to shareholders for achieving the Group’s strategic objectives
and delivering sustainable growth in shareholder value. Directors act in a way
they consider will promote the long-term success of the Company for the
bene?t of shareholders as a whole, with regard to the interests of the Group’s
employees, the impact of the business on the community and environment
and the interests of stakeholders. The Board has adopted a formal schedule of
matters speci?cally reserved to it. Key matters reserved to the Board are set
out in the table opposite.
Key matters reserved to the Board
The Board maintains a list of matters reserved to it, including:
Strategy and
Management
— Responsibility for the overall oversight of
the Group, including approval of the Group’s
long-term objectives and commercial strategy
— Approval of the Group’s annual operating
and capital expenditure budgets and any
material changes
— Review of performance in light of the
Group’s strategy, objectives, business plans
and budgets
Contracts — Approval of signi?cant acquisitions
and disposals
Structure and Capital — Changes relating to the Group’s capital
structure and major changes to the Group’s
corporate structure
Financial reporting
and Controls
— Approval of ?nancial statements
Internal controls — Ensuring maintenance of a sound system
of internal control and risk management
Board membership
and other
appointments
— Ensuring adequate succession planning
for the Board and senior management
— Appointments to the Board, following
recommendations by the Nomination
Committee
Remuneration — Determining the remuneration of the
Non-Executive Directors, subject to the
articles of association and shareholder
approval, as appropriate
Corporate Governance
— Undertaking a formal review annually of
its own performance, that of its committees
and individual directors and determining the
independence of directors
The Board also views the brands and reputations of its subsidiaries as
important assets of the Group and accordingly protection of the brand
and reputation of the Group and its subsidiaries, including ensuring that
subsidiaries continue to meet local regulatory requirements, is also a key
part of the Board’s role.
The roles of Chairman and Chief Executive are distinct and separate with a
clear division of responsibilities. The Chairman is responsible for the running
and leadership of the Board and ensuring its effectiveness. The Chief
Executive has delegated authority from, and is responsible to, the Board
for managing the Company’s business with the power for further delegation
in respect of matters which are necessary for the effective running and
management of the business. The current key responsibilities of both
the Chairman and the Chief Executive are set out on page 59.
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Governance Corporate governance
London Stock Exchange Group plc Annual Report 2014
Matters considered by the Board in FY2014
Each meeting Annually Throughout the year
Reports from the Chief Executive on performance
in each of the business areas, together with Risk,
Regulation, Legal, HR and Strategy
Health and safety
Monitoring the progress of integrating LCH.Clearnet
into the Group
Reports from the Chief Financial Of?cer on the
?nancial performance and position of the Group,
investor relations activity and Treasury matters
Three Year Business Plan and
annual Budget
Discussion and approval of Group strategy
Updates from the Board committees Off-site strategy day Detailed consideration and approval of the acquisition by
Borsa Italiana of a majority stake in EuroTLX SIM S.p.A.
FCA’s risk mitigation programme together
with a presentation by the FCA
Considering the LSEG Balance Sheet and changes to the
Group’s Financial Risk Model
Evaluation of Board Effectiveness Discussion on the implementation of the Enterprise-wide
Risk Management Framework and related policies
Review of independence of Directors
pursuant to the UK Corporate
Governance Code
Approval of the Group Risk Register and Risk Appetite
Review of quarterly ?nancial forecasts and funding
of acquisitions
Executive and Non-Executive succession planning,
including the appointment of new Non-Executive Directors
Presentations on the Group’s approach to risk management
in current ?nancial markets
Review and approval of full year and interim results and
quarterly IMS prior to market release
Discussion and approval of the change of the Group’s
accounting reference date to 31 December
58 Governance
Corporate governance
continued
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Board meeting attendance in the year ended 31 March 2014
Scheduled Ad hoc Strategy Day Total
Chris Gibson-Smith 6/6 3/3 1/1 10/10
Xavier Rolet 6/6 2/3 1/1 9/10
Raffaele Jerusalmi 6/6 3/3 1/1 10/10
David Warren
1
6/6 3/3 1/1 10/10
Paolo Scaroni 6/6 3/3 0/1 9/10
Paul Heiden 6/6 2/3 1/1 9/10
Andrea Munari 6/6 2/3 1/1 9/10
Massimo Tononi 5/6 2/3 1/1 8/10
Robert Webb 5/6 2/3 1/1 8/10
Jacques Aigrain
1
6/6 3/3 1/1 10/10
Stephen O’Connor
2
5/5 2/3 1/1 8/9
Stuart Lewis
2
4/5 2/3 0/1 6/9
Joanna Shields OBE
3
1/2 – 1/1 2/3
Sherry Coutu CBE
3
2/2 – 1/1 3/3
Directors who left the Board
in the year 31 March 2014
Sergio Ermotti
4
2/2 1/3 – 3/5
Baroness (Janet) Cohen
4
2/2 1/3 – 3/5
Gay Huey Evans
4
1/2 2/3 – 3/5
1 Joined the Board on 1 May 2013.
2 Joined the Board on 12 June 2013.
3 Joined the Board on 17 January 2014.
4 Left the Board on 18 July 2013.
When arranging meetings on short notice, every attempt is made to
accommodate Directors’ diaries; however, inevitably, not all Directors are
able to attend all such meetings. The majority of meetings where Directors
have been unable to attend were the three additional meetings called on
short notice.
When Directors have not been able to attend meetings due to con?icts in
their schedule, they received and reviewed papers to be considered at the
relevant meeting. Where they had comments or concerns on the matters to
be discussed, they provided these to the Chairman of the Board or Committee
in advance of the meeting. The Chairman of the Board engages with Directors
between Board meetings to discuss business and strategic issues.
Key responsibilities
Chairman
— Acts as an independent Non-Executive Director and chairs the Board
of the Company;
— Forges an effective Board as to composition, skills and competencies;
— Ensures, in collaboration with the Chief Executive, that the Board
considers the strategic issues facing the Company in a timely manner
and is presented with sound information and analysis appropriate to
the decisions that it is asked to make;
— Acts as a sounding board for the Chief Executive and provides general
advice relating to the management and development of the Company’s
business; and
— Supports the commercial activities of the Company by, inter alia,
maintaining contact with the Company’s key stakeholders and
maintaining dialogue with other industry participants.
Chief Executive
— Formulates the strategic direction of the Company and periodically
agrees this with the Board;
— Ensures proper ?nancial and business control is exercised within
the Company;
— Chairs the Executive Committee;
— Ensures there is a clear management structure with appropriately
delegated responsibilities staffed by suitably experienced and
quali?ed staff;
— Ensures appropriate reporting and communication systems are
established across the Company;
— Ensures key performance objectives are set for all operational
departments, action plans and budgetary controls are established and,
where necessary, corrective action is taken to maximise the performance
of the Company;
— Ensures the Company’s strategy and values are effectively understood
and applied by management and staff; and
— Ensures an appropriate risk management framework is in operation.
Board and Committee meetings in FY2014
The Board held six scheduled meetings, three additional meetings on short
notice and a dedicated off-site strategy day. On a number of occasions
throughout the year, the Chairman met Non-Executive Directors without the
presence of Executive Directors. The Chairman and Non-Executive Directors
also meet without the Executive Directors at the start of each Board meeting
to discuss the business of that meeting and other issues. Throughout the
year, the Chairman also met with Non-Executive Directors individually to
discuss business-related matters.
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London Stock Exchange Group plc Annual Report 2014
It is likely that the Board will continue to include Non-Executive Directors with
current or recent experience in ?nancial markets, as the Board believes it
bene?ts from this expertise. The Board also believes that the Group bene?ts
from having directors with a mixture of tenures and backgrounds.
The Board has concluded that all Non-Executive Directors are independent
in character and judgement. In assessing each Director, the Board considered
whether there are relationships or circumstances which are likely to affect,
or could appear to affect, the Director’s judgement.
The Code requires a company to state its reasons if it determines that a
director is independent in certain circumstances, including where a director
indirectly has a material business relationship with the Company as a director
of a body that has such relationship with the Company, or has had in the
last three years, and where a director has served on the Board for more than
nine years.
Jacques Aigrain is currently Chairman of LCH.Clearnet Group. LCH.Clearnet
Group is a non-wholly owned subsidiary of the Company with whom the
Company has a material business relationship. Mr Aigrain brings vast
experience in the area of post trade which greatly assists the Board. Following
the departure of LCH.Clearnet Group’s CEO, Ian Axe, Mr Aigrain was appointed
as Executive Chairman from October 2013 to 3 February 2014. During this
period Mr Aigrain did not participate in the Company’s Executive Committee.
It was felt that Mr Aigrain’s appointment to this role on a temporary basis was
the best way to manage any risks following Mr Axe’s departure. Any potential
con?icts of interest arising as a result of Mr Aigrain’s appointment to the
Board are governed by the terms of a con?icts memorandum of
understanding between LCH.Clearnet and the Company.
Andrea Munari was, until 31 December 2013, employed by Intesa San Paolo,
which is a customer of the Group. While the Company values its relationship
with Intesa as a customer, given the size of Intesa, it is believed that Intesa’s
relationship with the Company and its subsidiaries is not material to Intesa.
The Board bene?ts greatly from Mr Munari’s current experience in ?nancial
markets and the Risk Committee also bene?ts from Mr Munari’s experience
of risk in a ?nancial services company.
Stuart Lewis is employed by Deutsche Bank AG, which is a customer of
the Group. While the Company values its relationship with Deutsche Bank,
it is believed that Deutsche Bank’s relationship with the Company and its
subsidiaries is not material to Deutsche Bank. Additionally, given his role as
Chief Risk Of?cer, Mr Lewis does not work in an area of Deutsche Bank which
has customer relationships with the Group.
Stephen O’Connor was, until June 2013, employed by Morgan Stanley,
which is a customer of the Group. While the Company values its relationship
with Morgan Stanley, it is believed that Morgan Stanley’s relationship with
the Company and its subsidiaries is not material to Morgan Stanley.
In particular, in the case of Mr Lewis and Mr O’Connor, following the
acquisition of a majority stake in LCH.Clearnet, the Board believes it is
important to have members who have current or recent experience in
credit and market risk.
Directors have the bene?t of indemnity arrangements from the Company in
respect of liabilities incurred as a result of their of?ce and execution of their
powers, duties and responsibilities. The Company maintained a Directors’
and Of?cers’ liability insurance policy throughout the year ended 31 March
2014. This policy covers the Directors for any such liabilities in respect of
which they are not indemni?ed by the Company and, to the extent to which
it has indemni?ed the Directors, also covers the Company. This insurance
cover has been renewed. Neither the Company’s indemnity nor insurance
provides cover for a Director in the event that the Director is proved to have
acted fraudulently or dishonestly.
Board balance and independence
There is a strong non-executive element on the Board, and the Non-Executive
Directors provide deep corporate experience and knowledge which they apply
to their understanding of the Group and its strategy.
The Board considers that the Directors possess a strong range of business
experience and that the Board has the right mix of skills and experience given
the Group’s increasing diversi?cation, scale and reach. The Board considers
that the appropriate balance of skills and experience is best achieved by
balancing continuity of experience and new joiners and also by drawing
Directors from a wide range of backgrounds, including in the ?nancial
markets in which the Group operates, and in broader business.
Non-Executive Director Changes
The following changes have taken place over the past 12 months:
— the appointment of Jacques Aigrain (Non-Executive Director) on
1 May 2013;
— the appointment of Stuart Lewis and Stephen O’Connor
(Non-Executive Directors) on 12 June 2013;
— the appointment of Sherry Coutu CBE and Joanna Shields OBE
(Non-Executive Directors) on 17 January 2014; and
— the resignation of Baroness (Janet) Cohen, Sergio Ermotti and
Gay Huey Evans (Non-Executive Directors) on 18 July 2013.
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Board development
Each new Director joining the Board is provided with an induction programme
covering the key business areas of the Group. Directors are provided with key
documents including strategy documents, past Board papers, an overview
of the business, including the regulatory framework within which the Group
operates, and information on directors’ responsibilities under the Listing
Rules. Additionally, Directors meet with executives from throughout the
Group to better understand each of the business areas together with the
Group’s governance and ?nancial and legal framework. Directors have access
to independent professional advice if they judge it necessary to ful?l their
responsibilities as directors.
Directors are encouraged to continually update their skills and knowledge
of the business, and brie?ngs are given at Board meetings on particular parts
of the business. During the year, the Board also continued its practice of
undertaking formal visits to its overseas businesses so that the Directors can
experience ?rst-hand key aspects of the Group’s operations.
Conflicts of interest
The articles of association allow the Board to authorise con?icts of interest
that may arise and to impose such limits or conditions as it thinks ?t.
The Company has established procedures whereby actual and potential
con?icts of interest are regularly reviewed, appropriate authorisation is
sought prior to the appointment of any new Director and new con?icts are
dealt with. The decision to authorise a con?ict of interest can only be made
by non-con?icted Directors and, in making such decision, the Directors must
act in a way they consider, in good faith, would be most likely to promote
the Company’s success. Potential con?icts of interest arising as a result of
Jacques Aigrain’s appointment to the Board are governed by the terms of a
con?icts memorandum of understanding between LCH.Clearnet Group and
the Company. The Board believes that, during the year ended 31 March 2014,
these procedures operated effectively.
Board Committees
The Company ensures that all Committees are provided with suf?cient
resources to undertake their duties. All Committees have written terms
of reference which are available from the corporate responsibility section
on the Company’s website at www.lseg.com or on request from the Group
Company Secretary.
Remuneration Committee
Details of the Committee’s remit and activities are set out in a separate
Remuneration Report on pages 70-97.
Audit Committee
Details of the Committee’s remit and activities are set out in a separate
Audit Committee Report on pages 66-68.
Risk Committee
Details of the Committee’s remit and activities are set out in a separate
Risk Committee Report on page 69.
Nomination Committee
Details of the Committee’s remit and activities are set out in a separate
Nomination Committee Report on page 65.
Robert Webb has served on the Board since 2001. The Board considers
that an individual’s independence cannot be determined arbitrarily on
the basis of a particular period of service. The Board also bene?ts from
his experience and knowledge resulting from the length of his service as
well as his wider business experience.
In line with the Code, all Directors are subject to annual re-election.
Directors who retired during the year
Baroness (Janet) Cohen and Sergio Ermotti, who each retired from the
Board on 18 July 2013, were considered by the Board to be independent
throughout the year. Baroness (Janet) Cohen had served on the Board since
2001 and Mr Ermotti was CEO of UBS Group, which is a customer of the
Group. Given the size of UBS and the large number of markets in which it
operates, its relationship with the Company is not material to UBS. In the
case of Baroness (Janet) Cohen, as set out previously, the Board considers
that an individual’s independence cannot be determined arbitrarily on the
basis of a particular period of service.
Board effectiveness and leadership
The Board carried out an internal review of its own effectiveness and that of
its committees and directors. The Board has carried out effectiveness reviews
since 2005 and has acted on the results of each review.
The evaluation process was conducted by the Group Company Secretary
using a detailed questionnaire. The review also included a separate
assessment of the Chairman’s performance with feedback provided to
the Chairman.
The results of the review were used to highlight areas of strength and weakness,
assist in consideration of the future development of the Board, its Committees
and its individual directors and further improve their performance.
Further to the discussions arising out of the 2013 review, the Board identi?ed
that the key area for Board development was ensuring that it had appropriate
skills to govern a more diversi?ed Group which included a greater number of
post trade assets. The Board recruited members with experience in risk and
clearing (Mr Aigrain, Mr Lewis and Mr O’Connor) together with information
technology (Ms Coutu and Ms Shields). The Board also constituted separate
Audit and Risk Committees (previously combined) to re?ect an even greater
focus on risk. The Board has also received regular updates and training in
relation to CCP risks. Given these substantial changes during the year, the
2014 board effectiveness review concluded that the Board, its Committees
and its individual directors were working effectively and did not identify any
signi?cant issues. The Board will continue to evaluate its effectiveness
annually and address any actions.
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Governance Corporate governance
London Stock Exchange Group plc Annual Report 2014
Under the matrix structure, lines of responsibility have been clearly de?ned
and an appropriate framework of delegated authorities is in place. The Group
continues to monitor the functioning of and implement improvements to its
risk management framework to ensure it is ?t for purpose for its new size and
current ambitions.
Risk management framework
The risk management process is governed by a Board-approved Enterprise-
wide Risk Management Framework, which was implemented last year.
Executive management is accountable for risk identi?cation, analysis,
evaluation, mitigation, monitoring and reporting in its area within the
framework established by the Board. A combined bottom-up and top-down
risk management approach is adopted, with risks identi?ed at a business
unit, divisional and Group level. Divisional and legal entity risk pro?les are
reviewed by the Risk Committees of the Executive Committee and the Group’s
consolidated risk pro?le is reviewed by the Executive Committee and reported
to the Risk Committee three times a year. In FY14, it was reviewed by the
Risk Committee twice, as the committee was only established in September.
It was also reviewed once by the Audit and Risk Committee before the change
in committee structure. The Group risk pro?le is reviewed by the Board at least
every six months following an updated assessment of the risk management
process by both the Audit Committee and the Risk Committee.
Each Group risk is owned by a member of the Executive Committee, who is
responsible for managing or mitigating the risk to a level within the Group’s
risk appetite. Executive Committee members present their division’s risk
management processes and latest risk registers to the Risk Committee every
six months on a rotational basis. On a semi-annual basis, a divisional internal
control and risk management self-certi?cation process is also performed.
Each business unit is required to con?rm that it is in compliance with the
Group’s policies and governance procedures. Any exceptions are reported
to the Audit Committee and to the Risk Committee. Internal audit provides
regular reports to the Audit Committee on the adequacy and effectiveness
of the Group’s system of internal controls and the Group’s risk framework.
An overview of the principal risks and uncertainties of the Group is provided
on pages 48-53.
Risk Management and Internal Control
The Board has overall responsibility for the risk management framework
and for ensuring that management maintains an adequate system of
internal control appropriate for the Group’s business and the risks to which
it is exposed. The Audit Committee and the Risk Committee assist the Board
in discharging this responsibility by reviewing and assessing the Group’s
risk framework, systems of internal controls and risk management process.
The Company has implemented a three lines of defence governance model.
Under this model, executive management is the ?rst line of defence and is
responsible for designing, operating and monitoring the system of internal
controls. The system of internal controls is designed to manage the business
within the Board’s risk appetite rather than eliminate the risk of failure to
achieve the Group’s objectives and can only provide reasonable, but not
absolute, assurance against material misstatement or loss, fraud or breaches
of laws and regulations.
Risk management and compliance constitute the second line of defence
and de?ne the risk management framework to keep the business activities
within the Group’s risk appetite. Finally, the internal audit function provides
the independent assurance on controls, risk and governance as the third line
of defence. The system of internal controls is amended as appropriate in
response to changes in the Group’s business and associated risks. The key
elements of the Group’s systems of internal controls are described below.
Further detail on the Group’s risk management oversight can be found at
pages 44-47.
Organisational structure
The day-to-day running of the Group is managed by an Executive Committee,
which is chaired by the Group Chief Executive Of?cer. The Group operates a
matrix structure designed to optimise resource allocation and organisational
capacity. Each Executive Committee member is responsible for one of the
Group’s operating divisions or a major area of strategic importance and each
legal entity is responsible for engaging with local regulators and ensuring
regulatory compliance. The Executive Committee meets regularly to review
business and ?nancial performance, risk exposure and to approve key
decisions. The Executive Committee is supported by three main committees:
— The Financial Risk Committee, chaired by the Group Chief Financial
Of?cer which is responsible for monitoring the ?nancial risk exposure,
including liquidity and counterparty risks of the Company and to make
recommendations to the Executive Committee and to the Risk
Committee for changes to its risk appetite or limits.
— The New Product and Market Committee, chaired by the Group Chief
Risk Of?cer, which is responsible for the review of proposals to launch new
products or expand its activities into new markets.
— The Operational Risk Committee, chaired by the Group Chief Operating
Of?cer, monitors the adequacy of the controls in place to manage key
operational risks across the Group.
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Policies and procedures
A framework of Group policies and procedures has been established for all
aspects of the Group’s activities, supplemented by additional local policies
where appropriate. The policies are reviewed and updated on an ongoing
basis, or at least once a year, to re?ect changes in the Group’s risk pro?le
and appetite. Key policies are emphasised in the employee induction
process and regularly reinforced through targeted training.
Financial Risks
Comprehensive ?nancial reporting and review procedures are in place,
with ?nancial and key performance indicators reviewed against operational
budgets on a monthly basis at a group, divisional and business unit level.
The CFO monthly management report used by the Executive Committee is
shared with the Group Board and any key issues are reviewed at each Board
meeting. Investment opportunities are evaluated following a clearly de?ned
investment appraisal process. The Financial Risk Committee and the New
Products (and Market) Committee, during the year, oversaw the risks related
to entering new markets, treasury, capital, investments and counterparty
risks. The CCP counterparty, investments, and liquidity risks are also overseen
by each CCP’s own board and risk committees. As part of its remit, the
Financial Risk Committee oversees the activities of the Group’s Treasury
function through its Treasury Committee, which is chaired by the Chief
Financial Of?cer. The Treasury Committee operates within Board approved
policy and meets regularly to review the management of the Group’s credit,
market and liquidity risks. Further details on ?nancial risk management are
provided in note 2 to the accounts.
Operational Risk
The Group manages and monitors operational risks through the setting of risk
appetite, clear de?nition of roles and responsibilities, policies and procedures,
and through reporting of exposures. The Group has in place an Operational
Risk Committee which is responsible for monitoring the Group’s operational
risk exposure, including controls that could have an impact on ?nancial
reporting, and ensuring risks remain within appetite. The Group has in
place key operational controls strategies that are overseen by the Business
Continuity Committee and Technology project committees. These committees
meet on a regular basis and ensure the business continuity programmes and
the change management approach are aligned with industry best practice
and are ?t for purpose for the operations of the Group and of its subsidiaries.
Further details on operational risks are provided in note 2 to the accounts.
Risk Appetite
The Board sets an overall risk appetite for the Group for each of its risk
categories (Strategic, Financial and Operational) and also in six strategic
risk objectives (see page 45 for further information on the strategic risk
objectives). The Risk Appetite Framework (RAF) is used to delegate the
Group Appetite down to the Group’s component businesses. Each area
of the business is expected to manage its exposures within risk appetite
as approved by the Board.
The Group de?nes an overall risk appetite as part of the execution of the
strategic business plan of LSEG while achieving its strategic risk objectives
(see page 45):
Strategic Risk
The Group acknowledges that strategic risks could be driven by external
factors over which the Group may have limited in?uence. As a result, the
Group may have to accept the risk exposure. The Group will manage these
risks in order to provide the best risk reward option, while minimising the
downside impact.
Financial Risk
The Group has limited appetite to undertake activities which may impact the
delivery of its ?nancial plan, or affect its ability to meet its liquidity, regulatory
capital or contractual requirements under extreme but plausible market stress
scenarios. The Board has no appetite to breach the regulatory requirements
set out for the management of CCP ?nancial risks. Group concentration limits
will respect each CCP’s own limits and will be monitored accordingly.
Operational Risks
The Group will maintain a governance framework and an effective system
of internal controls to mitigate its operational risks within its risk appetite
limit. The Group has zero risk appetite for unethical behaviour.
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London Stock Exchange Group plc Annual Report 2014
The IR function, reporting to the CFO, is responsible for planning and
executing the IR programme and day-to-day contact with the market.
The CEO and CFO engage with investors, through meetings and presentations,
to discuss strategy, performance and other matters. The Chairman,
Senior Independent Director and Chairman of the Remuneration Committee
are also available to meet major investors, particularly to discuss corporate
governance and remuneration, as required. Over the past year, senior
management and the IR team held more than 280 meetings and calls
with shareholders and potential investors from around the world.
The Board receives a report on IR matters at each of its scheduled meetings,
including market expectations of ?nancial performance, share register
composition and feedback from major investors. Sell-side analyst research
notes are circulated to the Board following publication. The Group’s corporate
brokers and a specialist IR advisory ?rm provide the Board with advice on
shareholder relations and share register analysis. The AGM provides the
opportunity for all shareholders to meet Directors and to put questions
to the Board, and the procedures for the AGM are compliant with the UK
Corporate Governance Code. Voting at the AGM is by way of a poll to ensure
all shareholders’ views are taken into account.
The Investor Relations section of the Group’s website, www.lseg.com,
is the primary source of regularly updated information about the Group.
Annual and interim reports and accounts, interim management statements,
news releases, presentations and other documents are available on the
website together with a list of analysts producing research on the Company
and a summary of analysts’ forecasts of performance. Presentations of
preliminary and interim results are accessible by all shareholders via
webcasts in real time and also via replay for a period after the event.
Regulatory monitoring
Regulatory and compliance risks in the markets in which the Group operates
are monitored by local compliance functions. These regulatory teams work
closely with the FCA and the Bank of England in the UK, CONSOB and Banca
d’Italia in Italy, ACPR and the Banque de France in France, the CFTC in the
USA and other regulators in countries where we operate. The compliance
functions are managed independently from the customer facing business
units and report on a regular basis to the Group Risk Committee and to local
and Group Boards.
Internal audit
The Internal Audit function provides reliable, objective and reasonable
assurance to management, Audit Committee members, Risk Committee
members and Group Board members on the adequacy and effectiveness
of the system of internal controls, the governance model and the risk
management framework in place to manage risks within the Group’s risk
appetite and achieve the Group’s business objectives. As a third line of
defence, the function has no operational responsibilities over the entities/
processes that it reviews.
The independence of the internal audit function is achieved through
the following means:
— the Group Head of Internal Audit reports to the Chairman of the
Audit Committee of the Board and to the CFO for administrative
matters and has direct access to the Chairman of the Board;
— the Audit Committee must be consulted on the appointment
or the dismissal of the Group Head of Internal Audit; and
— the Audit Committee approves the annual budget for internal audit.
Conclusion
The Board con?rms that, through the Audit Committee and the Risk
Committee, it has reviewed the operation and effectiveness of the Group’s
system of internal controls throughout the year and up to the date of
approval of this Annual Report. No signi?cant failings or weaknesses were
identi?ed during this review. The Board is satis?ed that the risk management
process and system of internal controls conform with the 2005 FRC’s Internal
Control Guidance to Directors (formerly known as the Turnbull guidance).
Relations with shareholders
The Company conducts a comprehensive Investor Relations (IR) programme,
ensuring regular contact with existing and potential shareholders, together
with sell-side analysts that produce investment research relating to the Group.
The IR programme typically consists of meetings, calls, presentations and
information releases on a regular basis throughout the year, based around
the Group’s ?nancial reporting calendar and following major corporate events
and news ?ow.
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The Committee spent the majority of its time during the year overseeing
the process for the appointment of new Non-Executive Directors described
elsewhere in the Governance Report. The Committee agreed the role
description for the new Non-Executive Directors and interviewed candidates
for the various Non-Executive Director appointments throughout the
year. The Committee members then gave feedback to the Chairman
and recommendations were made to the Board. The Committee used
an executive search agency, Spencer Stuart, to help identify potential
candidates. Prior to being engaged by the Company to carry out the
search, Spencer Stuart carried out the Board Effectiveness Review in FY2012.
The Committee also considered senior management succession planning.
The Committee formally met once in the year. Nomination Committee
members also held a number of informal discussions with the Chairman
during the year.
Gender Diversity
The Board supports the Davies Review’s conclusion that greater efforts should be
made in improving the gender balance of corporate boards and that quotas
for female Board representation are not the preferred approach.
The Committee and the Board have sought to ensure that appointments
are of the best candidates to promote the success of the Company and
that appointments are based on merit, with due regard for the bene?ts of
diversity on the Board, including gender (while also meeting the requirements
of the Equality Act). Subject to these requirements, the Board made a
commitment in 2013 to further strengthening female representation on
the Board. At Board level, this has included requesting headhunters to ensure
that as far as practicable, a signi?cant proportion of the long list of candidates
are female. Further to this commitment, Joanna Shields OBE and Sherry
Coutu CBE were appointed during the year. The Board’s diversity policy can
be found athttp://www.lseg.com/about-london-stock-exchange-group/
corporate-responsibility/ethics-and-governance.
Chris Gibson-Smith
Chairman
The Nomination Committee members as at 31 March 2014 were:
Chris Gibson-Smith (Chairman), Robert Webb, Paolo Scaroni
and Massimo Tononi. The Committee’s role is to review the
size and structure of the Board, consider succession planning
and make recommendations to the Board on potential
candidates for the Board.
Nomination Committee meeting attendance
in the year ended 31 March 2014
Total
Chris Gibson-Smith 1/1
Paolo Scaroni 1/1
Robert Webb 1/1
Massimo Tononi 1/1
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Report of the Nomination Committee
Chris Gibson-Smith
Chairman of the Nomination Committee
London Stock Exchange Group plc Annual Report 2014
Paul Heiden
Chairman of the Audit Committee
This report is intended to give an understanding of the role
of the Audit Committee in assisting the Board to ful?l its
oversight responsibilities for the system of internal control
and the integrity of the Group’s ?nancial statements.
In 2013, the previous Audit and Risk Committee of the Board was
separated into two separate committees: the Audit Committee and
the Risk Committee. As the Chairman of the Audit Committee, I sit on
the Risk Committee in order to improve the coordination of information
between the two committees. The new set-up of the committees re?ects
the growing importance of risk management and the clear separation
of duties between the second and third line of defence within the Group.
This separation has increased the ef?ciency and effectiveness of
each committee.
Priorities in the forthcoming year will include: establishing a successful
working relationship with the new external auditor, further aligning the
control environment of the Group’s recent acquisitions with the LSEG
framework, optimising the coordination with the Risk Committee and
reviewing the Committee’s meeting arrangements to further improve
its effectiveness.
Paul Heiden
Chairman of the Audit Committee
Role and responsibilities of the Audit Committee
1. Financial reporting
The Committee recommends the ?nancial statements of the Group to
the Board, including the annual and half-yearly reports, preliminary results
announcements and any other formal announcement relating to its ?nancial
performance, reviewing the signi?cant ?nancial reporting judgements that
they contain.
2. Internal controls and risk management systems
The Committee keeps under review the effectiveness of the Group’s system
of internal control and risk management. In order to do this, the Committee
considers reports from management and the internal audit function.
The Audit Committee makes recommendations to the Board regarding
the effectiveness of the Group’s internal control and risk management
systems and recommends to the Board the statements to be included
in the Annual Report concerning internal controls and risk management
(in collaboration with the Risk Committee).
3. External auditors
The Committee oversees the relationship with the external auditor and meets
with the external auditor at the start of each Committee meeting, without
management being present, to discuss their remit and any issues arising from
their audit. The Committee reviews and approves the annual audit plan, ensures
that it is consistent with the scope of the audit engagement and reviews the
?ndings of the audit with the external auditor. The Committee ensures that the
external audit services contract is put out to tender on a periodic basis in line
with existing best practices. The Committee oversees the selection process for
new auditors and if an auditor resigns the Committee investigates the issues
leading to the resignation and decides whether any action is required.
4. Other matters
Treasury
The Committee, with the Risk Committee, reviews proposed changes to
the Group Treasury Policy, approves the taking of any actions which fall
outside the scope of policy and considers material ?nancing and treasury
transactions reserved for the Board ahead of review by the Board.
Whistleblowing and fraud
The Committee reviews the Group’s arrangements for its employees to raise
concerns, in con?dence, about possible wrongdoing in ?nancial reporting
or other matters. The Committee ensures that these arrangements allow
proportionate and independent investigation of such matters and appropriate
follow-up action.
Composition and meetings
The Committee meets the requirements of the UK Code. It is comprised
of three independent Non-Executive Directors who all bring recent and
relevant ?nancial experience. It is chaired by Paul Heiden who is a quali?ed
chartered accountant with a career in a variety of senior ?nance roles.
The other members are Jacques Aigrain and Massimo Tononi who have each
previously held various executive management roles in ?nancial institutions.
(Baroness (Janet) Cohen and Gay Huey Evans both stepped down from the
Board, and from the Audit and Risk Committee, on 18 July 2013). The skills
and experience of each Committee member are provided on page 55.
The Group Chief Financial Of?cer, Group Financial Controller, Group Head
of Internal Audit, Group Chief Risk Of?cer and the external auditors are all
invited to attend all Audit Committee meetings. In addition, various other
managers are invited from time to time to present speci?c strategic issues
relevant to the Committee’s purview. The external auditors did not attend the
Audit Committee meeting on 18 March 2014 as it was dedicated to the
selection of the new external auditors.
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Attendance at Audit Committee meetings in FY2014
1
:
Scheduled Ad hoc
4
TOTAL
Paul Heiden 3/3 1/1 4/4
Jacques Aigrain 3/3 1/1 4/4
Baroness (Janet) Cohen
2
0/1 – 0/1
Gay Huey Evans
3
1/1 – 1/1
Massimo Tononi 3/3 1/1 4/4
1 The Board appointed separate audit and risk committees on 18 July 2013. Prior to that date,
the Board operated a combined Audit and Risk Committee.
2, 3 Baroness (Janet) Cohen and Gay Huey Evans each stepped down from the Board, and the
Audit Committee, on 18 July 2013.
4 The ad hoc meeting was dedicated to the selection of the external auditor on 18 March 2014.
Activities in FY2014
The Committee maintains a formal agenda which ensures that all matters
for which the Committee is responsible are considered at the appropriate
meeting. During the year, the Committee discharged its responsibilities as
set in its terms of reference by performing the following:
Financial matters:
— Reviewed and approved key accounting judgements
— Reviewed and approved the half year and full year ?nancial results
— Reviewed the capital management policy
— Discussed the post completion planning of the LCH.Clearnet acquisition
— Reviewed and discussed the Treasury update reports
— Reviewed and approved the goodwill impairments
— Reviewed and discussed management’s view of commitments and
contingencies and the adequacy of the proposed disclosures
Internal controls:
— Reviewed compliance with the UK governance code – internal controls
(including whistle blowing) at half year and year end
— Reviewed updates on internal audit plans
— Approved the three year internal audit plan (2013-2016)
— Reviewed reports on the performance of internal audit
— Reviewed group risk reports
External auditors:
— Reviewed reports from the external auditor
— Approved the services provided by the external auditor
— Reviewed and approved the audit and non-audit fees
— Reviewed the effectiveness of the external auditor
— Reviewed and approved the Group audit plan
— Oversaw and approved the selection of the new external auditor
Other matters:
— Assessed its own effectiveness
— Reviewed and updated its own terms of reference
— Reviewed and discussed an update to the Group’s business continuity
and crisis management plans
— Reviewed and discussed the Annual Report and the procedures
implemented to ensure it is fair, balanced and understandable
Significant judgments in the Annual Report
Signi?cant
judgements for
FY2014 How the Committee reviewed these matters
Goodwill impairment
assessment
The Audit Committee considered the approach and
methodology applied to measuring the impairment
of Goodwill, including the key assumptions for short
and long-term growth rates, and the discount rate
used for the Group’s cost of capital. As a result, a
reconsideration of appropriate cash generating units
in Italy was made and the Committee reviewed and
approved the changes proposed. The Audit
Committee also considered various scenarios to
evaluate the impact of changes in assumptions on
the models’ results. The impairment review was also
an area of focus for the external auditors, who
reported their ?ndings to the Committee. As a result
of these activities, the Committee agreed that there
was no impairment to be recorded in the FY2014
accounts. More details can be found in note 13
on pages 124-125.
Going concern The Audit Committee satis?ed itself that the Group
has adequate ?nancial resources for the future by
reviewing and challenging the Group’s committed
funding and liquidity positions, its ability to generate
cash from its various activities, the quality of its risk
management and its ability to raise external funding.
The Committee relied on the detailed working capital
process, the FY2015 Budget and the three year
business plan. The Committee considered the
assumptions made by management in its evaluation
of future cash ?ows under stress including possible
mitigating actions under the control of management.
The Committee subsequently recommended to the
Board the adoption of the going concern statement
for inclusion in the Annual Report and Accounts.
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London Stock Exchange Group plc Annual Report 2014
Signi?cant
judgements for
FY2014 How the Committee reviewed these matters
Recognition and
measurement of
goodwill on acquisitions
The Audit Committee considered which method
was appropriate to recognise the goodwill for the
acquisitions during the year that involved less than
100 per cent of the target by considering the key
criteria used to make the determination. Based on
discussions with management and the external
auditors, the Audit Committee agreed that the fair
value approach should be used for LCH.Clearnet while
the proportionate share method would be used for
the smaller acquisitions. Results can be found in
note 28 on pages 136 and 137.
Purchase price
allocation on
acquisitions
The Audit Committee satis?ed itself on the validity
of the methodology to allocate the purchase price
for acquisitions based on detailed discussions with
management, with the external auditor and after
consideration of the advice of external third party
valuations. These discussions focused on the
reasonableness of the model and assumptions
used in comparison with best practices. The results
can be found in note 28 on pages 136 and 137.
Commitments and
Contingencies
The Audit Committee considered the facts and
circumstances surrounding commitments and
contingencies, in particular with respect to
LCH.Clearnet. It considered the nature of the
correspondence and discussions which had taken
place and after due consideration, the Committee
agreed that no provision should be recorded in the
FY2014 accounts.
Report on external auditors
A breakdown of audit and non-audit service fees paid and payable to the
external auditor for the year ended 31 March 2014 is provided below and in
note 32 to the accounts on page 141:
2014
£m
2013
£m
Audit services:
Audit of parent company and consolidated accounts 0.5 0.2
Audit of subsidiary companies 1.1 1.0
Audit related assurance services 0.4 0.4
Other non-audit services:
– Taxation 0.6 0.2
– Corporate ?nance 0.2 0.6
– Other assurance services – 0.1
Total expenses 2.8 2.5
In the year ended 31 March 2014, the majority of other non-audit services
provided by PricewaterhouseCoopers LLP were in relation to taxation.
These services were mostly for compliance and VAT advice for LCH.Clearnet
and included other smaller tax-related projects.
The Committee reviewed each of these individual appointments on their
merits, prior to PricewaterhouseCoopers LLP being engaged. (LCH.Clearnet
had engaged PwC to provide tax services prior to the Group’s acquisition of a
majority stake. These services were retrospectively reviewed and approved by
the Chair of the Audit Committee within the context of the Group policy).
The review process involved considering management’s assessment of:
— which accounting ?rms had the appropriate experience and expertise
to undertake the work;
— whether there were any con?icts of interest for
PricewaterhouseCoopers LLP;
— whether the con?icts of interest that existed for other potential ?rms,
which were advising other parties to the transactions or were auditors
of the other company, could be appropriately managed; and
— the quantum of non-audit fees in the context of the overall audit fee and
relative signi?cance to PricewaterhouseCoopers LLP in the context of its
total client fees.
In each case the Audit Committee concluded, on the balance of risks,
that the appointment of PricewaterhouseCoopers LLP represented the
most effective, secure and ef?cient way of obtaining the necessary advice
and services, given its knowledge of our business and the Group’s structure
and accounting and tax affairs together with its wider knowledge of our
industry sector.
The Group has also engaged other accounting ?rms on transactional
work during the year, selecting the appropriate ?rms based on the
criteria above, and the fees for these assignments are included alongside
PricewaterhouseCoopers’ and other advisers’ costs within the transaction
costs disclosed in note 7 to the accounts.
In light of the increasing diversi?cation, scale and reach of the Group, and also
in line with the Corporate Governance Code and UK Competition Commission
proposals regarding periodic tenders, the Audit Committee agreed on 18
September 2013 that a tender process should be conducted for the position
of the Group’s external auditor. The Audit Committee reviewed and approved
the tender process, governance and selection criteria.
As a result of the tender, the Audit Committee recommended to the Board
that Ernst & Young LLP (EY) be appointed as the Group’s external auditor.
Such appointment of EY will take place under the casual vacancy basis by
the Board shortly after the completion of the audit of LSEG’s consolidated
accounts for the year ended 31 March 2014 by PwC, and the appointment
of EY will be recommended to shareholders for approval at the Annual
General Meeting in July 2014.
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Stephen O’Connor
Chairman of the Risk Committee
Risk Committee meeting attendance
in the year ended 31 March 2014
Scheduled Ad hoc Total
Steven O’Connor 2/2 0 2/2
Paul Heiden 2/2 0 2/2
Stuart Lewis 2/2 0 2/2
Andrea Munari 2/2 0 2/2
This report is intended to give an understanding of the role of
the Risk Committee in assisting the Board to ful?l its oversight
responsibilities for risk management and the adequacy of the
systems of internal controls in place to mitigate key risks.
The Committee was established in September 2013 following a split of
responsibilities of the former Audit and Risk Committee. From 1 April
to September, the Audit and Risk Committee considered the risk matters.
During the year the Committee met twice and oversaw the implementation
of new frameworks, systems and tools to manage the risks of the enlarged
Group following the acquisition of a majority stake in LCH.Clearnet. This
included the further roll-out and embedding of the Enterprise-wide
Risk Management Framework introduced last year.
In order to avoid potential duplication of coverage and, more importantly,
to reduce the potential for non coverage of important risk matters, by either
the Audit or the Risk Committees, the Committee membership includes the
Chairman of the Audit Committee.
Priorities in the forthcoming year will include the Group’s ongoing efforts
to: further embed its Enterprise-wide Risk Management Framework
and ensure appropriate application throughout the Group; further develop
and implement risk tools and VaR models; further align the LSEG and
LCH.Clearnet risk frameworks; and, embed the enhanced risk
appetite framework.
The Committee will review, on a rotational basis, the risk pro?le of each
of its main lines of business and key legal entities.
Stephen O’Connor
Chairman of the Risk Committee
Composition and responsibilities
The Committee is chaired by Steven O’Connor who provides recent and
relevant ?nancial and risk management experience through his career
in a variety of senior executive roles in the ?nancial industry. In addition,
the Board is satis?ed that each member of the Committee has the skills
and experience necessary to enable the Committee to discharge its
responsibilities effectively. The names, skill and experience of the members
of the Risk Committee are provided on pages 54-55.
Further details of who normally attends meetings and the Committee’s terms
of reference, which are approved by the Board and reviewed on an ongoing
basis, are available from the Group Company Secretary or at the corporate
governance section of the Company’s website at www.lseg.com.
Activities
The Committee maintains a formal agenda which ensures that all matters
for which the Committee is responsible are considered at the appropriate
meeting. During the year the Committee discharged its responsibilities as
set out in its terms of reference by reviewing the following:
— The reports on risk exposures of the Company and on emerging risks
— The development and implementation of the Company’s counterparty
risk Group-wide aggregation and monitoring tool
— The adequacy of proposed actions to mitigate certain risk exposures
— The effectiveness programme in place to further align the risk
management framework of the Group and its subsidiaries
— Regulatory compliance reports and the actions in place to ensure
ongoing compliance
— The effectiveness of the Risk function and roll-out status of the new risk
framework and test results
— The programme in place to consolidate Group risks including the risks
from the newly acquired majority stake in subsidiary LCH.Clearnet
— The adequacy of the treasury limits in the area of ?nancial risk
management and approved changes to the treasury policy
— Papers on the potential impact of the regulatory requirements on the
CCPs of the group and related mitigating plans
— Compliance with the Group risk management procedures as described in
the section on internal controls on pages 62-64.
In addition the Committee oversaw the process that led to the rati?cation of
the Group Risk Appetite by the Board.
Risk Management function
During the year, the risk function continued the roll-out of the new Group
Enterprise-wide Risk Management Framework launched during the previous
year. The Committee has been monitoring the roll-out programme.
As part of its mandate the Committee reviews, at least three times a year,
the risk pro?le of the Group and comments on the adequacy of the processes
in place to identify and report on key risks. The Board as a whole reviews the
Group risk pro?le at least twice a year. It also received reports on compliance
with relevant regulatory requirements for each regulated entity of the Group.
The risk management function is headed by the Chief Risk Of?cer who
oversees all aspects of risk management in the Group. She reports to the
Chief Executive Of?cer and, for independence purposes, to the Chairman of
the Risk Committee. The Committee must be consulted on the appointment
or the dismissal of the Chief Risk Of?cer.
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Governance Report of the Risk Committee
Robert Webb
Chairman of the Remuneration Committee
London Stock Exchange Group plc Annual Report 2014
On behalf of the Board, I am pleased to present the Directors’ Remuneration
Report for the year ended 31 March 2014. This is the ?rst year that we
are presenting under the new remuneration reporting regime, and
subsequently this year’s report has been split into two separate sections:
the Remuneration Policy Report and the Annual Report on Remuneration.
31 December 2014). The Committee has taken this change into account
when making remuneration decisions relating to the bonus and LTIP awards,
as explained later in this report.
Key remuneration decisions
— Adjusted operating pro?t is up 20 per cent at £514.7 million
— Adjusted basic EPS is up two per cent at 107.1 pence
The Group has had a strong year increasing its global footprint and
diversifying its service offering which has delivered an increase in revenue,
operating pro?ts and market capitalisation. This performance has been
achieved through the execution of the Group’s strategy including the
completion of the acquisition of a majority stake in the global clearing house,
LCH.Clearnet Group and the work to integrate them further into the Group;
building best in class capabilities through innovative solutions in post trade,
information services and capital markets; creating a global business with
expanded reach through FTSE, MTS, MillenniumIT and now LCH.Clearnet;
developing opportunities through diversi?cation with plans to launch a new
central securities depository, new derivatives products and continued
development of our ELITE programme. This strong performance is re?ected
in the bonus outcomes in respect of ?nancial year ended 31 March 2014.
As part of the annual review of salaries for Executive Directors, the Committee
has awarded the Chief Executive an increase of four per cent and kept the
Chief Financial Of?cer’s salary at the same level as last year. This year the
Committee has taken the opportunity to consider the salary level for Raffaele
Jerusalmi, Chief Executive Of?cer of Borsa Italiana and Director of Capital
Markets, in greater detail. His salary has been increased to €480,000 to re?ect
the growing breadth and complexity of Mr Jerusalmi’s role. Further details are
set out in the Annual Report on Remuneration. These increases took effect
from 1 April 2014.
Concluding remarks
The Committee would like to thank all of our shareholders who took time
to provide feedback on our proposed remuneration arrangements for
2014 onwards.
I would also like to extend a warm welcome to Sherry Coutu who has recently
joined the Remuneration Committee after the end of FY13/14.
At the forthcoming AGM, shareholders will be provided with three separate
votes relating to remuneration matters:
1. Vote on the new Remuneration Policy Report, which is forward looking
– this is a binding vote.
2. Vote on the FY13/14 Annual Report on Remuneration – in line with the
regulations, this is an advisory vote.
3. Approval of the new 2014 LTIP as the Group’s current LTIP will expire in
July 2014.
The Committee has looked to ensure the Group’s approach to remuneration
takes into account best practice developments and market trends in the
?nancial services sectors and wider market while continuing to support the
commercial needs of the Group and the interests of shareholders. We hope
that you are able to support these proposals at the AGM.
Robert Webb
Chairman of the Remuneration Committee
Incentive review
In 2013, we committed to reviewing our remuneration framework, including
our Group’s LTIP which is due for renewal in July this year. During the past
year the Committee has undertaken a comprehensive assessment of our
remuneration structure to ensure it continues to support the Group’s strategic
priorities. As part of this process the Committee evaluated the arrangements
against evolving practice. As a result of this assessment, we are making a
number of changes to our remuneration framework. However, the overall
incentive opportunity has not increased.
The key changes are as follows:
— Simpli?cation of arrangements by removing the voluntary matching
element and providing one LTIP in future award cycles
— Introduction of a compulsory deferral of 50 per cent of the annual
bonus for the ?nancial year ending 31 December 2014 onwards
— Reduction in the threshold level of vesting under the LTIP from 30 per
cent to 25 per cent of the maximum
— Introduction of malus and clawback provisions on future bonus
and LTIP awards
— Alignment of good leaver policy with best practice
— Increase in the minimum shareholding requirement
The Group continues to focus on integrating our strategic acquisitions,
building on our increasingly diverse world class assets and working
in partnership with our customers to deliver service and product
innovation, all of which will contribute towards delivery of pro?table
growth. Subsequently, the Committee has concluded that EPS and TSR
remain the most suitable performance metrics for long-term awards.
As part of the review, the Committee consulted with shareholders throughout
the process and took their feedback into account. The overall changes have
been widely supported by our major shareholders.
Change in financial year end
As announced on 27 March 2014, the Group intends to migrate its ?nancial
year to align with the calendar year from 1 January 2015. This change
will result in a truncated ?nancial year in 2014 (i.e. from 1 April 2014 to
70 Governance
Directors’ Remuneration Report
Statement by the Chairman of the Remuneration Committee
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Summary of key Executive remuneration decisions (Audited)
Role Chief Executive Of?cer Chief Financial Of?cer
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
Name Xavier Rolet David Warren Raffaele Jerusalmi
Previous salary
1
(FY13/14)
£705,000 £425,000 €435,000
Annual salary with
effect from 1 April 2014
£733,000 (+4%) £425,000 (+0%) €480,000 (+10%)
Max. bonus opportunity
for FY2014
2
225% 200% 200%
FY2014 LTIP award
3,4,5
(subject to performance)
200% of salary (£1,466,000) 176% of salary (£750,000) 181% of salary (£719,000)
FY13/14 bonus
% of salary
6
210% of salary 141% of salary 161% of salary
% of max 93% of maximum 71% of maximum 81% of maximum
amount £1,480,500 £600,000 €700,000
Notes:
1 FY13/14: refers to the period 1 April 2013 to 31 March 2014.
2 FY2014: refers to the period 1 April 2014 to 31 December 2014.
3 These proposed LTIP award levels assume grants to be made under the 2004 LTIP together with the additional opportunity to participate in a matching award.
4 Salary here refers to Annual salary with effect from 1 April 2014.
5 The Executive Director is also eligible (for this transition year) for a grant of matching shares up to 100 per cent of salary dependent on an investment of up to 50 per cent of their net salary.
6 Salary here refers to Previous salary (FY13/14).
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Governance Directors’ Remuneration Report
Annual bonus
Annual incentive subject to performance objectives
for the ?nancial year
Compulsory bonus deferral
Executives must defer 50 per cent of their bonus
for a period of two years
Performance Shares
Awards of Performance Shares which vest
subject to three-year performance targets
Further changes
Malus and clawback
provisions introduced
Reduced threshold
vesting for LTIP
Increase minimum
shareholding requirement
Alignment of good leaver
treatment with best practice
Annual bonus
Annual incentive subject to performance objectives
for the ?nancial year
Voluntary bonus deferral
Executives may invest all or part of their pre-tax bonus
(up to 50 per cent of net salary) into Shares
Matching Shares
Performance Shares
Deferred bonus attracts a performance related
Matching Share award
Awards of Performance Shares which vest subject
to three-year performance targets
London Stock Exchange Group plc Annual Report 2014
Remuneration Policy Report (pages 74-85)
This section contains the remuneration policy that we intend to
apply following the 2014 AGM. This report will be subject to a
binding shareholder vote at the 2014 AGM.
As the policy is forward looking, this section details how we intend
to operate remuneration arrangements in future years.
The new incentive structure has been implemented following
consultation with the Group’s major shareholders. The new structure
is simpler, and incorporates a number of elements from emerging
best practice.
New incentive structure for Executive Directors – overview
of future approach.
This report has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013, and relevant sections of the Listing Rules.
This year’s disclosure has been split into two sections:
Annual Report on Remuneration (pages 86-97)
This section sets out how remuneration arrangements have been
operated during the past year, and also provides details on how we
intend to operate our policy during the coming year. This report
will be put to an advisory vote at the 2014 AGM.
This section ?rstly explains how Executives have been paid during the last
?nancial year.
In previous years, the Group operated a slightly different incentive structure.
Subsequently, the awards referenced differ from the structure set out in the
forward-looking Remuneration Policy Report.
Previous incentive structure for Executive Directors – which will
no longer operate in future years.
In addition to presenting the Remuneration Policy Report for approval at
the AGM, the Group will also be presenting a new Long Term Incentive
Plan to shareholders for approval at the 2014 AGM. This new plan
replaces the previous plan that was approved by shareholders in 2004.
Further details regarding the operation of the new plan are set out in the
Notice of AGM.
Matching Shares and Performance Shares under the previous structure
were granted under the 2004 Long Term Incentive Plan. This plan
expires in July 2014 after which no further awards will be granted under
this arrangement.
As well as detailing the remuneration arrangements during the year,
the Annual Report on Remuneration also details how we intend to
operate the new incentive structure in the coming year.
72 Governance
Directors’ Remuneration Report continued
Introduction
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Change in financial year
As announced on 27 March 2014, the Group intends to migrate the Group’s
?nancial year to align with the calendar year from 1 January 2015. This
change will result in a truncated ?nancial year in 2014 (i.e. from 1 April 2014
to 31 December 2014). The Committee has taken this change into account
when making remuneration decisions relating to the bonus and LTIP awards.
The Committee has carefully considered the impact of the change in ?nancial
year on the Group’s remuneration framework and has concluded that:
Bonus
— For the ?nancial period ending 31 December 2014, the maximum bonus
opportunities will be pro-rated to re?ect the shortened period with
performance measured over the truncated ?nancial year.
— Any bonus payment would be determined by March 2015. Under the
new proposals, 50 per cent of any award would be deferred.
LTIP
— The vesting period for outstanding long-term share awards will remain
unaffected by the change, with no acceleration of vesting. In addition, no
changes to the existing performance metrics are proposed (including the
annualised growth targets).
— The TSR conditions for outstanding awards will continue to be measured
over three calendar years from the date of grant. In line with the
performance schedule, EPS would be measured over three ?nancial years
while seeking to ensure performance is assessed on a like-for-like basis.
— Long-term awards granted in 2012 will vest in June/July 2015 using
a proxy 12-month ?nancial year for 2014 as closing year for EPS
performance measure. Similarly for awards to be granted in 2015,
the Committee will use the same proxy 12-month ?nancial year for
2014 as the baseline year for the EPS measure.
— The Committee will assess the performance period for each LTIP grant to
ensure no participant is materially advantaged or disadvantaged from
the change in year end.
— For grants made prior to the 2014 AGM, Executive Directors will be invited
to participate in the voluntary matching scheme. The performance
measures for such Performance and Matching Shares will be the same
as for awards granted in previous years, as set out on page 85.
For details of legacy arrangements, please also refer to page 85.
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Future policy table for Executive Directors
A summary of the key elements of remuneration for
Executive Directors is shown in the table opposite.
This Remuneration Policy Report determined
by the Group’s Remuneration Committee
(“the Committee”), will, if it is approved by
shareholders at the 2014 AGM, be effective
from the date of its approval at that meeting.
The Group must attract and retain a high calibre
senior management team to ensure it is in a
position to deliver its business plans and maximise
returns for shareholders. The Group is committed
to paying for performance, rewarding the senior
management team only when its goals are
achieved. Each year the remuneration framework
and the packages of the Executive Directors
and members of the Executive Committee are
reviewed by the Committee to ensure that they
continue to achieve this objective. In doing so, the
Committee takes into account multiple reference
points when setting pay including companies in
the FTSE 31-100, the broader Financial Services
sector as well as other international exchanges.
The Committee has taken the following areas
into account in establishing the Group
remuneration policy:
— a focus on shareholder value;
— the continued expansion of the Group
beyond the UK;
— the need to attract and retain senior
management from the international
?nancial sector which requires
remuneration packages with a
suf?cient variable pay component;
— the Group’s intent to be mindful of best
practice as expressed by institutional
shareholders and their representative
bodies; and
— the relatively higher pro?le of the Group
compared with many other quoted companies
with similar market capitalisation.
ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Salary Provides a core element of remuneration which re?ects the
responsibilities of the role.
Enables the recruitment and retention of individuals of the
calibre required to execute the Group’s strategy.
Base salaries are normally reviewed annually by taking
into account a range of factors, including:
— size and scope of the role;
— skills and experience of the individual;
— market competitiveness/relative positioning;
— performance of the Group and of the individual;
— wider market and economic conditions; and
— level of increases being made across the Group.
Any changes are normally effective from 1 April
each year.
There is no de?ned maximum salary.
Increases are determined based on the
factors described in the Operation column.
The Committee’s normal approach is to
initially consider increases within the range
awarded to other employees. More
signi?cant increases may be awarded in
certain circumstances, such as where there
is a signi?cant change in the scale, scope or
responsibility of a role, development within
a role and/or signi?cant market movement.
The annual base salaries in FY13/14 and
FY2014 for each Executive Director are set
out in the Annual Report on Remuneration.
n/a
Benefits
Provide local market competitive bene?ts
and support the wellbeing of employees.
A ?exible bene?ts plan is offered, in which individuals
have certain core bene?ts (such as private medical, life
assurance, income protection and, additionally in Italy
only, disability, accident, car, fuel allowance and luncheon
vouchers) together with (in the UK) a taxable cash
allowance which can be spent on elective bene?ts
(such as additional medical, life or dental cover).
A chauffeur-driven motor car may also be provided for
Executive Directors where appropriate.
Due to the high pro?le of the Group, the Committee
reserves the right to provide our Executives with the
appropriate level of security arrangements to allow them
to perform their duties in the safest possible conditions.
Bene?ts are reviewed periodically to ensure they remain
affordable and competitive. The Committee retains the
discretion to provide reasonable additional bene?ts
as appropriate – for example, relocation and other
allowances including expatriate assistance, housing and
school fees for a ?nite period, tax preparation and ?ling
assistance and ?ights back to the home country for the
Executive and his family. Repatriation costs are met by
the Company if employment is terminated by the
Company, other than for just cause.
Where necessary any bene?ts may be grossed up
for taxes.
Executives are eligible to participate in the Group’s
HMRC-approved Save As You Earn Option Scheme
(or international equivalent) on the same basis as
other employees.
Executive Directors are covered by the Directors’ and
Of?cers’ insurance and indemni?cation.
There is no de?ned maximum. Bene?ts
plans are set at (what are in the Committee’s
opinion) reasonable levels in order to be
market competitive for their local
jurisdiction and are dependent on individual
circumstances.
Participation in the Save As You Earn
Option Scheme (or international equivalent)
is capped at the same level as all other
participants, which is determined by the
Company within the parameters of
applicable legislation.
n/a
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ELEMENT PURPOSE AND LINK
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OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Salary Provides a core element of remuneration which re?ects the
responsibilities of the role.
Enables the recruitment and retention of individuals of the
calibre required to execute the Group’s strategy.
Base salaries are normally reviewed annually by taking
into account a range of factors, including:
— size and scope of the role;
— skills and experience of the individual;
— market competitiveness/relative positioning;
— performance of the Group and of the individual;
— wider market and economic conditions; and
— level of increases being made across the Group.
Any changes are normally effective from 1 April
each year.
There is no de?ned maximum salary.
Increases are determined based on the
factors described in the Operation column.
The Committee’s normal approach is to
initially consider increases within the range
awarded to other employees. More
signi?cant increases may be awarded in
certain circumstances, such as where there
is a signi?cant change in the scale, scope or
responsibility of a role, development within
a role and/or signi?cant market movement.
The annual base salaries in FY13/14 and
FY2014 for each Executive Director are set
out in the Annual Report on Remuneration.
n/a
Benefits
Provide local market competitive bene?ts
and support the wellbeing of employees.
A ?exible bene?ts plan is offered, in which individuals
have certain core bene?ts (such as private medical, life
assurance, income protection and, additionally in Italy
only, disability, accident, car, fuel allowance and luncheon
vouchers) together with (in the UK) a taxable cash
allowance which can be spent on elective bene?ts
(such as additional medical, life or dental cover).
A chauffeur-driven motor car may also be provided for
Executive Directors where appropriate.
Due to the high pro?le of the Group, the Committee
reserves the right to provide our Executives with the
appropriate level of security arrangements to allow them
to perform their duties in the safest possible conditions.
Bene?ts are reviewed periodically to ensure they remain
affordable and competitive. The Committee retains the
discretion to provide reasonable additional bene?ts
as appropriate – for example, relocation and other
allowances including expatriate assistance, housing and
school fees for a ?nite period, tax preparation and ?ling
assistance and ?ights back to the home country for the
Executive and his family. Repatriation costs are met by
the Company if employment is terminated by the
Company, other than for just cause.
Where necessary any bene?ts may be grossed up
for taxes.
Executives are eligible to participate in the Group’s
HMRC-approved Save As You Earn Option Scheme
(or international equivalent) on the same basis as
other employees.
Executive Directors are covered by the Directors’ and
Of?cers’ insurance and indemni?cation.
There is no de?ned maximum. Bene?ts
plans are set at (what are in the Committee’s
opinion) reasonable levels in order to be
market competitive for their local
jurisdiction and are dependent on individual
circumstances.
Participation in the Save As You Earn
Option Scheme (or international equivalent)
is capped at the same level as all other
participants, which is determined by the
Company within the parameters of
applicable legislation.
n/a
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ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Retirement benefits Provide Executives with retirement bene?ts.
Support recruitment and retention of high calibre people.
Provision of annual pension allowance, invested in
the Company’s de?ned contribution plan or taken
as a cash allowance.
In certain jurisdictions, more bespoke pension
arrangements may be provided. In such circumstances,
the Committee will give appropriate consideration to local
employment legislation, market practices and the cost of
the arrangement.
The maximum annual pension
contribution/cash allowance is 25 per
cent of salary (except where determined
by local market practice).
In Italy, Mr Jerusalmi accrues mandatory
state pension (INPS) bene?ts which are
calculated on salary, bene?ts and annual
bonus. Actual bene?t due at retirement is
set out by the applicable Italian legislation
in force from time to time. Under the
Italian Trattamento di Fine Rapporto (TFR),
he receives contributions which are funded
by the Group at a rate ?xed by local law
and which are paid to Mr Jerusalmi’s
private pension plan. TFR is calculated
on salary, capped bene?ts, annual bonus
and LTIP.
n/a
Annual bonus
Rewards annual performance against challenging ?nancial,
strategic and individual targets linked to Group strategy.
Deferral reinforces retention and enhances alignment with
shareholders by encouraging longer term focus and
sustainable performance.
The Group operates a Group-wide bonus pool which is
funded based on the achievement of ?nancial and
strategic goals of the Group. Allocations to individual
Executive Directors are made from this pool based on the
Committee’s assessment of their individual performance,
taking into account the Group’s ?nancial and strategic
performance and the achievement of any individual
objectives related to their role.
Performance targets are reviewed and set by the
Committee at the beginning of each performance year.
Awards are determined by the Committee after the
year end based upon the actual performance against
these targets.
The Committee applies judgement where necessary to
ensure approved pay-out levels are re?ective of actual,
overall performance.
— 50 per cent of the annual bonus will be subject
to mandatory deferral, normally for a period of
two years.
— Until the minimum shareholding requirement (see
below) is reached, bonus deferral will be 100 per cent
into shares. Once the level of minimum shareholding
has been reached, individuals will be able to defer
100 per cent into shares, 50 per cent into shares/50
per cent into cash or 100 per cent into cash.
— Dividends (or equivalents) may be paid in respect
of deferred shares on vesting.
— Deferred awards are subject to malus provisions as
described below. Paid bonuses and vested awards are
subject to clawback as described below.
Maximum annual bonus opportunity of
225 per cent of salary for CEO and 200
per cent of salary for other Executive
Directors for maximum performance.
Based on a combination of ?nancial
(e.g. adjusted operating pro?t), strategic and
individual performance targets. Strategic
objectives include key targets under the
strategic pillars of building best in class
capabilities, creating a global business and
developing opportunities. These strategic
objectives also impact ?nancial results in
the medium-term.
The Committee will set the detail and mix
of performance measures, targets and
weighting based on the strategic objectives
at the start of each year. At least 50 per
cent of the targets relating to the annual
bonus pool in any year will be subject to
?nancial measures.
No bonuses are paid for below threshold
performance. The Committee may award
any amount between zero and 100 per cent
of the maximum opportunity.
The performance measures are applied in
the performance year only.
Due to the ?nancial year end change,
FY2014 will be based on a nine-month
performance period from 1 April 2014 to
31 December 2014, followed by a calendar
year from 1 January to 31 December from
2015 onwards. Further details about the
impact of the ?nancial year-end change
can be found on page 73.
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ELEMENT PURPOSE AND LINK
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OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Retirement benefits Provide Executives with retirement bene?ts.
Support recruitment and retention of high calibre people.
Provision of annual pension allowance, invested in
the Company’s de?ned contribution plan or taken
as a cash allowance.
In certain jurisdictions, more bespoke pension
arrangements may be provided. In such circumstances,
the Committee will give appropriate consideration to local
employment legislation, market practices and the cost of
the arrangement.
The maximum annual pension
contribution/cash allowance is 25 per
cent of salary (except where determined
by local market practice).
In Italy, Mr Jerusalmi accrues mandatory
state pension (INPS) bene?ts which are
calculated on salary, bene?ts and annual
bonus. Actual bene?t due at retirement is
set out by the applicable Italian legislation
in force from time to time. Under the
Italian Trattamento di Fine Rapporto (TFR),
he receives contributions which are funded
by the Group at a rate ?xed by local law
and which are paid to Mr Jerusalmi’s
private pension plan. TFR is calculated
on salary, capped bene?ts, annual bonus
and LTIP.
n/a
Annual bonus
Rewards annual performance against challenging ?nancial,
strategic and individual targets linked to Group strategy.
Deferral reinforces retention and enhances alignment with
shareholders by encouraging longer term focus and
sustainable performance.
The Group operates a Group-wide bonus pool which is
funded based on the achievement of ?nancial and
strategic goals of the Group. Allocations to individual
Executive Directors are made from this pool based on the
Committee’s assessment of their individual performance,
taking into account the Group’s ?nancial and strategic
performance and the achievement of any individual
objectives related to their role.
Performance targets are reviewed and set by the
Committee at the beginning of each performance year.
Awards are determined by the Committee after the
year end based upon the actual performance against
these targets.
The Committee applies judgement where necessary to
ensure approved pay-out levels are re?ective of actual,
overall performance.
— 50 per cent of the annual bonus will be subject
to mandatory deferral, normally for a period of
two years.
— Until the minimum shareholding requirement (see
below) is reached, bonus deferral will be 100 per cent
into shares. Once the level of minimum shareholding
has been reached, individuals will be able to defer
100 per cent into shares, 50 per cent into shares/50
per cent into cash or 100 per cent into cash.
— Dividends (or equivalents) may be paid in respect
of deferred shares on vesting.
— Deferred awards are subject to malus provisions as
described below. Paid bonuses and vested awards are
subject to clawback as described below.
Maximum annual bonus opportunity of
225 per cent of salary for CEO and 200
per cent of salary for other Executive
Directors for maximum performance.
Based on a combination of ?nancial
(e.g. adjusted operating pro?t), strategic and
individual performance targets. Strategic
objectives include key targets under the
strategic pillars of building best in class
capabilities, creating a global business and
developing opportunities. These strategic
objectives also impact ?nancial results in
the medium-term.
The Committee will set the detail and mix
of performance measures, targets and
weighting based on the strategic objectives
at the start of each year. At least 50 per
cent of the targets relating to the annual
bonus pool in any year will be subject to
?nancial measures.
No bonuses are paid for below threshold
performance. The Committee may award
any amount between zero and 100 per cent
of the maximum opportunity.
The performance measures are applied in
the performance year only.
Due to the ?nancial year end change,
FY2014 will be based on a nine-month
performance period from 1 April 2014 to
31 December 2014, followed by a calendar
year from 1 January to 31 December from
2015 onwards. Further details about the
impact of the ?nancial year-end change
can be found on page 73.
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ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
LTIP (Long Term
Incentive Plan) 2014
Incentivises performance over the longer term through the
award of performance related shares.
Aligns reward with long-term, sustainable Group performance
and a focus on shareholder value.
— Under the (new) LTIP 2014, which is being put to
shareholders for approval at the AGM in 2014,
awards of shares (or equivalent) are granted
annually subject to performance conditions.
— Awards normally vest subject to performance targets
assessed over a performance period, normally of
at least three ?nancial years. The Committee has
discretion to set different performance periods if
it considers them to be appropriate.
— The Committee shall determine the extent to
which the performance measures have been
met. The Committee may make adjustments to
performance targets if an event occurs that the
Committee determines that an adjustment is
appropriate. The performance targets will be at
least as challenging as the ones originally set.
— Dividends (or equivalents) may be paid on vesting.
Unvested awards are subject to a malus provision
and vested awards are subject to clawback,
as described on the following page.
— Details on the impact of the ?nancial year end
change on the proposed LTIP can be found on
page 73.
Although there is a facility for maximum
awards of up to 400 per cent of salary under
the plan rules in exceptional cases, it is
expected that awards under this plan will
normally be up to 300 per cent of salary.
The Committee determines performance
targets each year to ensure that the targets
are stretching and support value creation for
shareholders while remaining motivational
for management.
Vesting of awards is subject to achievement
of total shareholder return and ?nancial
performance targets. For initial grants under
this new LTIP, awards are subject to absolute
TSR and adjusted EPS measures.
Measures will normally be equally weighted
but in any event, any total shareholder
return element will represent at least 50 per
cent of the award.
For each performance element,
achievement of the threshold performance
level will result in no more than 25 per cent
of the maximum award paying out. For
achievement of the maximum performance
level, 100 per cent of the maximum pays
out. Normally, there is straight-line vesting
between these points.
Share ownership
Ensures alignment with shareholders’ interests. Executive Directors are expected to build up share ownership over a period of ?ve years and maintain holdings of at least 2x base salary.
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TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
LTIP (Long Term
Incentive Plan) 2014
Incentivises performance over the longer term through the
award of performance related shares.
Aligns reward with long-term, sustainable Group performance
and a focus on shareholder value.
— Under the (new) LTIP 2014, which is being put to
shareholders for approval at the AGM in 2014,
awards of shares (or equivalent) are granted
annually subject to performance conditions.
— Awards normally vest subject to performance targets
assessed over a performance period, normally of
at least three ?nancial years. The Committee has
discretion to set different performance periods if
it considers them to be appropriate.
— The Committee shall determine the extent to
which the performance measures have been
met. The Committee may make adjustments to
performance targets if an event occurs that the
Committee determines that an adjustment is
appropriate. The performance targets will be at
least as challenging as the ones originally set.
— Dividends (or equivalents) may be paid on vesting.
Unvested awards are subject to a malus provision
and vested awards are subject to clawback,
as described on the following page.
— Details on the impact of the ?nancial year end
change on the proposed LTIP can be found on
page 73.
Although there is a facility for maximum
awards of up to 400 per cent of salary under
the plan rules in exceptional cases, it is
expected that awards under this plan will
normally be up to 300 per cent of salary.
The Committee determines performance
targets each year to ensure that the targets
are stretching and support value creation for
shareholders while remaining motivational
for management.
Vesting of awards is subject to achievement
of total shareholder return and ?nancial
performance targets. For initial grants under
this new LTIP, awards are subject to absolute
TSR and adjusted EPS measures.
Measures will normally be equally weighted
but in any event, any total shareholder
return element will represent at least 50 per
cent of the award.
For each performance element,
achievement of the threshold performance
level will result in no more than 25 per cent
of the maximum award paying out. For
achievement of the maximum performance
level, 100 per cent of the maximum pays
out. Normally, there is straight-line vesting
between these points.
Share ownership
Ensures alignment with shareholders’ interests. Executive Directors are expected to build up share ownership over a period of ?ve years and maintain holdings of at least 2x base salary.
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— Recognising that the Group competes for talent in the international
?nancial services sector, on an exceptional basis, the Committee has the
ability to include other elements of pay which it feels is appropriate taking
into account the speci?c commercial circumstances (e.g. for an interim
appointment). However this would remain subject to the limit on variable
remuneration set out above. The rationale for any such component would
be appropriately disclosed.
— In addition, where an individual forfeits arrangements as a result of
appointment, the Committee may offer a buy-out, in such form as the
Committee considers appropriate taking into account all relevant factors
which may include the vehicle, expected value and timing of forfeited
opportunities. Any such buy-out will be limited to the commercial value
of payments and awards forfeited by the individual.
— Where an Executive Director is required to relocate from their home
location to take up their role, the Committee may provide reasonable
relocation assistance and other allowances including expatriate
assistance. Global relocation support (normally for up to ?ve years)
and any associated costs or bene?ts (including but not limited to
housing, school fees, tax preparation and ?ling assistance and ?ights
back to the home country) may also be provided if business needs
require it. Should the Executive’s employment be terminated without
cause by the Group, repatriation costs will be met by the Group.
— In the event that an internal candidate was promoted to the Board,
legacy terms and conditions would normally be honoured, including
pension entitlements and any outstanding incentive awards.
The remuneration package for a newly appointed Non-Executive Director
would normally be in line with the structure set out in the policy table for
Non-Executive Directors (see page 83).
Service contracts and payments for departing Directors
Policy in respect of new appointments
The Group’s current policy is that Executive Directors’ service agreements
should have notice periods that are no longer than 12 months. The Group
may terminate an Executive Director’s service agreement by making a
payment in lieu of notice of a sum equal to 12 months’ salary, pension,
?exible bene?ts allowance, life and medical insurance (but excluding
bonus and share incentives) plus any accrued unused holiday entitlement.
Consideration will be given to appropriate mitigation terms to reduce
payments in lieu of notice made on termination in the event of the Executive
Director commencing alternative employment, being appointed as a
Non-Executive Director or providing services pursuant to a consultancy
agreement in the 12 months following the Executive Director’s departure.
The lawful termination mechanisms described above are without prejudice
to the Group’s ability in appropriate circumstances to terminate in breach of
the notice period referred to above, and thereby to be liable for damages to
the Executive Director. Liquidated damages clauses are not used. The Group
may pay the Executive Director’s reasonable legal fees for receiving advice in
connection with the termination of their employment.
In the event of termination by the Group, each Executive Director may
have an entitlement to compensation in respect of his statutory rights
under employment protection legislation in the UK and potentially
elsewhere. Directors’ and Of?cers’ liability insurance and an indemnity
to the fullest extent permitted by the law and the Group’s Articles of
Association are provided to the Executive Directors for the duration of
their employment and for a minimum of seven years following termination.
Notes to the Policy Table
Selection of performance measures
Performance targets are set by the Committee to be both stretching and
achievable, taking into account the Group’s strategic priorities and the
economic landscape.
The performance measures that are used for our annual bonus and Long
Term Incentive Plans have been chosen to support the Group’s strategy.
For the annual bonus plan, the Committee continues to believe that it is
appropriate to use a balance between ?nancial targets, strategic objectives
and individual performance objectives.
The Committee considers that the measures to be used for the LTIP, i.e. TSR
and adjusted EPS, are currently the most appropriate measures of long-term
performance for the Group.
Malus and clawback provisions
A malus provision applies to awards granted under the new LTIP, and to
unvested awards under the Deferred Bonus Plan. This would allow the
Committee in its absolute discretion to determine, at any time prior to
the vesting of an award, to reduce, cancel or impose further conditions in
certain circumstances, including (i) where there is a material misstatement
or restatement of the results of the Group in its audited accounts, (ii) the
negligence, fraud or serious misconduct of the individual which results in
signi?cant reputational damage to the Group or which has a material adverse
effect on the ?nancial position of the Group or the business opportunities of
the Group, or (iii) if the individual is a member of a company in the Group
which suffers signi?cant reputational damage or material adverse effect on
its ?nancial position or on its business opportunities.
A clawback provision applies to vested awards granted under the new LTIP,
vested awards under the Deferred Bonus Plan and annual bonuses paid
previously. This would allow the Committee in its absolute discretion to claw
back from individuals some or all of the vested awards or paid bonus in
certain circumstances, including (i) if there is a material misstatement or
restatement of the results of the Group in its audited accounts, (ii) the
negligence, fraud or serious misconduct of the individual which results in
signi?cant reputational damage to the Group or a material adverse effect on
the ?nancial position of the Group or the business opportunities of the Group,
or (iii) if the individual is a member of a company in the Group which suffers
signi?cant reputational damage or material adverse effect on its ?nancial
position or on its business opportunities. Clawback will normally apply for a
period of three years following vesting of shares and/ or payment of bonus,
unless the Committee determines otherwise.
Recruitment policy
When determining the remuneration package for a newly appointed Executive
Director, the Committee would seek to apply the following principles:
— The package should be market competitive to facilitate the recruitment
of individuals of suf?cient calibre required by the Group. Consistent with
the UK Corporate Governance Code, the Committee would intend to pay
no more than it believes is necessary to secure the required talent.
— The ongoing remuneration package would normally include the key
elements on the same terms as those set out in the policy table for
Executive Directors.
— The maximum level of variable remuneration which may be awarded on
recruitment (excluding any buy-outs referred to below) is 625 per cent
of salary. Incentive awards made in the ?rst year of appointment may
be subject to different performance measures and targets appropriate
to the newly recruited Executive Director.
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Detailed share plan provisions
Share awards are subject to the terms of the relevant plan rules under which
the award has been granted. The Committee may adjust or amend awards
only in accordance with the provisions of the plan rules. This includes making
adjustments to awards to re?ect certain corporate events, including a
variation in the Company’s share capital, a demerger or a special dividend.
In change of control circumstances, all LTIP awards will normally vest on an
accelerated basis subject to the extent that the performance conditions are
satis?ed, and, unless the Committee determines otherwise, time pro-rating.
Deferred Bonus awards will normally vest in full. The Committee may also
allow some or all of an award to be exchanged if not yet vested.
Individual terms
Xavier Rolet entered into a service agreement with the Group on 25 February
2009 and was appointed with effect from 16 March 2009. Xavier Rolet’s
service agreement can be terminated by either party giving not less than
12 months’ notice. Alternatively, the Group may terminate the contract by
making a payment in lieu of notice of a sum equal to 12 months’ salary,
pension, ?exible bene?ts allowance, life and private medical insurance
(but excluding bonus and share incentives) paid in a lump sum or, at the
Committee’s absolute discretion, paid in 12 equal monthly instalments from
the date of termination of the employment. Alternatively, the Group may in
its discretion continue to provide pension, life and private medical insurance
for the 12 months following termination. If the payment is made in
instalments and Mr Rolet commences alternative employment, is appointed
as a Non-Executive Director or provides services pursuant to a consultancy
agreement in the relevant period (of 12 months) following his departure from
the Group, the instalments will be reduced by one-twelfth of the annual
remuneration earned from the alternative employment, directorship or
consultancy. On termination (other than by reason of summary dismissal)
Mr Rolet will be eligible to receive a pro-rata bonus for the year in which his
employment is terminated subject to company and individual performance.
David Warren entered into a service agreement with the Group on 11 June
2012 and was appointed with effect from 2 July 2012. David Warren’s service
agreement may be terminated by either party giving at least 12 months’
notice. Alternatively, the Group may terminate the contract by payment in lieu
of notice of a sum equal to 12 months’ salary, pension, ?exible bene?ts
allowance, life and private medical insurance (but excluding bonus and share
incentives). Any payment in lieu of notice will be paid in 12 equal monthly
instalments from the date of termination of the employment. Alternatively,
the Group may in its discretion continue to provide pension and life and private
medical insurance for the 12 months following termination. Should Mr Warren
commence alternative employment, be appointed as a Non-Executive Director
or provide services pursuant to a consultancy agreement in the relevant period
(of 12 months) following his departure from the Group, the instalments will
be reduced by one-twelfth of the annual remuneration earned from the
alternative employment, directorship or consultancy. Payments of the
instalments may be required to be deferred until six months after termination
by US tax rules applying to Mr Warren. To the extent that any payment or
bene?ts payable to Mr Warren under his service agreement or under any
bonus or share incentive plan would be subject to US excise tax, the payments
and bene?ts may be reduced if this would result in Mr Warren receiving a
greater after tax amount than if the bene?ts were not reduced. On termination
(other than by reason of summary dismissal) Mr Warren will be eligible to
receive a pro-rata bonus for the year in which his employment is terminated
subject to company and individual performance.
The Committee considers that this is consistent with current best practice
and this approach will generally be adopted for new appointments. Where
appropriate and when recruiting non-UK based Directors, the Committee may
agree different terms based on local legal requirements or market practice.
Treatment of variable incentives
Annual bonus Individuals may be considered for an annual bonus
in respect of the period prior to cessation. Any award
would be at the discretion of the Committee, subject to
the Executive Director’s performance and period
of employment.
Deferred Bonus
Plan 2014
For good leavers, awards vest at the normal vesting date,
although the Committee may determine that awards
vest on cessation of employment. The award will usually
vest in full or on a pro-rated basis at the Committee’s
discretion. Good leavers are those who cease to be an
employee of a member of the Group by reason of death,
injury, disability, ill-health, redundancy, the sale of the
individual’s employing business or the transfer of the
Company out of the Group, or any other reason which
the Committee decides in its discretion, having regard
to a range of relevant factors including the Executive
Director’s performance, length of service and
circumstances of their departure.
Where an individual is not considered to be a good
leaver, unvested awards will lapse. Where an individual
is summarily dismissed, all his awards will lapse.
Deferred awards are subject to malus and vested awards
are subject to clawback as detailed under page 80.
Long-Term Incentive
Plan 2014
For good leavers, awards will normally vest at the
normal vesting date and following the end of the
performance period, unless the Committee determines
that awards should vest following cessation of
employment. Vesting will be subject to performance
and unless the Committee determines otherwise
(or that another basis of reduction is appropriate)
pro-rated for time in employment. Good leavers are
those who cease to be an employee of a member of the
Group by reason of death, injury, disability, ill-health,
redundancy, and the sale of the individual’s employing
business or transfer of the Company out of the Group,
or any other reason which the Committee decides in its
discretion, having regard to a range of relevant factors
including the Executive Director’s performance, length
of service and circumstances of their departure.
Where an individual is not considered to be a good
leaver, unvested awards will lapse.
Unvested awards are subject to malus and vested awards
are subject to clawback as detailed under page 80.
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Other senior employees participate in long-term incentive plans on
similar terms to Executive Directors but with reduced award levels for
less senior roles.
The malus provision on unvested awards applies automatically to all awards
granted under the Deferred Bonus Plan and the 2014 LTIP. However, the
Committee will have the discretion to determine at the grant date whether
the clawback rule on paid bonuses and vested awards will apply to awards
granted to participants other than Executive Directors. Below the Board,
LTIP participants (excluding Executive Directors) may continue to be eligible
for matching share awards if they acquire investment shares up to 50 per
cent of their net salary at or around the time the award is granted.
In setting remuneration for Executive Directors, the Committee considers
the overall approach to reward employees across the Group taking into
account the scale, scope or responsibility of the role, development within
a role and/or signi?cant market movement.
Salary increases of Executive Directors in percentage terms are in line
with those of employees in their local jurisdictions. The Committee does
not formally consult directly with employees on Executive Directors’ pay.
The Committee receives ongoing regulatory updates and information on
external market practices from its independent external advisers which
provide additional context for decisions.
Consideration of shareholders’ views
The Committee is mindful of shareholder views when setting and evaluating
ongoing remuneration principles, and commits to consulting with
shareholders prior to any signi?cant changes to the remuneration policy.
Shareholders have been particularly supportive of the simpli?cation of
the Group incentive arrangements without increasing the overall
incentive opportunities.
They have welcomed the compulsory deferral of 50 per cent of the bonus
into shares until the increased minimum shareholding requirement is met.
The Committee has taken shareholders’ feedback into account and proposed
that in addition to the malus provision applied to any bonus amount deferred,
a clawback provision should apply to the entire bonus.
The Committee is incorporating similar malus and clawback provisions
for awards under the new LTIP.
Raffaele Jerusalmi entered into a service agreement with Borsa Italiana on
1 October 2001, amended on 3 May 2011, and a service agreement with LSEG
Holdings (Italy) on 3 May 2011, which re?ects his period of continuous service
from 1 October 2001. On 1 April 2013, Raffaele Jerusalmi’s employment
contract transferred from LSEG Holdings (Italy) to LSEG Holdings Italia S.p.A.
Raffaele Jerusalmi’s employment contracts with Borsa Italiana and LSEG
Holdings Italia S.p.A. expressly state that no collective bargaining agreements
apply to his employment and accordingly, the terms applying to the
termination of his employment are governed by Italian law. If Raffaele
Jerusalmi is dismissed, his notice period will be equal to eight months based
on continuous service since 1 October 2001 until 1 October 2016 and equal
to nine months from 2 October 2016 onwards. If Raffaele Jerusalmi resigns,
he is required to give three months’ notice. On termination of either
employment for any reason, Raffaele Jerusalmi is entitled to severance
payments under Italian law equal to: (i) Trattamento di Fine Rapporto (TFR)
which Raffaele Jerusalmi has elected to transfer to his private pension plan
on a monthly basis since August 2007. He will therefore not be entitled to
further TFR bene?ts post-employment. The TFR contributions currently
equate to 7.4 per cent (including solidarity tax at the current rate of 0.49 per
cent, which does not count towards Raffaele Jerusalmi’s contributions to his
private pension plan) of base salary, bene?ts, annual bonus and LTIP paid to
Raffaele Jerusalmi during his employment; (ii) pro-rated supplementary
monthly payments (the annual salary is normally paid in 12 instalments plus
two supplementary monthly payments); and (iii) a payment in lieu of
untaken holidays, if any. Where no just cause for termination exists, a
payment in lieu of notice is payable if the employment is terminated
with immediate effect. The payment in lieu of notice is in addition to the
payments at (i), (ii) and (iii) above and is equal to the overall salary due to
Raffaele Jerusalmi during the notice period. For these purposes, overall salary
includes base salary, average of any variable pay and TFR contributions paid
during the last 36 months of the employment, and bene?ts in kind.
Remuneration policy for other employees and consideration of
wider employee remuneration
The remuneration policy for senior Executives and other employees is
determined based on similar principles to Executive Directors. For roles below
the main Board, the exact structure and balance are tailored based on various
factors including the scale, scope or responsibility of the role, development
within a role and/or signi?cant market movement. The Committee reviews
and comments on the salary, bonus and LTIP awards of the senior Executives
immediately below Board level and approves the overall design and
distribution of incentive awards available to all employees, including
share-based plans.
The approach in respect of base salary and bene?ts is generally consistent
across the organisation. Executive Directors’ and other senior managers’
remuneration includes a greater proportion of performance related pay when
compared to other employees. The Committee considers this is essential to
differentiate levels of responsibility and align pay to sustainable long-term
performance and shareholders’ interests.
All employees are eligible to participate in the annual bonus plan which
is subject to similar metrics to those used for the Executive Directors.
Some Sales employees are eligible to participate in commission plans rather
than the annual bonus plan. Opportunities vary by organisational level.
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Policy for Non-Executive Directors
Approach to setting fees Basis of fees Other items
The fees for Non-Executive Directors are set at a level
which is considered appropriate to attract individuals
with the necessary experience and ability to make an
important contribution to the Group’s affairs.
The Chairman’s fee is determined by the
Remuneration Committee, and the Board is
responsible for determining all other Non-Executive
Director fees.
Fees are reviewed periodically to ensure they remain
appropriate. The Committee retains the ?exibility
to increase, adjust and make one-off payments to
Non-Executive Directors based on their remit.
Fees are set taking into account the level of
responsibility, relevant experience and specialist
knowledge of each Non-Executive Director and fees
at other companies of a similar size and complexity.
The aggregate fees payable to all Non-Executives
combined (excluding the Chairman and excluding
fees paid for any appointments on subsidiary
boards) are capped as set out in the Group’s Articles
of Association as they may be amended by a
resolution of shareholders from time to time. The
current limit on the aggregate fees that are payable is
£1,500,000 per ?nancial year.
Details of current fees are set out on page 91.
Non-Executive Directors receive a basic annual
fee with additional fees payable for further Board
and Group responsibilities such as committee
chairmanship or membership, subsidiary board
or committee membership and Senior
Independent Director.
The Non-Executive Chairman of the Group receives
an all-inclusive fee for the role.
Fees are neither performance-related nor pensionable.
Non-Executive Directors are not eligible to
participate in the annual bonus or LTIP plans.
Non-Executive Directors do not receive any bene?ts
or entitlements other than their fees and reasonable
expenses. The Chairman receives the use of a
chauffeur driven motor car for travel to the Group’s
of?ces and business purposes.
Travel and other appropriate expenses with associated
taxes (including fees incurred in obtaining professional
advice in the furtherance of their duties) incurred in
the course of performing their duties are reimbursed
to Non-Executive Directors.
Non-Executive Directors are covered by the Directors’
and Of?cers’ insurance and indemni?cation.
Non-Executive Directors have letters of appointment with no notice period except for the Group Chairman who has a notice period of six months unless he is
not re-elected by shareholders in which case his appointment will terminate immediately. The Non-Executive Directors’ appointments are for an initial period
of three years from the date of appointment and are also subject to re-election by shareholders.
Amendments to the Remuneration Policy Report
The Committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative purposes or to take account
of a change in legislation) without obtaining shareholder approval for that amendment.
The Committee remains mindful that regulation of companies in the ?nancial services sector continues to evolve. The Committee recognises that remuneration
arrangements may need to be amended in order to comply with any new regulations which become applicable to the Group. The Committee reserves the right
to make changes to the Policy described above in order to comply with any such regulatory requirements which apply to the Group including any changes
required under the UK Corporate Governance Code. Where this results in a major structural change, the Committee would expect to present a revised policy to
shareholders for approval at the following AGM.
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5,000
4,000
3,000
2,000
1,000
0
Fixed Mid Max Fixed Mid Max Fixed Mid Max
?Fixed remuneration ?Annual variable remuneration ?Long term remuneration
Xavier Rolet
£’000
David Warren
£’000
Raffaele Jerusalmi
£’000
100%
976
2,901
4,825
747
1,810
2,872
792
1,783
2,775
34%
28%
38%
20%
34%
46%
100% 41%
23%
35%
44%
30%
26% 100% 44%
22%
33%
43%
29%
29%
London Stock Exchange Group plc Annual Report 2014
Illustration of the application of the remuneration policy for Executive Directors
The charts below illustrate how much the current Executive Directors could receive under different scenarios in the ?rst year of the policy, assuming a constant
share price. Note that London Stock Exchange Group plc does not have a stated ‘target’ level for bonus and share awards, so we have assumed 50 per cent of
maximum awards to illustrate a mid-range scenario.
Element of remuneration Detail of assumptions
Fixed remuneration This comprises:
— Base salary with effect from 1 April 2014
— Bene?ts paid in 2013/14 as shown in the single ?gure table in the Annual Remuneration Report
— Pension
Annual Bonus Assumes maximum opportunity of 225 per cent of salary for CEO and 200 per cent of salary for other Executive Directors
For mid-range scenario: assumes payment of 50 per cent of the maximum opportunity
For maximum: assumes payment of 100 per cent of the maximum opportunity
Long Term Incentive Plan Assumes maximum opportunity of 300 per cent of salary in conditional shares
For mid-range scenario: assumes 50 per cent of the maximum opportunity
For maximum: assumes vesting of 100 per cent of the maximum opportunity
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Legacy arrangements
The Committee may make any remuneration payments and payments for loss of of?ce (including exercising any discretions available to it in connection with
such payments) where the terms of the payment were agreed/granted (i) before the policy came into effect or (ii) at a time when the relevant individual was
not a Director of the Group and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Group.
Executive Directors have awards outstanding under the Long Term Incentive Plan 2004 which expires in July 2014.
Element Summary
Long Term Incentive
Plan 2004
The 2004 LTIP plan has two elements: a conditional award of Performance Shares and an award of Matching Shares linked
to investment by Executive Directors of up to 50 per cent of net salary funded from their bonus payment. The pre-tax value
of the amount deferred is matched on a 2:1 basis subject to the standard LTIP performance targets as speci?ed below
(“Matching Shares”).
Performance Shares and Matching Shares are subject to the Group’s absolute TSR (50 per cent) and adjusted EPS (50 per cent)
performance over a single three-year period (“the performance period”). For absolute TSR, the performance period started on
the date of grant and for adjusted EPS on the ?rst day of the ?nancial year in which the award is granted.
For absolute TSR, performance is calculated using a two-month average share price at the start and at the end of the performance
period to ensure any anomalous share price movements at these measurement points do not have a disproportionate effect on
the assessment of performance over the full three-year period. The Committee considers the use of both of these measures will
best align the interests of the Executive Directors with those of shareholders. Both absolute TSR and adjusted EPS measures are
independently veri?ed by Deloitte LLP.
The performance conditions and vesting schedule for awards granted in 2010, 2011, 2012 and 2013 are set out below. The same
targets also apply to awards granted prior to the date that the new LTIP Plan is approved at the July 2014 AGM.
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of relevant
element which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 30%
12% p.a. or more 16% p.a. or more 100%
Straight-line pro-rating applies between these points
Our policy is to grant awards on an annual cycle. Awards will normally vest three years after the grant date.
Details of how the Committee intends to measure performance for these awards to re?ect the change in the ?nancial year
are set out on page 90. The Committee may adjust or amend awards only in accordance with the provisions of the plan rules.
This includes making adjustments to awards to re?ect certain one-off events, including a variation in the Company’s share
capital, a demerger or a special dividend. In accordance with the plan rules, awards may be settled in cash rather than shares
where the Committee considers this appropriate.
For good leavers, awards vest to the extent that the performance conditions have been met. Good leavers are those who cease
to be an employee of a member of the Group by reason of death, injury, disability, ill-health, redundancy, and the sale of the
individual’s employing business or transfer of the Company out of the Group or any other reason which the Committee decides
in its discretion, having regard to a range of relevant factors including the Executive Director’s performance, length of service
and circumstances of their departure.
The number of shares which vest will be reduced on a time pro-rated basis to re?ect the period elapsed between grant and the
individual leaving. On retirement, awards continue to be subject to the LTIP until the end of the performance period and will vest
to the extent that the performance conditions have been satis?ed at the normal vesting date unless the Committee chooses to let
awards vest at the date of retirement, in which case vesting will depend on the satisfaction of the performance conditions and will
be subject to time pro-rating.
Where an individual is not considered to be a good leaver, awards will lapse. Where an individual is summarily dismissed, all their
awards will lapse.
In the event of a change of control, awards will vest subject to the achievement of the relevant performance conditions and unless
the Committee determines otherwise, on a time pro-rated basis.
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The annual report on remuneration sets out how the Group has applied its remuneration policy during FY13/14 and will be put to an advisory vote at the 2014
AGM. The information from this page to page 97 has been audited where required under the regulations and is indicated as audited where applicable.
Single total figure of remuneration for Executive Directors (Audited)
Single total ?gure
of remuneration
Xavier Rolet David Warren
4
Raffaele Jerusalmi
9
FY13/14
£000
% of
total
FY12/13
£000
% of
total
FY13/14
£000
% of
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FY12/13
£000
% of
total
FY13/14
£000
% of
total
FY12/13
£000
% of
total
Fixed pay
Salary 705 675 425 319 360 351
Flexible bene?ts
allowance 20 20 20 15
Bene?ts 40
3
39 196
5
187 26
6
23
Pension 176
1
169 106
1
80 219
7
211
Other 150
8
99
941 15% 903 15% 747 55% 601 53% 755 33% 684 28%
Pay for
performance
Annual bonus 1,481 1,350 600 525 579 558
Long term
incentives
2
:
Performance shares 2,660 2,320 – – 985 1,160
Matching shares 1,212 1,442 – – – –
5,353 85% 5,112 85% 600 45% 525 47% 1,564 67% 1,718 72%
Total remuneration 6,294 6,015 1,347 1,126 2,319 2,402
Notes
1 Annual pension allowance of 25 per cent of salary.
2 Value shown for FY13/14 represents estimated value of share awards granted in 2011 that are expected to vest in June and July 2014. The estimate assumes 100 per cent vesting and
is based on a three-month average share price from 1 January to 31 March 2014, being £19.13. Value shown for FY12/13 represents the actual vesting of LTIP awards granted in 2010
that vested in September 2013 using the share price on the vesting date, being £16.24 for LTIP Performance shares that vested on 16 September 2013 and £15.66 for Matching shares
that vested on 27 September 2013.
Xavier Rolet
3 Bene?ts include the cash value of private medical and life assurance, Save As You Earn (SAYE) and commuting expenses with associated taxes (including a chauffeur-driven motor car
where appropriate). Mr Rolet started contributing to SAYE in February 2014. SAYE has been valued based on the monthly savings amount (£250) and the discount provided (20%) from
February 2014 – i.e. £250 x 2 months x 20 per cent.
David Warren
4 David Warren joined on 2 July 2012, so FY12/13 ?gures are for a partial year.
5 Bene?ts include the cash value of private medical and life assurance and expatriate allowances with associated taxes.
Raffaele Jerusalmi
6 Bene?ts represent the cash value of private medical, disability, life and accident insurance cover, luncheon vouchers, car and fuel bene?t.
7 Pension: mandatory INPS contributions calculated on salary, bene?ts and bonus.
8 Trattamento di Fine Rapporto mandatory arrangements calculated on salary, capped bene?ts, bonus and shares and paid into Mr Jerusalmi’s pension plan.
9 FY13/14 rate of £1 = €1.21 (FY12/13 ?gures re-stated at FY13/14 rate on a constant currency basis).
Additional notes to the Single total figure
of remuneration (Audited)
Fixed pay
Base salary
When reviewing Executive Director salaries, and in line with our policy stated
on page 74, the Committee considers multiple reference points including
companies in the FTSE 31-100, the broader Financial Services sector as well
as other international exchanges.
Benefits
A ?exible bene?ts plan is offered, in which individuals have certain core
bene?ts (such as private medical, life assurance, income protection and,
additionally in Italy only, disability, accident, car, fuel allowance and luncheon
vouchers) together with (in the UK) a taxable cash allowance which can be
spent on elective bene?ts (such as additional medical, life or dental cover).
Where received as a cash supplement, this allowance is not used to calculate
bonus payments or pension contributions. Bene?ts are reviewed periodically
to ensure they remain affordable and competitive. Executives are eligible to
participate in the Group’s HMRC-approved Save as You Earn Option (SAYE)
Scheme (or international equivalent).
Xavier Rolet and David Warren each receive a ?exible bene?t allowance of
£20,000 per annum. These values have not been increased since last year.
Both of them also receive bene?ts in kind which principally include private
health care and life assurance arrangements.
Xavier Rolet has started to contribute £250 per month since February 2014
into the Save As You Earn (SAYE) scheme which will run until February 2017.
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As set out in the Remuneration Policy Report on page 77, Raffaele Jerusalmi
accrues mandatory state pension (INPS) bene?ts in Italy. Actual bene?t due
at retirement is set out by the applicable Italian legislation in force from time
to time. Under the Italian Trattamento di Fine Rapporto (TFR), he receives
contributions which are funded by the Company at a rate ?xed by local law
and which are paid to Mr Jerusalmi’s private pension plan. Both INPS and TFR
contributions are included in the single total ?gure of remuneration table on
page 86.
Pay for Performance
The Committee takes into account multiple reference points when setting
pay including FTSE 31-100, the ?nancial services sector, international
exchanges and FTSE 250 roles for key subsidiaries where relevant.
Overall the Committee wishes to position total target remuneration (?xed pay,
variable pay and bene?ts) at or around the median of the reference points.
The Committee considers it appropriate to reward superior performance with
compensation levels at the upper quartile of the target market(s).
Annual bonus awarded for FY13/14
Executive Directors are eligible to receive an annual bonus based on meeting
or exceeding bonus targets that are set at the beginning of the year.
For FY13/14, the Committee determined that the sole annual ?nancial target
should again be adjusted operating pro?t. The Committee considers adjusted
operating pro?t to be of particular signi?cance for the Group and believes it
should continue to be the main ?nancial measure for annual bonus plan
purposes. At least 50 per cent of the annual bonus pool is subject to achieving
this ?nancial target. Other measures include the achievement of strategic and
individual targets. The maximum bonus opportunity is 225 per cent of salary for
the Chief Executive Officer and 200 per cent of salary for other Executive Directors.
As an expatriate from the US to UK, David Warren is also entitled to receive
the following net amounts:
— Each year he is entitled to tax preparation and ?ling assistance in the
US and the UK.
— The Group will meet the costs of repatriating Mr Warren’s effects back to
the US if it terminates his employment other than in circumstances such
as serious misconduct which would justify summary termination.
— An allowance to cover the cost of renting accommodation in the UK
during the ?rst four years of his appointment (£60,000 net per annum
up until 1 November 2014 – at which point the allowance will then
reduce to £30,000 per annum for the following two years). If Mr Warren
purchases a property within the ?rst two years of appointment, he may
use the balance of the allowance payable for that period to cover
associated costs such as stamp duty or legal costs.
— An annual allowance of £30,000 net per annum to cover ?ights between
London and New York for Mr Warren and his family.
Raffaele Jerusalmi receives bene?ts in kind such as health, disability, life and
accident insurance cover, luncheon vouchers, car and fuel bene?t. He also
contributes towards the Italian mandatory national insurance system.
There are no contractual malus or clawback provisions in place in relation
to bene?ts. Executive Directors are covered by the Directors’ and Of?cers’
insurance and indemni?cation.
Retirement Benefits
The London Stock Exchange plc ?nal salary pension scheme was closed to new
entrants in 1999 and was closed to future accruals from 1 April 2012. The current
Executive Directors do not participate in this ?nal salary pension scheme.
Pension provision takes the form of a non-consolidated cash allowance.
Xavier Rolet and David Warren each receive an allowance equivalent to 25
per cent of base salary as a taxable cash supplement. Only base salary is
used to calculate pension entitlement and no other pension supplements
apply. In the tax year to 6 April 2014, Xavier Rolet contributed £200,000 into
the company Group Pension Plan with Scottish Widows. On a one-off basis,
this included contributions for the three prior tax years up to the maximum,
tax-free headroom.
Determination of FY13/14 Annual Bonus
The Committee determined the overall Group bonus pool with reference to performance for the year ended 31 March 2014. The performance measures and
targets are set out below:
Actual performance Performance relative to target Maximum percentage of bonus Actual percentage of bonus
FY13/14
Group bonus
pool
Group AOP Adjusted operating pro?t up
20 per cent at £514.7 million
‘Above Target’ 50 40
Strategic
Deliverables
Key achievements:
— Completion of the majority
acquisition and integration of
LCH.Clearnet Group
— Increase in equities market share
— TARGET2-Securities and the
development of the new international
central securities depository in
Luxembourg
Between ‘Target’ and
‘Above Target’
50 31
Total 100 71
Note: Due to commercial con?dentiality, these sensitive performance targets will not be disclosed now or in the future as this would provide an unfair advantage to our international competitors.
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Chief Executive Officer
In increasingly complex market conditions and a challenging regulatory
environment, the Group has had a strong year led expertly by Xavier Rolet.
Financial results were above target with an increase in our revenue, operating
pro?ts and market capitalisation. This performance has been achieved
through: the execution of the Group’s strategy including the completion of
the acquisition of a majority stake in the global clearing house, LCH.Clearnet
Group and key achievements under our strategic pillars; building best in class
capabilities through innovative solutions in post trade, information services
and capital markets; creating a global business with expanded reach through
FTSE, MTS, MillenniumIT and now LCH.Clearnet; and developing opportunities
through diversi?cation with plans to launch a new pan-European central
securities depository, new derivatives products and continued development
of our ELITE programme.
Chief Financial Officer
David Warren delivered: longer term ?nancing structure post completion
of the majority stake in LCH.Clearnet; the integration with LCH.Clearnet
extending the cost synergies; close control of our cost base and careful
?nancial management to aid our diversi?cation strategy, all of which are
re?ected in good ?nancial performance and returns to our shareholders.
Executive Director, CEO of Borsa Italiana & Director of Capital Markets
Raffaele Jerusalmi has led: our Capital Markets and Post Trade divisions; the
completion of a majority acquisition in Euro TLX, the development of MTS to
trade interest rate swaps and MTS Markets International; signi?cant increase
in market share of Turquoise the pan-European trading platform; plans to
launch a new central securities depository in Luxembourg; six year high in new
issue activity; the development of Exchange Traded Funds (ETF) and Exchange
Traded Products (ETP) markets; the development of our ELITE offering to
enhance our SME offering; signi?cant growth in our ?xed income products and
Monte Titoli has signed the TARGET2-Securities (T2S) Framework Agreement
and will participate in the ?rst wave of T2S, scheduled to go-live in June 2015.
Based on the above context and an assessment of individual performance,
the Remuneration Committee awarded annual bonuses to each of the
Executive Directors as follows:
Role Chief Executive Of?cer Chief Financial Of?cer
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
FY13/14
bonus
% of salary
210% of salary 141% of salary 161% of salary
% of max. 93% of maximum 71% of maximum 81% of maximum
amount £1,480,500 £600,000 €700,000 (approx. £579,000)
Long-term incentive plan (LTIP)
Under the current 2004 LTIP, awards have two elements: a conditional award
of Performance Shares and an award of Matching Shares linked to investment
by the senior management of all or some of their annual bonus.
Performance Shares and Matching Shares granted in 2010, 2011, 2012 and in
the last ?nancial year were subject to Company’s absolute TSR (50 per cent)
and adjusted EPS (50 per cent) performance over a single three-year period
(“the performance period”). For absolute TSR, the performance period started
on the date of grant and for adjusted EPS on the ?rst day of the ?nancial year
in which the award is granted.
For absolute TSR, performance is calculated using a two-month average
share price at the start and at the end of the performance period to ensure
any anomalous share price movements at these measurement points do
not have a disproportionate effect on the assessment of performance over
the full three-year period.
The Committee considers the use of both of these measures will best align the
interests of the Executive Directors with those of shareholders. Both absolute
TSR and adjusted EPS measures are independently veri?ed by Deloitte LLP.
The performance conditions and vesting schedule are set out below:
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of relevant
element which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 30%
12% p.a. or more 16% p.a. or more 100%
Straight-line pro-rating applies between these points
Awards granted in September 2010 with performance period ending
in 2013
The awards granted in 2010 were based on absolute TSR performance in
the three years from grant and adjusted EPS performance in the three year
period to March 2013. Over the period the Company delivered adjusted EPS
performance of 21 per cent per annum and absolute TSR growth of 38 per
cent and 37 per cent per annum for the Performance Shares (vested on 16
September 2013) and Matching Share awards (vested on 27 September 2013)
respectively. Subsequently, 100 per cent of the maximum Performance Share
and Matching Share awards vested last year.
Awards granted in June 2011 with a performance period ending in 2014
The performance period for the absolute TSR element of the Performance
Share and Matching Share awards ends in June and July 2014 respectively.
Awards vesting in 2014 will be disclosed in the annual report on remuneration
covering the next nine-month ?nancial period (April to December 2014).
The awards granted in 2011 were based on absolute TSR performance in
the three years from grant, and adjusted EPS performance in the three year
period to March 2014. Over the period the Company delivered adjusted EPS
performance of 13.3 per cent per annum for performance and matching
shares. Subsequently the adjusted EPS element for both these awards will
deliver 100 per cent vesting. Absolute TSR growth will be known after 3 June
2014 but is currently also forecast to vest at the full 100 per cent for this
element. The ?nal vesting outcome (including the actual share price at
vesting) following the end of the performance period will be set out in next
year’s Annual Remuneration Report, but based on latest forecasts is likely
to be at the full 100 per cent vesting level.
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Other share plans (SAYE)
All UK employees, including Executive Directors, are eligible to participate in
the HM Revenue & Customs approved Save As You Earn Scheme (SAYE).
Under the rules of the SAYE, participants can save up to £250 each month,
increasing to £500 from April 2014, for a period of three years. At the end of
the saving period, savings plus interest may be used to acquire shares by
exercising the related option.
The options may be granted at an exercise price which represents a discount
of up to 20 per cent to market value at the date of invitation. No performance
conditions are attached to SAYE options. There is also an International
Sharesave Plan (ISP), which is designed to provide share options to Group
employees who are not based in the UK on similar terms to the options
that are available to UK employees through the SAYE. To date, employees in
France, Hong Kong, Italy, Sri Lanka and the US have participated in the ISP.
During the ?nancial year April 2013 to March 2014, a grant was made in
January 2014 under the UK and international schemes. Due to the ?nancial
year-end change, an additional interim grant will be made in July 2014.
From 2015 onwards, annual SAYE grants will normally take place in May.
The same performance conditions described above apply to all awards
granted between 2010 and 2013, and for those to be awarded in 2014
(if prior to July 2014 AGM), namely:
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of
relevant element
which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 30%
12% p.a. or more 16% p.a. or more 100%
Straight-line pro-rating applies between these points
Due to the ?nancial year-end change, EPS will be measured over 33 months
for 2012, 2013 and 2014 grants. From 2015 onwards, grants will return to
being measured over 36 months on a calendar year basis. The ?nancial
year-end change does not affect the TSR measurement period which is
still three calendar years from grant. Vesting remains over 36 months.
The Committee will determine ?nal outcomes to ensure there is no material
advantage or disadvantage to participants due to the year-end change.
LTIP Awards Granted in FY13/14 (Audited)
Awards made in FY13/14
For the year ended 31 March 2014, awards of Performance Shares were made with a value of 200 per cent of salary for Xavier Rolet, 176 per cent of salary
for David Warren, and 193 per cent of salary for Raffaele Jerusalmi (at historical rate of £1 = €1.18). Xavier Rolet also received an award of Matching Shares
equivalent to 100 per cent of salary following his investment in London Stock Exchange Group shares.
Chief Executive Of?cer
2
Chief Financial Of?cer
3
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
3
FY13/14
LTIP
(Nil-cost
performance
options)
granted on
12 June 2013
% of salary 200% of salary + 100% of
salary in matching shares
176% of salary 193% of salary
face value £1,410,000 + £705,000 £750,000 £710,000 (approx. €838,000)
share price
1
£13.88 £13.88 £13.88
Number of LTIP
shares granted
101,585 + 50,792 54,034 51,152
Notes:
1 The share price of £13.88 was determined using the closing price (MMQ) on 10 June 2013 and approved by the Share Scheme Committee (a subsidiary of the Remuneration Committee).
2 Between 31 May 2013 and 11 June 2013 Mr Rolet acquired a further 13,312 invested shares at an average price of £14.03, equivalent to 50 per cent of his net salary (or £186,825 in total).
In return he was granted a further 100 per cent of salary (£705.000) in matching LTIP shares (being 50,792 matching shares at £13.88 share price).
3 Mr Warren and Mr Jerusalmi did not participate in the voluntary matching share scheme in FY13/14.
Executive Directors’ Share Options under the ShareSave (SAYE) Plan
SAYE
Number of shares
At start
of year
Awarded
during the year
Vested
during year
At end
of year
Price at
award date
Date of
award
Final
vesting
date
Expiry
date
Xavier Rolet – 712 – 712 17.99 10/01/2014 01/03/2017 30/08/2017
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Implementation of the remuneration policy during FY2014
(1 April to 31 December 2014)
Base salary operation:
When reviewing Executive Director salaries, and in line with our policy,
the Committee considers multiple reference points including companies
in the FTSE 31-100, the broader Financial Services sector as well as other
international exchanges.
Base salaries for 2014/15, effective from 1 April 2014, are set out in the table below:
Annual salary 2013/14 2014/15
Xavier Rolet £705,000 £733,000 (+4%)
David Warren £425,000 £425,000 (+0%)
Raffaele Jerusalmi €435,000 €480,000 (+10%)
Chief Executive Officer
The Chief Executive’s salary has been reviewed in the context of Group
performance and salary increases elsewhere in the Group as well as
positioning against peers. He has been awarded a four per cent salary increase.
Executive Director, Chief Executive Officer of Borsa Italiana and
Director of Capital Markets
Since his appointment to the Board in June 2010, the Committee has
been aware that Raffaele Jerusalmi’s salary has been behind his peers,
both internally and externally. At that time the Committee chose not to
substantially increase his salary preferring to recognise Mr Jerusalmi’s
contribution and importance to the Group in his capacity as a key member
of the Board over an extended period of time. Subsequently, the Committee
has determined that Mr Jerusalmi’s salary will be increased to €480,000,
an increase of 10 per cent. The Group’s strategy continues to be focused on
increasing its global footprint and diversifying its service offering. Mr Jerusalmi
has made an exceptional contribution to this sustained success. As the Group
executes its growth strategy, the breadth and complexity of Mr Jerusalmi’s role
continues to increase. He has responsibility for Capital Markets, Post Trade
including TARGET2-Securities and the development of the new International
Central Securities Depository in Luxembourg.
Annual bonus operation:
— For FY2014, targets will be adjusted to re?ect this shorter nine-month
performance period. Performance measures and weighting
remain unaffected.
— The maximum bonus opportunities will be pro-rated to re?ect the shortened
period with performance measured over the truncated ?nancial year.
— Any bonus payment would be determined in March 2015. The following
?nancial year will align with the calendar year of January to December
2015 with bonuses determined in March 2016.
Under the new Deferred Bonus Plan proposals:
— The current, voluntary deferral of up to 50 per cent of net salary is
replaced with the introduction of the mandatory deferral of 50 per cent
of bonus for a period of two years.
— Until the increased minimum shareholding requirement is reached,
bonus deferral will be 100 per cent into shares. Once the level of minimum
shareholding has been reached, individuals will be able to elect to defer
100 per cent into shares, 50 per cent into shares/50 per cent into cash or
100 per cent into cash.
— Deferred awards are subject to malus provisions. Bonuses already paid
out under the Deferred Bonus Plan and vested awards are subject to
clawback with judgement applied by the Committee.
— For good leavers, awards will usually vest at the normal vesting date and
in full, unless the Committee determines to scale back the award based
on any factors deemed relevant. Where an individual is not considered
to be a good leaver, unvested awards will lapse.
Long Term Incentive Plan:
As described in the Remuneration Policy Report set out above, the Company
is seeking approval for a new Long-Term Incentive Plan at the 2014 AGM.
The new plan was designed after consulting with major shareholders and
incorporates many aspects of evolving best practice. The key changes are
as follows:
— The current, voluntary matching (equal to 100 per cent of salary
opportunity) has been removed and replaced with a single long term
incentive plan. In future years, the Company will only make annual
grants of Performance Shares.
— An increased maximum opportunity from 300 per cent to 400 per cent
of salary to recognise loss of opportunity where voluntary matching has
been replaced by mandatory deferral but with no increase in overall
incentive opportunities.
— A reduction of threshold level of vesting from 30 per cent to 25 per cent
of the maximum, in line with market practice.
— Introduction of malus and clawback provisions, allowing the Committee
to reduce subsisting awards in certain circumstances (e.g. material
misstatement or gross misconduct).
— Alignment of good leaver policy with best practice. LTIP awards will
now subsist until the end of the performance period in line with other
award-holders and vest at that point with time pro-rating based on
the number of actual months’ service within the relevant 36-month
vesting period.
Under the 2014 LTIP, awards of shares (or equivalent) are granted annually
subject to performance conditions. The awards will continue to be based on
absolute Total Shareholder Return (TSR) and adjusted Earnings per Share
(EPS) performance measures as described overleaf.
Awards to be made during FY2014
Our policy is to grant awards on an annual cycle. All awards granted during 2014 will continue to be based on absolute TSR and adjusted EPS growth and
subject to a three-year vesting period. Awards will normally vest three years after the grant date.
Based on the context as previously stated and an assessment of individual performance, the Remuneration Committee has approved grants to each of the
Executive Directors under the 2004 LTIP as follows (?gures below exclude any matching awards that may be made as a result of a voluntary investment in
shares by the Executive Director):
Role Chief Executive Of?cer Chief Financial Of?cer
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
FY2014
LTIP
% of salary 200% of salary 176% of annual salary 181% of salary
amount £1,466,000 £750,000 £719,000 (approx €870,000)
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The Remuneration Committee intends to grant LTIP awards before the
AGM under the 2004 Plan as described on page 85. If for whatever reason
(including any regulatory or legal restriction) the Committee is unable to
make the grant before the AGM, awards will be granted under the new LTIP
(assuming it is approved by shareholders) within the limits described in the
Policy on page 79.
For awards granted after the 2014 AGM, the threshold vesting level has been
reduced to 25 per cent of the maximum, as described in our Remuneration
Policy Report on page 79. Subsequently the performance conditions for
awards granted post-AGM will be as follows:
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of
relevant element
which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 25%
12% p.a. or more 16% p.a or more 100%
Straight-line pro-rating applies between these points
Non-Executive Directors’ Remuneration
Non-Executive Directors’ remuneration is determined by the Board and is neither performance-related nor pensionable. The Chairman’s fee is determined by
the Remuneration Committee. The fees for Non-Executive Directors are set at a level which is intended to recognise the signi?cant responsibilities of Directors
and to attract individuals with the necessary experience and ability to make an important contribution to the Company’s affairs. Comparisons are made with
fees paid at FTSE 31-100 companies.
Travel and other appropriate expenses with associated taxes (including fees incurred in obtaining professional advice in the furtherance of their duties) incurred
in the course of performing their duties are reimbursed to the Chairman and to the Non-Executive Directors. In addition, the Chairman receives the use of a
chauffeur-driven motor car for travel to the Group’s of?ces and business purposes.
The Chairman and the Non-Executive Directors do not participate in any of the Company’s annual bonus or LTIP plans and are not entitled to any payments
on termination.
Certain Non-Executive Directors are entitled to receive fees from subsidiary companies, details are set out below.
The original date of appointment as Directors of the Company is as follows:
Name Date Appointed
5
Date of letter of
appointment Time to expiry Notice period Date of resignation
LSEG Committee
membership/
chairmanship
Other subsidiaries
membership/
chairmanship
Baroness (Janet) Cohen 01/02/2001 N/A Expired None 17/07/2013
Robert Webb QC
1,3
01/02/2001 01/02/2013 31 January 2016 None
Remuneration
Chair
LSE plc LCH.
Clearnet
Chris Gibson-Smith 01/05/2003 18/07/2012 2015 AGM 6 months Group Chairman
Andrea Munari
2
01/10/2007 01/10/2013
30 September
2016 None Risk
Paolo Scaroni 01/10/2007 01/10/2013
30 September
2016 None Remuneration
Sergio Ermotti 01/10/2007 N/A Expired 17/07/2013
Gay Huey Evans 04/06/2010 N/A Expired 17/07/2013
Paul Heiden
2,3
04/06/2010 04/06/2013 3 June 2016 None Audit Chair, Risk LSE plc
Massimo Tononi 27/09/2010 27/09/2013 September 2016 None Audit
Borsa Italiana,
LSEGH Italia,
CC&G and Euro
TLX
Non-Executive Directors’ fees for FY2014
From 1 April 2014, it was determined that there would be no proposed
changes to the Chairman’s and Non-Executive Directors’ fee levels in respect
of LSEG Board membership which would be as follows:
Fees
With
effect from
1 April 2013
With
effect from
1 April 2014
Group Chairman £370,000 £370,000
Deputy Chairman/Senior Independent Director £120,000 £120,000
Non-Executive Director base fee £60,000 £60,000
Audit Committee Chairman £20,000 £20,000
Risk Committee Chairman £20,000 £20,000
Remuneration Committee Chairman £20,000 £20,000
Audit Committee, Risk Committee or Remuneration
Committee membership £10,000 £10,000
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Name Date Appointed
5
Date of letter of
appointment Time to expiry Notice period Date of resignation
LSEG Committee
membership/
chairmanship
Other subsidiaries
membership/
chairmanship
Jacques Aigrain 01/05/2013 01/05/2013 30 April 2016 None Audit
LCH.Clearnet
Chairman
Stuart Lewis
2
12/06/2013 12/06/2013 11 June 2016 None Risk
Stephen O’Connor
2,4
12/06/2013 12/06/2013 11 June 2016 None Risk Chair LSE plc
Sherry Coutu 17/01/2014 17/01/2014 16 January 2017 None
Joanna Shields
4
17/01/2014 17/01/2014 16 January 2017 None LSE plc
Notes:
1 Robert Webb was appointed to the LCH.Clearnet Remuneration Committee on 1 May 2013.
2 Paul Heiden, Andrea Munari, Stephen O’Connor and Stuart Lewis were appointed to the Risk Committee on 17 July 2013.
3 Paul Heiden and Robert Webb are Directors of London Stock Exchange plc throughout FY13/14.
4 Stephen O’Connor and Joanna Shields were appointed to the Board of London Stock Exchange plc on 28 January 2014.
5 All appointments to the LSEG Board are expected to continue for a period of three years and are subject to earlier termination in accordance with the provisions of the Articles.
Non-Executive Directors’ Remuneration Table (Audited)
FY13/14
LSEG Fees
FY13/14
Subsidiary
Fees
FY13/14
Total Fees
FY13/14
Taxable
Bene?ts
1
FY13/14
Total
FY12/13
LSEG Fees
FY12/13
Subsidiary
Fees
FY12/13
Total Fees
FY12/13
Taxable
Bene?ts
1
FY12/13
Total
£000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Baroness (Janet) Cohen
2
21 23 44 1 45 65 21 86 – 86
Robert Webb QC 80 10 90 – 90 80 – 80 – 80
Chris Gibson-Smith 370 – 370 83 453 370 – 370 63 433
Andrea Munari 70 – 70 3 73 65 – 65 – 65
Paolo Scaroni 130 – 130 – 130 125 – 125 – 125
Sergio Ermotti 21 – 21 – 21 65 – 65 – 65
Gay Huey Evans 24 2 26 – 26 70 – 70 – 70
Paul Heiden 87 5 92 7 99 80 – 80 – 80
Massimo Tononi
3
70 182 252 2 254 65 147 212 – 212
Jacques Aigrain
4
64 586 650 8 658 – – – – –
Stuart Lewis 57 – 57 – 57 – – – – –
Stephen O’Connor
1
60 1 61 39 100 – – – – –
Sherry Coutu 13 – 13 – 13 – – – – –
Joanna Shields 12 1 13 – 13 – – – – –
Total Non-Executive Directors’ fees 1,079 810 1,889 143 2,032 985 168 1,153 63 1,216
Notes:
1 Bene?ts in kind relate to travelling expenses, including taxes where applicable. These bene?ts include use of chauffeur-driven car for Mr Gibson-Smith and international ?ights for Mr O’Connor.
2 Baroness (Janet) Cohen received a fee of €26,000 (or £21,488 at £1 = €1.21) for her role as Vice Chairman of Borsa Italiana S.p.A.
3 Mr Tononi received a combined fee of €214,332 (£177,133) for his roles as Chairman and Director of Borsa Italiana S.p.A., Chairman of CC&G, Chairman of EuroTLX and Chairman and Director of
London Stock Exchange Group Holdings (Italia). Mr Tononi renounced his fees for FY13/14 period as Director of Borsa Italiana S.p.A. and London Stock Exchange Holdings (Italia) on 1 January
2014 and 20 March 2014 respectively.
4 Mr Aigrain received an annualised fee of £530,000 as Chairman of LCH.Clearnet. In addition he received a one-off, additional fee of £100,000 for performing the role of interim Executive
Chairman in the absence of an LCH.Clearnet CEO. In addition to travelling expenses, he was also in receipt of health cover which ceased on 1 April 2014.
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Five-year TSR chart v FTSE 100
FTSE 100 LSEG
600
500
400
300
200
100
0
Mar
2009
Mar
2010
Mar
2011
Mar
2012
Mar
2013
Mar
2014
Alignment between pay and performance
Total Shareholder Return (TSR) performance
The following graph shows, for the ?nancial year ended 31 March 2014 and for each of the previous ?ve years, the TSR on a holding of the Company’s
ordinary shares of the same kind and number as those by reference to which the FTSE 100 is calculated. The TSR graph represents the value, at 31 March
2014, of £100 invested in London Stock Exchange Group plc on 31 March 2009, compared with the value of £100 invested in the FTSE 100 Index over the
same period. As a member of the FTSE100, we have chosen the FTSE100 Index as it is currently the most relevant index for benchmarking our performance
over the ?ve year period.
Historic levels of CEO pay
Year ended 31 March: CEO
CEO single total ?gure
of remuneration (£’000)
Annual bonus payout against
maximum opportunity %
Long-term incentive vesting rates
against maximum opportunity %
2014
Xavier Rolet 6,297 93% 100%
2013
Xavier Rolet 6,015 89% 100%
2012
Xavier Rolet 5,245 100% 65%
2011
Xavier Rolet 2,134 89% _
2010
Xavier Rolet
1
1,873 71% _
Clara Furse
2
400 49% 0%
Notes:
Xavier Rolet
1 In the role of CEO from 20 May 2009, appointed to the Board 16 March 2009.
Clara Furse
2 In the role of CEO until 20 May 2009. She resigned from the Board on 15 July 2009.
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Percentage change in remuneration of CEO
The table below shows the percentage year-on-year change in salary,
bene?ts and annual bonus earned between the year ended 31 March 2013
and the year ended 31 March 2014 for the CEO compared to the average
of the representative sample of UK employees (all LSEG UK employees
excluding LCH.Clearnet):
Salary Bene?ts Annual Bonus
CEO +4% +5% +10%
Average pay of Group UK employees
1
+3% +10%
2
+14%
Notes:
1 This group has been selected to re?ect the jurisdiction in which the CEO is based.
LCH.Clearnet employees are not included for this year as they are currently on a
different pay cycle.
2 10 per cent increase in bene?ts’ cost in UK is largely due to implementation of
pension auto-enrolment (with effect from 1 January 2014).
Relative importance of spend on pay
The table below shows the relative FY13/14 v FY12/13 expenditure of the
Group on Dividends versus Total Employee Costs. These ?gures are taken
directly from the Notes to the Financial Statements at the back of this report.
Year on year increases (%) FY13/14 FY12/13 Annual Increase
Dividends Paid In
Financial Year
£80.8m £77.4m +4%
Total Employee Costs £303.9m
1
£167.3m +82%
Note:
1 Total employee costs include LCH.Clearnet with effect from 1 May 2013 onwards.
94 Governance
Directors’ Remuneration Report continued
Annual Report on Remuneration continued
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Statement of directors’ shareholdings and share interests as at 31 March 2014 (Audited)
All Executive Directors who served in the ?nancial year, with the exception of David Warren, who was appointed to the Board on 2 July 2012, currently own
shares outright and at a level exceeding their required shareholding as described in the section on Share Ownership Guidelines on page 79 based on a share
price of £19.70 (being the closing share price on 31 March 2014). Current shareholdings are summarised in the following table:
Shares held Options held
1
Minimum Shareholding Requirement
Owned
Outright
Unvested and
subject to
performance
conditions
Unvested and
subject to
continued
employment
Vested
but not
exercised
Current
Requirement
(% salary)
New
Requirement
(% salary)
Shareholding
as at 31 March
2014 (% salary)
Requirement
met
Executive Directors
Xavier Rolet 329,598 560,559 712 – 100 200 921 Yes
David Warren – 138,695 – – 100 200 – No
Raffaele Jerusalmi 41,721 164,278 – – 100 200 228 Yes
Non-Executive Directors
Chris Gibson-Smith 63,757 – – – – – – N/A
Andrea Munari – – – – – – – N/A
Paolo Scaroni – – – – – – – N/A
Robert Webb 1,200 – – – – – – N/A
Paul Heiden 3,000 – – – – – – N/A
Massimo Tononi – – – – – – – N/A
Jacques Aigrain – – – – – – – N/A
Stuart Lewis – – – – – – – N/A
Stephen O’Connor – – – – – – – N/A
Sherry Coutu – – – – – – – N/A
Joanna Shields – – – – – – – N/A
Former Directors
Baroness (Janet) Cohen 6,616 – – – – – – N/A
Sergio Ermotti – – – – – – – N/A
Gay Huey Evans – – – – – – – N/A
Note:
1 No options were exercised by the Directors during the year to 31 March 2014.
Directors’ Interests in Ordinary Shares – Beneficial, Family and any Connected Persons Interests (Audited)
Ordinary Shares Held LTIP Options
2
SAYE options Total Interests
31 March 2014 31 March 2013 31 March 2014 31 March 2013 31 March 2014 31 March 2013 31 March 2014
3
31 March 2013
Executive Directors
Xavier Rolet 329,598 191,840 560,559 643,112 712 – 890,869 834,952
David Warren – – 138,695 84,661 – – 138,695 84,661
Raffaele Jerusalmi 41,721 41,721
1
164,278 184,554 – – 205,999 226,275
Non-Executive Directors
Chris Gibson-Smith 63,757 63,757 – – – – 63,757 63,757
Andrea Munari – – – – – – – –
Paolo Scaroni – – – – – – – –
Robert Webb 1,200 1,200 – – – – 1,200 1,200
Paul Heiden 3,000 3,000 – – – – 3,000 3,000
Massimo Tononi – – – – – – – –
Jacques Aigrain – – – – – – – –
Stuart Lewis – – – – – – – –
Stephen O’Connor – – – – – – – –
Sherry Coutu – – – – – – – –
Joanna Shields – – – – – – – –
Former Directors
Baroness (Janet) Cohen 6,616 6,616 – – – – 6,616 6,616
Sergio Ermotti – – – – – – – –
Gay Huey Evans – – – – – – – –
Notes:
1 Raffaele Jerusalmi’s shareholding was overstated by 5,208 shares in 2013. He still met and continues to meet his minimum shareholding requirement.
2 LTIP performance shares are structured as nil-cost options.
3 There have been no further changes in these interests between 31 March 2014 and 15 May 2014.
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Long Term Incentive Plan Table
The Long Term Incentive Plan has two elements, a conditional award of Performance Shares and an award of Matching Shares linked to investment by the
Executive in the Company’s shares.
The awards are dependent on TSR performance for 50 per cent of the award, with the other 50 per cent dependent on an adjusted basic EPS growth target.
Details of performance conditions are set out on page 79.
The table below sets out the Executive Directors’ Long Term Incentive Plan awards (including the exercise of vested shares in FY13/14), as at 31 March 2014:
Number of shares
Date of
award
Price at
award
date £
At start
of year
Award
during
the year
Vested
during
year
Lapsed
during
year
At end
of year
Vesting
date
Price at
vesting
date £
Value at
vesting
date £
Exercise
date
Prices at
exercise
date £
Value at
exercise
date £ Comment
Xavier
Rolet 14/09/2010 7.00 142,857 – 142,857 – – 16/09/2013 16.24 2,319,998 15/11/2013 15.75 2,249,736
FY12/13
Actual
27/09/2010 7.03 92,073 – 92,073 – – 27/09/2013 15.66 1,441,863 15/11/2013 15.75 1,449,981
FY12/13
Actual
03/06/2011 9.71 139,031 – – – 139,031 03/06/2014 19.13 2,659,663 – –
FY13/14
Estimate
08/07/2011 10.65 63,380 – – – 63,380 08/07/2014 19.13 1,212,460 – –
FY13/14
Estimate
19/06/2012 9.74 138,674 – – – 138,674 19/06/2015 – – – –
21/06/2012 10.06 67,097 – – – 67,097 21/06/2015 – – – –
12/06/2013 13.88 101,585 – – 101,585 13/06/2016 – – – –
12/06/2013 13.88 50,792 – – 50,792 13/06/2016 – – – –
643,112 152,377 234,930 – 560,559 3,761,861 3,699,717 FY12/13
Actual
3,872,123 FY13/14
Estimate
David
Warren 02/07/2012 10.04 84,661 – – – 84,661 02/07/2015 – – – –
12/06/2013 13.88 54,034 – – 54,034 13/06/2016 – – – –
84,661 54,034 – – 138,695 – –
Raffaele
Jerusalmi 14/09/2010 7.00 71,428 – 71,428 – – 16/09/2013 16.24 1,159,991 15/11/2013 15.77 1,126,146
FY12/13
Actual
03/06/2011 9.71 51,493 – – – 51,493 03/06/2014 19.13 985,061 – –
FY13/14
Estimate
19/06/2012 9.74 61,633 – – – 61,633 19/06/2015 – – – –
12/06/2013 13.88 51,152 – – 51,152 13/06/2016 – – – –
184,554 51,152 71,428 – 164,278 1,159,991 1,126,146 FY12/13
Actual
985,061 FY13/14
Estimate
Note:
All estimates are shown separately in bold. They will be fully disclosed in next year’s Annual Report on Remuneration.
96 Governance
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Annual Report on Remuneration continued
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Remuneration Committee – Governance
The Remuneration Committee is appointed by the Board and comprises
only independent Non-Executive Directors. The Committee’s remit includes
the remuneration of the Chairman of the Group, Executive Directors and the
Executive Committee (please see pages 20 and 21 for details of the Group’s
Executive Committee), including the awards made under the performance-
related incentive schemes.
All members of the Committee are considered to be independent.
Details of the Committee’s remit and activities are set out in this Directors’
Remuneration Report. The Committee has written terms of reference which
are available from the Group Company Secretary or at the corporate
governance section of the Company’s website at www.lseg.com.
During the year ended 31 March 2014, the Committee met on ?ve occasions.
Remuneration Committee composition and meeting attendance
in the year ended 31 March 2014
Total
Robert Webb (Chairman)
5/5
Chris Gibson-Smith
5/5
Gay Huey Evans (resigned 17 July 2013)
1/5
Paolo Scaroni
5/5
Sergio Ermotti (resigned 17 July 2013)
1/5
To assist the Committee, the results of market surveys are made available
and, where appropriate, the Committee invites the views of the Chief
Executive Of?cer, Chief Financial Of?cer and Head of Human Resources.
None of these individuals or the Chairman participated in any discussion
relating to their own remuneration.
Statement of shareholder voting
The table below sets out the results of the vote on the Directors’ Remuneration
Report at the 2013 AGM:
Votes for Votes against Votes cast Votes withheld
Number % Number %
210,062,132 96.86 6,806,546 3.14 216,868,678 791,531
Advisors
The Remuneration Committee continues to be mindful of recommendations
from key stakeholders, including institutional investor bodies, and the
Committee consults with major shareholders on any key decisions taken.
Deloitte LLP is the principal advisor appointed by the Committee to provide
independent advice on Executive remuneration policy and practice and
reviews our policy framework and implementation thereof against current
and emerging corporate governance best practice. During the year, Deloitte
received £152,600 (excluding VAT) based on actual time spent for these
services. Separately, other parts of Deloitte LLP also advised the Company
in FY13/14 in relation to tax, internal audit, risk management, consulting and
transaction support services.
Deloitte is a founder member of the Remuneration Consultants Group
and, as such, voluntarily operates under the code of conduct in relation to
Executive remuneration consulting in the UK. The Committee is satis?ed
that the advice provided by Deloitte LLP is independent and objective.
Outside appointments
Executive Directors are allowed to accept appointments as Non-Executive
Directors of other companies with the prior approval of the Chairman.
Approval will only be given where the appointment does not represent a
con?ict of interest with the Company’s activities and the wider exposure
gained will be bene?cial to the development of the individual. Executive
Directors may retain fees to encourage them to seek out the development
opportunities and valuable experience afforded by these appointments
and in recognition of the personal responsibility Executives assume in such
roles and we would disclose these fees.
At present, none of the Executive Directors are in receipt of additional fees.
Signed on behalf of the Board of Directors
Robert Webb
Chairman of the Remuneration Committee
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London Stock Exchange Group plc Annual Report 2014
Results
The Group made a pro?t before taxation, before amortisation of purchased
intangible assets and non-recurring items, of £442.4 million (2013: £380.7
million). After taking into account amortisation of purchased intangible
assets and non-recurring items, the pro?t of the Group before taxation for
the year ended 31 March 2014 was £284.3 million (2013: £298.9 million).
Pro?t after taxation was £182.7 million (2013: £215.5 million).
Dividends
The Directors are recommending a ?nal dividend for the year of 20.7 pence
(2013: 19.8 pence) per share which is expected to be paid on 19 August 2014
to shareholders on the register on 25 July 2014. Together with the interim
dividend of 10.1 pence (2013: 9.7 pence) per share paid in January 2014,
this produces a total dividend for the year of 30.8 pence (2013: 29.5 pence)
per share estimated to amount to £83.3 million (2013: £79.7 million).
Share capital
As at 31 March 2014 the Company had 271.1 million ordinary shares in issue
with a nominal value of 6
79
/86 pence each, representing 100 per cent of the
total issued share capital. There were no changes to the Company’s issued
ordinary share capital during the year.
Share rights
The rights and obligations attached to the Company’s ordinary shares are set out
in the Company’s articles of association, copies of which can be obtained from
Companies House in the UK or by writing to the Group Company Secretary.
No shareholder shall be entitled to vote at a general meeting, either in person
or by proxy, in respect of any share held by him or her unless all monies
presently payable by him in respect of that share have been paid. In addition,
no shareholder shall be entitled to vote, either in person or by proxy, if he has
been served with a notice under section 793 of the Companies Act 2006
(concerning interests in those shares) and has failed to supply the Company
with the requisite information.
Other than restrictions considered to be standard for a UK listed company
there are no limitations on the holding or transfers of ordinary shares in the
Company, both of which are governed and regulated by the Company’s
articles of association and applicable legislation and regulation, and the
Company is not aware of any agreements between holders of shares that
may result in restrictions on the transfer of shares or on voting rights.
Corporate Governance Statement
The Company’s Corporate Governance Report and the reports of the
Nomination, Audit and Risk Committees are set out on pages 56-69 and are,
together with the information on share rights set out above, incorporated
into this Corporate Governance Statement by reference.
Articles of Association
The Company’s articles of association (adopted by special resolution passed
on 14 July 2010) may only be amended by special resolution at a general
meeting of the shareholders.
The Directors of the Company are pleased to present their
Annual Report to shareholders, together with the ?nancial
statements for the year ended 31 March 2014.
The following sections of the Annual Report are incorporated into this
Directors’ Report by reference:
— The information that ful?ls the requirements of the Strategic Report
(including the Financial Review) can be found on pages 2-53; and
— Board of Directors on pages 54 and 55.
98 Governance
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Substantial Shareholding
As at 15 May 2014 the Company had been noti?ed of the following interests
amounting to more than three per cent in the issued share capital of
the Company in accordance with DTR 5 of the FCA Disclosure and
Transparency Rules:
Borse Dubai Limited 20.6%
Qatar Investment Authority 15.08%
Authority to Purchase Shares
The authority for the Company to purchase in the market up to 27,000,000
of its ordinary shares (representing less than 10 per cent of the issued share
capital of the Company as at the latest practicable date before publication
of the Notice of the Company’s last AGM) granted at the Company’s last
AGM, expires on the date of the forthcoming AGM. Although the latter
authority was not utilised by the Company, shareholders will be asked
to give a similar authority to purchase shares at the forthcoming AGM.
Directors’ interests
Directors’ interests in the shares of the Company as at 31 March 2014,
according to the register maintained under the Companies Act 2006, are set
out in the Directors’ Remuneration Report on pages 95-96. No company
in the Group was, during or at the end of the ?nancial year, party to any
contract of signi?cance in which any Director was materially interested.
Employees
Information on the Company’s employment policies is given on page 36
and information on the Group’s share schemes is provided in the Directors’
Remuneration Report on pages 70-97. The Company provides an induction
programme for new employees, including training on health and safety,
and a range of development programmes for all staff to develop their skills
and knowledge. The Company encourages and assists the employment,
training and retention of disabled people. Where changes to working practices
or structure affect staff, they are consulted and given the appropriate support.
All employees are provided with information on matters of concern to them
in their work, through regular brie?ng meetings and internal publications.
GHG Emissions
Global FY14 GHG Emissions
(1 April 2013 to 31 March 2014) (tCO
2
e)
Total Scope 1 & 2 Emissions (as per below) 22,843
per m
2 1
0.26
per FTE 7.20
per £m Revenue 20.99
Combustion of fuel and operation of facilities
2
1,392
Purchase of electricity, heat, steam and cooling
by the Group for its own use
3
21,451
1 Total building ?oor space, including data centres.
2 Scope 1 including Natural Gas, Diesel, LPG and Fleet Vehicles.
3 Scope 2 (The Group does not purchase heat, steam or cooling).
Note: FY14 GHG Emissions will form the new baseline for GHG emissions due to signi?cant
changes in the LSEG, incorporating FTSE and LCH.Clearnet.
Further details of our approach to environmental issues, including
greenhouse gas emissions, can be found in the Our Wider Responsibility
section of the Strategic Report on page 36. Full details of our corporate
responsibility (CR) practices can be found in the Group’s CR report at
www.lseg.com/corporate-responsibility/corporate-responsibility.htm.
Political Donations and Expenditure
The Group made no political donations and incurred no political expenditure
during the year. It remains the Company’s policy not to make political
donations or to incur political expenditure, however the application of the
relevant provisions of the Companies Act 2006 is potentially very broad in
nature and, as last year, the Board is seeking shareholder authority to ensure
that the Group does not inadvertently breach these provisions as a result of
the breadth of its business activities, although the Board has no intention of
using this authority. Accordingly, the Board is proposing that shareholders
pass a resolution at the forthcoming AGM to authorise the Group to:
— make political donations to political parties and independent election
candidates not exceeding £100,000 in total;
— make political donations to political organisations other than political
parties not exceeding £100,000 in total; and
— incur political expenditure not exceeding £100,000 in total;
and in aggregate not exceeding £100,000, until the Company’s AGM in 2015.
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Governance Directors’ report
London Stock Exchange Group plc Annual Report 2014
Significant agreements
The following are signi?cant agreements to which the Company is a party
that take effect, alter or terminate upon a change of control of the Company
following a takeover bid.
Facility Agreement
The Company (as borrower) has entered into a revolving facility agreement with
The Bank of Tokyo-Mitsubishi UFJ, Ltd, HSBC Bank plc, Morgan Stanley Bank
International Limited, The Royal Bank of Scotland plc, Abbey National Treasury
Services plc, Barclays Bank plc and Lloyds TSB Bank plc, dated 18 July 2013.
The above agreement contains terms appropriate for an investment grade
borrower including change of control provisions which, if triggered, allow the
facility agent upon instructions from the majority lenders to cancel the facility
and declare all outstanding loans under the agreement, together with accrued
interest and all other amounts accrued, due and payable.
Notes
The Company has issued two sterling Notes to the wholesale ?xed income
market due 2016 and 2019. Both Notes contain a ‘redemption upon change
of control’ provision which, if triggered by the combination of a change
of control and, within 120 days thereafter, a credit rating downgrade to
non-investment grade, allows Note holders to exercise their option to require
the Issuer to redeem the Notes and pay any accrued and unpaid interest due.
Retail Bond Issue
The Company has issued sterling denominated retail bonds, under its £1,000
million Euro Medium Term Note Programme, which are due 2021. The retail
bonds contain change of control provisions which, if triggered, allow the
holder of these bonds to have the option to require the Issuer to repay early
or to purchase the bonds of that holder at their face value together with
accrued interest.
Employee Share Plans
The rules of the Company’s employee share plans set out the consequences
of a change of control of the Company on employees’ rights under the plans.
Generally such rights will vest on a change of control and participants will
become entitled to acquire shares in the Company (although in certain
circumstances the Remuneration Committee has the discretion to defer
vesting and to require rights to be exchanged for equivalent rights over
the acquiring company’s shares).
Employee benefit trust
As at 31 March 2014, the trustee of the London Stock Exchange Employee
Bene?t Trust, which is an independent trustee, held 0.6 million shares
(2013: 1.1 million) under the terms of the trust for the bene?t of employees
and former employees of the Company and its subsidiaries. The trust is a
discretionary trust and the shares are held to meet employees’ entitlements
under the Company’s share plans. Employees have no voting rights in relation
to the shares while they are held in trust. The trustee has full discretion to
exercise the voting rights attaching to the shares or to abstain from voting.
Shares acquired by employees through the Company’s employee share plans
rank equally with the ordinary shares in issue and have no special rights.
Branches outside the UK
Certain of the Company’s subsidiaries have established branches in a number
of different countries in which they operate.
Financial risk management
The use of ?nancial instruments by the Group and the Group’s ?nancial risk
management have been speci?cally considered by the Directors, and relevant
disclosures appear in Principal Risks and Uncertainties, on pages 48-53 of
this Annual Report, and in the notes to the Financial Statements, on pages
110-141 of this Annual Report, and in each case are incorporated by reference
into this Directors’ Report.
Audit information
In accordance with Section 418(2) of the Companies Act 2006, the Directors
con?rm, in the case of each Director in of?ce at the date the Directors’ Report
is approved, that:
— so far as the Director is aware, there is no relevant audit information of
which the Company’s auditors are unaware; and
— he/she has taken all the steps that he/she ought to have taken as a
Director in order to make himself or herself aware of any relevant audit
information and to establish that the Company’s auditors are aware of
that information.
Auditors
On 22 April 2014, the Group announced that, following a competitive
tender process, it was proposing to appoint Ernst & Young LLP (EY) as
auditor of the Group. Further details of the tender process can be found
within the Report of the Audit Committee on page 68.
A resolution to reappoint EY as the Company’s auditors will be proposed
at the AGM.
Strategic Report
The Strategic Report (pages 2-53) was approved by the Board on
14 May 2014 and signed on their behalf.
By Order of the Board
Lisa Condron
Group Company Secretary
15 May 2014
100 Governance
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The Directors are responsible for preparing the Annual Report,
the Directors’ Remuneration Report and the ?nancial statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare ?nancial statements for
each ?nancial year. Under that law the Directors have prepared the Group
and Company ?nancial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union.
Under company law the Directors must not approve the ?nancial statements
unless they are satis?ed that they give a true and fair view of the state of the
affairs of the Group and the Company and of the pro?t or loss for that period.
In preparing those ?nancial statements, the Directors are required to:
— select suitable accounting policies and then apply them consistently;
— make judgements and accounting estimates that are reasonable
and prudent
— state whether applicable IFRSs as adopted by the European Union have
been followed, subject to any material departures disclosed and
explained in the ?nancial statements; and
— prepare the ?nancial statements on the going concern basis, unless
it is inappropriate to presume that the Group will continue in business.
The Directors con?rm that they have complied with the above requirements
in preparing the ?nancial statements.
The Directors are responsible for keeping adequate accounting records that
are suf?cient to show and explain the Company’s transactions and disclose
with reasonable accuracy at any time the ?nancial position of the Company
and the Group and to enable them to ensure that the ?nancial statements
and the Directors’ Remuneration Report comply with the Companies Act
2006 and, as regards the Group ?nancial statements, Article 4 of the IAS
Regulation. The Directors are also responsible for safeguarding the assets
of the Company and the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of ?nancial 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
2-53. In particular, the current economic conditions continue to pose a
number of risks and uncertainties for the Group and these are set out in
Principal Risks and Uncertainties on pages 48-53.
The ?nancial 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 114-17. The Group continues to meet Group and
individual entity capital requirements and day-to-day liquidity needs through
the Group’s cash resources and available credit facilities. Committed term
funding at 31 March 2014 was £1,649 million which is committed until July
2016 or beyond (2013: £1,650 million, £1,400 million of which was committed
until December 2014 or beyond), described further in the Financial Review on
pages 38-43.
The Directors have reviewed the Group’s forecasts and projections, taking into
account reasonably possible changes in trading performance, which show
that the Group has suf?cient ?nancial 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 ?nancial statements.
Each of the Directors, whose names and functions are set out on pages
54-55 of this Annual Report con?rm that, to the best of their knowledge
and belief:
— the Group ?nancial statements, which have been prepared in accordance
with IFRSs as adopted by the EU, give a true and fair view of the assets,
liabilities, ?nancial position and pro?t 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 2014, taken as a
whole, is fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance,
business model and strategy.
By Order of the Board
Lisa Condron
Group Company Secretary
15 May 2014
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Governance Statement of directors’ responsibilities
Statement of directors’ responsibilities
London Stock Exchange Group plc Annual Report 2014
Report on the financial statements
Our opinion
In our opinion:
— The ?nancial statements, de?ned below, give a true and fair view of the
state of the Group’s and of the Parent Company’s affairs as at 31 March
2014 and of the Group’s pro?t and of the Group’s and Parent Company’s
cash ?ows for the year then ended;
— The Group ?nancial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
— The Parent Company ?nancial statements have been properly prepared
in accordance with IFRSs as adopted by the European Union and as
applied in accordance with the provisions of the Companies Act 2006; and
— The ?nancial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
?nancial statements, Article 4 of the IAS Regulation.
This opinion is to be read in the context of what we say in the remainder of
this report.
What we have audited
The Group ?nancial statements and Parent Company ?nancial statements
(the “?nancial statements”), which are prepared by London Stock Exchange
Group (“LSEG”) plc, comprise:
— the Group and Parent Company balance sheet as at 31 March 2014;
— the Group income statement and statement of comprehensive income
for the year then ended;
— the Group and Parent Company statements of changes in equity and
statements of cash ?ows for the year then ended; and
— the notes to the ?nancial statements, which include a summary of
signi?cant accounting policies and other explanatory information.
The ?nancial reporting framework that has been applied in their preparation
comprises applicable law and IFRSs as adopted by the European Union and,
as regards the Parent Company, as applied in accordance with the provisions
of the Companies Act 2006.
What an audit of financial statements involves
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves obtaining
evidence about the amounts and disclosures in the ?nancial statements
suf?cient to give reasonable assurance that the ?nancial statements are free
from material misstatement, whether caused by fraud or error. This includes
an assessment of:
— whether the accounting policies are appropriate to the Group’s and
Parent Company’s circumstances and have been consistently applied
and adequately disclosed;
— the reasonableness of signi?cant accounting estimates made by the
Directors; and
— the overall presentation of the ?nancial statements.
In addition, we read all the ?nancial and non-?nancial information in
the Annual Report and Accounts (“Annual Report”) to identify material
inconsistencies with the audited ?nancial statements and to identify any
information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing
the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Overview of our audit approach
Materiality
We set certain thresholds for materiality. These helped us to determine the
nature, timing and extent of our audit procedures and to evaluate the effect of
misstatements, both individually and on the ?nancial statements as a whole.
Based on our professional judgment, we determined overall materiality for the
Group ?nancial statements as a whole to be £22.1 million, being ?ve per cent
of pro?t before tax, acquisition amortisation and non-recurring items. We
chose this benchmark because we believe it is a reasonable representation of
the underlying performance of the Group.
We agreed with the Audit Committee that we would report to them
misstatements identi?ed during our audit above £500,000 as well as
misstatements below that amount that, in our view, warranted reporting
for qualitative reasons.
Overview of the scope of our audit
When establishing the scope of our audit we considered the internal
organisation of the Group and determined a scope of audit work that
optimised the coverage of risks, balances and transactions.
We scoped our audit based on the Group’s legal entity structure. Our work
focused primarily on those entities which in our view required an audit of
their complete ?nancial information due to their size and risk characteristics.
This work included an audit of those entities that comprise all, or substantially
all, of the Capital Markets, Post Trade Services, Information Services and
LCH.Clearnet businesses which together constituted 97 per cent of the
Group pro?t before tax, acquisition amortisation and non-recurring items.
In addition we carried out speci?c audit procedures on certain ?nancial
statement line items and performed work on the consolidation process.
This gave us the evidence we needed for our opinion on the Group ?nancial
statements as a whole.
In establishing the overall approach to the Group audit, we determined
the type of work that needed to be performed at the legal entities by us,
by component auditors from another PwC network ?rm and one other
?rm operating under our instruction. Where the work was performed by
component auditors, we determined the level of involvement we needed to
have in the audit work at those legal entities to be able to conclude whether
suf?cient appropriate audit evidence had been obtained as a basis for our
opinion on the Group ?nancial statements as a whole.
Areas of particular audit focus
In preparing the ?nancial statements, the Directors made a number of
subjective judgements, for example in respect of signi?cant accounting
estimates that involved making judgments and considering future events
that are inherently uncertain. We primarily focused our work in these areas by
assessing the Directors’ judgements against available evidence, forming our
own judgements, and evaluating the disclosures in the ?nancial statements.
In our audit, we tested and examined information, using sampling and other
auditing techniques, to the extent we considered necessary to provide a
reasonable basis for us to draw conclusions. We obtained audit evidence
through testing the effectiveness of controls, substantive procedures or a
combination of both.
We considered the following areas to be those that required particular focus
in the current year. This is not a complete list of all risks or areas of focus
identi?ed by our audit. We discussed these areas of focus with the Audit
Committee. Their report on those matters that they considered to be signi?cant
issues in relation to the ?nancial statements is set out on pages 67-68.
Independent Auditors’ Report to the
members of London Stock Exchange Group plc
102 Governance
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Area of focus
How the scope of our audit addressed
the area of focus
Goodwill impairment
assessment
We focused on this
area because the
determination of
whether or not
the carrying value
of goodwill is
supportable involved
signi?cant judgements
about the future
performance of the
business, as set out in
note 13 to the Group
?nancial statements.
We evaluated the Directors’ forecast of future cash
?ows including comparing them to the latest Board
approved budgets and considering past
performance against budget. We also tested the
integrity of the model and assessed how both
internal and external drivers of performance were
incorporated into the projections. In particular
we challenged:
— The Director’s key assumptions for short and
long term revenue growth rates by comparing
them to economic and industry forecasts; and
— The discount rate used by independently
recalculating the cost of capital.
To direct our testing to the areas of highest risk we
performed sensitivity analysis, including assessing
the impact of reasonably possible changes in
discount rates, revenues and operating margins
on the goodwill carrying value.
We also evaluated the adequacy of disclosures
made in note 13 to the Group ?nancial statements.
Consolidation of
LCH.Clearnet
We focused on this area
because the governance
and management of
LCH.Clearnet is subject
to complex shareholder
agreements and
therefore judgement is
required to determine
whether the Group
exercises control over
LCH.Clearnet.
We read the shareholder agreements and assessed
the nature of the interactions between LSEG,
LCH.Clearnet and other non-controlling interests,
including Board balance, rights of veto, and rights
to appoint and remove Directors.
We also evaluated how the Group demonstrated
its ability to exercise control over LCH.Clearnet
in practice, for example in connection with key
governance decisions such as the setting of
strategy, appointment of the CEO, approval of
remuneration of senior management and changes
in material contracts.
Area of focus
How the scope of our audit addressed
the area of focus
Purchase Price
Allocation on
acquisition of
LCH.Clearnet
We focused on this area
because judgement is
required to allocate the
price paid between the
different intangible
assets acquired.
We tested the Directors’ purchase price allocation
exercise including evaluating the reasonableness
of the assumptions used, testing the input data
and re-performing the model calculations. As part
of this work we:
— Met with the third party valuers who carried
out the Directors’ purchase price allocation
exercise to understand the methodology used
and also their view on the key sensitivities and
judgments taken;
— Assessed the methodology used including
considering valuation best practice relevant
to the LCH.Clearnet exercise; and
— Challenged the assumptions used, including
revenue growth, operating margin, customer
attrition and discount rates, by comparing
them with historical performance and
considering how external performance
drivers were incorporated into the projections.
We also evaluated the appropriateness of the
disclosures made in note 28 to the Group
?nancial statements.
Central Counterparty
Clearing (‘CCP’) assets
and liabilities
We focused on this
area because of the
magnitude of the
balance in the overall
context of the Group.
Speci?cally we focused
on the completeness,
valuation and existence
of the CCP assets and
liabilities recognised
on the Group
balance sheet.
In respect of the Italian clearing business,
we tested the IT general computer controls and
automated controls for clearing systems, as well
as the manual controls over processing activities.
We also tested the reconciliations between the
operational systems and the ?nancial records and
obtained external con?rmations for a sample of
CCP balances at the year end and all cash balances
in relation to default funds.
In respect of the UK clearing business, we tested
the IT general computer controls and automated
controls for clearing systems, as well as the manual
controls over processing activities. We also tested
the reconciliations between the operational
systems and the ?nancial records.
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Governance Independent Auditors’ Report to the members of London Stock Exchange Group plc
London Stock Exchange Group plc Annual Report 2014
Going Concern
Under the Listing Rules we are required to review the Directors’ statement,
set out on page 101, in relation to going concern. We have nothing to report
having performed our review.
As noted in the Directors’ statement, the Directors have concluded that
it is appropriate to prepare the Group’s and Parent Company’s ?nancial
statements using the going concern basis of accounting. The going concern
basis presumes that the Group and Parent Company have adequate resources
to remain in operation, and that the Directors intend them to do so, for at
least one year from the date the ?nancial statements were signed. As part
of our audit we have concluded that the Directors’ use of the going concern
basis is appropriate.
However, because not all future events or conditions can be predicted, these
statements are not a guarantee as to the Group’s and the Parent Company’s
ability to continue as a going concern.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion:
— the information given in the Strategic Report and the Directors’ Report
for the ?nancial year for which the ?nancial statements are prepared is
consistent with the ?nancial statements; and
— the part of the Directors’ Remuneration Report to be audited has been
properly prepared in accordance with the Companies Act 2006.
Area of focus
How the scope of our audit addressed
the area of focus
Risk of fraud in
revenue recognition
ISAs (UK & Ireland)
presume there is a risk
of fraud in revenue
recognition as a result
of the potential for
management bias
in order to achieve
planned results.
We focused on the
accuracy of Capital
Markets secondary
revenue and the
occurrence of
Information Services
revenue because
of the higher risk
posed by complex
tariff structures.
For the Group’s main Capital Markets secondary
businesses we tested the accuracy of the capital
markets secondary revenue by rebuilding the
pricing model and independently recalculating
the total revenue using the base trade data.
Additional testing of revenue included:
— Testing of the IT general controls for revenue
systems and agreeing output from revenue
systems to ?nancial ledgers
— Tracing full populations of revenue postings
through to cash or receivables and
investigating unusual items
— Testing compliance with complex contractual
agreements for a sample of Information
Services revenue postings
Risk of management
override of internal
controls
ISAs (UK & Ireland)
require that we
consider this and
hence it is an area that
receives heightened
focus on every audit
conducted under these
auditing standards.
We tested journal entries, including targeting
our testing at higher risk journals by stratifying
the population by risk characteristics.
We also tested key reconciliations for bank,
intercompany and other balance sheet accounts.
We assessed the overall control environment
of the Group and interviewed senior management,
Group’s legal, risk, compliance and internal
audit functions.
We understood the key trigger points for
incentive payments to senior management
and examined the signi?cant accounting
estimates and judgements relevant to the
?nancial statements for evidence of bias by
Directors that may represent a risk of material
misstatement due to fraud.
104 Governance
Independent Auditors’ Report to the
members of London Stock Exchange Group plc
continued
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Other matters on which we are required to report by exception
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
— we have not received all the information and explanations we require for
our audit; or
— adequate accounting records have not been kept by the Parent Company,
or returns adequate for our audit have not been received from branches
not visited by us; or
— the Parent Company ?nancial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report if, in our opinion,
certain disclosures of Directors’ remuneration speci?ed by law have not been
made, and under the Listing Rules we are required to review certain elements
of the report to shareholders by the Board on Directors’ remuneration. We
have no exceptions to report arising from these responsibilities.
Corporate Governance Statement
Under the Listing Rules we are required to review the part of the Corporate
Governance Statement relating to the Parent Company’s compliance with
nine provisions of the UK Corporate Governance Code (‘the Code’). We have
nothing to report having performed our review.
On page 101 of the Annual Report, as required by the Code Provision C.1.1,
the Directors state that they consider the Annual Report taken as a whole
to be fair, balanced and understandable and provides the information
necessary for members to assess the Group’s performance, business model
and strategy. On pages 67 and 68, as required by C.3.8 of the Code, the Audit
Committee has set out the signi?cant issues that it considered in relation
to the ?nancial statements, and how they were addressed. Under ISAs
(UK & Ireland) we are required to report to you if, in our opinion:
— the statement given by the Directors is materially inconsistent with our
knowledge of the Group acquired in the course of performing our audit; or
— the section of the Annual Report describing the work of the Audit
Committee does not appropriately address matters communicated by
us to the Audit Committee.
We have no exceptions to report arising from this responsibility.
Other information in the Annual Report
Under ISAs (UK & Ireland), we are required to report to you if, in our opinion,
information in the Annual Report is:
— materially inconsistent with the information in the audited ?nancial
statements; or
— apparently materially incorrect based on, or materially inconsistent with,
our knowledge of the Group and Parent Company acquired in the course
of performing our audit; or
— is otherwise misleading.
We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the Directors
As explained more fully in the Directors’ Responsibilities Statement set out
on page 101, the Directors are responsible for the preparation of the Group
and Parent Company ?nancial statements and for being satis?ed that they
give a true and fair view.
Our responsibility is to audit and express an opinion on the Group and Parent
Company ?nancial statements in accordance with applicable law and ISAs
(UK & Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the
Company’s members as a body in accordance with Chapter 3 of Part 16
of the Companies Act 2006 and for no other purpose. We do not, in giving
these opinions, accept or assume responsibility for any other purpose or to
any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
Alison Morris
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
15 May 2014
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Governance Independent Auditors’ Report to the members of London Stock Exchange Group plc
106 Group ?nancial statements
Consolidated income statement
Consolidated statement
of comprehensive income
London Stock Exchange Group plc Annual Report 2014
Year ended 31 March 2014 2014 2013
Before acquisition
amortisation and
non-recurring
items
Acquisition
amortisation and
non-recurring
items Total
Before acquisition
amortisation and
non-recurring
items
Acquisition
amortisation and
non-recurring
items Total
Notes £m £m £m £m £m £m
Revenue 4 1,088.3 – 1,088.3 726.4 – 726.4
Net treasury income through CCP business 109.8 – 109.8 116.7 – 116.7
Other income 11.5 – 11.5 9.8 18.3 28.1
Total income 4 1,209.6 – 1,209.6 852.9 18.3 871.2
Expenses
Operating expenses 5 (698.4) (158.1) (856.5) (422.7) (100.1) (522.8)
Operating pro?t/(loss) 7 511.2 (158.1) 353.1 430.2 (81.8) 348.4
Finance income 5.5 – 5.5 2.7 – 2.7
Finance expense (74.3) – (74.3) (52.2) – (52.2)
Net ?nance expense 8 (68.8) – (68.8) (49.5) – (49.5)
Pro?t/(loss) before taxation 442.4 (158.1) 284.3 380.7 (81.8) 298.9
Taxation 9 (124.7) 23.1 (101.6) (95.7) 12.3 (83.4)
Pro?t/(loss) for the ?nancial year 317.7 (135.0) 182.7 285.0 (69.5) 215.5
Pro?t/(loss) attributable to non-controlling interests 30.7 (18.1) 12.6 1.0 (2.5) (1.5)
Pro?t/(loss) attributable to equity holders 287.0 (116.9) 170.1 284.0 (67.0) 217.0
317.7 (135.0) 182.7 285.0 (69.5) 215.5
Basic earnings per share 10 63.0p 80.4p
Diluted earnings per share 10 61.4p 79.0p
Adjusted basic earnings per share 10 107.1p 105.3p
Adjusted diluted earnings per share 10 104.4p 103.4p
Dividend per share in respect of the ?nancial period: 11
Dividend per share paid during the year 29.9p 28.7p
Dividend per share declared for the year 30.8p 29.5p
Year ended 31 March 2014 2014 2013
Notes £m £m
Pro?t for the ?nancial year 182.7 215.5
Other comprehensive income/(loss):
Items that may be subsequently reclassi?ed to pro?t or loss
De?ned bene?t pension scheme actuarial loss 16 (1.3) (6.9)
Cash ?ow hedge (0.3) 0.3
Net investment hedge (16.4) (1.9)
Change in value of available for sale ?nancial assets 6.1 1.2
Exchange (loss)/gain on translation of foreign operations (43.7) 19.2
Tax related to items not recognised in income statement 9 1.5 3.9
Other comprehensive (loss)/income net of tax (54.1) 15.8
Total comprehensive income for the ?nancial year 128.6 231.3
Attributable to non-controlling interests 5.2 (0.6)
Attributable to equity holders 123.4 231.9
Total comprehensive income for the ?nancial year 128.6 231.3
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107 Group ?nancial statements Balance sheets
Balance sheets
31 March 2014 Group Company
2014 2013 2014 2013
Notes £m £m £m £m
Assets
Non-current assets
Property, plant and equipment 12 93.3 80.1 – –
Intangible assets 13 2,476.0 2,049.3 – –
Investments in associates 0.3 0.6 – –
Investments in subsidiary undertakings 14 – – 3,858.9 3,779.1
Deferred tax assets 15 42.2 19.2 – –
Derivative ?nancial instruments 18 6.7 4.3 6.7 4.0
Available for sale investments 18 4.8 – – –
Retirement bene?t asset 16 14.5 – – –
Other non-current assets 38.0 12.0 – –
2,675.8 2,165.5 3,865.6 3,783.1
Current assets
Inventories 0.5 1.5 – –
Trade and other receivables 17 250.5 185.7 534.1 579.4
CCP ?nancial assets 470,497.7 137,620.2 – –
CCP cash and cash equivalents (restricted) 33,278.5 8,476.2 – –
CCP clearing business assets 18 503,776.2 146,096.4 – –
Current tax 22.3 24.6 0.1 –
Assets held at fair value 18 18.7 6.1 – –
Cash and cash equivalents 20 919.2 446.2 – 0.1
504,987.4 146,760.5 534.2 579.5
Total assets 507,663.2 148,926.0 4,399.8 4,362.6
Liabilities
Current liabilities
Trade and other payables 21 401.5 230.0 204.3 160.9
Derivative ?nancial instruments 18 3.4 0.1 – –
CCP clearing business liabilities 18 503,747.4 146,088.1 – –
Current tax 14.8 43.2 – –
Borrowings 22 278.7 0.4 26.0 –
Provisions 24 2.8 1.1 – –
504,448.6 146,362.9 230.3 160.9
Non-current liabilities
Borrowings 22 945.0 796.4 796.6 796.4
Other non-current payables 21 – 3.4 – –
Derivative ?nancial instruments 18 4.0 3.5 4.0 3.5
Deferred tax liabilities 15 176.0 109.0 – –
Retirement bene?t obligation 16 36.9 25.6 – –
Other non-current liabilities 79.2 – – –
Provisions 24 16.6 26.2 – –
1,257.7 964.1 800.6 799.9
Total liabilities 505,706.3 147,327.0 1,030.9 960.8
Net assets 1,956.9 1,599.0 3,368.9 3,401.8
Equity
Capital and reserves attributable to the Company’s equity holders
Ordinary share capital 25 18.8 18.8 18.8 18.8
Retained (losses)/earnings (79.0) (126.8) 1,531.6 1,564.5
Other reserves 1,587.0 1,638.5 1,818.5 1,818.5
Total shareholder funds 1,526.8 1,530.5 3,368.9 3,401.8
Non-controlling interests 430.1 68.5 – –
Total equity 1,956.9 1,599.0 3,368.9 3,401.8
The ?nancial statements on pages 106-141 were approved by the Board on 15 May 2014 and signed on its behalf by:
Xavier Rolet David Warren
Chief Executive Chief Financial Of?cer
108 Group ?nancial statements
Cash ?ow statements
London Stock Exchange Group plc Annual Report 2014
Year ended 31 March 2014 Group Company
2014 2013 2014 2013
Notes £m £m £m £m
Cash ?ow from operating activities
Cash generated from/(absorbed by) operations 26 515.4 487.5 (13.0) 0.1
Interest received 4.6 2.4 23.5 47.1
Interest paid (71.7) (43.2) (62.6) (51.9)
Corporation tax paid (99.8) (64.9) – 24.9
Withholding tax paid (23.2) (39.3) – –
Net cash in?ow/(out?ow) from operating activities 325.3 342.5 (52.1) 20.2
Cash ?ow from investing activities
Purchase of property, plant and equipment (23.6) (18.2) – –
Purchase of intangible assets (67.3) (28.2) – –
Investment in other acquisition – (11.2) – –
Investment in subsidiaries (376.5) (3.1) – –
Net cash in?ow from acquisitions 432.0 1.1 – –
Dividends received 0.3 0.2 118.2 160.7
Proceeds from sale of investment in associate 7.1 – – –
Net cash (out?ow)/in?ow from investing activities (28.0) (59.4) 118.2 160.7
Cash ?ow from ?nancing activities
Capital Raise 114.4 – – –
Dividends paid to shareholders (80.8) (77.4) (80.8) (77.4)
Dividends paid to non-controlling interests (2.9) (4.3) – –
Cost of capital raise (2.7) – – –
Loans from/(to) ESOP trust – – – (13.9)
Loans to subsidiary companies – – 16.6 (139.4)
Purchase of own shares by ESOP Trust (28.0) (13.9) (28.0)
Proceeds from own shares on exercise of employee share options 2.3 0.3 – 0.3
Proceeds from borrowings 283.5 297.6 26.0 297.6
Repayments of borrowings (91.4) (257.8) – (247.8)
Net cash in?ow/(out?ow) from ?nancing activities 194.4 (55.5) (66.2) (180.6)
Increase/(decrease) in cash and cash equivalents 491.7 227.6 (0.1) 0.3
Cash and cash equivalents at beginning of year 446.2 216.0 0.1 0.2
Exchange (losses)/gains on cash and cash equivalents (18.7) 2.6 – (0.4)
Cash and cash equivalents at end of year 919.2 446.2 – 0.1
Group cash ?ow does not include cash and cash equivalents held by the Group’s Post Trade operations on behalf of its clearing members for use in its operation
as manager of the clearing and guarantee system. These balances represent margins and default funds held for counterparties for short periods in connection
with this operation. Interest on CCP balances are received net of withholding tax, which is deducted at source. This withholding tax is effectively a cash out?ow
for the Group, and is shown separately in the cash ?ow statement.
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109 Group ?nancial statements Statements of changes in equity
Statements of changes in equity
Group Attributable to equity holders
Ordinary
share
capital
Retained
loss
Other
reserves
Total
attributable to
equity holders
Non-controlling
interests
Total
equity
£m £m £m £m £m £m
31 March 2012 18.8 (262.9) 1,620.9 1,376.8 72.9 1,449.7
Pro?t/(loss) for the year – 217.0 – 217.0 (1.5) 215.5
Other comprehensive income for the year – (2.7) 17.6 14.9 0.9 15.8
Final dividend relating to the year ended 31 March 2012 – (51.2) – (51.2) – (51.2)
Interim dividend relating to the year ended 31 March 2013 – (26.2) – (26.2) – (26.2)
Dividend payments to non-controlling interests – – – – (3.8) (3.8)
Employee share scheme expenses – (0.8) – (0.8) – (0.8)
31 March 2013 18.8 (126.8) 1,638.5 1,530.5 68.5 1,599.0
Pro?t for the year – 170.1 – 170.1 12.6 182.7
Other comprehensive income for the year – 4.8 (51.5) (46.7) (7.4) (54.1)
Final dividend relating to the year ended 31 March 2013 – (53.5) – (53.5) – (53.5)
Interim dividend relating to the year ended 31 March 2014 – (27.3) – (27.3) – (27.3)
Dividend payments to non-controlling interests – – – – (5.4) (5.4)
Employee share scheme expenses – (13.0) – (13.0) – (13.0)
Purchase of non-controlling interest – (33.3) – (33.3) 361.8 328.5
31 March 2014 18.8 (79.0) 1,587.0 1,526.8 430.1 1,956.9
Other reserves comprise the following:
Capital redemption reserve of £514.2 million (2013: £514.2 million), a non-distributable reserve set up as a result of a court approved capital reduction.
Reverse acquisition reserve of £(512.5) million (2013: £(512.5) million), a non-distributable capital reserve arising on consolidation as a result of the capital
reduction scheme.
Foreign exchange translation reserve of £318.5 million (2013: £353.3 million), re?ecting the impact of foreign currency changes on the translation of
foreign operations.
Merger reserve of £1,304.3 million (2013: £1,304.3 million), arising on consolidation when the Company issued shares as part of the consideration
to acquire subsidiary undertakings.
Hedging reserve of £(37.5) million (2013: £(20.8) million), representing the cumulative fair value adjustment recognised in respect of net investment and
cash ?ow hedges undertaken in accordance with hedge accounting principles.
Company Attributable to equity holders
Other reserves
Ordinary
share
capital
Retained
earnings
Capital
redemption
reserve
Merger
reserve
Total
attributable to
equity holders
£m £m £m £m £m
31 March 2012 18.8 1,463.3 514.2 1,304.3 3,300.6
Pro?t for the year – 176.2 – – 176.2
Final dividend relating to the year ended 31 March 2012 – (51.2) – – (51.2)
Interim dividend relating to the year ended 31 March 2013 – (26.2) – – (26.2)
Employee share scheme expenses – 2.4 – – 2.4
31 March 2013 18.8 1,564.5 514.2 1,304.3 3,401.8
Pro?t for the year – 63.2 – – 63.2
Final dividend relating to the year ended 31 March 2013 – (53.5) – – (53.5)
Interim dividend relating to the year ended 31 March 2014 – (27.3) – – (27.3)
Employee share scheme expenses – (15.3) – – (15.3)
31 March 2014 18.8 1,531.6 514.2 1,304.3 3,368.9
110 Group ?nancial statements
Notes to the ?nancial statements
London Stock Exchange Group plc Annual Report 2014
1. Basis of preparation and accounting policies
The Company’s and Group’s consolidated ?nancial statements are prepared
in accordance with International Financial Reporting Standards (IFRS)
and IFRS Interpretations Committee (IFRIC) interpretations endorsed
by the European Union, and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
The principal accounting policies applied in the preparation of these consolidated
?nancial statements are set out below. These policies have been consistently
applied to all the years presented, unless otherwise stated.
The ?nancial statements are prepared under the historical cost convention
as modi?ed by the revaluation of assets and liabilities held at fair value and
on the basis of the Group’s accounting policies.
The Group uses a columnar format for the presentation of its consolidated
income statement. This enables the Group to aid the reader’s understanding
of its results by presenting pro?t for the year before amortisation of purchased
intangible assets and non-recurring items. This is the pro?t measure used
to calculate adjusted earnings per share and is considered to be the most
appropriate as it best re?ects the Group’s underlying, recurring cash earnings
and is the primary measure of performance monitored by the Group’s Executive
Committee. Pro?t before acquisition amortisation and non-recurring items
is reconciled to pro?t before taxation on the face of the income statement.
Consolidation
The consolidated ?nancial statements comprise the ?nancial statements
of the Company and its subsidiaries with all inter-company balances and
transactions eliminated, together with the Group’s attributable share of the
results of associates. The results of subsidiaries sold or acquired are included in
the income statement up to, or from, the date that control passes. As permitted
by Section 408 of the Companies Act 2006, the Company’s income statement
has not been included in these ?nancial statements. The Company’s income
for the year is disclosed within the statement of changes in equity.
Investments in associates are accounted for under the equity method.
The Group’s investments in associates are initially recognised at cost,
and its share of pro?ts or losses after tax from associates is included in the
consolidated income statement. Cumulative post-acquisition movements
are adjusted against the carrying amount of the investment in the Group’s
balance sheet. The ?nancial statements of associates are used by the Group to
apply the equity method, under which the Group’s income statement re?ects
the Group’s share of the results of operations of the associates. A company is
considered an associate where the Group has a signi?cant in?uence.
The acquisition of subsidiaries is accounted for using the purchase method.
The cost of the acquisition is measured at the aggregate of the fair values,
at the date of exchange, of assets given, liabilities incurred or assumed,
and equity instruments issued by the Group in exchange for control of the
acquiree. Adjustments to fair values include those made to bring accounting
policies into line with those of the Group.
The Group applies a policy of treating transactions with non-controlling interests
through the economic entity model. Transactions with non-controlling interests
are recognised in equity.
Investments in subsidiaries shares, loans and other contributions are
recognised at cost. These are reviewed for impairment when events indicate
the carrying amount may not be recoverable and are accounted for in the
Company’s ?nancial statements at cost less accumulated impairment losses.
Recent accounting developments
The following standards and interpretations have been issued by the
International Accounting Standards Board (IASB) and IFRIC and have
been adopted in these ?nancial statements:
Amendments to IFRS 1, ‘First time adoption’ – exemption for severe
hyperin?ation and removal of ?xed dates;
Amendment to IFRS 7, ‘Financial instruments: Disclosures’ – disclosures
on transfers of ?nancial assets and offsetting ?nancial assets and liabilities;
IAS19R, ‘Amendments to IAS 19 Employee Bene?ts’;
IFRS 13, ‘Fair value measurement’;
IAS 1, ‘Presentation of Financial Statements’ – Presentation of Items of Other
Comprehensive Income; and
IFRS various Annual improvements 2012 and 2013.
The adoption of these standards did not have a material impact on these
consolidated ?nancial statements.
The restatement relating to IAS19R resulted in reclassi?cation of net expenses
with an immaterial impact to pro?t for the ?nancial period.
The following standards and interpretations were issued by the IASB and IFRIC
since the last Annual Report, but have not been adopted either because they
were not endorsed by the European Union (EU) at 31 March 2014 or they are
not yet mandatory and the Group has not chosen to early adopt. The impact
on the Group’s ?nancial statements of the future standards, amendments and
interpretations is still under review, but the Group does not expect any of these
changes to have a material impact on the results or the net assets of the Group:
International accounting standards and interpretations Effective date
IFRS 10, ‘Consolidated ?nancial statements’ and amendments 1 January 2013
IFRS 11, ‘Joint arrangements’ 1 January 2013
IFRS 12, ‘Disclosure of interests in other entities’
and amendments 1 January 2013
IAS 27 (Revised 2011), ‘Separate ?nancial statements’
and amendments 1 January 2013
IAS 28 (Revised 2011), ‘Associates and joint ventures’ 1 January 2013
Amendment to IAS 32, ‘Financial instruments: Presentation’ 1 January 2014
Amendment to IAS 36, ‘Impairment of assets’ on recoverable
amount disclosures 1 January 2014
Amendment to IAS 39 on novation of derivatives
and hedge accounting 1 January 2014
IFRIC 21, ‘Levies’ 1 January 2014
Amendments to IAS 19, ‘Employee Bene?ts’ on de?ned
bene?t plans 1 July 2014
IFRS 14, ‘Regulatory deferral accounts’ 1 January 2016
IFRS 9, ‘Financial instruments’ and amendments 1 January 2018
Accounting policies
Income Statement
Revenue
Revenue is measured at the fair value of the consideration received or receivable
and represents amounts receivable for goods and services provided in the
normal course of business, net of discounts, VAT and other sales related taxes.
Revenue is recognised in the period when the service or supply is provided.
The sources of revenue are:
a) Maintenance contracts, membership and other fees – revenue is
recognised on a straight-line basis over the period to which the fee relates;
b) Admission fees – revenue is recognised at the time of admission to trading;
c) Clearing fee income and rebates, together with other fee income and net
settlement fees, are recognised on a transaction by transaction basis in
accordance with the Group’s fee scales;
d) Royalties – revenue is recognised at the date at which they are earned or
measurable with certainty;
e) IT products – where there is no signi?cant service obligation the revenue
is recognised upon delivery and acceptance of the software or hardware
by the customer, in other circumstances revenue is recognised on
provision of contracted services;
f) IT solutions – where software is sold requiring signi?cant modi?cation,
integration or customisation, the consideration is allocated between the
different elements on a fair value basis. Revenue is recognised using a
percentage of completion method. The stage of completion is determined
by reference to the costs incurred to date as a proportion of the total
estimated costs or the services performed to date as a percentage of
total services to be performed. Provision is made for all foreseeable
future losses in the period in which they are identi?ed;
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111 Group ?nancial statements Notes to the ?nancial statements
g) Software and Licence fees – revenue is recognised when the performance
under the contract has occurred and the revenue has been earned; and
h) Other – all other revenue is recognised in the month in which the service
is provided. Borsa Italiana group defers some of the income received
from cash trading and FTSE MIB futures trading and clearing. This deferral
results in revenues being recognised at the average price of transactions
forecast for the full year, as pricing levels reduce during the year when
incremental volume targets are achieved.
The main source of revenue are through fees.
Non-recurring items
Items of income and expense that are material by size and/or nature and are
non-recurring are classi?ed as non-recurring items on the face of the income
statement within their relevant category. The separate reporting of these
items together with amortisation of purchased intangible assets helps give
an indication of the Group’s underlying performance.
Pension costs
The Group operates de?ned bene?t and de?ned contribution pension
schemes. For the de?ned bene?t schemes the service cost, representing
bene?ts accruing to employees, is included as an operating expense.
The interest cost and expected return on plan assets used in the previous
version of IAS 19 are replaced with a net-interest amount under IAS 19
(Revised 2011), which is calculated by applying the discount rate to the net
de?ned bene?t liability or asset at the start of each annual reporting period.
Actuarial gains and losses arising from experience adjustments, changes in
actuarial assumptions or differences between actual and expected returns
on assets are recognised at each period end net of tax in the statement of
comprehensive income. The net asset or liability recognised on the balance
sheet comprises the difference between the present value of pension
obligations and the fair value of scheme assets. For de?ned contribution
schemes, the expense is charged to the income statement as incurred
Share based compensation
The Group operates a number of equity settled share based compensation
plans for employees. The charge to the income statement is determined by
the fair value of the options granted or shares awarded at the date of grant
and recognised over the relevant vesting period.
Foreign currencies
The consolidated ?nancial statements are presented in sterling, which is
the Company’s presentation and functional currency. Foreign currency
transactions are converted into the functional currency using the rate ruling
at the date of the transaction. Foreign exchange gains or losses resulting
from the settlement of such transactions and from the translation at
year-end rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement. Translation differences
on non-monetary items, such as equities held at fair value through pro?t or
loss, are reported as part of their fair value gain or loss. Exceptions to this are
where the non-monetary items form part of the net investment in a foreign
operation or are designated as hedges of a net investment, or as cash ?ow
hedges. Such exchange differences are initially recognised in equity.
The results and ?nancial position of all Group entities that have a functional
currency different from the presentation currency are converted into the
presentation currency as follows:
a) assets and liabilities including goodwill, purchased intangible assets and
fair value adjustments are converted at the closing balance sheet rate;
b) income and expenses are translated and recorded in the income
statement at the average monthly rates prevailing; and
c) all resulting exchange differences are recognised as a separate
component of equity.
On consolidation, exchange differences arising from the translation of the
net investment in foreign operations, and of borrowing and other currency
instruments designated as hedges of such investments, are taken to
shareholders’ equity. When a foreign operation is partially disposed of
or sold, exchange differences that were recorded in equity are recognised
in the income statement as part of the gain or loss on sale.
Finance income and expense
Finance income and expense comprises interest earned on cash deposited
with ?nancial counterparties and interest paid on borrowings which re?ect
the agreed market-based or contractual rate for each transaction undertaken
during the ?nancial year.
Recurring fees and charges levied on committed bank facilities and the
payments and cash management transactions and services provided by the
Group’s banks are charged to the income statement as accrued. Credit facility
arrangement fees are capitalised and then amortised back to the income
statement over the term of the facility subject to protected utilisation. If a
facility is deemed unlikely to be drawn over its life, the arrangement fees
will be charged immediately to the income statement. Fees and charges
are included within other ?nance costs.
Fair value gains and losses on ?nancial instruments include the movement
in the market valuations of derivative instruments held as fair value hedges.
Balance Sheet
Property, plant and equipment
Property, plant and equipment are included in the ?nancial statements
at cost less accumulated depreciation and any provision for impairment.
Freehold buildings, ?xed plant and plant and equipment are stated at cost
and are depreciated to residual value on a straight line basis over the
estimated useful economic lives of the assets which are as follows:
a) Freehold buildings – 33 to 50 years;
b) Fixed plant – three to 20 years; and
c) Plant and equipment – three to 15 years.
Leasehold properties and improvements are included at cost and depreciated
to residual value over the shorter of the period of the lease or the useful
economic life of the asset.
Leases
Leases in which a signi?cant portion of the risks and rewards of ownership
are retained by the lessor are classi?ed as operating leases. Payments made
under operating leases are charged to the income statement on a straight-
line basis. Lease incentives are spread over the term of the lease.
The Group leases certain plant and equipment where the Group has
substantially all the risks and rewards of ownership. These are classi?ed as
?nance leases. Finance leases are capitalised at the lease’s commencement
at the lower of the fair value of the leased property and the present value of
the minimum lease payments.
Each lease payment is apportioned between the ?nance charge and the
liability so as to achieve a constant rate on the ?nance balance outstanding.
Plant and equipment acquired under ?nance leases is depreciated over the
shorter of the useful life of the asset and the lease term.
Due to the immaterial value of ?nance leases within the Group, they are not
disclosed separately within the accounts.
Intangible assets
Goodwill arising on the acquisition of subsidiaries represents the excess of
consideration paid over the fair value of the Group’s share of net identi?able
assets purchased and is allocated on a cash generating unit basis. It is
not amortised but is tested for impairment annually, and when there are
indications that the carrying value may not be recoverable, and is carried
at cost less accumulated impairment losses.
112 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
c) Loans and receivables
Loans and receivables are non-derivative ?nancial assets with ?xed or
determinable payments that are not quoted in an active market. They are
included in current assets, except for those with maturities greater than
12 months after the balance sheet date which are classi?ed as non-current
assets. Loans and receivables comprise trade and other receivables and cash
and cash equivalents in the balance sheet.
Financial assets and liabilities of the central counterparty
(CCP) business
Assets and liabilities of the CCP clearing service relate to subsidiaries that
perform the CCP clearing business. The activities include clearing of
?nancial derivatives, equities and bond transactions on regulated markets.
The Group enters into a contractual arrangement in respect of each side
of the transaction, bears the risk associated with counterparties failing
to honour their obligations and, in the event of a failure to deliver by any
counterparty, is required itself to complete the delivery. Accordingly, the
Group must record an asset and a liability on its balance sheet in respect of
each of the sale and purchase sides of each transaction. However, except in
respect of failed transactions the Group as a CCP clearer does not bear any
price risk and the value of the sale and purchase side of each transaction
are the same; consequently, the principal CCP asset and liability amounts
largely match each other. The Group has adopted the settlement date as
the reference date for recognising ?nancial assets.
Income recognised through the CCP clearing business includes net treasury
income earned on margin and default funds, held as part of our risk management
process, and is shown separately from the Group revenues. This amount has been
shown separately on the face of the income statement to distinguish this income
stream from revenues arising from the Group’s other activities and provides the
reader with a greater understanding of the operating activities of the Group.
Financial assets and liabilities are offset and the net amount reported
in the balance sheet when there is a legally enforceable right to offset
the recognised amounts and there is an intention to settle on a net basis
or realise the asset and settle the liability simultaneously.
Accounting treatments of CCP financial assets and liabilities include the following:
a) Derivatives, trading assets and liabilities
These transactions are initially recorded at fair value, and are subsequently
re-measured on the basis of the market price of each derivative instrument
at the period end. Since the asset and liability positions of the CCP clearer are
matched, the same amount is recorded for both the assets and liabilities and
no net fair value gains or losses are recognised in the income statement.
b) Receivables for and liabilities under repurchase transactions
These represent repurchase transactions (repos) by clearing members using the
Group’s clearing and guarantee service. They represent the value of transactions
already settled spot and not yet settled at term. These transactions are initially
recognised at fair value and are subsequently measured at amortised cost,
by allocating the yield on the repo pro-rated over the duration of the contract
(the coupon accrued in the period and the difference between the spot and
forward prices). Since the asset and liability positions for repos are matched,
the same amount is recorded for both assets and liabilities and no gain or loss
is recorded in the income statement.
c) Other receivables from and payables to clearing members and default funds
These comprise accounts receivable and payable deriving from the activities of
clearing members in derivatives, equities and bond transactions. They mainly
represent amounts to be received or paid in relation to initial and variation
margins, option premiums, securities as collateral and default fund contributions
and are initially recorded at fair value. They are generally settled on the next day
and, accordingly, are not discounted back to current value. Default funds absorb
any losses incurred by the Group in the event of clearing members default where
margin collateral is insuf?cient to cover the management and close out of the
positions of the defaulting members.
On the acquisition of a business, fair values are attributed to the assets and
liabilities acquired. These may include brand names, customer relationships,
licences and software intellectual property, all of which are recorded as intangible
assets and held at cost less accumulated amortisation. These assets are amortised
on a straight line basis over their useful economic lives, which are as follows:
a) Customer and supplier relationships – two to 25 years (material assets
are amortised over a life exceeding 15 years);
b) Brands – 10 to 25 years (material assets are amortised over a life of
25 years); and
c) Software licenses and intellectual property – two to 25 years (the majority
of material assets are amortised over a life not exceeding ?ve years).
Third party software costs for the development and implementation of systems
which enhance the services provided by the Group are capitalised and amortised
over their estimated useful economic lives of three to ?ve years.
Internal product development expenditure is capitalised if the costs can be
reliably measured, the product or process is technically and commercially
feasible, future economic bene?ts are probable and the Group has suf?cient
resources to complete the development and to use or sell the asset. The assets
are recorded at cost including labour, directly attributable costs and any third
party expenses, and amortised over their useful economic lives of three years.
Current and deferred taxation
The current income tax charge is calculated on the basis of the tax laws
enacted or substantively enacted at the balance sheet date in the countries
where the Company and its subsidiaries operate and generate taxable income.
Full provision is made, using the liability method, for temporary differences
arising between the tax bases of assets and liabilities and their carrying
amounts in the ?nancial statements. Deferred taxation is determined using
tax rates that are substantially enacted at the balance sheet date and are
expected to apply when the asset is realised or liability settled. Deferred tax
assets are recognised to the extent it is probable that they will be recoverable
against future taxable pro?ts.
Classification of financial assets
Financial assets (excluding clearing business)
The Group classi?es its ?nancial assets in the following categories: at fair
value through pro?t or loss, available-for-sale and loans and receivables.
The classi?cation depends on the purpose for which the ?nancial assets were
acquired. Management determines the classi?cation of its ?nancial assets
at initial recognition:
a) Financial assets at fair value through pro?t or loss
Financial assets at fair value through pro?t or loss include ?nancial assets
held for liquidity purposes, they are initially recognised at fair value and
any subsequent changes in fair value are recognised directly in the income
statement. These assets are ?nancial instruments not designated as hedges.
b) Available-for-sale ?nancial assets
Investments (other than term deposits and interests in joint ventures,
associates and subsidiaries) are designated as available-for-sale and are
recorded on trade date at fair value plus transaction costs with changes
in fair value recognised in equity. Where the fair value is not reliably
measurable, the investment is held at cost less any provision for impairment.
Assets such as shares in clearing and payment transmission operations
and long term equity investments that do not qualify as associates or joint
ventures are usually classi?ed as available for sale.
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113 Group ?nancial statements Notes to the ?nancial statements
Trade receivables
Trade receivables are non-interest bearing and are stated at their fair value,
which is usually the original invoiced amount less provision for impairment.
A provision for impairment of trade receivables is established when there is
objective evidence that the Group will not be able to collect all amounts due
according to the original terms of the receivables. Signi?cant ?nancial
dif?culties of the debtor, probability that the debtor will enter bankruptcy
or will be subject to a ?nancial reorganisation or default on, or be delinquent
on, its payment obligations are considered indicators that the trade receivable
is impaired. The amount of the provision is the difference between the asset’s
carrying amount and the present value of the portion deemed recoverable.
The carrying amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognised in the income statement.
Subsequent recoveries of amounts previously written off are credited in the
income statement.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank, term deposits and
investments in money market funds and other instruments and structures
that are readily convertible to known amounts of cash and are subject to
insigni?cant risk of changes in value.
Assets held for sale
Assets are classi?ed as assets held for sale when their carrying amount is to
be recovered principally through a sale transaction and a sale is considered
highly probable. They are stated at the lower of carrying amount and fair
value less costs to sell.
Borrowings
Bank borrowings are initially recorded at the fair value of amounts received,
net of direct issue costs and transaction costs (including upfront facility fees).
Subsequently, these liabilities are carried at amortised cost, and interest is
charged to the income statement over the period of the borrowings using
the effective interest rate method. Similarly direct issue costs and transaction
costs (including upfront facility fees) are charged to the income statement
over the period of the borrowings using the effective interest rate method.
Share capital
The Company’s own shares held by the Employee Bene?t Trust are deducted
from equity until they vest unconditionally for employees and are held at
cost. Consideration paid in respect of these treasury shares is deducted from
equity until the shares are cancelled, reissued or disposed of.
2. Financial risk management
The Group seeks to protect its ?nancial performance from exposure to capital,
credit, sovereign, liquidity and market (including foreign exchange, fair value
and cash ?ow interest rate) risks.
Financial risk management is not speculative. It is performed at a Group
level, where the treasury function identi?es, evaluates and hedges ?nancial
risks from a Group perspective and also locally, where operating units
manage regulatory and operational risks. This includes clearing operations
at LCH.Clearnet Group and CC&G that operate in accordance with local
regulation and under locally approved risk and investment policies.
The Financial Risk Committee (FRC), a sub-Committee of the Executive
Committee, chaired by the Chief Financial Of?cer, meets monthly to
oversee the consolidated ?nancial risks of the Group. In addition, the Treasury
Committee, a sub-Committee of the FRC which is also chaired by the
Chief Financial Of?cer, meets regularly to monitor the management of
foreign exchange, interest rates, credit risks and the investment of excess
liquidity in addition to its oversight of the Group’s funding arrangements.
Both Committees ensure that treasury and risk operations are performed
in accordance with Group Board approved policies and procedures and
regular updates, on a range of key criteria as well as new developments,
are provided through the Enterprise Risk Management Framework to the
LSEG Risk Committee. See ‘Principal Risk and Uncertainties’, pages 48-53,
for further detail on the Group’s risk framework.
d) Financial assets and liabilities at fair value
These represent quoted equity and bond securities which have already
withdrawn from the settlement system but have not yet delivered to the
intermediaries who have bought them and securities traded but not yet
settled as part of the CCP function. These are initially recognised at fair value
and subsequently re-measured at fair value, based on the market price of
each security. The difference between the settlement price of each security
at trade date and the market price of that security at the period end is
recognised as a fair value gain or loss in the income statement.
e) Held to maturity
These are non-derivative ?nancial assets with ?xed or determinable payments
and ?xed maturities which the Group has the intention and ability to hold to
maturity. After initial measurement held to maturity ?nancial investments are
subsequently measured at amortised cost using the effective interest rate less
impairment. The amortisation of any premium or discount is included in the
interest income.
f) Cash and cash equivalents (restricted)
These include amounts received from clearing members to cover initial and
variation margins and default fund contributions as collateral against default
or insolvency and are deposited with banks. Such amounts are initially
recognised at fair value and are subsequently recognised at amortised cost
using the effective interest method.
Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently re-measured at their fair value
at each balance sheet date. The method of recognising the resulting gain
or loss depends on whether or not the derivative is designated as a hedging
instrument, and if so the nature of the item being hedged.
The Group applies fair value hedge accounting for hedging interest rate risk
on borrowings. Any gain or loss is recognised in the income statement within
?nance expenses.
The Group designates as cash ?ow hedges both foreign currency derivatives
and hedges of interest rate movements associated with highly probable
forecast transactions. Any gain or loss on the hedging instrument relating
to the effective portion of the hedge is recognised in equity.
The Group hedges a proportion of its net investment in its Italian Companies
by designating euro borrowings as a net investment hedge. In order to qualify
for hedge accounting, a transaction must meet strict criteria as regards
documentation, effectiveness, probability of occurrence and reliability of
measurement. The Group documents at the inception of the transaction the
relationship between hedging instruments and hedged items, as well as its
risk management objectives and strategy for undertaking various hedging
transactions. Effectiveness testing is conducted at each reporting date and
at the commencement and conclusion of any hedge in order to verify that
the hedge continues to satisfy all the criteria for hedge accounting to be
maintained. The ineffective portion is recognised in the income statement
within ?nance costs.
Amounts accumulated in equity are recycled in the income statement
in the period when the hedged item affects pro?t or loss (for example,
when the forecast transaction that is hedged takes place). When a hedging
instrument expires or is sold, or when a hedge no longer meets the criteria
for hedge accounting, any cumulative gain or loss existing in equity at that
time remains in equity and is recognised when the forecast transaction is
ultimately recognised in the income statement. When a forecast transaction
is no longer expected to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the income statement.
114 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Capital risk
Risk description Risk management approach
The Group is pro?table and its capital base comprises
equity capital and debt capital.
However, the Group recognises the risk that its entities
(whether regulated or unregulated) may not maintain
suf?cient capital to meet commercial requirements
or they may invest in projects that fail to generate a
return that is value enhancing.
The Group incorporates a number of regulated entities
within its structure. It considers that increases in the
regulatory capital requirements of those companies
and a scarcity of debt or equity (driven by its own
performance or ?nancial market conditions) 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, ful?l 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 ?exibility to invest for growth is a key capital management consideration.
The Group can manage its capital structure by varying returns to shareholders, issuing new shares or
increasing or reducing borrowings. The Board reviews dividend policy and funding capacity on a regular
basis and the Group maintains comfortable levels of debt facility headroom. Regulated entities continuously
monitor compliance with the capital requirements set by their respective competent authorities and the terms
of reference of the FRC 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 of the impact of new investments by the Group on its capital position.
As at 31 March 2014, £803.6 million of cash and cash equivalents was held to meet a number of regulatory
and operational requirements across the Group’s regulated entities. This amount materially increased during
the year as a result of the inclusion of LCH.Clearnet Group’s total cash and cash equivalents, in addition to
the existing £200 million generally set aside by other LSEG operations. We anticipate that Group companies’
cash and cash equivalents are suf?cient to comfortably support current regulatory frameworks, including
requirements under EMIR. The level of cash set aside by the Group for these purposes remains subject to
on-going review with regulators in Europe and the US.
To maintain the ?nancial strength to access new capital at reasonable cost and meet the Group’s objective
of maintaining an investment grade credit rating, the Group monitors its net leverage ratio which is operating
net debt (i.e. net debt excluding cash and cash equivalents set aside for regulatory and operational purposes) to
adjusted EBITDA (Group consolidated earnings before net ?nance charges, taxation, impairment, depreciation
and amortisation and non-recurring items) against a target range of one to two times. The Group is also mindful
of potential impacts on the key metrics employed by the credit rating agencies (including gross debt to EBITDA
and EBITDA coverage of interest expense) in considering increases to its borrowings.
As at 31 March 2014 net leverage was 1.9 times (2013: 1.2 times), towards the top end of the Group’s target
range but having reduced during the year following the debt funding of the majority acquisition of LCH.
Clearnet Group and its subsequent capital raise in May 2013. The Group is in compliance with its bank facility
ratio covenants (net leverage and debt service) and these measures do not inhibit the Group’s operations or its
?nancing plans.
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115 Group ?nancial statements Notes to the ?nancial statements
Credit and concentration risk
Risk description Risk management approach
In their roles as central counterparty (CCP) clearers
to ?nancial market participants, the Group’s CCPs
guarantee ?nal 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 Risk
and Uncertainties’, pages 48-53.
Notwithstanding revised regulations in Europe that
require CCPs to invest predominantly in secured
instruments or structures (such as reverse repos),
CC&G and the LCH.Clearnet Group CCPs will continue
to be able to invest up to ?ve per cent of their margin
and default fund cash unsecured. Through this
un-secured investment by its CCPs (as well as by
certain other 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 deposit counterparties.
Concentration risk may arise through having large,
connected individual exposures and signi?cant 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.
More broadly, 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 ?nancial instruments
CCPs
To address the market participant and latent market risk, the Group’s CCPs have established ?nancial 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 would incur in order to close out open positions in the event
of the member’s default. Margins are calculated using established international risk models and are debited from
participants’ accounts through central bank accounts and via commercial bank payment systems. Minimum levels
of cash collateral are required and non-cash collateral is re-valued daily. As at 31 March 2014, the total aggregate
margin liability of clearing members amounted to £68.3 billion, against which the Group had received £35.8 billion
in cash and £34.4 billion in non-cash securities. The maximum margin liability during the year was £77.2 billion.
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. As at 31 March 2014, the total of
clearing member contributions to the default funds amounted to £9.0 billion in aggregate across the Group’s CCPs.
The maximum amount during the year was £9.1 billion. Furthermore, in accordance with recent regulatory changes,
each of the Group’s CCPs has reinforced its capital position to meet the more stringent requirements, including
holding a minimum amount of dedicated own resources to further underpin the protective credit risk framework
in the event of a signi?cant market stress event or participant failure.
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 body 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 which are subject to a “haircut”
on their market value) 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. The investment portfolio at 31 March 2014 totalled
£47.4 billion in aggregate, of which a weighted average 99.7 per cent was invested securely with an overall
maturity of 87 days, including material amounts invested over a very short timeframe to support liquidity needs.
The maximum portfolio size during the year was £54.1 billion. Associated liquidity risks are considered in the
investment mix and discussed further below.
To address concentration risk, the Group maintains a diversi?ed 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 March 2014 was 10.4 per cent of the total investment portfolio to the French Government
(including cash held at Banque de France).
Group
Credit risk is controlled through policies developed at a Group level.
Group companies make a judgement on the credit quality of their customers based upon the customer’s
?nancial 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 as low.
Credit risk of cash and cash equivalents is managed by limiting the exposure to up to £50 million for 12 months
with counterparties rated long term AAA (or equivalent) through to a maximum £25 million overnight with
counterparties rated short term A-2 (or equivalent). Derivative transactions are undertaken with well-capitalised
counterparties, authorised by policy, to limit the credit risk underlying these transactions.
116 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Sovereign risk
Risk description Risk management approach
Distress amongst sovereigns through market concerns
over the levels of government debt and the ability of
certain governments to service their debts over time,
could have adverse effects particularly on the Group’s
CCPs, potentially impacting cleared products, margin
collateral, investments, the clearing membership and
the ?nancial industry as a whole.
Speci?c risk frameworks manage sovereign risk for both ?xed 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 ?nancial
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 market volatility in the
sovereign debt markets.
The Group has material investments of more than £1 billion in the following sovereigns as at 31 March 2014:
Sovereign Treasury Exposures Group Aggregate £ billion
France 4.9
Italy 4.5
USA 3.9
Belgium 2.2
Germany 1.5
UK 1.0
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 businesses are pro?table, generate strong free cash ?ow and operations are not signi?cantly impacted
by seasonal variations. The Group maintains suf?cient liquid resources to meet its ?nancial obligations as they
fall due and to invest in capital expenditure, make dividend payments, support acquisitions or repay borrowings.
With the exception of regulatory constraints impacting the Group’s CCPs and certain other regulated entities,
funds can generally be lent across the Group or remitted through dividend payments and this is an important
component of the Group Treasury cash management policy and approach.
Management monitors forecasts of the Group’s cash ?ow and overlays sensitivities to these forecasts to re?ect
assumptions about more dif?cult market conditions.
Treasury policy requires that the Group maintains adequate credit facilities provided by a diversi?ed lending
group to cover its expected funding requirements and ensure a minimum level of headroom for at least the
next 24 months. The ?nancial strength of lenders to the Group is monitored regularly. During the year new,
committed, revolving three and ?ve year credit facilities totalling £700 million were arranged by LSEG to
underpin the Group’s ?nancial ?exibility. The new facilities extend the Group’s average drawn debt maturity
pro?le to just under 5 years and underpin facility headroom over the medium term; the next scheduled debt
maturity is in July 2016. At 31 March 2014, £422 million of the Group’s facilities were unutilised.
The Group’s CCPs maintain suf?cient cash and cash equivalents and, in certain jurisdictions, have access
to central bank re?nancing or commercial bank liquidity support credit lines to meet the cash requirements
of the clearing and settlement cycle. Revised regulations require CCPs to arrange appropriate levels of back
up liquidity to underpin the dynamics of a largely secured cash investment requirement, ensuring that the
maximum potential out?ow under extreme market conditions is covered (see Credit Risk section above).
In addition, certain Group companies, including the CCPs, maintain operational support facilities from banks
to manage intraday and overnight liquidity. The table below analyses the Group’s ?nancial liabilities into
relevant maturity groupings based on the remaining period from the balance sheet date to the contractual
maturity date. The amounts disclosed in the table are the contractual undiscounted cash ?ows.
Where possible, the Group employs guaranteed delivery versus payment techniques and manages CCP margin
and default fund ?ows through central bank or long-established, bespoke commercial bank settlement
mechanisms. Monies due from clearing members remain the clearing members’ liability if the payment agent
is unable to effect the appropriate transfer.
Custodians are subject to minimum eligibility requirements and ongoing credit assessment, robust contractual
arrangements and are required to have appropriate back-up contingency arrangements in place.
At 31 March 2014
Less than
1 year
Between 1
and 2 years
Between 2
and 5 years
Over
5 years
£m £m £m £m
Borrowings 278.7 – 399.4 545.6
Trade and other payables 401.5 – – –
CCP liabilities 503,747.4 – – –
Derivative ?nancial instruments 3.4 – – 4.0
504,431.0 – 399.4 549.6
At 31 March 2013
Less than
1 year
Between 1
and 2 years
Between 2
and 5 years
Over
5 years
£m £m £m £m
Borrowings 0.4 – 499.2 297.2
Trade and other payables 230.0 3.2 0.2 –
CCP liabilities 146,088.1 – – –
Derivative ?nancial instruments 0.1 – 1.1 2.4
146,318.6 3.2 500.5 299.6
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117 Group ?nancial statements Notes to the ?nancial statements
Market risk – Foreign Exchange
Risk description Risk management approach
The Group operates in the UK, Italy, France and Sri Lanka
and, through its FTSE International Limited and LCH.
Clearnet Group Limited subsidiaries, has growing
businesses in the USA and Asia. With the exception of
MillenniumIT (a Sri Lankan Rupee reporting entity), which
invoices a material proportion of its revenues in US dollars,
and LCH.Clearnet Limited (a euro reporting entity), which
incurs a majority of its costs in sterling, Group companies
generally invoice revenues, incur expenses and purchase
assets in their respective local currencies. As a result,
foreign exchange risk arises mainly from the translation
of the Group’s foreign currency earnings, assets and
liabilities into its reporting currency, sterling, and from
occasional, large intercompany transactions.
The Group faces less signi?cant foreign exchange
exposures from transaction risk on dividends that are
remitted in currencies other than the currency of the
recipient operation.
The Group may be exposed from time to time by
strategic investments in currencies other than sterling.
The Group seeks, where it can, to match the currency of its debt liabilities with its EBITDA generation in the same
currency whilst endeavouring to balance the currency of its assets with the currency of its liabilities. The Group
reinforces this methodology by regularly distributing its currency cash earnings in dividends and by absorbing
currency earnings through interest payments on sterling debt, re-denominated through the use of cross-currency
swaps or by drawing debt in the same currency, where this is practicable. A proportion of the Group’s debt is held
or effectively held in euro. As at 31 March 2014, £400.5 million of drawn debt was euro denominated (2013: nil)
and £248.5 million (2013: £255.5 million) of cross-currency swaps, directly linked to sterling debt, were designated
as a hedge of the net investment in the Italian Group. A pro?t of £4.3 million for the ?nancial year (2013: pro?t of
£5.7 million) on foreign currency borrowings, inter company loan assets and liabilities and cross-currency swap
hedges was recognised in equity. The net investment hedge was fully effective.
Whilst transactional foreign exchange exposure is limited, the Group hedges material transactions in accordance
with Group Treasury policy (which requires that cash ?ows of more than £1 million or equivalent per annum should
be hedged) with appropriate derivative instruments or by settling currency payables or receivables within a short
timeframe. Hedge accounting of derivatives is considered to mitigate material levels of income statement volatility.
The Group reviews sensitivities to movements in exchange rates which are appropriate to market conditions. As at
31 March 2014, the Group has considered movements in the euro over the last year and has concluded that a 10
per cent movement in rates is a reasonable level to measure the risk to the Group. At 31 March 2014, if sterling had
weakened or strengthened by 10 per cent against the euro with all other variables held constant, post tax pro?t
for the year would have been, respectively, £0.3 million higher or £0.4 million lower (2013: £0.4 million higher and
£0.3 million lower); however, equity would have been £19.0 million lower (2013: £5.7 million lower) and £23.2 million
higher (2013: £7.0 million higher). This re?ects foreign exchange gains or losses on translation of euro denominated
trade receivables, trade payables, ?nancial assets at fair value through pro?t or loss including euro denominated
cash and borrowings. If, on the other hand, the average sterling : euro exchange rate for the year had moved
€5 cents, this would have changed the Group’s operating pro?t for the year before amortisation of purchased
intangibles and non-recurring items by approximately £12 million.
Market risk – Cash Flow and Fair Value Interest Rate Risk
Risk description Risk management approach
The Group’s interest rate risk arises through the impact
of changes in market rates on cash ?ows associated
with cash and cash equivalents, investments in
?nancial assets and borrowings held at ?oating rates.
The Group’s CCPs face interest rate exposure through
the impact of changes in the reference rates used to
calculate member liabilities versus the yields achieved
through their investment activities.
Group interest rate management policy has been updated recently to re?ect the change in the Group’s net
debt dynamic following the majority acquisition of LCH.Clearnet Group Limited (which maintains a signi?cant
net cash position). The revised policy focusses on protecting the Group’s credit rating and requires a minimum
coverage of interest expense by EBITDA to be maintained of 7 times and a maximum ?oating rate component
of 50 per cent of total debt. As at 31 March 2014, interest expense cover was at 8.0 times (2013: 9.9 times) and
the ?oating rate component of total debt was 23 per cent.
Group interest rate risk on cash and cash equivalents and investments in ?nancial assets re?ects underlying
investments generally over short durations and so the Group is more exposed to movements in short term rates.
In the Group’s CCPs, interest bearing assets have generally been invested for a longer term than interest
bearing liabilities, whose interest rate is generally reset daily. This makes investment revenue vulnerable to
volatility in overnight rates and shifts in spreads between overnight and term rates. Interest rate exposures
(and the risk to CCP capital) are managed within de?ned 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 one percentage point upward movement (with a limited prospect of material downward movement) re?ects
a reasonable level of risk to current rates. At 31 March 2014, at the Group level, if interest rates on sterling-
denominated and euro-denominated cash and borrowings had been 1 percentage point higher with all other
variables held constant, post-tax pro?t for the year would actually have been £6.5 million higher (2013:
£6.3 million higher) mainly as a result of higher interest income on ?oating rate cash and cash equivalents.
At 31 March 2014, 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 one percentage point higher, with all other variables held constant, the daily impact on post-tax
pro?t for the Group would have been £0.8 million lower. This de?cit would be recovered as investment yields
increase as the portfolio matures and is re-invested.
3. Significant judgements and estimates
Judgements and estimates are regularly evaluated based on historical experience, current circumstances and expectations of future events. The signi?cant
judgements and estimates for the year ended 31 March 2014 are as follows:
Goodwill – tested for impairment annually. The recoverable amounts of relevant cash generating units are based on value in use calculations using management’s
best estimate of future performance and estimates of the return required by investors to determine an appropriate discount rate. Sensitivity analysis is
provided in note 13;
Purchased intangible assets – valued on acquisition using appropriate methodologies and amortised over their estimated useful economic lives.
These valuations and lives are based on management’s best estimates of future performance and periods over which value from the intangible assets is realised;
De?ned bene?t pension asset or liability – determined based on the present value of future pension obligations using assumptions determined by the
Group with advice from an independent quali?ed actuary. Sensitivity analysis is provided in note 16; and
Contingent Liabilities – assessment based on management’s judgement concerning the particular facts and circumstances surrounding commitments
and contingencies.
118 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
4. Segmental Information
Segmental disclosures for the year ended 31 March 2014 are as follows:
Capital
Markets
Post Trade
Services
– CC&G and
Monte Titoli
Post Trade
Services – LCH.
Clearnet
Information
Services
Technology
Services Other Eliminations Group
£m £m £m £m £m £m £m £m
Revenue from external customers 309.5 98.4 263.0 348.7 64.0 4.7 – 1,088.3
Inter-segmental revenue – 0.9 – – 10.9 – (11.8) –
Revenue 309.5 99.3 263.0 348.7 74.9 4.7 (11.8) 1,088.3
Net treasury income through CCP business – 47.6 62.2 – – – – 109.8
Other Income – – (3.5) – – 15.0 – 11.5
Total income 309.5 146.9 321.7 348.7 74.9 19.7 (11.8) 1,209.6
Operating pro?t before amortisation
of purchased intangible assets and
non-recurring items 144.7 83.5 81.1 169.7 11.8 8.7 11.7 511.2
Amortisation of purchased intangible assets (116.5)
Non-recurring items (41.6)
Operating pro?t 353.1
Net ?nance expense (68.8)
Pro?t before taxation 284.3
Other income statement items:
Depreciation and software amortisation (25.3) (5.5) (23.0) (15.6) (5.3) (0.2) 12.6 (62.3)
The segmental reporting incorporates LCH.Clearnet’s results since its acquisition by the Group on 1 May 2013. Comparative information for LCH.Clearnet
has not been included within the following tables.
Revenue from external customers principally comprises fees for services rendered £1,014.0 million (2013: £658.5 million) and Technology Services £64.0 million
(2013: £56.1 million).
Post Trade Services – CC&G and Monte Titoli, saw an expected sharp decline in net treasury income following completion of the migration to a minimum 95 per
cent secured investment portfolio, partially offset by a modest increase in revenue resulting in total income decreasing to £146.9 million (2013: £208.5 million).
Net treasury income through CCP business of £109.8 million comprises gross interest income of £261.1 million less gross interest expense of £151.3 million.
Interest from investment in securities amount to £34.8 million.
Comparative segmental disclosures for the year ended 31 March 2013 (restated) are as follows:
Capital
Markets
Post Trade
Services – CC&G
and Monte Titoli
Information
Services
Technology
Services Other Eliminations Group
£m £m £m £m £m £m £m
Revenue from external customers 267.5 91.8 306.3 56.1 4.7 – 726.4
Inter-segmental revenue – – – 21.3 – (21.3) –
Revenue 267.5 91.8 306.3 77.4 4.7 (21.3) 726.4
Net treasury income through CCP business – 116.7 – – – – 116.7
Other Income – – – – 9.8 – 9.8
Other non-recurring income – – – – 18.3 – 18.3
Total income 267.5 208.5 306.3 77.4 32.8 (21.3) 871.2
Operating pro?t before amortisation
of purchased intangible assets and
non-recurring items 118.9 144.3 147.1 20.2 0.5 (0.8) 430.2
Amortisation of purchased intangible assets (88.8)
Non-recurring income 18.3
Non-recurring expenses (11.3)
Operating pro?t 348.4
Net ?nance expense (49.5)
Pro?t before taxation 298.9
Other income statement items:
Depreciation and software amortisation (27.0) (5.6) (14.6) (5.4) (0.4) 12.6 (40.4)
Net treasury income through CCP business of £116.7 million comprises gross interest income of £128.9 million less gross interest expense of £12.2 million.
Interest from investment in securities amount to £12.5 million.
The comparatives are shown following restatement for reallocation of technology costs across other segments.
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119 Group ?nancial statements Notes to the ?nancial statements
Geographical disclosure
2014 2013
£m £m
Revenue
UK 659.5 432.9
Italy 283.5 255.4
France 87.0 1.9
Other 58.3 36.2
Total 1,088.3 726.4
Revenue has been restated to be allocated based on the location of the group entity which earns the revenue which better represents our operating reviews.
2014 2013
£m £m
Total assets
UK 183,482.2 1,300.1
Italy 141,001.8 147,596.9
France 182,593.1
Other 577.3 28.4
Total 507,654.4 148,925.4
Associates – Italy – 0.6
Total 507,654.4 148,926.0
5. Expenses by nature
Expenses comprise the following:
2014 2013
£m £m
Cost of sales 74.1 60.0
Employee costs 303.9 167.3
Depreciation and non-acquisition software amortisation 62.3 40.4
Amortisation of purchased intangibles assets and non-recurring costs 158.1 100.1
IT costs 92.0 64.5
Other costs 166.1 90.5
Total expenses 856.5 522.8
Foreign exchange gains or losses included in the income statement are immaterial.
6. Employee costs
Employee costs comprise the following:
2014 2013
Notes £m £m
Salaries and other short term bene?ts 237.6 128.1
Social security costs 37.4 19.2
Pension costs 16 17.3 7.5
Share based compensation 11.6 12.5
Total 303.9 167.3
The average number of employees in the Group was:
2014 2013
UK 1,329 753
Italy 503 428
France 205 7
Sri Lanka 659 654
Other 151 120
Total 2,847 1,962
The Company has no employees.
Average is calculated from date of acquisition of the subsidiary company by the Group.
120 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
7. Amortisation of purchased intangible assets and non-recurring items
2014 2013
Notes £m £m
Amortisation of purchased intangible assets 13 116.5 88.8
Transaction credit – (18.3)
Transaction costs 14.9 7.6
Restructuring costs 28.8 3.7
Pension curtailment credit (2.1) –
Total affecting operating pro?t 158.1 81.8
Total affecting pro?t before tax 158.1 81.8
Tax effect on items affecting pro?t before tax
Deferred tax on amortisation of purchased intangible assets (11.8) (9.1)
Current tax on amortisation of purchased intangible assets (2.2) (2.2)
Tax effect on other items affecting pro?t before tax (9.1) (1.0)
Total tax effect on items affecting pro?t before tax (23.1) (12.3)
Total charge to income statement 135.0 69.5
Transaction costs comprise charges incurred for ongoing services related to potential or completed acquisitions. Restructuring costs primarily relate to the
integration of the LCH business in the current year.
The transaction credit in 2013 relates to funds received from the TMX Group following the termination of the 2010 merger agreement.
8. Net finance expense
2014 2013
Notes £m £m
Finance income
Bank deposit and other interest income 5.2 2.4
Other ?nance income 0.3 0.3
5.5 2.7
Finance expense
Interest payable on bank and other borrowings (71.2) (48.2)
De?ned bene?t pension scheme interest cost 16 (0.8) (2.0)
Other ?nance expenses (2.3) (2.0)
(74.3) (52.2)
Net ?nance expense (68.8) (49.5)
9. Taxation
The standard UK corporation tax rate was 23 per cent (24 per cent for the year ended 31 March 2013).
Taxation charged to the income statement 2014 2013
Notes £m £m
Current tax:
UK corporation tax for the year 43.5 30.5
Overseas tax for the year 77.6 78.6
Adjustments in respect of previous years (1.2) (16.4)
119.9 92.7
Deferred tax: 15
Deferred tax for the year (4.7) 0.3
Adjustments in respect of previous years (1.8) (0.5)
Deferred tax liability on amortisation of purchased intangible assets (11.8) (9.1)
Taxation charge 101.6 83.4
The adjustments in respect of previous years’ corporation tax are mainly in respect of tax returns agreed with relevant tax authorities.
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121 Group ?nancial statements Notes to the ?nancial statements
Taxation on items not credited/(charged) to income statement 2014 2013
£m £m
Current tax credit:
Tax allowance on share options/awards in excess of expense recognised 3.5 2.0
Deferred tax (loss)/credit:
De?ned bene?t pension scheme actuarial (gain)/loss (1.7) 1.7
Tax allowance on share options/awards in excess of expense recognised 1.0 0.5
Movement in value of available for sale ?nancial assets (0.7) (0.4)
Adjustments relating to change in UK tax rate (0.6) 0.1
1.5 3.9
Factors affecting the tax charge for the year
The income statement tax charge for the year differs from the standard rate of corporation tax in the UK as explained below:
2014 2013
£m £m
Pro?t before taxation 284.3 298.9
Pro?t multiplied by standard rate of corporation tax in the UK 65.4 71.7
Expenses not deductible/(income not taxable) 4.3 (2.2)
Adjustment arising from change in UK tax rate 2.4 0.7
Overseas earnings taxed at higher rate 19.1 17.7
Adjustments in respect of previous years (3.0) (16.8)
Amortisation of purchased intangibles 13.4 12.3
Taxation charge 101.6 83.4
10. Earnings per share
Earnings per share is presented on four bases: basic earnings per share; diluted earnings per share; adjusted basic earnings per share; and adjusted diluted
earnings per share. Basic earnings per share is in respect of all activities and diluted earnings per share takes into account the dilution effects which would arise
on conversion or vesting of share options and share awards under the Employee Share Ownership Plan (ESOP). Adjusted basic earnings per share and adjusted
diluted earnings per share exclude amortisation of purchased intangible assets, non-recurring items and unrealised gains and losses to enable a better
comparison of the underlying earnings of the business with prior periods.
2014 2013
Basic earnings per share 63.0p 80.4p
Diluted earnings per share 61.4p 79.0p
Adjusted basic earnings per share 107.1p 105.3p
Adjusted diluted earnings per share 104.4p 103.4p
£m £m
Pro?t for the ?nancial year attributable to equity holders 170.1 217.0
Adjustments:
Amortisation and non-recurring items:
Amortisation of purchased intangible assets 116.5 88.8
Transaction costs 14.9 7.6
Transaction cost contribution from TMX Group – (18.3)
Restructuring costs 28.8 3.7
Pension curtailment costs (2.1) –
Other adjusting items:
Unrealised net investment loss (included in other income) 3.5 –
Tax effect of amortisation and non-recurring items (23.1) (12.3)
Tax effect of other adjusting items (1.2) –
Amortisation, non-recurring and adjusting items, and taxation attributable to non-controlling interests (18.1) (2.5)
Adjusted pro?t for the ?nancial year attributable to equity holders 289.3 284.0
Weighted average number of shares – million 270.1 269.8
Effect of dilutive share options and awards – million 7.0 4.8
Diluted weighted average number of shares – million 277.1 274.6
The weighted average number of shares excludes those held in the ESOP.
122 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
11. Dividends
2014 2013
£m £m
Final dividend for 2013 paid 19 August 2013: 19.8p per Ordinary share (2012: 19.0p) 53.5 51.2
Interim dividend for 2014 paid 6 January 2014: 10.1p per Ordinary share (2013: 9.7p) 27.3 26.2
80.8 77.4
The Board has proposed a ?nal dividend in respect of the year ended 31 March 2014 of 20.7p, per share, which is estimated to amount to £56.0 million,
to be paid on 19 August 2014.
12. Property, plant and equipment
Land & Buildings
Freehold Leasehold
Fixed plant,
other plant
and equipment Total
£m £m £m £m
Cost:
31 March 2012 46.3 40.0 96.9 183.2
Additions 0.4 – 17.6 18.0
Foreign exchange 0.4 0.1 0.7 1.2
Acquisition of subsidiaries – – 0.1 0.1
Reclassi?cation from Held for Sale 6.3 – – 6.3
Disposals – (0.1) (8.1) (8.2)
31 March 2013 53.4 40.0 107.2 200.6
Additions 2.3 0.1 20.4 22.8
Foreign exchange (0.1) (0.1) (1.4) (1.6)
Acquisition of subsidiaries – 7.3 8.1 15.4
Disposals – (0.1) (8.9) (9.0)
31 March 2014 55.6 47.2 125.4 228.2
Accumulated depreciation:
31 March 2012 27.8 29.1 53.0 109.9
Charge for the year 0.3 2.1 15.2 17.6
Foreign exchange – 0.1 0.3 0.4
Disposals – – (7.4) (7.4)
31 March 2013 28.1 31.3 61.1 120.5
Charge for the year 0.4 2.9 20.7 24.0
Foreign exchange (0.1) (0.1) (0.5) (0.7)
Disposals – (0.1) (8.8) (8.9)
31 March 2014 28.4 34.0 72.5 134.9
Net book values:
31 March 2014 27.2 13.2 52.9 93.3
31 March 2013 25.3 8.7 46.1 80.1
The Company has no property, plant and equipment.
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123 Group ?nancial statements Notes to the ?nancial statements
13. Intangible assets
Purchased intangible assets
Goodwill
Customer
and supplier
relationships Brands
Software,
licenses and
intellectual
property Software Total
£m £m £m £m £m £m
Cost:
31 March 2012 1,188.9 959.5 236.8 342.4 219.0 2,946.6
Additions 1.1 – – – 21.3 22.4
Acquisition of subsidiaries 4.1 – – – 0.5 4.6
Disposals – – – – (84.4) (84.4)
Foreign exchange 17.8 8.7 0.2 2.2 1.3 30.2
31 March 2013 1,211.9 968.2 237.0 344.6 157.7 2,919.4
Additions – – – – 106.8 106.8
Acquisition of subsidiaries 166.1 232.0 18.1 82.0 35.4 533.6
Disposals – – – – (30.3) (30.3)
Foreign exchange (31.8) (32.5) (1.5) (6.0) (3.9) (75.7)
31 March 2014 1,346.2 1,167.7 253.6 420.6 265.7 3,453.8
Accumulated amortisation and impairment:
31 March 2012 437.3 135.8 7.3 76.5 172.3 829.2
Amortisation charge for the year – 49.5 10.0 29.3 22.8 111.6
Disposals – – – – (84.4) (84.4)
Foreign exchange 8.3 2.9 0.1 1.7 0.7 13.7
31 March 2013 445.6 188.2 17.4 107.5 111.4 870.1
Amortisation charge for the year – 61.0 10.9 44.6 38.3 154.8
Disposals – – – – (30.3) (30.3)
Foreign exchange (8.4) (4.4) (0.3) (2.8) (0.9) (16.8)
31 March 2014 437.2 244.8 28.0 149.3 118.5 977.8
Net book values:
31 March 2014 909.0 922.9 225.6 271.3 147.2 2,476.0
31 March 2013 766.3 780.0 219.6 237.1 46.3 2,049.3
The fair values of the purchased intangible assets were principally valued using discounted cash ?ow methodologies and are being amortised over their useful
economic lives, which do not normally exceed 25 years. The goodwill arising on consolidation represents the growth potential and assembled workforces of the
Italian Group, LCH.Clearnet Group, FTSE Group, MillenniumIT and Turquoise. The Company has no intangible assets.
The acquisition of the LCH.Clearnet Group, the EuroTLX business within the Italian Group, and the FTSE TMX business during the year resulted in an increase of
goodwill in the Group of £166.1 million in the year. This value is preliminary and will be ?nalised during the following year.
During the year additions relating to internally generated software was £103.0 million.
124 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Impairment tests for goodwill
Goodwill has been allocated for impairment testing purposes to eight cash generating units (CGUs), including the CGU resulting from the acquisition of the
LCH.Clearnet Group. The Italian Group’s Issuer, Equities Trading, Derivatives Trading and Fixed Income Trading CGUs which were in place as at 31 March 2013
were combined into a single Capital Markets CGU on 1 April 2013, re?ecting the way in which those businesses are managed. Similarly, MillenniumIT’s Software
and Enterprise Service Provider CGUs which were in place as at 31 March 2013 were combined into a single MillenniumIT CGU on 1 April 2013.
The recoverable amounts of these CGUs have been determined based on value in use calculations, using discounted cash ?ow projections prepared by management
covering the ?ve year period ending 31 March 2019. Cash ?ows beyond this period are extrapolated using the estimated long term growth rates and applying the
pre-tax discount rates referred to below.
The amount of the net book value of goodwill allocated to each CGU is set out below:
Net book value of goodwill
31 March
2013
Impact of
restructuring of
CGUs
Acquisitions of
subsidiaries
Foreign
exchange
31 March
2014
Pre-tax discount
rate used in
value in use
calculations
£m £m £m £m £m
Italian group:
Issuer 18.6 (18.6) – – – n/a
Equities Trading 62.6 (62.6) – – – n/a
Derivatives Trading 28.0 (28.0) – – – n/a
Fixed Income Trading 70.7 (70.7) – – – n/a
Capital Markets – 179.9 15.0 (4.0) 190.9 9.9%
Information Services 115.9 – – (2.3) 113.6 9.9%
Technology Services 17.8 – – (0.4) 17.4 10.1%
Post Trade Services 367.0 – – (7.3) 359.7 9.8%
MillenniumIT:
Software 0.8 (0.8) – – – n/a
Enterprise Service Provider 0.8 (0.8) – – – n/a
MillenniumIT – 1.6 – (0.2) 1.4 17.3%
Turquoise 7.4 – – – 7.4 14.1%
FTSE Group 76.7 – 27.4 (5.7) 98.4 11.0%
LCH.Clearnet Group – – 123.7 (3.5) 120.2 12.4%
766.3 – 166.1 (23.4) 909.0
Management has based its value in use calculations for each CGU on key assumptions about short and medium term revenue and cost growth, long term
economic growth rates (used to determine terminal values) and pre-tax discount rates.
The values assigned to short and medium term revenue and cost growth assumptions re?ect current trends, anticipated market and regulatory developments,
discussions with customers and suppliers, and management’s experience, taking into account an expected further recovery in underlying ?nancial markets.
Long term growth rates (assumed to be 1.8 per cent for each of the Italian CGUs, 13.5 per cent for MillenniumIT, and 3.1 per cent for Turquoise, the FTSE Group
and the LCH.Clearnet Group) represent management’s internal forecasts based on external estimates of GDP and in?ation for the 16 year period 1 January
2003 to 31 December 2018, and do not exceed the long term average growth rates for the countries in which the CGUs operate.
Pre-tax discount rates are based on a number of factors including the risk-free rates in Italy, Sri Lanka and the UK as appropriate, the Group’s estimated market
risk premium and a premium to re?ect the inherent risks of each of the CGUs.
Based on the results of the impairment tests performed management believes there is no impairment of the carrying value of the goodwill in any CGU.
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125 Group ?nancial statements Notes to the ?nancial statements
Value in use calculations for each CGU are sensitive to changes in short and medium term revenue and cost growth assumptions, long term growth rates
and pre-tax discount rates. The impact on value in use of reasonable changes in these assumptions is shown below:
Impact on value in use of:
Excess of
value in use over
carrying value
5%
reduction
in revenues
5%
increase
in costs
0.5% reduction
in long term
growth rate
0.5% increase
in pre-tax
discount rate
Cash generating unit £m £m £m £m £m
Italian group:
Capital Markets 478.1 102.6 53.3 66.7 82.6
Information Services 205.2 32.7 12.8 25.4 31.6
Technology Services 43.2 12.7 8.9 4.4 5.4
Post Trade Services 420.7 88.9 41.6 60.9 75.5
Management believes goodwill allocated to the LCH.Clearnet Group, FTSE Group, MillenniumIT and Turquoise CGUs is unlikely to be materially impaired
under any reasonable changes to key assumptions. The excess of value in use over carrying value is determined by reference to the net book value as at
31 March 2014. Revenue and cost sensitivities assume a ?ve per cent change in revenues or costs for each of the ?ve years in the value in use calculations.
14. Investment in subsidiary undertakings
Shares Loans Other Total
Company £m £m £m £m
31 March 2012 3,320.6 375.2 67.0 3,762.8
Other movements during the year – 5.2 11.1 16.3
31 March 2013 3,320.6 380.4 78.1 3,779.1
Capital contribution to London Stock Exchange Group Holdings (I) Ltd – – 460.4 460.4
Impairment of London Stock Exchange Group Holdings (R) Ltd (10.6) – – (10.6)
Other movements during the year – (380.4) 10.4 (370.0)
31 March 2014 3,310.0 – 548.9 3,858.9
Principal subsidiaries:
Principal
activity
Country of
incorporation
Country of
principal
operations
%
equity and
votes held
Held directly by the Company:
London Stock Exchange plc Recognised investment exchange UK UK 100
Held indirectly by the Company:
BIt Market Services S.p.A. Retail information services & market technology Italy Italy 99.99
Borsa Italiana S.p.A. Recognised investment exchange Italy Italy 99.99
Cassa di Compensazione e Garanzia S.p.A. CCP for clearing Italy Italy 99.99
FTSE International Ltd Market indices provider UK UK 100
LCH.Clearnet Group Limited CCP clearing services UK UK 57.80
Monte Titoli S.p.A. Pre-settlement, settlement and centralised custody Italy Italy 98.80
MillenniumIT Software (Private) Ltd IT solutions provider Sri Lanka Sri Lanka 100
Societa per il Mercato dei Titoli di Stato S.p.A. Wholesale ?xed income bonds Italy Italy 60.37
Turquoise Global Holdings Ltd Multi-lateral trading facility UK UK 51.36
On 5 April 2013, the Group entered into a transaction that resulted in the Group acquiring a 75 per cent stake in FTSE TMX Global Debt Capital Markets Limited
for a total consideration of £78.1 million.
On 1 May 2013, the Group completed the acquisition of a further 55.5 per cent stake in LCH.Clearnet Group Limited (LCH.Clearnet), resulting in a majority stake
of 57.8 per cent in LCH.Clearnet for a consideration of £470.3 million.
Under Regulation 7 of The Partnerships (Accounts) Regulations 2008, the Group elected not to prepare partnership accounts for its indirect partnership interest
in London Stock Exchange Connectivity Solutions LP, as its results are contained in the consolidated group accounts.
A full list of subsidiaries will be annexed to the next annual return of London Stock Exchange Group plc.
126 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
15. Deferred tax
The movements in deferred tax assets and liabilities during the year are shown below.
Accelerated tax
depreciation
Acquisition
deferred tax and
amortisation
Provisions and
other temporary
differences Total
Group £m £m £m £m
31 March 2012 2.0 (117.3) 14.8 (100.5)
Tax (charged)/credited to the income statement: (0.4) 9.1 0.6 9.3
Tax credited/(charged) to other comprehensive income:
– de?ned bene?t pension scheme actuarial loss – – 1.6 1.6
– allowance on share options/awards – – 0.6 0.6
– movement in value of available for sale ?nancial assets – – (0.4) (0.4)
– foreign exchange – (0.4) – (0.4)
Balance sheet transfer of pre-acquisition balances – – – –
31 March 2013 1.6 (108.6) 17.2 (89.8)
Tax credited to the income statement: 1.1 11.8 5.4 18.3
Tax credited/(charged) to other comprehensive income:
– de?ned bene?t pension scheme actuarial loss – – (2.5) (2.5)
– allowance on share options/awards – – 1.0 1.0
– movement in value of available for sale ?nancial assets – – (0.7) (0.7)
– foreign exchange – 0.7 – 0.7
Balance sheet transfer of pre-acquisition balances 5.7 (72.3) 5.8 (60.8)
31 March 2014 8.4 (168.4) 26.2 (133.8)
Assets at 31 March 2014 8.4 – 33.8 42.2
Liabilities at 31 March 2014 – (168.4) (7.6) (176.0)
Net assets/(liabilities) at 31 March 2014 8.4 (168.4) 26.2 (133.8)
Assets at 31 March 2013 1.6 – 17.6 19.2
Liabilities at 31 March 2013 – (108.6) (0.4) (109.0)
Net (liabilities)/assets at 31 March 2013 1.6 (108.6) 17.2 (89.8)
The deferred tax assets are recoverable against future taxable pro?ts and are due after more than one year.
The purchased intangible assets of the Italian group create a deferred tax liability due to the difference between their accounting and tax treatment.
This liability is amortised at the same rate as the intangible assets.
The Group has unrecognised deferred tax assets in respect of losses of £59 million (2013: £57 million) within certain Group subsidiaries. The assets would be
recognised in the future only if suitable taxable income were to arise within the Group.
There was no deferred tax in the Company.
16. Retirement benefit obligations
The Group operates separate de?ned bene?t and de?ned contribution schemes. The assets of the de?ned bene?t and de?ned contribution schemes in the UK
are held separately from those of the Group in a separate trustee administered fund and the funds are primarily managed by Schroder Investment Management
Limited, Legal & General Investment Management Limited, PIMCO Europe Limited and Aviva Investors during the year.
The ‘Other plans’ relate to the severance and leaving indemnity scheme Trattamento di Fine Rapporto (TFR) operated by the Italian group in accordance with
Italian law, the employee bene?t and retirement plan operated by MillenniumIT and the pension commitments of LCH.Clearnet group.
The Company has no retirement bene?t obligations.
The only scheme operated by FTSE International is a de?ned contribution scheme.
Defined benefit schemes
The UK de?ned bene?t scheme was a non-contributory scheme and closed to new members in 1999. With effect from 31 March 2012, the scheme also closed
to accrual of future bene?ts for active members and it has been agreed that the bene?ts for affected members will remain linked to their salary with the Group.
Pension scheme obligations and costs are determined by an independent quali?ed actuary on a regular basis using the projected unit credit method. The
obligations are measured by discounting the best estimate of future cash ?ows to be paid out by the scheme and are re?ected in the Group balance sheet.
The TFR operated by the Italian group is classi?ed as an unfunded de?ned bene?t scheme for funds accumulated prior to 1 July 2007. The service cost,
representing deferred salaries accruing to employees, was included as an operating expense and was determined by law at 6.91 per cent of salary payments
subject to certain adjustments. The scheme obligation comprises accumulated service costs and is revalued by law at a rate equal to 75 per cent of ‘national
life price index +1.5 per cent’ by an independent quali?ed actuary. Since 1 July 2007, the Group retains no obligation, as contributions are made directly into
Italian state funds in the manner of a de?ned contribution scheme.
The employee bene?t and retirement plan operated by MillenniumIT is classi?ed as a de?ned bene?t plan. The net obligation in respect of this plan is the
amount of future bene?t that employees have earned in return for their service in the current and prior periods. Once an employee is continuously employed for
more than ?ve years, he or she is entitled to a payment equivalent to half a month’s gross salary multiplied by the number of years in service at MillenniumIT.
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127 Group ?nancial statements Notes to the ?nancial statements
The de?ned bene?t scheme operated by LCH.Clearnet was closed to new members from 30 September 2009. The scheme was closed to further employee
contributions on 31 March 2013.
Defined contribution schemes
The Group’s de?ned contribution schemes are now the only schemes open to new employees in the UK, Italy and LCH entities. For the UK pension plan, a core
contribution of four to eight per cent of pensionable pay is provided and the Group will match employee contributions up to a maximum of six to ten per cent
of pensionable pay. LCH pays ?xed contributions to the de?ned contribution scheme and there is no legal or constructive obligation to pay further contributions.
Amounts recognised in the income statement are as follows:
2014 2013
LSEG UK LCH UK Other plans UK Pension Other plans
Notes £m £m £m £m
Restated
£m
Restated
De?ned contribution schemes (3.4) (5.5) (7.6) (3.4) (2.2)
De?ned bene?t scheme – current service cost (0.9) (0.5) 0.6 – (1.9)
Total pension charge included in employee costs 6 (4.3) (6.0) (7.0) (3.4) (4.1)
Net ?nance expense 8 (0.7) 0.4 (0.5) (1.7) (0.3)
Total recognised in the income statement (5.0) (5.6) (7.5) (5.1) (4.4)
Defined benefit assets/(obligations) for UK pension scheme
2014 2014 2013 2012 2011 2010
LSEG UK
£m
LCH UK
£m
LSEG UK
£m
LSEG UK
£m
LSEG UK
£m
LSEG UK
£m
Fair value of assets:
Equities (quoted) 8.4 87.7 9.4 39.0 39.3 37.2
Bonds (quoted) 104.2 76.8 110.8 67.5 219.5 218.5
Property 4.3 – 11.4 24.4 23.3 13.3
Cash 4.4 5.8 – – – –
Pensioner buy in policy 155.4 – 142.1 – – –
Foreign exchange – (2.8) – 133.5 – –
Total fair value of assets 276.7 167.5 273.7 264.4 282.1 269.0
Present value of funded obligations (300.6) (153.0) (291.4) (274.2) (244.5) (264.4)
(De?cit)/surplus (23.9) 14.5 (17.7) (9.8) 37.6 4.6
UK pension plan actuarial assumptions are set out below:
2014
LSEG UK
2014
LCH UK
2013
LSEG UK
In?ation rate – RPI 3.4% 3.4% 3.4%
In?ation rate – CPI 2.4% 2.4% 2.4%
Rate of increase in salaries 3.4% n/a 3.4%
Rate of increase in pensions in payment 3.6% 2.2% 3.6%
Discount rate 4.5% 4.5% 4.5%
Life expectancy from age 60 (years)
– Non retired male member 28.6 n/a 28.0
– Non retired female member 30.5 n/a 30.8
– Retired male member 27.1 29.3 26.5
– Retired female member 29.2 31.3 29.3
The mortality assumptions are based on the standard tables S1NA published by the Institute and Faculty of Actuaries adjusted to take account of projected
future improvements in life expectancy from the Self Administered Pension Scheme (SAPS) mortality survey, which was published in 2008. We have used an
allowance for CM1 2013 projections and applied a 1.25 per cent/1.00 per cent for male/female long term trend rate in respect of future mortality improvements.
Sensitivities
The sensitivities regarding the principal assumptions used to measure the LSEG UK scheme obligations are:
Assumption Change in assumption Impact on scheme obligations
In?ation rate (CPI) Increase/decrease by 0.5% Increase/decrease by £4.1m
Rate of increase in pensions payment Increase/decrease by 0.5% Increase/decrease by £20.1m
Discount rate Increase/decrease by 0.5% Decrease/increase by £22.9m
Mortality rate Increase by 1 year Increase by £8.8m
128 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Changes in the present value of the defined benefit obligation
2014 2013
LSEG UK LCH UK Other plans LSEG UK Other plans
£m £m £m £m £m
Bene?t obligation as at 1 April 291.4 – 7.9 274.2 6.7
Liabilities acquired in a business combination – 160.6 11.1 – –
Pension expense/(income):
Current service cost – 0.5 (0.6) – 1.9
Interest cost 12.9 6.1 0.6 13.5 0.3
Subtotal included in the income statement 12.9 6.6 – 13.5 2.2
Re-measurement losses/(gains)
Actuarial (gains)/losses – ?nancial assumptions – (13.6) 0.3 22.2 0.1
Actuarial losses – demographic assumptions 1.3 – 0.2 – –
Actuarial losses/(gains) – experience 4.3 – (0.5) (9.5) –
Subtotal included in other comprehensive income 5.6 (13.6) – 12.7 0.1
Bene?ts paid (9.3) (2.4) (5.4) (9.0) (1.4)
Foreign exchange – 1.8 (0.2) – 0.3
Bene?t obligation as at 31 March 300.6 153.0 13.4 291.4 7.9
Movement in fair value of scheme assets during the period
2014 2013
LSEG UK LCH UK Other plans LSEG UK Other plans
£m £m £m £m £m
Fair value of scheme assets as at 1 April 273.7 – – 264.4 –
Assets acquired in a business combination – 169.6 3.6 – –
Pension income:
Interest income 12.2 6.5 0.1 11.8 –
Subtotal included in the income statement 12.2 6.5 0.1 11.8 –
Re-measurement gains:
Actuarial (losses)/gains (2.6) (7.0) 0.3 5.9 –
Subtotal included in other comprehensive income (2.6) (7.0) 0.3 5.9 –
Contributions by employer 3.6 – 0.1 0.6 –
Expenses (0.9) – – – –
Bene?ts paid (9.3) (2.4) (3.7) (9.0) –
Foreign exchange – 0.8 – – –
Fair value of scheme assets as at 31 March 276.7 167.5 0.4 273.7 –
The actual return on plan assets was £9.6 million (2013: £17.7 million).
Defined benefit actuarial gains and losses recognised
The experience adjustments and the effects of changes in actuarial assumptions of the pension scheme during the year are recognised in the statement
of comprehensive income:
2014 2013
LSEG UK LCH UK Other plans LSEG UK Other plans
£m £m £m £m £m
Recognised up to 1 April (19.7) – (1.0) (12.9) (0.9)
Net actuarial (loss)/gain recognised in the year (8.2) 6.6 0.3 (6.8) (0.1)
Cumulative amount recognised at 31 March (27.9) 6.6 (0.7) (19.7) (1.0)
The last actuarial valuation of the de?ned bene?t scheme was carried out at 31 March 2012 by an independent quali?ed actuary. The Group is currently in
discussion on the contributions to the de?ned bene?t scheme during the year to 31 March 2014. The next actuarial valuation as at 31 March 2015 may result
in an adjustment to future contribution levels.
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129 Group ?nancial statements Notes to the ?nancial statements
The Group estimates the present value of the duration of de?ned bene?t obligations on average to fall due over 20 years.
History of experience gains and losses for the UK pension scheme 2014 2013 2012 2011 2010
Experience adjustments arising on scheme assets:
Experience (loss)/gain (£m) (2.6) 5.9 (23.4) 5.3 25.6
Percentage of scheme assets (0.9%) 2.2% (8.9%) 1.9% 9.5%
Experience adjustments arising on scheme liabilities:
Experience (loss)/gain (£m) (4.3) 9.5 (3.9) 1.5 7.5
Impact of changes in assumptions (£m) (1.3) (22.2) (20.4) 25.3 (34.9)
Total (£m) (5.6) (12.7) (24.3) 26.8 (27.4)
Percentage of scheme liabilities
Experience (loss)/gain (1.4%) 3.3% (1.4%) 0.6% 2.8%
Impact of changes in assumptions (0.4%) (7.6%) (7.4%) 10.3% (13.2%)
Total (1.8%) (4.3%) (8.8%) 10.9% (10.4%)
17. Trade and other receivables
Group Company
2014 2013 2014 2013
£m £m £m £m
Trade receivables 133.5 121.2 – –
Less: provision for impairment of receivables (5.2) (6.1) – –
Trade receivables – net 128.3 115.1 – –
Amounts due from Group undertakings – – 534.1 579.4
Other receivables 38.3 5.9 – –
Prepayments and accrued income 83.9 64.7 – –
250.5 185.7 534.1 579.4
The carrying values less impairment provision of trade and other receivables are reasonable approximations of fair values.
Trade receivables that are not past due are not considered to be impaired.
The ageing of past due debtors for the Group is as follows:
2014 2013
Impaired Not impaired Impaired Not impaired
£m £m £m £m
0 to 3 months past due – 50.7 0.1 40.9
Greater than 3 months past due 5.2 11.6 6.0 9.7
5.2 62.3 6.1 50.6
The carrying amount of the Group’s trade and other receivables are denominated in the following currencies:
2014 2013
£m £m
Sterling 122.9 98.3
Euro 90.7 58.4
Other Currencies 36.9 29.0
250.5 185.7
Movements on the Group provision for impairment of trade receivables are as follows:
2014 2013
£m £m
1 April 6.1 7.8
Provision for receivables impairment 3.4 1.4
Receivables written off during the year as uncollectible (0.7) (0.9)
Provisions no longer required (3.4) (2.2)
Foreign exchange (0.2) –
31 March 5.2 6.1
The creation and release of the provision for impaired receivables have been included in operating expenses in the income statement. Amounts charged to the
allowance account are written off when there is no expectation of recovering additional cash.
The other classes within trade and other receivables and the other categories of ?nancial assets do not contain impaired assets.
130 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
18. Financial instruments by category
The ?nancial instruments of the Group and Company are categorised as follows:
Group Company
Loans and
receivables
Available
for sale
Assets at fair
value through
pro?t or loss
Held to
maturity Total
Loans and
receivables
Assets at fair
value through
pro?t or loss Total
31 March 2014 £m £m £m £m £m £m £m £m
Assets as per balance sheet
Financial assets of the CCP clearing
business:
– CCP trading assets – – 337,211.5 – 337,211.5 – –
– Receivables for repurchase transactions 117,702.6 – – – 117,702.6 – –
– Other receivables from clearing members 1,295.3 – 3,147.2 – 4,442.5 – –
– Financial assets held at fair value – – 9,707.8 1,433.3 11,141.1 – –
– Cash and cash equivalents of clearing
members 24,735.1 5,926.7 2,616.7 – 33,278.5 – –
Financial assets of the CCP clearing business 143,733.0 5,926.7 352,682.2 1,433.3 503,776.2 – –
Assets held at fair value – – 18.7 – 18.7 – –
Total ?nancial assets for CCP clearing 143,733.0 5,926.7 352,701.9 1,433.3 503,794.9 – –
Trade and other receivables 133.5 – – – 133.5 534.1 – 534.1
Cash and cash equivalents 919.2 – – – 919.2 – – –
Available for sale ?nancial assets – 4.8 – – 4.8 – – –
Cross currency interest rate swaps – – 6.7 – 6.7 – 6.7 6.7
Total 144,785.7 5,931.5 352,708.6 1,433.3 504,859.1 534.1 6.7 540.8
Group Company
Derivatives used
for hedging
Other ?nancial
liabilities Total
Derivatives used
for hedging
Other ?nancial
liabilities Total
£m £m £m £m £m £m
Liabilities as per balance sheet
Financial liabilities of the CCP clearing business:
– CCP trading liabilities – 337,211.5 337,211.5 – – –
– Liabilities under repurchase transactions – 117,702.6 117,702.6 – – –
– Other payables to clearing members – 48,808.2 48,808.2 – – –
– Financial liabilities held at fair value – 25.1 25.1 – – –
Financial liabilities of the CCP clearing business – 503,747.4 503,747.4 – – –
Trade and other payables – 401.5 401.5 – 204.4 204.4
Other non-current liabilities – 79.2 79.2 – – –
Provisions – 19.4 19.4 – – –
Borrowings – 1,223.7 1,223.7 – 822.6 822.6
Interest rate swaps 3.4 – 3.4 – – –
Cross currency interest rate swaps 4.0 – 4.0 4.0 – 4.0
Total 7.4 505,471.2 505,478.6 4.0 1,027.0 1,031.0
The Group uses the following hierarchy for determining and disclosing the fair value of ?nancial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs, which have a signi?cant effect on the recorded fair value are observable, either directly or indirectly; and
Level 3: techniques which use inputs which have a signi?cant effect on the recorded fair value that are not based on observable market data. The Group has no
?nancial instruments in this category.
For assets and liabilities classi?ed as level 2, the fair value is calculated using valuation techniques with market observable inputs. Frequently applied
techniques include forward pricing and swap models using present value calculations. The models incorporate various inputs including foreign exchange spot
and forward rates, interest rate curves and forward rate curves.
Level 1 CCP trading assets and liabilities were £8,467.8 million (2013: £3,426.6 million), Level 2 CCP trading assets and liabilities were £328,733.4 million (2013: nil).
Level 1 Financial assets held at fair value were £10,275.8 million (2013: £12.6 million), Level 2 Financial assets held at fair value were £865.3 million (2013: nil).
The cross currency interest rate swaps (amounting to six contracts of €50 million each,) effectively exchange some of the proceeds of the 2016 and the
2019 £250 million bonds from sterling into euros to better match the currency of borrowings to the Group’s currency of earnings, to reduce exposure to euro
denominated net assets and to protect sterling cash ?ow. These are designated as a hedge of the Group’s net investment in the Italian group and qualify for
effective hedge accounting as both legs of the swap are at ?xed rates and the cash ?ow components of the swaps exactly match the terms of the underlying bonds.
For the year ended 31 March 2014, the Group recognised the £2.3 million movement in mark to market value of these derivatives in reserves (2013: £2.5 million).
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131 Group ?nancial statements Notes to the ?nancial statements
Foreign exchange forward contracts were arranged during the year to hedge the fair value of USD denominated exposures. These hedges forward buy and
sell USD payables and receivables, with the mark to market adjustments offsetting the hedged item revaluation in the income statement. This also offers more
predictable sterling cash ?ows to the Group at maturity. At 31 March 2014, USD18m of receivables and USD12.7m of payables were hedged forward into the
next ?nancial year. The market value of the hedges was £3k in aggregate.
Other non-current liabilities includes a CAD51.3m ?nancial liability relating to the FTSE-TMX Canadian Dollar denominated investment. This ?nancial liability
has been designated as a hedge of the Group’s net investment in FTSE-TMX.
The Group’s ?nancial assets held at fair value consist largely of securities restricted in use for the operations of the Group’s CCPs as managers of their respective
clearing and guarantee systems. The fair value of ?nancial instruments traded in active markets (such as trading and available-for-sale securities) is based on
quoted market prices at the balance sheet date.
The nature and composition of the CCP clearing business assets and liabilities are explained in the accounting policies note on pages 112-113.
As at 31 March 2014, there were no provisions for impairment in relation to any of the CCP ?nancial assets (2013: nil) and none of these assets were past due
(2013: nil).
The ?nancial instruments of the Group and the Company at the previous year’s balance sheet date were as follows:
Group Company
Loans and
receivables
Available
for sale
Assets at fair
value through
pro?t or loss Total
Loans and
receivables
Assets at fair
value through
pro?t or loss Total
31 March 2013 £m £m £m £m £m £m £m
Assets as per balance sheet
Financial assets of the CCP clearing business:
– CCP trading assets – – 3,426.6 3,426.6 – – –
– Receivables for repurchase transactions 127,036.2 – – 127,036.2 – – –
– Other receivables from clearing members 7,144.8 – – 7,144.8 – – –
– Financial assets held at fair value – – 12.6 12.6 – – –
– Cash and cash equivalents of clearing
members 2,681.1 5,795.1 – 8,476.2 – – –
Financial assets of the CCP clearing business 136,862.1 5,795.1 3,439.2 146,096.4 – – –
Assets held at fair value – – 6.1 6.1 – – –
Total ?nancial assets for CCP clearing 136,862.1 5,795.1 3,445.3 146,102.5 – – –
Trade and other receivables 121.0 – – 121.0 579.4 – 579.4
Cash and cash equivalents 446.2 – – 446.2 0.1 – 0.1
Available for sale ?nancial assets – 11.9 – 11.9 – – –
Cross currency interest rate swaps – – 4.0 4.0 – 4.0 4.0
Forward foreign exchange contract – – 0.3 0.3 – – –
Total 137,429.3 5,807.0 3,449.6 146,685.9 579.5 4.0 583.5
Group Company
Derivatives used
for hedging
Other ?nancial
liabilities Total
Derivatives used
for hedging
Other ?nancial
liabilities Total
£m £m £m £m £m £m
Liabilities as per balance sheet
Financial liabilities of the CCP clearing business:
– CCP trading liabilities – 3,426.6 3,426.6 – – –
– Liabilities under repurchase transactions – 127,036.2 127,036.2 – – –
– Other payables to clearing members – 15,610.4 15,610.4 – – –
– Financial liabilities held at fair value – 14.9 14.9 – – –
Financial liabilities of the CCP clearing business – 146,088.1 146,088.1 – – –
Trade and other payables – 233.4 233.4 – 160.9 160.9
Provisions – 27.3 27.3 – – –
Borrowings – 796.8 796.8 – 796.4 796.4
Cross currency interest rate swaps 3.5 – 3.5 3.5 – 3.5
Forward foreign exchange contracts – 0.1 0.1 – – –
Total 3.5 147,145.7 147,149.2 3.5 957.3 960.8
132 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
19. Offsetting financial assets and financial liabilities
The Group reports ?nancial assets and ?nancial liabilities on a net basis on the balance sheet where there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liabilities simultaneously.
The following table shows the impact of netting arrangements on all ?nancial assets and liabilities that are reported net on the balance sheet.
31 March 2014
Gross
amounts
Amount
offset
Net amount as
reported
£m £m £m
Derivative ?nancial assets 24,807,530 (24,806,500) 1,030
Reverse repurchase agreements 513,873 (187,152) 326,721
Other movements during the year 88,284 (87,294) 990
Total assets 25,409,687 (25,080,946) 328,741
Derivative ?nancial liabilities (24,807,530) 24,806,500 (1,030)
Reverse repurchase agreements (513,873) 187,152 (326,721)
Other (88,284) 87,294 (990)
Total liabilities (25,409,687) 25,080,946 (328,741)
All offset amounts are held in the CCP trading assets and CCP trading liabilities within the Group’s ?nancial instruments.
As CCPs, the Group’s operating companies sit in the middle of members’ transactions and hold default funds and margin amounts as a contingency against
the default of a member. As such, further amounts are available to offset in the event of a default reducing the asset and liability of £328,741.6 million to nil.
Default funds for derivatives of £4,018.7 million, repos of £1,497.1 million and other transactions of £377.0 million are held by the Group. In addition, the Group
holds margin of €14,954.8 million for derivatives, €12,506.5 million for repos and €4,896.3 million for other transactions, as well as additional variation margin
amounts which are not allocated by business line.
20. Cash and cash equivalents
Group Company
2014 2013 2014 2013
£m £m £m £m
Cash at bank 683.9 217.0 – 0.1
Short term deposits 235.3 229.2 – –
919.2 446.2 – 0.1
Cash and cash equivalents are held with authorised counterparties of a high credit standing, in secured investments at LCH.Clearnet Group companies and at
CC&G and unsecured interest bearing current and call accounts, short term deposits and AAA rated money market funds elsewhere in the Group. Management
does not expect any losses from non-performance by the counterparties holding cash and cash equivalents, and there are no material differences between
their book and fair values.
Cash and cash equivalents do not include amounts held by subsidiaries on behalf of its clearing members, the use of which is restricted to the operation of the
clearers as managers of the clearing and guarantee system (see note 18). Cash and cash equivalents include amounts held by regulated entities for regulatory
and operational purposes. At 31 March 2014, the Group set aside £803.6 million (2013: £200.0 million) for such purposes, with the amount subject to regular
review with regulators in the UK, France and Italy.
21. Trade and other payables
Group Company
2014 2013 2014 2013
Notes £m £m £m £m
Trade payables 43.9 30.4 – –
Amounts owed to Group undertakings 31 – – 182.0 132.2
Social security and other taxes 17.2 12.5 – –
Other payables 110.5 26.4 1.0 3.3
Accruals and deferred income 229.9 164.1 21.4 25.4
401.5 233.4 204.4 160.9
Current 401.5 230.0 204.4 160.9
Non-current – 3.4 – –
401.5 233.4 204.4 160.9
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133 Group ?nancial statements Notes to the ?nancial statements
22. Borrowings
Group Company
2014 2013 2014 2013
£m £m £m £m
Current
Bank borrowings and trade ?nance loans 278.7 0.4 26.0 –
278.7 0.4 26.0 –
Non-current
Bonds 796.6 796.5 796.7 796.5
Preferred securities 148.4 – – –
Deferred arrangement fees – (0.1) – (0.1)
945.0 796.4 796.7 796.4
The Group has the following committed bank facilities and unsecured notes:
Notes/Facility
Carrying value at
31 March 2014
Interest rate
percentage at
31 March 2014
Type Expiry Date £m £m %
Drawn value of Facilities
Multi-currency revolving credit facility Jul 2016 250.0 165.1 LIBOR + 0.8
Multi-currency revolving credit facility Jul 2018 450.0 112.7 LIBOR + 0.95
Total Bank Facilities 700.0 277.8
Notes due July 2016 Jul 2016 250.0 251.0 6.125
Notes due October 2019 Oct 2019 250.0 248.2 9.125
Notes due November 2021 Nov 2021 300.0 297.4 4.75
LCH.Clearnet preferred securities May 2017 165.6 148.4 6.576
Total Bonds 965.6 945.0
Total Committed Facilities 1,665.6 1,222.8
Current borrowings
The Group’s committed bank facility arrangements of £700 million were partially utilised at 31 March 2014 with £277.8 million drawn.
In addition, a number of Group entities have access to uncommitted operational, money market and overdraft facilities which support post trade activities
and day to day liquidity requirements across its operations. As at 31 March 2014, £0.9 million was the aggregate drawing against these facilities.
CC&G has unlimited direct intra-day access to re?nancing with the Bank of Italy to cover its operational liquidity requirements in the event of a market
stress or participant failure. In addition, it has arranged secured and unsecured credit lines with a number of commercial banks, which totalled €450 million
at the 31 March 2014, to further support its operational and liquidity requirements.
As a bank, Clearnet SA has full and unlimited access to the liquidity operations provided by the central bank, including re?nancing securities at Banque de
France to support its normal day to day requirements.
134 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Non-current borrowings
In July 2006, the Company issued a £250 million bond which is unsecured and is due for repayment in July 2016. Interest is paid semi-annually in arrears in
January and July each year. The issue price of the bond was £99.679 per £100 nominal. The coupon on the bond is dependent on movements in the Company’s
credit rating with Moody’s which was unchanged throughout the ?nancial year. The bond coupon remained at 6.125 per cent per annum throughout this period.
In June 2009, the Company issued another £250 million bond which is unsecured and is due for repayment in October 2019. Interest is paid semi-annually in
arrears in April and October each year. The issue price of the bond was £99.548 per £100 nominal. The coupon on the bond is dependent on the Company’s
credit ratings with Moody’s and Standard & Poor’s which were unchanged throughout the ?nancial year. The bond coupon remained at 9.125 per cent per
annum throughout this period.
In November 2012, the Company issued a further £300 million bond under its euro medium term notes programme (launched at the same time) which is
unsecured and is due for repayment in November 2021. Interest is paid semi-annually in arrears in May and November each year. The issue price of the bond
was £100 per £100 nominal. The coupon on the bond is ?xed at 4.75 per cent per annum.
In May 2007, LCH.Clearnet Group Limited issued through Freshwater Finance plc €200 million of Perpetual Preferred Securities to underpin its capital structure.
€20 million of these Securities were subsequently repurchased in the market by LCH.Clearnet Group Limited. The coupon on these Securities is currently a ?xed
rate of 6.576 per cent per annum and interest is paid annually. In May 2017 this coupon is replaced by a rate of three month Euribor plus 2.1 per cent per
annum, and a ?rst call date attached to the Securities is May 2018.
Fair values
The fair values of the Group’s borrowings are as follows:
2014 2013
Carrying value Fair value Carrying value Fair value
Group £m £m £m £m
Borrowings
– within one year 278.7 278.7 0.4 0.4
– after more than one year 945.0 1,066.2 796.4 942.4
1,223.7 1,344.9 796.8 942.8
The fair values of the Company’s borrowings are as follows:
2014 2013
Carrying value Fair value Carrying value Fair value
Company £m £m £m £m
Borrowings
– within one year 26.0 26.0 – –
– after more than one year 796.6 910.3 796.4 942.4
822.6 936.3 796.4 942.4
The fair values of borrowings are based on discounted cash ?ows using a rate based on borrowing cost. Floating rate borrowings bear interest at an agreed
margin over LIBOR.
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
2014 2013
Drawn Swapped Effective Drawn Swapped Effective
Currency £m £m £m £m £m £m
Sterling 822.6 (248.5) 574.1 796.4 (255.5) 540.9
Euro 400.5 248.5 649.0 – 255.5 255.5
Sri Lankan Rupees 0.6 – 0.6 0.4 – 0.4
Total 1,223.7 – 1,223.7 796.8 – 796.8
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135 Group ?nancial statements Notes to the ?nancial statements
23. Analysis of net debt
Group Company
2014 2013 2014 2013
£m £m £m £m
Due within one year
Cash and cash equivalents 919.2 446.2 – 0.1
Bank borrowings (278.7) (0.4) (26.0) –
Derivative ?nancial liabilities (3.4) (0.1) – –
637.1 445.7 (26.0) 0.1
Due after one year
Deferred arrangement fees – 0.1 – 0.1
Bonds (796.6) (796.5) (796.6) (796.4)
Preferred Securities (148.4) – – –
Derivative ?nancial assets 6.7 4.3 6.7 4.0
Derivative ?nancial liabilities (4.0) (3.5) (4.0) (3.5)
Total net debt (305.2) (349.9) (819.9) (795.7)
Reconciliation of net cash flow to movement in net debt
Group Company
2014 2013 2014 2013
£m £m £m £m
Increase/(decrease) in cash in the year 491.7 227.6 (0.1) 0.3
Bond issue proceeds – (297.6) – (297.6)
Bank loan repayments less new drawings (192.1) 257.8 (26.0) 247.8
Change in net debt resulting from cash ?ows 299.6 187.8 (26.1) (49.5)
Foreign exchange movements (11.2) 2.6 (0.5) (0.4)
Movement on derivative ?nancial assets and liabilities (1.4) (2.4) 2.2 (2.6)
Bond valuation adjustment 0.1 0.1 0.2 0.1
Acquired debt (242.4) – – –
Net debt at the start of the year (349.9) (538.0) (795.7) (743.3)
Net debt at the end of the year (305.2) (349.9) (819.9) (795.7)
24. Provisions
Group
Property
£m
1 April 2012 30.1
Utilised during the year (4.1)
Interest on discounted provision 1.3
31 March 2013 27.3
Utilised during the year (9.7)
Interest on discounted provision 1.8
31 March 2014 19.4
Current 2.8
Non-current 16.6
31 March 2014 19.4
The property provision represents the estimated net present value of future costs for lease rentals and dilapidation costs less the expected receipts from
sub-letting space which is surplus to business requirements. The leases have between one and 15 years to expiry.
The Company has no provisions.
136 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
25. Ordinary share capital
2014 2013
Authorised millions £m millions £m
Ordinary shares of 6
79
/86p 271.1 18.8 271.1 18.8
More information about the shares and rights attached to the ordinary shares is given in the Directors’ Report on pages 98 and 99.
26. Net cash flow generated from operations
Group Company
2014 2013 2014 2013
£m £m £m £m
Pro?t before taxation 284.3 298.9 64.4 159.1
Depreciation and amortisation 178.6 129.2 – –
Loss on disposal of property, plant and equipment 0.2 1.5 – –
Pro?t on acquisition/disposal of shares in subsidiary and joint venture (6.9) – – –
Net ?nance expense/(income) 68.8 49.5 (79.3) (148.9)
Decrease in inventories 0.8 0.5 – –
Decrease in trade and other receivables 37.2 (3.0) 9.7 3.2
Decrease in trade and other payables (118.6) (9.6) (6.7) (10.2)
Borrowing costs capitalised – (0.5) – (0.6)
Goodwill valuation amendment – (1.2) – –
Decrease/(increase) in CCP ?nancial assets 92,323.0 (43,590.5) – –
(Decrease)/increase in CCP clearing business liabilities (92,236.4) 43,594.4 – –
De?ned bene?t pension obligation – contributions (in excess of)/lower than expenses charged (3.3) (1.0) – –
Provisions utilised during the year (9.7) (6.1) – –
(Increase)/decrease in assets held at fair value from operating activities (9.5) 8.0 – –
Share scheme expense 13.4 13.1 – –
Foreign exchange (losses)/gains on operating activities (6.5) 4.3 (1.1) (2.5)
Cash generated from/(absorbed by) operations 515.4 487.5 (13.0) 0.1
Comprising:
Ongoing operating activities 548.7 480.5 1.7 0.1
Non-recurring items (33.3) 7.0 (14.7) –
515.4 487.5 (13.0) 0.1
27. Commitments and contingencies
Contracted capital commitments and other contracted commitments not provided for in the ?nancial statements of the Group were £1.7 million (2013: £1.6 million)
and £nil (2013: £13.2 million) respectively.
LCH.Clearnet Group Limited is currently engaged in correspondence and discussions regarding concerns raised by administrators in relation to a past default
exercise which could give rise to a claim against it. The amount and likelihood of success of any such claim, if made, is currently uncertain and accordingly no
provision for any liability has been made in the interim statements.
28. Business combinations
Acquisitions in the year to 31 March 2014
The Group made three acquisitions during the period.
On 5 April 2013, the Group and TMX Group Limited completed a transaction to combine their ?xed income businesses into a new business, FTSE TMX Global
Debt Capital Markets Limited. The transaction resulted in the Group acquiring a 75 per cent stake in FTSE TMX Global Debt Capital Markets Limited for a total
consideration of £78.2 million. The non-controlling interest (‘NCI’) has an option to sell the remaining 25 per cent interest to the Group after six years or earlier
in other limited scenarios.
On 1 May 2013, the Group completed the acquisition of a further 55.5 per cent stake in LCH.Clearnet resulting in a majority stake of 57.8 per cent in LCH.Clearnet.
The total investment of £470.3 million includes deferred consideration of £20.0 million, payable on 30 September 2017 subject to acceleration or delay in certain
limited circumstances. The investment is inclusive of the Group’s participation in the capital raise of LCH.Clearnet issued share capital of £158.2 million.
On 23 September 2013, the Group acquired a 70 per cent interest in EuroTLX SIM SpA for a consideration of £26.1 million and £0.9 million in deferred
consideration. The NCI has an option to sell the remaining 30 per cent interest to the Group. The value of the option is dependent on achieving growth and cost
synergies in the next ?nancial year.
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137 Group ?nancial statements Notes to the ?nancial statements
Contribution post acquisition
Date acquired Total investment Goodwill
Fair value of
assets acquired Revenue
Operating
pro?t
£m £m £m £m £m £m
LCH.Clearnet Group Limited 1 May 2013 470.3 123.8 346.5 263.0 78.5
EuroTLX SIM SpA 23 September 2013 27.0 15.6 11.4 6.6 2.0
FTSE TMX Global Debt Capital Markets Limited 5 April 2013 78.2 27.4 50.8 10.9 6.7
575.5 166.8 408.7 280.5 87.2
The total investment included in the acquisition of LCH.Clearnet comprises cash consideration of £292.1 million, deferred consideration of £20.0 million and the
Group’s participation in the capital raise of £158.2 million. Included in the LCH.Clearnet value of assets acquired is £273.7 million raised from all shareholders as
part of the capital raise.
If all acquisitions had occurred on 1 April 2013, estimated Group revenue for the year would have been £1,124 million, with operating pro?t (before acquisition
amortisation and exceptional items) of £525 million. These amounts have been calculated using the Group’s accounting policies and based on available information.
The assets and liabilities arising out of each acquisition at the relevant acquisition date are as follows:
LCH.Clearnet Group Limited EuroTLX SIM SpA
FTSE TMX Global Debt Capital
Markets Limited Total
Book value Fair value Book value Fair value Book value Fair value Book value Fair value
£m £m £m £m £m £m £m £m
Non-current assets:
Intangible assets 55.4 277.1 0.1 11.0 11.0 75.9 66.5 364.0
Goodwill 119.9 – – – 90.1 – 210.0 –
Property, plant
and equipment 14.6 14.6 0.9 0.9 – – 15.5 15.5
Other non-current assets 24.0 24.0 – – – – 24.0 24.0
Current assets:
Cash and cash equivalents 425.1 425.1 8.2 8.2 2.7 2.7 436.0 436.0
Other current assets 466,555.5 466,555.5 2.5 2.5 3.0 3.2 466,561.0 466,561.2
Current liabilities:
Borrowings (92.4) (92.4) – – – – (92.4) (92.4)
Other current liabilities (461,088.1) (461,088.1) (2.8) (6.3) (4.4) (4.5) (461,095.3) (461,098.9)
Non-current liabilities:
Borrowings (152.4) (152.4) – – – – (152.4) (152.4)
Other non-current liabilities (5,214.0) (5,277.4) (0.1) (0.1) (4.5) (9.6) (5,218.6) (5,287.1)
Net assets 647.6 686.0 8.8 16.2 97.9 67.7 754.3 769.9
Non controlling interest – (339.5) – (4.8) – (16.9) – (361.2)
Goodwill – 123.8 – 15.6 – 27.4 – 166.8
647.6 470.3 8.8 27.0 97.9 78.2 754.3 575.5
Satis?ed by:
Cash and capital raise 450.3 26.1 73.1 549.5
Deferred consideration 20.0 0.9 – 20.9
Transfer of assets – – 5.1 5.1
Total investment 470.3 27.0 78.2 575.5
The fair values are preliminary and will be ?nalised within 12 months of the acquisition date.
The fair value adjustments include:
LCH.Clearnet Group Limited
The additional £245.2 million of intangible assets arising on consolidation represents £47.4 million relating to various technologies, £33.4 million relating to
software licences, £152.1 million relating to customer relationships and £12.3 million relating to trade names. The fair values of these purchased intangible
assets are being amortised over their remaining useful life from the date of completion. The goodwill of £123.8 million arising on consolidation represents
the growth of future expected income streams from customers and its assembled workforce.
EuroTLX SIM SpA
The purchased intangibles of £10.9 million primarily relates to customer relations of £10.0 million. The goodwill of £15.6 million arising on consolidation
includes value attributed to its assembled workforce.
FTSE TMX Global Debt Capital Markets Limited
The purchased intangibles of £74.1 million mainly relate to customer relations of £69.1 million. The goodwill of £27.4 million arising on consolidation represents
the potential for the Group to expand into new territories such as the USA (£16.3 million), Australia (£7.4 million) and China (£3.7 million).
138 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
29. Leases
The Group leases various of?ce properties and equipment under non-cancellable operating leases.
The total future minimum lease payments under non-cancellable operating leases are due as follows:
Property Equipment
2014 2013 2014 2013
Leases expiring in: £m £m £m £m
Less than one year 30.8 25.3 1.1 1.4
More than one year but less than ?ve years 102.4 84.0 0.6 –
More than ?ve years 93.0 82.7 – –
226.2 192.0 1.7 1.4
Operating lease payments of £34.1 million (2013: £25.6 million) were charged to the income statement in the year in relation to property and £1.9 million
(2013: £3.0 million) in the year in relation to equipment.
The total future minimum lease payments expected to be received under non-cancellable operating leases for property where the Group is lessor are due as follows:
Property
2014 2013
Leases expiring in: £m £m
Less than one year 5.5 8.2
More than one year but less than ?ve years 21.2 21.2
More than ?ve years 7.0 10.9
33.7 40.3
The Company has no lease commitments.
30. Share Schemes
The London Stock Exchange Group Long Term Incentive Plan (LTIP), approved at the 2004 AGM, has two elements, a conditional award of Performance Shares
and an award of Matching Shares linked to investment by the executive of annual bonus in the Company’s shares. Vesting of these awards is dependent upon
the Company’s total shareholder return performance and for awards made since 2008, adjusted basic earnings per share. Further details are provided in the
Remuneration Report on pages 70-97.
The SAYE scheme and International Sharesave Plan provide for grants of options to employees who enter into a SAYE savings contract and options were granted
at 20 per cent below fair market value. Share awards were granted at nil cost to employees and other share options were granted at fair market value or above.
The Group has an ESOP discretionary trust to administer the share plans and to acquire the shares to meet commitments to Group employees.
At the year end 642,936 (2013: 1,128,556) shares were held by the trust, funded by an interest free loan from the Group. The Company has no employees,
but in accordance with SIC 12 “Consolidation – Special Purpose Entities” has the obligation for the assets, liabilities, income and costs of the ESOP trust and
these have been consolidated in the Group’s ?nancial statements. The cost of the Group’s shares held by the trust are deducted from retained earnings.
Movements in the number of share options and awards outstanding and their weighted average exercise prices are as follows:
Share options SAYE Scheme LTIP
Number
Weighted average
exercise
price Number
Weighted average
exercise
price Number
Weighted average
exercise
price
31 March 2012 404,240 5.26 489,271 6.13 6,093,311 –
Granted 55,440 9.85 220,046 8.20 2,814,239 –
Exercised (67,570) 3.57 (3,844) 6.13 (1,386,330) –
Lapsed/forfeited (8,995) 7.80 (20,403) 6.13 (1,028,747) –
31 March 2013 383,115 6.16 685,070 6.79 6,492,473 –
Granted – – 214,485 12.64 2,231,649 –
Exercised (235,139) 7.12 (3,501) 6.43 (1,902,989) –
Lapsed/forfeited (9,943) 9.27 (29,171) 6.80 (428,407) –
31 March 2014 138,033 9.25 866,883 8.25 6,392,726 –
Exercisable at:
31 March 2014 32,778 7.73 – – – –
31 March 2013 183,631 1.69 – – 121,483 –
The weighted average share price of London Stock Exchange Group plc shares during the year was £16.08 (2013: £10.70).
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139 Group ?nancial statements Notes to the ?nancial statements
The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows:
2014 2013
Number
outstanding
Weighted average
remaining
contractual life
Number
outstanding
Weighted average
remaining
contractual life
Share options
Less than £7 – – 153,935 0.3
Between £7 and £8 10,506 – 85,680 1.7
Between £8 and £9 22,272 – 29,696 0.5
More than £9 105,255 0.5 113,804 2.6
SAYE
Less than £7 439,487 0.5 465,024 1.2
Between £8 and £9 212,911 0.5 220,046 1.0
More than £9 214,485 0.7 – –
LTIP
Nil 6,392,726 1.3 6,492,473 1.4
Total 7,397,642 1.3 7,560,658 1.6
The fair value of share awards and share options granted during the year was determined using a stochastic valuation model. The key assumptions used in the
valuation were as follows:
Performance Related Equity Plan Matching Shares Share Save Plan
12 Jun 2013 12 Aug 2013 3 Sep 2013 5 Feb 2014 12 Jun 2013 30 Sep 2013 10 Jan 2014
Grant date share price £13.45 £15.71 £15.74 £18.34 £13.45 £15.37 £17.99
Expected life 3 years 3 years 3 years 3.07 years 3 years 3 years 3 years
Exercise price n/a n/a n/a n/a n/a n/a £12.64
Dividend yield 2.20% 1.90% 1.90% 1.60% 2.20% 1.90% 1.70%
Risk-free interest rate 0.70% 0.70% 0.90% 1.00% 0.70% 0.80% 1.10%
Volatility 30% 30% 30% 29% 30% 30% 30%
Fair value – – – – – – 6.06
Fair value TSR £4.11 £5.06 £5.13 £6.05 £4.11 £4.98 –
Fair value EPS £12.59 £14.84 £14.86 £17.48 £12.59 £14.49 –
The approach adopted by the Group in determining the fair value for the Performance and Matching Shares granted during the year was based on a
Total Shareholder Return pricing model which incorporates TSR and EPS performance conditions and references the vesting schedules of the awards.
For all other share awards, including the Share Save Plan, the Black-Scholes model was used.
The signi?cant inputs into both models are the share price at grant date, expected volatility, dividend yields and annual risk-free interest rate. The volatility
assumption is based on the historical three-year volatility as at the date of grant. The risk-free interest rate represents the yield available on a UK zero-coupon
government bond on the date of grant for a term commensurate with the vesting period of the award. The expected life refers to the time from the date
of grant to the date the awards vest. Holders of share awards and share options are not entitled to receive dividends declared during the vesting period.
140 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
31. 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:
2014 2013
£m £m
Salaries and other short term bene?ts 9.9 8.9
Pensions 0.9 0.5
Share based payments 10.7 4.6
21.5 14.0
Inter-company transactions with subsidiary undertakings
The Company has loan agreements with some subsidiary undertakings. Details as at 31 March 2014 are shown in the table below:
Amount in millions due
(owed to)/from as at 31 March
Interest in millions
(charge) /credit
Loan counterparty 2014 2013 Term
Interest rate as at 31
March 2014 2014 2013
London Stock Exchange plc £(181.1)m £(88.7)m 25 years from May 2006 with
?ve equal annual repayments
commencing in May 2027.
LIBOR plus
2% per annum
£(5.0)m £(6.8)m
London Stock Exchange
Employee Bene?t Trust
£13.2m £14.2m Repayable on demand. Non-interest
bearing
nil nil
London Stock Exchange Group
Holdings (Italy) Limited – Italian
Branch
nil €450.0m Five years from March 2009,
repayable in full on maturity
in March 2014.
EURIBOR plus
4.0% per annum
nil €24.4m
London Stock Exchange Group
Holdings (Italy) Limited – Italian
Branch
nil €94.5m 20 years from January 2008
with ?ve equal repayments
commencing in January 2024.
EURIBOR plus
1.2% per annum
nil €2.6m
London Stock Exchange Group
Holdings (Italy) Limited
€(9.6)m nil Fifth anniversary of the initial
utilisation date which was
April 2013.
LIBOR plus
1.5% per annum
€0.1m nil
London Stock Exchange Group
Holdings Limited
£474.9m £463.6m Fifth anniversary of the initial
utilisation date which was
October 2009.
LIBOR plus
4.0% per annum
£23.3m £22.1m
London Stock Exchange Group
Holdings (R) Limited
nil £(0.6)m Fifth anniversary of the initial
utilisation date which was
April 2011.
LIBOR plus
1.5% per annum
nil nil
Cassa di Compensazione e Garanzia
S.p.A.
nil nil One year from initial utilisation
date which was January 2012.
EURIBOR plus
1.2% per annum
nil €(0.5)m
Monte Titoli S.p.A. nil €(31.9)m One year from initial utilisation
date which was January 2012,
extended for further six months
to July 2013.
EURIBOR plus
1.2% per annum
€(0.2)m €(0.4)m
Societa Mercato Titoli di Stato S.p.A. nil €(22.2)m One year from initial utilisation
date which was 1 August 2013.
EURIBOR plus
1.2% per annum
€(0.3)m €(0.2)m
LSE Reg Holdings Limited €0.2m nil Fifth anniversary of the initial
utilisation date which was
December 2013.
EURIBOR plus
1.2% per annum
nil nil
LSE Reg Holdings Limited £1.3m nil Fifth anniversary of the initial
utilisation date which was
December 2013.
LIBOR plus
1.2% per annum
nil nil
London Stock Exchange (C) Limited €49.8m €13.8m Fifth anniversary of the initial
utilisation date which was
April 2012.
EURIBOR plus
1.5% per annum
€0.8m €0.3m
London Stock Exchange (C) Limited £2.8m nil Fifth anniversary of the initial
utilisation date which was
April 2012.
LIBOR plus
1.5% per annum
nil nil
During the year the Company charged in respect of employee share schemes £5.0 million (2013: £8.0 million) to London Stock Exchange plc, £0.2 million
(2013: nil) to London Stock Exchange Group Holdings Inc, £0.1 million (2013: nil) to London Stock Exchange (OV) Limited, £0.1 million (2013: nil) to UnaVista
Limited, £2.7 million (2013: £2.8 million) to London Stock Exchange Group Holdings (Italy) Ltd, £1.0 million (2013: £0.7 million) to Millennium Information
£2.0 million (2013: £1.2 million) to FTSE Group and £0.2 million (2013: nil) to LCH.Clearnet Group. The Company received dividends of £118.2 million
(2013: €112,4 million) and €60.0 million (2013: €60.0 million) respectively from its subsidiaries London Stock Exchange plc and London Stock Exchange
Group Holdings (Italy) Limited.
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141 Group ?nancial statements Notes to the ?nancial statements
32. Other Statutory Information
Auditors’ remuneration payable to PricewaterhouseCoopers LLP (PwC) and its associates comprise the following:
2014 2013
£m £m
Audit of parent and consolidated ?nancial statements 0.5 0.2
Audit of subsidiary companies 1.1 1.0
Audit related assurance services 0.4 0.4
Other non-audit services:
– Taxation 0.6 0.2
– Corporate ?nance 0.2 0.6
– Other assurance services – 0.1
Total expenses 2.8 2.5
Further details of the services provided by PwC are given in the Report of the Audit and Risk Committee on pages 68.
Directors’ emoluments comprise the following:
2014 2013
£m £m
Salary and fees 3.4 2.6
Performance bonus 2.7 2.6
Gains made on share awards 4.8 4.9
Bene?ts 0.4 0.3
11.3 10.4
Contributions to de?ned contribution schemes 0.7 0.3
12.0 10.7
During the year no Directors (2013: none) had retirement bene?ts accruing under de?ned contribution schemes and one Director (2013: one) had retirement
bene?ts accruing under a de?ned bene?t scheme.
Further details of Directors’ emoluments are included in the Remuneration Report on pages 70-97.
142 Shareholder information London Stock Exchange Group plc Annual Report 2014
Market structures
PROCESS EXPLANATION THE GROUP’S INVOLVEMENT
The process of trading
Electronic trading Computerised systems for matching
buy and sell orders of ?nancial
instruments, such as equities,
bonds and derivatives.
— Equities – London and Italian trading platforms and Turquoise pan-European & US trading
— ETFs, ETCs – London and Italian trading platforms
— Bonds – MTS, MOT, ORB and EuroTLX
— Derivatives – LSE Derivatives, IDEM, IDEX and AGREX
Clearing After a trade has been matched,
usually by a trading system, it is
cleared by a Central counterparty
(CCP) who stands in the middle of
a trade as the buyer to every
seller and the seller to every buyer.
If either party defaults on the trade,
the CCP owns the defaulter’s risk
and becomes accountable for its
liabilities. During the life of a trade,
or that of a portfolio of trades,
CCPs process all cash ?ows and
continuously mark the trade or
book to market, calling variation
and initial margin in relation to
prevailing risk of the overall portfolio.
LCH.Clearnet acts as a CCP for LSE equities, derivatives and bonds, Turquoise equities
and MTS bonds. LCH.Clearnet also clears commodities and for global OTC derivatives
and non-Group venues. It has clearing houses in the UK, France and USA.
CC&G acts as a CCP for Italian cash equities, derivatives and ?xed income. CC&G also clears
OTC trades and non-Group venues.
Settlement Settlement is the process of
delivering title to the ?nancial
instrument to the buyer against
payment to the seller. For equities,
this normally takes place three days
after the trade. Netted settlement
reduces a large number of positions
to a single position/payment.
Settlement operates both for
transactions through a trading
system and those completed over
the counter (OTC).
Monte Titoli operates the X-TRM and EXPRESS II systems, which cover Italian pre-settlement
and settlement, creating netted settlement instructions, making the actual payments and
delivering securities.
Custody A custodian or Central Securities
Depositary (CSD) undertakes the
safekeeping and administration
of securities on behalf of issuers
and investors.
Monte Titoli provides Italian custody services for ?nancial instruments such as equities
and bonds, whether dematerialised or in paper form. De-materialised securities are those
that can be held without the need for paper certi?cates.
The Group will launch a new International CSD, based in Luxembourg, in the ?rst half of 2014.
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143 Shareholder information Market structures
What are features of lit and dark order books?
Lit order books display price and size of bids and offers so that orders are
visible prior to execution. The bene?t is certainty of trade. The challenge i
s potential market impact. Dark order books mitigate market impact by
allowing orders to reside in an order book where the price and size of an
order is not displayed until after the trade. Users of a dark book, therefore,
have no certainty – pre-trade – that another order is in the dark book.
The bene?t, however, is the ability to place orders without revealing one’s
intention, pre-trade. Furthermore, an investor can peg the non-displayed
price of the order in the dark book to follow the mid-point of the bid and
offer displayed on the reference lit Exchange. After a trade, the price and
size of the completed order is published. This is important as it adds to
transparency for all investors, because post trade transparency is
pre-trade transparency for the next trade.
Dark pool trading on Turquoise
Turquoise Midpoint Dark is a public order book offered equally to all
members. Turquoise Midpoint Dark matches orders pegged to the
mid-point of the Primary Best Bid and Offer of the respective Exchange.
Size priority in Turquoise Midpoint matching logic is different to traditional
time priority of other public orders books and promotes larger sized
orders to the front of the queue. Size priority and user-de?ned Minimum
Execution Size (MES) are key features of two distinct functionalities
that Turquoise Midpoint Dark offers: Continuous Midpoint Matching,
and Turquoise Uncross™ an innovation that provides periodic random
uncrossings during the trading day which increases likelihood of matching
resting buy and sell orders at a fair mid price. Independent study by Liquid
Metrix observed execution quality of Turquoise Uncross best in class
among public dark pools by multiple criteria.
Regulatory development – Revised MiFID/MiFIR
Revised MiFID/MiFIR, political agreement having been reached,
are now in the rule-making stage with the EU Commission and ESMA.
The measures contain a broad range of market structure and conduct
of business measures, aimed at extending the scope of MiFID more
generally to non-equities, promoting transparency, regulation, ef?ciency
and competitiveness of EU ?nancial markets. Key changes of relevance
to the Group include non-discriminatory access to trading venues and
CCPs, non-exclusive licensing of benchmark indices, the introduction
of SME Growth Markets, the extension of pre and post trade transparency
to non-equity asset classes, including bonds and derivatives, and increased
regulatory requirements for high frequency trading strategies and
algorithmic trading. Implementation is expected to take place by
end 2016, with full implementation of some aspects thereafter.
EXPLANATION ATTRIBUTES THE GROUP’S INVOLVEMENT
Trading under MiFID
Exchange model
for trading
— Traded through trading
platforms run by an operator
of a Regulated Market.
— Regulated
— Order driven
— Neutral
— Transparent
— Liquid
— Widest stock coverage
— Widest client base
— Trading platforms offered by the London
Stock Exchange and Borsa Italiana,
including securities listed and/or admitted
to trading on the Group’s primary markets
— On exchange business done off
order book and reported to a
Regulated Market.
— Telephone trading — On exchange trade reporting and publication
MTF MiFID compliant secondary trading
platform providing trading facilities
similar to those offered by
exchanges/regulated markets.
— Regulated
— Order driven
— Neutral
— Transparent
— Can include dark pool trading
(see below)
— MTF services provided through Turquoise
and Euro MTS
OTC Over-the-counter/bilateral market
conducted through electronic
systems or by telephone.
Electronically connected market
consisting of dealers who are in
constant contact, thereby facilitating
trading directly between two parties.
— Regulated participants
— Large or block trades
— Way to trade less liquid stocks
— OTC trade reporting and publication services
144 Shareholder information London Stock Exchange Group plc Annual Report 2014
Glossary
AGREX
The Group’s Italian agricultural commodities derivatives segment of IDEM
AIM
The Group’s market for smaller and growing companies established in
London and now extended to AIM Italia – MAC
Borsa Italiana (BIt)
Borsa Italiana S.p.A., the Group’s Italian exchange business
CAGR
Compound annual growth rate
CCP
Central Counterparty – stands between two parties to a trade to eliminate
counterparty risk by ensuring that settlement takes place
CC&G
Cassa di Compensazione e Garanzia S.p.A., the Group’s Italian subsidiary
which manages the Italian CCP for equity, derivative, commodity and
?xed income trades
Central Securities Depository (CSD)
An entity that enables securities to be processed, settled and held in custody
Company or LSEG, London Stock Exchange Group
London Stock Exchange Group plc
CONSOB
Commissione Nazionale per le Società e la Borsa, Italy’s of?cial body for
regulating and supervising companies and trading infrastructure providers
CPI
Consumer Price Index which measures changes in the price of consumer
goods and services purchased by households
Dark Pool
Electronic trading networks developed by regulated venues such as
Regulated Markets, MTFs and by OTC broker dealers to enable the matching
of orders between buyers and sellers without pre-trade transparency until
the trade is complete
Depositary Receipts/Global Depositary Receipts (GDR)
Tradable certi?cates representing ownership of a number of underlying
shares, mainly for companies in developing or emerging markets
Derivatives
Tradable ?nancial instruments whose value is determined by the value
an underlying instruments; this could be equity, an index, a commodity
or any other tradable instrument
Exchange traded derivatives (ETD) are listed derivatives traded on an
electronic trading venue such as an exchange and cleared through a
clearing house
Over the counter (OTC) derivatives are negotiated privately between
two parties and may be cleared through a clearing house
EBITDA
Earnings before interest, tax, depreciation and amortisation
European Market Infrastructure Regulation (EMIR)
European legislation on regulation of clearing of derivatives,
and the operation and governance of CCPs and trade repositories
ESOP
Employee Share Option Plan
ETC
Exchange Traded Commodity – securities that provide exposure to a range
of commodities and commodity indices
ETF
Exchange Traded Fund – low cost and ?exible investments that track indices
and sectors
ETP
Exchange traded products including ETFs and ETCs
ELITE
A programme in Italy and the UK which is aimed at providing support to
fast growing SMEs, allowing them to boost their appeal and visibility to
potential investors
EuroTLX
The Group’s 70 per cent subsidiary which owns and operates a European MTF
for the trading of ?xed income securities in retail-size and investment
products distributed to retail clients
FCA
Financial Conduct Authority, the current regulator of conduct of providers
of ?nancial services in the UK and of UK trading venues such as Recognised
Investment Exchanges (RIEs) and MTFs
FTSE Group or FTSE
FTSE International Limited and its subsidiaries, the Group subsidiary that
is a leading global provider of index and analytics solutions
FTSE 100 Index
The index developed by FTSE and London Stock Exchange of leading UK
quoted companies
FTSE MIB Index
The index developed by FTSE and Borsa Italiana of leading Italian
quoted companies
globeSettle
The Group’s International Central Securities Depository in Luxembourg
Group
The Company and its group undertakings
Group undertakings
Group undertakings shall be construed in accordance with s1161 of the
Companies Act 2006 and, in relation to the Company, includes London
Stock Exchange plc, Borsa Italiana S.p.A. and FTSE International Limited,
together with respective direct and indirect subsidiaries
High Growth Segment (HGS)
A new segment of the LSE Main Market for the equity shares of UK and
European trading businesses that can demonstrate signi?cant growth
in revenues and a longer term aspiration to join the Premium segment
of the Main Market
International Central Securities Depository (ICSD)
The Group’s new Luxembourg based globeSettle entity that will provide
a full range of custody and settlement services
IDEM
The Group’s Italian Derivatives Market, trading contracts based on equities
and related indices
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IDEX
The Group’s Italian energy derivatives segment, trading contracts based
on commodities and related indices
IOB
International Order Book – the Group’s electronic trading service for
international securities
IPO
Initial Public Offering – the process whereby companies join our markets
and raise capital for the ?rst time
Latency
A measure of time delay experienced in a system, measured in milliseconds
(1/1,000th of a second) or microseconds (1/1,000,000th of a second)
LCH.Clearnet or LCH.Clearnet Group
LCH.Clearnet Group Limited and its subsidiaries, the Group’s 57.8 per cent
owned global clearing and risk management business
Main Market
The market for companies which have been admitted to trading on the
London Stock Exchange’s principal market; and in Italy, the market for
companies listed on Borsa Italiana’s principal MTA market
MiFID or Markets in Financial Instruments Directive
EU Directive introduced in November 2007 to harmonise cross-border trading
of equities, providing greater choice of trading venues. Revised MiFID and
MiFIR (a directive and regulation) are now in the rule making stage with the
EU Commission and ESMA
Millennium Exchange
MillenniumIT’s multi-asset trading platform, deployed for the UK, Italian and
Turquoise equities markets
MillenniumIT
Millennium Information Technologies Limited, the Group’s subsidiary that
is the developer of ?exible, low cost, high performance trading platforms
and ?nancial markets software serving both the Group’s own businesses
and third parties
Monte Titoli
Monte Titoli S.p.A., the Group’s Italian Central Securities Depository and
settlement provider
MOT
Mercato Obbligazionario Telematico is the Group’s Italian retail bond
trading platform
MTA
Mercato Telematico Azionario is the Group’s Italian electronic market on
which shares, convertible bonds, warrants and option rights are traded
MTS
Società per il Mercato dei Titoli di Stato S.p.A., the Group’s 60 per cent
subsidiary which owns and operates an electronic trading platform for
European ?xed income securities
Multilateral Trading Facility (MTF)
Alternative electronic trading systems as categorised under MiFID
ORB
The Group’s UK Order Book for Retail Bonds
OTC
Over-the-counter trades in ?nancial instruments executed outside a
Regulated Market or MTF – see also OTC Derivatives
Primary market
The listing of securities for the ?rst time via an IPO or introduction of
existing securities
Proquote
The Group’s ?nancial market software and data services provider
Regulated Market
A multilateral system which brings together multiple third party buying and
selling in ?nancial instruments in accordance with rules, authorised under
provisions of MiFID
Repo
Repurchase Agreement – the process of borrowing money by combining
the sale and subsequent repurchase of an asset, traded through MTS and
cleared through CC&G or LCH.Clearnet
RNS
Regulatory News Service, the Group’s Primary Information Provider,
for dissemination of regulatory and non-regulatory news to the market
RPI
The Retail Price Index which measures in?ation in the UK economy
Secondary market
The public market on which securities once issued are traded
SEDOL
The Group’s securities identi?cation service
SETS
The electronic order book operated by the London Stock Exchange for the
trading of the most liquid securities
Specialist Fund Market (SFM)
The Group’s regulated market for highly specialised investment entities that
wish to target institutional, professional and highly knowledgeable investors
SwapClear
LCH.Clearnet’s OTC interest rate swap clearing service
TARGET2-Securities (T2S)
Initiative led by the European Central Bank to provide a platform for
settlement of bonds and equities traded in the Eurozone, expected to be
launched in 2015
Transaction Reporting Service (TRS)
Approved Reporting Mechanism, part of the UnaVista range of services
Turquoise
Turquoise Global Holdings Limited and its subsidiaries, the Group’s 51 per cent
owned pan-European MTF equity trading subsidiary, a venture between the
Group and 12 global investment bank clients
UnaVista
The Group’s web-based matching, reconciliation and data integration engine
that provides matching of post trade data in a simple, automated process and
the Trade Repository approved by ESMA under EMIR
X-TRM
The Group’s post trade router, to manage the trade ?ows between two
competing CCPs and onward to settlement
146 Shareholder information London Stock Exchange Group plc Annual Report 2014
Financial calendar
(Provisional)
AGM 16 July 2014
Q1 Interim Management Statement (revenues only) 16 July 2014
Ex-dividend date for ?nal dividend 23 July 2014
Final dividend record date 25 July 2014
Final dividend payment 19 August 2014
Half year end 30 September 2014
Interim Results November 2014
New Financial year end (9 months) 31 December 2014
Preliminary Results (9 months) March 2015
Change of financial year
In order to create alignment of the ?nancial years of LSEG plc and LCH.Clearnet
Group, a change was made to the Group’s accounting reference date,
moving from 31 March to 31 December, with effect from 1 April 2014.
Dividend payments are expected to be made as follows:
— Final dividend for year ending 31 March 2014 – to be paid August
2014 (as per current timetable)
— Interim dividend for 6 months ending 30 September 2014
– to be paid January 2015 (as per current timetable)
— Final dividend for 9 months ended 31 December 2014
– to be paid May 2015
— Thereafter, interim dividends to be paid in October and ?nal
dividends to be paid in May
The ?nancial calendar is updated on a regular basis throughout the year.
Please refer to our website www.lseg.com/investor-relations/
investor-relations.htm and click on the shareholder services section
for up-to-date details.
The Group’s AGM for the year ended 31 March 2014 will be held on
16 July 2014 at Haberdashers’ Hall, 18 West Smith?eld, London EC1A 9HQ
starting at 12:00 noon.
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147 Shareholder information Investor relations
Investor relations
Shareholder services
Equiniti registrars Shareview service
Shareholders who hold London Stock Exchange Group shares in certi?cated
form or within Equiniti Investment Account or ISA can access Shareview.
Shareview is a free service provided by our registrars, Equiniti. It may be
accessed through the internet at www.shareview.co.uk
By creating a Shareview portfolio, you will gain online access to
information about your London Stock Exchange Group shares and
other investments including:
— Direct access to information held for you on the share register
including share movements
— A daily indicative valuation of all investments held in your portfolio
— A range of information and practical help for shareholders.
To register at Shareview you will need your shareholder reference (which
can be found on your share certi?cate) and you will be asked to select your
own personal identi?cation number. A user ID will then be posted to you.
If you have any problems in registering your portfolio for the Shareview
service, contact Equiniti on 0871 384 2544. Calls to this number are
charged at eight pence per minute from a BT landline. Other telephone
providers’ costs may vary. For calls from outside the UK, contact Equiniti
on +44 121 415 7047. Please note that you should only use electronic
addresses included in this Annual Report for the purposes expressly stated.
Group’s share price service
To obtain share price information for London Stock Exchange Group plc,
see our website at: www.lseg.com
By clicking on the Investor Relations tab, you will ?nd the Company’s
share price, historical closing prices and volumes and an interactive
share price graph.
Substantial Shareholders
As at 14 May 2014, the Company had been noti?ed of the following
interests amounting to more than three per cent in the issued share
capital of the Company in accordance with DTR 5 of the FSA’s Disclosure
and Transparency Rules:
Borse Dubai Limited 20.6%
Qatar Investment Authority 15.08%
148 Shareholder information London Stock Exchange Group plc Annual Report 2014
Investor relations contacts
Investor Relations
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
For enquiries relating to shareholdings in London Stock Exchange Group plc:
Shareholder helpline: +44 (0)20 7797 3322
email: [email protected]
Visit the investor relations section of our website for up-to-date information
including the latest share price, announcements, ?nancial reports and details
of analysts and consensus forecasts
www.lseg.com/investor-relations/investor-relations.htm
Registered office
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Registered company number
London Stock Exchange Group plc: 5369106
Registrar information
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
T 0871 384 2544 or +44 (0)121 415 7047
www.shareview.co.uk
Chartered accountants and independent auditors
PricewaterhouseCoopers LLP
7 More London Riverside
London SE1 2RT
Principal legal adviser
Fresh?elds Bruckhaus Deringer LLP
65 Fleet Street
London
EC4Y IHS
T +44 (0)20 7936 4000
Corporate brokers
Barclays
5 The North Colonnade
Canary Wharf
London
E14 4BB
T +44 (0)20 7623 2323
www.barclays.com
Morgan Stanley & Co Limited
20 Bank Street
Canary Wharf
London
E14 4AD
T +44 (0)20 7425 8000
www.morganstanley.com
AIM, London Stock Exchange, the London Stock Exchange coat of arms device, NOMAD, RNS,
SEDOL, SEDOL Master?le, SETS, TradElect, UnaVista, and IOB are registered trade marks of London
Stock Exchange plc. Main Market, Specialist Fund Market, SFM and ORB, High Growth Segment,
Professional Securities Market, PSM are trade marks of London Stock Exchange plc.
Borsa Italiana, MTA, MIB, MOT, AGREX and IDEX are registered trade marks of Borsa Italiana S.p.A.
IDEM is a trade mark of Borsa Italiana S.p.A.. CC&G is a trade mark of Cassa di Compensazione e
Garanzia S.p.A.. Monte Titoli S.p.A. and X-TRM are registered trade marks of Monte Titoli S.p.A..
EuroMTS, MTS and BOND VISION are registered trade marks of Mercato dei Titoli di Stato S.p.A.
Proquote is a registered trade mark of Proquote Limited.
FTSE is a registered trade mark of subsidiaries of London Stock Exchange Group plc and is used by
FTSE International Limited under licence.
MillenniumIT and Millennium Exchange are registered trade marks of Millennium Information
Technologies (Private) Limited and MillenniumIT Software and NewClear are registered trade marks
of Millennium IT Software (Private) Limited.
Millennium Surveillance and Millennium CSD are trade marks of MillenniumIT Software
(Private) Limited.
Turquoise is a registered trade mark of Turquoise Global Holdings Limited.
SwapClear, ForexClear and CDSClear are registered trade marks of LCH.Clearnet Limited.
LCH.Clearnet is a trade mark of LCH.Clearnet Limited.
Other logos, organisations and company names referred to may be the trade marks of
their respective owners.
Designed by Addison Group www.addison-group.net
Board and Executive Committee photography by
Paul Hackett (www.paulhackett.net) and Nick Sinclair (www.nicksinclair.com)
Printed in England by CPI Colour, CPI Colour is a certi?ed CarbonNeutral company.
Welcome to our
annual report
Further information on London Stock
Exchange Group can be found at:
www.lseg.com
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales
No. 5369106
Who we are
London Stock Exchange Group is a diversi?ed international market
infrastructure and capital markets business that sits at the heart of
the world’s ?nancial community.
The Group operates a broad range of international equity, bond and derivatives
markets, including London Stock Exchange; Borsa Italiana; MTS, one of
Europe’s leading ?xed income markets; and Turquoise, the pan-European
equities MTF. Through its various platforms, the Group offers international
businesses and investors unrivalled access to Europe’s capital markets.
Post trade and risk management services are a signi?cant part of the Group’s
business operations. LSEG operates CC&G, the Italian clearing house, and
Monte Titoli, the European settlement business. The Group is also a majority
owner of leading multi-asset global clearing service, LCH.Clearnet Group.
The Group offers customers an extensive range of real time, reference
data and news products, including SEDOL, UnaVista, Proquote and RNS,
as well as access to over 250,000 international equity, bond and alternative
asset class indices, through its world leading index provider, FTSE.
The Group is also a leading developer of high performance trading platforms
and capital markets software for customers around the world.
Headquartered in London, with signi?cant operations in Italy, France,
North America and Sri Lanka, the Group employs approximately 2,900 people.
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Delivering
Growth
Annual Report
31 March 2014
© May 2014
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales No. 5369106
www.lseg.com
doc_821960912.pdf
London Stock Exchange Group is a diversified international market infrastructure and capital markets business that sits at the heart of the worlds financial community.
DISCLAIMER
This PDF is an exact copy of the Annual Report and Accounts of London Stock Exchange Group plc as
provided to shareholders. The audit report is set out on page 66.
The maintenance and integrity of the London Stock Exchange Group plc website is the responsibility of
the directors; the work carried out by the auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes that may have occurred to the
financial statements since they were initially presented on the website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
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Delivering
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Annual Report
31 March 2014
© May 2014
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales No. 5369106
www.lseg.com
AIM, London Stock Exchange, the London Stock Exchange coat of arms device, NOMAD, RNS,
SEDOL, SEDOL Master?le, SETS, TradElect, UnaVista, and IOB are registered trade marks of London
Stock Exchange plc. Main Market, Specialist Fund Market, SFM and ORB, High Growth Segment,
Professional Securities Market, PSM are trade marks of London Stock Exchange plc.
Borsa Italiana, MTA, MIB, MOT, AGREX and IDEX are registered trade marks of Borsa Italiana S.p.A.
IDEM is a trade mark of Borsa Italiana S.p.A.. CC&G is a trade mark of Cassa di Compensazione e
Garanzia S.p.A.. Monte Titoli S.p.A. and X-TRM are registered trade marks of Monte Titoli S.p.A..
EuroMTS, MTS and BOND VISION are registered trade marks of Mercato dei Titoli di Stato S.p.A.
Proquote is a registered trade mark of Proquote Limited.
FTSE is a registered trade mark of subsidiaries of London Stock Exchange Group plc and is used by
FTSE International Limited under licence.
MillenniumIT and Millennium Exchange are registered trade marks of Millennium Information
Technologies (Private) Limited and MillenniumIT Software and NewClear are registered trade marks
of Millennium IT Software (Private) Limited.
Millennium Surveillance and Millennium CSD are trade marks of MillenniumIT Software
(Private) Limited.
Turquoise is a registered trade mark of Turquoise Global Holdings Limited.
SwapClear, ForexClear and CDSClear are registered trade marks of LCH.Clearnet Limited.
LCH.Clearnet is a trade mark of LCH.Clearnet Limited.
Other logos, organisations and company names referred to may be the trade marks of
their respective owners.
Designed by Addison Group www.addison-group.net
Board and Executive Committee photography by
Paul Hackett (www.paulhackett.net) and Nick Sinclair (www.nicksinclair.com)
Printed in England by CPI Colour, CPI Colour is a certi?ed CarbonNeutral company.
Welcome to our
annual report
Further information on London Stock
Exchange Group can be found at:
www.lseg.com
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales
No. 5369106
Who we are
London Stock Exchange Group is a diversi?ed international market
infrastructure and capital markets business that sits at the heart of
the world’s ?nancial community.
The Group operates a broad range of international equity, bond and derivatives
markets, including London Stock Exchange; Borsa Italiana; MTS, one of
Europe’s leading ?xed income markets; and Turquoise, the pan-European
equities MTF. Through its various platforms, the Group offers international
businesses and investors unrivalled access to Europe’s capital markets.
Post trade and risk management services are a signi?cant part of the Group’s
business operations. LSEG operates CC&G, the Italian clearing house, and
Monte Titoli, the European settlement business. The Group is also a majority
owner of leading multi-asset global clearing service, LCH.Clearnet Group.
The Group offers customers an extensive range of real time, reference
data and news products, including SEDOL, UnaVista, Proquote and RNS,
as well as access to over 250,000 international equity, bond and alternative
asset class indices, through its world leading index provider, FTSE.
The Group is also a leading developer of high performance trading platforms
and capital markets software for customers around the world.
Headquartered in London, with signi?cant operations in Italy, France,
North America and Sri Lanka, the Group employs approximately 2,900 people.
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London Stock Exchange Group plc Annual Report 2014
STRATEGIC REPORT
An overview of our business, the markets and
regulatory environment in which we operate,
our vision and strategy and statements from our
Chairman and our Chief Executive. More detail on
each of our divisions, our performance, how we
consider our wider responsibilities and the
principal risks that could affect our business.
Financial highlights 2
Operational highlights 3
Group at a glance 4
What we do: our business model 6
Market position and outlook 8
Chairman’s statement 14
Chief Executive’s statement 16
Strategy in action 18
Executive management team 20
Introduction to segmental review 23
Capital Markets 24
Post Trade Services 28
Information Services 32
Technology Services 34
Our wider responsibility 36
Financial review 38
Risk management oversight 44
Principal risks and uncertainties 48
Sign-off for the Strategic Report is provided
in the Directors’ Report on page 98
GOVERNANCE
An introduction to our Board of Directors, our
approach to corporate governance and how we
reward performance, along with other statutory
and regulatory information.
Board of Directors 54
Corporate governance 56
Report of the Nomination Committee 65
Report of the Audit Committee 66
Report of the Risk Committee 69
Directors’ remuneration report 70
Directors’ report 98
Statement of directors’ responsibilities 101
Independent Auditors’ report to the members
of London Stock Exchange Group plc 102
GROUP FINANCIAL STATEMENTS
Detailed ?nancial information setting out our
performance for the year and ?nancial position
at year end, together with the report thereon by
our independent auditors.
Consolidated income statement 106
Consolidated statement of
comprehensive income 106
Balance sheets 107
Cash ?ow statements 108
Statements of changes in equity 109
Notes to the ?nancial statements 110
SHAREHOLDER INFORMATION
An explanation of how trading markets are
structured, a glossary of terms used in this
report and other information for shareholders.
Market structures 142
Glossary 144
Financial calendar 146
Investor relations 147
Investor relations contacts 148
2010 2014 2013 2012 2011
514.7
430.2
441.9
341.1
280.3
Adjusted operating pro?t
*
£ million
2010 2014 2013 2012 2011
353.1 348.4
358.5
283.0
182.0
Operating pro?t
£ million
2010 2014 2013 2012 2011
1,213.1
852.9
814.8
674.9
628.3
Adjusted total income
*
£ million
2010 2014 2013 2012 2011
107.1
105.3
100.6
73.7
60.1
Adjusted earnings per share
*
pence
2010 2014 2013 2012 2011
63.0
80.4
193.6
56.4
33.8
Basic earnings per share
pence
2010 2014 2013 2012 2011
30.8 29.5
28.3
26.8
24.4
Dividends per share
pence
2 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial highlights
Year ended 31 March 2014 2013 Variance %
Adjusted total income* £1,213.1m £852.9m 42%
Adjusted operating pro?t* £514.7m £430.2m 20%
Operating pro?t £353.1m £348.4m 1%
Adjusted pro?t before tax* £445.9m £380.7m 17%
Pro?t before tax £284.3m £298.9m -5%
Adjusted basic earnings per share* 107.1p 105.3p 2%
Basic earnings per share 63.0p 80.4p -22%
* London Stock Exchange Group uses non-GAAP performance measures as key ?nancial indicators as the Board believes these
better re?ect the underlying performance of the business. Adjusted operating pro?t, adjusted total income, adjusted pro?t
before tax and adjusted basic earnings per share all exclude amortisation of purchased intangibles, non-recurring items and
unrealised losses/gains.
Group Adjusted Total Income by segment
£ million
Capital Markets 309.5
Post Trade Services
CC&G and Monte Titoli 146.0
Post Trade Services LCH.Clearnet 325.2
Information Services 348.7
Technology Services 64.0
Other 19.7
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Operational highlights
The Group is delivering on its strategy, leveraging its range
of products and services and further diversifying its offering
through new product development and strategic investments.
A few examples of the progress being made are highlighted below:
Capital Markets
— Primary markets saw a six year high in new issue activity with 188
companies admitted
— In equity trading, UK value traded increased eight per cent;
Italian number of trades increased six per cent
— In ?xed income trading, MTS cash and BondVision value traded
increased 48 per cent; MTS Repo increased two per cent
— Turquoise widened its stock universe and added functionality;
value traded increased 68 per cent
— Following success in Italy, the ELITE programme was launched in the UK
in April 2014 – providing ambitious, high growth private businesses from a
wide variety of sectors with access to a unique package of education,
business support and investors to enhance their growth prospects
— The Group acquired a majority stake in EuroTLX, an Italian MTF
operating in the European retail ?xed income market
— MTS announced agreement to acquire Bonds.com Group, a US based
platform for the electronic trading of US corporate and emerging
market bonds
Post Trade Services – CC&G and Monte Titoli
— Monte Titoli is the largest CSD entering the ?rst wave of TARGET2-Securities
— The new international CSD in Luxembourg (globeSettle), utilising Monte
Titoli’s expertise, is on track to commence operation in Summer 2014
having received regulatory approval from the CSSF – J.P. Morgan has
already signed up as the ?rst user of settlement, custody and asset
servicing services
Post Trade Services – LCH.Clearnet
— The Group completed the acquisition of a majority stake in
LCH.Clearnet Group in May 2013
— SwapClear, the world’s leading interest rate swap clearing service,
cleared $526 trillion notional
— Fixed income nominal value cleared increased one per cent;
equity trades cleared increased 17 per cent
— LCH.Clearnet was named Risk Magazine’s 2014 Clearing House of
the Year after ful?lling criteria which included risk management,
customer satisfaction, responsiveness to new regulations,
engagement with regulators, liquidity provision and creativity
— LCH.Clearnet Limited launched clearing for NASDAQ OMX’s NLX,
a new multilateral trading facility (MTF) offering a range of both
short-term interest rate (STIRs) and long-term interest rate (LTIRs)
euro and sterling-based listed derivatives
— Enhanced its compression offering via SwapClear to include multilateral
compression, which enables customers to reduce outstanding positions
and lower their counterparty exposure and capital costs
Information Services
— In April 2013, FTSE and Canada’s TMX combined their ?xed income
businesses in a new joint venture, FTSE TMX Global Debt Capital Markets.
MTS bond indices also became part of the FTSE TMX venture
— Vanguard in the United States completed the move of $209 billion of assets
to FTSE benchmarks, one of the largest ever switches of benchmarks
— FTSE increased its China offering, with continued development of the
FTSE China Index series, widely regarded as the leading benchmark for
Chinese ETFs, and the launch of the FTSE BOCHK Offshore RMB Bond
Index series in partnership with Bank of China (Hong Kong)
— UnaVista increased its user base to over 30,000 (2013: 9,000), becoming
the largest approved reporting mechanism in Europe by trade volumes
and client numbers
— UnaVista launched an EMIR Trade Repository solution, approved by ESMA
as a repository across all asset classes and geographies, and the UnaVista
Rules Engine to help clients meet their wider regulatory reporting needs
Technology Services
— Millennium PostTrade was selected by Singapore Stock Exchange (SGX)
to support its clearing, settlement and depository services
— Millennium Smart Order Router (SOR) went live on Canada’s TMX to aid
compliance with Canadian regulation; it is also supporting the Orion
Central Gateway platform for Hong Kong Exchanges and Clearing Limited
— MillenniumIT successfully launched the Compliance Monitoring Systems
(CMS) for the London Metal Exchange, and extended Millennium
Exchange to Burgundy, the Nordic MTF owned by Oslo Børs
— The Group was selected as the business development and technology
partner by the Argentinian Central Securities Depository (CSD), Caja de
Valores S.A. (CVSA)
4 Strategic report London Stock Exchange Group plc Annual Report 2014
Group at a glance
TOTAL
INCOME CONTRIBUTION
SUB-SEGMENT
MAIN TYPES OF
REVENUE
Capital Markets
At the heart of what we do are our
multi-asset markets providing capital
formation for companies trading in
London and Italy – and increasingly
throughout Europe.
Group total income: 26%
Primary
Secondary
Other
£309.5
m
2013: £267.5m
Clearing
Interest
Settlement
& Custody
£146.0
m
2013: £208.5m
Post Trade Services
CC&G and Monte Titoli
We offer open access and ef?cient
clearing, settlement and custody services.
These post trade businesses support cash
equity, derivative, commodity and ?xed
income markets, mostly in Italy.
Group total income: 12%
Clearing OTC
Clearing non OTC
& other
Interest
£325.2
m
2013: N/A
Post Trade Services
LCH.Clearnet
We provide clearing services through
which counterparty risk is mitigated
across multiple asset classes for sell-side
clearing members and buy-side clients in
conjunction with trading venues globally.
Group total income: 27%
FTSE
Real time data
Other information
£348.7
m
2013: £306.3m
Information Services
We sell real time price information
and a wide range of other
information services from
indices to post trade analytics.
Group total income: 29%
MillenniumIT
Technology
£64.0
m
2013: £56.1m
Technology Services
Our businesses and customers
depend on our secure technology
that performs to high levels of
availability and throughput.
Group total income: 5%
London Stock Exchange Group is a diversified international
infrastructure business, incorporating Borsa Italiana,
London Stock Exchange, FTSE International, MillenniumIT
and LCH.Clearnet. The information below and on pages 6-7
provides an outline of our business model and core activities.
Primary
— Admission fees for initial listing or raising
further capital
— Annual fees for securities traded on our markets
Secondary
— Fees based on value traded (UK equities and
Government bonds) or number of trades
(Italian equities, retail bonds and derivatives)
Other
— Membership fees to access our trading markets
CC&G – Clearing
— Fees based on trades or contracts cleared, and
Central Counterparty (CCP) services provided
— Net interest on cash and securities held for margin
and default funds
Monte Titoli – Settlement & Custody
— Revenue mostly from the settlement of equity and
?xed income trades
— Custody fees are charged on the issuance of an equity
or ?xed income instrument, when dividend and interest
payments are made and on any corporate action
Clearing and other
— Fees based on trades or contracts cleared and CCP
services provided
— Fees for SwapClear interest rate swap service and
other OTC derivative clearing primarily based on
membership fees
— Fees for managing non-cash collateral
Interest
— Net interest on cash held for margin and
default funds
FTSE
— Subscription fees for data and analytic services
— Licence fees for passive funds tracking indices
Real time data
— Fees primarily based on number of terminals taking
our real time price and trading data
Other information
— Fees vary based on the nature of service provided,
mostly subscriptions and licence fees
MillenniumIT
— Sales of capital markets software, including trading,
market surveillance and post trade systems
— Provision of enterprise sales and IT infrastructure
services in Sri Lanka and to international capital
markets customers
Technology
— Fees for network connections, server hosting and
systems supplied by Group businesses
Note: Other income £19.7m, one per cent Group total income (2013: £14.5m, two per cent). Group total income of £1,213.1m is shown on an adjusted basis.
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CUSTOMER
PROFILE
HIGHLIGHTS KPIs
Primary
188 new companies joined our markets in the
year, including 34 international companies
CC&G
Clearing of equity and derivatives volumes increased by
three per cent
Clearing services
The Group acquired a majority stake in LCH.Clearnet
in May 2013
LCH.Clearnet was named Risk Magazine’s 2014
Clearing House of the Year
SwapClear obtained US approval as a Derivatives
Clearing Organisation (DCO) as mandatory client
clearing was implemented
FTSE
FTSE China is widely regarded as the leading benchmark
for Chinese ETFs. Developed new partnerships in Australia
and Mexico
MillenniumIT
Launched MillenniumIT’s Smart Order Router
technology, which is now in use by Canada’s TMX
and Hong Kong Exchanges and Clearing Limited
Primary
Companies from 70 countries around the world have
come to our markets to raise money for growth, together
with issuers of bonds, ETFs and other instruments
Secondary
Banks and brokers worldwide, trading on the Group’s
equities, derivatives and ?xed income trading platforms
Other
Banks and brokers worldwide
CC&G
150 members, mainly banks and brokers,
over 40 per cent of which are based outside Italy
Monte Titoli
Wide range of Italian and international banks
and brokers for both on market and OTC trades.
Issuers of equity and ?xed income products
(Italian and international)
Clearing services
A wide base of banks, brokers and fund manager
?rms worldwide for OTC derivatives and listed equity,
derivatives, ?xed income and commodities
FTSE
Asset managers, active and passive buy-side ?rms
and trading venues
Real time data
Direct to trading ?rms and via service providers,
such as Bloomberg and Thomson Reuters, that
incorporate our data with other information
Other information
Our customers vary based on the service provided,
including fund managers, traders, retail brokers and
market makers
MillenniumIT
London Stock Exchange Group divisions, other exchange
groups and capital market clients, banks, IT and large
Sri Lankan companies
Technology
Banks, trading ?rms and depositories in Europe,
North America, Africa and Asia-Paci?c region
Number of companies on our markets
2,740 2013: 2,746
Capital raised by new and further issues
£34bn 2013: £18bn
Number of equity and derivative contracts cleared
97.3m 2013: 94.7m
Average initial margin held
€11.9bn 2013: €10.1bn
Number of customers using MillenniumIT
capital markets software
37 2013: 35
Nominal value of ?xed income cleared
€72.3tr 2013: €71.5tr
Number of SwapClear members
103 2013: 78
Average cash collateral held
€40.3bn 2013: €43.9bn
Average number of equity order book trades
per day in Italy
235,000 2013: 223,000
Average order book equity value traded per
day in London
£4.3bn 2013: £4.0bn
ETF assets benchmarked to FTSE indices
$186bn 2013: $143bn
Settlement instructions handled
58.3m 2013: 55.3m
Monte Titoli’s custody assets under management
€3.32tr 2013: €3.23tr
Availability of UK equity market during the year
100% uptime 2013: 100%
Number of professional terminals taking Group
data (79,000 London data; 126,000 Italian data)
205,000 2013: 221,000
UnaVista number of transaction reports processed
1,179m 2013: 879m
Monte Titoli
International CSD, globeSettle, to commence operations
in Summer 2014 having received regulatory approval
from the CSSF
Settlement rate of 99.2 per cent of trades
Government and corporate bond issuance remained
at high levels
Real time data
Direct billing, enterprise licence and non-display
tariff initiatives
Other information
UnaVista increased its user base from 9,000 to over
30,000 in the last year
Technology
Will be launching FTSE Low Latency based on
the lowest latency calculation performed by
our Group Ticker Plant
Secondary
Share of order book trading remained stable during
the year at 64.7 per cent in UK equities and 84.6 per
cent in Italian equities
MTS cash and BondVision ?xed income volume
traded up 48 per cent
Turquoise increased value traded by 68 per cent
6 Strategic report London Stock Exchange Group plc Annual Report 2014
What we do:
our business model
26% Capital Markets
12% Post Trade Services – CC&G Monte Titoli
27% Post Trade Services – LCH.Clearnet
29% Information Services
5% Technology Services
1% Other*
Key
Contribution to Group adjusted income
CAPITAL FORMATION
INTELLECTUAL PROPERTY
Need help?
Like any industry, capital markets have their own
language. For that reason, we have included a
glossary on pages 144-145.
We provide services to a broad range of customers on an
international basis, across a diverse range of asset classes.
Our business activities fall into three categories:
– Capital formation
– Risk and balance sheet management
– Intellectual property
How we add value
— Our markets, post trade operations and information services
are connected to a wide range of issuers, traders and investors,
creating a valuable network that provides deep liquidity,
informs trading and investment decisions and provides market
ef?ciencies, including capital allocation and risk management.
— We provide a range of connected market services on an open
access basis, which offers customers the choice of using our
services but does not impose or restrict use.
— We have proven expertise in operating transparent, well governed
market infrastructure in highly regulated capital markets, providing
market services that are trusted, independent and resilient.
* Other income includes sub-let rental income and a gain from disposal of shares in a
non-core asset.
Information Services
We supply real time price and trading data, as well
as indices through FTSE.
Capital Raising – Primary Markets
Our central function is to bring together companies
and others seeking capital with investors from
around the world. Companies raise ?nance through:
— Equity
— Debt
Markets:
London – Main Market; Professional Securities
Market; Specialist Fund Market; AIM; Order Book for
Retail Bonds (ORB);
Borsa Italiana – MTA Main Market; AIM Italia –
MAC; MOT
Services:
Indices/analytics
Real time data
(prices/trading data)
Specialist services:
Reference data
Transaction reporting/
trade matching
News
Provided by:
FTSE
LSE, Borsa Italiana,
Proquote
SEDOL
UnaVista
Proquote
RNS
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Strategic report What we do: our business model
RISK and BALANCE SHEET MANAGEMENT
Technology Services
All of our businesses depend on technology that is
secure, stable and performs to high levels of availability
and throughput. MillenniumIT is a developer of ?exible,
low cost, high performance trading platforms and
?nancial markets software serving the Group’s own
business and third parties. Technology services include:
— Trading systems
— Post trade software
— Market surveillance and order routing
— Data centre and network services
Trading – Secondary Markets
Our systems provide fast and ef?cient trading, giving
investors and institutions access to a range of markets.
Products:
Cash equities & ETFs
Derivatives
Fixed income
Commodities, power
and specialist products
Markets and trading platforms:
LSE, Borsa Italiana, Turquoise
LSE Derivatives, IDEM
MTS, MOT, ORB, EuroTLX
IDEM, IDEX, AGREX
Post Trade
The Group offers a full range of post trade services, providing
risk management and ef?ciency for counterparties.
Process:
Clearing, central
counterparty services
Settlement
Custody, central securities
depository services
Services offered:
LCH.Clearnet (UK, France and US )
CC&G (Italy)
Monte Titoli, globeSettle
(international CSD in Luxembourg)
8 Strategic report London Stock Exchange Group plc Annual Report 2014
Market position and outlook
Capital Formation
— Access to primary sources of equity and debt ?nance for companies
of all sizes from all over the world
— Secondary markets for price formation and trading
Risk and Balance Sheet Management
— Post trade services to mitigate counterparty risk, maximise capital
ef?ciencies for customers, support the safe transfer of securities
and optimise cash ?ows for ef?cient collateral management
— Technology and analytics to support ef?cient processes and meet
regulatory requirements
Intellectual Property
— Market data, indices, analytics and information services to increase
knowledge and transparency in support of trading and investment
decision making
— Technology solutions to enable customers and markets to operate
reliably, securely and ef?ciently
The markets in which we operate are affected by a wide range of factors,
including structural shifts in the global economy, demographic trends,
the geopolitical landscape and ongoing regulatory changes.
Economic conditions
Economic recovery in advanced economies is expected to continue in 2014.
Economists widely anticipate a gradual end to quantitative easing (QE)
in the US with tapering having already commenced on a modest scale.
Should the reduction in QE continue, we can expect upward pressure on
interest rates in the medium term and increased bond yields. Economic
activity in the Eurozone is gradually stabilising as the region emerges from
recession. However, the recovery is not broad based and is slower than in
some other developed markets. Consequently, any tightening of Eurozone
monetary policy is expected to lag behind that of the US. Other risks remain,
including slowing growth in China and tensions around Ukraine.
The gradual turnaround in sentiment and overall economic activity in
the past year was re?ected in a 27 per cent global increase in the capital
raised (aggregate value of $163 billion). Such improved opportunities for
investment combined with growing consumer con?dence, excess liquidity and
continued GDP growth in developed markets are creating an “equity-friendly”
environment which is likely to prevail throughout 2014. Equity funding is,
therefore, likely to remain attractive and to support primary market activity.
The Group is responding to this trend with innovations such as the
introduction of the High Growth Segment on London Stock Exchange.
In other asset classes, trading levels remain uncertain due to proposed
regulatory changes and the impact of bank de-leveraging. Regulatory factors
in Europe such as MiFID/MiFIR requirements on controls for dark pools
and high frequency trading (HFT), as well as the potential for a widespread
?nancial transaction tax (FTT), could have a negative impact on capital
markets activity. Regulation continues to in?uence the shape of ?nancial
infrastructure more broadly (see more details on pages 10-13). At the
same time, such trends create opportunities for the Group’s clearing,
post trade and information services operations where our open access
principles are aligned with the demand for greater transparency and
improved, cost effective services. In particular, LCH.Clearnet is responding
to customer needs in respect of the Basel III Capital Requirements and is
seeing increased clearing volumes of OTC derivatives as a result. LCH.Clearnet,
UnaVista and Monte Titoli are also developing a range of solutions for EMIR
compliance including globeSettle, our new international central securities
depository. Requirements affecting ?nancial benchmarks in MiFID II,
from IOSCO and other national and supranational bodies, will likely create
new opportunities for globally focused index providers such as FTSE with
established strong governance standards and transparency in the provision
of index services.
With its three core business activities: capital formation,
risk and balance sheet management and intellectual property,
the Group helps to underpin global economic growth by offering
a wide range of services to support the effective functioning
of global capital markets and the creation of innovative new
?nancial and investment products.
FTSE 100
7,000
6,800
6,660
6,400
6,200
6,000
5,800
5,600
Mar
2014
Mar
2013
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
London Stock Exchange order-book value traded
and share of trading
?LSE daily value traded LSE share of lit trading
6
5
.
9
%
6
4
.
7
%
6
5
.
4
%
6
2
.
4
%
6
3
.
2
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6
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.
3
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6
3
.
7
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6
3
.
2
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6
4
.
1
%
6
4
.
5
%
6
6
.
1
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6
7
.
3
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May
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Jun
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Jul
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Oct
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Nov
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Dec
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Jan
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Feb
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London Stock Exchange money raised – new and further issues
£ billion
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
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2004
Q
1
Q
2
Q
3
Q
4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Q
1
Q
2
Q
3
Q
4
Q
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Q
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?new issues – money raised ?further issues – money raised
FTSE 100 (RH scale)
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Strategic report Market position and outlook
Global socio-demographic trends such as increasing wealth in emerging
economies, the ageing population in developed markets and the consequent
implications for state funding of health and pension bene?ts, are driving
investment globally and increasing competition among investment product
providers. These trends favour low cost passive investment and create
opportunities for innovative new index products, such as alternative-weighted
indices, and licensing of fund and ETF products.
Market position
The Group had a market capitalisation of £5.0 billion (as of 9 May 2014)
and ranks among the top ?ve global exchange groups by income. In FY
2014, all of our main business segments recorded good performances,
both through organic development and as a result of successful additions
to the Group’s portfolio of businesses. Income is increasingly diversi?ed by
asset class and geography, with cash equities trading accounting for just
11 per cent of total income. Information Services and Post Trade businesses
contributed 29 per cent and 39 per cent of adjusted income respectively.
The Group saw a signi?cant increase in both the number of IPOs and the
value of capital raised. On the back of a series of large IPOs, equity capital
raised during the year was £34.2 billion (vs £18.0 billion in 2013). The FTSE
100 ?nished the ?nancial year up three per cent and the FTSE MIB ?nished
up 41 per cent. LSEG trading venues between them captured almost 30 per
cent of European equity trading volume, more than any other group (2013:
28 per cent).
Exchange traded fund (ETF) assets under management tracking FTSE indices
increased. This was largely driven by the decision of Vanguard to adopt FTSE
benchmarks for its global emerging markets funds. FTSE now ranks fourth
globally among index providers for ETFs in terms of benchmarked assets.
Global regulatory momentum led to increased demand for risk management
and OTC clearing services through LCH.Clearnet. Strengthening its position
as a leading OTC clearing provider, SwapClear’s notional value cleared
increased over the past year by 18 per cent to $526 trillion, with its clearing
membership increasing by 25 to 103 members. There were also a number
of service enhancements, including the expansion of compression services.
ForexClear built on its existing inter-dealer service with the launch of
client clearing and cleared $832 billion in notional throughout the year.
CDSClear, which extended its reach to include European clients and US
clearing members, cleared €154 billion in notional value. Derivatives
clearing volumes decreased, while the ?xed income clearing services
business maintained market share, clearing €72 trillion in nominal value.
The commodities and cash equities clearing businesses experienced steady
growth in volumes.
FTSE MIB
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
Mar
2014
Mar
2013
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Jan
2014
Feb
2014
Global ETP assets
Source: BlackRock
assets US$ billion
3,000
2,500
2,000
1,500
1,000
500
0
Mar
2014
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
7
91
0
9
1
4
6
2
1
8
3
1
9
4
2
8
5
9
88
5
1
7
7
2
1
,
1
5
6
1
,
4
8
3
1
,
5
2
51
,
9
4
4
2
,
3
9
6
2
,
4
4
7
79
109
146
218
319
428
598
851
772
1156
1483
1525
1,944
2,396
2,447
10 Strategic report London Stock Exchange Group plc Annual Report 2014
Market position and outlook
continued
Outlook
Our diversi?cation strategy and strong customer relationships will continue
to enable us to respond to emerging customer requirements in multiple
product and service areas. The need for clients to maintain cost control,
ef?cient capital management and a strong focus on risk management
will remain as their business models evolve. This increases the demand for
ef?cient clearing solutions as well as technology and services supporting
automation and overhead reduction. The Group is well positioned to respond
to these needs through both organic and inorganic initiatives.
In the year ahead, signi?cant focus will remain on the integration of
LCH.Clearnet through a number of detailed programmes targeted at
delivering the broad bene?ts of the transaction. Elsewhere, our focus is on
expanding our global footprint and developing further growth opportunities
across the Group. Evolving and improving market conditions, regulatory
changes and customer demand will continue to shape our business and
create new opportunities throughout 2014 and beyond. The Group will
bene?t from the value we provide to customers through service expansion
and innovative solutions.
Regulatory landscape
The regulatory landscape continues to evolve, with the introduction of further
regulation in ?nancial markets by national regulators and international
policymakers. As a global group, most of our activities are subject to regulation
on a domestic and/or supranational basis.
Most of the regulatory changes discussed have been implemented; others are
drawing closer to the implementation phase. However, their impact has yet to
be fully realised and it remains dif?cult to predict the eventual effect on the
markets with any certainty.
Whether as a result of, or in spite of the numerous regulatory initiatives
discussed within this review, capital markets are beginning to emerge more
positively from the downturn, with increasing IPO activity and trading
interest in many market areas. Looking ahead, there is a sense that, in Europe
at least, the regulatory reform agenda is moving into a phase of consolidation
and review, allowing for a focus on economic growth, jobs and stability.
Global notional outstanding of exchange traded vs OTC derivatives
US$ trillion Source: BIS
D
e
c
9
8
D
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c
9
9
D
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0
0
D
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c
0
1
D
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c
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2
D
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c
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3
D
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4
D
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c
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5
D
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6
D
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c
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7
D
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D
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0
D
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D
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1
2
J
u
n
1
3
?exchange traded ?OTC
0
100
200
300
400
500
600
700
800
SwapClear OTC interest rate swaps –
total notional cleared and number of clearing members
US$ trillion
?cleared volume number of members
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
93
64
104
67
106
72
147
78
127
83
114
100
120
103
165
103
79
109
146
218
319
428
598
851
772
1156
1483
1525
1,944
2,396
2,447
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G20 goals
Efforts continue to implement the G20 commitment to strengthen
the regulatory framework for OTC derivatives. In Europe and the US,
derivatives transactions are now subject to trade reporting obligations;
mandatory clearing of certain derivatives contracts has been introduced
in the US and Japan, and mandatory trading has begun under CFTC rules.
European Union
Relevant Regulatory Developments
The MiFID/MiFIR, MAD/MAR and CSDR dossiers have reached political
agreement at Level I in the EU; 2014 will require a substantial effort by
regulators and the market for the development of the Level II measures
(so-called Technical Standards and Delegated Acts) under these key
pieces of legislation, leading to implementation of most in 2016.
— MiFID/MiFIR (Markets in Financial Instruments Directive/Regulation)
contains a broad range of market structure measures, aimed at
promoting the integration, competitiveness and ef?ciency of EU ?nancial
markets. Key changes include non-discriminatory open access to trading
venues and CCPs; non-exclusive licensing of benchmark indices; the
introduction of SME Growth Markets; the extension of pre and post
trade transparency to non-equity asset classes, including bonds and
derivatives; and increased regulatory requirements for high frequency
trading strategies and algorithmic trading.
— CSDR (Central Securities Depository Regulation) brings in measures
to harmonise the authorisation and operation of central securities
depositories and certain aspects of securities settlement in the EU,
including settlement periods and settlement discipline. A shorter
settlement cycle of T+2 is expected to be introduced in the UK and EU
in October 2014, with full dematerialisation expected by 2025. CSDs will
bene?t from uniform requirements for licensing and from an EU-wide
passport, which will help remove existing barriers of entry and promote
competition, presenting both opportunities and risks to the Group.
— MAD/MAR (Market Abuse Directive/Regulation) has been expanded
to include securities and derivatives traded on any trading venue and
platforms, and will now cover the manipulation of both benchmarks
and carbon emission allowances.
12 Strategic report London Stock Exchange Group plc Annual Report 2014
Market position and outlook
continued
Banking Union
There has been progress in establishing a Banking Union in the EU which will
consist of: (1) a Single Supervisory Mechanism (SSM) to monitor the health of
eurozone banks; (2) a Deposit Guarantee Scheme (DGS) to protect depositors;
and (3) a Single Resolution Mechanism (SRM) to take action where a bank
must be closed or restructured. The details of the SSM have been agreed
(implementation date is November 2014). However, negotiations continue
on the SRM, which is expected to be agreed in mid-2014.
Ongoing Measures
The EU Commission’s proposed regulation of benchmarks continues to
be negotiated in the European Parliament and Council of Ministers.
The Commission also adopted proposals seeking to address potential
issues in the system of credit intermediation that exists outside the regular
banking system (so called “shadow banking”), with proposed regulations on
Money Market Funds (MMFs) and Securities Financing Transactions (SFTs).
Negotiations continue on the introduction of a Financial Transaction Tax
(FTT). This is being progressed by 11 Member States under a procedure
known as “Enhanced Cooperation”. To date it has proved dif?cult to reach
agreement on a number of areas, including the scope, and the proposed
implementation timeframe which has now moved out to 2016. At this stage,
it is dif?cult to predict the likely outcome or scope of any ?nal measure that
may be agreed, nor its potential impact beyond the 11 Member States.
France and Italy have both implemented a domestic FTT.
Future Measures
During 2014 the European Commission plans to bring forward proposals
for Recovery & Resolution for CCPs, measures aimed at facilitating the
long-term ?nancing of the EU economy (including proposals for regulation
of crowdfunding) and amendments to the Shareholders’ Rights Directive.
All these measures may affect Group activities to some extent.
T2S
T2S (TARGET2-Securities), a project led by the ECB (European Central Bank),
aims to facilitate cheaper cross-border settlement across Europe. The testing
phase is expected to start in Q2 calendar year 2014, with delivery of the T2S
application to CSDs for the user-testing phase scheduled for 1 October 2014.
Migration to T2S will take place in phases, with Monte Titoli participating in
the ?rst phase in June 2015.
Regulatory Structure
US
In the US, implementation of the Dodd-Frank Act continues, with rules on
regulatory structures, bringing OTC derivatives on to trading venues and into
clearing and, increased regulation on the establishment and operation of
CCPs. These rules will apply to LCH.Clearnet LLC, Ltd and SA registered as
Derivatives Clearing Organisations (DCOs) in the US. In addition, the CFTC
applies heightened regulatory standards to systemically important DCOs
(SIDCOs), which include the requirement to have recovery and wind-down
plans in place. LCH.Clearnet LLC is not a SIDCO but has decided to opt in to
the regime for SIDCOs for Basel capital treatment purposes.
UK
The UK regulators (PRA, Bank of England and FCA) are now well established
and developing their forward-looking, pre-emptive approach to supervision
and regulation. The FCA has recently consulted on its new remit in relation
to competition law, giving new impetus to its consumer focused approach.
In the Principal Risks and Uncertainties section (page 48), we set out the
potential implications for the expanded Group of the key measures we
have identi?ed.
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Strategic report Market position and outlook
Overview of regulatory landscape
The increasing scope of regulation and the breadth of the operations of the Group mean that regulation inevitably has a growing impact on the Group
and its activities. Set out below are some of the key areas where there is likely to be some impact or opportunity:
LSEG DIVISION &
BUSINESS AREA LEGISLATION/MEASURE SCOPE
Capital Markets
Primary markets MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— SME (Small and Medium-Sized Enterprises) Growth Market proposals to support SME
funding and markets
Secondary (trading)
markets
FTT non UK but in Italy, France.
Commission proposal under
negotiation
— To impose transaction tax on equity, bond and derivatives trades that involve one
?nancial institution with its headquarters in the EU FTT zone
MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— Non-discriminatory open access to trading venues and CCPs, and non-exclusive
licensing of benchmark indices
— Extension of pre and post trade transparency to non-equity asset classes, including
bonds and derivatives
— Increased regulatory requirements for high frequency trading strategies and
algorithmic trading
— Additional organisational, transparency and market surveillance requirements
for trading venues
— Platform trading obligation for shares and OTC derivatives
MAD/MAR (political agreement
reached at Level I; work on technical
aspects, Level II – underway)
— Index manipulation and non-listed issues within Market Abuse regime
Post Trade
CCPs EMIR (Level II under implementation) — Mandates CCP clearing for a wide range of eligible derivatives contracts
— Mandates the reporting of derivative trades to Trade Repositories
— Establishes harmonised requirements for CCPs and Trade Repositories, so that they
can demonstrate safety, soundness and ef?ciency
EC regime for recovery and resolution
for CCPs (awaiting Commission
proposal)
— Commission likely to propose recovery and resolution measures in Q4 2014 for CCPs
— May provide regulators with expanded powers to intervene at an early stage, including
the power to require an entity to implement measures under its recovery plan
— Authorities will also be provided with wide range of resolution tools
Settlement
Monte Titoli
CSDR (political agreement reached at
Level I agreed; work on technical
aspects, Level II – under way)
— Measures to harmonise:
– the authorisation and operation of central securities depositories
– certain aspects of securities settlement in the EU, including settlement periods
and settlement discipline
T2S (ECB project) — In November 2011, the ECB agreed the Framework Agreement, which sets out the
contractual rights and obligations of the Eurosystem and each contracting CSD. Monte
Titoli has already signed the Framework Agreement, recon?rming its positioning in the
‘?rst wave’ of the project
— The implementation date for phase 1 of the European Central Bank’s T2S project, aimed
at facilitating cheaper cross-border settlement across Europe, has now been set for
June 2015
Information Services
FTSE Index Regulation – (Commission
proposal under negotiation)
— Regulation of speci?ed benchmarks/indices
MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— Access under MiFIR Art 30 requires non-exclusive licensing of benchmarks
Market data MiFID (political agreement reached
at Level I; work on technical aspects,
Level II – under way)
— Post trade consolidated tape (CT) – introduction of requirements for harmonised post
trade data reporting to enable “consolidated tape” and data provision on a “reasonable
commercial basis”
14 Strategic report London Stock Exchange Group plc Annual Report 2014
Chairman’s statement
“ WE NEVER LOSE
SIGHT OF THE
WIDER ROLE OUR
BUSINESS PLAYS
IN SOCIETY”
Chris Gibson-Smith
Chairman
Overview/Execution of strategy
London Stock Exchange Group continued to expand its global footprint and
strengthen its position as one of the world’s leading, diversi?ed exchange
groups. Our portfolio of market infrastructure businesses was further
strengthened with the completion of the acquisition of a majority stake
in LCH.Clearnet Group, a leading provider of clearing services. We have
been pleased with the progress made to date to realise the bene?ts of the
transaction and this will be a major focus in the year ahead. We also made
further progress realising the bene?ts of previous transactions through the
global growth of businesses such as FTSE and MTS.
Over the past 12 months, there has been a sense of renewed optimism in
capital markets. We have seen companies returning to the IPO markets
to raise equity capital, with the highest number of ?otations since 2007.
188 companies joined our markets and total money raised was over
£34 billion across our equity markets in the past year. The Group provides
markets that help a broad range of companies to access equity and debt
capital; in particular, we support efforts to help small and medium-sized
enterprises (SMEs) access ?nance to enable their growth and development.
The recent launch of ELITE in the UK, a programme dedicated to supporting
high growth private companies, builds upon the success of a similar
initiative run by Borsa Italiana which has 150 participants. In April, the ?rst
19 companies signed up to the scheme, which will run in partnership with
Imperial College Business School, and is a good example of the Group’s
ongoing commitment to SMEs across Europe.
Our wider role
We ?rmly believe that the Group’s open access business model, which drives
a partnership approach with our customers, helps facilitate the operation of
stable ?nancial markets which bene?t our customers, regulators and society
at large. The model also promotes ?exibility, transparency and choice which,
in turn, helps drive our business forward. LCH.Clearnet Group shares our
open access philosophy, and provides its customers with risk management
services across a broad range of asset classes, helping them to manage their
own risk positions and capital ef?ciencies. This contributes to a safer and
more stable ?nancial system.
We never lose sight of the wider role our business plays in society. Our support
for companies of all sizes, for open access and fair and transparent markets,
has a signi?cant impact on economic business activity, as well as job and
wealth creation, and is core to our approach to corporate social responsibility.
In addition, the Group donated £1.66 million to charity in the past year, of
which £1.01 million was donated through the Group’s charitable Foundation.
To celebrate our third annual charity trading day, held in March, the Group
invited representatives from our partner charities Habitat for Humanity,
In-Presa, Friendship Works and UNICEF to open trading in London.
2010 2014 2013 2012 2011
30.8
29.5
28.3
26.8
24.4
Dividends per share
pence
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London Stock Exchange Group continues to look for ways to reduce its carbon
footprint and to improve its CSR activities through Group-wide initiatives such
as Green Week. We summarise our Corporate Responsibility activities on
pages 36 and 37 and in a fuller corporate report, which can be accessed
from our website.
Strengthened board/risk management
As a trusted, global ?nancial infrastructure provider, we must ensure that
we continue to meet the highest standards of corporate governance and due
process. As reported last year, the Group has split its Risk and Audit operating
functions and made senior appointments within both teams. We have also
operated separate Audit and Risk committees of the Board, both bene?ting
from contributions from Non-Executive Directors with considerable and
specialist experience in these areas.
Following the Group’s AGM in July 2013, Baroness (Janet) Cohen,
Sergio Ermotti and Gay Huey Evans stepped down as Non-Executive
Directors. The Board appreciates the valuable contributions that all three
made to the successful strategic development of the business.
In June 2013, Stephen O’Connor and Stuart Lewis were appointed
as Non-Executive Directors. Stephen and Stuart bring considerable
experience in credit and market risk, re?ecting the signi?cant and
growing proportion of the Group’s overall business that post trade and
risk management now represent. In January 2014, we also welcomed
Sherry Coutu and Joanna Shields to the Board, both of whom bring
broad international management expertise and a strong track record
of entrepreneurship and building businesses.
Financial performance and dividend
The Group delivered a good ?nancial performance, with adjusted income up
42 per cent to £1.21 billion, including contribution from LCH.Clearnet for the
?rst time. Successful delivery on our stated strategy is also re?ected in the
strong share price performance over the last year.
The Group is therefore proposing a 4.5 per cent increase in the ?nal dividend
to 20.7 pence per share, resulting in a full year dividend of 30.8 pence per
share, a 4.4 per cent rise. The ?nal dividend will be paid to shareholders
on the register as at 25 July 2014.
Accounting reference date
In order to create alignment of the ?nancial years of LSEG plc and
LCH.Clearnet, the Board has approved a change to the Group’s accounting
reference date, moving from 31 March to 31 December, with effect from
1 April 2014.
Conclusion
It has been a strong year for the Group. We have further expanded our
global business, building best in class capabilities as we grow. We expect
the substantial bene?ts of the LCH.Clearnet transaction to continue to work
through over the coming year and the improving economic outlook and
evolving regulatory landscape present further opportunity to develop our
business. We look forward to further growth in the year ahead.
Chris Gibson-Smith
Chairman
16 Strategic report London Stock Exchange Group plc Annual Report 2014
Chief Executive’s statement
Overview
This has been another year of achievement as we continued to grow and
diversify the Group on an increasingly global basis, most notably through
the successful completion of our transaction with LCH.Clearnet Group.
The environment in which we operate has also evolved. We have been
encouraged by regulation emerging out of Europe, which will promote
competition, empowering investors through enhanced choice, lower costs
and greater capital ef?ciency. The provisions for open access in clearing and
access to benchmarks will help reduce the fragmentation of risk in closed
silos and promote lower cost, more ef?cient and robust competitive markets.
As the economic recovery continues, we have also seen a return of investors
to our equity markets. The Group helped companies raise over £34 billion in
new and further equity issues across our markets. Providing companies with
the ability to access capital to grow their businesses is a fundamental part
of what we do and we continue to develop products and services across
asset classes, as well as initiatives such as ELITE, to support small and
medium-sized enterprises (SMEs) across Europe to grow and attract investors
along the funding ladder. This is also a core underpinning of our approach
to corporate responsibility.
LCH.Clearnet
One of the key landmarks for the Group during the past year was the
completion of the acquisition of a majority stake in the global clearing
house, LCH.Clearnet Group. Risk management is a vital component
of stable ?nancial markets and LCH.Clearnet has a strong record of
helping its members and customers manage their risk. The business
embraces an open access model, which also makes it well positioned
to bene?t from regulatory change being implemented across the world.
By operating a multi-asset global platform, across multiple geographies,
LCH.Clearnet provides customers with enhanced collateral ef?ciency
opportunities through services such as portfolio netting and compression.
LCH.Clearnet is also particularly well positioned to meet the needs of
OTC clearing across a range of asset classes.
Suneel Bakhshi joined as CEO of LCH.Clearnet Group in February 2014, bringing
a wealth of risk and change management experience in ?nancial services.
Together with his team, he is aiming to further develop opportunities through
product innovation and geographic expansion designed to support its global
customer base in an evolving regulatory landscape. He is also focused on
realising the bene?ts of the relationship with LSEG and we are very pleased
that our work on the integration now means that we are able to extend
the expected cost synergies. These are now expected to reach €60 million/
£49 million per annum by the end of 2015. In addition, further changes to the
operation of the OTC clearing businesses, particularly SwapClear, have resulted
in additional revenues for the Group, as well as changes to the share of costs.
“ THE GROUP’S
DIVERSIFICATION
STRATEGY IS
DELIVERING
TANGIBLE SUCCESS,
REFLECTED IN
CONSISTENTLY
GOOD FINANCIAL
PERFORMANCE AND
RETURNS TO OUR
SHAREHOLDERS”
Xavier Rolet
Group Chief Executive
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Building best in class capabilities
Our portfolio of products and brands enables us to offer our customers
innovative solutions across the trading cycle from technology to post trade.
In February, UnaVista Trade Repository went live helping customers to
meet their obligations under EMIR, receiving approximately ten million
reports on behalf of over 2,500 counterparties on day one. In ?xed income,
we completed the acquisition of a 70 per cent stake in EuroTLX, a retail
bond platform, which will enable Borsa Italiana to extend the range of
trading services for retail investors. MTS, the European ?xed income market,
announced plans to launch a new platform, which will give buy-side
institutions the ability to trade interest rate swaps electronically.
Turquoise, the Group’s pan-European trading platform, expanded its stock
universe to include a number of the mid-tier securities, previously only
available to trade via domestic exchanges. Turquoise has seen its overall share
of trading improve signi?cantly throughout the year with the platform now
regularly accounting for more than eight per cent of all volume traded across
Europe. The Group also continued to enhance its technology offering with
a series of product upgrades to allow improved functionality for users.
Creating a global business
The Group’s global reach was further increased during the year with FTSE
reinforcing its position as a leading international index provider. FTSE
continued to consolidate its leading position in China with $18 billion of
assets under management linked to ETFs tracking the FTSE China Index
series, as of the end of March 2014. FTSE also made good progress in
expanding its operations in North America and further enhanced its ?xed
income offering with the launch of a new offshore RMB Bond Index Series,
in partnership with Bank of China, as well as the recent acquisition of the
MTS indices business through its joint venture with TMX.
MTS began trading in the US following the launch of MTS Markets
International and took further steps to grow its customer base in the
region through the acquisition of Bonds.com, an electronic platform
for the trading of US corporate and emerging market bonds.
MillenniumIT recorded a number of wins throughout the year, such as the
signing of an agreement to provide post trade technology to SGX, as well
as extending existing contracts with London Metal Exchange and TMX.
Developing opportunities
The Group has taken further positive steps to diversify its business. In July
2013, the Group con?rmed plans to launch a new central securities depository
(CSD) business, based in Luxembourg. The new CSD, globeSettle, has received
regulatory approval from CSSF and is on track to commence operations
in Summer 2014. It has previously been announced the CSD will provide
settlement, custody and asset servicing for J.P. Morgan’s international
collateral management business.
The Group launched a number of new derivative products, including the
introduction of Single Stock Options both in Italy and the UK as well as FTSE
UK Large Cap Super Liquid index futures. As noted above, we believe that
we are well positioned to bene?t from a number of the MiFID II regulations,
which promote an open access, competitive model for customers across
many of our businesses, including indices and post trade services.
In the UK, we welcomed the Government’s decision to abolish stamp duty
for AIM-listed stocks, which followed an earlier move to allow AIM securities
to be included in ISAs. Initiatives aimed at encouraging greater investment
in SMEs among retail investors are vital and we remain ?rmly committed to
supporting high growth, entrepreneurial companies, which are the lifeblood
of our economy. In November 2013, we published our inaugural report titled
‘1000 Companies to Inspire Britain’, a landmark study that identi?ed some
of the UK’s most exciting and dynamic SMEs and, last month, the Group
launched ELITE in the UK, based on the success of a similar programme
in Italy, which helps small and medium-sized enterprises access ?nance
to enable their future growth and development.
The landscape for global capital markets infrastructure continues to evolve
and consolidation remains a key theme. We will continue to seek to expand
the Group’s global offering, as value-enhancing opportunities arise.
Outlook
I joined the Group ?ve years ago. During this period, the business has
transformed through control of the cost base, investment in high
performance technology, organic development, innovation and strategic
acquisitions. The Group’s expansion in capital markets infrastructure is
delivering tangible success, re?ected in consistently good ?nancial
performance and returns to our shareholders. I am particularly pleased
how colleagues across the business have embraced the opportunities
brought through diversi?cation, working together to identify opportunities
and realise the bene?ts of being part of a global group. We have accelerated
our cost savings targets at LCH.Clearnet Group and we see opportunity for
growth as the regulatory landscape evolves. I am more optimistic than
ever that our truly unique position – as the only global, open access market
infrastructure player which works in close partnership with its customers
across all of our businesses – will position us well for the future.
Xavier Rolet
Group Chief Executive
18 Strategic report London Stock Exchange Group plc Annual Report 2014
Strategy in action
The last year has seen the Group take
signi?cant steps forward in all areas
of strategic focus. As our clients become
increasingly sophisticated and their
needs evolve in response to factors such
as regulatory change, we are expanding
our offering into new asset categories,
geographies and client segments.
The completion of the LCH.Clearnet
acquisition built momentum in the
diversi?cation of both client base
and revenue and our programme to
integrate FTSE has similarly generated
new opportunities throughout the
Group as well as increased ef?ciencies.
Both of these acquisitions are key drivers
for future innovation, service expansion
and growth.
Underpinning the business are the capabilities
of our people and the infrastructure which drive our
services. For the Group, the ef?ciencies that we are
able to bring through low cost, high performance
technology and strong cost control throughout the
business mean that our people can focus on what
they do best: listen, respond to and deliver on the
promises we make to our customers, seek out new
opportunities and realise the value in the Group’s
assets. At the heart of our business and key to our
success in the future are the strong partnerships
that we build with our customers and the highest
standards of performance and integrity which we
apply to our business globally.
STRATEGY ACTION PROGRESS
Building best in
class capabilities
— We develop the people and skills we need to create
innovative solutions and to service our customers
around the world
— We aim to continuously improve our infrastructure
and technology capabilities
— We prioritise the highest levels of governance and
integrity across our businesses
— We deliver value from acquisitions through
ef?cient integration
— We follow strong cost discipline
We have built a strong and ef?cient business
— Implementation of our Risk Management Framework across the Group
— Implementation of our Group-wide strategic client management programme
— Integration programme for LCH.Clearnet delivering tangible cost savings
— Realignment of LCH.Clearnet management to position this key asset for growth
— Bene?ts derived from FTSE; synergies programme on target
— Corporate responsibility strategy approved by the Group Board and implementation plan agreed
Creating a
global business
— We engage with the leading participants in ?nancial
markets worldwide to understand their needs and
provide solutions
— We seek new opportunities to provide services
and build our footprint in key geographies
— We develop partnerships around the world to
extend our customer servicing capabilities
Our footprint is global
— 34 international new issues raising £4.1 billion
— Creation and success of the FTSE TMX Debt Capital Markets venture in Canada, now the third largest ?xed income & ETF
benchmark provider by assets under management
— Acquisition of Bonds.com by MTS
— FTSE TMX Debt Capital Markets partnership with Bank of China in Hong Kong
— UnaVista Trade Repository ahead of target on EMIR implementation and offering full trade reporting to LCH.Clearnet members
and other clients
— Successful launch on LSE of the ?rst direct European-listed China ETF, a FTSE China A50-benchmarked ETF and the world’s ?rst
RMB bond in FY 2014
— Continued global expansion of MillenniumIT via new contracts with LME, SGX, HKEx and Argentinian CSD
— SwapClear business expansion in the United States and Australia
Developing
opportunities
— We anticipate customers’ evolving needs
— We deliver market leading innovation
— We capitalise on our assets of intellectual property,
?nancial markets expertise and our global customer
and partner network to diversify our offering
— We continue to seek new organic and inorganic
opportunities to grow our business
We are successfully diversifying to take advantage of growth opportunities
— Development of MTS credit platform offering trading on MTS BondVision distribution technology
— Newly formed LSE Derivatives Market launched and FTSE SuperLiquid index futures trading successfully
— New products and services identi?ed through co-operation between LCH.Clearnet, Capital Markets,
Information Services and Post Trade divisions
— Innovative clearing services speci?cally for OTC derivatives developed by LCH.Clearnet
— Elite platform of integrated services for Italian SMEs, now extended to the UK
— UnaVista and NetOTC partner to provide an innovative clearable derivatives risk model
— Establishment of a CSD in Luxembourg, globeSettle, providing custody, settlement and post trade services
for international collateral management
— Successful acquisition of EuroTLX; plans in place for integration of Group corporate functions and migration to
MillenniumIT technology
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Strategic report Strategy in action
STRATEGY ACTION PROGRESS
Building best in
class capabilities
— We develop the people and skills we need to create
innovative solutions and to service our customers
around the world
— We aim to continuously improve our infrastructure
and technology capabilities
— We prioritise the highest levels of governance and
integrity across our businesses
— We deliver value from acquisitions through
ef?cient integration
— We follow strong cost discipline
We have built a strong and ef?cient business
— Implementation of our Risk Management Framework across the Group
— Implementation of our Group-wide strategic client management programme
— Integration programme for LCH.Clearnet delivering tangible cost savings
— Realignment of LCH.Clearnet management to position this key asset for growth
— Bene?ts derived from FTSE; synergies programme on target
— Corporate responsibility strategy approved by the Group Board and implementation plan agreed
Creating a
global business
— We engage with the leading participants in ?nancial
markets worldwide to understand their needs and
provide solutions
— We seek new opportunities to provide services
and build our footprint in key geographies
— We develop partnerships around the world to
extend our customer servicing capabilities
Our footprint is global
— 34 international new issues raising £4.1 billion
— Creation and success of the FTSE TMX Debt Capital Markets venture in Canada, now the third largest ?xed income & ETF
benchmark provider by assets under management
— Acquisition of Bonds.com by MTS
— FTSE TMX Debt Capital Markets partnership with Bank of China in Hong Kong
— UnaVista Trade Repository ahead of target on EMIR implementation and offering full trade reporting to LCH.Clearnet members
and other clients
— Successful launch on LSE of the ?rst direct European-listed China ETF, a FTSE China A50-benchmarked ETF and the world’s ?rst
RMB bond in FY 2014
— Continued global expansion of MillenniumIT via new contracts with LME, SGX, HKEx and Argentinian CSD
— SwapClear business expansion in the United States and Australia
Developing
opportunities
— We anticipate customers’ evolving needs
— We deliver market leading innovation
— We capitalise on our assets of intellectual property,
?nancial markets expertise and our global customer
and partner network to diversify our offering
— We continue to seek new organic and inorganic
opportunities to grow our business
We are successfully diversifying to take advantage of growth opportunities
— Development of MTS credit platform offering trading on MTS BondVision distribution technology
— Newly formed LSE Derivatives Market launched and FTSE SuperLiquid index futures trading successfully
— New products and services identi?ed through co-operation between LCH.Clearnet, Capital Markets,
Information Services and Post Trade divisions
— Innovative clearing services speci?cally for OTC derivatives developed by LCH.Clearnet
— Elite platform of integrated services for Italian SMEs, now extended to the UK
— UnaVista and NetOTC partner to provide an innovative clearable derivatives risk model
— Establishment of a CSD in Luxembourg, globeSettle, providing custody, settlement and post trade services
for international collateral management
— Successful acquisition of EuroTLX; plans in place for integration of Group corporate functions and migration to
MillenniumIT technology
20 Strategic report London Stock Exchange Group plc Annual Report 2014
Executive management team
The Executive Committee manages the
business on a day-to-day basis. The team
meets regularly to review a wide range
of business matters, including ?nancial
performance, development of strategy,
setting performance targets, reviewing
projects and other developments.
This year, Diane Côté, Group Chief Risk Of?cer,
and Suneel Bakhshi, the newly appointed Chief
Executive Of?cer of LCH.Clearnet, joined the
Executive Committee. Both bring a wealth of skills
to the team; Diane has many years of experience
in senior ?nance, audit and risk positions, and
Suneel has spent over 30 years in international
trading, banking and risk management roles.
For further information on Xavier Rolet, David
Warren and Raffaele Jerusalmi, who are also
members of the Board of Directors, see their
biographies on page 54.
Xavier Rolet
Group Chief Executive Of?cer
Raffaele Jerusalmi
Chief Executive Of?cer of Borsa Italiana
and Director of Capital Markets
David Warren
Group Chief Financial Of?cer
Alexander Justham
Chief Executive Of?cer, London Stock Exchange
plc. Joined the Group in 2012 from the Financial
Services Authority where he was Director of
Markets. Prior to this he worked at J.P. Morgan for
17 years, where he held a number of roles, latterly
as a Managing Director at J.P. Morgan Cazenove.
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Suneel Bakhshi
Chief Executive Of?cer, LCH.Clearnet Group.
Joined in February 2014 from Citigroup with over
30 years of experience in trading, banking and risk
management. Most recently, he was President
and CEO, Citigroup Global Markets, Japan. Prior to
this, he held several senior risk roles, including
leading Citigroup’s Emerging Markets Corporate
Bank. He also held a number of senior banking
and markets roles, including Sales and Trading
in CEMEA, Fixed Income Derivatives Trading for
Europe and Derivatives in Japan.
Diane Côté
Group Chief Risk Of?cer. Diane Côté was appointed
Chief Risk Of?cer and joined the Executive
Committee on 1 June 2013. Diane was previously
Aviva Plc’s Chief Finance Operations Of?cer. Prior to
this, Diane held the position of Aviva’s Chief Audit
Of?cer. Diane has many years’ experience holding
senior positions within Aviva and other leading
organisations, including Standard Life Assurance.
David Lester
Group Director of Corporate Strategy. Joined the
Group in 2001. He has over 23 years’ experience
in ?nancial markets including with Thomson
Financial, Accenture and KPMG.
Mark Makepeace
Group Director of Information Services and Chief
Executive Of?cer of FTSE Group. He was a founding
Director of FTSE Group in 1995 and joined the
Group in 2012. Mark has over 15 years’ experience
of developing successful joint ventures and has
forged alliances with stock exchanges, academics
and leading industry groups.
Tony Weeresinghe
Director of Global Development and Chairman of
MillenniumIT. Joined the Group in 2009. Prior to
founding MillenniumIT in 1996 he was Head of
the Open Systems Division of ComputerLand
and Country Manager of Oracle in Sri Lanka.
Antoine Shagoury
Group Chief Operating Of?cer and Chief Information
Of?cer. Joined in 2010 from the American Stock
Exchange where he was CIO. Over the preceding
10 years Antoine held several executive technology
positions at Instinet, most recently as CTO of Instinet
Services. He has over 20 years of technology and
?nancial services experience.
London Stock Exchange Group plc Annual Report 2014 22 Strategic report
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Adjusted total income
£ million
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Introduction to
segmental review
Year ended 31 March 2014
Capital Markets £m
1 Annual fees 41.2
2 Admission fees 39.9
3 Cash equities trading UK & Turquoise 94.5
4 Cash equities trading Italy 36.1
5 Derivatives trading 19.6
6 Fixed income trading 68.1
7 Other capital markets 10.1
309.5
Post Trade Services CC&G & Monte Titoli
8 Clearing – CC&G 40.0
9 Settlement & Custody – Monte Titoli 58.4
10 Net interest income – CC&G 47.6
146.0
Post Trade Services LCH.Clearnet
11 Clearing – LCH.Clearnet 263.0
12 Net interest income – LCH.Clearnet 62.2
325.2
Information Services
13 FTSE 174.0
14 Real time data 90.8
15 Other information 83.9
348.7
Technology Services
16 MillenniumIT 31.5
17 Technology 32.5
64.0
Other
18 Other income 19.7
19.7
Adjusted total income* 1,213.1
* Adjusted total income excludes unrealised gain/loss.
24 Strategic report London Stock Exchange Group plc Annual Report 2014
Capital Markets
Primary
Secondary
Other*
Revenues
£309.5
m
2013: £267.5m
Introduction
London Stock Exchange Group provides access to capital for a wide range
of domestic and international businesses.
Our range of primary markets provides a choice for issuers and investors,
enabling companies to raise capital ef?ciently depending on their individual
?nancing needs, as well as increasing their visibility with a wide group of
customers and investors. Our secondary markets create a deep pool of
liquidity and allow active and ef?cient trading through our highly competitive
trading platforms.
Primary Markets
In the last year, we have seen a six year high in new issue activity with 188
new companies listing or being admitted to trading on our markets (2013:
121). Among the notable high pro?le businesses were Royal Mail, the largest
UK capital raising, and Moncler in Italy. In addition, our markets continue to
be at the forefront of international issuance, with listings including Al Noor
from United Arab Emirates, Damac from Dubai, Coca-Cola HBC from Greece,
and Romgaz, the ?rst Romanian privatisation on the London market.
Italy welcomed 20 new companies (2013: seven) including World Duty
Free, the global retailer. In January 2014, the Bank of China successfully
issued £253 million in Chinese bonds, the largest RMB issue outside China.
This last year also saw a vibrant market for private equity-backed IPOs on
the London market, with 20 businesses successfully joining our markets,
including Merlin Entertainments and Foxtons Group plc, raising a combined
£6.5 billion. These companies have performed well in the secondary market,
and these successful transactions have helped reinforce investor appetite
for sponsor-backed issuance and bodes well for other future deals in the
pipeline. LSE saw 54 per cent of all ?nancial sponsor-backed IPOs by volume
in calendar year 2013 on European exchanges – almost three times that of
any other exchange.
The total amount of capital raised across our equity markets, both through
IPOs and additional ?nancing, increased 90 per cent to £34.2 billion (2013:
£18.0 billion), with the second half of the year showing a strong uptick in
activity. Looking ahead, the pipeline of companies looking to hold IPOs
remains encouraging. At year end there were a total 2,740 companies on
our markets (2013: 2,746), re?ecting the new companies joining our markets
and the normal attrition through M&A activity.
Our Exchange Traded Funds (ETF) and Exchange Traded Products (ETP)
markets continue to develop. We have seen new products coming to the
market which offer exposures to asset classes that were not accessible
previously. For example, we listed a new ETF this year that tracks the Russian
corporate bond market and, for the ?rst time, an ETF that directly tracks
China A-shares. The total number of ETFs and other ETPs listed remained
stable at 1,880 (2013: 1,883).
AIM is one of the world’s leading growth markets for small and mid-cap
companies. Since its launch in 1995, almost 3,500 companies have joined AIM,
raising over £85 billion to fund their growth. This year, 110 companies were
admitted to AIM in the UK (2013: 72) and 17 to AIM Italia – MAC (2013: six).
Key Summary
— Revenues increased by 16 per cent to £309.5 million (2013:
£267.5 million).
— Primary markets saw a six year high in IPO activity with revenues
up 15 per cent to £81.1 million and 188 companies admitted
including Royal Mail, the largest UK capital raising IPO of the year.
— Secondary market revenues increased by 15 per cent on higher
cash equity and ?xed income trading volumes.
— Turquoise widened its stock universe and added functionality.
Value traded increased 68 per cent.
— The Group strengthened its position as the leading venue for
ETF trading in Europe by value traded.
— Following a slowdown in some international markets, the value
traded on IOB declined six per cent, and derivative contracts
traded are down 11 per cent.
— In ?xed income, MTS Cash and BondVision volumes increased
48 per cent to €3,580 billion (2013: €2,426 billion).
* Other revenue includes Entrance and Membership fees.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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2,938
3,046
Number of companies listed – Group
2010 2014 2013 2012 2011
2,743
2,509
2,263
2,440
2,330
Market capitalisation – Group
£ billion
2010 2014 2013 2012 2011
34
18
34
40
77
Equity money raised – Group
£ billion
2010 2014 2013 2012 2011
1,880 1,883
1,661
1,345
861
Exchange Traded Products – Group
number listed
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We continue our drive to improve access to equity ?nance for small and
medium-sized enterprises and have engaged with policymakers. The UK
Government’s decision to abolish stamp duty for companies quoted on
growth markets, such as AIM and the High Growth Segment, came into effect
on 28 April 2014, and companies admitted to AIM are now eligible for stocks
and shares ISAs. We believe these moves will help boost investment in
companies admitted to growth markets, and reduce the cost of capital for
the UK’s fast growing, job-creating businesses. Our AIM and AIM Italia –
MAC markets, High Growth Segment and STAR the Italian mid size company
segment are of signi?cant importance to economic growth in terms of
providing funding opportunities, particularly at a time when bank credit
remains restricted.
As part of our continuing focus on promoting growth and supporting the
capital raising environment for SMEs, we released the publication of “1000
Companies to Inspire Britain”, a celebration of some of the fastest growing
and most dynamic SMEs in the UK.
In Italy, our SME offering is further enhanced by our ELITE programme.
The programme is aimed at providing support to high quality Italian SMEs,
allowing them to boost their appeal and visibility to potential investors.
ELITE provides growth companies with a dedicated team of advisors from
its 80 partners, including banks, lawyers, auditors and other specialist
advisors, including those specialising in public relations and private equity.
Launched in April 2012, ELITE now has 150 members with an average
revenue of €105 million (as of 7 May 2014). Following completion of the
programme in Italy, should they choose to, SMEs are given a fast-tracked
access to IPO or bond issuance. So far, three members have issued bonds
and several are planning IPOs.
Following the success of ELITE in Italy, the service was also launched in the
UK in April 2014. ELITE provides a selection of ambitious, high growth private
businesses, drawn across a wide variety of sectors, with access to a unique
package of education, business support and supportive investors in order
to enhance their growth prospects. Partnering with Imperial College and
50 other partners across the City of London, 19 high growth UK SMEs were
admitted in the ?rst cohort of companies to participate in the programme.
STAR is the market segment of Borsa Italiana’s equity market (MTA) dedicated
to mid size companies. The companies listed on STAR are leaders in their
industry and represent Italy’s economic diversity and strong competitiveness.
The FTSE Italia STAR index has outperformed the Main Market indices in the
last year. There are currently 68 companies listed on the STAR segment,
which represent 24 per cent of Borsa Italiana’s MTA listed companies.
Each year, the annual STAR Conference is a chance for companies listed
on the STAR segment to showcase their performance and gain exposure to
international investors and the ?nancial community. This year the 12th STAR
Conference was held in Milan, with 57 companies meeting 175 international
investors for a total of more than 1,200 one-to-one meetings.
We continue to help issuers gain access to a large and diverse range of
institutional investors and private client brokers in order to boost their capital
raising potential. In the past year, we have held a number of Capital Markets
Days, including events focusing on Pakistan, Russia and Asia, highlighting
the opportunities for investing in companies based in these countries.
26 Strategic report London Stock Exchange Group plc Annual Report 2014
Capital Markets
continued
The London Investor Show and Trading Online Expo in Milan were held
in October 2013, continuing our commitment to further the understanding
of ?nancial markets by retail investors. Additionally, we have a quarterly
Private Investor magazine, launched in 2012, which has a wide distribution
to retail investors.
In February 2014, LSE welcomed GF Financial Markets (UK) Ltd, one of the
largest integrated securities brokerage ?rms in China, to its markets as the
?rst Chinese member ?rm focusing on both equity and derivatives trading.
Listed products
The Group has strengthened its position as the leading venue for ETF and
other ETP trading in Europe by value traded. Total ETP value traded in the
past year increased 11 per cent to £113 billion (2013: £102 billion). There are
23 registered market makers and over 100 other member ?rms trading ETFs.
In December, we launched a new trading service for ETFs which offers our
clients the choice of trading in a wide range of currencies and settlement on
different venues.
Derivatives
Global derivatives volumes decreased in the last year, largely as a result
of lower volatility. Over the past year, the number of contracts traded on
LSE Derivatives reduced by 22 per cent to 18.7 million (2013: 24.0 million).
This was largely due to the uncertainty in dividend policies in Russian markets.
IDEM, the Group’s Italian derivatives market, saw volumes decline by three per
cent to 34.8 million contracts (2013: 35.9 million). This was in line with other
European exchanges and was driven by reduced volumes on single name
products. FTSE MIB index products continued to grow, with volumes up nine
per cent on last year and FTSE MIB index futures reaching a new monthly all
time record in March 2014.
In May 2013, IDEM launched the Pan-European Single Stock Dividend
Futures, allowing intermediaries and investors to gain exposure to, or hedge
their dividend risk on the main issuers across Europe. Since their introduction,
dividend futures on IDEM have traded over 164,000 contracts.
In October 2013, LSE Derivatives launched the FTSE UK Large Cap Super
Liquid index (FTSE UK SLQ) futures. This innovative index tracks the
performance of the UK equity market through 35 highly liquid stocks offering
new opportunities to reduce frictional trading and maintenance costs as well
as a tool for new trading opportunities. Since its launch FTSE UK SLQ has
traded over 35,500 contracts with a nominal value of nearly £1.7 billion.
This year, Trading Technologies International, Inc. announced the connectivity
agreement to the Group’s derivatives markets to provide their clients with the
ability to view and trade products across both IDEM and LSE Derivatives
through a single gateway.
Fixed income
MTS is a leading regulated electronic trading platform for intermediaries
trading European wholesale Government Bonds and other types of ?xed
income securities. MTS Cash and BondVision volumes have grown
signi?cantly, up 48 per cent on last year to €3,580 billion (2013: €2,426
billion), with a record year for BondVision. MTS Repo volumes increased by
two per cent to €70.2 trillion (2013: €69.1 trillion). In March 2014, MTS also
announced its merger agreement to acquire Bonds.com Group, a US based
platform for the electronic trading of US corporate and emerging market
bonds. This transaction enhances MTS’ position as a global provider of ?xed
income trading platforms and enables them to meet the ongoing drive
Secondary Markets
Equity trading
Both UK and Italian cash equity trading activity increased on last year. In the
UK, the average daily value traded was up eight per cent to £4.3 billion (2013:
£4.0 billion); in Italy, the average daily number of trades was up ?ve per cent
to 235,000 (2013: 223,000). The FTSE 100 rose three per cent and the FTSE
MIB showed strong recovery up 41 per cent.
Turquoise is our majority owned European cash equities MTF in partnership
with the user community. With a single connection to Turquoise, users can
trade equities from 18 countries across Europe as well as US stocks and IOB
Depositary Receipts. Turquoise offers access to two discrete order books for
complementary liquidity, an Integrated Lit book as well as a dark pool.
Turquoise Midpoint Dark features size priority and two distinct functionalities:
continuous matching at mid-point and Turquoise Uncross, an innovation that
provides randomised mid-point uncrossings during the trading day. Average
daily value traded increased 67 per cent to €2.8 billion (2013: €1.7 billion).
Turquoise’s share of European equity trading has risen from 3.0 per cent
when acquired to an average of 8.2 per cent for the year.
In the second half of the year, we branded Turquoise Uncross and widened
our stock universe by more than 800, including small caps. We enhanced
Turquoise by enabling customers to trade the second line of dual-listed
securities, i.e. where a security is listed on more than one European exchange,
and we enabled the trading of European rights issues. We optimised post
trade clearing of internationally traded Spanish equities. We migrated to the
latest version of LSEG’s MillenniumIT technology, and we introduced several
functional improvements to our lit and dark order books. We were delighted
to welcome new trading members from continental Europe, Switzerland and
the Nordic communities.
Since the branding of Turquoise Uncross in September 2013, values matched
using this service increased more than three times (see page 143 for more
detail on dark pools and Turquoise Uncross). Turquoise members traded €83.3
billion in March 2014, the largest monthly value since Turquoise launched in
2008. March 2014 saw a Turquoise record 17.9 million trades in 1965 stocks.
The International Order Book (IOB) enables investors to unlock the potential
of some of the world’s fastest growing markets through a single central
electronic order book. It offers easy and cost ef?cient direct access to
securities via depositary receipts from 40 countries, including those in
Central and Eastern Europe, Asia and the Middle East. During the year,
we saw increased share of trading in Asian stocks, with Samsung Electronics
from South Korea remaining the most liquid Asian name. In February
2014, we made changes to the tick size in the IOB to support the increased
liquidity of some stocks, changed the opening time to match the rest of
LSE, and extended the post closing auction CPX session by 15 minutes.
Globally, during the year there has been a widespread slowdown across
many emerging markets. This is re?ected in IOB value traded which
declined six per cent to US$190 billion (2013: US$202 billion).
In London and Italy, we are working with industry initiatives to shorten
the standard securities settlement cycle from T+3 to T+2 in October 2014.
This means that the cash and securities components of a trade will be
exchanged within two days of the trade.
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2010 2014 2013 2012 2011
4.3
4.0
4.7 4.7
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London Stock Exchange –
average order-book daily value traded
£ billion
2010 2014 2013 2012 2011
235
223
260 257 252
Borsa Italiana –
average order-book daily number of trades
thousands
2010 2014 2013 2012 2011
3,580
2,426 2,444
2,719
2,404
MTS cash and BondVision
volume traded € billion
Turquoise – European equity trading
value traded € billion and share of European equity trading
?Turquoise value € billion Turquoise share
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FY
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FY
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FY
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FY
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4 Q1 Q2 Q3
6
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7
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6
8
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2
2
2
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9
International Order Book
value traded US$ billion
2014 2003 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
1
0
1
42
6
3
3
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5
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Strategic report Capital Markets
towards transparency and ef?ciency in ?xed income markets. Its new US
subsidiary, MTS Markets International offers US buy-side participants the
ability to directly access real time pricing from one of the deepest liquidity
pools in Europe and to trade electronically with all the major European dealers
via its BondVision platform. 2014 will see the launch of MTS Swaps, a platform
for trading swaps products, with clearing provided by LCH.Clearnet’s
SwapClear. In April 2014, MTS announced that its bond indices are joining
FTSE and TMX in their combined ?xed income venture FTSE TMX Global Debt
Capital Markets.
Our electronic LSE Order Book for Retail Bonds (ORB), which celebrated its
fourth anniversary in February, has 178 bonds (2013: 176), including 69 gilts.
Since the launch of the market, £3.9 billion has been raised through 41 new
issues and six secondary issues. Our on-book liquidity grew signi?cantly
in the past 12 months, from £112 million to £347 million. We now have 35
specialist retail brokers as ORB members (2013: 30), with 11 dedicated ORB
market makers providing continuous two-way tradable prices.
MOT is the most liquid and heavily traded retail ?xed income platform in
Europe. It is the only Italian regulated market dedicated to the trading of
Italian and non-Italian Government securities, domestic and international
bank and corporate bonds, supranational securities and asset-backed
securities. This year, the Italian Treasury issued further BTP Italia Bonds
with subscription through MOT. The fourth issue raised €18 billion in April
2013, with the ?fth issue raising €22.3 billion in November 2013, an all time
record in Europe for a direct placement. We also introduced a CCP service,
managed by CC&G, for bonds denominated in euros that settle through
ICSDs. This year saw an increase in the number of bonds listed in ExtraMOT
PRO (the professional segment of MOT). MOT has a total of 1,206 bonds listed
which saw a nine per cent decline in the number of trades to 5.64 million
(2013: 6.22 million).
In September 2013, the Group acquired a majority stake in EuroTLX, an Italian
multilateral trading facility (MTF) operating in the European retail ?xed income
market. Over the next 12 months, EuroTLX will be fully migrating to MillenniumIT
technology and will complement the ?xed income part of the Group.
28 Strategic report London Stock Exchange Group plc Annual Report 2014
Post Trade Services
CC&G and Monte Titoli
Clearing
Interest
Settlement & Custody
Income
Introduction
Post Trade Services in Italy are crucial to the securities trading industry.
Our post trade businesses in Italy, Monte Titoli and CC&G, provide the
markets with settlement, depository, custody, risk and collateral
management, clearing and central counterparty (CCP) services in order
to mitigate risk and ensure the ef?cient running of capital markets.
The post trade regulatory landscape is undergoing signi?cant changes,
emphasising the importance of the role of clearing houses and Central
Securities Depositaries (CSDs) in post-crisis ?nancial markets. It also creates
opportunities for growth in this area, as more reliance is placed on post trade
infrastructure providers. Our continued strong service in volatile market
conditions emphasises the high quality of our risk management and post
trade processes.
CC&G
CC&G provides risk management, open access clearing and CCP services for
14 markets, including services to non-Group markets, and has 150 clearing
members. CC&G eliminates counterparty risk, acting as buyer toward the
seller and vice versa, becoming the guarantor of the ?nal settlement of the
contracts. CC&G provides services across a diverse range of asset classes
including cash equities, derivatives, closed-end funds, ?xed income, energy
products and, most recently, agricultural commodity derivatives. CC&G has
an interoperability agreement with LCH.Clearnet SA for European Bond and
Repo markets.
As a result of increased trading volumes in equities and ?xed income,
clearing revenues increased by 11 per cent to £40.0 million (2013: £36.1 million).
CC&G generates net treasury income by investing the cash margin it holds.
Average daily initial margin rose by 18 per cent to €11.9 billion for the period
(2013: €10.1 billion). As we entered the year CC&G had started to change its
investment policy in terms of where the cash margin it holds is invested.
This change was made to meet new regulatory technical standards for the
European Market Infrastructure Regulation (EMIR). By September 2013
CC&G met these standards with 95 per cent of cash invested on a fully
collateralised basis. In last year’s report we stated that we expected a
reduction in net treasury income, and income for the year amounted to
£47.6 million, down 59 per cent on the previous year (2013: £116.7 million).
CC&G has been increasing the range of international services and markets
it serves. In October 2013, we extended our CCP service to clear bonds
denominated in euros settled via international CSDs, offering a pan-European
settlement system. The service offers clients a more ef?cient post trade
management process, allowing CC&G operators and customers to bene?t
from signi?cant savings on settlement commissions.
Given the importance of the role of CCPs in post-crisis ?nancial markets,
CCPs have come under scrutiny with increased regulatory requirements.
CC&G received recerti?cation authorisation under EMIR in May 2014.
This process will lead to increased minimum capital requirements which
CC&G will meet through existing capital resources.
£146.0
m
2013: £208.5m
Key Summary
— Revenues grew by seven per cent to £98.4 million.
— Total income (including net treasury income) fell by 30 per cent
to £146.0 million, re?ecting a change of investment policy.
— CC&G clearing revenues grew by 11 per cent to £40.0 million as a
result of increased trading volumes in equities and ?xed income.
— Monte Titoli processed 58.3 million settlement instructions, up
5.4 per cent on the previous year re?ecting higher trading levels
in Italian equity and ?xed income markets.
— Monte Titoli is the largest CSD entering the ?rst wave of
TARGET2-Securities from June 2015. In addition, from October
2014, settlement of contracts executed on the Italian market
will move to T+2.
— The new international CSD in Luxembourg (globeSettle), utilising
Monte Titoli’s expertise, is on track to commence operation in
Summer 2014 having received regulatory approval from the CSSF
– J.P. Morgan has already signed up as the ?rst user of settlement,
custody and asset servicing services.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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2010 2014 2013 2012 2011
11.9
10.1
9.4
6.8
4.6
Initial margin held
average € billion
2010 2014 2013 2012 2011
58.3
55.3
68.2 69.8
83.9
Settlement instructions
million
2010 2014 2013 2012 2011
3.32
3.23
3.08 3.02
2.87
Assets under custody
€ trillion
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Monte Titoli
Monte Titoli, our Central Securities Depository (CSD), is a leading provider
of ef?cient and secure pre-settlement, settlement, custody, asset servicing
and collateral management services. It is a leader in the post trade industry
with an AA rating from Thomas Murray, the specialist custody rating,
risk management and research ?rm, and has €3.32 trillion in assets
under custody.
Monte Titoli processed 58.3 million settlement instructions, up ?ve per cent
on the previous year re?ecting higher trading levels in the Italian equity and
?xed income markets (2013: 55.3 million). Monte Titoli continued to provide a
low cost and ef?cient settlement system, with a settlement rate of 99.2 per
cent of trades (2013: 99.4). Monte Titoli’s settlement rate exceeds the
European settlement standards.
Monte Titoli has signed the TARGET2-Securities (T2S) Framework Agreement
and will participate in the ?rst wave of T2S, scheduled to go live in June 2015.
T2S will be the new centralised settlement platform for securities, developed
and operated by the Eurosystem (the European Central Bank and the national
central banks of the Eurozone), created to provide settlement services for any
type of transaction in Central Bank money. In March 2014, 13 institutions
signed a declaration to become Directly Connected Participants (DCP) of
Monte Titoli in Wave 1, signalling strong interest for the Monte Titoli offering
since the launch of the T2S platform.
Monte Titoli is the largest CSD entering in the ?rst wave of T2S and will be able
to offer major European players access to settle cross-border contracts as if
they were domestic, eliminating problems such as delays and errors in the
interaction of different settlement systems. In the past year, Monte Titoli has
been working to harmonise its processes in view of T2S. As part of this, in
October 2014, settlement of contracts executed on the Italian market will
move from T+3 to T+2, meaning that the intended settlement date shall be no
later than the second business day after a trade takes place.
Monte Titoli has an extensive customer base, comprising 232 banks, brokers,
CCPs, trading venues and 2,174 issuers and provides asset servicing in relation
to a wide range of ?nancial instruments. Assets held under custody at Monte
Titoli increased by 2.8 per cent to €3.32 trillion (2013: €3.23 trillion).
In July 2013, the Group con?rmed plans to launch globeSettle, a new central
securities depository (CSD) business, based in Luxembourg. The new CSD is on
track to commence operation in Summer 2014, having received approval from
the CSSF. It has already con?rmed that it will provide settlement, custody and
asset servicing for J.P. Morgan’s international collateral management business.
30 Strategic report London Stock Exchange Group plc Annual Report 2014
Post Trade Services
LCH.Clearnet
Clearing OTC
Clearing non-OTC & other
Interest
Adjusted income*
£325.2
m
Introduction
On 1 May 2013, the Group completed the acquisition of a majority stake
in LCH.Clearnet. LCH.Clearnet is a leading multinational clearing house,
with clearing operations in the UK (LCH.Clearnet Limited), the Eurozone
(LCH.Clearnet SA), the US (LCH.Clearnet LLC) and an expanding presence in the
Asia-Paci?c region. LCH.Clearnet provides services to mitigate counterparty
risk across multiple asset classes for sell-side clearing members and buy-side
clients operating on major exchanges and platforms as well as a range of
OTC markets.
As central counterparties (CCPs), LCH.Clearnet operating companies sit in
the middle of a trade as the buyer to every seller and the seller to every buyer.
If either party defaults on the trade, the relevant CCP owns the defaulter’s risk
and becomes accountable for its liabilities. During the life of a trade, or that of
a portfolio of trades, the LCH.Clearnet operating companies process all cash
?ows and mark the trade or book to market, calling variation and initial
margin in relation to prevailing risk of the overall portfolio.
The Group’s revenue base continues to diversify across its products and services.
Fundamental to LCH.Clearnet’s risk process is its collection of quality collateral
from clearing members and clients as insurance to recover or replace
defaulted risk.
Suneel Bakhshi was appointed as the Group Chief Executive Of?cer for
LCH.Clearnet, joining in February 2014. Upon taking up his position,
Mr Bakhshi also became a member of LSEG’s Executive Committee.
LCH.Clearnet was named Risk Magazine’s 2014 Clearing House of the Year
after ful?lling criteria which included risk management, customer satisfaction,
responsiveness to new regulations, engagement with regulators, liquidity
provision and creativity.
OTC derivatives
SwapClear, the world’s leading interest rate swap clearing service, led the
move to mandatory central clearing, delivering high levels of ef?ciency
and liquidity to an increasing roster of members and clients. At year end,
SwapClear cleared $526 trillion total notional and compressed a further
$168 trillion of interest rate derivatives. During the year, SwapClear cleared
$67.5 trillion of client notional, bringing the total to date to $95 trillion client
notional, nearly four times the level of its nearest competitor.
During the year, membership increased by 25 members to 103, with 142
market makers now using the service. Total clearing revenue for the 11 month
period was £91.5 million.
SwapClear introduced real time trade registration, currency and tenor
extensions to its Overnight Index Swap (OIS) offering, and a timely initial
margin recalibration to ensure optimal risk management performance
in a range of interest rate environments.
In the US, SwapClear expanded its global footprint with the launch of
LCH.Clearnet LLC, a US-domiciled Derivatives Clearing Organisation (DCO)
and the new SwapClear US-domiciled service.
In the coming months, SwapClear plans to expand and adapt its service
globally to cater for more time zones, develop its proprietary compression
offering, and introduce in?ation-linked swaps and other product extensions.
On recerti?cation of LCH.Clearnet, SwapClear will be rolling out more customer
protection offerings under EMIR.
Key Summary
— The Group acquired a majority stake in LCH.Clearnet in May 2013.
— LCH.Clearnet’s income for the 11 month period was £325.2
million, with OTC clearing revenues of £109.6 million, non-OTC
revenues of £153.4 million, and net treasury income of
£62.2 million.
— SwapClear, the world’s leading interest rate swap clearing service,
cleared $526 trillion notional.
— SwapClear obtained a license to provide OTC rate clearing services
to Australian member banks, and will be further expanding its
service globally to cater for different timezones.
— RepoClear, one of Europe’s largest ?xed income clearers, cleared
€72.3 trillion in nominal value.
— EquityClear clearing volumes increased to 384.7 million trades
due to increases in trading activity, as well as an increase in
venues and customers. It also became the ?rst CCP to offer OTC
Equity Contracts for Difference (CFDs).
— In May 2013, LCH.Clearnet began clearing for NASDAQ OMX NLX,
the new London-based single market for trading the full European
interest rate curve.
— Enhanced its compression offering via SwapClear to include
multilateral compression, which enables customers to reduce
outstanding positions and lower their counterparty exposure
and capital costs.
* Adjusted income excludes unrealised gain/loss.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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Q2
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Q3
2013
Q4
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Q1
2014
Q2
2014
Q3
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Q4
103
100
103
72
78
83
67
64
SwapClear
members
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
17.9
18.3
17.5 17.6
18.4 18.6
18.1
17.5
Fixed Income
nominal value cleared € trillion
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
165
114
120
106
147
127
104
90
SwapClear total notional cleared
US$ trillion
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CDSClear offers industry leading default management provisions and clears
the broadest set of European credit indices. In July 2013 CDSClear extended
its reach to offer clearing to European clients and US clearing members.
In December 2013, the CFTC granted LCH.Clearnet SA registration as a
Derivatives Clearing Organisation (DCO), enabling the service to provide US
client clearing for broad based indices. In the same month, CDSClear’s
product set was expanded with the introduction of 187 single-name CDS.
CDSClear cleared €153.8 billion notional value in the last year, with open
interest standing at over €28.3 billion. CDSClear has 11 members and over the
next year will expand the product offering to include the new ISDA
de?nitions, CDX/US Single names and Financials.
ForexClear is LCH.Clearnet’s market-leading service clearing interbank foreign
exchange (FX) non-deliverable forwards (NDF) in multiple currencies. During
the year ForexClear cleared US$832 billion. The service offers the only 24-hour
OTC FX clearing service for 20 members. In 2013, the service became fully
US compliant through the implementation of real time trade registration, and
launched client clearing. In the upcoming year, ForexClear will be working with
industry participants to de?ne settlement solutions to expand the clearing
of FX products in line with regulatory requirements and will look
to expand its global offering.
In April 2014, the SwapClear, ForexClear and CDSClear services’ arrangements
were amended (with effect from 1 January 2014) to ensure they met EMIR
and other regulatory requirements for clearing houses, as well as recognising
the changing economics and increased regulatory capital for running OTC
derivatives clearing services. The surplus share arrangements in the SwapClear
and ForexClear services have been replaced with revenue share arrangements.
Non-OTC Clearing
Fixed Income
LCH.Clearnet is the leading clearer of European repo and cash bond markets,
clearing €72.3 trillion in nominal value in the last year (2013: €71.5 trillion),
comprising 15 European government repo and cash bond markets.
LCH.Clearnet SA has an interoperability agreement with CC&G for Italian
Government Bond and Repo markets. Total revenue for the 11 month period
was £31.8 million.
In March, LCH.Clearnet SA launched €GCPlus, a central clearing services for
the tri-party repo market, in collaboration with Euroclear and Banque de
France. The new service enables ?xed income trading desks, treasurers and
other market participants to ef?ciently manage Eurosystem eligible collateral
and to generate liquidity in a cleared environment.
RepoClear is LCH.Clearnet Limited’s market leading service clearing cash
bond and repo trades across a number of European markets. RepoClear is
one of Europe’s largest clearers of ?xed income and plays an important role
in the facilitation of interbank liquidity.
RepoIQ, a new Value at Risk (VaR) margin methodology with a margin
simulator, was introduced to all RepoClear members during April 2014.
Additionally, RepoCalc, the new margin monitoring and simulation tool has
been launched, providing greater margin requirement visibility and
simulation capabilities.
Commodities and Listed Derivatives
LCH.Clearnet provides clearing services for interest rate and equity derivatives
as well as a range of commodities markets, including power and associated
energy markets, base and precious metals and agricultural products. It also
provides clearing for OTC forward freight agreements for the most actively
traded routes. Total revenue for the 11 month period was £82.1 million.
Clearing for the London Metal Exchange, a major part of the commodities
clearing performed by LCH.Clearnet, is expected to cease from September
2014, as this business is migrated to LME’s own clearing house.
In 2013, LCH.Clearnet Limited launched clearing for NLX, a new Nasdaq OMX
MTF offering a range of both short-term interest rate (STIRs) and long-term
interest rate (LTIRs) euro and sterling-based listed derivatives. As expected,
the clearing of derivatives on the LIFFE market by LCH.Clearnet ceased in
June 2013, while a Euronext continental derivatives agreement was signed
to extend clearing of listed derivatives until December 2018.
Cash Equities
LCH.Clearnet provides equity clearing services for a wide coverage of
European regulated exchanges and MTFs including LSE, Turquoise, Euronext,
SIX Swiss Exchange, Oslo Børs, BATS Chi-X Europe, AQUIS and other venues.
LCH.Clearnet is uniquely positioned to provide risk management and clearing
services from Asian market hours through European Trading to the close of
the US markets. It has been at the forefront of industry initiatives to introduce
competition and provide cost ef?ciencies for users of the European cash
equities markets through the implementation of interoperable arrangements
with other CCPs. Total revenue for the 11 month period was £32.4 million.
In the last year, clearing volumes increased to 384.7 million trades (2013:
327.9 million). This is due to increases in trading activity, as well as an
increase in venues and customers. In October 2013, LCH.Clearnet became
the ?rst CCP to offer clearing of OTC Equity Contracts for Difference (CFDs),
helping investors to access the best market price for a trade while bene?ting
from reduced counterparty risk, collateral ef?ciencies and cross-margining
opportunities between cash equities and CFDs.
LCH.Clearnet also provides interoperability with three other clearers (SIX,
EuroCCP NV and Oslo Clearing). Clearing members bene?t from margin
off-sets and collateral ef?ciencies from centralised clearing. Also members
will bene?t from reduced clearing costs with increased volumes through the
global incremental tariff.
Net Treasury Income
Net treasury income is the result of revenue earned on assets posted to the
clearing house, less interest paid to the members on their initial margin and
default fund contributions. The primary role of the investment function is
the protection of client assets. Prudent investment and robust liquidity risk
management remain at the core of LCH.Clearnet’s investment strategy
with risk parameters set by independent risk committees and regulatory
requirements. Total income from Net Treasury Income for the 11 month
period was £62.2 million.
Revenues
32 Strategic report London Stock Exchange Group plc Annual Report 2014
FTSE
Data charges
Other information
Information Services
Introduction
Our Information Services division meets the needs of ?nancial market
participants for fast, reliable and accurate market information. We offer
a wide range of other services, including real time trading data, global indices
and post trade con?rmation and reporting services.
This year, we have continued integrating FTSE, our global index business,
into the Group. We have seen continued growth in North America and
emerging markets, with an increase in ETF assets linked to FTSE benchmarks.
FTSE
FTSE is a leading worldwide provider of information solutions. It is a high
growth, high quality global index business with over 250,000 indices
calculated across 80 countries and is the number three provider of indices
worldwide by revenue. FTSE earns around 60 per cent of revenue from annual
subscription fees and 40 per cent from licensing for index-based products.
Clients include both active and passive fund managers, consultants, asset
owners, sell-side ?rms and data vendors. FTSE’s products are used extensively
by market participants worldwide for investment analysis, performance
measurement, asset allocation and hedging. Leading pension funds, asset
managers, ETF providers and investment banks work with FTSE to benchmark
their investment performance and use FTSE’s indices to create world-class
ETFs, index tracking funds, structured products and index derivatives. FTSE
also provides many exchanges around the world with their domestic indices.
Total revenue for the last year increased 30 per cent to £174.0 million (2013:
£134.1 million).
FTSE’s presence in the US continues to grow, with a signi?cant portion of its
revenue coming from operations in North America. There has been continued
development of the FTSE China Index Series, with launches of ETFs based
on the FTSE China A50 Index on various exchanges including London
Stock Exchange.
In April 2013, FTSE and TMX combined their ?xed income businesses in
a new venture, FTSE TMX Global Debt Capital Markets. FTSE TMX ?xed
income indices are used as benchmarks for more than $1 trillion in assets.
Additionally, MTS bond indices have become part of the FTSE TMX venture,
and these indices will be rebranded in the coming months. This year FTSE
launched the FTSE BOCHK Offshore RMB Bond Index series, in partnership
with the Bank of China (Hong Kong).
FTSE products cover a range of asset classes and vary from traditional market
capitalisation weighted indices to an expanding range of thematic and
alternatively weighted indices.
In 2013, FTSE won the titles of Index Provider of the Year at the European
Pensions Awards and Most Recognised ETF Brand (Asia) at the Global ETF
Awards for China A50.
FTSE expects to issue a statement with respect to its compliance with IOSCO’s
Principles for Financial Benchmarks, by July 2014.
Real Time Data
Our Real Time Data service provides the primary reference data for UK and
Italian equities, delivered by our advanced market data platform. This real
time, tick by tick data is used by traders, brokers and fund managers around
the globe. Total revenue for the last year declined six per cent to £90.8 million
(2013: £96.9 million).
The number of professional users accessing real time data across our direct
network, or through our network service providers and market data vendor
partners, decreased by six per cent to 79,000 professional terminals for
Key Summary
— Revenues increased by 14 per cent to £348.7 million,
representing growth in North America and Asia, and the
completion of Vanguard’s $209 billion benchmark switch
to FTSE, one of the largest ever switches of benchmarks.
— FTSE entered into an agreement with TMX to create FTSE
TMX Global Debt Capital Markets in April 2013.
— FTSE also increased its China offering, with continued
development of the FTSE China Index series, the leading
benchmark for Chinese ETFs, and the launch of the FTSE
BOCHK Offshore RMB Bond.
— Real time data revenue declined six per cent to £90.8 million.
Other Information Services products performed well, with
revenues up by 11 per cent to £83.9 million.
— UnaVista increased its user base to over 30,000 (2013: 9,000).
It became the largest approved reporting mechanism in Europe
by trade volumes and client numbers.
£348.7
m
2013: £306.3m
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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2010 2014 2013 2012 2011
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2014 2013 2012
186
143
55
ETF assets under management
benchmarked to FTSE indices
US$ billion
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London Stock Exchange (2013: 84,000) and by eight per cent to 126,000
professional terminals for Borsa Italiana (2013: 137,000). These declines were
largely the result of headcount reductions and general cost cutting in the
sector. Declining terminal revenue is to some extent offset by increasing use
of real time data by many non-display applications, including algorithmic/
black-box trading. Private investor appetite for real time data continues to
grow, with increasing interest in LSEG data on digital platforms such as Google.
This year our focus has been on increasing customer accessibility and
promoting harmonisation between data services. We have been progressing
with our Group Ticker Plan project, which will offer access to all of our markets
via a single feed. LSE sits on the Market Model Typology (MMT) steering
committee which, in collaboration with other exchanges and data distributors
and trading participants, is promoting the design of a new data standard to
enable clearer comparisons to be made between post trade equity data from
trading venues across Europe.
Other Information Services
UnaVista is the Group’s secure platform for all matching, validation and
reconciliation needs. It offers services for regulatory reporting, trade
con?rmations, reconciliations and reference data. In the last 12 months,
UnaVista has increased its user base to over 30,000 (2013: 9,000).
Our multi-asset class MiFID Transaction Reporting service processes
over 1.5 billion trades annually, making it the largest Approved Reporting
Mechanism in Europe by trade volumes and client numbers.
This year, we launched our EMIR Trade Repository solution, approved by
ESMA as a repository across all asset classes and geographies. We also
launched the UnaVista Rules Engine to help clients meet their wider
regulatory reporting needs. In February, the Hellenic Exchanges Group
selected UnaVista Rules Engine and Trade Repository solutions to assist
it with EMIR trade reporting. Over the next year, UnaVista plans to launch
other solutions to assist clients manage their evolving regulatory reporting
needs including the Alternative Investment Fund Managers Directive (AIFMD)
and the Regulation on Energy Market Integrity and Transparency (REMIT).
SEDOL is our global, multi-asset class numbering system, providing reference
data and unique identi?cation codes for global equity, derivatives and ?xed
income securities. The SEDOL Master?le Service database provides clients
with access to reference data on over ?ve million live and almost 50 million
historical instruments. In an extension to its duties as a national numbering
agency, London Stock Exchange was sponsored by the Financial Conduct
Authority (FCA) to be a Local Operating Unit (LOU) for the global allocation of
the new Legal Entity Identi?er (LEI), which uniquely identi?es every
legal entity or structure, in any jurisdiction, which is party to a ?nancial
transaction. The LEI is mandatory for a number of global regulations and
UnaVista technology is being used to allocate and maintain the codes.
Since launch in mid 2013, we have become the third largest LOU and have
allocated over 20,000 LEIs globally across six continents.
Proquote is our cost effective, global market data provider and offers a
wide range of trading services through its trading platform and electronic
execution gateway. Proquote has a partnership programme with companies
including Factset, SunGard, Liquid Metrix and Digital Look, offering solutions
for mobile services, risk, surveillance, and best execution. This year, Proquote
also partnered with Web Financial Group to form Obsidian IR Ltd, which will
deliver content and technology speci?cally tailored to meet companies’
increasing demand for sophisticated investor relations solutions. In October,
Proquote launched a global order routing network for retail brokers, allowing
them to route care orders and direct market access instructions through a
community of 170 sell-side brokers by connecting into the LSE hub.
RNS is a leading high quality service for UK regulatory news announcements
and global press releases. RNS helps companies and their intermediaries
to ful?l their UK and other global regulatory disclosure obligations in the
most effective and time-ef?cient way. Over 70 per cent of all regulatory and
potentially price-sensitive UK company announcements are published using
RNS. Our 2013 customer survey found that over 99 per cent of RNS customers
were either satis?ed or very satis?ed with the service. Of the 120 IPOs in 2013,
118 registered to become RNS customers. Over 265,000 announcements were
processed by RNS during FY 2014 (2013: 256,605), covering the majority of
UK company announcements. RNS operates as a Primary Information
Provider and is regulated by the FCA.
Total revenue for the last year increased 11 per cent to £83.9 million (2013:
£75.3 million).
34 Strategic report London Stock Exchange Group plc Annual Report 2014
MillenniumIT and Global
Business Development
Exchange Technology
Revenues
Technology Services
Introduction
The Group’s Technology Services provides high speed trading platforms,
post trade platforms, real time market data and infrastructure products
and services to our own markets and to a wide range of customers including
banks, specialist trading ?rms and other exchanges.
Exchange Technology
All of our cash equity and retail bond markets have now been migrated and
upgraded to the latest version of the Millennium Exchange trading platform.
This migration has helped reduce our cost base and increased opportunities
for customers to bene?t from enhanced functionality and further expansion
of our co-location services. As a consequence of technology upgrades, we are
able to modernise and develop at lower costs and have seen a 100 per cent
uptime for all markets. The next stage will be to further improve ef?ciency
for other Group platforms.
Our UK cash equity and Turquoise platforms continue to exhibit excellent
technical performance attributable to our Millennium Exchange technology.
Our Turquoise markets have an average latency of 102 microseconds,
remaining one of the fastest operating trading platforms in the world.
On the UK cash equities platform, average latency is 111 microseconds,
slightly higher than Turquoise due to the more diverse range of customers
and the advanced functionality that it offers.
In Post Trade Services, our IT systems and processes are on track for the
migration to TARGET2-Securities (T2S), with testing due to commence later
this year. T2S is a project of the European Central Bank, which aims to
facilitate cheaper cross-border settlement across Europe. Phase 1 of T2S,
of which the Group is a participant, is due to start in June 2015.
Our Group Ticker Plant (GTP) project launched this year. This high speed
technology platform provides a single, normalised real time market data
protocol for broadcast of market data from across the Group, regardless
of asset class, trading platform or geography. The launch represents a
signi?cant step in our technology strategy. It will allow customers to connect
to our markets or data products including indices via a single interface.
The FTSE Low Latency Index Series will introduce the lowest latency
calculation of the leading FTSE UK Series indices. Driven by client requests
following consultation, the FTSE 100 Low Latency and FTSE 250 Low Latency
indices will initially be calculated by the GTP, directly at the creation of the
underlying data in the Group’s data centres.
£64.0
m
2013: £56.1m
Key Summary
— Revenues increased 14 per cent to £64.0 million.
— Our cash equity markets use the Millennium Exchange trading
platform, Turquoise, which has an average latency of 102
microseconds (2013: 99 microseconds), remaining one of the
fastest operating trading platforms in the world. LSE has average
latency of 111 microseconds (2013: 106 microseconds), slightly
higher than Turquoise due to the more diverse range of products,
customers and the advanced functionality that it offers.
— MillenniumIT increased revenue by 17 per cent to £31.5 million
(2013: £26.9 million).
— Canada’s TMX went live with MillenniumIT Smart Order Router
to aid compliance with Canadian regulation. It was also recently
rolled out as the Orion Central Gateway platform for Hong Kong
Exchanges and Clearing Limited.
— MillenniumIT also successfully launched the Compliance
Monitoring System (CMS) for the London Metal Exchange, and
extended Millennium Exchange to Burgundy, the Nordic MTF.
— In July 2013, the Group was selected as the business development
and technology partner by the Argentinian Central Securities
Depository (CSD), Caja de Valores S.A.
A glossary of terms can be found on pages 144 and 145.
Pro?tability of each segment can be found in the Financial Review on page 38.
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Our Sponsored Access service allows non members a direct technical
connection to the LSEG’s equity order books under the trading codes of
a Sponsoring Firm.
GATElab, our Italian and UK based technology company supplies advanced
trading, market access and post trade technology globally.
GATElab’s multi-asset cross-markets suite of components, MiFID compliant,
ful?ls the needs of buy-side, sell-side and hedge-fund partners: from
a fast single-click trading front-end to a ?exible and easily-programmable
automated trading and quoting engine, from a dealer-to-broker ?x
interconnection and a fast Execution Management System (EMS) and Order
Management System (OMS), to a real time forwarding of captured trades/
orders to position and back-of?ce systems.
EuroTLX, a European Retail Bond trading platform, which joined the Group
in September 2013, will be migrated to Millennium Exchange in Italy later
this year.
In 2014, Exchange Technology revenue increased by 11 per cent to
£32.5 million (2013: £29.2 million).
MillenniumIT
MillenniumIT offers pre- to post trade, multi-asset, ultra-low latency,
agile capital market solutions. MillenniumIT technology powers trading
venues, banks, broker dealers and post trade institutions and its systems
are live in over 30 organisations around the world. The MillenniumIT model
is to invest in technological innovation to give clients a competitive
advantage. MillenniumIT has been part of the Group since 2009 and this
year opened a new state-of-the-art, 40,000 sq ft software development
building on its existing Sri Lanka campus, to better support the building
of best in class technology.
MillenniumIT’s suite of capital market products includes Millennium
Exchange, our ?agship low latency multi-asset trading engine; Millennium
SOR an intelligent smart order router and gateway solution; Millennium
Surveillance, providing powerful multi-market, multi-asset class market
monitoring; Millennium MarketData, providing ultra-fast and ef?cient data
for ?nancial markets; and Millennium PostTrade, offering multi-asset clearing,
settlement, risk and depository solutions in real time. MillenniumIT also
provides enterprise systems integration and low latency infrastructure
services to customers in Sri Lanka and beyond.
In 2014, MillenniumIT revenue increased by 17 per cent to £31.5 million
(2013: £26.9 million).
Highlights this year include:
— Millennium PostTrade was selected by Singapore Stock Exchange (SGX) to
support its clearing, settlement and depository services. The new system
will allow SGX to clear, settle and safe-keep assets in a quicker and easier
way in multiple currencies and across asset classes, allowing SGX to
improve customer access and roll out new products much faster.
— Millennium SOR went live in Canada’s TMX to aid compliance with
Canadian regulation. It is also supporting the Orion Central Gateway
platform for Hong Kong Exchanges and Clearing Limited.
— Millennium Surveillance went live in the London Metal Exchange,
powering the Compliance Monitoring System (CMS).
— Millennium Exchange was rolled out in Burgundy, the Nordic MTF
owned by Oslo Børs.
Global Business Development
The Global Business Development team develops and implements business
opportunities with other exchanges and business partners, leveraging the
assets of the Group to generate new revenues and establish long term
strategic partnerships.
In July 2013, the Group was selected as the business development and
technology partner by the Argentinian Central Securities Depository (CSD),
Caja de Valores S.A. (CVSA). CVSA acts as the technology provider to the newly
formed Bolsa & Mercados Argentinos exchange (B&MA). MillenniumIT, will
supply capital markets technology across asset classes, including its ultra low
latency, highly scalable trading platform, Millennium Exchange. London
Stock Exchange Group will also provide a range of ancillary services alongside
the trading technology agreement to help further develop the Argentinian
capital markets.
We continue to assist the Mongolian Stock Exchange’s (MSE) project to
modernise the country’s capital markets infrastructure. We are currently
working with the Ghanaian Central Securities Depository (CSD (Gh)) and
Ghana Stock Exchange to help develop their ?ve year strategic plans and help
contribute to the economic growth in Ghana and its sub region.
Interest from markets worldwide is strong, including from frontier and
emerging markets looking to develop and promote their capital markets.
36 Strategic report London Stock Exchange Group plc Annual Report 2014
Our wider responsibility
The Group plays a vital economic and social role in enabling
companies to access funds for growth and development.
As such, integrity and trust in our markets, and across the
Group, are at the core of what we do.
Below, we summarise our approach to corporate responsibility and outline
some of our key achievements during the year. We have also produced a
detailed corporate responsibility (CR) report, which can be downloaded at
www.lseg.com/corporate-responsibility/corporate-responsibility.htm.
Managing the business in an effective and sustainable manner
Integrity and trust are at the core of what we do. For more than 200 years,
we have operated under the banner of ‘My word is my bond’. This overriding
principle is still relevant today as a provider of open, trusted, reliable,
independent and user-neutral services. Exchanges underpin global economic
growth and ful?l an important social purpose by supporting funding and
development of SMEs, encouraging market transparency, benchmarking
investments and by advocating sustainable best practice in corporate
behaviour. Environmental, social and governance (ESG) factors are core
to ef?cient, transparent, resilient and well governed capital markets.
Environment
Over the last three years, we have achieved considerable improvements
in our approach to environmental sustainability. The Group’s primary GHG
emissions arise from energy, waste and water in our of?ces and data centres
around the world, from staff travel, and indirectly from our supply chain
(please see the Environment section of our CR report for details on emissions
and targets).
We are taking an active approach to emissions management, with our global
Environmental Management Group measuring GHG impacts across our
51 location property portfolio, including managed of?ces where possible.
We report performance quarterly via our Intranet, and annually disclose
to the Carbon Disclosure Project, DJSI, FTSE4Good and on our website.
Global FY14 GHG Emissions (1 April 2013 to 31 March 2014)
(tCO
2
e)
Total Scope 1 & 2 Emissions (as per below) 22,843
per m
2 1
0.26
per FTE 7.20
per £m Revenue 20.99
Combustion of fuel and operation of facilities
2
1,392
Purchase of electricity, heat, steam and cooling
by the Group for its own use
3
21,451
1 Total building ?oor space, including data centres.
2 Scope 1 including Natural Gas, Diesel, LPG and Fleet Vehicles.
3 Scope 2 (the Group does not purchase heat, steam or cooling).
Note: FY2014 GHG emissions will form the new baseline for GHG emissions due to signi?cant
changes in the LSEG, incorporating FTSE and LCH.Clearnet.
Our emissions are calculated using GHG Protocol and UK Government
Environmental Reporting Guidelines, including mandatory greenhouse
gas emissions reporting guidance. We use DEFRA UK Government
GHG Conversion Factors, US Environmental Protection Agency eGrid,
and International Energy Agency factors.
The emissions stated above are all of the emissions sources required under
the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations
2013. These sources fall within our consolidated ?nancial statement. We do
not have responsibility for any emissions sources that are not included in our
consolidated statement.
Social
People
Our people are at the heart of what we do and drive the success of our
business. Attracting, developing and retaining the skills we need to deliver on
our strategy of being the most trusted market expert is a key imperative for
the Group. We are dedicated to unifying our growing company and supporting
our employees’ talent in an environment built on partnership, integrity,
innovation and excellence.
This year, we invested signi?cantly in implementing our Group Behavioural
Framework, which underpins our values, Code of Conduct and Group CR policy
by driving behaviours that are key to our long term success. Further information
on our approach to developing and retaining our people is detailed in the
CR report.
Diversity/Equal Opportunities
We value diversity as a driver for development and innovation. Our operations
span four continents, with of?ces in Canada, France, Hong Kong, India,
Italy, Japan, Sri Lanka, the UK and the US. We have employees of 51 different
nationalities, re?ecting both the growing international scale of our business
and the diversity of our customer base. Six nationalities are represented on
our Executive Committee.
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Gender Diversity
Female Male
LSEG plc Board
1
2 12
LSEG Subsidiary Boards
1,3
10 126
Executive Commitee and Leadership Teams
2,3
19 94
All staff 898 1,869
Total 917 1,963
1 Mix of staff and Non-Executive Directors.
2 Executive Committee and leadership teams in LSEG and LCH.Clearnet.
3 The LSEG Subsidiary Board members and the Executive Committee and Leadership
Teams together comprise the “Senior Managers” for the purposes of 414C(10)(b)
Companies Act 2006.
Human Rights
London Stock Exchange Group prides itself on its high standards of social
responsibility. To that effect, the Group respects and seeks to adhere to the
principles covered by the Universal Declaration of Human Rights together
with the International Labour Organisation Conventions and the Voluntary
Principles on Security and Human Rights within its working environment
in each location where it operates. The Group strongly supports these
conventions which aim to abolish forced labour and child labour and promote
freedom of association and equality. Human rights considerations are
included in our Group-wide Code of Conduct.
Community
Our global presence continues to expand, both in terms of the companies
that join our markets and the countries in which we operate. As part of this
progression, we are dedicated to engaging with the growing number of
communities that we become a part of. Whether through our charitable
programmes, reducing our environmental footprint, or encouraging an open
dialogue with our stakeholders, we are committed to serving our communities.
The Group established the London Stock Exchange Group Foundation in
2010 which provides a single channel for the Group’s charitable giving and
for promoting and facilitating staff engagement with the community.
The Community section of the Group CR report outlines some of the work
that the Foundation supports.
This year, the Group donated £1,661,000 to charity (2013: £1,193,000),
an increase of 39 per cent on last year (excluding charitable donations
made through LCH.Clearnet, the increase in donations was 17 per cent).
This year’s total donations are equivalent to £577 per employee, in line
with £593 last year. Our donation per employee is 16 per cent higher than
the level calculated in research by the London Benchmarking Group,
which showed that the average amount donated per employee by leading
UK corporate donors in 2013 was £499.
Governance
We are committed to the highest standards of corporate governance.
Given our central role in a constantly evolving global economic landscape,
it is important to us that we foster con?dence in our markets and in the
services we provide. Our Group-wide Code of Conduct sets out the ethical
and behavioural framework governing the Group’s activities and the
behaviours we expect from our directors and staff. Complying with the
framework ensures that we maintain our reputation and that our employees
apply the highest standards when dealing with our stakeholders. The Group
also complies with the UK Corporate Governance Code (see page 57 for
further details).
Given the size and scope of our businesses, we face a wide and expanding
universe of risks. In particular, our presence in post trade services increases our
direct and indirect exposure to the volatility of ?nancial markets. We also face
technology risks such as cyber threats, systems resilience, and technological
innovation; and political, regulatory and macro-economic risks, which include
the impact of the actions of our competitors. To pursue our growth strategy
in this dynamic environment requires best in class risk management.
Our governance and risk management structures have evolved to meet
this need (see pages 61 and 62 for further details).
Looking ahead
As our business expands and diversi?es, we continue to review our approach to
corporate responsibility. In the coming year, we plan to promote sustainable,
responsible and effective business management through each of our core
business activities. In addition to quantitative environmental, social and
governance targets, we are dedicated to achieving the following aims:
Our Markets — Continue to support the development of SMEs
on our markets, including cleantech companies.
— Encourage further good governance practices
on our markets.
Our Services — Further develop our offering of tools to help
investors incorporate ESG considerations within
their investment process and across all assets.
— Further integrate our services to increase
ef?ciencies for market participants.
Our People — Focus on innovation through collaboration
by leveraging our Group’s talent and business
diversity and promoting staff engagement.
— Further embed our values and ethical behaviours
within our business globally.
Our
Communities
— Increase the impact of our charitable
giving approach.
— Focus on our short- and long-term
environmental targets.
Adjusted total income
2
£ million
?increased ?decreased
1,500
1,300
1,100
900
700
500
2013
852.9
FX
13.3
2013 Organic
and constant
currency
866.2
NTI
74.3
Organic
76.5
Acquisitions
344.7
2014
1,213.1
38 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial review
Highlights
— Adjusted total income up 42 per cent at £1,213.1 million (2013: £852.9
million) and total revenue rose 50 per cent to £1,088.3 million (2013:
£726.4 million), including eleven months’ contribution from LCH.Clearnet.
On an organic constant currency basis adjusted total income was ?at
with increases in revenue from the core business segments offset by
a reduction in net treasury income.
— Operating expenses increased 65 per cent to £698.4 million (2013:
£422.7 million) including £245.2 million of costs relating to businesses
acquired of which LCH.Clearnet was £240.6 million. On an organic
constant currency basis costs were up six per cent (including in?ation
and growth in cost of sales) re?ecting continued good cost control.
— Adjusted operating pro?t up 20 per cent at £514.7 million (2013:
£430.2 million).
— Operating pro?t rose one per cent to £353.1 million (2013: £348.4 million).
— Adjusted basic earnings per share increased by two per cent to 107.1
pence. This included the bene?t of one-time items of 2.4 pence relating
to the release of provisions for Lehmans debtors and the exit from a
leasehold property and 2.2 pence from the sale of a non-core asset
(2013: 105.3 pence which included the bene?t of 5.4 pence from a
one-time prior years’ tax adjustment).
— Basic earnings per share fell 22 per cent to 63.0 pence (2013: 80.4
pence) as a result of increased amortisation, transaction costs and
interest payments following the acquisition of a majority stake in
LCH.Clearnet Group and higher tax charges mainly due to a ?nancial
industry surcharge in Italy.
— Cash generated from operations increased six per cent to £515.4 million
(2013: £487.5 million).
— Year end operating net debt to adjusted EBITDA at 1.9 times (2013:
1.2 times), within the Group’s normal target range of one to two times
following the debt ?nancing of the acquisition of a majority stake in
LCH.Clearnet and its subsequent capital raise.
David Warren
Group Chief Financial Of?cer
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
3
%
Capital Markets 309.5 267.5 16 12
Post Trade Services – CC&G and
Monte Titoli 98.4 91.8 7 4
Post Trade Services – LCH.Clearnet
1
263.0 – – –
Information Services 348.7 306.3 14 10
Technology Services 64.0 56.1 14 12
Other 4.7 4.7 0 (2)
Total revenue 1,088.3 726.4 50 10
Net treasury income
– CC&G 47.6 116.7 (59) (61)
– LCH.Clearnet 62.2 – – –
Other income 11.5 9.8 17 19
Total income 1,209.6 852.9 42 0
Adjusted total income
excluding unrealised losses
2
1,213.1 852.9 42 0
Operating expenses
2
(698.4) (422.7) 65 6
Adjusted operating pro?t
2
514.7 430.2 20 (6)
Operating pro?t 353.1 348.4 1 (12)
Adjusted basic earnings
per share
2
107.1p 105.3p 2
Basic earnings per share 63.0p 80.4p (22)
1 LCH.Clearnet results represent 11 months ended 31 March 2014.
2 Before amortisation of purchased intangibles, non-recurring items and unrealised net
investment gains/losses at LCH.Clearnet.
3 Organic growth is calculated in respect of businesses owned for at least 12 months in
either period and so excludes EuroTLX, FTSE TMX Global Debt Capital Markets, GATElab
and LCH.Clearnet. The Group’s principal foreign exchange exposure arises from translating
our European based euro reporting businesses into sterling.
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Capital Markets
Year ended 31 March
Revenue
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2013
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Variance
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Variance at
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Primary Markets
Annual Fees 41.2 38.5 7 6
Admission Fees 39.9 32.3 24 21
Total Primary Markets 81.1 70.8 15 13
Secondary Markets
Cash equities: UK & Turquoise 94.5 86.0 10 10
Cash equities: Italy 36.1 32.7 10 7
Derivatives 19.6 19.1 3 0
Fixed income 68.1 51.8 31 17
Total Secondary Markets 218.3 189.6 15 10
Other 10.1 7.1 42 38
Total revenue 309.5 267.5 16 12
Operating expenses (164.8) (148.6) 11
Operating pro?t 144.7 118.9 22
Capital Markets revenue, which comprises primary and secondary market
activities, increased 16 per cent to £309.5 million (2013: £267.5 million).
Primary markets revenue was up 15 per cent to £81.1 million (2013: £70.8
million) following the highest IPO activity seen in the last six years, and
secondary market revenues increased by 15 per cent on higher equity
and ?xed income trading volumes and the inclusion of revenue from
EuroTLX in which a majority stake was acquired in September 2013.
In primary markets, the total amount of capital raised across our equity
markets, both through new and further issues, increased by 90 per cent to
£34.2 billion (2013: £18.0 billion). This re?ected a strong recovery, particularly
in the second half of the year, in equity issuance for both domestic and
international companies across our markets. In total, 57 issuers (2013: 40)
joined our main markets in London, 20 companies (2013: seven) came to
market in Italy and 111 companies (2013: 74) were admitted to trading on
AIM. Looking ahead, the pipeline of companies looking to join our markets
remains encouraging.
In secondary markets, both the UK and Italian equity trading activity increased
on last year with average order book daily value traded in the UK up eight per
cent to £4.3 billion (2013: £4.0 billion) and order book volume in Italy up ?ve
per cent to 235,000 trades per day (2013: 223,000). Trading on Turquoise,
our pan-European equities platform, delivered a 67 per cent rise in average daily
equity value traded to €2.8 billion (2013: €1.7 billion). Global derivatives volumes
decreased in the last year, with 23 per cent and four per cent declines in the UK
and Italy respectively, largely as a result of lower market volatility.
Fixed Income produced a good performance despite MOT volumes down nine
per cent, while MTS grew strongly with MTS Repo volumes up two per cent
and MTS Cash and BondVision value traded up 48 per cent. In September,
the Group acquired a majority stake in EuroTLX, an Italian MTF operating in
the European ?xed income market, and six months of revenue (£6.6 million)
is included in Fixed Income (£5.8 million) and Admission Fees (£0.8 million).
Other capital markets revenues of £10.1 million (2013: £7.1 million) primarily
comprise fees for membership of and connectivity to our markets.
Operating expenses (including cost of sales and Euro TLX costs) were up 11 per
cent to £164.8 million (2013: £148.6 million) in line with increasing revenue and
operating pro?t was up 22 per cent to £144.7 million (2013: £118.9 million).
Post Trade Services – CC&G and Monte Titoli
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
%
Clearing (CC&G) 40.0 36.1 11 7
Settlement (Monte Titoli) 16.4 15.5 6 2
Custody & other 42.0 40.2 4 1
Total revenue 98.4 91.8 7 4
Net treasury income 47.6 116.7 (59) (61)
Inter-segmental income 0.9 –
Total income 146.9 208.5 (30) (33)
Operating expenses (63.4) (64.2) (1)
Operating pro?t 83.5 144.3 (42)
Post Trade Services – CC&G and Monte Titoli, saw an expected sharp decline
in net treasury income following completion of the migration to a minimum
95 per cent secured investment portfolio, partially offset by a modest
increase in revenue resulting in total income decreasing to £146.9 million
(2013: £208.5 million).
Clearing revenues grew by 11 per cent to £40.0 million, following the recovery
in trading volumes in equities and ?xed income. Similarly settlement
revenues increased by six per cent with Monte Titoli processing 58.3 million
settlement instructions, up ?ve per cent on the previous year.
In the Monte Titoli CSD business the average value of assets under custody
grew by three per cent, leading to an increase in year on year revenues from
Custody on a constant currency basis. The main increase in assets under
custody came in Government Bonds and Equity, the latter mainly due to
increases in market capitalisation.
100
80
60
40
20
0
Secured investments
(excludes cash deposited with LCH.Clearnet SA through CC&G’s
interoperability arrangement)
%
?secured cash investments ?unsecured cash deposits
Sep
2012
100
24
Oct
76
50
Nov
50
53
Dec
47
53
Jan
2013
47
57
Feb
43
61
Mar
39
70
Apr
30
74
May
26
73
Jun
27
83
Jul
17
83
Aug
17
97
Sep
3
100
Oct
0
99
Nov
1
99
Dec
1
100
Jan
2014
0
100
Feb
1
99
Mar
1
40 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial review
continued
CC&G generates net treasury income by investing the cash margin it holds,
retaining any surplus after members are paid a return on their cash collateral
contributions. The average daily initial margin rose 18 per cent to €11.9 billion
for the period (2013: €10.1 billion). CC&G completed the move to a minimum
95 per cent secured investment level for cash margin, required to meet EMIR
regulatory standards, with a subsequent reduction in yields. Net treasury
income, as a result of this change, decreased by £69.1 million to £47.6 million
(2013: £116.7 million).
Operating expenses were down one per cent to £63.4 million and combined
with the decline in net treasury income resulted in a 42 per cent decrease in
operating pro?t to £83.5 million (2013: £144.3 million).
Post Trade Services – LCH.Clearnet
Year ended 31 March (eleven months)
Revenue
2014
£m
OTC 109.6
Non-OTC 146.3
Other 7.1
Total revenue 263.0
Net treasury income 62.2
Other income (3.5)
Total income 321.7
Operating Expenses (240.6)
Operating Pro?t 81.1
The Post Trade Services – LCH.Clearnet segment comprises the Group’s
majority owned global clearing business which was acquired on 1 May
2013. In the 11 month period as part of the Group, the division contributed
revenue of £263.0 million and net treasury income of £62.2 million, offset by
operating expenses of £240.6 million and resulted in an operating pro?t of
£81.1 million.
OTC revenue of £109.6 million includes revenue from SwapClear, the world’s
leading interest rate swap clearing service, CDS Clear, which clears European
credit indices and ForexClear, clearing interbank foreign exchange non-
deliverable forwards in multiple currencies. SwapClear membership increased
to 103 members in 2014 (2013: 78 members) while CDSClear had 11 members
and ForexClear 20 members, an increase in the year of three members and
?ve members respectively.
In April 2014, the SwapClear, ForexClear and CDSClear services’ arrangements
were amended (with effect from 1 January 2014) to ensure they met EMIR
and other regulatory requirements for clearing houses, as well as recognising
the changing economics and increased regulatory capital for running OTC
derivatives clearing services. The surplus share arrangements in the SwapClear
and ForexClear services have been replaced with revenue share arrangements.
The impact for the period to 31 March 2014, including changes to CDSClear,
has been to increase OTC revenues by £14.0 million with a corresponding
increase in operating expenses of £10.2 million; this re?ects the move to a
revenue share and LCH.Clearnet is now recognising in full the assets and their
associated amortisation relating to these businesses. In 2014, it is expected
that LCH.Clearnet’s overall share from the three OTC services in aggregate
will be over 50 per cent, while SwapClear will be over 60 per cent. The new
arrangements will become increasingly bene?cial as the cost base is controlled
and the OTC businesses continue to grow, through fee increases for new
services and products, geographic expansion and an increased number of
customers using the services.
Non-OTC revenue contributed £146.3 million in 11 months including
£82.1 million from clearing services for interest rate and equity derivatives
as well as a range of commodities markets, £32.4 million from cash equities
which provides clearing services for a wide coverage of European regulated
exchanges and multilateral trading facilities and £31.8 million from clearing
cash bond and repo trades across a number of European markets.
Net treasury income is earned by investing the cash margin held, retaining any
surplus after members are paid a return on their cash collateral contributions.
This income for the 11 month period was £62.2 million with LCH.Clearnet
investments remaining at over 95 per cent secured throughout the period.
The Group has identi?ed signi?cant additional cost savings as part of the
integration process that commenced following completion of the acquisition.
We have increased the cost synergies from the original €23 million (£19 million)
target, to €60 million (£49 million) to be achieved in 2015 (from an expected
annualised 2013 cost base of €306 million (£251 million), just prior to last
year’s acquisition). One-time costs to achieve the savings are expected to
be €43 million (£35 million), with €31 million (£26 million) of this included
in non-recurring items in the Group’s March 2014 results.
These savings are being achieved through a number of measures, including
restructuring of operations, procurement ef?ciencies, combination of group
functions and other headcount reductions. These savings will more than
offset expected cost increases over the same period, principally from higher
depreciation charges from investment in systems and processes necessary
to meet EMIR requirements and other operational needs.
Information Services
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
%
FTSE revenues 174.0 134.1 30 22
Real time data 90.8 96.9 (6) (7)
Other information services 83.9 75.3 11 11
Total revenue 348.7 306.3 14 10
Operating Expenses (179.0) (159.2) 12
Operating Pro?t 169.7 147.1 15
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currency
426.9
In?ation
4.2
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22.1
Acquisitions
245.2
2014
698.4
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Information Services provides fast, reliable market information including
global indices products, trade processing operations, desktop and work?ow
products. In the last year Information Services revenue rose 14 per cent to
£348.7 million (2013: £306.3 million) re?ecting a strong performance from
FTSE as well as growth in other products.
FTSE’s revenue increased 30 per cent to £174.0 million (2013: £134.1 million)
driven by an increase in subscription revenues from net new business and
the completion of Vanguard’s benchmark switch to FTSE. Growth was boosted
from the inclusion of the new FTSE TMX ?xed income indices joint venture in
April 2013. We remain on track to achieve the three year aggregate target of
£28 million set for FTSE global revenue and cost synergies, with the SEDOL
business bene?ting in particular through the FTSE sales network.
Real time data revenue declined six per cent year on year as a result of
fewer users in both the UK and Italy, down six per cent and eight per cent
respectively. These falls were largely the result of headcount reductions and
general cost cutting in the sector. Other Information Services performed well,
in particular UnaVista which increased its user base to over 30,000 in the last
year (2013: 9,000). UnaVista also launched its EMIR trade repository solution
to assist clients manage their evolving regulatory and reporting needs.
Operating expenses of £179.0 million (2013: £159.2 million) are up 12 per cent
on 2013 levels re?ecting increased cost of sales, up 25 per cent, and staff
costs following strong growth in the FTSE business. Operating pro?t rose
15 per cent to £169.7 million (2013: £147.1 million).
Technology Services
Year ended 31 March
Revenue
2014
£m
2013
£m
Variance
%
Variance at
organic and
constant
currency
%
MillenniumIT 31.5 26.9 17 21
Technology 32.5 29.2 11 3
Total revenue 64.0 56.1 14 12
Intersegmental revenue 10.9 21.3 (49) (45)
Total income 74.9 77.4 (3) (2)
Operating expenses (63.1) (57.2) 10
Operating pro?t 11.8 20.2 (42)
Technology Services comprises technology connections and data centre
services, along with the MillenniumIT business, based in Sri Lanka, which
provides technology and enterprise services for the Group and third parties.
Revenues for Technology Services increased by 14 per cent to £64.0 million
(2013: £56.1 million).
MillenniumIT third party revenue rose 17 per cent to £31.5 million (2013: £26.9
million) mostly relating to growth in the Enterprise Service Provision (ESP)
operation. The business continued to perform well, launching new technology
and building new relationships with Singapore Stock Exchange and Canada’s
TMX among others.
Revenue from other technology services grew by 11 per cent to £32.5 million
(2013: £29.2 million) including a full year’s contribution from the GATELab
business (acquired in December 2012), which supplies advanced trading and
post trade technology globally.
Operating expenses were up 10 per cent to £63.1 million (2013: £57.2 million),
primarily due to an increase in cost of sales relating to growth in ESP revenues,
and operating pro?t was down 42 per cent to £11.8 million (2013: £20.2 million).
Operating expenses before amortisation of purchased intangibles and
non-recurring items rose 65 per cent to £698.4 million (2013: £422.7 million),
mainly re?ecting the inclusion of £240.6 million of costs relating to 11
months of LCH.Clearnet and costs of £4.6 million from other acquired
businesses (FTSE TMX, EuroTLX and GATELab) for a full year.
Organic costs on a constant currency basis remained well controlled, up six per
cent (including in?ation), mainly attributable to investments in staff, higher
project-related professional fees and an increase in cost of sales. Offsetting
these cost increases were one-time items of £8.4 million for the release of
provisions relating to Lehmans debtors and the exit from a leasehold property.
We remain committed to maintaining high levels of cost control, including
realising synergies as part of the LCH.Clearnet acquisition, where we have
increased annualised target cost savings from €23 million (£19 million) to
€60 million (£49 million) by the end of 2015.
Finance income and expense and taxation
Net ?nance costs were £68.8 million, up £19.3 million on the prior year,
principally re?ecting the full year cost of the £300 million retail bond (issued
in November 2012), the drawing of credit facilities to fund the acquisition of
the majority stake in LCH.Clearnet in May 2013 (and its subsequent capital
raise), 11 months’ interest cost on the LCH.Clearnet Preferred Securities and
also arrangement fees totalling £3 million for new bank facilities, signed in
July 2013.
Debt maturity pro?le
£ million
?drawn ?undrawn
600
500
400
300
200
100
0
2016
500
2017
149
2018
450
2019
250
2020 2021
300
42 Strategic report London Stock Exchange Group plc Annual Report 2014
Financial review
continued
The Group’s effective tax rate on pro?t before amortisation of purchased
intangibles and non-recurring items was 28.2 per cent, which is slightly lower
than last year (2013: 29.0 per cent). This re?ects the ongoing reduction in the
UK statutory corporation tax rate of 23.0 per cent (2013: 24.0 per cent) and a
slight change in the taxable pro?t mix towards the UK following the majority
acquisition of LCH.Clearnet. This downward move is offset by a temporary
increase in the Italian corporate tax rate for certain of the Group’s Italian
entities and the expansion of the Group into new markets (France and
Canada) following the majority acquisitions of LCH.Clearnet and FTSE TMX
Global Debt Capital Markets. Both of these jurisdictions have higher statutory
rates of corporate tax than the UK.
Cash flow and balance sheet
The Group’s business continued to be strongly cash generative during the
year, with cash generated from operations up six per cent to £515.4 million.
Total investment in the year, net of dividends received, was £28.0 million
principally due to the Group investing £376.5 million in the majority acquisitions
of LCH.Clearnet, EuroTLX and FTSE TMX along with £90.9 million on capital
expenditure offset by acquired cash from acquisitions of £432.0 million.
The Group purchased shares for £28 million to cover long term incentive
plan commitments; however, in future years it is expected that we will issue
shares in combination with cash purchases to meet these requirements.
At 31 March 2014, the Group had net assets of £1,956.9 million (2013: £1,599.0
million). Intangible assets increased by £426.7 million, mainly re?ecting
goodwill and purchased intangibles recognised from the purchase of LCH.
Clearnet. The central counterparty clearing business assets and liabilities
within LCH.Clearnet and CC&G largely offset each other but are shown gross
on the balance sheet as the amounts receivable and payable are with
different counterparties.
Net debt, facilities and credit rating
2014
£m
2013
£m
Gross borrowings 1,223.7 796.8
Cash and cash equivalents (919.2) (446.2)
Net derivative ?nancial liabilities/(assets) 0.7 (0.7)
Net debt 305.2 349.9
Regulatory and operational cash 803.6 200.0
Operating net debt 1,108.8 549.9
At 31 March 2014, the Group had operating net debt of £1,108.8 million
after adjusting for £803.6 million of cash and cash equivalents held to
support regulatory and operational requirements, including cash and cash
equivalents held by LCH.Clearnet together with a further £200 million
covering requirements at other LSEG companies.
The Group’s gross borrowings increased by £426.9 million re?ecting the
?nancing of the acquisition of the majority stake in LCH.Clearnet including
our participation in its subsequent capital raise to fund increased regulatory
capital needs, the consolidation of the LCH.Clearnet Group Preferred
Securities, the investment in the FTSE TMX Debt Capital Markets joint
venture and the acquisition of a 70 per cent interest in EuroTLX.
In July 2013, the Group took advantage of favourable market conditions
and signed a new £700 million unsecured, committed revolving bank facility
package, on improved terms, to replace its existing credit lines. The new
facility comprises a mix of three and ?ve year commitments which extend
the Group’s debt maturity pro?le and underpin its ?nancial ?exibility. At 31
March 2014, the Group had drawn debt and committed credit lines totalling
£1.65 billion, with maturities extending to July 2016 or beyond. With £422
million of undrawn bank lines available, together with continuing strong cash
generation, the Group remains well positioned to fund future growth.
The Group’s interest cover (the coverage of net ?nance expense by earnings
before interest, taxation, depreciation and amortisation, both before
non-recurring items) reduced to 8.6 times (2013: 9.5 times) due to the
increase in net ?nance costs during the year being only partially covered
by the growth in EBITDA. However, the Group’s cash generation remained
strong, which resulted in an improvement in leverage in the second half of
the year following the material increase in borrowings in the ?rst half. As at
31 March 2014, operating net debt to adjusted EBITDA of 1.9 times (2013: 1.2
times) is back within the Group’s target range for leverage of one to two times.
The Group’s long term credit ratings remained unchanged during the year.
Standard & Poor’s concluded its watch reviews over both LSEG and LCH.Clearnet
on 3 May 2013, following the majority acquisition of LCH.Clearnet, by af?rming
its A- rating for LSEG, and moving the A+ rating of LCH.Clearnet back to a stable
outlook. However, following the introduction of new global criteria published
later in 2013 (that examines the risks to LSEG around its businesses in Italy –
given that the sovereign state is rated lower than LSEG, at BBB) and re?ecting
its caution, in the short term, around the achievement of key ?nancial metric
targets set for the Group Standard & Poor’s has placed LSEG on credit watch
with negative implications. This credit watch also applies to the A+ rating of
LCH.Clearnet with the watch review period to the end of May 2014.
Moody’s af?rmed its rating of Baa2 during the year and assigned a stable
outlook following completion of the LCH.Clearnet Group acquisition.
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Foreign exchange
2014 2013
Spot £/€ rate at 31 March 1.21 1.18
Average £/€ rate for the year 1.19 1.23
The Group’s principal foreign exchange exposure arises as a result of translating
the Group’s euro earnings, assets and liabilities from our European based euro
reporting businesses into sterling. A €5c movement in the average £/€ rate
for the year would have changed the Group’s operating pro?t for the year
before amortisation of purchased intangibles and non-recurring items by
approximately £12 million.
The acquisition of a majority stake in LCH.Clearnet has increased the
exposure the Group has to the euro. In addition, the growth of LCH.Clearnet
and the FTSE businesses during the year has also increased, but to a lesser
extent, our foreign exchange exposure to the US dollar. The Group manages
its translation risk exposure by matching the currency of its debt (including
debt effectively swapped from sterling into currency) to the currency of its
earnings, where possible, to ensure its key ?nancial metrics are protected
from material foreign exchange rate volatility.
Earnings per share
The Group recorded an adjusted basic earnings per share, which excludes
amortisation of purchased intangible assets, non-recurring items and
unrealisable gains/losses on investments, of 107.1 pence, up two per cent
including an increase of one-time items of 2.4 pence from the £8.4 million
release of provisions relating to Lehmans debtors and the exit from a leasehold
property and 2.2 pence from £6.9 million sale of a non-core asset (2013: 105.3
pence including 5.4 pence relating to the one-time prior years’ tax adjustment).
Basic earnings per share decreased by 21 per cent to 63.0 pence (2013: 80.4
pence) as a result of increased amortisation, transaction costs and interest
payments following the acquisition of a majority stake in LCH.Clearnet and
higher tax charges mainly due to a ?nancial industry surcharge in Italy.
LSEG Board
Risk
Committee
Audit
Committee
Executive
Financial Operational New Products
Treasury
Business
Continuity Board
L.O.B. & Risk Champions Group Functions Risk Internal Audit
FIRST LINE SECOND LINE THIRD LINE
44 Strategic report London Stock Exchange Group plc Annual Report 2014
Risk management oversight
Group Committees
Functions
Line of Business (L.O.B.)
LSEG Governance structure
The components of the ERMF are as follows:
— The Board is responsible for determining the Group Risk Appetite
(see Risk Management and Internal Control Section page 62).
This de?nes the nature and extent of the risks LSEG is willing to take
to achieve its strategic objectives while reinforcing the risk culture.
— The Board Risk and Audit Committees have been separated to
strengthen the oversight provided over Group risk management
following the acquisition of LCH.Clearnet.
— The ERMF de?nes roles and responsibilities for risk management
oversight and activities, including for the Board, the Executive
Committee (ExCo) and sub-Committees thereof.
— There are three Executive Risk sub-Committees covering ?nancial,
operational and new product (and market) risk to provide the appropriate
level of risk oversight across the organisation.
— The Financial and Operational Risk Committees monitor and report
on the ?nancial and operational risk pro?le of the Group, review and
challenge the application of the Group risk framework, recommend risk
appetite statements to the Executive Committee and monitor compliance
with the relevant risk policies.
— The New Product (and Market) Committee reviews and recommends
business cases to the Executive Committee ensuring product innovation
and new market risks are appropriately identi?ed and assessed.
— LSEG’s risk control structure is based on the ‘three lines of defence’ model:
The First line, management, is responsible and accountable for
identifying, assessing and managing risk.
We are subject to a variety of risks, the management of which
is fundamental to the successful execution of our Strategic Plan.
As our Group has grown we have continually enhanced our risk
management capabilities to ensure that we maintain our
trajectory while protecting the value of our business.
The LSEG Enterprise-wide Risk Management Framework
During FY2014 the Group has further embedded its Enterprise-wide Risk
Management Framework (ERMF). This Framework is designed to allow
management and the Board, as part of our business model, to identify
and assess LSEG principal risks and ensure better decision taking by
informing the Board and other key stakeholders of the key risks related
to the execution of our strategy.
The ERMF also enables the Board and executive management to maintain,
and attest to the effectiveness of, the systems of internal control and risk
management as set out in the UK Corporate Governance Code.
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Strategic report Risk management oversight
Risk Identification
The Group is subject to a variety of risks and uncertainties which may impact
its ability to execute its strategy and deliver its expected performance.
Group-wide risks are classi?ed into the following three categories:
— Strategic Risks: Risks related to our strategy (quality of the strategy,
the implementation of strategic initiatives and external threats to the
achievement of our strategy). This category also includes the risks
associated with reputation or brand values.
— Financial Risks: The risks of ?nancial failure, reputational loss, loss of
earnings and/or value as a result of investment activity, lack of liquidity,
funding or capital, and/or the inappropriate recording, reporting and
disclosure of ?nancial results, taxation and regulatory information.
— Operational Risks: The risk of loss, regulatory censure, or other adverse
consequences to the business, resulting from inadequate/non-compliant
or failed internal processes, people and systems, or from external events.
The Group promotes a risk culture that identi?es and manages risk at all
levels of the business. We set out clear roles and responsibilities for our
people within our risk policies to ensure risks are consistently identi?ed and
captured across the Group.
Risks are identi?ed at source and recorded in each business unit and division
by “Risk Champions”. These are employees in the business responsible for
facilitating the application of the Group risk management framework. Risk
identi?cation is regularly reviewed and challenged by the risk function to
ensure completeness. For high velocity, high impact risks, Key Risk Indicators
(KRIs) are established to enable the business to monitor the risk on an
ongoing basis.
The Second line (Risk Management and Compliance functions),
is responsible for de?ning the risk management process and policy
framework, and providing challenge to the ?rst line on risk management
activities, assessing risks and reporting to the Group Board Committees
on risk exposure.
The Third line of defence (Internal Audit) provides independent
assurance to the Board and other key stakeholders over the effectiveness
of the systems of controls and the Risk Framework.
— Group-wide risk policies have been enhanced across the whole business.
These policies contain the level of risk we are willing to take against our risk
appetite statements. They also set out the principles, minimum standards
and risk management activities LSEG requires the Group’s businesses
and functions to follow to manage their business within risk appetite.
The Group CCPs are independently managed and have risk policies
aligned to the high level requirements set in the Group-wide polices.
Strategic Risk Objectives
The Strategic Risk Objectives of the Group have been de?ned as follows:
— Maintaining stable earnings growth: ensuring the strategic growth
of the business is delivered in a controlled manner with long term value
enhancement and low volatility to the underlying pro?tability of the Group.
— Maintaining capital requirements: ensuring the Group has suf?cient
capital resources to meet regulatory requirements, to cover unexpected
losses and to meet the Group’s strategic ambitions.
— Maintaining liquidity: the Group retains or has adequate access
to funding to meet its obligations taking into account the availability
of funds.
— Adhering to regulatory requirements: the Group conducts activities at
all times in full compliance with its regulatory obligations.
— Maintaining operational stability, facilitating orderly market
operations: the Group’s operations are delivered in a secure and ef?cient
manner without disruption.
— Maintaining stakeholder con?dence: to ensure that stakeholders have
con?dence in the ability of the Group to deliver its strategic objectives with
robust and effective governance and operational controls.
— Maintaining a risk aware culture throughout the Group: ensuring the
risk management framework is embedded within Divisions and Functions
engendering a risk aware culture.
Risk Appetite
LSEG de?nes Risk Appetite as the level of risk that the Group is prepared
to sustain in pursuit of its Strategic Objectives. The Group Risk Appetite
Statement is proposed by the Executive Committee, is approved by the
Board on at least an annual basis and is determined in conjunction with
the Group’s overall business strategy.
The risk appetite can be modi?ed by the Board at any time (details on page 62).
Risk Culture
Capital Liquidity Regulation Operational Stability
Earnings & Stakeholder Con?dence
STRATEGIC RISK
FINANCIAL RISK OPERATIONAL RISK
46 Strategic report London Stock Exchange Group plc Annual Report 2014
Risk management oversight
continued
LSEG Risk Pillars
Risk Assessment
The risk identi?cation and assessment process allows for the monitoring of risk
trends and management actions at all levels and also facilitates the decision
making process. Management is required to escalate and take mitigating
actions in respect of incidents, control failures and policy breaches as and
when they are identi?ed. In addition, the Group regularly performs bottom-up
and top-down risk assessments, with risks identi?ed at legal entity, divisional
and Group levels. Divisional and entity level risk reports are reviewed by the
Operational Risk Committee; Group risk reports are reviewed by the Executive
Committee each quarter and are also reviewed by the Risk Committee (RC) at
least three times a year and by the Board at least twice a year.
Financial risks are monitored and managed on a frequent basis (daily for
key risks) at the Business Unit level and across the Group in aggregate.
Thresholds for capital suf?ciency, capital commitments and limits in respect
of various aspects of treasury management are set out in the Group Capital
and Treasury policies.
CCP risks are assessed according to the metrics determined both by the
CCPs and also by the Group, including Group-level risk appetite and key risk
indicators for clearing related activities.
Signi?cant new products, and proposed initiatives in new markets, are now
reviewed by the New Product/Market Committee prior to approval by the
Executive Committee.
The Reports of the Audit and of the Risk Committees, on pages 66-69,
provide details on the work carried out to assist the Board in ful?lling its
oversight responsibilities for risk management and systems of internal control.
Risk Management
Each Group-level risk is owned by a member of the Executive Committee who
is responsible for managing or mitigating the risk in order to remain within
risk appetite. The Board and the Risk Committee receive presentations on
material risks and related mitigants as appropriate.
Risk Reporting/Monitoring
The risk pro?le of the Group is reported to the Board via the Risk Committee
quarterly. Risk reporting across the Group is aligned to the Risk Committee
governance structure and is divided between ?nancial and operational risk.
Quantitative and qualitative risk limits and tolerances, identi?ed within the
overarching Group Risk appetite statement, form the basis of the key
reporting metrics used across the Group.
— Financial Risk Reporting – CCP liquidity management balances and
counterparty disintermediation risk is consolidated daily at the Group level
and reported to the Executive Committee and Board, including limits and
Risk Appetite. An enhanced weekly report including market commentary
and member health monitoring is distributed to the Executive Committee
and to certain Board members.
— Extensive ?nancial risk reports are produced for the Financial Risk
Committee on a monthly basis.
— Operational Risk Reporting – Business units produce a risk register on a
quarterly basis considering the key residual risks facing their business
area. Group risk consolidates and reports this information to the Group’s
Operational Risk Committee on a quarterly basis.
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— The Group Risk Report is produced on a quarterly basis and presents the
Group’s aggregate risk pro?le (Operational and Financial) to the Board via
the Risk Committee. This report considers the key residual risks facing the
Group, aggregated across all the Group’s subsidiaries.
— CCP ?nancial risks are monitored both at the CCP level and centrally
according to the speci?c quantitative metrics set out in the CCP Financial
Risk Policy, including Group-level risk appetite and key risk indicators for
clearing related activities. Reporting requirements for capital suf?ciency,
capital commitments and various aspects of treasury management are
set out in the Group Capital and Treasury policies.
Business Continuity Management (BCM)
The Group has a BCM framework in place which is managed and maintained
through a fully established Business Continuity Programme. The Business
Continuity Programme is overseen by the Business Continuity Board,
a sub-committee of the Operational Risk Committee. The Business
Continuity Board receives the self certi?cation results of all the Group’s
Business areas which de?ne the status of Business Continuity within each
business area. The BCM Board regularly challenges the request from all the
business areas. The Risk Committee and the Audit Committee are regularly
updated as to the status and progress of the Business Continuity Programme.
48 Strategic report London Stock Exchange Group plc Annual Report 2014
Principal risks and uncertainties
Overview of Principal Risks:
Strategic Risks Financial Risks Operational Risks
Global economy
Competition
Regulatory change and compliance
Transformation risk
Liquidity risk (Clearing)
Latent market risk (Clearing)
Settlement and custodial risks
Capital management
Technology
Change management
Security threats
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
Global economy
The improving economic environment in the UK has had a positive impact on
the Group’s business, and has increased the activity on our primary markets.
There are concerns caused by persistently low in?ation levels in the
Eurozone and mixed economic indicators. Ongoing geopolitical tensions
are introducing additional uncertainty in the markets and may impact
investors’ con?dence.
The Group performs regular analyses to monitor the markets and the
potential impacts on the business. Activities include Key Risk Indicator
tracking, stress testing, and a hedging strategy.
The Financial Risk Committee closely monitors and analyses multiple
market scenarios and action plans in order to minimise the potential
impacts stemming from a potential deterioration of the macroeconomic
environment. The Eurozone crisis and geopolitical concerns are regular
items on the agenda of the Financial Risk Committee and the Group’s
exposure to these risks is closely monitored.
In Sri Lanka the Group maintains regular contact with key Governmental
parties, and has appropriate contingency plans in place to ensure key
technology operations are not dependent on a single geography. Business
Continuity Management (BCM) and crisis management procedures would
be invoked to manage the response to an unexpected event.
For more information, see Market Position and Outlook, pages 8-13, and note 2 to the accounts: Financial Risk Management on pages 113-117.
Competition
We operate in a highly competitive industry. Continued consolidation
has fuelled competition including between groups in different
geographical areas.
In our Capital Markets operations there is a risk that competitors will
improve their products, pricing and technology in a way that erodes
our businesses. There is increasing competition for primary listings
from other global exchanges and regional centres.
In Post Trade Services the consolidation of clients has led to a
concentration of revenues. Any future loss of liquidity or reduction in
volumes on exchanges may impact clearing revenues.
In Information Services, consolidation within the industry is expected
over the next three to ?ve years. Client migration to competitors could
lead to a loss of revenue.
In Technology Services, there is intense competition across all activities
and there are strong market players in some areas where we are
establishing a presence.
Competitive markets are, by their very nature, dynamic, and the effects
of competitor activity can never be fully mitigated. Senior management
actively engages with clients and the Group undertakes constant market
monitoring and period pricing revision to mitigate risks. Commercial
initiatives are aligned with our major clients and this is complemented
by an ongoing focus on new technology deployment and cost reduction.
The Group’s track record of innovation and diversi?cation ensures
the Group offers best in class services with a global capability.
We maintain a dedicated international marketing team focused on key target
markets who promote the bene?ts of listing on our markets to international
issuers, the global advisory community and other stakeholders.
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RISK DESCRIPTION MITIGATION
Regulatory change
The Group and its exchanges, CCPs and other regulated entities operate in
industries that are highly, and increasingly, regulated by governmental,
competition and regulatory bodies at European, federal, national and
provincial levels.
Delivery of the G20 agenda in the EU has resulted in a large number of
measures which may impact our business directly or indirectly. The European
Commission has adopted proposals for the regulation of ?nancial benchmarks;
to address potential issues in the system of credit intermediation (“shadow
banking”), by issuing Regulations on Money Market funds (MMFs) and securities
?nancing transactions (“SFTs”). Towards the end of 2014, it is planning to
propose measures for resolving CCPs. Following political agreement of MiFID
and MiFIR, the rule-making work will continue through much of 2014.
In the UK, the ?nancial services industry has been operating under a new
regulatory structure since 1 April 2013 with the FSA being replaced by three
separate regulatory bodies: the Bank of England, the Prudential Regulation
Authority (PRA) and the Financial Conduct Authority (FCA). These bodies
are now well-established and are pursuing a policy of proactive regulation.
For example the FCA has recently consulted on its new remit in relation to
Competition Law.
The CCPs have focused on the analysis of the potential impact of the
new Basel III rules on capital requirements for banks’ exposure to CCPs.
This could have an impact on the clearing volumes, with implications for
the Group’s revenues.
Compliance
There is a risk that one or more of the Group’s entities may fail to comply
with the laws and regulatory requirements to which it is, or becomes,
subject. In this event, the entity in question may be subject to censures,
?nes and other regulatory or legal proceedings.
Regulatory change
Changes in the regulatory environment form a key input into our strategic
planning, including the impact on our growth strategies, both organic and
inorganic. We monitor regulatory developments continually and engage
directly with regulatory and governmental authorities at a national, EU and
international level.
We continue to develop our relationships with the key political stakeholders,
particularly at EU and national level. Potential impacts from regulatory
change are assessed and, depending on the impact, opportunities are
developed and mitigating strategies and actions are planned.
As the various regulatory initiatives progress, there will be greater certainty
about their likely ?nal form. The Group continues to focus on remaining well
positioned to respond to regulatory developments and further opportunities
exist for the Group to deliver solutions to help the market address the
changing regulatory environment.
The implications of capital requirements on clearing members have been
analysed and future actions put in place.
The CCPs have performed analytical work to test the methodologies proposed
by the Basel framework and have contributed to the consultations launched
by the BCBS.
Compliance
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.
For more information on regulatory changes see “Market Position and Outlook” on pages 10-13.
Transformation risk
The Group is exposed to transformation risks (risk of loss or failure resulting
from change/transformation) given the current levels of change and alignment
activity currently taking place across the Group. As part of the alignment
processes the Group targets speci?c cost savings and revenue increases.
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.
With regards to M&A and alignment activities, the additional projects and
workstreams could have an adverse impact on day-to-day performance
and/or key strategic initiatives and could damage the Group’s reputation.
The scale and complexity of the LCH.Clearnet business as part of the Group
has contributed to an increase in the risk pro?le associated with change
management and transformation risk.
The governance of the enlarged Group is aligned and strengthened as
appropriate. The Group performs regular reporting of change performance,
including ongoing alignment activity. LSEG has set up a programme
management framework to deliver the LCH.Clearnet transaction objectives
which includes close implementation oversight by an executive team
representative of LSEG and LCH.Clearnet; this steering group includes the
LSEG Group CFO, CRO and COO as well as the LCH Group CEO, CFO and CRO.
The LSEG Enterprise-wide Risk Management Framework covers the whole
Group, including LCH.Clearnet, and was designed to ensure appropriate risk
management across the whole of the enlarged Group.
50 Strategic report London Stock Exchange Group plc Annual Report 2014
Principal risks and uncertainties
continued
Financial Risks
The risk of ?nancial 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 ?nancial results, taxation and regulatory information.
RISK DESCRIPTION MITIGATION
Liquidity risk (clearing)
The Group’s clearing providers hold a signi?cant amount of cash and
securities deposited by clearing members as margin or default funds.
To ensure optimum ongoing liquidity and immediate access to funds,
the CCPs deposit the cash received in highly liquid and secure investments,
as mandated by the EMIR regulations.
Potential liquidity risks faced by the Group CCPs include:
— Margin payments: Margins (Initial and Variation) are settled at least
daily. The CCPs must ensure that suf?cient funds are available to ful?l
their obligations.
— Collateral switches and excess cash margin cover: Members can choose
whether to post margin in cash or securities, and may choose to
over-collateralise.
— Market disruptions: Such as unusual market volatility driving large
margin movements; liquidity squeezes in the cash or securities
markets and central bank actions.
— Failed cash settlements: Arising, for instance, from mismatches in
settlement dates for the CCPs’ own activities.
Under the ERMF, CCP investments must be made in compliance with the
Group CCP Financial Risk Policy as well as Policies issued pursuant to the
governance of the CCPs themselves. These Policies stipulate a number of
risk management standards including concentration limits and minimum
ratings. Committees overseeing CCP investment risk meet regularly.
Group CCPs have put in place EMIR compliant liquidity plans for day-to-day
liquidity management, including contingencies for stressed conditions.
Group CCPs have multiple layers of defence against liquidity shortfall
including minimum cash balances, access to contingent liquidity
arrangements and for certain CCPs, access to central bank liquidity.
CCP liquidity management balances and counterparty disintermediation
risk is consolidated daily at the Group level and reported to the Executive
Committee and Board, including limits and status rating. An enhanced
report including market commentary and member health monitoring is
produced each week and distributed to the LSEG Executive Committee
and Board.
All four group CCPs report their liquidity position via the Group Financial
Risk Committee each month. Each CCP monitors liquidity needs daily
under stressed and unstressed assumptions. Breaches, if any, are reported
and discussed monthly at the Committee.
Latent market risk (clearing)
Our clearing services guarantee ?nal settlement of trades and manage
counterparty risk for a range of assets and instruments including cash
equities, derivatives, energy products and Government bonds. Therefore
the Group is exposed to country risk, credit risk, issuer risk, market risk,
liquidity risk, interest rate risk and foreign exchange risk.
There is a risk that one of the parties to a cleared transaction defaults on
their obligation; in this circumstance the CCP is obliged to honour the
contract on the defaulter’s behalf and thus an unmatched risk position
arises. The CCP may suffer a loss in the process of work-out (the ‘Default
Management Process’) if the market moves against the CCP’s positions.
Under the ERMF, CCP latent market risk must be managed in compliance
with the Group CCP Financial Risk Policy as well as policies issued pursuant
to the governance of the CCPs themselves. Latent market risk is part of the
agenda of the CCP risk Committees.
The ?nancial risks associated with clearing operations are mitigated by:
— Strict CCP membership rules including supervisory capital, technical
and organisational criteria.
— The maintenance of prudent levels of margin and default funds
to cover exposures to participants. Each member pays margins,
computed at least daily, to cover the theoretical costs which the
clearing service would incur in order to close out open positions in
the event of the member’s default. Clearing members also contribute
to default funds.
CCP liquidity management balances and counterparty disintermediation
risk is consolidated daily at the Group level and reported to the Executive
Committee and Board, including limits and RAGs. An enhanced report
including market commentary and member health monitoring is
produced each week and distributed to the Executive Committee
and Board.
Committees overseeing latent market and member risks meet on a
regular basis.
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RISK DESCRIPTION MITIGATION
Settlement and custodial risks
The Group offers post trade services and centralised administration of
?nancial instruments through its CSD subsidiary, Monte Titoli. Monte Titoli
offers pre-settlement, settlement and custody services. These activities
carry counterparty risk (in particular asset commitment risk), operational
risk and custody risk (including asset servicing risk).
Monte Titoli does not provide intraday settlement ?nancing to
its members.
Asset commitment risk is mitigated through pre-positioning (availability
of security) and pre-funding (availability of cash).
Operational risk is minimised via highly automated processes reducing
administrative activities and formalised procedures for all services. Monte
Titoli mitigates IT risks by providing for redundancy of systems, daily
backup of data, fully updated remote recovery sites and SLAs with
outsourcers. Liquidity for Monte Titoli’s operations is provided by the
Bank of Italy.
For more information on these risks see the “Post Trade Services” section of the Segmental Review (on pages 28-31), and Note 2 to the accounts,
“Financial Risk Management” (on pages 113-117).
Capital Risk
The Group incorporates a number of regulated and unregulated entities
within its structure. Principal risks to managing its capital are:
— In respect of regulated entities, capital adequacy compliance risk
(the risk that regulated entities do not maintain and report suf?cient
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 suf?cient capital resources are
maintained to meet regulatory requirements this could lead to loss
of regulatory approvals.
— In respect of regulated and unregulated entities, commercial capital
adequacy and quality risk (the risk that Group and solo entities do not
maintain both suf?cient quantity and quality of capital to meet
commercial requirements) and investment return risk (the risk that
capital is held in subsidiaries or invested in projects that generate a
return that is below the Group‘s cost of capital).
— Availability of debt or equity (whether speci?c to the Group or driven
by general ?nancial 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 Group maintains an ongoing review of the capital positions of its
regulated entities and operates within capital limits which are overseen
by the Treasury Committee, the Financial Risk Committee, the Executive
Committee and the Board.
The Group can manage its capital structure by varying returns to
shareholders, issuing new shares or increasing or reducing borrowings.
The Board reviews dividend policy and funding capacity on a regular basis
and the Group maintains comfortable levels of debt facility headroom.
The Group makes regular assessments of debt and equity market
conditions. To maintain suf?cient ?nancial strength to access new capital
at reasonable cost, and meet its objective of maintaining an investment
grade credit rating. The Group is mindful of potential impacts on its key
metrics when considering changes to its capital structure.
For more information on this risk see Note 2 to the accounts, “Financial Risk Management” (on pages 113-117).
52 Strategic report London Stock Exchange Group plc Annual Report 2014
Principal risks and uncertainties
continued
Operational Risk
The risk of loss, or other adverse consequences to the business, resulting from inadequate or failed internal processes, people and systems,
or from external events.
RISK DESCRIPTION MITIGATION
Technology
Secure and stable technology performing to high levels of availability
and throughput continues to be critical to the support of the Group’s
businesses. Technology failures impact our clients and can potentially
lead to a loss of trading and clearing volumes and adversely impact the
Group’s reputation and brand.
The Group continues to consolidate its IT development and operations in
the MillenniumIT infrastructure to provide greater control and ef?ciency.
This focus of activity means there is a risk of resource over-stretch to meet
both the requirements of the Group and those of third parties. Continued
innovation and investment in new trading/information systems can lead
to further resource stretch in coping with increased volumes and new
product development.
The Group also has dependencies on a number of third parties for the
provision of hardware, software, communication and networks for
elements of its trading, clearing, data and other systems.
The performance and availability of the Group systems are constantly
reviewed and monitored to prevent problems arising where possible and
ensure a prompt response to any potential service interruption issues.
The Group’s technology teams mitigate this risk by ensuring prioritisation
of all development and operations activities, and resource utilisation and
allocation are kept under constant review.
The MillenniumIT systems are designed to be fault tolerant and alternative
standby computer facilities are maintained to minimise the risk of
system disruptions.
The robust change management procedures and capacity monitoring
provide assurance that Group technology changes are effectively managed.
The Group actively manages relationships with key strategic IT suppliers to
avoid any breakdown in service provision which could adversely affect the
Group’s businesses. Where possible the Group has identi?ed alternative
suppliers that could be engaged in the event of a third party failing to
deliver on its contractual commitments.
For more information see the “Technology Services” section of the Segmental Review, on pages 34 and 35.
For information on LCH.Clearnet see section of the Segmental Review on pages 30 and 31.
Change management
The considerable change agenda is driven by both internal and external
factors. Internal factors include the diversi?cation strategy of the Group
and its drive for technology innovation and consolidation. External factors
include the changing regulatory landscape and requirements which
necessitate changes to our systems and processes.
There are a signi?cant number of major, complex projects and strategic
actions underway concurrently, that, if not delivered to suf?ciently high
standards and within agreed timescales, could have an adverse impact on
the operation of core services, and revenue growth, as well as damaging
the Group’s reputation. The volume of simultaneous change could also lead
to a loss of client goodwill if the execution is not managed appropriately.
Synergies and cost bene?ts may not be delivered to anticipated levels.
The senior management team is focused on the implementation of the
Group’s strategy and the project pipeline in view of their importance to
the Group’s future success. Each major project is managed via a dedicated
project of?ce overseen by members of the Executive Committee.
Software design methodologies, testing regimes and test environments
are continuously being strengthened to minimise implementation risk.
For more information see the Chairman’s statement, on pages 14 and 15, and the Chief Executive’s review, on pages 16 and 17.
Security threats
The Group is reliant upon secure premises to protect its employees and
physical assets as well as appropriate safeguards to ensure uninterrupted
operation of its IT systems and infrastructure. The threat of cyber crime
requires a high level of scrutiny as it may have an adverse impact on our
business. Terrorist attacks and similar activities directed against our
of?ces, operations, computer systems or networks could disrupt our
markets, harm staff, tenants and visitors, and severely disrupt our business
operations. Civil or political unrest could impact on companies within
the Group.
Long-term unavailability of key premises or trading and information
outages and corruption of data could lead to the loss of client con?dence
and reputational damage. Security risks have escalated in recent years
due to the increasing sophistication of cyber crime.
Security threats are treated very seriously. The Group has robust physical
security arrangements, and extensive IT measures are in place to mitigate
technical security risks. The Group is a member of the Centre for the
Protection of National Infrastructure (CPNI), with both physical and IT
security teams monitoring intelligence and liaising closely with police
and global Government agencies.
The Group has well established and regularly tested business continuity
and crisis management procedures. The Group risk function assesses its
dependencies on critical suppliers and ensures robust contingency
measures are in place.
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RISK DESCRIPTION MITIGATION
Employees
The calibre, quality and retention of employees are critical to the success
of the Group. Failure to adequately manage and retain staff resulting in
unacceptable levels of staff turnover leads to increased costs of attracting
replacement staff and undue distraction of senior management time in
recruiting replacements. The loss of key members of staff could have an
adverse impact on the Group’s operations and ability to deliver its strategy.
The Group’s ability to attract and retain high quality individuals depends on
the condition of recruitment markets and corresponding compensation
packages of ?nancial services, technology ?rms and regulators with which
the Group competes for the same key staff.
The Group operates a performance management and appraisal system,
and Executive development opportunities are provided with the
Nominations Committee responsible for considering succession plans
for key senior positions.
A performance related annual bonus and pay review process is in place
for all employees. Regular benchmarking of reward and incentive systems
is performed to ensure they are competitive. The Group also offers Long
Term Incentive Plans for high performers and critical staff and turnover is
monitored. A centralised training budget allows a co-ordinated approach
to development across the Group.
A programme of succession planning is operated by the Group to minimise
the impact of the loss of key staff critical to the operation of the business.
We have also enhanced our talent management approach in the last year
and will keep doing so while rolling out our succession plans and HR
systems to LCH.Clearnet during the next 12 months.
For more information see “Our wider responsibility”, on pages 36 and 37 and Remuneration Report, on pages 70-97.
London Stock Exchange Group plc Annual Report 2014
Chris Gibson-Smith
Chairman of the Company and of the Nomination
Committee (age 68)
Appointed to the Board in May 2003
Committee membership: Remuneration, Nomination (Chair)
Skills and experience: Chairman of Partnership Assurance Group.
He was Chairman of The British Land Company plc from 2007 until
2012, and he was also previously Non-Executive Director of Qatar
Financial Centre Authority from 2006 to 2012, Chairman of National
Air Traffic Services Ltd from 2001 to 2005, Non-Executive Director of
Lloyds TSB plc from 1999 to 2005, Group Managing Director of BP plc
from 1997 to 2001, and a past Trustee of the Institute of Public Policy
Research and the arts charity Arts & Business.
Other current appointments: Chris is Chairman of the Advisory
Board of Reform Research Trust.
Xavier Rolet
Group Chief Executive Officer (age 54)
Appointed to the Board in March 2009 and appointed
Chief Executive in May 2009
Committee membership: Group Executive
Skills and experience: Xavier was a senior Executive at Lehman
Brothers from 2000 to 2008 and, latterly, Chief Executive Officer of
Lehman in France. Prior to Lehman Brothers, he held senior positions
at Dresdner Kleinwort Benson from 1997 to 2000, Credit Suisse First
Boston from 1994 to 1996 and Goldman Sachs from 1984 to 1994.
Other current appointments: Xavier is a member of the HM Treasury
Financial Services Trade and Investment Board, a member of the
Columbia Business School Board of Overseers and an Honorary Fellow
of the Chartered Institute for Securities and Investments, FSCI (Hon).
Raffaele Jerusalmi
Executive Director (age 53)
Appointed to the Board in June 2010
Committee membership: Group Executive
Skills and experience: Chief Executive Officer of Borsa Italiana
S.p.A., Vice Chairman of Monte Titoli and Director of Capital Markets
of London Stock Exchange Group. He is also Vice-Chairman of MTS
and CC&G, a Director of Monte Titoli and Institore of the LSEGH (Italy)
group of companies. Prior to joining Borsa Italiana in 1998, he was
Head of Trading for Italian Fixed Income at Credit Suisse First Boston
from 1993 to 1998. From 1996, he was a member of their proprietary
trading group in London. From 1997 to 1998, he was a Director of MTS
S.p.A., representing Credit Suisse First Boston, and from 1989 to 1993
he was head of trading for the fixed income and derivatives divisions
at Cimo S.p.A. in Milan.
Other current appointments: Raffaele is a venture partner of the
Advisory Committee of Atlantic Capital Partners GmbH.
Paolo Scaroni
Non-Executive Deputy Chairman and Senior
Independent Director (age 67)
Appointed to the Board in October 2007
Committee membership: Remuneration, Nomination
Skills and experience: Paolo was CEO of eni from May 2005 to May
2014 and was also previously CEO of Pilkington plc from 1997 to 2002,
Non-Executive Director of BAE Systems plc from 2000 to 2004 and of
Invensys plc from 2001 to 2002. He was also CEO of Enel from 2002 to
2005, Non-Executive Director of Alliance Unichem plc from 2002 to
2005 and then Chairman from 2005 to 2006.
Other current appointments: Paolo is currently Non-Executive
Director of Assicurazioni Generali, Veolia Environnement, Fondazione
Teatro alla Scala and Member of the Board of Overseers of Columbia
Business School.
David Warren
Group Chief Financial Officer (age 60)
Appointed to the Board in July 2012
Committee membership: Group Executive
Skills and experience: Prior to being appointed Chief Financial Officer
of London Stock Exchange Group, David was CFO of NASDAQ OMX from
2001 to 2009 and Senior Advisor to the NASDAQ CEO from 2011 to 2012.
He was Chief Financial Officer at Long Island Power Authority of NY from
1998 to 2001, Deputy Treasurer of the State of Connecticut from 1995 to
1998 and a Vice President at CS First Boston from 1988 to 1995.
Other current appointments: None.
Board structure
The Board comprised:
— Non-Executive Chairman, who was
independent on appointment
— Non-Executive Deputy Chairman, who
is also the Senior Independent Director
— Nine other independent
Non-Executive Directors
— Three Executive Directors.
Board and Committees
Meetings in FY 2014 FY 2013
Board 9 15
Supporting committees
– Audit and Risk
1
1 5
– Audit 3 n/a
– Risk 2 n/a
– Remuneration 5 4
– Nomination 1 1
1 The Board appointed separate audit and risk committees on 18 July 2013.
Prior to that date, the Board operated a combined Audit and Risk Committee.
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Jacques Aigrain
Non-Executive Director (age 60)
Appointed to the Board in May 2013
Committee membership: Audit
Skills and experience: Chairman of LCH.Clearnet Group Limited and
a director of Qatar Financial Centre Authority. Previously, he was a
Non-Executive Director at Resolution from 2010 to 2012 and CEO
of Swiss Re from 2006 to 2009, having joined in 2001 as Head of
Financial Services, New York. Prior to this, he spent 20 years, from
1981 to 2001, with J.P. Morgan Chase, working in the New York, London
and Paris offices and holding a number of senior roles including Head
of Global Health & Chemicals, Co-Head of Global M&A and Co-Head,
Client Management.
Other current appointments: He is a Supervisory Board Member
of Deutsche Lufthansa and Swiss International Airlines. He is also
a Supervisory Board Member of LyondellBasell NV, a Non-Executive
Director of WPP plc and serves as a Senior Advisor at Warburg Pincus.
Stephen O’Connor
Non-Executive Director and Chairman of the Risk Committee (age 52)
Appointed to the Board in June 2013
Committee membership: Risk (Chair)
Skills and experience: Chairman of the International Swaps and
Derivatives Association, a position held since 2011, having been
appointed as a Non-Executive Director in 2009. Previously, he worked
at Morgan Stanley in London and New York from 1988 to 2013,
where he was a member of the Fixed Income Management
Committee and held a number of senior roles including Global Head
of Counterparty Portfolio Management and Global Head of OTC Client
Clearing. Stephen was a member of the High Level Stakeholder Group
for the UK Government’s review of the Future of Computer Trading in
Financial Markets. He was a Non-Executive Director of OTC DerivNet
Ltd from 2001 to 2013 and was Chairman from 2001 to 2011.
Other current appointments: Member of the US CFTC Global Markets
Advisory Committee and Vice-Chairman of the Financial Stability
Board’s Market Participants Group on Financial Benchmark Reform.
Sherry Coutu CBE
Non-Executive Director (age 50)
Appointed to the Board with effect from 17 January 2014
Committee membership: None
Skills and experience: Non-Executive Director of Cambridge
Temperature Concepts, Cambridge Assessment, Cambridge University
Press, Raspberry Pi, and Artfinder. Sherry was an investor and a
Director of New Energy Finance from 2006 to 2009, and was a
Non-Executive Director and Senior Independent Director of RM Plc
from 1998 to 2007, where she also served as Chairman of the
Remuneration Committee and as a member of the Audit Committee.
From 2006 to 2010, Sherry was a Trustee of NESTA National
Endowment for Science, Technology and Arts. In 1995, Sherry
founded Interactive Investor International and served as CEO and
Chairman from 1995 to 2001.
Other current appointments: Sherry currently serves on the
Advisory Boards of Linkedin.com, Care.com and is an external
member of the University of Cambridge finance committee.
Paul Heiden
Non-Executive Director and Chairman of the
Audit Committee (age 57)
Appointed to the Board in June 2010
Committee membership: Audit (Chair), Risk
Skills and experience: Non-Executive Chairman of Intelligent Energy
Holdings plc and was previously Chairman of Talaris Topco Limited
from 2009 to 2012, Non-Executive Director of United Utilities Group
plc from 2006 to 2013 and Chief Executive Officer of FKI plc from
2003 to 2008. Paul was an Executive Director of Rolls-Royce plc from
1997 to 1999 and Group Finance Director from 1999 to 2003. He has
also had previous senior finance roles at Hanson plc and Mercury
Communications and was a Non-Executive Director of Bunzl plc
from 1998 to 2005 and Filtrona plc from 2005 to 2006.
Other current appointments: Paul is a Non-Executive Director of
Meggitt plc.
Stuart Lewis
Non-Executive Director (aged 48)
Appointed to the Board in June 2013
Committee membership: Risk
Skills and experience: Chief Risk Officer and Member of the
Management Board at Deutsche Bank AG, where he previously
held senior roles. From 1992 to 1996, he worked at Credit Suisse
Financial Products in Credit Risk Management and, from 1990
to 1991, at Continental Illinois National Bank.
Other current appointments: None.
Joanna Shields OBE
Non-Executive Director (aged 51)
Appointed to the Board with effect from 17 January 2014
Committee membership: None
Skills and experience: Veteran technology executive and
entrepreneur. In October 2012, she was appointed by the Prime Minister
to lead the UK Government’s Tech City UK, previously served as its CEO
and is now Chairman. She is also UK Ambassador for Digital Industries.
Prior to this, she led international expansion for Facebook as Vice
President and Managing Director, and she held executive positions at
Time Warner/Aol, Inc. including President of People Networks after the
acquisition of Bebo, where she served as CEO. She was also Managing
Director at Google EMEA, Vice President and Managing Director at
Decru, Inc., VP and Managing Director, EMEA at RealNetworks and
CEO of Veon Inc, a start-up she built and led to its acquisition by Philips
NV. Joanna started her career in Silicon Valley in 1989 at EFI, Inc and,
over the next decade, held various executive roles.
Other current appointments: Joanna is a Non-Executive Director
of TalkTalk Telecom Group Plc and serves on the Mayor’s London
Smart Board.
Andrea Munari
Non-Executive Director (age 51)
Appointed to the Board in October 2007
Committee membership: Risk
Skills and experience: CEO of Credito Fondiario SpA. Andrea was
previously General Manager of Banca IMI, the investment arm of
Intesa Sanpaolo Group from March 2006 to December 2013. He was
also previously Managing Director of Morgan Stanley Fixed Income
Division and CEO and General Manager of Banca Caboto (now Banca
IMI). In addition, he was a Director of MTS S.p.A. from 2003 to 2005
and of TLX S.p.A. from January to September 2007.
Other current appointments: None.
Massimo Tononi
Non-Executive Director (age 49)
Appointed to the Board in September 2010
Committee membership: Audit, Nomination
Skills and experience: Chairman of Borsa Italiana S.p.A. and was
previously Partner and Managing Director in the investment banking
division of Goldman Sachs from 2008 to July 2010. While at Goldman
Sachs, he played a senior role in business development and the
execution of investment banking transactions throughout Europe.
From 2006 to 2008, he was Treasury Undersecretary at the Italian
Ministry of Economy & Finance in Rome.
Other current appointments: Massimo is currently a Non-Executive
Director of Sorin S.p.A. and Chairman of Prysmian S.p.A.
Robert Webb QC
Non-Executive Director and Chairman of the
Remuneration Committee (age 65)
Appointed to the Board in February 2001
Committee membership: Remuneration (Chair), Nomination
Skills and experience: General Counsel of Rolls-Royce plc.
Robert was Chairman of Autonomy Corporation plc from 2009 to
2011 and of BBC Worldwide from 2009 to 2012. He served as General
Counsel of British Airways from September 1998 to April 2009 where
he was responsible for law, Government affairs, safety, security and
risk management. Robert was a Non-Executive Director of Argent
Group plc from 2009 to 2012 and of the Emerging Health Threats
Forum from 2006 to 2012. He was also Chairman of Sciemus Ltd
from 2010 to 2011. He was Head of Chambers and a practising QC
at 5 Bell Yard, London from 1988 to 1998.
Other current appointments: Non-Executive Director of the
Holdingham Group Ltd. He is also a Bencher of the Inner Temple,
a Trustee of Comic Relief and of the Migratory Salmon Fund.
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Governance Board of Directors
London Stock Exchange Group plc Annual Report 2014
The Corporate Governance Report which follows is intended to
give shareholders an understanding of the Group’s corporate
governance arrangements and how they operated during the
year ended 31 March 2014, including how the Group complied
with the principles of the Code.
Changes to the Board and succession planning
I and the Board have continued to work to ensure that the balance of skills
and experience on the Board remains appropriate.
During the ?nancial year ended 31 March 2014, the Company made a number
of appointments to the Board. Jacques Aigrain, Chairman of LCH.Clearnet
was appointed on the completion of the acquisition of a majority stake in
LCH.Clearnet and con?rmed by shareholders at the AGM on 18 July 2013.
Stuart Lewis, Stephen O’Connor, Sherry Coutu CBE and Joanna Shields OBE
were all appointed as Non-Executive Directors during the year following the
engagement of external recruitment consultants. A shortlist of candidates met
with the Chairman, Chief Executive and a selection of Non-Executive Directors.
Mr Lewis and Mr O’Connor each have experience in credit and market
risk and their appointments re?ect the signi?cant and growing proportion
of the Group’s overall business that post trade and risk management
now represent. Additionally, both Ms Coutu and Ms Shields have broad
international management experience and, in particular, deep knowledge
of the information technology sector, re?ecting the Group’s continued focus
on delivering innovative technology solutions to its customers around
the world, as well as its ongoing commitment to supporting entrepreneurs
and small and medium-sized businesses (SMEs) to ?nd appropriate and
sustainable ?nancing solutions. The collective experience of our new
Non-Executive Directors deepens the overall skills, experience and diversity
of the Board. Con?rmation of each of their appointments will be sought at
this year’s AGM.
Baroness (Janet) Cohen, Sergio Ermotti and Gay Huey Evans have stepped down
from the Board. The Board is grateful to each of them for their contribution.
Board focus
The Board has continued to oversee the Group’s strategy, risk framework,
?nancial performance and Board succession planning. Further detail on
matters considered by the Board can be found on page 58.
The Board has also continued its programme of visiting its overseas
businesses and meeting local management. The Board carried out a trip
to Milan (the main of?ce of Borsa Italiana) in September and March to hold
its regular meetings and meet with customers and stakeholders.
Diversity
I stated last year that the Board was focused on ensuring the balance of
its membership re?ected diversity of experiences, business backgrounds,
nationalities and gender, recognising the bene?ts this brings to the Group.
The Board appointments made during the year re?ect this focus. The female
appointments also re?ect the Board’s ongoing commitment to strengthening
female representation at Board level, including requesting headhunters to
ensure that a signi?cant proportion of Board candidates are female.
Board effectiveness
This year, the Board carried out an internal review of its own effectiveness.
The process and ?ndings are described on page 61. Following this review,
I am satis?ed that the Board continues to perform well.
Investor engagement
Shareholder engagement and support remain central to our planning and
thinking. This was again particularly important in another year of corporate
activity. We have a comprehensive investor relations programme, which is
described in more detail elsewhere in the Corporate Governance Report.
The Board receives regular updates on shareholder feedback at each of
its meetings so that it is aware of shareholders’ views and concerns.
Shareholders are also offered the opportunity to meet with the Senior
Independent Director, the Chairman of the Remuneration Committee
and the Chairman, as appropriate.
Chris Gibson-Smith
Chairman
56 Governance
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Corporate governance report
Complying with the provisions of the Code
The Group is committed to high standards of corporate governance
and business integrity in all of its activities. Throughout the year ended
31 March 2014, the Company has complied with all provisions of the
UK Corporate Governance Code (“the Code”), other than for a period
following the resignations of Sergio Ermotti and Gay Huey Evans when
the Remuneration Committee comprised two Independent directors and
the Chairman. Sherry Coutu has since the year end been appointed to
the Committee.
The Code sets out guidance in the form of main principles and more speci?c
provisions for good governance in relation to Board leadership, effectiveness,
accountability, remuneration and relations with shareholders. The Code
applies to all companies with a premium listing of equity shares in the UK
and requires companies to disclose, in relation to the Code, how they have
applied its main principles and whether they have complied with all relevant
provisions throughout the year. Where the relevant provisions have not
been complied with, companies must provide an explanation for their
non-compliance. Further information on the UK Corporate Governance Code
can be found on the Financial Reporting Council’s website, at www.frc.org.uk.
This Corporate Governance Report forms part of the Corporate Governance
Statement on pages 98 and 99 of the Directors’ Report.
Board of Directors
Role of the Board
The Board is the principal decision-making forum for the Group and is
responsible to shareholders for achieving the Group’s strategic objectives
and delivering sustainable growth in shareholder value. Directors act in a way
they consider will promote the long-term success of the Company for the
bene?t of shareholders as a whole, with regard to the interests of the Group’s
employees, the impact of the business on the community and environment
and the interests of stakeholders. The Board has adopted a formal schedule of
matters speci?cally reserved to it. Key matters reserved to the Board are set
out in the table opposite.
Key matters reserved to the Board
The Board maintains a list of matters reserved to it, including:
Strategy and
Management
— Responsibility for the overall oversight of
the Group, including approval of the Group’s
long-term objectives and commercial strategy
— Approval of the Group’s annual operating
and capital expenditure budgets and any
material changes
— Review of performance in light of the
Group’s strategy, objectives, business plans
and budgets
Contracts — Approval of signi?cant acquisitions
and disposals
Structure and Capital — Changes relating to the Group’s capital
structure and major changes to the Group’s
corporate structure
Financial reporting
and Controls
— Approval of ?nancial statements
Internal controls — Ensuring maintenance of a sound system
of internal control and risk management
Board membership
and other
appointments
— Ensuring adequate succession planning
for the Board and senior management
— Appointments to the Board, following
recommendations by the Nomination
Committee
Remuneration — Determining the remuneration of the
Non-Executive Directors, subject to the
articles of association and shareholder
approval, as appropriate
Corporate Governance
— Undertaking a formal review annually of
its own performance, that of its committees
and individual directors and determining the
independence of directors
The Board also views the brands and reputations of its subsidiaries as
important assets of the Group and accordingly protection of the brand
and reputation of the Group and its subsidiaries, including ensuring that
subsidiaries continue to meet local regulatory requirements, is also a key
part of the Board’s role.
The roles of Chairman and Chief Executive are distinct and separate with a
clear division of responsibilities. The Chairman is responsible for the running
and leadership of the Board and ensuring its effectiveness. The Chief
Executive has delegated authority from, and is responsible to, the Board
for managing the Company’s business with the power for further delegation
in respect of matters which are necessary for the effective running and
management of the business. The current key responsibilities of both
the Chairman and the Chief Executive are set out on page 59.
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Governance Corporate governance
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Matters considered by the Board in FY2014
Each meeting Annually Throughout the year
Reports from the Chief Executive on performance
in each of the business areas, together with Risk,
Regulation, Legal, HR and Strategy
Health and safety
Monitoring the progress of integrating LCH.Clearnet
into the Group
Reports from the Chief Financial Of?cer on the
?nancial performance and position of the Group,
investor relations activity and Treasury matters
Three Year Business Plan and
annual Budget
Discussion and approval of Group strategy
Updates from the Board committees Off-site strategy day Detailed consideration and approval of the acquisition by
Borsa Italiana of a majority stake in EuroTLX SIM S.p.A.
FCA’s risk mitigation programme together
with a presentation by the FCA
Considering the LSEG Balance Sheet and changes to the
Group’s Financial Risk Model
Evaluation of Board Effectiveness Discussion on the implementation of the Enterprise-wide
Risk Management Framework and related policies
Review of independence of Directors
pursuant to the UK Corporate
Governance Code
Approval of the Group Risk Register and Risk Appetite
Review of quarterly ?nancial forecasts and funding
of acquisitions
Executive and Non-Executive succession planning,
including the appointment of new Non-Executive Directors
Presentations on the Group’s approach to risk management
in current ?nancial markets
Review and approval of full year and interim results and
quarterly IMS prior to market release
Discussion and approval of the change of the Group’s
accounting reference date to 31 December
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Board meeting attendance in the year ended 31 March 2014
Scheduled Ad hoc Strategy Day Total
Chris Gibson-Smith 6/6 3/3 1/1 10/10
Xavier Rolet 6/6 2/3 1/1 9/10
Raffaele Jerusalmi 6/6 3/3 1/1 10/10
David Warren
1
6/6 3/3 1/1 10/10
Paolo Scaroni 6/6 3/3 0/1 9/10
Paul Heiden 6/6 2/3 1/1 9/10
Andrea Munari 6/6 2/3 1/1 9/10
Massimo Tononi 5/6 2/3 1/1 8/10
Robert Webb 5/6 2/3 1/1 8/10
Jacques Aigrain
1
6/6 3/3 1/1 10/10
Stephen O’Connor
2
5/5 2/3 1/1 8/9
Stuart Lewis
2
4/5 2/3 0/1 6/9
Joanna Shields OBE
3
1/2 – 1/1 2/3
Sherry Coutu CBE
3
2/2 – 1/1 3/3
Directors who left the Board
in the year 31 March 2014
Sergio Ermotti
4
2/2 1/3 – 3/5
Baroness (Janet) Cohen
4
2/2 1/3 – 3/5
Gay Huey Evans
4
1/2 2/3 – 3/5
1 Joined the Board on 1 May 2013.
2 Joined the Board on 12 June 2013.
3 Joined the Board on 17 January 2014.
4 Left the Board on 18 July 2013.
When arranging meetings on short notice, every attempt is made to
accommodate Directors’ diaries; however, inevitably, not all Directors are
able to attend all such meetings. The majority of meetings where Directors
have been unable to attend were the three additional meetings called on
short notice.
When Directors have not been able to attend meetings due to con?icts in
their schedule, they received and reviewed papers to be considered at the
relevant meeting. Where they had comments or concerns on the matters to
be discussed, they provided these to the Chairman of the Board or Committee
in advance of the meeting. The Chairman of the Board engages with Directors
between Board meetings to discuss business and strategic issues.
Key responsibilities
Chairman
— Acts as an independent Non-Executive Director and chairs the Board
of the Company;
— Forges an effective Board as to composition, skills and competencies;
— Ensures, in collaboration with the Chief Executive, that the Board
considers the strategic issues facing the Company in a timely manner
and is presented with sound information and analysis appropriate to
the decisions that it is asked to make;
— Acts as a sounding board for the Chief Executive and provides general
advice relating to the management and development of the Company’s
business; and
— Supports the commercial activities of the Company by, inter alia,
maintaining contact with the Company’s key stakeholders and
maintaining dialogue with other industry participants.
Chief Executive
— Formulates the strategic direction of the Company and periodically
agrees this with the Board;
— Ensures proper ?nancial and business control is exercised within
the Company;
— Chairs the Executive Committee;
— Ensures there is a clear management structure with appropriately
delegated responsibilities staffed by suitably experienced and
quali?ed staff;
— Ensures appropriate reporting and communication systems are
established across the Company;
— Ensures key performance objectives are set for all operational
departments, action plans and budgetary controls are established and,
where necessary, corrective action is taken to maximise the performance
of the Company;
— Ensures the Company’s strategy and values are effectively understood
and applied by management and staff; and
— Ensures an appropriate risk management framework is in operation.
Board and Committee meetings in FY2014
The Board held six scheduled meetings, three additional meetings on short
notice and a dedicated off-site strategy day. On a number of occasions
throughout the year, the Chairman met Non-Executive Directors without the
presence of Executive Directors. The Chairman and Non-Executive Directors
also meet without the Executive Directors at the start of each Board meeting
to discuss the business of that meeting and other issues. Throughout the
year, the Chairman also met with Non-Executive Directors individually to
discuss business-related matters.
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London Stock Exchange Group plc Annual Report 2014
It is likely that the Board will continue to include Non-Executive Directors with
current or recent experience in ?nancial markets, as the Board believes it
bene?ts from this expertise. The Board also believes that the Group bene?ts
from having directors with a mixture of tenures and backgrounds.
The Board has concluded that all Non-Executive Directors are independent
in character and judgement. In assessing each Director, the Board considered
whether there are relationships or circumstances which are likely to affect,
or could appear to affect, the Director’s judgement.
The Code requires a company to state its reasons if it determines that a
director is independent in certain circumstances, including where a director
indirectly has a material business relationship with the Company as a director
of a body that has such relationship with the Company, or has had in the
last three years, and where a director has served on the Board for more than
nine years.
Jacques Aigrain is currently Chairman of LCH.Clearnet Group. LCH.Clearnet
Group is a non-wholly owned subsidiary of the Company with whom the
Company has a material business relationship. Mr Aigrain brings vast
experience in the area of post trade which greatly assists the Board. Following
the departure of LCH.Clearnet Group’s CEO, Ian Axe, Mr Aigrain was appointed
as Executive Chairman from October 2013 to 3 February 2014. During this
period Mr Aigrain did not participate in the Company’s Executive Committee.
It was felt that Mr Aigrain’s appointment to this role on a temporary basis was
the best way to manage any risks following Mr Axe’s departure. Any potential
con?icts of interest arising as a result of Mr Aigrain’s appointment to the
Board are governed by the terms of a con?icts memorandum of
understanding between LCH.Clearnet and the Company.
Andrea Munari was, until 31 December 2013, employed by Intesa San Paolo,
which is a customer of the Group. While the Company values its relationship
with Intesa as a customer, given the size of Intesa, it is believed that Intesa’s
relationship with the Company and its subsidiaries is not material to Intesa.
The Board bene?ts greatly from Mr Munari’s current experience in ?nancial
markets and the Risk Committee also bene?ts from Mr Munari’s experience
of risk in a ?nancial services company.
Stuart Lewis is employed by Deutsche Bank AG, which is a customer of
the Group. While the Company values its relationship with Deutsche Bank,
it is believed that Deutsche Bank’s relationship with the Company and its
subsidiaries is not material to Deutsche Bank. Additionally, given his role as
Chief Risk Of?cer, Mr Lewis does not work in an area of Deutsche Bank which
has customer relationships with the Group.
Stephen O’Connor was, until June 2013, employed by Morgan Stanley,
which is a customer of the Group. While the Company values its relationship
with Morgan Stanley, it is believed that Morgan Stanley’s relationship with
the Company and its subsidiaries is not material to Morgan Stanley.
In particular, in the case of Mr Lewis and Mr O’Connor, following the
acquisition of a majority stake in LCH.Clearnet, the Board believes it is
important to have members who have current or recent experience in
credit and market risk.
Directors have the bene?t of indemnity arrangements from the Company in
respect of liabilities incurred as a result of their of?ce and execution of their
powers, duties and responsibilities. The Company maintained a Directors’
and Of?cers’ liability insurance policy throughout the year ended 31 March
2014. This policy covers the Directors for any such liabilities in respect of
which they are not indemni?ed by the Company and, to the extent to which
it has indemni?ed the Directors, also covers the Company. This insurance
cover has been renewed. Neither the Company’s indemnity nor insurance
provides cover for a Director in the event that the Director is proved to have
acted fraudulently or dishonestly.
Board balance and independence
There is a strong non-executive element on the Board, and the Non-Executive
Directors provide deep corporate experience and knowledge which they apply
to their understanding of the Group and its strategy.
The Board considers that the Directors possess a strong range of business
experience and that the Board has the right mix of skills and experience given
the Group’s increasing diversi?cation, scale and reach. The Board considers
that the appropriate balance of skills and experience is best achieved by
balancing continuity of experience and new joiners and also by drawing
Directors from a wide range of backgrounds, including in the ?nancial
markets in which the Group operates, and in broader business.
Non-Executive Director Changes
The following changes have taken place over the past 12 months:
— the appointment of Jacques Aigrain (Non-Executive Director) on
1 May 2013;
— the appointment of Stuart Lewis and Stephen O’Connor
(Non-Executive Directors) on 12 June 2013;
— the appointment of Sherry Coutu CBE and Joanna Shields OBE
(Non-Executive Directors) on 17 January 2014; and
— the resignation of Baroness (Janet) Cohen, Sergio Ermotti and
Gay Huey Evans (Non-Executive Directors) on 18 July 2013.
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Board development
Each new Director joining the Board is provided with an induction programme
covering the key business areas of the Group. Directors are provided with key
documents including strategy documents, past Board papers, an overview
of the business, including the regulatory framework within which the Group
operates, and information on directors’ responsibilities under the Listing
Rules. Additionally, Directors meet with executives from throughout the
Group to better understand each of the business areas together with the
Group’s governance and ?nancial and legal framework. Directors have access
to independent professional advice if they judge it necessary to ful?l their
responsibilities as directors.
Directors are encouraged to continually update their skills and knowledge
of the business, and brie?ngs are given at Board meetings on particular parts
of the business. During the year, the Board also continued its practice of
undertaking formal visits to its overseas businesses so that the Directors can
experience ?rst-hand key aspects of the Group’s operations.
Conflicts of interest
The articles of association allow the Board to authorise con?icts of interest
that may arise and to impose such limits or conditions as it thinks ?t.
The Company has established procedures whereby actual and potential
con?icts of interest are regularly reviewed, appropriate authorisation is
sought prior to the appointment of any new Director and new con?icts are
dealt with. The decision to authorise a con?ict of interest can only be made
by non-con?icted Directors and, in making such decision, the Directors must
act in a way they consider, in good faith, would be most likely to promote
the Company’s success. Potential con?icts of interest arising as a result of
Jacques Aigrain’s appointment to the Board are governed by the terms of a
con?icts memorandum of understanding between LCH.Clearnet Group and
the Company. The Board believes that, during the year ended 31 March 2014,
these procedures operated effectively.
Board Committees
The Company ensures that all Committees are provided with suf?cient
resources to undertake their duties. All Committees have written terms
of reference which are available from the corporate responsibility section
on the Company’s website at www.lseg.com or on request from the Group
Company Secretary.
Remuneration Committee
Details of the Committee’s remit and activities are set out in a separate
Remuneration Report on pages 70-97.
Audit Committee
Details of the Committee’s remit and activities are set out in a separate
Audit Committee Report on pages 66-68.
Risk Committee
Details of the Committee’s remit and activities are set out in a separate
Risk Committee Report on page 69.
Nomination Committee
Details of the Committee’s remit and activities are set out in a separate
Nomination Committee Report on page 65.
Robert Webb has served on the Board since 2001. The Board considers
that an individual’s independence cannot be determined arbitrarily on
the basis of a particular period of service. The Board also bene?ts from
his experience and knowledge resulting from the length of his service as
well as his wider business experience.
In line with the Code, all Directors are subject to annual re-election.
Directors who retired during the year
Baroness (Janet) Cohen and Sergio Ermotti, who each retired from the
Board on 18 July 2013, were considered by the Board to be independent
throughout the year. Baroness (Janet) Cohen had served on the Board since
2001 and Mr Ermotti was CEO of UBS Group, which is a customer of the
Group. Given the size of UBS and the large number of markets in which it
operates, its relationship with the Company is not material to UBS. In the
case of Baroness (Janet) Cohen, as set out previously, the Board considers
that an individual’s independence cannot be determined arbitrarily on the
basis of a particular period of service.
Board effectiveness and leadership
The Board carried out an internal review of its own effectiveness and that of
its committees and directors. The Board has carried out effectiveness reviews
since 2005 and has acted on the results of each review.
The evaluation process was conducted by the Group Company Secretary
using a detailed questionnaire. The review also included a separate
assessment of the Chairman’s performance with feedback provided to
the Chairman.
The results of the review were used to highlight areas of strength and weakness,
assist in consideration of the future development of the Board, its Committees
and its individual directors and further improve their performance.
Further to the discussions arising out of the 2013 review, the Board identi?ed
that the key area for Board development was ensuring that it had appropriate
skills to govern a more diversi?ed Group which included a greater number of
post trade assets. The Board recruited members with experience in risk and
clearing (Mr Aigrain, Mr Lewis and Mr O’Connor) together with information
technology (Ms Coutu and Ms Shields). The Board also constituted separate
Audit and Risk Committees (previously combined) to re?ect an even greater
focus on risk. The Board has also received regular updates and training in
relation to CCP risks. Given these substantial changes during the year, the
2014 board effectiveness review concluded that the Board, its Committees
and its individual directors were working effectively and did not identify any
signi?cant issues. The Board will continue to evaluate its effectiveness
annually and address any actions.
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Governance Corporate governance
London Stock Exchange Group plc Annual Report 2014
Under the matrix structure, lines of responsibility have been clearly de?ned
and an appropriate framework of delegated authorities is in place. The Group
continues to monitor the functioning of and implement improvements to its
risk management framework to ensure it is ?t for purpose for its new size and
current ambitions.
Risk management framework
The risk management process is governed by a Board-approved Enterprise-
wide Risk Management Framework, which was implemented last year.
Executive management is accountable for risk identi?cation, analysis,
evaluation, mitigation, monitoring and reporting in its area within the
framework established by the Board. A combined bottom-up and top-down
risk management approach is adopted, with risks identi?ed at a business
unit, divisional and Group level. Divisional and legal entity risk pro?les are
reviewed by the Risk Committees of the Executive Committee and the Group’s
consolidated risk pro?le is reviewed by the Executive Committee and reported
to the Risk Committee three times a year. In FY14, it was reviewed by the
Risk Committee twice, as the committee was only established in September.
It was also reviewed once by the Audit and Risk Committee before the change
in committee structure. The Group risk pro?le is reviewed by the Board at least
every six months following an updated assessment of the risk management
process by both the Audit Committee and the Risk Committee.
Each Group risk is owned by a member of the Executive Committee, who is
responsible for managing or mitigating the risk to a level within the Group’s
risk appetite. Executive Committee members present their division’s risk
management processes and latest risk registers to the Risk Committee every
six months on a rotational basis. On a semi-annual basis, a divisional internal
control and risk management self-certi?cation process is also performed.
Each business unit is required to con?rm that it is in compliance with the
Group’s policies and governance procedures. Any exceptions are reported
to the Audit Committee and to the Risk Committee. Internal audit provides
regular reports to the Audit Committee on the adequacy and effectiveness
of the Group’s system of internal controls and the Group’s risk framework.
An overview of the principal risks and uncertainties of the Group is provided
on pages 48-53.
Risk Management and Internal Control
The Board has overall responsibility for the risk management framework
and for ensuring that management maintains an adequate system of
internal control appropriate for the Group’s business and the risks to which
it is exposed. The Audit Committee and the Risk Committee assist the Board
in discharging this responsibility by reviewing and assessing the Group’s
risk framework, systems of internal controls and risk management process.
The Company has implemented a three lines of defence governance model.
Under this model, executive management is the ?rst line of defence and is
responsible for designing, operating and monitoring the system of internal
controls. The system of internal controls is designed to manage the business
within the Board’s risk appetite rather than eliminate the risk of failure to
achieve the Group’s objectives and can only provide reasonable, but not
absolute, assurance against material misstatement or loss, fraud or breaches
of laws and regulations.
Risk management and compliance constitute the second line of defence
and de?ne the risk management framework to keep the business activities
within the Group’s risk appetite. Finally, the internal audit function provides
the independent assurance on controls, risk and governance as the third line
of defence. The system of internal controls is amended as appropriate in
response to changes in the Group’s business and associated risks. The key
elements of the Group’s systems of internal controls are described below.
Further detail on the Group’s risk management oversight can be found at
pages 44-47.
Organisational structure
The day-to-day running of the Group is managed by an Executive Committee,
which is chaired by the Group Chief Executive Of?cer. The Group operates a
matrix structure designed to optimise resource allocation and organisational
capacity. Each Executive Committee member is responsible for one of the
Group’s operating divisions or a major area of strategic importance and each
legal entity is responsible for engaging with local regulators and ensuring
regulatory compliance. The Executive Committee meets regularly to review
business and ?nancial performance, risk exposure and to approve key
decisions. The Executive Committee is supported by three main committees:
— The Financial Risk Committee, chaired by the Group Chief Financial
Of?cer which is responsible for monitoring the ?nancial risk exposure,
including liquidity and counterparty risks of the Company and to make
recommendations to the Executive Committee and to the Risk
Committee for changes to its risk appetite or limits.
— The New Product and Market Committee, chaired by the Group Chief
Risk Of?cer, which is responsible for the review of proposals to launch new
products or expand its activities into new markets.
— The Operational Risk Committee, chaired by the Group Chief Operating
Of?cer, monitors the adequacy of the controls in place to manage key
operational risks across the Group.
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Corporate governance
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Policies and procedures
A framework of Group policies and procedures has been established for all
aspects of the Group’s activities, supplemented by additional local policies
where appropriate. The policies are reviewed and updated on an ongoing
basis, or at least once a year, to re?ect changes in the Group’s risk pro?le
and appetite. Key policies are emphasised in the employee induction
process and regularly reinforced through targeted training.
Financial Risks
Comprehensive ?nancial reporting and review procedures are in place,
with ?nancial and key performance indicators reviewed against operational
budgets on a monthly basis at a group, divisional and business unit level.
The CFO monthly management report used by the Executive Committee is
shared with the Group Board and any key issues are reviewed at each Board
meeting. Investment opportunities are evaluated following a clearly de?ned
investment appraisal process. The Financial Risk Committee and the New
Products (and Market) Committee, during the year, oversaw the risks related
to entering new markets, treasury, capital, investments and counterparty
risks. The CCP counterparty, investments, and liquidity risks are also overseen
by each CCP’s own board and risk committees. As part of its remit, the
Financial Risk Committee oversees the activities of the Group’s Treasury
function through its Treasury Committee, which is chaired by the Chief
Financial Of?cer. The Treasury Committee operates within Board approved
policy and meets regularly to review the management of the Group’s credit,
market and liquidity risks. Further details on ?nancial risk management are
provided in note 2 to the accounts.
Operational Risk
The Group manages and monitors operational risks through the setting of risk
appetite, clear de?nition of roles and responsibilities, policies and procedures,
and through reporting of exposures. The Group has in place an Operational
Risk Committee which is responsible for monitoring the Group’s operational
risk exposure, including controls that could have an impact on ?nancial
reporting, and ensuring risks remain within appetite. The Group has in
place key operational controls strategies that are overseen by the Business
Continuity Committee and Technology project committees. These committees
meet on a regular basis and ensure the business continuity programmes and
the change management approach are aligned with industry best practice
and are ?t for purpose for the operations of the Group and of its subsidiaries.
Further details on operational risks are provided in note 2 to the accounts.
Risk Appetite
The Board sets an overall risk appetite for the Group for each of its risk
categories (Strategic, Financial and Operational) and also in six strategic
risk objectives (see page 45 for further information on the strategic risk
objectives). The Risk Appetite Framework (RAF) is used to delegate the
Group Appetite down to the Group’s component businesses. Each area
of the business is expected to manage its exposures within risk appetite
as approved by the Board.
The Group de?nes an overall risk appetite as part of the execution of the
strategic business plan of LSEG while achieving its strategic risk objectives
(see page 45):
Strategic Risk
The Group acknowledges that strategic risks could be driven by external
factors over which the Group may have limited in?uence. As a result, the
Group may have to accept the risk exposure. The Group will manage these
risks in order to provide the best risk reward option, while minimising the
downside impact.
Financial Risk
The Group has limited appetite to undertake activities which may impact the
delivery of its ?nancial plan, or affect its ability to meet its liquidity, regulatory
capital or contractual requirements under extreme but plausible market stress
scenarios. The Board has no appetite to breach the regulatory requirements
set out for the management of CCP ?nancial risks. Group concentration limits
will respect each CCP’s own limits and will be monitored accordingly.
Operational Risks
The Group will maintain a governance framework and an effective system
of internal controls to mitigate its operational risks within its risk appetite
limit. The Group has zero risk appetite for unethical behaviour.
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Governance Corporate governance
London Stock Exchange Group plc Annual Report 2014
The IR function, reporting to the CFO, is responsible for planning and
executing the IR programme and day-to-day contact with the market.
The CEO and CFO engage with investors, through meetings and presentations,
to discuss strategy, performance and other matters. The Chairman,
Senior Independent Director and Chairman of the Remuneration Committee
are also available to meet major investors, particularly to discuss corporate
governance and remuneration, as required. Over the past year, senior
management and the IR team held more than 280 meetings and calls
with shareholders and potential investors from around the world.
The Board receives a report on IR matters at each of its scheduled meetings,
including market expectations of ?nancial performance, share register
composition and feedback from major investors. Sell-side analyst research
notes are circulated to the Board following publication. The Group’s corporate
brokers and a specialist IR advisory ?rm provide the Board with advice on
shareholder relations and share register analysis. The AGM provides the
opportunity for all shareholders to meet Directors and to put questions
to the Board, and the procedures for the AGM are compliant with the UK
Corporate Governance Code. Voting at the AGM is by way of a poll to ensure
all shareholders’ views are taken into account.
The Investor Relations section of the Group’s website, www.lseg.com,
is the primary source of regularly updated information about the Group.
Annual and interim reports and accounts, interim management statements,
news releases, presentations and other documents are available on the
website together with a list of analysts producing research on the Company
and a summary of analysts’ forecasts of performance. Presentations of
preliminary and interim results are accessible by all shareholders via
webcasts in real time and also via replay for a period after the event.
Regulatory monitoring
Regulatory and compliance risks in the markets in which the Group operates
are monitored by local compliance functions. These regulatory teams work
closely with the FCA and the Bank of England in the UK, CONSOB and Banca
d’Italia in Italy, ACPR and the Banque de France in France, the CFTC in the
USA and other regulators in countries where we operate. The compliance
functions are managed independently from the customer facing business
units and report on a regular basis to the Group Risk Committee and to local
and Group Boards.
Internal audit
The Internal Audit function provides reliable, objective and reasonable
assurance to management, Audit Committee members, Risk Committee
members and Group Board members on the adequacy and effectiveness
of the system of internal controls, the governance model and the risk
management framework in place to manage risks within the Group’s risk
appetite and achieve the Group’s business objectives. As a third line of
defence, the function has no operational responsibilities over the entities/
processes that it reviews.
The independence of the internal audit function is achieved through
the following means:
— the Group Head of Internal Audit reports to the Chairman of the
Audit Committee of the Board and to the CFO for administrative
matters and has direct access to the Chairman of the Board;
— the Audit Committee must be consulted on the appointment
or the dismissal of the Group Head of Internal Audit; and
— the Audit Committee approves the annual budget for internal audit.
Conclusion
The Board con?rms that, through the Audit Committee and the Risk
Committee, it has reviewed the operation and effectiveness of the Group’s
system of internal controls throughout the year and up to the date of
approval of this Annual Report. No signi?cant failings or weaknesses were
identi?ed during this review. The Board is satis?ed that the risk management
process and system of internal controls conform with the 2005 FRC’s Internal
Control Guidance to Directors (formerly known as the Turnbull guidance).
Relations with shareholders
The Company conducts a comprehensive Investor Relations (IR) programme,
ensuring regular contact with existing and potential shareholders, together
with sell-side analysts that produce investment research relating to the Group.
The IR programme typically consists of meetings, calls, presentations and
information releases on a regular basis throughout the year, based around
the Group’s ?nancial reporting calendar and following major corporate events
and news ?ow.
64 Governance
Corporate governance
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The Committee spent the majority of its time during the year overseeing
the process for the appointment of new Non-Executive Directors described
elsewhere in the Governance Report. The Committee agreed the role
description for the new Non-Executive Directors and interviewed candidates
for the various Non-Executive Director appointments throughout the
year. The Committee members then gave feedback to the Chairman
and recommendations were made to the Board. The Committee used
an executive search agency, Spencer Stuart, to help identify potential
candidates. Prior to being engaged by the Company to carry out the
search, Spencer Stuart carried out the Board Effectiveness Review in FY2012.
The Committee also considered senior management succession planning.
The Committee formally met once in the year. Nomination Committee
members also held a number of informal discussions with the Chairman
during the year.
Gender Diversity
The Board supports the Davies Review’s conclusion that greater efforts should be
made in improving the gender balance of corporate boards and that quotas
for female Board representation are not the preferred approach.
The Committee and the Board have sought to ensure that appointments
are of the best candidates to promote the success of the Company and
that appointments are based on merit, with due regard for the bene?ts of
diversity on the Board, including gender (while also meeting the requirements
of the Equality Act). Subject to these requirements, the Board made a
commitment in 2013 to further strengthening female representation on
the Board. At Board level, this has included requesting headhunters to ensure
that as far as practicable, a signi?cant proportion of the long list of candidates
are female. Further to this commitment, Joanna Shields OBE and Sherry
Coutu CBE were appointed during the year. The Board’s diversity policy can
be found athttp://www.lseg.com/about-london-stock-exchange-group/
corporate-responsibility/ethics-and-governance.
Chris Gibson-Smith
Chairman
The Nomination Committee members as at 31 March 2014 were:
Chris Gibson-Smith (Chairman), Robert Webb, Paolo Scaroni
and Massimo Tononi. The Committee’s role is to review the
size and structure of the Board, consider succession planning
and make recommendations to the Board on potential
candidates for the Board.
Nomination Committee meeting attendance
in the year ended 31 March 2014
Total
Chris Gibson-Smith 1/1
Paolo Scaroni 1/1
Robert Webb 1/1
Massimo Tononi 1/1
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Report of the Nomination Committee
Chris Gibson-Smith
Chairman of the Nomination Committee
London Stock Exchange Group plc Annual Report 2014
Paul Heiden
Chairman of the Audit Committee
This report is intended to give an understanding of the role
of the Audit Committee in assisting the Board to ful?l its
oversight responsibilities for the system of internal control
and the integrity of the Group’s ?nancial statements.
In 2013, the previous Audit and Risk Committee of the Board was
separated into two separate committees: the Audit Committee and
the Risk Committee. As the Chairman of the Audit Committee, I sit on
the Risk Committee in order to improve the coordination of information
between the two committees. The new set-up of the committees re?ects
the growing importance of risk management and the clear separation
of duties between the second and third line of defence within the Group.
This separation has increased the ef?ciency and effectiveness of
each committee.
Priorities in the forthcoming year will include: establishing a successful
working relationship with the new external auditor, further aligning the
control environment of the Group’s recent acquisitions with the LSEG
framework, optimising the coordination with the Risk Committee and
reviewing the Committee’s meeting arrangements to further improve
its effectiveness.
Paul Heiden
Chairman of the Audit Committee
Role and responsibilities of the Audit Committee
1. Financial reporting
The Committee recommends the ?nancial statements of the Group to
the Board, including the annual and half-yearly reports, preliminary results
announcements and any other formal announcement relating to its ?nancial
performance, reviewing the signi?cant ?nancial reporting judgements that
they contain.
2. Internal controls and risk management systems
The Committee keeps under review the effectiveness of the Group’s system
of internal control and risk management. In order to do this, the Committee
considers reports from management and the internal audit function.
The Audit Committee makes recommendations to the Board regarding
the effectiveness of the Group’s internal control and risk management
systems and recommends to the Board the statements to be included
in the Annual Report concerning internal controls and risk management
(in collaboration with the Risk Committee).
3. External auditors
The Committee oversees the relationship with the external auditor and meets
with the external auditor at the start of each Committee meeting, without
management being present, to discuss their remit and any issues arising from
their audit. The Committee reviews and approves the annual audit plan, ensures
that it is consistent with the scope of the audit engagement and reviews the
?ndings of the audit with the external auditor. The Committee ensures that the
external audit services contract is put out to tender on a periodic basis in line
with existing best practices. The Committee oversees the selection process for
new auditors and if an auditor resigns the Committee investigates the issues
leading to the resignation and decides whether any action is required.
4. Other matters
Treasury
The Committee, with the Risk Committee, reviews proposed changes to
the Group Treasury Policy, approves the taking of any actions which fall
outside the scope of policy and considers material ?nancing and treasury
transactions reserved for the Board ahead of review by the Board.
Whistleblowing and fraud
The Committee reviews the Group’s arrangements for its employees to raise
concerns, in con?dence, about possible wrongdoing in ?nancial reporting
or other matters. The Committee ensures that these arrangements allow
proportionate and independent investigation of such matters and appropriate
follow-up action.
Composition and meetings
The Committee meets the requirements of the UK Code. It is comprised
of three independent Non-Executive Directors who all bring recent and
relevant ?nancial experience. It is chaired by Paul Heiden who is a quali?ed
chartered accountant with a career in a variety of senior ?nance roles.
The other members are Jacques Aigrain and Massimo Tononi who have each
previously held various executive management roles in ?nancial institutions.
(Baroness (Janet) Cohen and Gay Huey Evans both stepped down from the
Board, and from the Audit and Risk Committee, on 18 July 2013). The skills
and experience of each Committee member are provided on page 55.
The Group Chief Financial Of?cer, Group Financial Controller, Group Head
of Internal Audit, Group Chief Risk Of?cer and the external auditors are all
invited to attend all Audit Committee meetings. In addition, various other
managers are invited from time to time to present speci?c strategic issues
relevant to the Committee’s purview. The external auditors did not attend the
Audit Committee meeting on 18 March 2014 as it was dedicated to the
selection of the new external auditors.
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The Group Head of Internal Audit meets privately with the Committee at
the end of each Committee meeting without management being present.
Attendance at Audit Committee meetings in FY2014
1
:
Scheduled Ad hoc
4
TOTAL
Paul Heiden 3/3 1/1 4/4
Jacques Aigrain 3/3 1/1 4/4
Baroness (Janet) Cohen
2
0/1 – 0/1
Gay Huey Evans
3
1/1 – 1/1
Massimo Tononi 3/3 1/1 4/4
1 The Board appointed separate audit and risk committees on 18 July 2013. Prior to that date,
the Board operated a combined Audit and Risk Committee.
2, 3 Baroness (Janet) Cohen and Gay Huey Evans each stepped down from the Board, and the
Audit Committee, on 18 July 2013.
4 The ad hoc meeting was dedicated to the selection of the external auditor on 18 March 2014.
Activities in FY2014
The Committee maintains a formal agenda which ensures that all matters
for which the Committee is responsible are considered at the appropriate
meeting. During the year, the Committee discharged its responsibilities as
set in its terms of reference by performing the following:
Financial matters:
— Reviewed and approved key accounting judgements
— Reviewed and approved the half year and full year ?nancial results
— Reviewed the capital management policy
— Discussed the post completion planning of the LCH.Clearnet acquisition
— Reviewed and discussed the Treasury update reports
— Reviewed and approved the goodwill impairments
— Reviewed and discussed management’s view of commitments and
contingencies and the adequacy of the proposed disclosures
Internal controls:
— Reviewed compliance with the UK governance code – internal controls
(including whistle blowing) at half year and year end
— Reviewed updates on internal audit plans
— Approved the three year internal audit plan (2013-2016)
— Reviewed reports on the performance of internal audit
— Reviewed group risk reports
External auditors:
— Reviewed reports from the external auditor
— Approved the services provided by the external auditor
— Reviewed and approved the audit and non-audit fees
— Reviewed the effectiveness of the external auditor
— Reviewed and approved the Group audit plan
— Oversaw and approved the selection of the new external auditor
Other matters:
— Assessed its own effectiveness
— Reviewed and updated its own terms of reference
— Reviewed and discussed an update to the Group’s business continuity
and crisis management plans
— Reviewed and discussed the Annual Report and the procedures
implemented to ensure it is fair, balanced and understandable
Significant judgments in the Annual Report
Signi?cant
judgements for
FY2014 How the Committee reviewed these matters
Goodwill impairment
assessment
The Audit Committee considered the approach and
methodology applied to measuring the impairment
of Goodwill, including the key assumptions for short
and long-term growth rates, and the discount rate
used for the Group’s cost of capital. As a result, a
reconsideration of appropriate cash generating units
in Italy was made and the Committee reviewed and
approved the changes proposed. The Audit
Committee also considered various scenarios to
evaluate the impact of changes in assumptions on
the models’ results. The impairment review was also
an area of focus for the external auditors, who
reported their ?ndings to the Committee. As a result
of these activities, the Committee agreed that there
was no impairment to be recorded in the FY2014
accounts. More details can be found in note 13
on pages 124-125.
Going concern The Audit Committee satis?ed itself that the Group
has adequate ?nancial resources for the future by
reviewing and challenging the Group’s committed
funding and liquidity positions, its ability to generate
cash from its various activities, the quality of its risk
management and its ability to raise external funding.
The Committee relied on the detailed working capital
process, the FY2015 Budget and the three year
business plan. The Committee considered the
assumptions made by management in its evaluation
of future cash ?ows under stress including possible
mitigating actions under the control of management.
The Committee subsequently recommended to the
Board the adoption of the going concern statement
for inclusion in the Annual Report and Accounts.
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Governance Report of the Audit Committee
London Stock Exchange Group plc Annual Report 2014
Signi?cant
judgements for
FY2014 How the Committee reviewed these matters
Recognition and
measurement of
goodwill on acquisitions
The Audit Committee considered which method
was appropriate to recognise the goodwill for the
acquisitions during the year that involved less than
100 per cent of the target by considering the key
criteria used to make the determination. Based on
discussions with management and the external
auditors, the Audit Committee agreed that the fair
value approach should be used for LCH.Clearnet while
the proportionate share method would be used for
the smaller acquisitions. Results can be found in
note 28 on pages 136 and 137.
Purchase price
allocation on
acquisitions
The Audit Committee satis?ed itself on the validity
of the methodology to allocate the purchase price
for acquisitions based on detailed discussions with
management, with the external auditor and after
consideration of the advice of external third party
valuations. These discussions focused on the
reasonableness of the model and assumptions
used in comparison with best practices. The results
can be found in note 28 on pages 136 and 137.
Commitments and
Contingencies
The Audit Committee considered the facts and
circumstances surrounding commitments and
contingencies, in particular with respect to
LCH.Clearnet. It considered the nature of the
correspondence and discussions which had taken
place and after due consideration, the Committee
agreed that no provision should be recorded in the
FY2014 accounts.
Report on external auditors
A breakdown of audit and non-audit service fees paid and payable to the
external auditor for the year ended 31 March 2014 is provided below and in
note 32 to the accounts on page 141:
2014
£m
2013
£m
Audit services:
Audit of parent company and consolidated accounts 0.5 0.2
Audit of subsidiary companies 1.1 1.0
Audit related assurance services 0.4 0.4
Other non-audit services:
– Taxation 0.6 0.2
– Corporate ?nance 0.2 0.6
– Other assurance services – 0.1
Total expenses 2.8 2.5
In the year ended 31 March 2014, the majority of other non-audit services
provided by PricewaterhouseCoopers LLP were in relation to taxation.
These services were mostly for compliance and VAT advice for LCH.Clearnet
and included other smaller tax-related projects.
The Committee reviewed each of these individual appointments on their
merits, prior to PricewaterhouseCoopers LLP being engaged. (LCH.Clearnet
had engaged PwC to provide tax services prior to the Group’s acquisition of a
majority stake. These services were retrospectively reviewed and approved by
the Chair of the Audit Committee within the context of the Group policy).
The review process involved considering management’s assessment of:
— which accounting ?rms had the appropriate experience and expertise
to undertake the work;
— whether there were any con?icts of interest for
PricewaterhouseCoopers LLP;
— whether the con?icts of interest that existed for other potential ?rms,
which were advising other parties to the transactions or were auditors
of the other company, could be appropriately managed; and
— the quantum of non-audit fees in the context of the overall audit fee and
relative signi?cance to PricewaterhouseCoopers LLP in the context of its
total client fees.
In each case the Audit Committee concluded, on the balance of risks,
that the appointment of PricewaterhouseCoopers LLP represented the
most effective, secure and ef?cient way of obtaining the necessary advice
and services, given its knowledge of our business and the Group’s structure
and accounting and tax affairs together with its wider knowledge of our
industry sector.
The Group has also engaged other accounting ?rms on transactional
work during the year, selecting the appropriate ?rms based on the
criteria above, and the fees for these assignments are included alongside
PricewaterhouseCoopers’ and other advisers’ costs within the transaction
costs disclosed in note 7 to the accounts.
In light of the increasing diversi?cation, scale and reach of the Group, and also
in line with the Corporate Governance Code and UK Competition Commission
proposals regarding periodic tenders, the Audit Committee agreed on 18
September 2013 that a tender process should be conducted for the position
of the Group’s external auditor. The Audit Committee reviewed and approved
the tender process, governance and selection criteria.
As a result of the tender, the Audit Committee recommended to the Board
that Ernst & Young LLP (EY) be appointed as the Group’s external auditor.
Such appointment of EY will take place under the casual vacancy basis by
the Board shortly after the completion of the audit of LSEG’s consolidated
accounts for the year ended 31 March 2014 by PwC, and the appointment
of EY will be recommended to shareholders for approval at the Annual
General Meeting in July 2014.
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Stephen O’Connor
Chairman of the Risk Committee
Risk Committee meeting attendance
in the year ended 31 March 2014
Scheduled Ad hoc Total
Steven O’Connor 2/2 0 2/2
Paul Heiden 2/2 0 2/2
Stuart Lewis 2/2 0 2/2
Andrea Munari 2/2 0 2/2
This report is intended to give an understanding of the role of
the Risk Committee in assisting the Board to ful?l its oversight
responsibilities for risk management and the adequacy of the
systems of internal controls in place to mitigate key risks.
The Committee was established in September 2013 following a split of
responsibilities of the former Audit and Risk Committee. From 1 April
to September, the Audit and Risk Committee considered the risk matters.
During the year the Committee met twice and oversaw the implementation
of new frameworks, systems and tools to manage the risks of the enlarged
Group following the acquisition of a majority stake in LCH.Clearnet. This
included the further roll-out and embedding of the Enterprise-wide
Risk Management Framework introduced last year.
In order to avoid potential duplication of coverage and, more importantly,
to reduce the potential for non coverage of important risk matters, by either
the Audit or the Risk Committees, the Committee membership includes the
Chairman of the Audit Committee.
Priorities in the forthcoming year will include the Group’s ongoing efforts
to: further embed its Enterprise-wide Risk Management Framework
and ensure appropriate application throughout the Group; further develop
and implement risk tools and VaR models; further align the LSEG and
LCH.Clearnet risk frameworks; and, embed the enhanced risk
appetite framework.
The Committee will review, on a rotational basis, the risk pro?le of each
of its main lines of business and key legal entities.
Stephen O’Connor
Chairman of the Risk Committee
Composition and responsibilities
The Committee is chaired by Steven O’Connor who provides recent and
relevant ?nancial and risk management experience through his career
in a variety of senior executive roles in the ?nancial industry. In addition,
the Board is satis?ed that each member of the Committee has the skills
and experience necessary to enable the Committee to discharge its
responsibilities effectively. The names, skill and experience of the members
of the Risk Committee are provided on pages 54-55.
Further details of who normally attends meetings and the Committee’s terms
of reference, which are approved by the Board and reviewed on an ongoing
basis, are available from the Group Company Secretary or at the corporate
governance section of the Company’s website at www.lseg.com.
Activities
The Committee maintains a formal agenda which ensures that all matters
for which the Committee is responsible are considered at the appropriate
meeting. During the year the Committee discharged its responsibilities as
set out in its terms of reference by reviewing the following:
— The reports on risk exposures of the Company and on emerging risks
— The development and implementation of the Company’s counterparty
risk Group-wide aggregation and monitoring tool
— The adequacy of proposed actions to mitigate certain risk exposures
— The effectiveness programme in place to further align the risk
management framework of the Group and its subsidiaries
— Regulatory compliance reports and the actions in place to ensure
ongoing compliance
— The effectiveness of the Risk function and roll-out status of the new risk
framework and test results
— The programme in place to consolidate Group risks including the risks
from the newly acquired majority stake in subsidiary LCH.Clearnet
— The adequacy of the treasury limits in the area of ?nancial risk
management and approved changes to the treasury policy
— Papers on the potential impact of the regulatory requirements on the
CCPs of the group and related mitigating plans
— Compliance with the Group risk management procedures as described in
the section on internal controls on pages 62-64.
In addition the Committee oversaw the process that led to the rati?cation of
the Group Risk Appetite by the Board.
Risk Management function
During the year, the risk function continued the roll-out of the new Group
Enterprise-wide Risk Management Framework launched during the previous
year. The Committee has been monitoring the roll-out programme.
As part of its mandate the Committee reviews, at least three times a year,
the risk pro?le of the Group and comments on the adequacy of the processes
in place to identify and report on key risks. The Board as a whole reviews the
Group risk pro?le at least twice a year. It also received reports on compliance
with relevant regulatory requirements for each regulated entity of the Group.
The risk management function is headed by the Chief Risk Of?cer who
oversees all aspects of risk management in the Group. She reports to the
Chief Executive Of?cer and, for independence purposes, to the Chairman of
the Risk Committee. The Committee must be consulted on the appointment
or the dismissal of the Chief Risk Of?cer.
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Report of the Risk Committee
Governance Report of the Risk Committee
Robert Webb
Chairman of the Remuneration Committee
London Stock Exchange Group plc Annual Report 2014
On behalf of the Board, I am pleased to present the Directors’ Remuneration
Report for the year ended 31 March 2014. This is the ?rst year that we
are presenting under the new remuneration reporting regime, and
subsequently this year’s report has been split into two separate sections:
the Remuneration Policy Report and the Annual Report on Remuneration.
31 December 2014). The Committee has taken this change into account
when making remuneration decisions relating to the bonus and LTIP awards,
as explained later in this report.
Key remuneration decisions
— Adjusted operating pro?t is up 20 per cent at £514.7 million
— Adjusted basic EPS is up two per cent at 107.1 pence
The Group has had a strong year increasing its global footprint and
diversifying its service offering which has delivered an increase in revenue,
operating pro?ts and market capitalisation. This performance has been
achieved through the execution of the Group’s strategy including the
completion of the acquisition of a majority stake in the global clearing house,
LCH.Clearnet Group and the work to integrate them further into the Group;
building best in class capabilities through innovative solutions in post trade,
information services and capital markets; creating a global business with
expanded reach through FTSE, MTS, MillenniumIT and now LCH.Clearnet;
developing opportunities through diversi?cation with plans to launch a new
central securities depository, new derivatives products and continued
development of our ELITE programme. This strong performance is re?ected
in the bonus outcomes in respect of ?nancial year ended 31 March 2014.
As part of the annual review of salaries for Executive Directors, the Committee
has awarded the Chief Executive an increase of four per cent and kept the
Chief Financial Of?cer’s salary at the same level as last year. This year the
Committee has taken the opportunity to consider the salary level for Raffaele
Jerusalmi, Chief Executive Of?cer of Borsa Italiana and Director of Capital
Markets, in greater detail. His salary has been increased to €480,000 to re?ect
the growing breadth and complexity of Mr Jerusalmi’s role. Further details are
set out in the Annual Report on Remuneration. These increases took effect
from 1 April 2014.
Concluding remarks
The Committee would like to thank all of our shareholders who took time
to provide feedback on our proposed remuneration arrangements for
2014 onwards.
I would also like to extend a warm welcome to Sherry Coutu who has recently
joined the Remuneration Committee after the end of FY13/14.
At the forthcoming AGM, shareholders will be provided with three separate
votes relating to remuneration matters:
1. Vote on the new Remuneration Policy Report, which is forward looking
– this is a binding vote.
2. Vote on the FY13/14 Annual Report on Remuneration – in line with the
regulations, this is an advisory vote.
3. Approval of the new 2014 LTIP as the Group’s current LTIP will expire in
July 2014.
The Committee has looked to ensure the Group’s approach to remuneration
takes into account best practice developments and market trends in the
?nancial services sectors and wider market while continuing to support the
commercial needs of the Group and the interests of shareholders. We hope
that you are able to support these proposals at the AGM.
Robert Webb
Chairman of the Remuneration Committee
Incentive review
In 2013, we committed to reviewing our remuneration framework, including
our Group’s LTIP which is due for renewal in July this year. During the past
year the Committee has undertaken a comprehensive assessment of our
remuneration structure to ensure it continues to support the Group’s strategic
priorities. As part of this process the Committee evaluated the arrangements
against evolving practice. As a result of this assessment, we are making a
number of changes to our remuneration framework. However, the overall
incentive opportunity has not increased.
The key changes are as follows:
— Simpli?cation of arrangements by removing the voluntary matching
element and providing one LTIP in future award cycles
— Introduction of a compulsory deferral of 50 per cent of the annual
bonus for the ?nancial year ending 31 December 2014 onwards
— Reduction in the threshold level of vesting under the LTIP from 30 per
cent to 25 per cent of the maximum
— Introduction of malus and clawback provisions on future bonus
and LTIP awards
— Alignment of good leaver policy with best practice
— Increase in the minimum shareholding requirement
The Group continues to focus on integrating our strategic acquisitions,
building on our increasingly diverse world class assets and working
in partnership with our customers to deliver service and product
innovation, all of which will contribute towards delivery of pro?table
growth. Subsequently, the Committee has concluded that EPS and TSR
remain the most suitable performance metrics for long-term awards.
As part of the review, the Committee consulted with shareholders throughout
the process and took their feedback into account. The overall changes have
been widely supported by our major shareholders.
Change in financial year end
As announced on 27 March 2014, the Group intends to migrate its ?nancial
year to align with the calendar year from 1 January 2015. This change
will result in a truncated ?nancial year in 2014 (i.e. from 1 April 2014 to
70 Governance
Directors’ Remuneration Report
Statement by the Chairman of the Remuneration Committee
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Summary of key Executive remuneration decisions (Audited)
Role Chief Executive Of?cer Chief Financial Of?cer
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
Name Xavier Rolet David Warren Raffaele Jerusalmi
Previous salary
1
(FY13/14)
£705,000 £425,000 €435,000
Annual salary with
effect from 1 April 2014
£733,000 (+4%) £425,000 (+0%) €480,000 (+10%)
Max. bonus opportunity
for FY2014
2
225% 200% 200%
FY2014 LTIP award
3,4,5
(subject to performance)
200% of salary (£1,466,000) 176% of salary (£750,000) 181% of salary (£719,000)
FY13/14 bonus
% of salary
6
210% of salary 141% of salary 161% of salary
% of max 93% of maximum 71% of maximum 81% of maximum
amount £1,480,500 £600,000 €700,000
Notes:
1 FY13/14: refers to the period 1 April 2013 to 31 March 2014.
2 FY2014: refers to the period 1 April 2014 to 31 December 2014.
3 These proposed LTIP award levels assume grants to be made under the 2004 LTIP together with the additional opportunity to participate in a matching award.
4 Salary here refers to Annual salary with effect from 1 April 2014.
5 The Executive Director is also eligible (for this transition year) for a grant of matching shares up to 100 per cent of salary dependent on an investment of up to 50 per cent of their net salary.
6 Salary here refers to Previous salary (FY13/14).
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Governance Directors’ Remuneration Report
Annual bonus
Annual incentive subject to performance objectives
for the ?nancial year
Compulsory bonus deferral
Executives must defer 50 per cent of their bonus
for a period of two years
Performance Shares
Awards of Performance Shares which vest
subject to three-year performance targets
Further changes
Malus and clawback
provisions introduced
Reduced threshold
vesting for LTIP
Increase minimum
shareholding requirement
Alignment of good leaver
treatment with best practice
Annual bonus
Annual incentive subject to performance objectives
for the ?nancial year
Voluntary bonus deferral
Executives may invest all or part of their pre-tax bonus
(up to 50 per cent of net salary) into Shares
Matching Shares
Performance Shares
Deferred bonus attracts a performance related
Matching Share award
Awards of Performance Shares which vest subject
to three-year performance targets
London Stock Exchange Group plc Annual Report 2014
Remuneration Policy Report (pages 74-85)
This section contains the remuneration policy that we intend to
apply following the 2014 AGM. This report will be subject to a
binding shareholder vote at the 2014 AGM.
As the policy is forward looking, this section details how we intend
to operate remuneration arrangements in future years.
The new incentive structure has been implemented following
consultation with the Group’s major shareholders. The new structure
is simpler, and incorporates a number of elements from emerging
best practice.
New incentive structure for Executive Directors – overview
of future approach.
This report has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013, and relevant sections of the Listing Rules.
This year’s disclosure has been split into two sections:
Annual Report on Remuneration (pages 86-97)
This section sets out how remuneration arrangements have been
operated during the past year, and also provides details on how we
intend to operate our policy during the coming year. This report
will be put to an advisory vote at the 2014 AGM.
This section ?rstly explains how Executives have been paid during the last
?nancial year.
In previous years, the Group operated a slightly different incentive structure.
Subsequently, the awards referenced differ from the structure set out in the
forward-looking Remuneration Policy Report.
Previous incentive structure for Executive Directors – which will
no longer operate in future years.
In addition to presenting the Remuneration Policy Report for approval at
the AGM, the Group will also be presenting a new Long Term Incentive
Plan to shareholders for approval at the 2014 AGM. This new plan
replaces the previous plan that was approved by shareholders in 2004.
Further details regarding the operation of the new plan are set out in the
Notice of AGM.
Matching Shares and Performance Shares under the previous structure
were granted under the 2004 Long Term Incentive Plan. This plan
expires in July 2014 after which no further awards will be granted under
this arrangement.
As well as detailing the remuneration arrangements during the year,
the Annual Report on Remuneration also details how we intend to
operate the new incentive structure in the coming year.
72 Governance
Directors’ Remuneration Report continued
Introduction
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Change in financial year
As announced on 27 March 2014, the Group intends to migrate the Group’s
?nancial year to align with the calendar year from 1 January 2015. This
change will result in a truncated ?nancial year in 2014 (i.e. from 1 April 2014
to 31 December 2014). The Committee has taken this change into account
when making remuneration decisions relating to the bonus and LTIP awards.
The Committee has carefully considered the impact of the change in ?nancial
year on the Group’s remuneration framework and has concluded that:
Bonus
— For the ?nancial period ending 31 December 2014, the maximum bonus
opportunities will be pro-rated to re?ect the shortened period with
performance measured over the truncated ?nancial year.
— Any bonus payment would be determined by March 2015. Under the
new proposals, 50 per cent of any award would be deferred.
LTIP
— The vesting period for outstanding long-term share awards will remain
unaffected by the change, with no acceleration of vesting. In addition, no
changes to the existing performance metrics are proposed (including the
annualised growth targets).
— The TSR conditions for outstanding awards will continue to be measured
over three calendar years from the date of grant. In line with the
performance schedule, EPS would be measured over three ?nancial years
while seeking to ensure performance is assessed on a like-for-like basis.
— Long-term awards granted in 2012 will vest in June/July 2015 using
a proxy 12-month ?nancial year for 2014 as closing year for EPS
performance measure. Similarly for awards to be granted in 2015,
the Committee will use the same proxy 12-month ?nancial year for
2014 as the baseline year for the EPS measure.
— The Committee will assess the performance period for each LTIP grant to
ensure no participant is materially advantaged or disadvantaged from
the change in year end.
— For grants made prior to the 2014 AGM, Executive Directors will be invited
to participate in the voluntary matching scheme. The performance
measures for such Performance and Matching Shares will be the same
as for awards granted in previous years, as set out on page 85.
For details of legacy arrangements, please also refer to page 85.
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London Stock Exchange Group plc Annual Report 2014
Future policy table for Executive Directors
A summary of the key elements of remuneration for
Executive Directors is shown in the table opposite.
This Remuneration Policy Report determined
by the Group’s Remuneration Committee
(“the Committee”), will, if it is approved by
shareholders at the 2014 AGM, be effective
from the date of its approval at that meeting.
The Group must attract and retain a high calibre
senior management team to ensure it is in a
position to deliver its business plans and maximise
returns for shareholders. The Group is committed
to paying for performance, rewarding the senior
management team only when its goals are
achieved. Each year the remuneration framework
and the packages of the Executive Directors
and members of the Executive Committee are
reviewed by the Committee to ensure that they
continue to achieve this objective. In doing so, the
Committee takes into account multiple reference
points when setting pay including companies in
the FTSE 31-100, the broader Financial Services
sector as well as other international exchanges.
The Committee has taken the following areas
into account in establishing the Group
remuneration policy:
— a focus on shareholder value;
— the continued expansion of the Group
beyond the UK;
— the need to attract and retain senior
management from the international
?nancial sector which requires
remuneration packages with a
suf?cient variable pay component;
— the Group’s intent to be mindful of best
practice as expressed by institutional
shareholders and their representative
bodies; and
— the relatively higher pro?le of the Group
compared with many other quoted companies
with similar market capitalisation.
ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Salary Provides a core element of remuneration which re?ects the
responsibilities of the role.
Enables the recruitment and retention of individuals of the
calibre required to execute the Group’s strategy.
Base salaries are normally reviewed annually by taking
into account a range of factors, including:
— size and scope of the role;
— skills and experience of the individual;
— market competitiveness/relative positioning;
— performance of the Group and of the individual;
— wider market and economic conditions; and
— level of increases being made across the Group.
Any changes are normally effective from 1 April
each year.
There is no de?ned maximum salary.
Increases are determined based on the
factors described in the Operation column.
The Committee’s normal approach is to
initially consider increases within the range
awarded to other employees. More
signi?cant increases may be awarded in
certain circumstances, such as where there
is a signi?cant change in the scale, scope or
responsibility of a role, development within
a role and/or signi?cant market movement.
The annual base salaries in FY13/14 and
FY2014 for each Executive Director are set
out in the Annual Report on Remuneration.
n/a
Benefits
Provide local market competitive bene?ts
and support the wellbeing of employees.
A ?exible bene?ts plan is offered, in which individuals
have certain core bene?ts (such as private medical, life
assurance, income protection and, additionally in Italy
only, disability, accident, car, fuel allowance and luncheon
vouchers) together with (in the UK) a taxable cash
allowance which can be spent on elective bene?ts
(such as additional medical, life or dental cover).
A chauffeur-driven motor car may also be provided for
Executive Directors where appropriate.
Due to the high pro?le of the Group, the Committee
reserves the right to provide our Executives with the
appropriate level of security arrangements to allow them
to perform their duties in the safest possible conditions.
Bene?ts are reviewed periodically to ensure they remain
affordable and competitive. The Committee retains the
discretion to provide reasonable additional bene?ts
as appropriate – for example, relocation and other
allowances including expatriate assistance, housing and
school fees for a ?nite period, tax preparation and ?ling
assistance and ?ights back to the home country for the
Executive and his family. Repatriation costs are met by
the Company if employment is terminated by the
Company, other than for just cause.
Where necessary any bene?ts may be grossed up
for taxes.
Executives are eligible to participate in the Group’s
HMRC-approved Save As You Earn Option Scheme
(or international equivalent) on the same basis as
other employees.
Executive Directors are covered by the Directors’ and
Of?cers’ insurance and indemni?cation.
There is no de?ned maximum. Bene?ts
plans are set at (what are in the Committee’s
opinion) reasonable levels in order to be
market competitive for their local
jurisdiction and are dependent on individual
circumstances.
Participation in the Save As You Earn
Option Scheme (or international equivalent)
is capped at the same level as all other
participants, which is determined by the
Company within the parameters of
applicable legislation.
n/a
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Remuneration Policy Report
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ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Salary Provides a core element of remuneration which re?ects the
responsibilities of the role.
Enables the recruitment and retention of individuals of the
calibre required to execute the Group’s strategy.
Base salaries are normally reviewed annually by taking
into account a range of factors, including:
— size and scope of the role;
— skills and experience of the individual;
— market competitiveness/relative positioning;
— performance of the Group and of the individual;
— wider market and economic conditions; and
— level of increases being made across the Group.
Any changes are normally effective from 1 April
each year.
There is no de?ned maximum salary.
Increases are determined based on the
factors described in the Operation column.
The Committee’s normal approach is to
initially consider increases within the range
awarded to other employees. More
signi?cant increases may be awarded in
certain circumstances, such as where there
is a signi?cant change in the scale, scope or
responsibility of a role, development within
a role and/or signi?cant market movement.
The annual base salaries in FY13/14 and
FY2014 for each Executive Director are set
out in the Annual Report on Remuneration.
n/a
Benefits
Provide local market competitive bene?ts
and support the wellbeing of employees.
A ?exible bene?ts plan is offered, in which individuals
have certain core bene?ts (such as private medical, life
assurance, income protection and, additionally in Italy
only, disability, accident, car, fuel allowance and luncheon
vouchers) together with (in the UK) a taxable cash
allowance which can be spent on elective bene?ts
(such as additional medical, life or dental cover).
A chauffeur-driven motor car may also be provided for
Executive Directors where appropriate.
Due to the high pro?le of the Group, the Committee
reserves the right to provide our Executives with the
appropriate level of security arrangements to allow them
to perform their duties in the safest possible conditions.
Bene?ts are reviewed periodically to ensure they remain
affordable and competitive. The Committee retains the
discretion to provide reasonable additional bene?ts
as appropriate – for example, relocation and other
allowances including expatriate assistance, housing and
school fees for a ?nite period, tax preparation and ?ling
assistance and ?ights back to the home country for the
Executive and his family. Repatriation costs are met by
the Company if employment is terminated by the
Company, other than for just cause.
Where necessary any bene?ts may be grossed up
for taxes.
Executives are eligible to participate in the Group’s
HMRC-approved Save As You Earn Option Scheme
(or international equivalent) on the same basis as
other employees.
Executive Directors are covered by the Directors’ and
Of?cers’ insurance and indemni?cation.
There is no de?ned maximum. Bene?ts
plans are set at (what are in the Committee’s
opinion) reasonable levels in order to be
market competitive for their local
jurisdiction and are dependent on individual
circumstances.
Participation in the Save As You Earn
Option Scheme (or international equivalent)
is capped at the same level as all other
participants, which is determined by the
Company within the parameters of
applicable legislation.
n/a
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Retirement benefits Provide Executives with retirement bene?ts.
Support recruitment and retention of high calibre people.
Provision of annual pension allowance, invested in
the Company’s de?ned contribution plan or taken
as a cash allowance.
In certain jurisdictions, more bespoke pension
arrangements may be provided. In such circumstances,
the Committee will give appropriate consideration to local
employment legislation, market practices and the cost of
the arrangement.
The maximum annual pension
contribution/cash allowance is 25 per
cent of salary (except where determined
by local market practice).
In Italy, Mr Jerusalmi accrues mandatory
state pension (INPS) bene?ts which are
calculated on salary, bene?ts and annual
bonus. Actual bene?t due at retirement is
set out by the applicable Italian legislation
in force from time to time. Under the
Italian Trattamento di Fine Rapporto (TFR),
he receives contributions which are funded
by the Group at a rate ?xed by local law
and which are paid to Mr Jerusalmi’s
private pension plan. TFR is calculated
on salary, capped bene?ts, annual bonus
and LTIP.
n/a
Annual bonus
Rewards annual performance against challenging ?nancial,
strategic and individual targets linked to Group strategy.
Deferral reinforces retention and enhances alignment with
shareholders by encouraging longer term focus and
sustainable performance.
The Group operates a Group-wide bonus pool which is
funded based on the achievement of ?nancial and
strategic goals of the Group. Allocations to individual
Executive Directors are made from this pool based on the
Committee’s assessment of their individual performance,
taking into account the Group’s ?nancial and strategic
performance and the achievement of any individual
objectives related to their role.
Performance targets are reviewed and set by the
Committee at the beginning of each performance year.
Awards are determined by the Committee after the
year end based upon the actual performance against
these targets.
The Committee applies judgement where necessary to
ensure approved pay-out levels are re?ective of actual,
overall performance.
— 50 per cent of the annual bonus will be subject
to mandatory deferral, normally for a period of
two years.
— Until the minimum shareholding requirement (see
below) is reached, bonus deferral will be 100 per cent
into shares. Once the level of minimum shareholding
has been reached, individuals will be able to defer
100 per cent into shares, 50 per cent into shares/50
per cent into cash or 100 per cent into cash.
— Dividends (or equivalents) may be paid in respect
of deferred shares on vesting.
— Deferred awards are subject to malus provisions as
described below. Paid bonuses and vested awards are
subject to clawback as described below.
Maximum annual bonus opportunity of
225 per cent of salary for CEO and 200
per cent of salary for other Executive
Directors for maximum performance.
Based on a combination of ?nancial
(e.g. adjusted operating pro?t), strategic and
individual performance targets. Strategic
objectives include key targets under the
strategic pillars of building best in class
capabilities, creating a global business and
developing opportunities. These strategic
objectives also impact ?nancial results in
the medium-term.
The Committee will set the detail and mix
of performance measures, targets and
weighting based on the strategic objectives
at the start of each year. At least 50 per
cent of the targets relating to the annual
bonus pool in any year will be subject to
?nancial measures.
No bonuses are paid for below threshold
performance. The Committee may award
any amount between zero and 100 per cent
of the maximum opportunity.
The performance measures are applied in
the performance year only.
Due to the ?nancial year end change,
FY2014 will be based on a nine-month
performance period from 1 April 2014 to
31 December 2014, followed by a calendar
year from 1 January to 31 December from
2015 onwards. Further details about the
impact of the ?nancial year-end change
can be found on page 73.
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ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
Retirement benefits Provide Executives with retirement bene?ts.
Support recruitment and retention of high calibre people.
Provision of annual pension allowance, invested in
the Company’s de?ned contribution plan or taken
as a cash allowance.
In certain jurisdictions, more bespoke pension
arrangements may be provided. In such circumstances,
the Committee will give appropriate consideration to local
employment legislation, market practices and the cost of
the arrangement.
The maximum annual pension
contribution/cash allowance is 25 per
cent of salary (except where determined
by local market practice).
In Italy, Mr Jerusalmi accrues mandatory
state pension (INPS) bene?ts which are
calculated on salary, bene?ts and annual
bonus. Actual bene?t due at retirement is
set out by the applicable Italian legislation
in force from time to time. Under the
Italian Trattamento di Fine Rapporto (TFR),
he receives contributions which are funded
by the Group at a rate ?xed by local law
and which are paid to Mr Jerusalmi’s
private pension plan. TFR is calculated
on salary, capped bene?ts, annual bonus
and LTIP.
n/a
Annual bonus
Rewards annual performance against challenging ?nancial,
strategic and individual targets linked to Group strategy.
Deferral reinforces retention and enhances alignment with
shareholders by encouraging longer term focus and
sustainable performance.
The Group operates a Group-wide bonus pool which is
funded based on the achievement of ?nancial and
strategic goals of the Group. Allocations to individual
Executive Directors are made from this pool based on the
Committee’s assessment of their individual performance,
taking into account the Group’s ?nancial and strategic
performance and the achievement of any individual
objectives related to their role.
Performance targets are reviewed and set by the
Committee at the beginning of each performance year.
Awards are determined by the Committee after the
year end based upon the actual performance against
these targets.
The Committee applies judgement where necessary to
ensure approved pay-out levels are re?ective of actual,
overall performance.
— 50 per cent of the annual bonus will be subject
to mandatory deferral, normally for a period of
two years.
— Until the minimum shareholding requirement (see
below) is reached, bonus deferral will be 100 per cent
into shares. Once the level of minimum shareholding
has been reached, individuals will be able to defer
100 per cent into shares, 50 per cent into shares/50
per cent into cash or 100 per cent into cash.
— Dividends (or equivalents) may be paid in respect
of deferred shares on vesting.
— Deferred awards are subject to malus provisions as
described below. Paid bonuses and vested awards are
subject to clawback as described below.
Maximum annual bonus opportunity of
225 per cent of salary for CEO and 200
per cent of salary for other Executive
Directors for maximum performance.
Based on a combination of ?nancial
(e.g. adjusted operating pro?t), strategic and
individual performance targets. Strategic
objectives include key targets under the
strategic pillars of building best in class
capabilities, creating a global business and
developing opportunities. These strategic
objectives also impact ?nancial results in
the medium-term.
The Committee will set the detail and mix
of performance measures, targets and
weighting based on the strategic objectives
at the start of each year. At least 50 per
cent of the targets relating to the annual
bonus pool in any year will be subject to
?nancial measures.
No bonuses are paid for below threshold
performance. The Committee may award
any amount between zero and 100 per cent
of the maximum opportunity.
The performance measures are applied in
the performance year only.
Due to the ?nancial year end change,
FY2014 will be based on a nine-month
performance period from 1 April 2014 to
31 December 2014, followed by a calendar
year from 1 January to 31 December from
2015 onwards. Further details about the
impact of the ?nancial year-end change
can be found on page 73.
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
LTIP (Long Term
Incentive Plan) 2014
Incentivises performance over the longer term through the
award of performance related shares.
Aligns reward with long-term, sustainable Group performance
and a focus on shareholder value.
— Under the (new) LTIP 2014, which is being put to
shareholders for approval at the AGM in 2014,
awards of shares (or equivalent) are granted
annually subject to performance conditions.
— Awards normally vest subject to performance targets
assessed over a performance period, normally of
at least three ?nancial years. The Committee has
discretion to set different performance periods if
it considers them to be appropriate.
— The Committee shall determine the extent to
which the performance measures have been
met. The Committee may make adjustments to
performance targets if an event occurs that the
Committee determines that an adjustment is
appropriate. The performance targets will be at
least as challenging as the ones originally set.
— Dividends (or equivalents) may be paid on vesting.
Unvested awards are subject to a malus provision
and vested awards are subject to clawback,
as described on the following page.
— Details on the impact of the ?nancial year end
change on the proposed LTIP can be found on
page 73.
Although there is a facility for maximum
awards of up to 400 per cent of salary under
the plan rules in exceptional cases, it is
expected that awards under this plan will
normally be up to 300 per cent of salary.
The Committee determines performance
targets each year to ensure that the targets
are stretching and support value creation for
shareholders while remaining motivational
for management.
Vesting of awards is subject to achievement
of total shareholder return and ?nancial
performance targets. For initial grants under
this new LTIP, awards are subject to absolute
TSR and adjusted EPS measures.
Measures will normally be equally weighted
but in any event, any total shareholder
return element will represent at least 50 per
cent of the award.
For each performance element,
achievement of the threshold performance
level will result in no more than 25 per cent
of the maximum award paying out. For
achievement of the maximum performance
level, 100 per cent of the maximum pays
out. Normally, there is straight-line vesting
between these points.
Share ownership
Ensures alignment with shareholders’ interests. Executive Directors are expected to build up share ownership over a period of ?ve years and maintain holdings of at least 2x base salary.
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ELEMENT PURPOSE AND LINK
TO STRATEGY
OPERATION MAXIMUM OPPORTUNITY PERFORMANCE MEASURES
LTIP (Long Term
Incentive Plan) 2014
Incentivises performance over the longer term through the
award of performance related shares.
Aligns reward with long-term, sustainable Group performance
and a focus on shareholder value.
— Under the (new) LTIP 2014, which is being put to
shareholders for approval at the AGM in 2014,
awards of shares (or equivalent) are granted
annually subject to performance conditions.
— Awards normally vest subject to performance targets
assessed over a performance period, normally of
at least three ?nancial years. The Committee has
discretion to set different performance periods if
it considers them to be appropriate.
— The Committee shall determine the extent to
which the performance measures have been
met. The Committee may make adjustments to
performance targets if an event occurs that the
Committee determines that an adjustment is
appropriate. The performance targets will be at
least as challenging as the ones originally set.
— Dividends (or equivalents) may be paid on vesting.
Unvested awards are subject to a malus provision
and vested awards are subject to clawback,
as described on the following page.
— Details on the impact of the ?nancial year end
change on the proposed LTIP can be found on
page 73.
Although there is a facility for maximum
awards of up to 400 per cent of salary under
the plan rules in exceptional cases, it is
expected that awards under this plan will
normally be up to 300 per cent of salary.
The Committee determines performance
targets each year to ensure that the targets
are stretching and support value creation for
shareholders while remaining motivational
for management.
Vesting of awards is subject to achievement
of total shareholder return and ?nancial
performance targets. For initial grants under
this new LTIP, awards are subject to absolute
TSR and adjusted EPS measures.
Measures will normally be equally weighted
but in any event, any total shareholder
return element will represent at least 50 per
cent of the award.
For each performance element,
achievement of the threshold performance
level will result in no more than 25 per cent
of the maximum award paying out. For
achievement of the maximum performance
level, 100 per cent of the maximum pays
out. Normally, there is straight-line vesting
between these points.
Share ownership
Ensures alignment with shareholders’ interests. Executive Directors are expected to build up share ownership over a period of ?ve years and maintain holdings of at least 2x base salary.
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— Recognising that the Group competes for talent in the international
?nancial services sector, on an exceptional basis, the Committee has the
ability to include other elements of pay which it feels is appropriate taking
into account the speci?c commercial circumstances (e.g. for an interim
appointment). However this would remain subject to the limit on variable
remuneration set out above. The rationale for any such component would
be appropriately disclosed.
— In addition, where an individual forfeits arrangements as a result of
appointment, the Committee may offer a buy-out, in such form as the
Committee considers appropriate taking into account all relevant factors
which may include the vehicle, expected value and timing of forfeited
opportunities. Any such buy-out will be limited to the commercial value
of payments and awards forfeited by the individual.
— Where an Executive Director is required to relocate from their home
location to take up their role, the Committee may provide reasonable
relocation assistance and other allowances including expatriate
assistance. Global relocation support (normally for up to ?ve years)
and any associated costs or bene?ts (including but not limited to
housing, school fees, tax preparation and ?ling assistance and ?ights
back to the home country) may also be provided if business needs
require it. Should the Executive’s employment be terminated without
cause by the Group, repatriation costs will be met by the Group.
— In the event that an internal candidate was promoted to the Board,
legacy terms and conditions would normally be honoured, including
pension entitlements and any outstanding incentive awards.
The remuneration package for a newly appointed Non-Executive Director
would normally be in line with the structure set out in the policy table for
Non-Executive Directors (see page 83).
Service contracts and payments for departing Directors
Policy in respect of new appointments
The Group’s current policy is that Executive Directors’ service agreements
should have notice periods that are no longer than 12 months. The Group
may terminate an Executive Director’s service agreement by making a
payment in lieu of notice of a sum equal to 12 months’ salary, pension,
?exible bene?ts allowance, life and medical insurance (but excluding
bonus and share incentives) plus any accrued unused holiday entitlement.
Consideration will be given to appropriate mitigation terms to reduce
payments in lieu of notice made on termination in the event of the Executive
Director commencing alternative employment, being appointed as a
Non-Executive Director or providing services pursuant to a consultancy
agreement in the 12 months following the Executive Director’s departure.
The lawful termination mechanisms described above are without prejudice
to the Group’s ability in appropriate circumstances to terminate in breach of
the notice period referred to above, and thereby to be liable for damages to
the Executive Director. Liquidated damages clauses are not used. The Group
may pay the Executive Director’s reasonable legal fees for receiving advice in
connection with the termination of their employment.
In the event of termination by the Group, each Executive Director may
have an entitlement to compensation in respect of his statutory rights
under employment protection legislation in the UK and potentially
elsewhere. Directors’ and Of?cers’ liability insurance and an indemnity
to the fullest extent permitted by the law and the Group’s Articles of
Association are provided to the Executive Directors for the duration of
their employment and for a minimum of seven years following termination.
Notes to the Policy Table
Selection of performance measures
Performance targets are set by the Committee to be both stretching and
achievable, taking into account the Group’s strategic priorities and the
economic landscape.
The performance measures that are used for our annual bonus and Long
Term Incentive Plans have been chosen to support the Group’s strategy.
For the annual bonus plan, the Committee continues to believe that it is
appropriate to use a balance between ?nancial targets, strategic objectives
and individual performance objectives.
The Committee considers that the measures to be used for the LTIP, i.e. TSR
and adjusted EPS, are currently the most appropriate measures of long-term
performance for the Group.
Malus and clawback provisions
A malus provision applies to awards granted under the new LTIP, and to
unvested awards under the Deferred Bonus Plan. This would allow the
Committee in its absolute discretion to determine, at any time prior to
the vesting of an award, to reduce, cancel or impose further conditions in
certain circumstances, including (i) where there is a material misstatement
or restatement of the results of the Group in its audited accounts, (ii) the
negligence, fraud or serious misconduct of the individual which results in
signi?cant reputational damage to the Group or which has a material adverse
effect on the ?nancial position of the Group or the business opportunities of
the Group, or (iii) if the individual is a member of a company in the Group
which suffers signi?cant reputational damage or material adverse effect on
its ?nancial position or on its business opportunities.
A clawback provision applies to vested awards granted under the new LTIP,
vested awards under the Deferred Bonus Plan and annual bonuses paid
previously. This would allow the Committee in its absolute discretion to claw
back from individuals some or all of the vested awards or paid bonus in
certain circumstances, including (i) if there is a material misstatement or
restatement of the results of the Group in its audited accounts, (ii) the
negligence, fraud or serious misconduct of the individual which results in
signi?cant reputational damage to the Group or a material adverse effect on
the ?nancial position of the Group or the business opportunities of the Group,
or (iii) if the individual is a member of a company in the Group which suffers
signi?cant reputational damage or material adverse effect on its ?nancial
position or on its business opportunities. Clawback will normally apply for a
period of three years following vesting of shares and/ or payment of bonus,
unless the Committee determines otherwise.
Recruitment policy
When determining the remuneration package for a newly appointed Executive
Director, the Committee would seek to apply the following principles:
— The package should be market competitive to facilitate the recruitment
of individuals of suf?cient calibre required by the Group. Consistent with
the UK Corporate Governance Code, the Committee would intend to pay
no more than it believes is necessary to secure the required talent.
— The ongoing remuneration package would normally include the key
elements on the same terms as those set out in the policy table for
Executive Directors.
— The maximum level of variable remuneration which may be awarded on
recruitment (excluding any buy-outs referred to below) is 625 per cent
of salary. Incentive awards made in the ?rst year of appointment may
be subject to different performance measures and targets appropriate
to the newly recruited Executive Director.
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Detailed share plan provisions
Share awards are subject to the terms of the relevant plan rules under which
the award has been granted. The Committee may adjust or amend awards
only in accordance with the provisions of the plan rules. This includes making
adjustments to awards to re?ect certain corporate events, including a
variation in the Company’s share capital, a demerger or a special dividend.
In change of control circumstances, all LTIP awards will normally vest on an
accelerated basis subject to the extent that the performance conditions are
satis?ed, and, unless the Committee determines otherwise, time pro-rating.
Deferred Bonus awards will normally vest in full. The Committee may also
allow some or all of an award to be exchanged if not yet vested.
Individual terms
Xavier Rolet entered into a service agreement with the Group on 25 February
2009 and was appointed with effect from 16 March 2009. Xavier Rolet’s
service agreement can be terminated by either party giving not less than
12 months’ notice. Alternatively, the Group may terminate the contract by
making a payment in lieu of notice of a sum equal to 12 months’ salary,
pension, ?exible bene?ts allowance, life and private medical insurance
(but excluding bonus and share incentives) paid in a lump sum or, at the
Committee’s absolute discretion, paid in 12 equal monthly instalments from
the date of termination of the employment. Alternatively, the Group may in
its discretion continue to provide pension, life and private medical insurance
for the 12 months following termination. If the payment is made in
instalments and Mr Rolet commences alternative employment, is appointed
as a Non-Executive Director or provides services pursuant to a consultancy
agreement in the relevant period (of 12 months) following his departure from
the Group, the instalments will be reduced by one-twelfth of the annual
remuneration earned from the alternative employment, directorship or
consultancy. On termination (other than by reason of summary dismissal)
Mr Rolet will be eligible to receive a pro-rata bonus for the year in which his
employment is terminated subject to company and individual performance.
David Warren entered into a service agreement with the Group on 11 June
2012 and was appointed with effect from 2 July 2012. David Warren’s service
agreement may be terminated by either party giving at least 12 months’
notice. Alternatively, the Group may terminate the contract by payment in lieu
of notice of a sum equal to 12 months’ salary, pension, ?exible bene?ts
allowance, life and private medical insurance (but excluding bonus and share
incentives). Any payment in lieu of notice will be paid in 12 equal monthly
instalments from the date of termination of the employment. Alternatively,
the Group may in its discretion continue to provide pension and life and private
medical insurance for the 12 months following termination. Should Mr Warren
commence alternative employment, be appointed as a Non-Executive Director
or provide services pursuant to a consultancy agreement in the relevant period
(of 12 months) following his departure from the Group, the instalments will
be reduced by one-twelfth of the annual remuneration earned from the
alternative employment, directorship or consultancy. Payments of the
instalments may be required to be deferred until six months after termination
by US tax rules applying to Mr Warren. To the extent that any payment or
bene?ts payable to Mr Warren under his service agreement or under any
bonus or share incentive plan would be subject to US excise tax, the payments
and bene?ts may be reduced if this would result in Mr Warren receiving a
greater after tax amount than if the bene?ts were not reduced. On termination
(other than by reason of summary dismissal) Mr Warren will be eligible to
receive a pro-rata bonus for the year in which his employment is terminated
subject to company and individual performance.
The Committee considers that this is consistent with current best practice
and this approach will generally be adopted for new appointments. Where
appropriate and when recruiting non-UK based Directors, the Committee may
agree different terms based on local legal requirements or market practice.
Treatment of variable incentives
Annual bonus Individuals may be considered for an annual bonus
in respect of the period prior to cessation. Any award
would be at the discretion of the Committee, subject to
the Executive Director’s performance and period
of employment.
Deferred Bonus
Plan 2014
For good leavers, awards vest at the normal vesting date,
although the Committee may determine that awards
vest on cessation of employment. The award will usually
vest in full or on a pro-rated basis at the Committee’s
discretion. Good leavers are those who cease to be an
employee of a member of the Group by reason of death,
injury, disability, ill-health, redundancy, the sale of the
individual’s employing business or the transfer of the
Company out of the Group, or any other reason which
the Committee decides in its discretion, having regard
to a range of relevant factors including the Executive
Director’s performance, length of service and
circumstances of their departure.
Where an individual is not considered to be a good
leaver, unvested awards will lapse. Where an individual
is summarily dismissed, all his awards will lapse.
Deferred awards are subject to malus and vested awards
are subject to clawback as detailed under page 80.
Long-Term Incentive
Plan 2014
For good leavers, awards will normally vest at the
normal vesting date and following the end of the
performance period, unless the Committee determines
that awards should vest following cessation of
employment. Vesting will be subject to performance
and unless the Committee determines otherwise
(or that another basis of reduction is appropriate)
pro-rated for time in employment. Good leavers are
those who cease to be an employee of a member of the
Group by reason of death, injury, disability, ill-health,
redundancy, and the sale of the individual’s employing
business or transfer of the Company out of the Group,
or any other reason which the Committee decides in its
discretion, having regard to a range of relevant factors
including the Executive Director’s performance, length
of service and circumstances of their departure.
Where an individual is not considered to be a good
leaver, unvested awards will lapse.
Unvested awards are subject to malus and vested awards
are subject to clawback as detailed under page 80.
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London Stock Exchange Group plc Annual Report 2014
Other senior employees participate in long-term incentive plans on
similar terms to Executive Directors but with reduced award levels for
less senior roles.
The malus provision on unvested awards applies automatically to all awards
granted under the Deferred Bonus Plan and the 2014 LTIP. However, the
Committee will have the discretion to determine at the grant date whether
the clawback rule on paid bonuses and vested awards will apply to awards
granted to participants other than Executive Directors. Below the Board,
LTIP participants (excluding Executive Directors) may continue to be eligible
for matching share awards if they acquire investment shares up to 50 per
cent of their net salary at or around the time the award is granted.
In setting remuneration for Executive Directors, the Committee considers
the overall approach to reward employees across the Group taking into
account the scale, scope or responsibility of the role, development within
a role and/or signi?cant market movement.
Salary increases of Executive Directors in percentage terms are in line
with those of employees in their local jurisdictions. The Committee does
not formally consult directly with employees on Executive Directors’ pay.
The Committee receives ongoing regulatory updates and information on
external market practices from its independent external advisers which
provide additional context for decisions.
Consideration of shareholders’ views
The Committee is mindful of shareholder views when setting and evaluating
ongoing remuneration principles, and commits to consulting with
shareholders prior to any signi?cant changes to the remuneration policy.
Shareholders have been particularly supportive of the simpli?cation of
the Group incentive arrangements without increasing the overall
incentive opportunities.
They have welcomed the compulsory deferral of 50 per cent of the bonus
into shares until the increased minimum shareholding requirement is met.
The Committee has taken shareholders’ feedback into account and proposed
that in addition to the malus provision applied to any bonus amount deferred,
a clawback provision should apply to the entire bonus.
The Committee is incorporating similar malus and clawback provisions
for awards under the new LTIP.
Raffaele Jerusalmi entered into a service agreement with Borsa Italiana on
1 October 2001, amended on 3 May 2011, and a service agreement with LSEG
Holdings (Italy) on 3 May 2011, which re?ects his period of continuous service
from 1 October 2001. On 1 April 2013, Raffaele Jerusalmi’s employment
contract transferred from LSEG Holdings (Italy) to LSEG Holdings Italia S.p.A.
Raffaele Jerusalmi’s employment contracts with Borsa Italiana and LSEG
Holdings Italia S.p.A. expressly state that no collective bargaining agreements
apply to his employment and accordingly, the terms applying to the
termination of his employment are governed by Italian law. If Raffaele
Jerusalmi is dismissed, his notice period will be equal to eight months based
on continuous service since 1 October 2001 until 1 October 2016 and equal
to nine months from 2 October 2016 onwards. If Raffaele Jerusalmi resigns,
he is required to give three months’ notice. On termination of either
employment for any reason, Raffaele Jerusalmi is entitled to severance
payments under Italian law equal to: (i) Trattamento di Fine Rapporto (TFR)
which Raffaele Jerusalmi has elected to transfer to his private pension plan
on a monthly basis since August 2007. He will therefore not be entitled to
further TFR bene?ts post-employment. The TFR contributions currently
equate to 7.4 per cent (including solidarity tax at the current rate of 0.49 per
cent, which does not count towards Raffaele Jerusalmi’s contributions to his
private pension plan) of base salary, bene?ts, annual bonus and LTIP paid to
Raffaele Jerusalmi during his employment; (ii) pro-rated supplementary
monthly payments (the annual salary is normally paid in 12 instalments plus
two supplementary monthly payments); and (iii) a payment in lieu of
untaken holidays, if any. Where no just cause for termination exists, a
payment in lieu of notice is payable if the employment is terminated
with immediate effect. The payment in lieu of notice is in addition to the
payments at (i), (ii) and (iii) above and is equal to the overall salary due to
Raffaele Jerusalmi during the notice period. For these purposes, overall salary
includes base salary, average of any variable pay and TFR contributions paid
during the last 36 months of the employment, and bene?ts in kind.
Remuneration policy for other employees and consideration of
wider employee remuneration
The remuneration policy for senior Executives and other employees is
determined based on similar principles to Executive Directors. For roles below
the main Board, the exact structure and balance are tailored based on various
factors including the scale, scope or responsibility of the role, development
within a role and/or signi?cant market movement. The Committee reviews
and comments on the salary, bonus and LTIP awards of the senior Executives
immediately below Board level and approves the overall design and
distribution of incentive awards available to all employees, including
share-based plans.
The approach in respect of base salary and bene?ts is generally consistent
across the organisation. Executive Directors’ and other senior managers’
remuneration includes a greater proportion of performance related pay when
compared to other employees. The Committee considers this is essential to
differentiate levels of responsibility and align pay to sustainable long-term
performance and shareholders’ interests.
All employees are eligible to participate in the annual bonus plan which
is subject to similar metrics to those used for the Executive Directors.
Some Sales employees are eligible to participate in commission plans rather
than the annual bonus plan. Opportunities vary by organisational level.
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Policy for Non-Executive Directors
Approach to setting fees Basis of fees Other items
The fees for Non-Executive Directors are set at a level
which is considered appropriate to attract individuals
with the necessary experience and ability to make an
important contribution to the Group’s affairs.
The Chairman’s fee is determined by the
Remuneration Committee, and the Board is
responsible for determining all other Non-Executive
Director fees.
Fees are reviewed periodically to ensure they remain
appropriate. The Committee retains the ?exibility
to increase, adjust and make one-off payments to
Non-Executive Directors based on their remit.
Fees are set taking into account the level of
responsibility, relevant experience and specialist
knowledge of each Non-Executive Director and fees
at other companies of a similar size and complexity.
The aggregate fees payable to all Non-Executives
combined (excluding the Chairman and excluding
fees paid for any appointments on subsidiary
boards) are capped as set out in the Group’s Articles
of Association as they may be amended by a
resolution of shareholders from time to time. The
current limit on the aggregate fees that are payable is
£1,500,000 per ?nancial year.
Details of current fees are set out on page 91.
Non-Executive Directors receive a basic annual
fee with additional fees payable for further Board
and Group responsibilities such as committee
chairmanship or membership, subsidiary board
or committee membership and Senior
Independent Director.
The Non-Executive Chairman of the Group receives
an all-inclusive fee for the role.
Fees are neither performance-related nor pensionable.
Non-Executive Directors are not eligible to
participate in the annual bonus or LTIP plans.
Non-Executive Directors do not receive any bene?ts
or entitlements other than their fees and reasonable
expenses. The Chairman receives the use of a
chauffeur driven motor car for travel to the Group’s
of?ces and business purposes.
Travel and other appropriate expenses with associated
taxes (including fees incurred in obtaining professional
advice in the furtherance of their duties) incurred in
the course of performing their duties are reimbursed
to Non-Executive Directors.
Non-Executive Directors are covered by the Directors’
and Of?cers’ insurance and indemni?cation.
Non-Executive Directors have letters of appointment with no notice period except for the Group Chairman who has a notice period of six months unless he is
not re-elected by shareholders in which case his appointment will terminate immediately. The Non-Executive Directors’ appointments are for an initial period
of three years from the date of appointment and are also subject to re-election by shareholders.
Amendments to the Remuneration Policy Report
The Committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative purposes or to take account
of a change in legislation) without obtaining shareholder approval for that amendment.
The Committee remains mindful that regulation of companies in the ?nancial services sector continues to evolve. The Committee recognises that remuneration
arrangements may need to be amended in order to comply with any new regulations which become applicable to the Group. The Committee reserves the right
to make changes to the Policy described above in order to comply with any such regulatory requirements which apply to the Group including any changes
required under the UK Corporate Governance Code. Where this results in a major structural change, the Committee would expect to present a revised policy to
shareholders for approval at the following AGM.
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Governance Directors’ Remuneration Report
5,000
4,000
3,000
2,000
1,000
0
Fixed Mid Max Fixed Mid Max Fixed Mid Max
?Fixed remuneration ?Annual variable remuneration ?Long term remuneration
Xavier Rolet
£’000
David Warren
£’000
Raffaele Jerusalmi
£’000
100%
976
2,901
4,825
747
1,810
2,872
792
1,783
2,775
34%
28%
38%
20%
34%
46%
100% 41%
23%
35%
44%
30%
26% 100% 44%
22%
33%
43%
29%
29%
London Stock Exchange Group plc Annual Report 2014
Illustration of the application of the remuneration policy for Executive Directors
The charts below illustrate how much the current Executive Directors could receive under different scenarios in the ?rst year of the policy, assuming a constant
share price. Note that London Stock Exchange Group plc does not have a stated ‘target’ level for bonus and share awards, so we have assumed 50 per cent of
maximum awards to illustrate a mid-range scenario.
Element of remuneration Detail of assumptions
Fixed remuneration This comprises:
— Base salary with effect from 1 April 2014
— Bene?ts paid in 2013/14 as shown in the single ?gure table in the Annual Remuneration Report
— Pension
Annual Bonus Assumes maximum opportunity of 225 per cent of salary for CEO and 200 per cent of salary for other Executive Directors
For mid-range scenario: assumes payment of 50 per cent of the maximum opportunity
For maximum: assumes payment of 100 per cent of the maximum opportunity
Long Term Incentive Plan Assumes maximum opportunity of 300 per cent of salary in conditional shares
For mid-range scenario: assumes 50 per cent of the maximum opportunity
For maximum: assumes vesting of 100 per cent of the maximum opportunity
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Legacy arrangements
The Committee may make any remuneration payments and payments for loss of of?ce (including exercising any discretions available to it in connection with
such payments) where the terms of the payment were agreed/granted (i) before the policy came into effect or (ii) at a time when the relevant individual was
not a Director of the Group and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Group.
Executive Directors have awards outstanding under the Long Term Incentive Plan 2004 which expires in July 2014.
Element Summary
Long Term Incentive
Plan 2004
The 2004 LTIP plan has two elements: a conditional award of Performance Shares and an award of Matching Shares linked
to investment by Executive Directors of up to 50 per cent of net salary funded from their bonus payment. The pre-tax value
of the amount deferred is matched on a 2:1 basis subject to the standard LTIP performance targets as speci?ed below
(“Matching Shares”).
Performance Shares and Matching Shares are subject to the Group’s absolute TSR (50 per cent) and adjusted EPS (50 per cent)
performance over a single three-year period (“the performance period”). For absolute TSR, the performance period started on
the date of grant and for adjusted EPS on the ?rst day of the ?nancial year in which the award is granted.
For absolute TSR, performance is calculated using a two-month average share price at the start and at the end of the performance
period to ensure any anomalous share price movements at these measurement points do not have a disproportionate effect on
the assessment of performance over the full three-year period. The Committee considers the use of both of these measures will
best align the interests of the Executive Directors with those of shareholders. Both absolute TSR and adjusted EPS measures are
independently veri?ed by Deloitte LLP.
The performance conditions and vesting schedule for awards granted in 2010, 2011, 2012 and 2013 are set out below. The same
targets also apply to awards granted prior to the date that the new LTIP Plan is approved at the July 2014 AGM.
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of relevant
element which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 30%
12% p.a. or more 16% p.a. or more 100%
Straight-line pro-rating applies between these points
Our policy is to grant awards on an annual cycle. Awards will normally vest three years after the grant date.
Details of how the Committee intends to measure performance for these awards to re?ect the change in the ?nancial year
are set out on page 90. The Committee may adjust or amend awards only in accordance with the provisions of the plan rules.
This includes making adjustments to awards to re?ect certain one-off events, including a variation in the Company’s share
capital, a demerger or a special dividend. In accordance with the plan rules, awards may be settled in cash rather than shares
where the Committee considers this appropriate.
For good leavers, awards vest to the extent that the performance conditions have been met. Good leavers are those who cease
to be an employee of a member of the Group by reason of death, injury, disability, ill-health, redundancy, and the sale of the
individual’s employing business or transfer of the Company out of the Group or any other reason which the Committee decides
in its discretion, having regard to a range of relevant factors including the Executive Director’s performance, length of service
and circumstances of their departure.
The number of shares which vest will be reduced on a time pro-rated basis to re?ect the period elapsed between grant and the
individual leaving. On retirement, awards continue to be subject to the LTIP until the end of the performance period and will vest
to the extent that the performance conditions have been satis?ed at the normal vesting date unless the Committee chooses to let
awards vest at the date of retirement, in which case vesting will depend on the satisfaction of the performance conditions and will
be subject to time pro-rating.
Where an individual is not considered to be a good leaver, awards will lapse. Where an individual is summarily dismissed, all their
awards will lapse.
In the event of a change of control, awards will vest subject to the achievement of the relevant performance conditions and unless
the Committee determines otherwise, on a time pro-rated basis.
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London Stock Exchange Group plc Annual Report 2014
The annual report on remuneration sets out how the Group has applied its remuneration policy during FY13/14 and will be put to an advisory vote at the 2014
AGM. The information from this page to page 97 has been audited where required under the regulations and is indicated as audited where applicable.
Single total figure of remuneration for Executive Directors (Audited)
Single total ?gure
of remuneration
Xavier Rolet David Warren
4
Raffaele Jerusalmi
9
FY13/14
£000
% of
total
FY12/13
£000
% of
total
FY13/14
£000
% of
total
FY12/13
£000
% of
total
FY13/14
£000
% of
total
FY12/13
£000
% of
total
Fixed pay
Salary 705 675 425 319 360 351
Flexible bene?ts
allowance 20 20 20 15
Bene?ts 40
3
39 196
5
187 26
6
23
Pension 176
1
169 106
1
80 219
7
211
Other 150
8
99
941 15% 903 15% 747 55% 601 53% 755 33% 684 28%
Pay for
performance
Annual bonus 1,481 1,350 600 525 579 558
Long term
incentives
2
:
Performance shares 2,660 2,320 – – 985 1,160
Matching shares 1,212 1,442 – – – –
5,353 85% 5,112 85% 600 45% 525 47% 1,564 67% 1,718 72%
Total remuneration 6,294 6,015 1,347 1,126 2,319 2,402
Notes
1 Annual pension allowance of 25 per cent of salary.
2 Value shown for FY13/14 represents estimated value of share awards granted in 2011 that are expected to vest in June and July 2014. The estimate assumes 100 per cent vesting and
is based on a three-month average share price from 1 January to 31 March 2014, being £19.13. Value shown for FY12/13 represents the actual vesting of LTIP awards granted in 2010
that vested in September 2013 using the share price on the vesting date, being £16.24 for LTIP Performance shares that vested on 16 September 2013 and £15.66 for Matching shares
that vested on 27 September 2013.
Xavier Rolet
3 Bene?ts include the cash value of private medical and life assurance, Save As You Earn (SAYE) and commuting expenses with associated taxes (including a chauffeur-driven motor car
where appropriate). Mr Rolet started contributing to SAYE in February 2014. SAYE has been valued based on the monthly savings amount (£250) and the discount provided (20%) from
February 2014 – i.e. £250 x 2 months x 20 per cent.
David Warren
4 David Warren joined on 2 July 2012, so FY12/13 ?gures are for a partial year.
5 Bene?ts include the cash value of private medical and life assurance and expatriate allowances with associated taxes.
Raffaele Jerusalmi
6 Bene?ts represent the cash value of private medical, disability, life and accident insurance cover, luncheon vouchers, car and fuel bene?t.
7 Pension: mandatory INPS contributions calculated on salary, bene?ts and bonus.
8 Trattamento di Fine Rapporto mandatory arrangements calculated on salary, capped bene?ts, bonus and shares and paid into Mr Jerusalmi’s pension plan.
9 FY13/14 rate of £1 = €1.21 (FY12/13 ?gures re-stated at FY13/14 rate on a constant currency basis).
Additional notes to the Single total figure
of remuneration (Audited)
Fixed pay
Base salary
When reviewing Executive Director salaries, and in line with our policy stated
on page 74, the Committee considers multiple reference points including
companies in the FTSE 31-100, the broader Financial Services sector as well
as other international exchanges.
Benefits
A ?exible bene?ts plan is offered, in which individuals have certain core
bene?ts (such as private medical, life assurance, income protection and,
additionally in Italy only, disability, accident, car, fuel allowance and luncheon
vouchers) together with (in the UK) a taxable cash allowance which can be
spent on elective bene?ts (such as additional medical, life or dental cover).
Where received as a cash supplement, this allowance is not used to calculate
bonus payments or pension contributions. Bene?ts are reviewed periodically
to ensure they remain affordable and competitive. Executives are eligible to
participate in the Group’s HMRC-approved Save as You Earn Option (SAYE)
Scheme (or international equivalent).
Xavier Rolet and David Warren each receive a ?exible bene?t allowance of
£20,000 per annum. These values have not been increased since last year.
Both of them also receive bene?ts in kind which principally include private
health care and life assurance arrangements.
Xavier Rolet has started to contribute £250 per month since February 2014
into the Save As You Earn (SAYE) scheme which will run until February 2017.
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As set out in the Remuneration Policy Report on page 77, Raffaele Jerusalmi
accrues mandatory state pension (INPS) bene?ts in Italy. Actual bene?t due
at retirement is set out by the applicable Italian legislation in force from time
to time. Under the Italian Trattamento di Fine Rapporto (TFR), he receives
contributions which are funded by the Company at a rate ?xed by local law
and which are paid to Mr Jerusalmi’s private pension plan. Both INPS and TFR
contributions are included in the single total ?gure of remuneration table on
page 86.
Pay for Performance
The Committee takes into account multiple reference points when setting
pay including FTSE 31-100, the ?nancial services sector, international
exchanges and FTSE 250 roles for key subsidiaries where relevant.
Overall the Committee wishes to position total target remuneration (?xed pay,
variable pay and bene?ts) at or around the median of the reference points.
The Committee considers it appropriate to reward superior performance with
compensation levels at the upper quartile of the target market(s).
Annual bonus awarded for FY13/14
Executive Directors are eligible to receive an annual bonus based on meeting
or exceeding bonus targets that are set at the beginning of the year.
For FY13/14, the Committee determined that the sole annual ?nancial target
should again be adjusted operating pro?t. The Committee considers adjusted
operating pro?t to be of particular signi?cance for the Group and believes it
should continue to be the main ?nancial measure for annual bonus plan
purposes. At least 50 per cent of the annual bonus pool is subject to achieving
this ?nancial target. Other measures include the achievement of strategic and
individual targets. The maximum bonus opportunity is 225 per cent of salary for
the Chief Executive Officer and 200 per cent of salary for other Executive Directors.
As an expatriate from the US to UK, David Warren is also entitled to receive
the following net amounts:
— Each year he is entitled to tax preparation and ?ling assistance in the
US and the UK.
— The Group will meet the costs of repatriating Mr Warren’s effects back to
the US if it terminates his employment other than in circumstances such
as serious misconduct which would justify summary termination.
— An allowance to cover the cost of renting accommodation in the UK
during the ?rst four years of his appointment (£60,000 net per annum
up until 1 November 2014 – at which point the allowance will then
reduce to £30,000 per annum for the following two years). If Mr Warren
purchases a property within the ?rst two years of appointment, he may
use the balance of the allowance payable for that period to cover
associated costs such as stamp duty or legal costs.
— An annual allowance of £30,000 net per annum to cover ?ights between
London and New York for Mr Warren and his family.
Raffaele Jerusalmi receives bene?ts in kind such as health, disability, life and
accident insurance cover, luncheon vouchers, car and fuel bene?t. He also
contributes towards the Italian mandatory national insurance system.
There are no contractual malus or clawback provisions in place in relation
to bene?ts. Executive Directors are covered by the Directors’ and Of?cers’
insurance and indemni?cation.
Retirement Benefits
The London Stock Exchange plc ?nal salary pension scheme was closed to new
entrants in 1999 and was closed to future accruals from 1 April 2012. The current
Executive Directors do not participate in this ?nal salary pension scheme.
Pension provision takes the form of a non-consolidated cash allowance.
Xavier Rolet and David Warren each receive an allowance equivalent to 25
per cent of base salary as a taxable cash supplement. Only base salary is
used to calculate pension entitlement and no other pension supplements
apply. In the tax year to 6 April 2014, Xavier Rolet contributed £200,000 into
the company Group Pension Plan with Scottish Widows. On a one-off basis,
this included contributions for the three prior tax years up to the maximum,
tax-free headroom.
Determination of FY13/14 Annual Bonus
The Committee determined the overall Group bonus pool with reference to performance for the year ended 31 March 2014. The performance measures and
targets are set out below:
Actual performance Performance relative to target Maximum percentage of bonus Actual percentage of bonus
FY13/14
Group bonus
pool
Group AOP Adjusted operating pro?t up
20 per cent at £514.7 million
‘Above Target’ 50 40
Strategic
Deliverables
Key achievements:
— Completion of the majority
acquisition and integration of
LCH.Clearnet Group
— Increase in equities market share
— TARGET2-Securities and the
development of the new international
central securities depository in
Luxembourg
Between ‘Target’ and
‘Above Target’
50 31
Total 100 71
Note: Due to commercial con?dentiality, these sensitive performance targets will not be disclosed now or in the future as this would provide an unfair advantage to our international competitors.
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London Stock Exchange Group plc Annual Report 2014
Chief Executive Officer
In increasingly complex market conditions and a challenging regulatory
environment, the Group has had a strong year led expertly by Xavier Rolet.
Financial results were above target with an increase in our revenue, operating
pro?ts and market capitalisation. This performance has been achieved
through: the execution of the Group’s strategy including the completion of
the acquisition of a majority stake in the global clearing house, LCH.Clearnet
Group and key achievements under our strategic pillars; building best in class
capabilities through innovative solutions in post trade, information services
and capital markets; creating a global business with expanded reach through
FTSE, MTS, MillenniumIT and now LCH.Clearnet; and developing opportunities
through diversi?cation with plans to launch a new pan-European central
securities depository, new derivatives products and continued development
of our ELITE programme.
Chief Financial Officer
David Warren delivered: longer term ?nancing structure post completion
of the majority stake in LCH.Clearnet; the integration with LCH.Clearnet
extending the cost synergies; close control of our cost base and careful
?nancial management to aid our diversi?cation strategy, all of which are
re?ected in good ?nancial performance and returns to our shareholders.
Executive Director, CEO of Borsa Italiana & Director of Capital Markets
Raffaele Jerusalmi has led: our Capital Markets and Post Trade divisions; the
completion of a majority acquisition in Euro TLX, the development of MTS to
trade interest rate swaps and MTS Markets International; signi?cant increase
in market share of Turquoise the pan-European trading platform; plans to
launch a new central securities depository in Luxembourg; six year high in new
issue activity; the development of Exchange Traded Funds (ETF) and Exchange
Traded Products (ETP) markets; the development of our ELITE offering to
enhance our SME offering; signi?cant growth in our ?xed income products and
Monte Titoli has signed the TARGET2-Securities (T2S) Framework Agreement
and will participate in the ?rst wave of T2S, scheduled to go-live in June 2015.
Based on the above context and an assessment of individual performance,
the Remuneration Committee awarded annual bonuses to each of the
Executive Directors as follows:
Role Chief Executive Of?cer Chief Financial Of?cer
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
FY13/14
bonus
% of salary
210% of salary 141% of salary 161% of salary
% of max. 93% of maximum 71% of maximum 81% of maximum
amount £1,480,500 £600,000 €700,000 (approx. £579,000)
Long-term incentive plan (LTIP)
Under the current 2004 LTIP, awards have two elements: a conditional award
of Performance Shares and an award of Matching Shares linked to investment
by the senior management of all or some of their annual bonus.
Performance Shares and Matching Shares granted in 2010, 2011, 2012 and in
the last ?nancial year were subject to Company’s absolute TSR (50 per cent)
and adjusted EPS (50 per cent) performance over a single three-year period
(“the performance period”). For absolute TSR, the performance period started
on the date of grant and for adjusted EPS on the ?rst day of the ?nancial year
in which the award is granted.
For absolute TSR, performance is calculated using a two-month average
share price at the start and at the end of the performance period to ensure
any anomalous share price movements at these measurement points do
not have a disproportionate effect on the assessment of performance over
the full three-year period.
The Committee considers the use of both of these measures will best align the
interests of the Executive Directors with those of shareholders. Both absolute
TSR and adjusted EPS measures are independently veri?ed by Deloitte LLP.
The performance conditions and vesting schedule are set out below:
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of relevant
element which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 30%
12% p.a. or more 16% p.a. or more 100%
Straight-line pro-rating applies between these points
Awards granted in September 2010 with performance period ending
in 2013
The awards granted in 2010 were based on absolute TSR performance in
the three years from grant and adjusted EPS performance in the three year
period to March 2013. Over the period the Company delivered adjusted EPS
performance of 21 per cent per annum and absolute TSR growth of 38 per
cent and 37 per cent per annum for the Performance Shares (vested on 16
September 2013) and Matching Share awards (vested on 27 September 2013)
respectively. Subsequently, 100 per cent of the maximum Performance Share
and Matching Share awards vested last year.
Awards granted in June 2011 with a performance period ending in 2014
The performance period for the absolute TSR element of the Performance
Share and Matching Share awards ends in June and July 2014 respectively.
Awards vesting in 2014 will be disclosed in the annual report on remuneration
covering the next nine-month ?nancial period (April to December 2014).
The awards granted in 2011 were based on absolute TSR performance in
the three years from grant, and adjusted EPS performance in the three year
period to March 2014. Over the period the Company delivered adjusted EPS
performance of 13.3 per cent per annum for performance and matching
shares. Subsequently the adjusted EPS element for both these awards will
deliver 100 per cent vesting. Absolute TSR growth will be known after 3 June
2014 but is currently also forecast to vest at the full 100 per cent for this
element. The ?nal vesting outcome (including the actual share price at
vesting) following the end of the performance period will be set out in next
year’s Annual Remuneration Report, but based on latest forecasts is likely
to be at the full 100 per cent vesting level.
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Other share plans (SAYE)
All UK employees, including Executive Directors, are eligible to participate in
the HM Revenue & Customs approved Save As You Earn Scheme (SAYE).
Under the rules of the SAYE, participants can save up to £250 each month,
increasing to £500 from April 2014, for a period of three years. At the end of
the saving period, savings plus interest may be used to acquire shares by
exercising the related option.
The options may be granted at an exercise price which represents a discount
of up to 20 per cent to market value at the date of invitation. No performance
conditions are attached to SAYE options. There is also an International
Sharesave Plan (ISP), which is designed to provide share options to Group
employees who are not based in the UK on similar terms to the options
that are available to UK employees through the SAYE. To date, employees in
France, Hong Kong, Italy, Sri Lanka and the US have participated in the ISP.
During the ?nancial year April 2013 to March 2014, a grant was made in
January 2014 under the UK and international schemes. Due to the ?nancial
year-end change, an additional interim grant will be made in July 2014.
From 2015 onwards, annual SAYE grants will normally take place in May.
The same performance conditions described above apply to all awards
granted between 2010 and 2013, and for those to be awarded in 2014
(if prior to July 2014 AGM), namely:
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of
relevant element
which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 30%
12% p.a. or more 16% p.a. or more 100%
Straight-line pro-rating applies between these points
Due to the ?nancial year-end change, EPS will be measured over 33 months
for 2012, 2013 and 2014 grants. From 2015 onwards, grants will return to
being measured over 36 months on a calendar year basis. The ?nancial
year-end change does not affect the TSR measurement period which is
still three calendar years from grant. Vesting remains over 36 months.
The Committee will determine ?nal outcomes to ensure there is no material
advantage or disadvantage to participants due to the year-end change.
LTIP Awards Granted in FY13/14 (Audited)
Awards made in FY13/14
For the year ended 31 March 2014, awards of Performance Shares were made with a value of 200 per cent of salary for Xavier Rolet, 176 per cent of salary
for David Warren, and 193 per cent of salary for Raffaele Jerusalmi (at historical rate of £1 = €1.18). Xavier Rolet also received an award of Matching Shares
equivalent to 100 per cent of salary following his investment in London Stock Exchange Group shares.
Chief Executive Of?cer
2
Chief Financial Of?cer
3
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
3
FY13/14
LTIP
(Nil-cost
performance
options)
granted on
12 June 2013
% of salary 200% of salary + 100% of
salary in matching shares
176% of salary 193% of salary
face value £1,410,000 + £705,000 £750,000 £710,000 (approx. €838,000)
share price
1
£13.88 £13.88 £13.88
Number of LTIP
shares granted
101,585 + 50,792 54,034 51,152
Notes:
1 The share price of £13.88 was determined using the closing price (MMQ) on 10 June 2013 and approved by the Share Scheme Committee (a subsidiary of the Remuneration Committee).
2 Between 31 May 2013 and 11 June 2013 Mr Rolet acquired a further 13,312 invested shares at an average price of £14.03, equivalent to 50 per cent of his net salary (or £186,825 in total).
In return he was granted a further 100 per cent of salary (£705.000) in matching LTIP shares (being 50,792 matching shares at £13.88 share price).
3 Mr Warren and Mr Jerusalmi did not participate in the voluntary matching share scheme in FY13/14.
Executive Directors’ Share Options under the ShareSave (SAYE) Plan
SAYE
Number of shares
At start
of year
Awarded
during the year
Vested
during year
At end
of year
Price at
award date
Date of
award
Final
vesting
date
Expiry
date
Xavier Rolet – 712 – 712 17.99 10/01/2014 01/03/2017 30/08/2017
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Implementation of the remuneration policy during FY2014
(1 April to 31 December 2014)
Base salary operation:
When reviewing Executive Director salaries, and in line with our policy,
the Committee considers multiple reference points including companies
in the FTSE 31-100, the broader Financial Services sector as well as other
international exchanges.
Base salaries for 2014/15, effective from 1 April 2014, are set out in the table below:
Annual salary 2013/14 2014/15
Xavier Rolet £705,000 £733,000 (+4%)
David Warren £425,000 £425,000 (+0%)
Raffaele Jerusalmi €435,000 €480,000 (+10%)
Chief Executive Officer
The Chief Executive’s salary has been reviewed in the context of Group
performance and salary increases elsewhere in the Group as well as
positioning against peers. He has been awarded a four per cent salary increase.
Executive Director, Chief Executive Officer of Borsa Italiana and
Director of Capital Markets
Since his appointment to the Board in June 2010, the Committee has
been aware that Raffaele Jerusalmi’s salary has been behind his peers,
both internally and externally. At that time the Committee chose not to
substantially increase his salary preferring to recognise Mr Jerusalmi’s
contribution and importance to the Group in his capacity as a key member
of the Board over an extended period of time. Subsequently, the Committee
has determined that Mr Jerusalmi’s salary will be increased to €480,000,
an increase of 10 per cent. The Group’s strategy continues to be focused on
increasing its global footprint and diversifying its service offering. Mr Jerusalmi
has made an exceptional contribution to this sustained success. As the Group
executes its growth strategy, the breadth and complexity of Mr Jerusalmi’s role
continues to increase. He has responsibility for Capital Markets, Post Trade
including TARGET2-Securities and the development of the new International
Central Securities Depository in Luxembourg.
Annual bonus operation:
— For FY2014, targets will be adjusted to re?ect this shorter nine-month
performance period. Performance measures and weighting
remain unaffected.
— The maximum bonus opportunities will be pro-rated to re?ect the shortened
period with performance measured over the truncated ?nancial year.
— Any bonus payment would be determined in March 2015. The following
?nancial year will align with the calendar year of January to December
2015 with bonuses determined in March 2016.
Under the new Deferred Bonus Plan proposals:
— The current, voluntary deferral of up to 50 per cent of net salary is
replaced with the introduction of the mandatory deferral of 50 per cent
of bonus for a period of two years.
— Until the increased minimum shareholding requirement is reached,
bonus deferral will be 100 per cent into shares. Once the level of minimum
shareholding has been reached, individuals will be able to elect to defer
100 per cent into shares, 50 per cent into shares/50 per cent into cash or
100 per cent into cash.
— Deferred awards are subject to malus provisions. Bonuses already paid
out under the Deferred Bonus Plan and vested awards are subject to
clawback with judgement applied by the Committee.
— For good leavers, awards will usually vest at the normal vesting date and
in full, unless the Committee determines to scale back the award based
on any factors deemed relevant. Where an individual is not considered
to be a good leaver, unvested awards will lapse.
Long Term Incentive Plan:
As described in the Remuneration Policy Report set out above, the Company
is seeking approval for a new Long-Term Incentive Plan at the 2014 AGM.
The new plan was designed after consulting with major shareholders and
incorporates many aspects of evolving best practice. The key changes are
as follows:
— The current, voluntary matching (equal to 100 per cent of salary
opportunity) has been removed and replaced with a single long term
incentive plan. In future years, the Company will only make annual
grants of Performance Shares.
— An increased maximum opportunity from 300 per cent to 400 per cent
of salary to recognise loss of opportunity where voluntary matching has
been replaced by mandatory deferral but with no increase in overall
incentive opportunities.
— A reduction of threshold level of vesting from 30 per cent to 25 per cent
of the maximum, in line with market practice.
— Introduction of malus and clawback provisions, allowing the Committee
to reduce subsisting awards in certain circumstances (e.g. material
misstatement or gross misconduct).
— Alignment of good leaver policy with best practice. LTIP awards will
now subsist until the end of the performance period in line with other
award-holders and vest at that point with time pro-rating based on
the number of actual months’ service within the relevant 36-month
vesting period.
Under the 2014 LTIP, awards of shares (or equivalent) are granted annually
subject to performance conditions. The awards will continue to be based on
absolute Total Shareholder Return (TSR) and adjusted Earnings per Share
(EPS) performance measures as described overleaf.
Awards to be made during FY2014
Our policy is to grant awards on an annual cycle. All awards granted during 2014 will continue to be based on absolute TSR and adjusted EPS growth and
subject to a three-year vesting period. Awards will normally vest three years after the grant date.
Based on the context as previously stated and an assessment of individual performance, the Remuneration Committee has approved grants to each of the
Executive Directors under the 2004 LTIP as follows (?gures below exclude any matching awards that may be made as a result of a voluntary investment in
shares by the Executive Director):
Role Chief Executive Of?cer Chief Financial Of?cer
Executive Director, CEO of Borsa Italiana
& Director of Capital Markets
FY2014
LTIP
% of salary 200% of salary 176% of annual salary 181% of salary
amount £1,466,000 £750,000 £719,000 (approx €870,000)
90 Governance
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The Remuneration Committee intends to grant LTIP awards before the
AGM under the 2004 Plan as described on page 85. If for whatever reason
(including any regulatory or legal restriction) the Committee is unable to
make the grant before the AGM, awards will be granted under the new LTIP
(assuming it is approved by shareholders) within the limits described in the
Policy on page 79.
For awards granted after the 2014 AGM, the threshold vesting level has been
reduced to 25 per cent of the maximum, as described in our Remuneration
Policy Report on page 79. Subsequently the performance conditions for
awards granted post-AGM will be as follows:
EPS element (50%) –
average adjusted EPS growth
TSR element (50%) –
absolute TSR growth
Proportion of
relevant element
which vests
Less than 6% p.a. Less than 8% p.a. 0%
6% p.a. 8% p.a. 25%
12% p.a. or more 16% p.a or more 100%
Straight-line pro-rating applies between these points
Non-Executive Directors’ Remuneration
Non-Executive Directors’ remuneration is determined by the Board and is neither performance-related nor pensionable. The Chairman’s fee is determined by
the Remuneration Committee. The fees for Non-Executive Directors are set at a level which is intended to recognise the signi?cant responsibilities of Directors
and to attract individuals with the necessary experience and ability to make an important contribution to the Company’s affairs. Comparisons are made with
fees paid at FTSE 31-100 companies.
Travel and other appropriate expenses with associated taxes (including fees incurred in obtaining professional advice in the furtherance of their duties) incurred
in the course of performing their duties are reimbursed to the Chairman and to the Non-Executive Directors. In addition, the Chairman receives the use of a
chauffeur-driven motor car for travel to the Group’s of?ces and business purposes.
The Chairman and the Non-Executive Directors do not participate in any of the Company’s annual bonus or LTIP plans and are not entitled to any payments
on termination.
Certain Non-Executive Directors are entitled to receive fees from subsidiary companies, details are set out below.
The original date of appointment as Directors of the Company is as follows:
Name Date Appointed
5
Date of letter of
appointment Time to expiry Notice period Date of resignation
LSEG Committee
membership/
chairmanship
Other subsidiaries
membership/
chairmanship
Baroness (Janet) Cohen 01/02/2001 N/A Expired None 17/07/2013
Robert Webb QC
1,3
01/02/2001 01/02/2013 31 January 2016 None
Remuneration
Chair
LSE plc LCH.
Clearnet
Chris Gibson-Smith 01/05/2003 18/07/2012 2015 AGM 6 months Group Chairman
Andrea Munari
2
01/10/2007 01/10/2013
30 September
2016 None Risk
Paolo Scaroni 01/10/2007 01/10/2013
30 September
2016 None Remuneration
Sergio Ermotti 01/10/2007 N/A Expired 17/07/2013
Gay Huey Evans 04/06/2010 N/A Expired 17/07/2013
Paul Heiden
2,3
04/06/2010 04/06/2013 3 June 2016 None Audit Chair, Risk LSE plc
Massimo Tononi 27/09/2010 27/09/2013 September 2016 None Audit
Borsa Italiana,
LSEGH Italia,
CC&G and Euro
TLX
Non-Executive Directors’ fees for FY2014
From 1 April 2014, it was determined that there would be no proposed
changes to the Chairman’s and Non-Executive Directors’ fee levels in respect
of LSEG Board membership which would be as follows:
Fees
With
effect from
1 April 2013
With
effect from
1 April 2014
Group Chairman £370,000 £370,000
Deputy Chairman/Senior Independent Director £120,000 £120,000
Non-Executive Director base fee £60,000 £60,000
Audit Committee Chairman £20,000 £20,000
Risk Committee Chairman £20,000 £20,000
Remuneration Committee Chairman £20,000 £20,000
Audit Committee, Risk Committee or Remuneration
Committee membership £10,000 £10,000
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Name Date Appointed
5
Date of letter of
appointment Time to expiry Notice period Date of resignation
LSEG Committee
membership/
chairmanship
Other subsidiaries
membership/
chairmanship
Jacques Aigrain 01/05/2013 01/05/2013 30 April 2016 None Audit
LCH.Clearnet
Chairman
Stuart Lewis
2
12/06/2013 12/06/2013 11 June 2016 None Risk
Stephen O’Connor
2,4
12/06/2013 12/06/2013 11 June 2016 None Risk Chair LSE plc
Sherry Coutu 17/01/2014 17/01/2014 16 January 2017 None
Joanna Shields
4
17/01/2014 17/01/2014 16 January 2017 None LSE plc
Notes:
1 Robert Webb was appointed to the LCH.Clearnet Remuneration Committee on 1 May 2013.
2 Paul Heiden, Andrea Munari, Stephen O’Connor and Stuart Lewis were appointed to the Risk Committee on 17 July 2013.
3 Paul Heiden and Robert Webb are Directors of London Stock Exchange plc throughout FY13/14.
4 Stephen O’Connor and Joanna Shields were appointed to the Board of London Stock Exchange plc on 28 January 2014.
5 All appointments to the LSEG Board are expected to continue for a period of three years and are subject to earlier termination in accordance with the provisions of the Articles.
Non-Executive Directors’ Remuneration Table (Audited)
FY13/14
LSEG Fees
FY13/14
Subsidiary
Fees
FY13/14
Total Fees
FY13/14
Taxable
Bene?ts
1
FY13/14
Total
FY12/13
LSEG Fees
FY12/13
Subsidiary
Fees
FY12/13
Total Fees
FY12/13
Taxable
Bene?ts
1
FY12/13
Total
£000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Baroness (Janet) Cohen
2
21 23 44 1 45 65 21 86 – 86
Robert Webb QC 80 10 90 – 90 80 – 80 – 80
Chris Gibson-Smith 370 – 370 83 453 370 – 370 63 433
Andrea Munari 70 – 70 3 73 65 – 65 – 65
Paolo Scaroni 130 – 130 – 130 125 – 125 – 125
Sergio Ermotti 21 – 21 – 21 65 – 65 – 65
Gay Huey Evans 24 2 26 – 26 70 – 70 – 70
Paul Heiden 87 5 92 7 99 80 – 80 – 80
Massimo Tononi
3
70 182 252 2 254 65 147 212 – 212
Jacques Aigrain
4
64 586 650 8 658 – – – – –
Stuart Lewis 57 – 57 – 57 – – – – –
Stephen O’Connor
1
60 1 61 39 100 – – – – –
Sherry Coutu 13 – 13 – 13 – – – – –
Joanna Shields 12 1 13 – 13 – – – – –
Total Non-Executive Directors’ fees 1,079 810 1,889 143 2,032 985 168 1,153 63 1,216
Notes:
1 Bene?ts in kind relate to travelling expenses, including taxes where applicable. These bene?ts include use of chauffeur-driven car for Mr Gibson-Smith and international ?ights for Mr O’Connor.
2 Baroness (Janet) Cohen received a fee of €26,000 (or £21,488 at £1 = €1.21) for her role as Vice Chairman of Borsa Italiana S.p.A.
3 Mr Tononi received a combined fee of €214,332 (£177,133) for his roles as Chairman and Director of Borsa Italiana S.p.A., Chairman of CC&G, Chairman of EuroTLX and Chairman and Director of
London Stock Exchange Group Holdings (Italia). Mr Tononi renounced his fees for FY13/14 period as Director of Borsa Italiana S.p.A. and London Stock Exchange Holdings (Italia) on 1 January
2014 and 20 March 2014 respectively.
4 Mr Aigrain received an annualised fee of £530,000 as Chairman of LCH.Clearnet. In addition he received a one-off, additional fee of £100,000 for performing the role of interim Executive
Chairman in the absence of an LCH.Clearnet CEO. In addition to travelling expenses, he was also in receipt of health cover which ceased on 1 April 2014.
92 Governance
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Five-year TSR chart v FTSE 100
FTSE 100 LSEG
600
500
400
300
200
100
0
Mar
2009
Mar
2010
Mar
2011
Mar
2012
Mar
2013
Mar
2014
Alignment between pay and performance
Total Shareholder Return (TSR) performance
The following graph shows, for the ?nancial year ended 31 March 2014 and for each of the previous ?ve years, the TSR on a holding of the Company’s
ordinary shares of the same kind and number as those by reference to which the FTSE 100 is calculated. The TSR graph represents the value, at 31 March
2014, of £100 invested in London Stock Exchange Group plc on 31 March 2009, compared with the value of £100 invested in the FTSE 100 Index over the
same period. As a member of the FTSE100, we have chosen the FTSE100 Index as it is currently the most relevant index for benchmarking our performance
over the ?ve year period.
Historic levels of CEO pay
Year ended 31 March: CEO
CEO single total ?gure
of remuneration (£’000)
Annual bonus payout against
maximum opportunity %
Long-term incentive vesting rates
against maximum opportunity %
2014
Xavier Rolet 6,297 93% 100%
2013
Xavier Rolet 6,015 89% 100%
2012
Xavier Rolet 5,245 100% 65%
2011
Xavier Rolet 2,134 89% _
2010
Xavier Rolet
1
1,873 71% _
Clara Furse
2
400 49% 0%
Notes:
Xavier Rolet
1 In the role of CEO from 20 May 2009, appointed to the Board 16 March 2009.
Clara Furse
2 In the role of CEO until 20 May 2009. She resigned from the Board on 15 July 2009.
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Percentage change in remuneration of CEO
The table below shows the percentage year-on-year change in salary,
bene?ts and annual bonus earned between the year ended 31 March 2013
and the year ended 31 March 2014 for the CEO compared to the average
of the representative sample of UK employees (all LSEG UK employees
excluding LCH.Clearnet):
Salary Bene?ts Annual Bonus
CEO +4% +5% +10%
Average pay of Group UK employees
1
+3% +10%
2
+14%
Notes:
1 This group has been selected to re?ect the jurisdiction in which the CEO is based.
LCH.Clearnet employees are not included for this year as they are currently on a
different pay cycle.
2 10 per cent increase in bene?ts’ cost in UK is largely due to implementation of
pension auto-enrolment (with effect from 1 January 2014).
Relative importance of spend on pay
The table below shows the relative FY13/14 v FY12/13 expenditure of the
Group on Dividends versus Total Employee Costs. These ?gures are taken
directly from the Notes to the Financial Statements at the back of this report.
Year on year increases (%) FY13/14 FY12/13 Annual Increase
Dividends Paid In
Financial Year
£80.8m £77.4m +4%
Total Employee Costs £303.9m
1
£167.3m +82%
Note:
1 Total employee costs include LCH.Clearnet with effect from 1 May 2013 onwards.
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Statement of directors’ shareholdings and share interests as at 31 March 2014 (Audited)
All Executive Directors who served in the ?nancial year, with the exception of David Warren, who was appointed to the Board on 2 July 2012, currently own
shares outright and at a level exceeding their required shareholding as described in the section on Share Ownership Guidelines on page 79 based on a share
price of £19.70 (being the closing share price on 31 March 2014). Current shareholdings are summarised in the following table:
Shares held Options held
1
Minimum Shareholding Requirement
Owned
Outright
Unvested and
subject to
performance
conditions
Unvested and
subject to
continued
employment
Vested
but not
exercised
Current
Requirement
(% salary)
New
Requirement
(% salary)
Shareholding
as at 31 March
2014 (% salary)
Requirement
met
Executive Directors
Xavier Rolet 329,598 560,559 712 – 100 200 921 Yes
David Warren – 138,695 – – 100 200 – No
Raffaele Jerusalmi 41,721 164,278 – – 100 200 228 Yes
Non-Executive Directors
Chris Gibson-Smith 63,757 – – – – – – N/A
Andrea Munari – – – – – – – N/A
Paolo Scaroni – – – – – – – N/A
Robert Webb 1,200 – – – – – – N/A
Paul Heiden 3,000 – – – – – – N/A
Massimo Tononi – – – – – – – N/A
Jacques Aigrain – – – – – – – N/A
Stuart Lewis – – – – – – – N/A
Stephen O’Connor – – – – – – – N/A
Sherry Coutu – – – – – – – N/A
Joanna Shields – – – – – – – N/A
Former Directors
Baroness (Janet) Cohen 6,616 – – – – – – N/A
Sergio Ermotti – – – – – – – N/A
Gay Huey Evans – – – – – – – N/A
Note:
1 No options were exercised by the Directors during the year to 31 March 2014.
Directors’ Interests in Ordinary Shares – Beneficial, Family and any Connected Persons Interests (Audited)
Ordinary Shares Held LTIP Options
2
SAYE options Total Interests
31 March 2014 31 March 2013 31 March 2014 31 March 2013 31 March 2014 31 March 2013 31 March 2014
3
31 March 2013
Executive Directors
Xavier Rolet 329,598 191,840 560,559 643,112 712 – 890,869 834,952
David Warren – – 138,695 84,661 – – 138,695 84,661
Raffaele Jerusalmi 41,721 41,721
1
164,278 184,554 – – 205,999 226,275
Non-Executive Directors
Chris Gibson-Smith 63,757 63,757 – – – – 63,757 63,757
Andrea Munari – – – – – – – –
Paolo Scaroni – – – – – – – –
Robert Webb 1,200 1,200 – – – – 1,200 1,200
Paul Heiden 3,000 3,000 – – – – 3,000 3,000
Massimo Tononi – – – – – – – –
Jacques Aigrain – – – – – – – –
Stuart Lewis – – – – – – – –
Stephen O’Connor – – – – – – – –
Sherry Coutu – – – – – – – –
Joanna Shields – – – – – – – –
Former Directors
Baroness (Janet) Cohen 6,616 6,616 – – – – 6,616 6,616
Sergio Ermotti – – – – – – – –
Gay Huey Evans – – – – – – – –
Notes:
1 Raffaele Jerusalmi’s shareholding was overstated by 5,208 shares in 2013. He still met and continues to meet his minimum shareholding requirement.
2 LTIP performance shares are structured as nil-cost options.
3 There have been no further changes in these interests between 31 March 2014 and 15 May 2014.
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Long Term Incentive Plan Table
The Long Term Incentive Plan has two elements, a conditional award of Performance Shares and an award of Matching Shares linked to investment by the
Executive in the Company’s shares.
The awards are dependent on TSR performance for 50 per cent of the award, with the other 50 per cent dependent on an adjusted basic EPS growth target.
Details of performance conditions are set out on page 79.
The table below sets out the Executive Directors’ Long Term Incentive Plan awards (including the exercise of vested shares in FY13/14), as at 31 March 2014:
Number of shares
Date of
award
Price at
award
date £
At start
of year
Award
during
the year
Vested
during
year
Lapsed
during
year
At end
of year
Vesting
date
Price at
vesting
date £
Value at
vesting
date £
Exercise
date
Prices at
exercise
date £
Value at
exercise
date £ Comment
Xavier
Rolet 14/09/2010 7.00 142,857 – 142,857 – – 16/09/2013 16.24 2,319,998 15/11/2013 15.75 2,249,736
FY12/13
Actual
27/09/2010 7.03 92,073 – 92,073 – – 27/09/2013 15.66 1,441,863 15/11/2013 15.75 1,449,981
FY12/13
Actual
03/06/2011 9.71 139,031 – – – 139,031 03/06/2014 19.13 2,659,663 – –
FY13/14
Estimate
08/07/2011 10.65 63,380 – – – 63,380 08/07/2014 19.13 1,212,460 – –
FY13/14
Estimate
19/06/2012 9.74 138,674 – – – 138,674 19/06/2015 – – – –
21/06/2012 10.06 67,097 – – – 67,097 21/06/2015 – – – –
12/06/2013 13.88 101,585 – – 101,585 13/06/2016 – – – –
12/06/2013 13.88 50,792 – – 50,792 13/06/2016 – – – –
643,112 152,377 234,930 – 560,559 3,761,861 3,699,717 FY12/13
Actual
3,872,123 FY13/14
Estimate
David
Warren 02/07/2012 10.04 84,661 – – – 84,661 02/07/2015 – – – –
12/06/2013 13.88 54,034 – – 54,034 13/06/2016 – – – –
84,661 54,034 – – 138,695 – –
Raffaele
Jerusalmi 14/09/2010 7.00 71,428 – 71,428 – – 16/09/2013 16.24 1,159,991 15/11/2013 15.77 1,126,146
FY12/13
Actual
03/06/2011 9.71 51,493 – – – 51,493 03/06/2014 19.13 985,061 – –
FY13/14
Estimate
19/06/2012 9.74 61,633 – – – 61,633 19/06/2015 – – – –
12/06/2013 13.88 51,152 – – 51,152 13/06/2016 – – – –
184,554 51,152 71,428 – 164,278 1,159,991 1,126,146 FY12/13
Actual
985,061 FY13/14
Estimate
Note:
All estimates are shown separately in bold. They will be fully disclosed in next year’s Annual Report on Remuneration.
96 Governance
Directors’ Remuneration Report continued
Annual Report on Remuneration continued
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Remuneration Committee – Governance
The Remuneration Committee is appointed by the Board and comprises
only independent Non-Executive Directors. The Committee’s remit includes
the remuneration of the Chairman of the Group, Executive Directors and the
Executive Committee (please see pages 20 and 21 for details of the Group’s
Executive Committee), including the awards made under the performance-
related incentive schemes.
All members of the Committee are considered to be independent.
Details of the Committee’s remit and activities are set out in this Directors’
Remuneration Report. The Committee has written terms of reference which
are available from the Group Company Secretary or at the corporate
governance section of the Company’s website at www.lseg.com.
During the year ended 31 March 2014, the Committee met on ?ve occasions.
Remuneration Committee composition and meeting attendance
in the year ended 31 March 2014
Total
Robert Webb (Chairman)
5/5
Chris Gibson-Smith
5/5
Gay Huey Evans (resigned 17 July 2013)
1/5
Paolo Scaroni
5/5
Sergio Ermotti (resigned 17 July 2013)
1/5
To assist the Committee, the results of market surveys are made available
and, where appropriate, the Committee invites the views of the Chief
Executive Of?cer, Chief Financial Of?cer and Head of Human Resources.
None of these individuals or the Chairman participated in any discussion
relating to their own remuneration.
Statement of shareholder voting
The table below sets out the results of the vote on the Directors’ Remuneration
Report at the 2013 AGM:
Votes for Votes against Votes cast Votes withheld
Number % Number %
210,062,132 96.86 6,806,546 3.14 216,868,678 791,531
Advisors
The Remuneration Committee continues to be mindful of recommendations
from key stakeholders, including institutional investor bodies, and the
Committee consults with major shareholders on any key decisions taken.
Deloitte LLP is the principal advisor appointed by the Committee to provide
independent advice on Executive remuneration policy and practice and
reviews our policy framework and implementation thereof against current
and emerging corporate governance best practice. During the year, Deloitte
received £152,600 (excluding VAT) based on actual time spent for these
services. Separately, other parts of Deloitte LLP also advised the Company
in FY13/14 in relation to tax, internal audit, risk management, consulting and
transaction support services.
Deloitte is a founder member of the Remuneration Consultants Group
and, as such, voluntarily operates under the code of conduct in relation to
Executive remuneration consulting in the UK. The Committee is satis?ed
that the advice provided by Deloitte LLP is independent and objective.
Outside appointments
Executive Directors are allowed to accept appointments as Non-Executive
Directors of other companies with the prior approval of the Chairman.
Approval will only be given where the appointment does not represent a
con?ict of interest with the Company’s activities and the wider exposure
gained will be bene?cial to the development of the individual. Executive
Directors may retain fees to encourage them to seek out the development
opportunities and valuable experience afforded by these appointments
and in recognition of the personal responsibility Executives assume in such
roles and we would disclose these fees.
At present, none of the Executive Directors are in receipt of additional fees.
Signed on behalf of the Board of Directors
Robert Webb
Chairman of the Remuneration Committee
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Governance Directors’ Remuneration Report
London Stock Exchange Group plc Annual Report 2014
Results
The Group made a pro?t before taxation, before amortisation of purchased
intangible assets and non-recurring items, of £442.4 million (2013: £380.7
million). After taking into account amortisation of purchased intangible
assets and non-recurring items, the pro?t of the Group before taxation for
the year ended 31 March 2014 was £284.3 million (2013: £298.9 million).
Pro?t after taxation was £182.7 million (2013: £215.5 million).
Dividends
The Directors are recommending a ?nal dividend for the year of 20.7 pence
(2013: 19.8 pence) per share which is expected to be paid on 19 August 2014
to shareholders on the register on 25 July 2014. Together with the interim
dividend of 10.1 pence (2013: 9.7 pence) per share paid in January 2014,
this produces a total dividend for the year of 30.8 pence (2013: 29.5 pence)
per share estimated to amount to £83.3 million (2013: £79.7 million).
Share capital
As at 31 March 2014 the Company had 271.1 million ordinary shares in issue
with a nominal value of 6
79
/86 pence each, representing 100 per cent of the
total issued share capital. There were no changes to the Company’s issued
ordinary share capital during the year.
Share rights
The rights and obligations attached to the Company’s ordinary shares are set out
in the Company’s articles of association, copies of which can be obtained from
Companies House in the UK or by writing to the Group Company Secretary.
No shareholder shall be entitled to vote at a general meeting, either in person
or by proxy, in respect of any share held by him or her unless all monies
presently payable by him in respect of that share have been paid. In addition,
no shareholder shall be entitled to vote, either in person or by proxy, if he has
been served with a notice under section 793 of the Companies Act 2006
(concerning interests in those shares) and has failed to supply the Company
with the requisite information.
Other than restrictions considered to be standard for a UK listed company
there are no limitations on the holding or transfers of ordinary shares in the
Company, both of which are governed and regulated by the Company’s
articles of association and applicable legislation and regulation, and the
Company is not aware of any agreements between holders of shares that
may result in restrictions on the transfer of shares or on voting rights.
Corporate Governance Statement
The Company’s Corporate Governance Report and the reports of the
Nomination, Audit and Risk Committees are set out on pages 56-69 and are,
together with the information on share rights set out above, incorporated
into this Corporate Governance Statement by reference.
Articles of Association
The Company’s articles of association (adopted by special resolution passed
on 14 July 2010) may only be amended by special resolution at a general
meeting of the shareholders.
The Directors of the Company are pleased to present their
Annual Report to shareholders, together with the ?nancial
statements for the year ended 31 March 2014.
The following sections of the Annual Report are incorporated into this
Directors’ Report by reference:
— The information that ful?ls the requirements of the Strategic Report
(including the Financial Review) can be found on pages 2-53; and
— Board of Directors on pages 54 and 55.
98 Governance
Directors’ report
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Substantial Shareholding
As at 15 May 2014 the Company had been noti?ed of the following interests
amounting to more than three per cent in the issued share capital of
the Company in accordance with DTR 5 of the FCA Disclosure and
Transparency Rules:
Borse Dubai Limited 20.6%
Qatar Investment Authority 15.08%
Authority to Purchase Shares
The authority for the Company to purchase in the market up to 27,000,000
of its ordinary shares (representing less than 10 per cent of the issued share
capital of the Company as at the latest practicable date before publication
of the Notice of the Company’s last AGM) granted at the Company’s last
AGM, expires on the date of the forthcoming AGM. Although the latter
authority was not utilised by the Company, shareholders will be asked
to give a similar authority to purchase shares at the forthcoming AGM.
Directors’ interests
Directors’ interests in the shares of the Company as at 31 March 2014,
according to the register maintained under the Companies Act 2006, are set
out in the Directors’ Remuneration Report on pages 95-96. No company
in the Group was, during or at the end of the ?nancial year, party to any
contract of signi?cance in which any Director was materially interested.
Employees
Information on the Company’s employment policies is given on page 36
and information on the Group’s share schemes is provided in the Directors’
Remuneration Report on pages 70-97. The Company provides an induction
programme for new employees, including training on health and safety,
and a range of development programmes for all staff to develop their skills
and knowledge. The Company encourages and assists the employment,
training and retention of disabled people. Where changes to working practices
or structure affect staff, they are consulted and given the appropriate support.
All employees are provided with information on matters of concern to them
in their work, through regular brie?ng meetings and internal publications.
GHG Emissions
Global FY14 GHG Emissions
(1 April 2013 to 31 March 2014) (tCO
2
e)
Total Scope 1 & 2 Emissions (as per below) 22,843
per m
2 1
0.26
per FTE 7.20
per £m Revenue 20.99
Combustion of fuel and operation of facilities
2
1,392
Purchase of electricity, heat, steam and cooling
by the Group for its own use
3
21,451
1 Total building ?oor space, including data centres.
2 Scope 1 including Natural Gas, Diesel, LPG and Fleet Vehicles.
3 Scope 2 (The Group does not purchase heat, steam or cooling).
Note: FY14 GHG Emissions will form the new baseline for GHG emissions due to signi?cant
changes in the LSEG, incorporating FTSE and LCH.Clearnet.
Further details of our approach to environmental issues, including
greenhouse gas emissions, can be found in the Our Wider Responsibility
section of the Strategic Report on page 36. Full details of our corporate
responsibility (CR) practices can be found in the Group’s CR report at
www.lseg.com/corporate-responsibility/corporate-responsibility.htm.
Political Donations and Expenditure
The Group made no political donations and incurred no political expenditure
during the year. It remains the Company’s policy not to make political
donations or to incur political expenditure, however the application of the
relevant provisions of the Companies Act 2006 is potentially very broad in
nature and, as last year, the Board is seeking shareholder authority to ensure
that the Group does not inadvertently breach these provisions as a result of
the breadth of its business activities, although the Board has no intention of
using this authority. Accordingly, the Board is proposing that shareholders
pass a resolution at the forthcoming AGM to authorise the Group to:
— make political donations to political parties and independent election
candidates not exceeding £100,000 in total;
— make political donations to political organisations other than political
parties not exceeding £100,000 in total; and
— incur political expenditure not exceeding £100,000 in total;
and in aggregate not exceeding £100,000, until the Company’s AGM in 2015.
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Governance Directors’ report
London Stock Exchange Group plc Annual Report 2014
Significant agreements
The following are signi?cant agreements to which the Company is a party
that take effect, alter or terminate upon a change of control of the Company
following a takeover bid.
Facility Agreement
The Company (as borrower) has entered into a revolving facility agreement with
The Bank of Tokyo-Mitsubishi UFJ, Ltd, HSBC Bank plc, Morgan Stanley Bank
International Limited, The Royal Bank of Scotland plc, Abbey National Treasury
Services plc, Barclays Bank plc and Lloyds TSB Bank plc, dated 18 July 2013.
The above agreement contains terms appropriate for an investment grade
borrower including change of control provisions which, if triggered, allow the
facility agent upon instructions from the majority lenders to cancel the facility
and declare all outstanding loans under the agreement, together with accrued
interest and all other amounts accrued, due and payable.
Notes
The Company has issued two sterling Notes to the wholesale ?xed income
market due 2016 and 2019. Both Notes contain a ‘redemption upon change
of control’ provision which, if triggered by the combination of a change
of control and, within 120 days thereafter, a credit rating downgrade to
non-investment grade, allows Note holders to exercise their option to require
the Issuer to redeem the Notes and pay any accrued and unpaid interest due.
Retail Bond Issue
The Company has issued sterling denominated retail bonds, under its £1,000
million Euro Medium Term Note Programme, which are due 2021. The retail
bonds contain change of control provisions which, if triggered, allow the
holder of these bonds to have the option to require the Issuer to repay early
or to purchase the bonds of that holder at their face value together with
accrued interest.
Employee Share Plans
The rules of the Company’s employee share plans set out the consequences
of a change of control of the Company on employees’ rights under the plans.
Generally such rights will vest on a change of control and participants will
become entitled to acquire shares in the Company (although in certain
circumstances the Remuneration Committee has the discretion to defer
vesting and to require rights to be exchanged for equivalent rights over
the acquiring company’s shares).
Employee benefit trust
As at 31 March 2014, the trustee of the London Stock Exchange Employee
Bene?t Trust, which is an independent trustee, held 0.6 million shares
(2013: 1.1 million) under the terms of the trust for the bene?t of employees
and former employees of the Company and its subsidiaries. The trust is a
discretionary trust and the shares are held to meet employees’ entitlements
under the Company’s share plans. Employees have no voting rights in relation
to the shares while they are held in trust. The trustee has full discretion to
exercise the voting rights attaching to the shares or to abstain from voting.
Shares acquired by employees through the Company’s employee share plans
rank equally with the ordinary shares in issue and have no special rights.
Branches outside the UK
Certain of the Company’s subsidiaries have established branches in a number
of different countries in which they operate.
Financial risk management
The use of ?nancial instruments by the Group and the Group’s ?nancial risk
management have been speci?cally considered by the Directors, and relevant
disclosures appear in Principal Risks and Uncertainties, on pages 48-53 of
this Annual Report, and in the notes to the Financial Statements, on pages
110-141 of this Annual Report, and in each case are incorporated by reference
into this Directors’ Report.
Audit information
In accordance with Section 418(2) of the Companies Act 2006, the Directors
con?rm, in the case of each Director in of?ce at the date the Directors’ Report
is approved, that:
— so far as the Director is aware, there is no relevant audit information of
which the Company’s auditors are unaware; and
— he/she has taken all the steps that he/she ought to have taken as a
Director in order to make himself or herself aware of any relevant audit
information and to establish that the Company’s auditors are aware of
that information.
Auditors
On 22 April 2014, the Group announced that, following a competitive
tender process, it was proposing to appoint Ernst & Young LLP (EY) as
auditor of the Group. Further details of the tender process can be found
within the Report of the Audit Committee on page 68.
A resolution to reappoint EY as the Company’s auditors will be proposed
at the AGM.
Strategic Report
The Strategic Report (pages 2-53) was approved by the Board on
14 May 2014 and signed on their behalf.
By Order of the Board
Lisa Condron
Group Company Secretary
15 May 2014
100 Governance
Directors’ report
continued
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The Directors are responsible for preparing the Annual Report,
the Directors’ Remuneration Report and the ?nancial statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare ?nancial statements for
each ?nancial year. Under that law the Directors have prepared the Group
and Company ?nancial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union.
Under company law the Directors must not approve the ?nancial statements
unless they are satis?ed that they give a true and fair view of the state of the
affairs of the Group and the Company and of the pro?t or loss for that period.
In preparing those ?nancial statements, the Directors are required to:
— select suitable accounting policies and then apply them consistently;
— make judgements and accounting estimates that are reasonable
and prudent
— state whether applicable IFRSs as adopted by the European Union have
been followed, subject to any material departures disclosed and
explained in the ?nancial statements; and
— prepare the ?nancial statements on the going concern basis, unless
it is inappropriate to presume that the Group will continue in business.
The Directors con?rm that they have complied with the above requirements
in preparing the ?nancial statements.
The Directors are responsible for keeping adequate accounting records that
are suf?cient to show and explain the Company’s transactions and disclose
with reasonable accuracy at any time the ?nancial position of the Company
and the Group and to enable them to ensure that the ?nancial statements
and the Directors’ Remuneration Report comply with the Companies Act
2006 and, as regards the Group ?nancial statements, Article 4 of the IAS
Regulation. The Directors are also responsible for safeguarding the assets
of the Company and the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of ?nancial 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
2-53. In particular, the current economic conditions continue to pose a
number of risks and uncertainties for the Group and these are set out in
Principal Risks and Uncertainties on pages 48-53.
The ?nancial 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 114-17. The Group continues to meet Group and
individual entity capital requirements and day-to-day liquidity needs through
the Group’s cash resources and available credit facilities. Committed term
funding at 31 March 2014 was £1,649 million which is committed until July
2016 or beyond (2013: £1,650 million, £1,400 million of which was committed
until December 2014 or beyond), described further in the Financial Review on
pages 38-43.
The Directors have reviewed the Group’s forecasts and projections, taking into
account reasonably possible changes in trading performance, which show
that the Group has suf?cient ?nancial 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 ?nancial statements.
Each of the Directors, whose names and functions are set out on pages
54-55 of this Annual Report con?rm that, to the best of their knowledge
and belief:
— the Group ?nancial statements, which have been prepared in accordance
with IFRSs as adopted by the EU, give a true and fair view of the assets,
liabilities, ?nancial position and pro?t 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 2014, taken as a
whole, is fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance,
business model and strategy.
By Order of the Board
Lisa Condron
Group Company Secretary
15 May 2014
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Governance Statement of directors’ responsibilities
Statement of directors’ responsibilities
London Stock Exchange Group plc Annual Report 2014
Report on the financial statements
Our opinion
In our opinion:
— The ?nancial statements, de?ned below, give a true and fair view of the
state of the Group’s and of the Parent Company’s affairs as at 31 March
2014 and of the Group’s pro?t and of the Group’s and Parent Company’s
cash ?ows for the year then ended;
— The Group ?nancial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
— The Parent Company ?nancial statements have been properly prepared
in accordance with IFRSs as adopted by the European Union and as
applied in accordance with the provisions of the Companies Act 2006; and
— The ?nancial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
?nancial statements, Article 4 of the IAS Regulation.
This opinion is to be read in the context of what we say in the remainder of
this report.
What we have audited
The Group ?nancial statements and Parent Company ?nancial statements
(the “?nancial statements”), which are prepared by London Stock Exchange
Group (“LSEG”) plc, comprise:
— the Group and Parent Company balance sheet as at 31 March 2014;
— the Group income statement and statement of comprehensive income
for the year then ended;
— the Group and Parent Company statements of changes in equity and
statements of cash ?ows for the year then ended; and
— the notes to the ?nancial statements, which include a summary of
signi?cant accounting policies and other explanatory information.
The ?nancial reporting framework that has been applied in their preparation
comprises applicable law and IFRSs as adopted by the European Union and,
as regards the Parent Company, as applied in accordance with the provisions
of the Companies Act 2006.
What an audit of financial statements involves
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves obtaining
evidence about the amounts and disclosures in the ?nancial statements
suf?cient to give reasonable assurance that the ?nancial statements are free
from material misstatement, whether caused by fraud or error. This includes
an assessment of:
— whether the accounting policies are appropriate to the Group’s and
Parent Company’s circumstances and have been consistently applied
and adequately disclosed;
— the reasonableness of signi?cant accounting estimates made by the
Directors; and
— the overall presentation of the ?nancial statements.
In addition, we read all the ?nancial and non-?nancial information in
the Annual Report and Accounts (“Annual Report”) to identify material
inconsistencies with the audited ?nancial statements and to identify any
information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing
the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Overview of our audit approach
Materiality
We set certain thresholds for materiality. These helped us to determine the
nature, timing and extent of our audit procedures and to evaluate the effect of
misstatements, both individually and on the ?nancial statements as a whole.
Based on our professional judgment, we determined overall materiality for the
Group ?nancial statements as a whole to be £22.1 million, being ?ve per cent
of pro?t before tax, acquisition amortisation and non-recurring items. We
chose this benchmark because we believe it is a reasonable representation of
the underlying performance of the Group.
We agreed with the Audit Committee that we would report to them
misstatements identi?ed during our audit above £500,000 as well as
misstatements below that amount that, in our view, warranted reporting
for qualitative reasons.
Overview of the scope of our audit
When establishing the scope of our audit we considered the internal
organisation of the Group and determined a scope of audit work that
optimised the coverage of risks, balances and transactions.
We scoped our audit based on the Group’s legal entity structure. Our work
focused primarily on those entities which in our view required an audit of
their complete ?nancial information due to their size and risk characteristics.
This work included an audit of those entities that comprise all, or substantially
all, of the Capital Markets, Post Trade Services, Information Services and
LCH.Clearnet businesses which together constituted 97 per cent of the
Group pro?t before tax, acquisition amortisation and non-recurring items.
In addition we carried out speci?c audit procedures on certain ?nancial
statement line items and performed work on the consolidation process.
This gave us the evidence we needed for our opinion on the Group ?nancial
statements as a whole.
In establishing the overall approach to the Group audit, we determined
the type of work that needed to be performed at the legal entities by us,
by component auditors from another PwC network ?rm and one other
?rm operating under our instruction. Where the work was performed by
component auditors, we determined the level of involvement we needed to
have in the audit work at those legal entities to be able to conclude whether
suf?cient appropriate audit evidence had been obtained as a basis for our
opinion on the Group ?nancial statements as a whole.
Areas of particular audit focus
In preparing the ?nancial statements, the Directors made a number of
subjective judgements, for example in respect of signi?cant accounting
estimates that involved making judgments and considering future events
that are inherently uncertain. We primarily focused our work in these areas by
assessing the Directors’ judgements against available evidence, forming our
own judgements, and evaluating the disclosures in the ?nancial statements.
In our audit, we tested and examined information, using sampling and other
auditing techniques, to the extent we considered necessary to provide a
reasonable basis for us to draw conclusions. We obtained audit evidence
through testing the effectiveness of controls, substantive procedures or a
combination of both.
We considered the following areas to be those that required particular focus
in the current year. This is not a complete list of all risks or areas of focus
identi?ed by our audit. We discussed these areas of focus with the Audit
Committee. Their report on those matters that they considered to be signi?cant
issues in relation to the ?nancial statements is set out on pages 67-68.
Independent Auditors’ Report to the
members of London Stock Exchange Group plc
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How the scope of our audit addressed
the area of focus
Goodwill impairment
assessment
We focused on this
area because the
determination of
whether or not
the carrying value
of goodwill is
supportable involved
signi?cant judgements
about the future
performance of the
business, as set out in
note 13 to the Group
?nancial statements.
We evaluated the Directors’ forecast of future cash
?ows including comparing them to the latest Board
approved budgets and considering past
performance against budget. We also tested the
integrity of the model and assessed how both
internal and external drivers of performance were
incorporated into the projections. In particular
we challenged:
— The Director’s key assumptions for short and
long term revenue growth rates by comparing
them to economic and industry forecasts; and
— The discount rate used by independently
recalculating the cost of capital.
To direct our testing to the areas of highest risk we
performed sensitivity analysis, including assessing
the impact of reasonably possible changes in
discount rates, revenues and operating margins
on the goodwill carrying value.
We also evaluated the adequacy of disclosures
made in note 13 to the Group ?nancial statements.
Consolidation of
LCH.Clearnet
We focused on this area
because the governance
and management of
LCH.Clearnet is subject
to complex shareholder
agreements and
therefore judgement is
required to determine
whether the Group
exercises control over
LCH.Clearnet.
We read the shareholder agreements and assessed
the nature of the interactions between LSEG,
LCH.Clearnet and other non-controlling interests,
including Board balance, rights of veto, and rights
to appoint and remove Directors.
We also evaluated how the Group demonstrated
its ability to exercise control over LCH.Clearnet
in practice, for example in connection with key
governance decisions such as the setting of
strategy, appointment of the CEO, approval of
remuneration of senior management and changes
in material contracts.
Area of focus
How the scope of our audit addressed
the area of focus
Purchase Price
Allocation on
acquisition of
LCH.Clearnet
We focused on this area
because judgement is
required to allocate the
price paid between the
different intangible
assets acquired.
We tested the Directors’ purchase price allocation
exercise including evaluating the reasonableness
of the assumptions used, testing the input data
and re-performing the model calculations. As part
of this work we:
— Met with the third party valuers who carried
out the Directors’ purchase price allocation
exercise to understand the methodology used
and also their view on the key sensitivities and
judgments taken;
— Assessed the methodology used including
considering valuation best practice relevant
to the LCH.Clearnet exercise; and
— Challenged the assumptions used, including
revenue growth, operating margin, customer
attrition and discount rates, by comparing
them with historical performance and
considering how external performance
drivers were incorporated into the projections.
We also evaluated the appropriateness of the
disclosures made in note 28 to the Group
?nancial statements.
Central Counterparty
Clearing (‘CCP’) assets
and liabilities
We focused on this
area because of the
magnitude of the
balance in the overall
context of the Group.
Speci?cally we focused
on the completeness,
valuation and existence
of the CCP assets and
liabilities recognised
on the Group
balance sheet.
In respect of the Italian clearing business,
we tested the IT general computer controls and
automated controls for clearing systems, as well
as the manual controls over processing activities.
We also tested the reconciliations between the
operational systems and the ?nancial records and
obtained external con?rmations for a sample of
CCP balances at the year end and all cash balances
in relation to default funds.
In respect of the UK clearing business, we tested
the IT general computer controls and automated
controls for clearing systems, as well as the manual
controls over processing activities. We also tested
the reconciliations between the operational
systems and the ?nancial records.
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Governance Independent Auditors’ Report to the members of London Stock Exchange Group plc
London Stock Exchange Group plc Annual Report 2014
Going Concern
Under the Listing Rules we are required to review the Directors’ statement,
set out on page 101, in relation to going concern. We have nothing to report
having performed our review.
As noted in the Directors’ statement, the Directors have concluded that
it is appropriate to prepare the Group’s and Parent Company’s ?nancial
statements using the going concern basis of accounting. The going concern
basis presumes that the Group and Parent Company have adequate resources
to remain in operation, and that the Directors intend them to do so, for at
least one year from the date the ?nancial statements were signed. As part
of our audit we have concluded that the Directors’ use of the going concern
basis is appropriate.
However, because not all future events or conditions can be predicted, these
statements are not a guarantee as to the Group’s and the Parent Company’s
ability to continue as a going concern.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion:
— the information given in the Strategic Report and the Directors’ Report
for the ?nancial year for which the ?nancial statements are prepared is
consistent with the ?nancial statements; and
— the part of the Directors’ Remuneration Report to be audited has been
properly prepared in accordance with the Companies Act 2006.
Area of focus
How the scope of our audit addressed
the area of focus
Risk of fraud in
revenue recognition
ISAs (UK & Ireland)
presume there is a risk
of fraud in revenue
recognition as a result
of the potential for
management bias
in order to achieve
planned results.
We focused on the
accuracy of Capital
Markets secondary
revenue and the
occurrence of
Information Services
revenue because
of the higher risk
posed by complex
tariff structures.
For the Group’s main Capital Markets secondary
businesses we tested the accuracy of the capital
markets secondary revenue by rebuilding the
pricing model and independently recalculating
the total revenue using the base trade data.
Additional testing of revenue included:
— Testing of the IT general controls for revenue
systems and agreeing output from revenue
systems to ?nancial ledgers
— Tracing full populations of revenue postings
through to cash or receivables and
investigating unusual items
— Testing compliance with complex contractual
agreements for a sample of Information
Services revenue postings
Risk of management
override of internal
controls
ISAs (UK & Ireland)
require that we
consider this and
hence it is an area that
receives heightened
focus on every audit
conducted under these
auditing standards.
We tested journal entries, including targeting
our testing at higher risk journals by stratifying
the population by risk characteristics.
We also tested key reconciliations for bank,
intercompany and other balance sheet accounts.
We assessed the overall control environment
of the Group and interviewed senior management,
Group’s legal, risk, compliance and internal
audit functions.
We understood the key trigger points for
incentive payments to senior management
and examined the signi?cant accounting
estimates and judgements relevant to the
?nancial statements for evidence of bias by
Directors that may represent a risk of material
misstatement due to fraud.
104 Governance
Independent Auditors’ Report to the
members of London Stock Exchange Group plc
continued
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Other matters on which we are required to report by exception
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
— we have not received all the information and explanations we require for
our audit; or
— adequate accounting records have not been kept by the Parent Company,
or returns adequate for our audit have not been received from branches
not visited by us; or
— the Parent Company ?nancial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report if, in our opinion,
certain disclosures of Directors’ remuneration speci?ed by law have not been
made, and under the Listing Rules we are required to review certain elements
of the report to shareholders by the Board on Directors’ remuneration. We
have no exceptions to report arising from these responsibilities.
Corporate Governance Statement
Under the Listing Rules we are required to review the part of the Corporate
Governance Statement relating to the Parent Company’s compliance with
nine provisions of the UK Corporate Governance Code (‘the Code’). We have
nothing to report having performed our review.
On page 101 of the Annual Report, as required by the Code Provision C.1.1,
the Directors state that they consider the Annual Report taken as a whole
to be fair, balanced and understandable and provides the information
necessary for members to assess the Group’s performance, business model
and strategy. On pages 67 and 68, as required by C.3.8 of the Code, the Audit
Committee has set out the signi?cant issues that it considered in relation
to the ?nancial statements, and how they were addressed. Under ISAs
(UK & Ireland) we are required to report to you if, in our opinion:
— the statement given by the Directors is materially inconsistent with our
knowledge of the Group acquired in the course of performing our audit; or
— the section of the Annual Report describing the work of the Audit
Committee does not appropriately address matters communicated by
us to the Audit Committee.
We have no exceptions to report arising from this responsibility.
Other information in the Annual Report
Under ISAs (UK & Ireland), we are required to report to you if, in our opinion,
information in the Annual Report is:
— materially inconsistent with the information in the audited ?nancial
statements; or
— apparently materially incorrect based on, or materially inconsistent with,
our knowledge of the Group and Parent Company acquired in the course
of performing our audit; or
— is otherwise misleading.
We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the Directors
As explained more fully in the Directors’ Responsibilities Statement set out
on page 101, the Directors are responsible for the preparation of the Group
and Parent Company ?nancial statements and for being satis?ed that they
give a true and fair view.
Our responsibility is to audit and express an opinion on the Group and Parent
Company ?nancial statements in accordance with applicable law and ISAs
(UK & Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the
Company’s members as a body in accordance with Chapter 3 of Part 16
of the Companies Act 2006 and for no other purpose. We do not, in giving
these opinions, accept or assume responsibility for any other purpose or to
any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
Alison Morris
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
15 May 2014
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Governance Independent Auditors’ Report to the members of London Stock Exchange Group plc
106 Group ?nancial statements
Consolidated income statement
Consolidated statement
of comprehensive income
London Stock Exchange Group plc Annual Report 2014
Year ended 31 March 2014 2014 2013
Before acquisition
amortisation and
non-recurring
items
Acquisition
amortisation and
non-recurring
items Total
Before acquisition
amortisation and
non-recurring
items
Acquisition
amortisation and
non-recurring
items Total
Notes £m £m £m £m £m £m
Revenue 4 1,088.3 – 1,088.3 726.4 – 726.4
Net treasury income through CCP business 109.8 – 109.8 116.7 – 116.7
Other income 11.5 – 11.5 9.8 18.3 28.1
Total income 4 1,209.6 – 1,209.6 852.9 18.3 871.2
Expenses
Operating expenses 5 (698.4) (158.1) (856.5) (422.7) (100.1) (522.8)
Operating pro?t/(loss) 7 511.2 (158.1) 353.1 430.2 (81.8) 348.4
Finance income 5.5 – 5.5 2.7 – 2.7
Finance expense (74.3) – (74.3) (52.2) – (52.2)
Net ?nance expense 8 (68.8) – (68.8) (49.5) – (49.5)
Pro?t/(loss) before taxation 442.4 (158.1) 284.3 380.7 (81.8) 298.9
Taxation 9 (124.7) 23.1 (101.6) (95.7) 12.3 (83.4)
Pro?t/(loss) for the ?nancial year 317.7 (135.0) 182.7 285.0 (69.5) 215.5
Pro?t/(loss) attributable to non-controlling interests 30.7 (18.1) 12.6 1.0 (2.5) (1.5)
Pro?t/(loss) attributable to equity holders 287.0 (116.9) 170.1 284.0 (67.0) 217.0
317.7 (135.0) 182.7 285.0 (69.5) 215.5
Basic earnings per share 10 63.0p 80.4p
Diluted earnings per share 10 61.4p 79.0p
Adjusted basic earnings per share 10 107.1p 105.3p
Adjusted diluted earnings per share 10 104.4p 103.4p
Dividend per share in respect of the ?nancial period: 11
Dividend per share paid during the year 29.9p 28.7p
Dividend per share declared for the year 30.8p 29.5p
Year ended 31 March 2014 2014 2013
Notes £m £m
Pro?t for the ?nancial year 182.7 215.5
Other comprehensive income/(loss):
Items that may be subsequently reclassi?ed to pro?t or loss
De?ned bene?t pension scheme actuarial loss 16 (1.3) (6.9)
Cash ?ow hedge (0.3) 0.3
Net investment hedge (16.4) (1.9)
Change in value of available for sale ?nancial assets 6.1 1.2
Exchange (loss)/gain on translation of foreign operations (43.7) 19.2
Tax related to items not recognised in income statement 9 1.5 3.9
Other comprehensive (loss)/income net of tax (54.1) 15.8
Total comprehensive income for the ?nancial year 128.6 231.3
Attributable to non-controlling interests 5.2 (0.6)
Attributable to equity holders 123.4 231.9
Total comprehensive income for the ?nancial year 128.6 231.3
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107 Group ?nancial statements Balance sheets
Balance sheets
31 March 2014 Group Company
2014 2013 2014 2013
Notes £m £m £m £m
Assets
Non-current assets
Property, plant and equipment 12 93.3 80.1 – –
Intangible assets 13 2,476.0 2,049.3 – –
Investments in associates 0.3 0.6 – –
Investments in subsidiary undertakings 14 – – 3,858.9 3,779.1
Deferred tax assets 15 42.2 19.2 – –
Derivative ?nancial instruments 18 6.7 4.3 6.7 4.0
Available for sale investments 18 4.8 – – –
Retirement bene?t asset 16 14.5 – – –
Other non-current assets 38.0 12.0 – –
2,675.8 2,165.5 3,865.6 3,783.1
Current assets
Inventories 0.5 1.5 – –
Trade and other receivables 17 250.5 185.7 534.1 579.4
CCP ?nancial assets 470,497.7 137,620.2 – –
CCP cash and cash equivalents (restricted) 33,278.5 8,476.2 – –
CCP clearing business assets 18 503,776.2 146,096.4 – –
Current tax 22.3 24.6 0.1 –
Assets held at fair value 18 18.7 6.1 – –
Cash and cash equivalents 20 919.2 446.2 – 0.1
504,987.4 146,760.5 534.2 579.5
Total assets 507,663.2 148,926.0 4,399.8 4,362.6
Liabilities
Current liabilities
Trade and other payables 21 401.5 230.0 204.3 160.9
Derivative ?nancial instruments 18 3.4 0.1 – –
CCP clearing business liabilities 18 503,747.4 146,088.1 – –
Current tax 14.8 43.2 – –
Borrowings 22 278.7 0.4 26.0 –
Provisions 24 2.8 1.1 – –
504,448.6 146,362.9 230.3 160.9
Non-current liabilities
Borrowings 22 945.0 796.4 796.6 796.4
Other non-current payables 21 – 3.4 – –
Derivative ?nancial instruments 18 4.0 3.5 4.0 3.5
Deferred tax liabilities 15 176.0 109.0 – –
Retirement bene?t obligation 16 36.9 25.6 – –
Other non-current liabilities 79.2 – – –
Provisions 24 16.6 26.2 – –
1,257.7 964.1 800.6 799.9
Total liabilities 505,706.3 147,327.0 1,030.9 960.8
Net assets 1,956.9 1,599.0 3,368.9 3,401.8
Equity
Capital and reserves attributable to the Company’s equity holders
Ordinary share capital 25 18.8 18.8 18.8 18.8
Retained (losses)/earnings (79.0) (126.8) 1,531.6 1,564.5
Other reserves 1,587.0 1,638.5 1,818.5 1,818.5
Total shareholder funds 1,526.8 1,530.5 3,368.9 3,401.8
Non-controlling interests 430.1 68.5 – –
Total equity 1,956.9 1,599.0 3,368.9 3,401.8
The ?nancial statements on pages 106-141 were approved by the Board on 15 May 2014 and signed on its behalf by:
Xavier Rolet David Warren
Chief Executive Chief Financial Of?cer
108 Group ?nancial statements
Cash ?ow statements
London Stock Exchange Group plc Annual Report 2014
Year ended 31 March 2014 Group Company
2014 2013 2014 2013
Notes £m £m £m £m
Cash ?ow from operating activities
Cash generated from/(absorbed by) operations 26 515.4 487.5 (13.0) 0.1
Interest received 4.6 2.4 23.5 47.1
Interest paid (71.7) (43.2) (62.6) (51.9)
Corporation tax paid (99.8) (64.9) – 24.9
Withholding tax paid (23.2) (39.3) – –
Net cash in?ow/(out?ow) from operating activities 325.3 342.5 (52.1) 20.2
Cash ?ow from investing activities
Purchase of property, plant and equipment (23.6) (18.2) – –
Purchase of intangible assets (67.3) (28.2) – –
Investment in other acquisition – (11.2) – –
Investment in subsidiaries (376.5) (3.1) – –
Net cash in?ow from acquisitions 432.0 1.1 – –
Dividends received 0.3 0.2 118.2 160.7
Proceeds from sale of investment in associate 7.1 – – –
Net cash (out?ow)/in?ow from investing activities (28.0) (59.4) 118.2 160.7
Cash ?ow from ?nancing activities
Capital Raise 114.4 – – –
Dividends paid to shareholders (80.8) (77.4) (80.8) (77.4)
Dividends paid to non-controlling interests (2.9) (4.3) – –
Cost of capital raise (2.7) – – –
Loans from/(to) ESOP trust – – – (13.9)
Loans to subsidiary companies – – 16.6 (139.4)
Purchase of own shares by ESOP Trust (28.0) (13.9) (28.0)
Proceeds from own shares on exercise of employee share options 2.3 0.3 – 0.3
Proceeds from borrowings 283.5 297.6 26.0 297.6
Repayments of borrowings (91.4) (257.8) – (247.8)
Net cash in?ow/(out?ow) from ?nancing activities 194.4 (55.5) (66.2) (180.6)
Increase/(decrease) in cash and cash equivalents 491.7 227.6 (0.1) 0.3
Cash and cash equivalents at beginning of year 446.2 216.0 0.1 0.2
Exchange (losses)/gains on cash and cash equivalents (18.7) 2.6 – (0.4)
Cash and cash equivalents at end of year 919.2 446.2 – 0.1
Group cash ?ow does not include cash and cash equivalents held by the Group’s Post Trade operations on behalf of its clearing members for use in its operation
as manager of the clearing and guarantee system. These balances represent margins and default funds held for counterparties for short periods in connection
with this operation. Interest on CCP balances are received net of withholding tax, which is deducted at source. This withholding tax is effectively a cash out?ow
for the Group, and is shown separately in the cash ?ow statement.
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109 Group ?nancial statements Statements of changes in equity
Statements of changes in equity
Group Attributable to equity holders
Ordinary
share
capital
Retained
loss
Other
reserves
Total
attributable to
equity holders
Non-controlling
interests
Total
equity
£m £m £m £m £m £m
31 March 2012 18.8 (262.9) 1,620.9 1,376.8 72.9 1,449.7
Pro?t/(loss) for the year – 217.0 – 217.0 (1.5) 215.5
Other comprehensive income for the year – (2.7) 17.6 14.9 0.9 15.8
Final dividend relating to the year ended 31 March 2012 – (51.2) – (51.2) – (51.2)
Interim dividend relating to the year ended 31 March 2013 – (26.2) – (26.2) – (26.2)
Dividend payments to non-controlling interests – – – – (3.8) (3.8)
Employee share scheme expenses – (0.8) – (0.8) – (0.8)
31 March 2013 18.8 (126.8) 1,638.5 1,530.5 68.5 1,599.0
Pro?t for the year – 170.1 – 170.1 12.6 182.7
Other comprehensive income for the year – 4.8 (51.5) (46.7) (7.4) (54.1)
Final dividend relating to the year ended 31 March 2013 – (53.5) – (53.5) – (53.5)
Interim dividend relating to the year ended 31 March 2014 – (27.3) – (27.3) – (27.3)
Dividend payments to non-controlling interests – – – – (5.4) (5.4)
Employee share scheme expenses – (13.0) – (13.0) – (13.0)
Purchase of non-controlling interest – (33.3) – (33.3) 361.8 328.5
31 March 2014 18.8 (79.0) 1,587.0 1,526.8 430.1 1,956.9
Other reserves comprise the following:
Capital redemption reserve of £514.2 million (2013: £514.2 million), a non-distributable reserve set up as a result of a court approved capital reduction.
Reverse acquisition reserve of £(512.5) million (2013: £(512.5) million), a non-distributable capital reserve arising on consolidation as a result of the capital
reduction scheme.
Foreign exchange translation reserve of £318.5 million (2013: £353.3 million), re?ecting the impact of foreign currency changes on the translation of
foreign operations.
Merger reserve of £1,304.3 million (2013: £1,304.3 million), arising on consolidation when the Company issued shares as part of the consideration
to acquire subsidiary undertakings.
Hedging reserve of £(37.5) million (2013: £(20.8) million), representing the cumulative fair value adjustment recognised in respect of net investment and
cash ?ow hedges undertaken in accordance with hedge accounting principles.
Company Attributable to equity holders
Other reserves
Ordinary
share
capital
Retained
earnings
Capital
redemption
reserve
Merger
reserve
Total
attributable to
equity holders
£m £m £m £m £m
31 March 2012 18.8 1,463.3 514.2 1,304.3 3,300.6
Pro?t for the year – 176.2 – – 176.2
Final dividend relating to the year ended 31 March 2012 – (51.2) – – (51.2)
Interim dividend relating to the year ended 31 March 2013 – (26.2) – – (26.2)
Employee share scheme expenses – 2.4 – – 2.4
31 March 2013 18.8 1,564.5 514.2 1,304.3 3,401.8
Pro?t for the year – 63.2 – – 63.2
Final dividend relating to the year ended 31 March 2013 – (53.5) – – (53.5)
Interim dividend relating to the year ended 31 March 2014 – (27.3) – – (27.3)
Employee share scheme expenses – (15.3) – – (15.3)
31 March 2014 18.8 1,531.6 514.2 1,304.3 3,368.9
110 Group ?nancial statements
Notes to the ?nancial statements
London Stock Exchange Group plc Annual Report 2014
1. Basis of preparation and accounting policies
The Company’s and Group’s consolidated ?nancial statements are prepared
in accordance with International Financial Reporting Standards (IFRS)
and IFRS Interpretations Committee (IFRIC) interpretations endorsed
by the European Union, and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
The principal accounting policies applied in the preparation of these consolidated
?nancial statements are set out below. These policies have been consistently
applied to all the years presented, unless otherwise stated.
The ?nancial statements are prepared under the historical cost convention
as modi?ed by the revaluation of assets and liabilities held at fair value and
on the basis of the Group’s accounting policies.
The Group uses a columnar format for the presentation of its consolidated
income statement. This enables the Group to aid the reader’s understanding
of its results by presenting pro?t for the year before amortisation of purchased
intangible assets and non-recurring items. This is the pro?t measure used
to calculate adjusted earnings per share and is considered to be the most
appropriate as it best re?ects the Group’s underlying, recurring cash earnings
and is the primary measure of performance monitored by the Group’s Executive
Committee. Pro?t before acquisition amortisation and non-recurring items
is reconciled to pro?t before taxation on the face of the income statement.
Consolidation
The consolidated ?nancial statements comprise the ?nancial statements
of the Company and its subsidiaries with all inter-company balances and
transactions eliminated, together with the Group’s attributable share of the
results of associates. The results of subsidiaries sold or acquired are included in
the income statement up to, or from, the date that control passes. As permitted
by Section 408 of the Companies Act 2006, the Company’s income statement
has not been included in these ?nancial statements. The Company’s income
for the year is disclosed within the statement of changes in equity.
Investments in associates are accounted for under the equity method.
The Group’s investments in associates are initially recognised at cost,
and its share of pro?ts or losses after tax from associates is included in the
consolidated income statement. Cumulative post-acquisition movements
are adjusted against the carrying amount of the investment in the Group’s
balance sheet. The ?nancial statements of associates are used by the Group to
apply the equity method, under which the Group’s income statement re?ects
the Group’s share of the results of operations of the associates. A company is
considered an associate where the Group has a signi?cant in?uence.
The acquisition of subsidiaries is accounted for using the purchase method.
The cost of the acquisition is measured at the aggregate of the fair values,
at the date of exchange, of assets given, liabilities incurred or assumed,
and equity instruments issued by the Group in exchange for control of the
acquiree. Adjustments to fair values include those made to bring accounting
policies into line with those of the Group.
The Group applies a policy of treating transactions with non-controlling interests
through the economic entity model. Transactions with non-controlling interests
are recognised in equity.
Investments in subsidiaries shares, loans and other contributions are
recognised at cost. These are reviewed for impairment when events indicate
the carrying amount may not be recoverable and are accounted for in the
Company’s ?nancial statements at cost less accumulated impairment losses.
Recent accounting developments
The following standards and interpretations have been issued by the
International Accounting Standards Board (IASB) and IFRIC and have
been adopted in these ?nancial statements:
Amendments to IFRS 1, ‘First time adoption’ – exemption for severe
hyperin?ation and removal of ?xed dates;
Amendment to IFRS 7, ‘Financial instruments: Disclosures’ – disclosures
on transfers of ?nancial assets and offsetting ?nancial assets and liabilities;
IAS19R, ‘Amendments to IAS 19 Employee Bene?ts’;
IFRS 13, ‘Fair value measurement’;
IAS 1, ‘Presentation of Financial Statements’ – Presentation of Items of Other
Comprehensive Income; and
IFRS various Annual improvements 2012 and 2013.
The adoption of these standards did not have a material impact on these
consolidated ?nancial statements.
The restatement relating to IAS19R resulted in reclassi?cation of net expenses
with an immaterial impact to pro?t for the ?nancial period.
The following standards and interpretations were issued by the IASB and IFRIC
since the last Annual Report, but have not been adopted either because they
were not endorsed by the European Union (EU) at 31 March 2014 or they are
not yet mandatory and the Group has not chosen to early adopt. The impact
on the Group’s ?nancial statements of the future standards, amendments and
interpretations is still under review, but the Group does not expect any of these
changes to have a material impact on the results or the net assets of the Group:
International accounting standards and interpretations Effective date
IFRS 10, ‘Consolidated ?nancial statements’ and amendments 1 January 2013
IFRS 11, ‘Joint arrangements’ 1 January 2013
IFRS 12, ‘Disclosure of interests in other entities’
and amendments 1 January 2013
IAS 27 (Revised 2011), ‘Separate ?nancial statements’
and amendments 1 January 2013
IAS 28 (Revised 2011), ‘Associates and joint ventures’ 1 January 2013
Amendment to IAS 32, ‘Financial instruments: Presentation’ 1 January 2014
Amendment to IAS 36, ‘Impairment of assets’ on recoverable
amount disclosures 1 January 2014
Amendment to IAS 39 on novation of derivatives
and hedge accounting 1 January 2014
IFRIC 21, ‘Levies’ 1 January 2014
Amendments to IAS 19, ‘Employee Bene?ts’ on de?ned
bene?t plans 1 July 2014
IFRS 14, ‘Regulatory deferral accounts’ 1 January 2016
IFRS 9, ‘Financial instruments’ and amendments 1 January 2018
Accounting policies
Income Statement
Revenue
Revenue is measured at the fair value of the consideration received or receivable
and represents amounts receivable for goods and services provided in the
normal course of business, net of discounts, VAT and other sales related taxes.
Revenue is recognised in the period when the service or supply is provided.
The sources of revenue are:
a) Maintenance contracts, membership and other fees – revenue is
recognised on a straight-line basis over the period to which the fee relates;
b) Admission fees – revenue is recognised at the time of admission to trading;
c) Clearing fee income and rebates, together with other fee income and net
settlement fees, are recognised on a transaction by transaction basis in
accordance with the Group’s fee scales;
d) Royalties – revenue is recognised at the date at which they are earned or
measurable with certainty;
e) IT products – where there is no signi?cant service obligation the revenue
is recognised upon delivery and acceptance of the software or hardware
by the customer, in other circumstances revenue is recognised on
provision of contracted services;
f) IT solutions – where software is sold requiring signi?cant modi?cation,
integration or customisation, the consideration is allocated between the
different elements on a fair value basis. Revenue is recognised using a
percentage of completion method. The stage of completion is determined
by reference to the costs incurred to date as a proportion of the total
estimated costs or the services performed to date as a percentage of
total services to be performed. Provision is made for all foreseeable
future losses in the period in which they are identi?ed;
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111 Group ?nancial statements Notes to the ?nancial statements
g) Software and Licence fees – revenue is recognised when the performance
under the contract has occurred and the revenue has been earned; and
h) Other – all other revenue is recognised in the month in which the service
is provided. Borsa Italiana group defers some of the income received
from cash trading and FTSE MIB futures trading and clearing. This deferral
results in revenues being recognised at the average price of transactions
forecast for the full year, as pricing levels reduce during the year when
incremental volume targets are achieved.
The main source of revenue are through fees.
Non-recurring items
Items of income and expense that are material by size and/or nature and are
non-recurring are classi?ed as non-recurring items on the face of the income
statement within their relevant category. The separate reporting of these
items together with amortisation of purchased intangible assets helps give
an indication of the Group’s underlying performance.
Pension costs
The Group operates de?ned bene?t and de?ned contribution pension
schemes. For the de?ned bene?t schemes the service cost, representing
bene?ts accruing to employees, is included as an operating expense.
The interest cost and expected return on plan assets used in the previous
version of IAS 19 are replaced with a net-interest amount under IAS 19
(Revised 2011), which is calculated by applying the discount rate to the net
de?ned bene?t liability or asset at the start of each annual reporting period.
Actuarial gains and losses arising from experience adjustments, changes in
actuarial assumptions or differences between actual and expected returns
on assets are recognised at each period end net of tax in the statement of
comprehensive income. The net asset or liability recognised on the balance
sheet comprises the difference between the present value of pension
obligations and the fair value of scheme assets. For de?ned contribution
schemes, the expense is charged to the income statement as incurred
Share based compensation
The Group operates a number of equity settled share based compensation
plans for employees. The charge to the income statement is determined by
the fair value of the options granted or shares awarded at the date of grant
and recognised over the relevant vesting period.
Foreign currencies
The consolidated ?nancial statements are presented in sterling, which is
the Company’s presentation and functional currency. Foreign currency
transactions are converted into the functional currency using the rate ruling
at the date of the transaction. Foreign exchange gains or losses resulting
from the settlement of such transactions and from the translation at
year-end rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement. Translation differences
on non-monetary items, such as equities held at fair value through pro?t or
loss, are reported as part of their fair value gain or loss. Exceptions to this are
where the non-monetary items form part of the net investment in a foreign
operation or are designated as hedges of a net investment, or as cash ?ow
hedges. Such exchange differences are initially recognised in equity.
The results and ?nancial position of all Group entities that have a functional
currency different from the presentation currency are converted into the
presentation currency as follows:
a) assets and liabilities including goodwill, purchased intangible assets and
fair value adjustments are converted at the closing balance sheet rate;
b) income and expenses are translated and recorded in the income
statement at the average monthly rates prevailing; and
c) all resulting exchange differences are recognised as a separate
component of equity.
On consolidation, exchange differences arising from the translation of the
net investment in foreign operations, and of borrowing and other currency
instruments designated as hedges of such investments, are taken to
shareholders’ equity. When a foreign operation is partially disposed of
or sold, exchange differences that were recorded in equity are recognised
in the income statement as part of the gain or loss on sale.
Finance income and expense
Finance income and expense comprises interest earned on cash deposited
with ?nancial counterparties and interest paid on borrowings which re?ect
the agreed market-based or contractual rate for each transaction undertaken
during the ?nancial year.
Recurring fees and charges levied on committed bank facilities and the
payments and cash management transactions and services provided by the
Group’s banks are charged to the income statement as accrued. Credit facility
arrangement fees are capitalised and then amortised back to the income
statement over the term of the facility subject to protected utilisation. If a
facility is deemed unlikely to be drawn over its life, the arrangement fees
will be charged immediately to the income statement. Fees and charges
are included within other ?nance costs.
Fair value gains and losses on ?nancial instruments include the movement
in the market valuations of derivative instruments held as fair value hedges.
Balance Sheet
Property, plant and equipment
Property, plant and equipment are included in the ?nancial statements
at cost less accumulated depreciation and any provision for impairment.
Freehold buildings, ?xed plant and plant and equipment are stated at cost
and are depreciated to residual value on a straight line basis over the
estimated useful economic lives of the assets which are as follows:
a) Freehold buildings – 33 to 50 years;
b) Fixed plant – three to 20 years; and
c) Plant and equipment – three to 15 years.
Leasehold properties and improvements are included at cost and depreciated
to residual value over the shorter of the period of the lease or the useful
economic life of the asset.
Leases
Leases in which a signi?cant portion of the risks and rewards of ownership
are retained by the lessor are classi?ed as operating leases. Payments made
under operating leases are charged to the income statement on a straight-
line basis. Lease incentives are spread over the term of the lease.
The Group leases certain plant and equipment where the Group has
substantially all the risks and rewards of ownership. These are classi?ed as
?nance leases. Finance leases are capitalised at the lease’s commencement
at the lower of the fair value of the leased property and the present value of
the minimum lease payments.
Each lease payment is apportioned between the ?nance charge and the
liability so as to achieve a constant rate on the ?nance balance outstanding.
Plant and equipment acquired under ?nance leases is depreciated over the
shorter of the useful life of the asset and the lease term.
Due to the immaterial value of ?nance leases within the Group, they are not
disclosed separately within the accounts.
Intangible assets
Goodwill arising on the acquisition of subsidiaries represents the excess of
consideration paid over the fair value of the Group’s share of net identi?able
assets purchased and is allocated on a cash generating unit basis. It is
not amortised but is tested for impairment annually, and when there are
indications that the carrying value may not be recoverable, and is carried
at cost less accumulated impairment losses.
112 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
c) Loans and receivables
Loans and receivables are non-derivative ?nancial assets with ?xed or
determinable payments that are not quoted in an active market. They are
included in current assets, except for those with maturities greater than
12 months after the balance sheet date which are classi?ed as non-current
assets. Loans and receivables comprise trade and other receivables and cash
and cash equivalents in the balance sheet.
Financial assets and liabilities of the central counterparty
(CCP) business
Assets and liabilities of the CCP clearing service relate to subsidiaries that
perform the CCP clearing business. The activities include clearing of
?nancial derivatives, equities and bond transactions on regulated markets.
The Group enters into a contractual arrangement in respect of each side
of the transaction, bears the risk associated with counterparties failing
to honour their obligations and, in the event of a failure to deliver by any
counterparty, is required itself to complete the delivery. Accordingly, the
Group must record an asset and a liability on its balance sheet in respect of
each of the sale and purchase sides of each transaction. However, except in
respect of failed transactions the Group as a CCP clearer does not bear any
price risk and the value of the sale and purchase side of each transaction
are the same; consequently, the principal CCP asset and liability amounts
largely match each other. The Group has adopted the settlement date as
the reference date for recognising ?nancial assets.
Income recognised through the CCP clearing business includes net treasury
income earned on margin and default funds, held as part of our risk management
process, and is shown separately from the Group revenues. This amount has been
shown separately on the face of the income statement to distinguish this income
stream from revenues arising from the Group’s other activities and provides the
reader with a greater understanding of the operating activities of the Group.
Financial assets and liabilities are offset and the net amount reported
in the balance sheet when there is a legally enforceable right to offset
the recognised amounts and there is an intention to settle on a net basis
or realise the asset and settle the liability simultaneously.
Accounting treatments of CCP financial assets and liabilities include the following:
a) Derivatives, trading assets and liabilities
These transactions are initially recorded at fair value, and are subsequently
re-measured on the basis of the market price of each derivative instrument
at the period end. Since the asset and liability positions of the CCP clearer are
matched, the same amount is recorded for both the assets and liabilities and
no net fair value gains or losses are recognised in the income statement.
b) Receivables for and liabilities under repurchase transactions
These represent repurchase transactions (repos) by clearing members using the
Group’s clearing and guarantee service. They represent the value of transactions
already settled spot and not yet settled at term. These transactions are initially
recognised at fair value and are subsequently measured at amortised cost,
by allocating the yield on the repo pro-rated over the duration of the contract
(the coupon accrued in the period and the difference between the spot and
forward prices). Since the asset and liability positions for repos are matched,
the same amount is recorded for both assets and liabilities and no gain or loss
is recorded in the income statement.
c) Other receivables from and payables to clearing members and default funds
These comprise accounts receivable and payable deriving from the activities of
clearing members in derivatives, equities and bond transactions. They mainly
represent amounts to be received or paid in relation to initial and variation
margins, option premiums, securities as collateral and default fund contributions
and are initially recorded at fair value. They are generally settled on the next day
and, accordingly, are not discounted back to current value. Default funds absorb
any losses incurred by the Group in the event of clearing members default where
margin collateral is insuf?cient to cover the management and close out of the
positions of the defaulting members.
On the acquisition of a business, fair values are attributed to the assets and
liabilities acquired. These may include brand names, customer relationships,
licences and software intellectual property, all of which are recorded as intangible
assets and held at cost less accumulated amortisation. These assets are amortised
on a straight line basis over their useful economic lives, which are as follows:
a) Customer and supplier relationships – two to 25 years (material assets
are amortised over a life exceeding 15 years);
b) Brands – 10 to 25 years (material assets are amortised over a life of
25 years); and
c) Software licenses and intellectual property – two to 25 years (the majority
of material assets are amortised over a life not exceeding ?ve years).
Third party software costs for the development and implementation of systems
which enhance the services provided by the Group are capitalised and amortised
over their estimated useful economic lives of three to ?ve years.
Internal product development expenditure is capitalised if the costs can be
reliably measured, the product or process is technically and commercially
feasible, future economic bene?ts are probable and the Group has suf?cient
resources to complete the development and to use or sell the asset. The assets
are recorded at cost including labour, directly attributable costs and any third
party expenses, and amortised over their useful economic lives of three years.
Current and deferred taxation
The current income tax charge is calculated on the basis of the tax laws
enacted or substantively enacted at the balance sheet date in the countries
where the Company and its subsidiaries operate and generate taxable income.
Full provision is made, using the liability method, for temporary differences
arising between the tax bases of assets and liabilities and their carrying
amounts in the ?nancial statements. Deferred taxation is determined using
tax rates that are substantially enacted at the balance sheet date and are
expected to apply when the asset is realised or liability settled. Deferred tax
assets are recognised to the extent it is probable that they will be recoverable
against future taxable pro?ts.
Classification of financial assets
Financial assets (excluding clearing business)
The Group classi?es its ?nancial assets in the following categories: at fair
value through pro?t or loss, available-for-sale and loans and receivables.
The classi?cation depends on the purpose for which the ?nancial assets were
acquired. Management determines the classi?cation of its ?nancial assets
at initial recognition:
a) Financial assets at fair value through pro?t or loss
Financial assets at fair value through pro?t or loss include ?nancial assets
held for liquidity purposes, they are initially recognised at fair value and
any subsequent changes in fair value are recognised directly in the income
statement. These assets are ?nancial instruments not designated as hedges.
b) Available-for-sale ?nancial assets
Investments (other than term deposits and interests in joint ventures,
associates and subsidiaries) are designated as available-for-sale and are
recorded on trade date at fair value plus transaction costs with changes
in fair value recognised in equity. Where the fair value is not reliably
measurable, the investment is held at cost less any provision for impairment.
Assets such as shares in clearing and payment transmission operations
and long term equity investments that do not qualify as associates or joint
ventures are usually classi?ed as available for sale.
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113 Group ?nancial statements Notes to the ?nancial statements
Trade receivables
Trade receivables are non-interest bearing and are stated at their fair value,
which is usually the original invoiced amount less provision for impairment.
A provision for impairment of trade receivables is established when there is
objective evidence that the Group will not be able to collect all amounts due
according to the original terms of the receivables. Signi?cant ?nancial
dif?culties of the debtor, probability that the debtor will enter bankruptcy
or will be subject to a ?nancial reorganisation or default on, or be delinquent
on, its payment obligations are considered indicators that the trade receivable
is impaired. The amount of the provision is the difference between the asset’s
carrying amount and the present value of the portion deemed recoverable.
The carrying amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognised in the income statement.
Subsequent recoveries of amounts previously written off are credited in the
income statement.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank, term deposits and
investments in money market funds and other instruments and structures
that are readily convertible to known amounts of cash and are subject to
insigni?cant risk of changes in value.
Assets held for sale
Assets are classi?ed as assets held for sale when their carrying amount is to
be recovered principally through a sale transaction and a sale is considered
highly probable. They are stated at the lower of carrying amount and fair
value less costs to sell.
Borrowings
Bank borrowings are initially recorded at the fair value of amounts received,
net of direct issue costs and transaction costs (including upfront facility fees).
Subsequently, these liabilities are carried at amortised cost, and interest is
charged to the income statement over the period of the borrowings using
the effective interest rate method. Similarly direct issue costs and transaction
costs (including upfront facility fees) are charged to the income statement
over the period of the borrowings using the effective interest rate method.
Share capital
The Company’s own shares held by the Employee Bene?t Trust are deducted
from equity until they vest unconditionally for employees and are held at
cost. Consideration paid in respect of these treasury shares is deducted from
equity until the shares are cancelled, reissued or disposed of.
2. Financial risk management
The Group seeks to protect its ?nancial performance from exposure to capital,
credit, sovereign, liquidity and market (including foreign exchange, fair value
and cash ?ow interest rate) risks.
Financial risk management is not speculative. It is performed at a Group
level, where the treasury function identi?es, evaluates and hedges ?nancial
risks from a Group perspective and also locally, where operating units
manage regulatory and operational risks. This includes clearing operations
at LCH.Clearnet Group and CC&G that operate in accordance with local
regulation and under locally approved risk and investment policies.
The Financial Risk Committee (FRC), a sub-Committee of the Executive
Committee, chaired by the Chief Financial Of?cer, meets monthly to
oversee the consolidated ?nancial risks of the Group. In addition, the Treasury
Committee, a sub-Committee of the FRC which is also chaired by the
Chief Financial Of?cer, meets regularly to monitor the management of
foreign exchange, interest rates, credit risks and the investment of excess
liquidity in addition to its oversight of the Group’s funding arrangements.
Both Committees ensure that treasury and risk operations are performed
in accordance with Group Board approved policies and procedures and
regular updates, on a range of key criteria as well as new developments,
are provided through the Enterprise Risk Management Framework to the
LSEG Risk Committee. See ‘Principal Risk and Uncertainties’, pages 48-53,
for further detail on the Group’s risk framework.
d) Financial assets and liabilities at fair value
These represent quoted equity and bond securities which have already
withdrawn from the settlement system but have not yet delivered to the
intermediaries who have bought them and securities traded but not yet
settled as part of the CCP function. These are initially recognised at fair value
and subsequently re-measured at fair value, based on the market price of
each security. The difference between the settlement price of each security
at trade date and the market price of that security at the period end is
recognised as a fair value gain or loss in the income statement.
e) Held to maturity
These are non-derivative ?nancial assets with ?xed or determinable payments
and ?xed maturities which the Group has the intention and ability to hold to
maturity. After initial measurement held to maturity ?nancial investments are
subsequently measured at amortised cost using the effective interest rate less
impairment. The amortisation of any premium or discount is included in the
interest income.
f) Cash and cash equivalents (restricted)
These include amounts received from clearing members to cover initial and
variation margins and default fund contributions as collateral against default
or insolvency and are deposited with banks. Such amounts are initially
recognised at fair value and are subsequently recognised at amortised cost
using the effective interest method.
Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently re-measured at their fair value
at each balance sheet date. The method of recognising the resulting gain
or loss depends on whether or not the derivative is designated as a hedging
instrument, and if so the nature of the item being hedged.
The Group applies fair value hedge accounting for hedging interest rate risk
on borrowings. Any gain or loss is recognised in the income statement within
?nance expenses.
The Group designates as cash ?ow hedges both foreign currency derivatives
and hedges of interest rate movements associated with highly probable
forecast transactions. Any gain or loss on the hedging instrument relating
to the effective portion of the hedge is recognised in equity.
The Group hedges a proportion of its net investment in its Italian Companies
by designating euro borrowings as a net investment hedge. In order to qualify
for hedge accounting, a transaction must meet strict criteria as regards
documentation, effectiveness, probability of occurrence and reliability of
measurement. The Group documents at the inception of the transaction the
relationship between hedging instruments and hedged items, as well as its
risk management objectives and strategy for undertaking various hedging
transactions. Effectiveness testing is conducted at each reporting date and
at the commencement and conclusion of any hedge in order to verify that
the hedge continues to satisfy all the criteria for hedge accounting to be
maintained. The ineffective portion is recognised in the income statement
within ?nance costs.
Amounts accumulated in equity are recycled in the income statement
in the period when the hedged item affects pro?t or loss (for example,
when the forecast transaction that is hedged takes place). When a hedging
instrument expires or is sold, or when a hedge no longer meets the criteria
for hedge accounting, any cumulative gain or loss existing in equity at that
time remains in equity and is recognised when the forecast transaction is
ultimately recognised in the income statement. When a forecast transaction
is no longer expected to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the income statement.
114 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Capital risk
Risk description Risk management approach
The Group is pro?table and its capital base comprises
equity capital and debt capital.
However, the Group recognises the risk that its entities
(whether regulated or unregulated) may not maintain
suf?cient capital to meet commercial requirements
or they may invest in projects that fail to generate a
return that is value enhancing.
The Group incorporates a number of regulated entities
within its structure. It considers that increases in the
regulatory capital requirements of those companies
and a scarcity of debt or equity (driven by its own
performance or ?nancial market conditions) 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, ful?l 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 ?exibility to invest for growth is a key capital management consideration.
The Group can manage its capital structure by varying returns to shareholders, issuing new shares or
increasing or reducing borrowings. The Board reviews dividend policy and funding capacity on a regular
basis and the Group maintains comfortable levels of debt facility headroom. Regulated entities continuously
monitor compliance with the capital requirements set by their respective competent authorities and the terms
of reference of the FRC 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 of the impact of new investments by the Group on its capital position.
As at 31 March 2014, £803.6 million of cash and cash equivalents was held to meet a number of regulatory
and operational requirements across the Group’s regulated entities. This amount materially increased during
the year as a result of the inclusion of LCH.Clearnet Group’s total cash and cash equivalents, in addition to
the existing £200 million generally set aside by other LSEG operations. We anticipate that Group companies’
cash and cash equivalents are suf?cient to comfortably support current regulatory frameworks, including
requirements under EMIR. The level of cash set aside by the Group for these purposes remains subject to
on-going review with regulators in Europe and the US.
To maintain the ?nancial strength to access new capital at reasonable cost and meet the Group’s objective
of maintaining an investment grade credit rating, the Group monitors its net leverage ratio which is operating
net debt (i.e. net debt excluding cash and cash equivalents set aside for regulatory and operational purposes) to
adjusted EBITDA (Group consolidated earnings before net ?nance charges, taxation, impairment, depreciation
and amortisation and non-recurring items) against a target range of one to two times. The Group is also mindful
of potential impacts on the key metrics employed by the credit rating agencies (including gross debt to EBITDA
and EBITDA coverage of interest expense) in considering increases to its borrowings.
As at 31 March 2014 net leverage was 1.9 times (2013: 1.2 times), towards the top end of the Group’s target
range but having reduced during the year following the debt funding of the majority acquisition of LCH.
Clearnet Group and its subsequent capital raise in May 2013. The Group is in compliance with its bank facility
ratio covenants (net leverage and debt service) and these measures do not inhibit the Group’s operations or its
?nancing plans.
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115 Group ?nancial statements Notes to the ?nancial statements
Credit and concentration risk
Risk description Risk management approach
In their roles as central counterparty (CCP) clearers
to ?nancial market participants, the Group’s CCPs
guarantee ?nal 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 Risk
and Uncertainties’, pages 48-53.
Notwithstanding revised regulations in Europe that
require CCPs to invest predominantly in secured
instruments or structures (such as reverse repos),
CC&G and the LCH.Clearnet Group CCPs will continue
to be able to invest up to ?ve per cent of their margin
and default fund cash unsecured. Through this
un-secured investment by its CCPs (as well as by
certain other 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 deposit counterparties.
Concentration risk may arise through having large,
connected individual exposures and signi?cant 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.
More broadly, 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 ?nancial instruments
CCPs
To address the market participant and latent market risk, the Group’s CCPs have established ?nancial 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 would incur in order to close out open positions in the event
of the member’s default. Margins are calculated using established international risk models and are debited from
participants’ accounts through central bank accounts and via commercial bank payment systems. Minimum levels
of cash collateral are required and non-cash collateral is re-valued daily. As at 31 March 2014, the total aggregate
margin liability of clearing members amounted to £68.3 billion, against which the Group had received £35.8 billion
in cash and £34.4 billion in non-cash securities. The maximum margin liability during the year was £77.2 billion.
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. As at 31 March 2014, the total of
clearing member contributions to the default funds amounted to £9.0 billion in aggregate across the Group’s CCPs.
The maximum amount during the year was £9.1 billion. Furthermore, in accordance with recent regulatory changes,
each of the Group’s CCPs has reinforced its capital position to meet the more stringent requirements, including
holding a minimum amount of dedicated own resources to further underpin the protective credit risk framework
in the event of a signi?cant market stress event or participant failure.
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 body 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 which are subject to a “haircut”
on their market value) 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. The investment portfolio at 31 March 2014 totalled
£47.4 billion in aggregate, of which a weighted average 99.7 per cent was invested securely with an overall
maturity of 87 days, including material amounts invested over a very short timeframe to support liquidity needs.
The maximum portfolio size during the year was £54.1 billion. Associated liquidity risks are considered in the
investment mix and discussed further below.
To address concentration risk, the Group maintains a diversi?ed 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 March 2014 was 10.4 per cent of the total investment portfolio to the French Government
(including cash held at Banque de France).
Group
Credit risk is controlled through policies developed at a Group level.
Group companies make a judgement on the credit quality of their customers based upon the customer’s
?nancial 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 as low.
Credit risk of cash and cash equivalents is managed by limiting the exposure to up to £50 million for 12 months
with counterparties rated long term AAA (or equivalent) through to a maximum £25 million overnight with
counterparties rated short term A-2 (or equivalent). Derivative transactions are undertaken with well-capitalised
counterparties, authorised by policy, to limit the credit risk underlying these transactions.
116 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Sovereign risk
Risk description Risk management approach
Distress amongst sovereigns through market concerns
over the levels of government debt and the ability of
certain governments to service their debts over time,
could have adverse effects particularly on the Group’s
CCPs, potentially impacting cleared products, margin
collateral, investments, the clearing membership and
the ?nancial industry as a whole.
Speci?c risk frameworks manage sovereign risk for both ?xed 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 ?nancial
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 market volatility in the
sovereign debt markets.
The Group has material investments of more than £1 billion in the following sovereigns as at 31 March 2014:
Sovereign Treasury Exposures Group Aggregate £ billion
France 4.9
Italy 4.5
USA 3.9
Belgium 2.2
Germany 1.5
UK 1.0
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 businesses are pro?table, generate strong free cash ?ow and operations are not signi?cantly impacted
by seasonal variations. The Group maintains suf?cient liquid resources to meet its ?nancial obligations as they
fall due and to invest in capital expenditure, make dividend payments, support acquisitions or repay borrowings.
With the exception of regulatory constraints impacting the Group’s CCPs and certain other regulated entities,
funds can generally be lent across the Group or remitted through dividend payments and this is an important
component of the Group Treasury cash management policy and approach.
Management monitors forecasts of the Group’s cash ?ow and overlays sensitivities to these forecasts to re?ect
assumptions about more dif?cult market conditions.
Treasury policy requires that the Group maintains adequate credit facilities provided by a diversi?ed lending
group to cover its expected funding requirements and ensure a minimum level of headroom for at least the
next 24 months. The ?nancial strength of lenders to the Group is monitored regularly. During the year new,
committed, revolving three and ?ve year credit facilities totalling £700 million were arranged by LSEG to
underpin the Group’s ?nancial ?exibility. The new facilities extend the Group’s average drawn debt maturity
pro?le to just under 5 years and underpin facility headroom over the medium term; the next scheduled debt
maturity is in July 2016. At 31 March 2014, £422 million of the Group’s facilities were unutilised.
The Group’s CCPs maintain suf?cient cash and cash equivalents and, in certain jurisdictions, have access
to central bank re?nancing or commercial bank liquidity support credit lines to meet the cash requirements
of the clearing and settlement cycle. Revised regulations require CCPs to arrange appropriate levels of back
up liquidity to underpin the dynamics of a largely secured cash investment requirement, ensuring that the
maximum potential out?ow under extreme market conditions is covered (see Credit Risk section above).
In addition, certain Group companies, including the CCPs, maintain operational support facilities from banks
to manage intraday and overnight liquidity. The table below analyses the Group’s ?nancial liabilities into
relevant maturity groupings based on the remaining period from the balance sheet date to the contractual
maturity date. The amounts disclosed in the table are the contractual undiscounted cash ?ows.
Where possible, the Group employs guaranteed delivery versus payment techniques and manages CCP margin
and default fund ?ows through central bank or long-established, bespoke commercial bank settlement
mechanisms. Monies due from clearing members remain the clearing members’ liability if the payment agent
is unable to effect the appropriate transfer.
Custodians are subject to minimum eligibility requirements and ongoing credit assessment, robust contractual
arrangements and are required to have appropriate back-up contingency arrangements in place.
At 31 March 2014
Less than
1 year
Between 1
and 2 years
Between 2
and 5 years
Over
5 years
£m £m £m £m
Borrowings 278.7 – 399.4 545.6
Trade and other payables 401.5 – – –
CCP liabilities 503,747.4 – – –
Derivative ?nancial instruments 3.4 – – 4.0
504,431.0 – 399.4 549.6
At 31 March 2013
Less than
1 year
Between 1
and 2 years
Between 2
and 5 years
Over
5 years
£m £m £m £m
Borrowings 0.4 – 499.2 297.2
Trade and other payables 230.0 3.2 0.2 –
CCP liabilities 146,088.1 – – –
Derivative ?nancial instruments 0.1 – 1.1 2.4
146,318.6 3.2 500.5 299.6
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117 Group ?nancial statements Notes to the ?nancial statements
Market risk – Foreign Exchange
Risk description Risk management approach
The Group operates in the UK, Italy, France and Sri Lanka
and, through its FTSE International Limited and LCH.
Clearnet Group Limited subsidiaries, has growing
businesses in the USA and Asia. With the exception of
MillenniumIT (a Sri Lankan Rupee reporting entity), which
invoices a material proportion of its revenues in US dollars,
and LCH.Clearnet Limited (a euro reporting entity), which
incurs a majority of its costs in sterling, Group companies
generally invoice revenues, incur expenses and purchase
assets in their respective local currencies. As a result,
foreign exchange risk arises mainly from the translation
of the Group’s foreign currency earnings, assets and
liabilities into its reporting currency, sterling, and from
occasional, large intercompany transactions.
The Group faces less signi?cant foreign exchange
exposures from transaction risk on dividends that are
remitted in currencies other than the currency of the
recipient operation.
The Group may be exposed from time to time by
strategic investments in currencies other than sterling.
The Group seeks, where it can, to match the currency of its debt liabilities with its EBITDA generation in the same
currency whilst endeavouring to balance the currency of its assets with the currency of its liabilities. The Group
reinforces this methodology by regularly distributing its currency cash earnings in dividends and by absorbing
currency earnings through interest payments on sterling debt, re-denominated through the use of cross-currency
swaps or by drawing debt in the same currency, where this is practicable. A proportion of the Group’s debt is held
or effectively held in euro. As at 31 March 2014, £400.5 million of drawn debt was euro denominated (2013: nil)
and £248.5 million (2013: £255.5 million) of cross-currency swaps, directly linked to sterling debt, were designated
as a hedge of the net investment in the Italian Group. A pro?t of £4.3 million for the ?nancial year (2013: pro?t of
£5.7 million) on foreign currency borrowings, inter company loan assets and liabilities and cross-currency swap
hedges was recognised in equity. The net investment hedge was fully effective.
Whilst transactional foreign exchange exposure is limited, the Group hedges material transactions in accordance
with Group Treasury policy (which requires that cash ?ows of more than £1 million or equivalent per annum should
be hedged) with appropriate derivative instruments or by settling currency payables or receivables within a short
timeframe. Hedge accounting of derivatives is considered to mitigate material levels of income statement volatility.
The Group reviews sensitivities to movements in exchange rates which are appropriate to market conditions. As at
31 March 2014, the Group has considered movements in the euro over the last year and has concluded that a 10
per cent movement in rates is a reasonable level to measure the risk to the Group. At 31 March 2014, if sterling had
weakened or strengthened by 10 per cent against the euro with all other variables held constant, post tax pro?t
for the year would have been, respectively, £0.3 million higher or £0.4 million lower (2013: £0.4 million higher and
£0.3 million lower); however, equity would have been £19.0 million lower (2013: £5.7 million lower) and £23.2 million
higher (2013: £7.0 million higher). This re?ects foreign exchange gains or losses on translation of euro denominated
trade receivables, trade payables, ?nancial assets at fair value through pro?t or loss including euro denominated
cash and borrowings. If, on the other hand, the average sterling : euro exchange rate for the year had moved
€5 cents, this would have changed the Group’s operating pro?t for the year before amortisation of purchased
intangibles and non-recurring items by approximately £12 million.
Market risk – Cash Flow and Fair Value Interest Rate Risk
Risk description Risk management approach
The Group’s interest rate risk arises through the impact
of changes in market rates on cash ?ows associated
with cash and cash equivalents, investments in
?nancial assets and borrowings held at ?oating rates.
The Group’s CCPs face interest rate exposure through
the impact of changes in the reference rates used to
calculate member liabilities versus the yields achieved
through their investment activities.
Group interest rate management policy has been updated recently to re?ect the change in the Group’s net
debt dynamic following the majority acquisition of LCH.Clearnet Group Limited (which maintains a signi?cant
net cash position). The revised policy focusses on protecting the Group’s credit rating and requires a minimum
coverage of interest expense by EBITDA to be maintained of 7 times and a maximum ?oating rate component
of 50 per cent of total debt. As at 31 March 2014, interest expense cover was at 8.0 times (2013: 9.9 times) and
the ?oating rate component of total debt was 23 per cent.
Group interest rate risk on cash and cash equivalents and investments in ?nancial assets re?ects underlying
investments generally over short durations and so the Group is more exposed to movements in short term rates.
In the Group’s CCPs, interest bearing assets have generally been invested for a longer term than interest
bearing liabilities, whose interest rate is generally reset daily. This makes investment revenue vulnerable to
volatility in overnight rates and shifts in spreads between overnight and term rates. Interest rate exposures
(and the risk to CCP capital) are managed within de?ned 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 one percentage point upward movement (with a limited prospect of material downward movement) re?ects
a reasonable level of risk to current rates. At 31 March 2014, at the Group level, if interest rates on sterling-
denominated and euro-denominated cash and borrowings had been 1 percentage point higher with all other
variables held constant, post-tax pro?t for the year would actually have been £6.5 million higher (2013:
£6.3 million higher) mainly as a result of higher interest income on ?oating rate cash and cash equivalents.
At 31 March 2014, 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 one percentage point higher, with all other variables held constant, the daily impact on post-tax
pro?t for the Group would have been £0.8 million lower. This de?cit would be recovered as investment yields
increase as the portfolio matures and is re-invested.
3. Significant judgements and estimates
Judgements and estimates are regularly evaluated based on historical experience, current circumstances and expectations of future events. The signi?cant
judgements and estimates for the year ended 31 March 2014 are as follows:
Goodwill – tested for impairment annually. The recoverable amounts of relevant cash generating units are based on value in use calculations using management’s
best estimate of future performance and estimates of the return required by investors to determine an appropriate discount rate. Sensitivity analysis is
provided in note 13;
Purchased intangible assets – valued on acquisition using appropriate methodologies and amortised over their estimated useful economic lives.
These valuations and lives are based on management’s best estimates of future performance and periods over which value from the intangible assets is realised;
De?ned bene?t pension asset or liability – determined based on the present value of future pension obligations using assumptions determined by the
Group with advice from an independent quali?ed actuary. Sensitivity analysis is provided in note 16; and
Contingent Liabilities – assessment based on management’s judgement concerning the particular facts and circumstances surrounding commitments
and contingencies.
118 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
4. Segmental Information
Segmental disclosures for the year ended 31 March 2014 are as follows:
Capital
Markets
Post Trade
Services
– CC&G and
Monte Titoli
Post Trade
Services – LCH.
Clearnet
Information
Services
Technology
Services Other Eliminations Group
£m £m £m £m £m £m £m £m
Revenue from external customers 309.5 98.4 263.0 348.7 64.0 4.7 – 1,088.3
Inter-segmental revenue – 0.9 – – 10.9 – (11.8) –
Revenue 309.5 99.3 263.0 348.7 74.9 4.7 (11.8) 1,088.3
Net treasury income through CCP business – 47.6 62.2 – – – – 109.8
Other Income – – (3.5) – – 15.0 – 11.5
Total income 309.5 146.9 321.7 348.7 74.9 19.7 (11.8) 1,209.6
Operating pro?t before amortisation
of purchased intangible assets and
non-recurring items 144.7 83.5 81.1 169.7 11.8 8.7 11.7 511.2
Amortisation of purchased intangible assets (116.5)
Non-recurring items (41.6)
Operating pro?t 353.1
Net ?nance expense (68.8)
Pro?t before taxation 284.3
Other income statement items:
Depreciation and software amortisation (25.3) (5.5) (23.0) (15.6) (5.3) (0.2) 12.6 (62.3)
The segmental reporting incorporates LCH.Clearnet’s results since its acquisition by the Group on 1 May 2013. Comparative information for LCH.Clearnet
has not been included within the following tables.
Revenue from external customers principally comprises fees for services rendered £1,014.0 million (2013: £658.5 million) and Technology Services £64.0 million
(2013: £56.1 million).
Post Trade Services – CC&G and Monte Titoli, saw an expected sharp decline in net treasury income following completion of the migration to a minimum 95 per
cent secured investment portfolio, partially offset by a modest increase in revenue resulting in total income decreasing to £146.9 million (2013: £208.5 million).
Net treasury income through CCP business of £109.8 million comprises gross interest income of £261.1 million less gross interest expense of £151.3 million.
Interest from investment in securities amount to £34.8 million.
Comparative segmental disclosures for the year ended 31 March 2013 (restated) are as follows:
Capital
Markets
Post Trade
Services – CC&G
and Monte Titoli
Information
Services
Technology
Services Other Eliminations Group
£m £m £m £m £m £m £m
Revenue from external customers 267.5 91.8 306.3 56.1 4.7 – 726.4
Inter-segmental revenue – – – 21.3 – (21.3) –
Revenue 267.5 91.8 306.3 77.4 4.7 (21.3) 726.4
Net treasury income through CCP business – 116.7 – – – – 116.7
Other Income – – – – 9.8 – 9.8
Other non-recurring income – – – – 18.3 – 18.3
Total income 267.5 208.5 306.3 77.4 32.8 (21.3) 871.2
Operating pro?t before amortisation
of purchased intangible assets and
non-recurring items 118.9 144.3 147.1 20.2 0.5 (0.8) 430.2
Amortisation of purchased intangible assets (88.8)
Non-recurring income 18.3
Non-recurring expenses (11.3)
Operating pro?t 348.4
Net ?nance expense (49.5)
Pro?t before taxation 298.9
Other income statement items:
Depreciation and software amortisation (27.0) (5.6) (14.6) (5.4) (0.4) 12.6 (40.4)
Net treasury income through CCP business of £116.7 million comprises gross interest income of £128.9 million less gross interest expense of £12.2 million.
Interest from investment in securities amount to £12.5 million.
The comparatives are shown following restatement for reallocation of technology costs across other segments.
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119 Group ?nancial statements Notes to the ?nancial statements
Geographical disclosure
2014 2013
£m £m
Revenue
UK 659.5 432.9
Italy 283.5 255.4
France 87.0 1.9
Other 58.3 36.2
Total 1,088.3 726.4
Revenue has been restated to be allocated based on the location of the group entity which earns the revenue which better represents our operating reviews.
2014 2013
£m £m
Total assets
UK 183,482.2 1,300.1
Italy 141,001.8 147,596.9
France 182,593.1
Other 577.3 28.4
Total 507,654.4 148,925.4
Associates – Italy – 0.6
Total 507,654.4 148,926.0
5. Expenses by nature
Expenses comprise the following:
2014 2013
£m £m
Cost of sales 74.1 60.0
Employee costs 303.9 167.3
Depreciation and non-acquisition software amortisation 62.3 40.4
Amortisation of purchased intangibles assets and non-recurring costs 158.1 100.1
IT costs 92.0 64.5
Other costs 166.1 90.5
Total expenses 856.5 522.8
Foreign exchange gains or losses included in the income statement are immaterial.
6. Employee costs
Employee costs comprise the following:
2014 2013
Notes £m £m
Salaries and other short term bene?ts 237.6 128.1
Social security costs 37.4 19.2
Pension costs 16 17.3 7.5
Share based compensation 11.6 12.5
Total 303.9 167.3
The average number of employees in the Group was:
2014 2013
UK 1,329 753
Italy 503 428
France 205 7
Sri Lanka 659 654
Other 151 120
Total 2,847 1,962
The Company has no employees.
Average is calculated from date of acquisition of the subsidiary company by the Group.
120 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
7. Amortisation of purchased intangible assets and non-recurring items
2014 2013
Notes £m £m
Amortisation of purchased intangible assets 13 116.5 88.8
Transaction credit – (18.3)
Transaction costs 14.9 7.6
Restructuring costs 28.8 3.7
Pension curtailment credit (2.1) –
Total affecting operating pro?t 158.1 81.8
Total affecting pro?t before tax 158.1 81.8
Tax effect on items affecting pro?t before tax
Deferred tax on amortisation of purchased intangible assets (11.8) (9.1)
Current tax on amortisation of purchased intangible assets (2.2) (2.2)
Tax effect on other items affecting pro?t before tax (9.1) (1.0)
Total tax effect on items affecting pro?t before tax (23.1) (12.3)
Total charge to income statement 135.0 69.5
Transaction costs comprise charges incurred for ongoing services related to potential or completed acquisitions. Restructuring costs primarily relate to the
integration of the LCH business in the current year.
The transaction credit in 2013 relates to funds received from the TMX Group following the termination of the 2010 merger agreement.
8. Net finance expense
2014 2013
Notes £m £m
Finance income
Bank deposit and other interest income 5.2 2.4
Other ?nance income 0.3 0.3
5.5 2.7
Finance expense
Interest payable on bank and other borrowings (71.2) (48.2)
De?ned bene?t pension scheme interest cost 16 (0.8) (2.0)
Other ?nance expenses (2.3) (2.0)
(74.3) (52.2)
Net ?nance expense (68.8) (49.5)
9. Taxation
The standard UK corporation tax rate was 23 per cent (24 per cent for the year ended 31 March 2013).
Taxation charged to the income statement 2014 2013
Notes £m £m
Current tax:
UK corporation tax for the year 43.5 30.5
Overseas tax for the year 77.6 78.6
Adjustments in respect of previous years (1.2) (16.4)
119.9 92.7
Deferred tax: 15
Deferred tax for the year (4.7) 0.3
Adjustments in respect of previous years (1.8) (0.5)
Deferred tax liability on amortisation of purchased intangible assets (11.8) (9.1)
Taxation charge 101.6 83.4
The adjustments in respect of previous years’ corporation tax are mainly in respect of tax returns agreed with relevant tax authorities.
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121 Group ?nancial statements Notes to the ?nancial statements
Taxation on items not credited/(charged) to income statement 2014 2013
£m £m
Current tax credit:
Tax allowance on share options/awards in excess of expense recognised 3.5 2.0
Deferred tax (loss)/credit:
De?ned bene?t pension scheme actuarial (gain)/loss (1.7) 1.7
Tax allowance on share options/awards in excess of expense recognised 1.0 0.5
Movement in value of available for sale ?nancial assets (0.7) (0.4)
Adjustments relating to change in UK tax rate (0.6) 0.1
1.5 3.9
Factors affecting the tax charge for the year
The income statement tax charge for the year differs from the standard rate of corporation tax in the UK as explained below:
2014 2013
£m £m
Pro?t before taxation 284.3 298.9
Pro?t multiplied by standard rate of corporation tax in the UK 65.4 71.7
Expenses not deductible/(income not taxable) 4.3 (2.2)
Adjustment arising from change in UK tax rate 2.4 0.7
Overseas earnings taxed at higher rate 19.1 17.7
Adjustments in respect of previous years (3.0) (16.8)
Amortisation of purchased intangibles 13.4 12.3
Taxation charge 101.6 83.4
10. Earnings per share
Earnings per share is presented on four bases: basic earnings per share; diluted earnings per share; adjusted basic earnings per share; and adjusted diluted
earnings per share. Basic earnings per share is in respect of all activities and diluted earnings per share takes into account the dilution effects which would arise
on conversion or vesting of share options and share awards under the Employee Share Ownership Plan (ESOP). Adjusted basic earnings per share and adjusted
diluted earnings per share exclude amortisation of purchased intangible assets, non-recurring items and unrealised gains and losses to enable a better
comparison of the underlying earnings of the business with prior periods.
2014 2013
Basic earnings per share 63.0p 80.4p
Diluted earnings per share 61.4p 79.0p
Adjusted basic earnings per share 107.1p 105.3p
Adjusted diluted earnings per share 104.4p 103.4p
£m £m
Pro?t for the ?nancial year attributable to equity holders 170.1 217.0
Adjustments:
Amortisation and non-recurring items:
Amortisation of purchased intangible assets 116.5 88.8
Transaction costs 14.9 7.6
Transaction cost contribution from TMX Group – (18.3)
Restructuring costs 28.8 3.7
Pension curtailment costs (2.1) –
Other adjusting items:
Unrealised net investment loss (included in other income) 3.5 –
Tax effect of amortisation and non-recurring items (23.1) (12.3)
Tax effect of other adjusting items (1.2) –
Amortisation, non-recurring and adjusting items, and taxation attributable to non-controlling interests (18.1) (2.5)
Adjusted pro?t for the ?nancial year attributable to equity holders 289.3 284.0
Weighted average number of shares – million 270.1 269.8
Effect of dilutive share options and awards – million 7.0 4.8
Diluted weighted average number of shares – million 277.1 274.6
The weighted average number of shares excludes those held in the ESOP.
122 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
11. Dividends
2014 2013
£m £m
Final dividend for 2013 paid 19 August 2013: 19.8p per Ordinary share (2012: 19.0p) 53.5 51.2
Interim dividend for 2014 paid 6 January 2014: 10.1p per Ordinary share (2013: 9.7p) 27.3 26.2
80.8 77.4
The Board has proposed a ?nal dividend in respect of the year ended 31 March 2014 of 20.7p, per share, which is estimated to amount to £56.0 million,
to be paid on 19 August 2014.
12. Property, plant and equipment
Land & Buildings
Freehold Leasehold
Fixed plant,
other plant
and equipment Total
£m £m £m £m
Cost:
31 March 2012 46.3 40.0 96.9 183.2
Additions 0.4 – 17.6 18.0
Foreign exchange 0.4 0.1 0.7 1.2
Acquisition of subsidiaries – – 0.1 0.1
Reclassi?cation from Held for Sale 6.3 – – 6.3
Disposals – (0.1) (8.1) (8.2)
31 March 2013 53.4 40.0 107.2 200.6
Additions 2.3 0.1 20.4 22.8
Foreign exchange (0.1) (0.1) (1.4) (1.6)
Acquisition of subsidiaries – 7.3 8.1 15.4
Disposals – (0.1) (8.9) (9.0)
31 March 2014 55.6 47.2 125.4 228.2
Accumulated depreciation:
31 March 2012 27.8 29.1 53.0 109.9
Charge for the year 0.3 2.1 15.2 17.6
Foreign exchange – 0.1 0.3 0.4
Disposals – – (7.4) (7.4)
31 March 2013 28.1 31.3 61.1 120.5
Charge for the year 0.4 2.9 20.7 24.0
Foreign exchange (0.1) (0.1) (0.5) (0.7)
Disposals – (0.1) (8.8) (8.9)
31 March 2014 28.4 34.0 72.5 134.9
Net book values:
31 March 2014 27.2 13.2 52.9 93.3
31 March 2013 25.3 8.7 46.1 80.1
The Company has no property, plant and equipment.
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123 Group ?nancial statements Notes to the ?nancial statements
13. Intangible assets
Purchased intangible assets
Goodwill
Customer
and supplier
relationships Brands
Software,
licenses and
intellectual
property Software Total
£m £m £m £m £m £m
Cost:
31 March 2012 1,188.9 959.5 236.8 342.4 219.0 2,946.6
Additions 1.1 – – – 21.3 22.4
Acquisition of subsidiaries 4.1 – – – 0.5 4.6
Disposals – – – – (84.4) (84.4)
Foreign exchange 17.8 8.7 0.2 2.2 1.3 30.2
31 March 2013 1,211.9 968.2 237.0 344.6 157.7 2,919.4
Additions – – – – 106.8 106.8
Acquisition of subsidiaries 166.1 232.0 18.1 82.0 35.4 533.6
Disposals – – – – (30.3) (30.3)
Foreign exchange (31.8) (32.5) (1.5) (6.0) (3.9) (75.7)
31 March 2014 1,346.2 1,167.7 253.6 420.6 265.7 3,453.8
Accumulated amortisation and impairment:
31 March 2012 437.3 135.8 7.3 76.5 172.3 829.2
Amortisation charge for the year – 49.5 10.0 29.3 22.8 111.6
Disposals – – – – (84.4) (84.4)
Foreign exchange 8.3 2.9 0.1 1.7 0.7 13.7
31 March 2013 445.6 188.2 17.4 107.5 111.4 870.1
Amortisation charge for the year – 61.0 10.9 44.6 38.3 154.8
Disposals – – – – (30.3) (30.3)
Foreign exchange (8.4) (4.4) (0.3) (2.8) (0.9) (16.8)
31 March 2014 437.2 244.8 28.0 149.3 118.5 977.8
Net book values:
31 March 2014 909.0 922.9 225.6 271.3 147.2 2,476.0
31 March 2013 766.3 780.0 219.6 237.1 46.3 2,049.3
The fair values of the purchased intangible assets were principally valued using discounted cash ?ow methodologies and are being amortised over their useful
economic lives, which do not normally exceed 25 years. The goodwill arising on consolidation represents the growth potential and assembled workforces of the
Italian Group, LCH.Clearnet Group, FTSE Group, MillenniumIT and Turquoise. The Company has no intangible assets.
The acquisition of the LCH.Clearnet Group, the EuroTLX business within the Italian Group, and the FTSE TMX business during the year resulted in an increase of
goodwill in the Group of £166.1 million in the year. This value is preliminary and will be ?nalised during the following year.
During the year additions relating to internally generated software was £103.0 million.
124 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Impairment tests for goodwill
Goodwill has been allocated for impairment testing purposes to eight cash generating units (CGUs), including the CGU resulting from the acquisition of the
LCH.Clearnet Group. The Italian Group’s Issuer, Equities Trading, Derivatives Trading and Fixed Income Trading CGUs which were in place as at 31 March 2013
were combined into a single Capital Markets CGU on 1 April 2013, re?ecting the way in which those businesses are managed. Similarly, MillenniumIT’s Software
and Enterprise Service Provider CGUs which were in place as at 31 March 2013 were combined into a single MillenniumIT CGU on 1 April 2013.
The recoverable amounts of these CGUs have been determined based on value in use calculations, using discounted cash ?ow projections prepared by management
covering the ?ve year period ending 31 March 2019. Cash ?ows beyond this period are extrapolated using the estimated long term growth rates and applying the
pre-tax discount rates referred to below.
The amount of the net book value of goodwill allocated to each CGU is set out below:
Net book value of goodwill
31 March
2013
Impact of
restructuring of
CGUs
Acquisitions of
subsidiaries
Foreign
exchange
31 March
2014
Pre-tax discount
rate used in
value in use
calculations
£m £m £m £m £m
Italian group:
Issuer 18.6 (18.6) – – – n/a
Equities Trading 62.6 (62.6) – – – n/a
Derivatives Trading 28.0 (28.0) – – – n/a
Fixed Income Trading 70.7 (70.7) – – – n/a
Capital Markets – 179.9 15.0 (4.0) 190.9 9.9%
Information Services 115.9 – – (2.3) 113.6 9.9%
Technology Services 17.8 – – (0.4) 17.4 10.1%
Post Trade Services 367.0 – – (7.3) 359.7 9.8%
MillenniumIT:
Software 0.8 (0.8) – – – n/a
Enterprise Service Provider 0.8 (0.8) – – – n/a
MillenniumIT – 1.6 – (0.2) 1.4 17.3%
Turquoise 7.4 – – – 7.4 14.1%
FTSE Group 76.7 – 27.4 (5.7) 98.4 11.0%
LCH.Clearnet Group – – 123.7 (3.5) 120.2 12.4%
766.3 – 166.1 (23.4) 909.0
Management has based its value in use calculations for each CGU on key assumptions about short and medium term revenue and cost growth, long term
economic growth rates (used to determine terminal values) and pre-tax discount rates.
The values assigned to short and medium term revenue and cost growth assumptions re?ect current trends, anticipated market and regulatory developments,
discussions with customers and suppliers, and management’s experience, taking into account an expected further recovery in underlying ?nancial markets.
Long term growth rates (assumed to be 1.8 per cent for each of the Italian CGUs, 13.5 per cent for MillenniumIT, and 3.1 per cent for Turquoise, the FTSE Group
and the LCH.Clearnet Group) represent management’s internal forecasts based on external estimates of GDP and in?ation for the 16 year period 1 January
2003 to 31 December 2018, and do not exceed the long term average growth rates for the countries in which the CGUs operate.
Pre-tax discount rates are based on a number of factors including the risk-free rates in Italy, Sri Lanka and the UK as appropriate, the Group’s estimated market
risk premium and a premium to re?ect the inherent risks of each of the CGUs.
Based on the results of the impairment tests performed management believes there is no impairment of the carrying value of the goodwill in any CGU.
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125 Group ?nancial statements Notes to the ?nancial statements
Value in use calculations for each CGU are sensitive to changes in short and medium term revenue and cost growth assumptions, long term growth rates
and pre-tax discount rates. The impact on value in use of reasonable changes in these assumptions is shown below:
Impact on value in use of:
Excess of
value in use over
carrying value
5%
reduction
in revenues
5%
increase
in costs
0.5% reduction
in long term
growth rate
0.5% increase
in pre-tax
discount rate
Cash generating unit £m £m £m £m £m
Italian group:
Capital Markets 478.1 102.6 53.3 66.7 82.6
Information Services 205.2 32.7 12.8 25.4 31.6
Technology Services 43.2 12.7 8.9 4.4 5.4
Post Trade Services 420.7 88.9 41.6 60.9 75.5
Management believes goodwill allocated to the LCH.Clearnet Group, FTSE Group, MillenniumIT and Turquoise CGUs is unlikely to be materially impaired
under any reasonable changes to key assumptions. The excess of value in use over carrying value is determined by reference to the net book value as at
31 March 2014. Revenue and cost sensitivities assume a ?ve per cent change in revenues or costs for each of the ?ve years in the value in use calculations.
14. Investment in subsidiary undertakings
Shares Loans Other Total
Company £m £m £m £m
31 March 2012 3,320.6 375.2 67.0 3,762.8
Other movements during the year – 5.2 11.1 16.3
31 March 2013 3,320.6 380.4 78.1 3,779.1
Capital contribution to London Stock Exchange Group Holdings (I) Ltd – – 460.4 460.4
Impairment of London Stock Exchange Group Holdings (R) Ltd (10.6) – – (10.6)
Other movements during the year – (380.4) 10.4 (370.0)
31 March 2014 3,310.0 – 548.9 3,858.9
Principal subsidiaries:
Principal
activity
Country of
incorporation
Country of
principal
operations
%
equity and
votes held
Held directly by the Company:
London Stock Exchange plc Recognised investment exchange UK UK 100
Held indirectly by the Company:
BIt Market Services S.p.A. Retail information services & market technology Italy Italy 99.99
Borsa Italiana S.p.A. Recognised investment exchange Italy Italy 99.99
Cassa di Compensazione e Garanzia S.p.A. CCP for clearing Italy Italy 99.99
FTSE International Ltd Market indices provider UK UK 100
LCH.Clearnet Group Limited CCP clearing services UK UK 57.80
Monte Titoli S.p.A. Pre-settlement, settlement and centralised custody Italy Italy 98.80
MillenniumIT Software (Private) Ltd IT solutions provider Sri Lanka Sri Lanka 100
Societa per il Mercato dei Titoli di Stato S.p.A. Wholesale ?xed income bonds Italy Italy 60.37
Turquoise Global Holdings Ltd Multi-lateral trading facility UK UK 51.36
On 5 April 2013, the Group entered into a transaction that resulted in the Group acquiring a 75 per cent stake in FTSE TMX Global Debt Capital Markets Limited
for a total consideration of £78.1 million.
On 1 May 2013, the Group completed the acquisition of a further 55.5 per cent stake in LCH.Clearnet Group Limited (LCH.Clearnet), resulting in a majority stake
of 57.8 per cent in LCH.Clearnet for a consideration of £470.3 million.
Under Regulation 7 of The Partnerships (Accounts) Regulations 2008, the Group elected not to prepare partnership accounts for its indirect partnership interest
in London Stock Exchange Connectivity Solutions LP, as its results are contained in the consolidated group accounts.
A full list of subsidiaries will be annexed to the next annual return of London Stock Exchange Group plc.
126 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
15. Deferred tax
The movements in deferred tax assets and liabilities during the year are shown below.
Accelerated tax
depreciation
Acquisition
deferred tax and
amortisation
Provisions and
other temporary
differences Total
Group £m £m £m £m
31 March 2012 2.0 (117.3) 14.8 (100.5)
Tax (charged)/credited to the income statement: (0.4) 9.1 0.6 9.3
Tax credited/(charged) to other comprehensive income:
– de?ned bene?t pension scheme actuarial loss – – 1.6 1.6
– allowance on share options/awards – – 0.6 0.6
– movement in value of available for sale ?nancial assets – – (0.4) (0.4)
– foreign exchange – (0.4) – (0.4)
Balance sheet transfer of pre-acquisition balances – – – –
31 March 2013 1.6 (108.6) 17.2 (89.8)
Tax credited to the income statement: 1.1 11.8 5.4 18.3
Tax credited/(charged) to other comprehensive income:
– de?ned bene?t pension scheme actuarial loss – – (2.5) (2.5)
– allowance on share options/awards – – 1.0 1.0
– movement in value of available for sale ?nancial assets – – (0.7) (0.7)
– foreign exchange – 0.7 – 0.7
Balance sheet transfer of pre-acquisition balances 5.7 (72.3) 5.8 (60.8)
31 March 2014 8.4 (168.4) 26.2 (133.8)
Assets at 31 March 2014 8.4 – 33.8 42.2
Liabilities at 31 March 2014 – (168.4) (7.6) (176.0)
Net assets/(liabilities) at 31 March 2014 8.4 (168.4) 26.2 (133.8)
Assets at 31 March 2013 1.6 – 17.6 19.2
Liabilities at 31 March 2013 – (108.6) (0.4) (109.0)
Net (liabilities)/assets at 31 March 2013 1.6 (108.6) 17.2 (89.8)
The deferred tax assets are recoverable against future taxable pro?ts and are due after more than one year.
The purchased intangible assets of the Italian group create a deferred tax liability due to the difference between their accounting and tax treatment.
This liability is amortised at the same rate as the intangible assets.
The Group has unrecognised deferred tax assets in respect of losses of £59 million (2013: £57 million) within certain Group subsidiaries. The assets would be
recognised in the future only if suitable taxable income were to arise within the Group.
There was no deferred tax in the Company.
16. Retirement benefit obligations
The Group operates separate de?ned bene?t and de?ned contribution schemes. The assets of the de?ned bene?t and de?ned contribution schemes in the UK
are held separately from those of the Group in a separate trustee administered fund and the funds are primarily managed by Schroder Investment Management
Limited, Legal & General Investment Management Limited, PIMCO Europe Limited and Aviva Investors during the year.
The ‘Other plans’ relate to the severance and leaving indemnity scheme Trattamento di Fine Rapporto (TFR) operated by the Italian group in accordance with
Italian law, the employee bene?t and retirement plan operated by MillenniumIT and the pension commitments of LCH.Clearnet group.
The Company has no retirement bene?t obligations.
The only scheme operated by FTSE International is a de?ned contribution scheme.
Defined benefit schemes
The UK de?ned bene?t scheme was a non-contributory scheme and closed to new members in 1999. With effect from 31 March 2012, the scheme also closed
to accrual of future bene?ts for active members and it has been agreed that the bene?ts for affected members will remain linked to their salary with the Group.
Pension scheme obligations and costs are determined by an independent quali?ed actuary on a regular basis using the projected unit credit method. The
obligations are measured by discounting the best estimate of future cash ?ows to be paid out by the scheme and are re?ected in the Group balance sheet.
The TFR operated by the Italian group is classi?ed as an unfunded de?ned bene?t scheme for funds accumulated prior to 1 July 2007. The service cost,
representing deferred salaries accruing to employees, was included as an operating expense and was determined by law at 6.91 per cent of salary payments
subject to certain adjustments. The scheme obligation comprises accumulated service costs and is revalued by law at a rate equal to 75 per cent of ‘national
life price index +1.5 per cent’ by an independent quali?ed actuary. Since 1 July 2007, the Group retains no obligation, as contributions are made directly into
Italian state funds in the manner of a de?ned contribution scheme.
The employee bene?t and retirement plan operated by MillenniumIT is classi?ed as a de?ned bene?t plan. The net obligation in respect of this plan is the
amount of future bene?t that employees have earned in return for their service in the current and prior periods. Once an employee is continuously employed for
more than ?ve years, he or she is entitled to a payment equivalent to half a month’s gross salary multiplied by the number of years in service at MillenniumIT.
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127 Group ?nancial statements Notes to the ?nancial statements
The de?ned bene?t scheme operated by LCH.Clearnet was closed to new members from 30 September 2009. The scheme was closed to further employee
contributions on 31 March 2013.
Defined contribution schemes
The Group’s de?ned contribution schemes are now the only schemes open to new employees in the UK, Italy and LCH entities. For the UK pension plan, a core
contribution of four to eight per cent of pensionable pay is provided and the Group will match employee contributions up to a maximum of six to ten per cent
of pensionable pay. LCH pays ?xed contributions to the de?ned contribution scheme and there is no legal or constructive obligation to pay further contributions.
Amounts recognised in the income statement are as follows:
2014 2013
LSEG UK LCH UK Other plans UK Pension Other plans
Notes £m £m £m £m
Restated
£m
Restated
De?ned contribution schemes (3.4) (5.5) (7.6) (3.4) (2.2)
De?ned bene?t scheme – current service cost (0.9) (0.5) 0.6 – (1.9)
Total pension charge included in employee costs 6 (4.3) (6.0) (7.0) (3.4) (4.1)
Net ?nance expense 8 (0.7) 0.4 (0.5) (1.7) (0.3)
Total recognised in the income statement (5.0) (5.6) (7.5) (5.1) (4.4)
Defined benefit assets/(obligations) for UK pension scheme
2014 2014 2013 2012 2011 2010
LSEG UK
£m
LCH UK
£m
LSEG UK
£m
LSEG UK
£m
LSEG UK
£m
LSEG UK
£m
Fair value of assets:
Equities (quoted) 8.4 87.7 9.4 39.0 39.3 37.2
Bonds (quoted) 104.2 76.8 110.8 67.5 219.5 218.5
Property 4.3 – 11.4 24.4 23.3 13.3
Cash 4.4 5.8 – – – –
Pensioner buy in policy 155.4 – 142.1 – – –
Foreign exchange – (2.8) – 133.5 – –
Total fair value of assets 276.7 167.5 273.7 264.4 282.1 269.0
Present value of funded obligations (300.6) (153.0) (291.4) (274.2) (244.5) (264.4)
(De?cit)/surplus (23.9) 14.5 (17.7) (9.8) 37.6 4.6
UK pension plan actuarial assumptions are set out below:
2014
LSEG UK
2014
LCH UK
2013
LSEG UK
In?ation rate – RPI 3.4% 3.4% 3.4%
In?ation rate – CPI 2.4% 2.4% 2.4%
Rate of increase in salaries 3.4% n/a 3.4%
Rate of increase in pensions in payment 3.6% 2.2% 3.6%
Discount rate 4.5% 4.5% 4.5%
Life expectancy from age 60 (years)
– Non retired male member 28.6 n/a 28.0
– Non retired female member 30.5 n/a 30.8
– Retired male member 27.1 29.3 26.5
– Retired female member 29.2 31.3 29.3
The mortality assumptions are based on the standard tables S1NA published by the Institute and Faculty of Actuaries adjusted to take account of projected
future improvements in life expectancy from the Self Administered Pension Scheme (SAPS) mortality survey, which was published in 2008. We have used an
allowance for CM1 2013 projections and applied a 1.25 per cent/1.00 per cent for male/female long term trend rate in respect of future mortality improvements.
Sensitivities
The sensitivities regarding the principal assumptions used to measure the LSEG UK scheme obligations are:
Assumption Change in assumption Impact on scheme obligations
In?ation rate (CPI) Increase/decrease by 0.5% Increase/decrease by £4.1m
Rate of increase in pensions payment Increase/decrease by 0.5% Increase/decrease by £20.1m
Discount rate Increase/decrease by 0.5% Decrease/increase by £22.9m
Mortality rate Increase by 1 year Increase by £8.8m
128 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Changes in the present value of the defined benefit obligation
2014 2013
LSEG UK LCH UK Other plans LSEG UK Other plans
£m £m £m £m £m
Bene?t obligation as at 1 April 291.4 – 7.9 274.2 6.7
Liabilities acquired in a business combination – 160.6 11.1 – –
Pension expense/(income):
Current service cost – 0.5 (0.6) – 1.9
Interest cost 12.9 6.1 0.6 13.5 0.3
Subtotal included in the income statement 12.9 6.6 – 13.5 2.2
Re-measurement losses/(gains)
Actuarial (gains)/losses – ?nancial assumptions – (13.6) 0.3 22.2 0.1
Actuarial losses – demographic assumptions 1.3 – 0.2 – –
Actuarial losses/(gains) – experience 4.3 – (0.5) (9.5) –
Subtotal included in other comprehensive income 5.6 (13.6) – 12.7 0.1
Bene?ts paid (9.3) (2.4) (5.4) (9.0) (1.4)
Foreign exchange – 1.8 (0.2) – 0.3
Bene?t obligation as at 31 March 300.6 153.0 13.4 291.4 7.9
Movement in fair value of scheme assets during the period
2014 2013
LSEG UK LCH UK Other plans LSEG UK Other plans
£m £m £m £m £m
Fair value of scheme assets as at 1 April 273.7 – – 264.4 –
Assets acquired in a business combination – 169.6 3.6 – –
Pension income:
Interest income 12.2 6.5 0.1 11.8 –
Subtotal included in the income statement 12.2 6.5 0.1 11.8 –
Re-measurement gains:
Actuarial (losses)/gains (2.6) (7.0) 0.3 5.9 –
Subtotal included in other comprehensive income (2.6) (7.0) 0.3 5.9 –
Contributions by employer 3.6 – 0.1 0.6 –
Expenses (0.9) – – – –
Bene?ts paid (9.3) (2.4) (3.7) (9.0) –
Foreign exchange – 0.8 – – –
Fair value of scheme assets as at 31 March 276.7 167.5 0.4 273.7 –
The actual return on plan assets was £9.6 million (2013: £17.7 million).
Defined benefit actuarial gains and losses recognised
The experience adjustments and the effects of changes in actuarial assumptions of the pension scheme during the year are recognised in the statement
of comprehensive income:
2014 2013
LSEG UK LCH UK Other plans LSEG UK Other plans
£m £m £m £m £m
Recognised up to 1 April (19.7) – (1.0) (12.9) (0.9)
Net actuarial (loss)/gain recognised in the year (8.2) 6.6 0.3 (6.8) (0.1)
Cumulative amount recognised at 31 March (27.9) 6.6 (0.7) (19.7) (1.0)
The last actuarial valuation of the de?ned bene?t scheme was carried out at 31 March 2012 by an independent quali?ed actuary. The Group is currently in
discussion on the contributions to the de?ned bene?t scheme during the year to 31 March 2014. The next actuarial valuation as at 31 March 2015 may result
in an adjustment to future contribution levels.
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129 Group ?nancial statements Notes to the ?nancial statements
The Group estimates the present value of the duration of de?ned bene?t obligations on average to fall due over 20 years.
History of experience gains and losses for the UK pension scheme 2014 2013 2012 2011 2010
Experience adjustments arising on scheme assets:
Experience (loss)/gain (£m) (2.6) 5.9 (23.4) 5.3 25.6
Percentage of scheme assets (0.9%) 2.2% (8.9%) 1.9% 9.5%
Experience adjustments arising on scheme liabilities:
Experience (loss)/gain (£m) (4.3) 9.5 (3.9) 1.5 7.5
Impact of changes in assumptions (£m) (1.3) (22.2) (20.4) 25.3 (34.9)
Total (£m) (5.6) (12.7) (24.3) 26.8 (27.4)
Percentage of scheme liabilities
Experience (loss)/gain (1.4%) 3.3% (1.4%) 0.6% 2.8%
Impact of changes in assumptions (0.4%) (7.6%) (7.4%) 10.3% (13.2%)
Total (1.8%) (4.3%) (8.8%) 10.9% (10.4%)
17. Trade and other receivables
Group Company
2014 2013 2014 2013
£m £m £m £m
Trade receivables 133.5 121.2 – –
Less: provision for impairment of receivables (5.2) (6.1) – –
Trade receivables – net 128.3 115.1 – –
Amounts due from Group undertakings – – 534.1 579.4
Other receivables 38.3 5.9 – –
Prepayments and accrued income 83.9 64.7 – –
250.5 185.7 534.1 579.4
The carrying values less impairment provision of trade and other receivables are reasonable approximations of fair values.
Trade receivables that are not past due are not considered to be impaired.
The ageing of past due debtors for the Group is as follows:
2014 2013
Impaired Not impaired Impaired Not impaired
£m £m £m £m
0 to 3 months past due – 50.7 0.1 40.9
Greater than 3 months past due 5.2 11.6 6.0 9.7
5.2 62.3 6.1 50.6
The carrying amount of the Group’s trade and other receivables are denominated in the following currencies:
2014 2013
£m £m
Sterling 122.9 98.3
Euro 90.7 58.4
Other Currencies 36.9 29.0
250.5 185.7
Movements on the Group provision for impairment of trade receivables are as follows:
2014 2013
£m £m
1 April 6.1 7.8
Provision for receivables impairment 3.4 1.4
Receivables written off during the year as uncollectible (0.7) (0.9)
Provisions no longer required (3.4) (2.2)
Foreign exchange (0.2) –
31 March 5.2 6.1
The creation and release of the provision for impaired receivables have been included in operating expenses in the income statement. Amounts charged to the
allowance account are written off when there is no expectation of recovering additional cash.
The other classes within trade and other receivables and the other categories of ?nancial assets do not contain impaired assets.
130 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
18. Financial instruments by category
The ?nancial instruments of the Group and Company are categorised as follows:
Group Company
Loans and
receivables
Available
for sale
Assets at fair
value through
pro?t or loss
Held to
maturity Total
Loans and
receivables
Assets at fair
value through
pro?t or loss Total
31 March 2014 £m £m £m £m £m £m £m £m
Assets as per balance sheet
Financial assets of the CCP clearing
business:
– CCP trading assets – – 337,211.5 – 337,211.5 – –
– Receivables for repurchase transactions 117,702.6 – – – 117,702.6 – –
– Other receivables from clearing members 1,295.3 – 3,147.2 – 4,442.5 – –
– Financial assets held at fair value – – 9,707.8 1,433.3 11,141.1 – –
– Cash and cash equivalents of clearing
members 24,735.1 5,926.7 2,616.7 – 33,278.5 – –
Financial assets of the CCP clearing business 143,733.0 5,926.7 352,682.2 1,433.3 503,776.2 – –
Assets held at fair value – – 18.7 – 18.7 – –
Total ?nancial assets for CCP clearing 143,733.0 5,926.7 352,701.9 1,433.3 503,794.9 – –
Trade and other receivables 133.5 – – – 133.5 534.1 – 534.1
Cash and cash equivalents 919.2 – – – 919.2 – – –
Available for sale ?nancial assets – 4.8 – – 4.8 – – –
Cross currency interest rate swaps – – 6.7 – 6.7 – 6.7 6.7
Total 144,785.7 5,931.5 352,708.6 1,433.3 504,859.1 534.1 6.7 540.8
Group Company
Derivatives used
for hedging
Other ?nancial
liabilities Total
Derivatives used
for hedging
Other ?nancial
liabilities Total
£m £m £m £m £m £m
Liabilities as per balance sheet
Financial liabilities of the CCP clearing business:
– CCP trading liabilities – 337,211.5 337,211.5 – – –
– Liabilities under repurchase transactions – 117,702.6 117,702.6 – – –
– Other payables to clearing members – 48,808.2 48,808.2 – – –
– Financial liabilities held at fair value – 25.1 25.1 – – –
Financial liabilities of the CCP clearing business – 503,747.4 503,747.4 – – –
Trade and other payables – 401.5 401.5 – 204.4 204.4
Other non-current liabilities – 79.2 79.2 – – –
Provisions – 19.4 19.4 – – –
Borrowings – 1,223.7 1,223.7 – 822.6 822.6
Interest rate swaps 3.4 – 3.4 – – –
Cross currency interest rate swaps 4.0 – 4.0 4.0 – 4.0
Total 7.4 505,471.2 505,478.6 4.0 1,027.0 1,031.0
The Group uses the following hierarchy for determining and disclosing the fair value of ?nancial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs, which have a signi?cant effect on the recorded fair value are observable, either directly or indirectly; and
Level 3: techniques which use inputs which have a signi?cant effect on the recorded fair value that are not based on observable market data. The Group has no
?nancial instruments in this category.
For assets and liabilities classi?ed as level 2, the fair value is calculated using valuation techniques with market observable inputs. Frequently applied
techniques include forward pricing and swap models using present value calculations. The models incorporate various inputs including foreign exchange spot
and forward rates, interest rate curves and forward rate curves.
Level 1 CCP trading assets and liabilities were £8,467.8 million (2013: £3,426.6 million), Level 2 CCP trading assets and liabilities were £328,733.4 million (2013: nil).
Level 1 Financial assets held at fair value were £10,275.8 million (2013: £12.6 million), Level 2 Financial assets held at fair value were £865.3 million (2013: nil).
The cross currency interest rate swaps (amounting to six contracts of €50 million each,) effectively exchange some of the proceeds of the 2016 and the
2019 £250 million bonds from sterling into euros to better match the currency of borrowings to the Group’s currency of earnings, to reduce exposure to euro
denominated net assets and to protect sterling cash ?ow. These are designated as a hedge of the Group’s net investment in the Italian group and qualify for
effective hedge accounting as both legs of the swap are at ?xed rates and the cash ?ow components of the swaps exactly match the terms of the underlying bonds.
For the year ended 31 March 2014, the Group recognised the £2.3 million movement in mark to market value of these derivatives in reserves (2013: £2.5 million).
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131 Group ?nancial statements Notes to the ?nancial statements
Foreign exchange forward contracts were arranged during the year to hedge the fair value of USD denominated exposures. These hedges forward buy and
sell USD payables and receivables, with the mark to market adjustments offsetting the hedged item revaluation in the income statement. This also offers more
predictable sterling cash ?ows to the Group at maturity. At 31 March 2014, USD18m of receivables and USD12.7m of payables were hedged forward into the
next ?nancial year. The market value of the hedges was £3k in aggregate.
Other non-current liabilities includes a CAD51.3m ?nancial liability relating to the FTSE-TMX Canadian Dollar denominated investment. This ?nancial liability
has been designated as a hedge of the Group’s net investment in FTSE-TMX.
The Group’s ?nancial assets held at fair value consist largely of securities restricted in use for the operations of the Group’s CCPs as managers of their respective
clearing and guarantee systems. The fair value of ?nancial instruments traded in active markets (such as trading and available-for-sale securities) is based on
quoted market prices at the balance sheet date.
The nature and composition of the CCP clearing business assets and liabilities are explained in the accounting policies note on pages 112-113.
As at 31 March 2014, there were no provisions for impairment in relation to any of the CCP ?nancial assets (2013: nil) and none of these assets were past due
(2013: nil).
The ?nancial instruments of the Group and the Company at the previous year’s balance sheet date were as follows:
Group Company
Loans and
receivables
Available
for sale
Assets at fair
value through
pro?t or loss Total
Loans and
receivables
Assets at fair
value through
pro?t or loss Total
31 March 2013 £m £m £m £m £m £m £m
Assets as per balance sheet
Financial assets of the CCP clearing business:
– CCP trading assets – – 3,426.6 3,426.6 – – –
– Receivables for repurchase transactions 127,036.2 – – 127,036.2 – – –
– Other receivables from clearing members 7,144.8 – – 7,144.8 – – –
– Financial assets held at fair value – – 12.6 12.6 – – –
– Cash and cash equivalents of clearing
members 2,681.1 5,795.1 – 8,476.2 – – –
Financial assets of the CCP clearing business 136,862.1 5,795.1 3,439.2 146,096.4 – – –
Assets held at fair value – – 6.1 6.1 – – –
Total ?nancial assets for CCP clearing 136,862.1 5,795.1 3,445.3 146,102.5 – – –
Trade and other receivables 121.0 – – 121.0 579.4 – 579.4
Cash and cash equivalents 446.2 – – 446.2 0.1 – 0.1
Available for sale ?nancial assets – 11.9 – 11.9 – – –
Cross currency interest rate swaps – – 4.0 4.0 – 4.0 4.0
Forward foreign exchange contract – – 0.3 0.3 – – –
Total 137,429.3 5,807.0 3,449.6 146,685.9 579.5 4.0 583.5
Group Company
Derivatives used
for hedging
Other ?nancial
liabilities Total
Derivatives used
for hedging
Other ?nancial
liabilities Total
£m £m £m £m £m £m
Liabilities as per balance sheet
Financial liabilities of the CCP clearing business:
– CCP trading liabilities – 3,426.6 3,426.6 – – –
– Liabilities under repurchase transactions – 127,036.2 127,036.2 – – –
– Other payables to clearing members – 15,610.4 15,610.4 – – –
– Financial liabilities held at fair value – 14.9 14.9 – – –
Financial liabilities of the CCP clearing business – 146,088.1 146,088.1 – – –
Trade and other payables – 233.4 233.4 – 160.9 160.9
Provisions – 27.3 27.3 – – –
Borrowings – 796.8 796.8 – 796.4 796.4
Cross currency interest rate swaps 3.5 – 3.5 3.5 – 3.5
Forward foreign exchange contracts – 0.1 0.1 – – –
Total 3.5 147,145.7 147,149.2 3.5 957.3 960.8
132 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
19. Offsetting financial assets and financial liabilities
The Group reports ?nancial assets and ?nancial liabilities on a net basis on the balance sheet where there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liabilities simultaneously.
The following table shows the impact of netting arrangements on all ?nancial assets and liabilities that are reported net on the balance sheet.
31 March 2014
Gross
amounts
Amount
offset
Net amount as
reported
£m £m £m
Derivative ?nancial assets 24,807,530 (24,806,500) 1,030
Reverse repurchase agreements 513,873 (187,152) 326,721
Other movements during the year 88,284 (87,294) 990
Total assets 25,409,687 (25,080,946) 328,741
Derivative ?nancial liabilities (24,807,530) 24,806,500 (1,030)
Reverse repurchase agreements (513,873) 187,152 (326,721)
Other (88,284) 87,294 (990)
Total liabilities (25,409,687) 25,080,946 (328,741)
All offset amounts are held in the CCP trading assets and CCP trading liabilities within the Group’s ?nancial instruments.
As CCPs, the Group’s operating companies sit in the middle of members’ transactions and hold default funds and margin amounts as a contingency against
the default of a member. As such, further amounts are available to offset in the event of a default reducing the asset and liability of £328,741.6 million to nil.
Default funds for derivatives of £4,018.7 million, repos of £1,497.1 million and other transactions of £377.0 million are held by the Group. In addition, the Group
holds margin of €14,954.8 million for derivatives, €12,506.5 million for repos and €4,896.3 million for other transactions, as well as additional variation margin
amounts which are not allocated by business line.
20. Cash and cash equivalents
Group Company
2014 2013 2014 2013
£m £m £m £m
Cash at bank 683.9 217.0 – 0.1
Short term deposits 235.3 229.2 – –
919.2 446.2 – 0.1
Cash and cash equivalents are held with authorised counterparties of a high credit standing, in secured investments at LCH.Clearnet Group companies and at
CC&G and unsecured interest bearing current and call accounts, short term deposits and AAA rated money market funds elsewhere in the Group. Management
does not expect any losses from non-performance by the counterparties holding cash and cash equivalents, and there are no material differences between
their book and fair values.
Cash and cash equivalents do not include amounts held by subsidiaries on behalf of its clearing members, the use of which is restricted to the operation of the
clearers as managers of the clearing and guarantee system (see note 18). Cash and cash equivalents include amounts held by regulated entities for regulatory
and operational purposes. At 31 March 2014, the Group set aside £803.6 million (2013: £200.0 million) for such purposes, with the amount subject to regular
review with regulators in the UK, France and Italy.
21. Trade and other payables
Group Company
2014 2013 2014 2013
Notes £m £m £m £m
Trade payables 43.9 30.4 – –
Amounts owed to Group undertakings 31 – – 182.0 132.2
Social security and other taxes 17.2 12.5 – –
Other payables 110.5 26.4 1.0 3.3
Accruals and deferred income 229.9 164.1 21.4 25.4
401.5 233.4 204.4 160.9
Current 401.5 230.0 204.4 160.9
Non-current – 3.4 – –
401.5 233.4 204.4 160.9
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133 Group ?nancial statements Notes to the ?nancial statements
22. Borrowings
Group Company
2014 2013 2014 2013
£m £m £m £m
Current
Bank borrowings and trade ?nance loans 278.7 0.4 26.0 –
278.7 0.4 26.0 –
Non-current
Bonds 796.6 796.5 796.7 796.5
Preferred securities 148.4 – – –
Deferred arrangement fees – (0.1) – (0.1)
945.0 796.4 796.7 796.4
The Group has the following committed bank facilities and unsecured notes:
Notes/Facility
Carrying value at
31 March 2014
Interest rate
percentage at
31 March 2014
Type Expiry Date £m £m %
Drawn value of Facilities
Multi-currency revolving credit facility Jul 2016 250.0 165.1 LIBOR + 0.8
Multi-currency revolving credit facility Jul 2018 450.0 112.7 LIBOR + 0.95
Total Bank Facilities 700.0 277.8
Notes due July 2016 Jul 2016 250.0 251.0 6.125
Notes due October 2019 Oct 2019 250.0 248.2 9.125
Notes due November 2021 Nov 2021 300.0 297.4 4.75
LCH.Clearnet preferred securities May 2017 165.6 148.4 6.576
Total Bonds 965.6 945.0
Total Committed Facilities 1,665.6 1,222.8
Current borrowings
The Group’s committed bank facility arrangements of £700 million were partially utilised at 31 March 2014 with £277.8 million drawn.
In addition, a number of Group entities have access to uncommitted operational, money market and overdraft facilities which support post trade activities
and day to day liquidity requirements across its operations. As at 31 March 2014, £0.9 million was the aggregate drawing against these facilities.
CC&G has unlimited direct intra-day access to re?nancing with the Bank of Italy to cover its operational liquidity requirements in the event of a market
stress or participant failure. In addition, it has arranged secured and unsecured credit lines with a number of commercial banks, which totalled €450 million
at the 31 March 2014, to further support its operational and liquidity requirements.
As a bank, Clearnet SA has full and unlimited access to the liquidity operations provided by the central bank, including re?nancing securities at Banque de
France to support its normal day to day requirements.
134 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
Non-current borrowings
In July 2006, the Company issued a £250 million bond which is unsecured and is due for repayment in July 2016. Interest is paid semi-annually in arrears in
January and July each year. The issue price of the bond was £99.679 per £100 nominal. The coupon on the bond is dependent on movements in the Company’s
credit rating with Moody’s which was unchanged throughout the ?nancial year. The bond coupon remained at 6.125 per cent per annum throughout this period.
In June 2009, the Company issued another £250 million bond which is unsecured and is due for repayment in October 2019. Interest is paid semi-annually in
arrears in April and October each year. The issue price of the bond was £99.548 per £100 nominal. The coupon on the bond is dependent on the Company’s
credit ratings with Moody’s and Standard & Poor’s which were unchanged throughout the ?nancial year. The bond coupon remained at 9.125 per cent per
annum throughout this period.
In November 2012, the Company issued a further £300 million bond under its euro medium term notes programme (launched at the same time) which is
unsecured and is due for repayment in November 2021. Interest is paid semi-annually in arrears in May and November each year. The issue price of the bond
was £100 per £100 nominal. The coupon on the bond is ?xed at 4.75 per cent per annum.
In May 2007, LCH.Clearnet Group Limited issued through Freshwater Finance plc €200 million of Perpetual Preferred Securities to underpin its capital structure.
€20 million of these Securities were subsequently repurchased in the market by LCH.Clearnet Group Limited. The coupon on these Securities is currently a ?xed
rate of 6.576 per cent per annum and interest is paid annually. In May 2017 this coupon is replaced by a rate of three month Euribor plus 2.1 per cent per
annum, and a ?rst call date attached to the Securities is May 2018.
Fair values
The fair values of the Group’s borrowings are as follows:
2014 2013
Carrying value Fair value Carrying value Fair value
Group £m £m £m £m
Borrowings
– within one year 278.7 278.7 0.4 0.4
– after more than one year 945.0 1,066.2 796.4 942.4
1,223.7 1,344.9 796.8 942.8
The fair values of the Company’s borrowings are as follows:
2014 2013
Carrying value Fair value Carrying value Fair value
Company £m £m £m £m
Borrowings
– within one year 26.0 26.0 – –
– after more than one year 796.6 910.3 796.4 942.4
822.6 936.3 796.4 942.4
The fair values of borrowings are based on discounted cash ?ows using a rate based on borrowing cost. Floating rate borrowings bear interest at an agreed
margin over LIBOR.
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
2014 2013
Drawn Swapped Effective Drawn Swapped Effective
Currency £m £m £m £m £m £m
Sterling 822.6 (248.5) 574.1 796.4 (255.5) 540.9
Euro 400.5 248.5 649.0 – 255.5 255.5
Sri Lankan Rupees 0.6 – 0.6 0.4 – 0.4
Total 1,223.7 – 1,223.7 796.8 – 796.8
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135 Group ?nancial statements Notes to the ?nancial statements
23. Analysis of net debt
Group Company
2014 2013 2014 2013
£m £m £m £m
Due within one year
Cash and cash equivalents 919.2 446.2 – 0.1
Bank borrowings (278.7) (0.4) (26.0) –
Derivative ?nancial liabilities (3.4) (0.1) – –
637.1 445.7 (26.0) 0.1
Due after one year
Deferred arrangement fees – 0.1 – 0.1
Bonds (796.6) (796.5) (796.6) (796.4)
Preferred Securities (148.4) – – –
Derivative ?nancial assets 6.7 4.3 6.7 4.0
Derivative ?nancial liabilities (4.0) (3.5) (4.0) (3.5)
Total net debt (305.2) (349.9) (819.9) (795.7)
Reconciliation of net cash flow to movement in net debt
Group Company
2014 2013 2014 2013
£m £m £m £m
Increase/(decrease) in cash in the year 491.7 227.6 (0.1) 0.3
Bond issue proceeds – (297.6) – (297.6)
Bank loan repayments less new drawings (192.1) 257.8 (26.0) 247.8
Change in net debt resulting from cash ?ows 299.6 187.8 (26.1) (49.5)
Foreign exchange movements (11.2) 2.6 (0.5) (0.4)
Movement on derivative ?nancial assets and liabilities (1.4) (2.4) 2.2 (2.6)
Bond valuation adjustment 0.1 0.1 0.2 0.1
Acquired debt (242.4) – – –
Net debt at the start of the year (349.9) (538.0) (795.7) (743.3)
Net debt at the end of the year (305.2) (349.9) (819.9) (795.7)
24. Provisions
Group
Property
£m
1 April 2012 30.1
Utilised during the year (4.1)
Interest on discounted provision 1.3
31 March 2013 27.3
Utilised during the year (9.7)
Interest on discounted provision 1.8
31 March 2014 19.4
Current 2.8
Non-current 16.6
31 March 2014 19.4
The property provision represents the estimated net present value of future costs for lease rentals and dilapidation costs less the expected receipts from
sub-letting space which is surplus to business requirements. The leases have between one and 15 years to expiry.
The Company has no provisions.
136 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
25. Ordinary share capital
2014 2013
Authorised millions £m millions £m
Ordinary shares of 6
79
/86p 271.1 18.8 271.1 18.8
More information about the shares and rights attached to the ordinary shares is given in the Directors’ Report on pages 98 and 99.
26. Net cash flow generated from operations
Group Company
2014 2013 2014 2013
£m £m £m £m
Pro?t before taxation 284.3 298.9 64.4 159.1
Depreciation and amortisation 178.6 129.2 – –
Loss on disposal of property, plant and equipment 0.2 1.5 – –
Pro?t on acquisition/disposal of shares in subsidiary and joint venture (6.9) – – –
Net ?nance expense/(income) 68.8 49.5 (79.3) (148.9)
Decrease in inventories 0.8 0.5 – –
Decrease in trade and other receivables 37.2 (3.0) 9.7 3.2
Decrease in trade and other payables (118.6) (9.6) (6.7) (10.2)
Borrowing costs capitalised – (0.5) – (0.6)
Goodwill valuation amendment – (1.2) – –
Decrease/(increase) in CCP ?nancial assets 92,323.0 (43,590.5) – –
(Decrease)/increase in CCP clearing business liabilities (92,236.4) 43,594.4 – –
De?ned bene?t pension obligation – contributions (in excess of)/lower than expenses charged (3.3) (1.0) – –
Provisions utilised during the year (9.7) (6.1) – –
(Increase)/decrease in assets held at fair value from operating activities (9.5) 8.0 – –
Share scheme expense 13.4 13.1 – –
Foreign exchange (losses)/gains on operating activities (6.5) 4.3 (1.1) (2.5)
Cash generated from/(absorbed by) operations 515.4 487.5 (13.0) 0.1
Comprising:
Ongoing operating activities 548.7 480.5 1.7 0.1
Non-recurring items (33.3) 7.0 (14.7) –
515.4 487.5 (13.0) 0.1
27. Commitments and contingencies
Contracted capital commitments and other contracted commitments not provided for in the ?nancial statements of the Group were £1.7 million (2013: £1.6 million)
and £nil (2013: £13.2 million) respectively.
LCH.Clearnet Group Limited is currently engaged in correspondence and discussions regarding concerns raised by administrators in relation to a past default
exercise which could give rise to a claim against it. The amount and likelihood of success of any such claim, if made, is currently uncertain and accordingly no
provision for any liability has been made in the interim statements.
28. Business combinations
Acquisitions in the year to 31 March 2014
The Group made three acquisitions during the period.
On 5 April 2013, the Group and TMX Group Limited completed a transaction to combine their ?xed income businesses into a new business, FTSE TMX Global
Debt Capital Markets Limited. The transaction resulted in the Group acquiring a 75 per cent stake in FTSE TMX Global Debt Capital Markets Limited for a total
consideration of £78.2 million. The non-controlling interest (‘NCI’) has an option to sell the remaining 25 per cent interest to the Group after six years or earlier
in other limited scenarios.
On 1 May 2013, the Group completed the acquisition of a further 55.5 per cent stake in LCH.Clearnet resulting in a majority stake of 57.8 per cent in LCH.Clearnet.
The total investment of £470.3 million includes deferred consideration of £20.0 million, payable on 30 September 2017 subject to acceleration or delay in certain
limited circumstances. The investment is inclusive of the Group’s participation in the capital raise of LCH.Clearnet issued share capital of £158.2 million.
On 23 September 2013, the Group acquired a 70 per cent interest in EuroTLX SIM SpA for a consideration of £26.1 million and £0.9 million in deferred
consideration. The NCI has an option to sell the remaining 30 per cent interest to the Group. The value of the option is dependent on achieving growth and cost
synergies in the next ?nancial year.
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137 Group ?nancial statements Notes to the ?nancial statements
Contribution post acquisition
Date acquired Total investment Goodwill
Fair value of
assets acquired Revenue
Operating
pro?t
£m £m £m £m £m £m
LCH.Clearnet Group Limited 1 May 2013 470.3 123.8 346.5 263.0 78.5
EuroTLX SIM SpA 23 September 2013 27.0 15.6 11.4 6.6 2.0
FTSE TMX Global Debt Capital Markets Limited 5 April 2013 78.2 27.4 50.8 10.9 6.7
575.5 166.8 408.7 280.5 87.2
The total investment included in the acquisition of LCH.Clearnet comprises cash consideration of £292.1 million, deferred consideration of £20.0 million and the
Group’s participation in the capital raise of £158.2 million. Included in the LCH.Clearnet value of assets acquired is £273.7 million raised from all shareholders as
part of the capital raise.
If all acquisitions had occurred on 1 April 2013, estimated Group revenue for the year would have been £1,124 million, with operating pro?t (before acquisition
amortisation and exceptional items) of £525 million. These amounts have been calculated using the Group’s accounting policies and based on available information.
The assets and liabilities arising out of each acquisition at the relevant acquisition date are as follows:
LCH.Clearnet Group Limited EuroTLX SIM SpA
FTSE TMX Global Debt Capital
Markets Limited Total
Book value Fair value Book value Fair value Book value Fair value Book value Fair value
£m £m £m £m £m £m £m £m
Non-current assets:
Intangible assets 55.4 277.1 0.1 11.0 11.0 75.9 66.5 364.0
Goodwill 119.9 – – – 90.1 – 210.0 –
Property, plant
and equipment 14.6 14.6 0.9 0.9 – – 15.5 15.5
Other non-current assets 24.0 24.0 – – – – 24.0 24.0
Current assets:
Cash and cash equivalents 425.1 425.1 8.2 8.2 2.7 2.7 436.0 436.0
Other current assets 466,555.5 466,555.5 2.5 2.5 3.0 3.2 466,561.0 466,561.2
Current liabilities:
Borrowings (92.4) (92.4) – – – – (92.4) (92.4)
Other current liabilities (461,088.1) (461,088.1) (2.8) (6.3) (4.4) (4.5) (461,095.3) (461,098.9)
Non-current liabilities:
Borrowings (152.4) (152.4) – – – – (152.4) (152.4)
Other non-current liabilities (5,214.0) (5,277.4) (0.1) (0.1) (4.5) (9.6) (5,218.6) (5,287.1)
Net assets 647.6 686.0 8.8 16.2 97.9 67.7 754.3 769.9
Non controlling interest – (339.5) – (4.8) – (16.9) – (361.2)
Goodwill – 123.8 – 15.6 – 27.4 – 166.8
647.6 470.3 8.8 27.0 97.9 78.2 754.3 575.5
Satis?ed by:
Cash and capital raise 450.3 26.1 73.1 549.5
Deferred consideration 20.0 0.9 – 20.9
Transfer of assets – – 5.1 5.1
Total investment 470.3 27.0 78.2 575.5
The fair values are preliminary and will be ?nalised within 12 months of the acquisition date.
The fair value adjustments include:
LCH.Clearnet Group Limited
The additional £245.2 million of intangible assets arising on consolidation represents £47.4 million relating to various technologies, £33.4 million relating to
software licences, £152.1 million relating to customer relationships and £12.3 million relating to trade names. The fair values of these purchased intangible
assets are being amortised over their remaining useful life from the date of completion. The goodwill of £123.8 million arising on consolidation represents
the growth of future expected income streams from customers and its assembled workforce.
EuroTLX SIM SpA
The purchased intangibles of £10.9 million primarily relates to customer relations of £10.0 million. The goodwill of £15.6 million arising on consolidation
includes value attributed to its assembled workforce.
FTSE TMX Global Debt Capital Markets Limited
The purchased intangibles of £74.1 million mainly relate to customer relations of £69.1 million. The goodwill of £27.4 million arising on consolidation represents
the potential for the Group to expand into new territories such as the USA (£16.3 million), Australia (£7.4 million) and China (£3.7 million).
138 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
29. Leases
The Group leases various of?ce properties and equipment under non-cancellable operating leases.
The total future minimum lease payments under non-cancellable operating leases are due as follows:
Property Equipment
2014 2013 2014 2013
Leases expiring in: £m £m £m £m
Less than one year 30.8 25.3 1.1 1.4
More than one year but less than ?ve years 102.4 84.0 0.6 –
More than ?ve years 93.0 82.7 – –
226.2 192.0 1.7 1.4
Operating lease payments of £34.1 million (2013: £25.6 million) were charged to the income statement in the year in relation to property and £1.9 million
(2013: £3.0 million) in the year in relation to equipment.
The total future minimum lease payments expected to be received under non-cancellable operating leases for property where the Group is lessor are due as follows:
Property
2014 2013
Leases expiring in: £m £m
Less than one year 5.5 8.2
More than one year but less than ?ve years 21.2 21.2
More than ?ve years 7.0 10.9
33.7 40.3
The Company has no lease commitments.
30. Share Schemes
The London Stock Exchange Group Long Term Incentive Plan (LTIP), approved at the 2004 AGM, has two elements, a conditional award of Performance Shares
and an award of Matching Shares linked to investment by the executive of annual bonus in the Company’s shares. Vesting of these awards is dependent upon
the Company’s total shareholder return performance and for awards made since 2008, adjusted basic earnings per share. Further details are provided in the
Remuneration Report on pages 70-97.
The SAYE scheme and International Sharesave Plan provide for grants of options to employees who enter into a SAYE savings contract and options were granted
at 20 per cent below fair market value. Share awards were granted at nil cost to employees and other share options were granted at fair market value or above.
The Group has an ESOP discretionary trust to administer the share plans and to acquire the shares to meet commitments to Group employees.
At the year end 642,936 (2013: 1,128,556) shares were held by the trust, funded by an interest free loan from the Group. The Company has no employees,
but in accordance with SIC 12 “Consolidation – Special Purpose Entities” has the obligation for the assets, liabilities, income and costs of the ESOP trust and
these have been consolidated in the Group’s ?nancial statements. The cost of the Group’s shares held by the trust are deducted from retained earnings.
Movements in the number of share options and awards outstanding and their weighted average exercise prices are as follows:
Share options SAYE Scheme LTIP
Number
Weighted average
exercise
price Number
Weighted average
exercise
price Number
Weighted average
exercise
price
31 March 2012 404,240 5.26 489,271 6.13 6,093,311 –
Granted 55,440 9.85 220,046 8.20 2,814,239 –
Exercised (67,570) 3.57 (3,844) 6.13 (1,386,330) –
Lapsed/forfeited (8,995) 7.80 (20,403) 6.13 (1,028,747) –
31 March 2013 383,115 6.16 685,070 6.79 6,492,473 –
Granted – – 214,485 12.64 2,231,649 –
Exercised (235,139) 7.12 (3,501) 6.43 (1,902,989) –
Lapsed/forfeited (9,943) 9.27 (29,171) 6.80 (428,407) –
31 March 2014 138,033 9.25 866,883 8.25 6,392,726 –
Exercisable at:
31 March 2014 32,778 7.73 – – – –
31 March 2013 183,631 1.69 – – 121,483 –
The weighted average share price of London Stock Exchange Group plc shares during the year was £16.08 (2013: £10.70).
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139 Group ?nancial statements Notes to the ?nancial statements
The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are as follows:
2014 2013
Number
outstanding
Weighted average
remaining
contractual life
Number
outstanding
Weighted average
remaining
contractual life
Share options
Less than £7 – – 153,935 0.3
Between £7 and £8 10,506 – 85,680 1.7
Between £8 and £9 22,272 – 29,696 0.5
More than £9 105,255 0.5 113,804 2.6
SAYE
Less than £7 439,487 0.5 465,024 1.2
Between £8 and £9 212,911 0.5 220,046 1.0
More than £9 214,485 0.7 – –
LTIP
Nil 6,392,726 1.3 6,492,473 1.4
Total 7,397,642 1.3 7,560,658 1.6
The fair value of share awards and share options granted during the year was determined using a stochastic valuation model. The key assumptions used in the
valuation were as follows:
Performance Related Equity Plan Matching Shares Share Save Plan
12 Jun 2013 12 Aug 2013 3 Sep 2013 5 Feb 2014 12 Jun 2013 30 Sep 2013 10 Jan 2014
Grant date share price £13.45 £15.71 £15.74 £18.34 £13.45 £15.37 £17.99
Expected life 3 years 3 years 3 years 3.07 years 3 years 3 years 3 years
Exercise price n/a n/a n/a n/a n/a n/a £12.64
Dividend yield 2.20% 1.90% 1.90% 1.60% 2.20% 1.90% 1.70%
Risk-free interest rate 0.70% 0.70% 0.90% 1.00% 0.70% 0.80% 1.10%
Volatility 30% 30% 30% 29% 30% 30% 30%
Fair value – – – – – – 6.06
Fair value TSR £4.11 £5.06 £5.13 £6.05 £4.11 £4.98 –
Fair value EPS £12.59 £14.84 £14.86 £17.48 £12.59 £14.49 –
The approach adopted by the Group in determining the fair value for the Performance and Matching Shares granted during the year was based on a
Total Shareholder Return pricing model which incorporates TSR and EPS performance conditions and references the vesting schedules of the awards.
For all other share awards, including the Share Save Plan, the Black-Scholes model was used.
The signi?cant inputs into both models are the share price at grant date, expected volatility, dividend yields and annual risk-free interest rate. The volatility
assumption is based on the historical three-year volatility as at the date of grant. The risk-free interest rate represents the yield available on a UK zero-coupon
government bond on the date of grant for a term commensurate with the vesting period of the award. The expected life refers to the time from the date
of grant to the date the awards vest. Holders of share awards and share options are not entitled to receive dividends declared during the vesting period.
140 Group ?nancial statements
Notes to the ?nancial statements continued
London Stock Exchange Group plc Annual Report 2014
31. 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:
2014 2013
£m £m
Salaries and other short term bene?ts 9.9 8.9
Pensions 0.9 0.5
Share based payments 10.7 4.6
21.5 14.0
Inter-company transactions with subsidiary undertakings
The Company has loan agreements with some subsidiary undertakings. Details as at 31 March 2014 are shown in the table below:
Amount in millions due
(owed to)/from as at 31 March
Interest in millions
(charge) /credit
Loan counterparty 2014 2013 Term
Interest rate as at 31
March 2014 2014 2013
London Stock Exchange plc £(181.1)m £(88.7)m 25 years from May 2006 with
?ve equal annual repayments
commencing in May 2027.
LIBOR plus
2% per annum
£(5.0)m £(6.8)m
London Stock Exchange
Employee Bene?t Trust
£13.2m £14.2m Repayable on demand. Non-interest
bearing
nil nil
London Stock Exchange Group
Holdings (Italy) Limited – Italian
Branch
nil €450.0m Five years from March 2009,
repayable in full on maturity
in March 2014.
EURIBOR plus
4.0% per annum
nil €24.4m
London Stock Exchange Group
Holdings (Italy) Limited – Italian
Branch
nil €94.5m 20 years from January 2008
with ?ve equal repayments
commencing in January 2024.
EURIBOR plus
1.2% per annum
nil €2.6m
London Stock Exchange Group
Holdings (Italy) Limited
€(9.6)m nil Fifth anniversary of the initial
utilisation date which was
April 2013.
LIBOR plus
1.5% per annum
€0.1m nil
London Stock Exchange Group
Holdings Limited
£474.9m £463.6m Fifth anniversary of the initial
utilisation date which was
October 2009.
LIBOR plus
4.0% per annum
£23.3m £22.1m
London Stock Exchange Group
Holdings (R) Limited
nil £(0.6)m Fifth anniversary of the initial
utilisation date which was
April 2011.
LIBOR plus
1.5% per annum
nil nil
Cassa di Compensazione e Garanzia
S.p.A.
nil nil One year from initial utilisation
date which was January 2012.
EURIBOR plus
1.2% per annum
nil €(0.5)m
Monte Titoli S.p.A. nil €(31.9)m One year from initial utilisation
date which was January 2012,
extended for further six months
to July 2013.
EURIBOR plus
1.2% per annum
€(0.2)m €(0.4)m
Societa Mercato Titoli di Stato S.p.A. nil €(22.2)m One year from initial utilisation
date which was 1 August 2013.
EURIBOR plus
1.2% per annum
€(0.3)m €(0.2)m
LSE Reg Holdings Limited €0.2m nil Fifth anniversary of the initial
utilisation date which was
December 2013.
EURIBOR plus
1.2% per annum
nil nil
LSE Reg Holdings Limited £1.3m nil Fifth anniversary of the initial
utilisation date which was
December 2013.
LIBOR plus
1.2% per annum
nil nil
London Stock Exchange (C) Limited €49.8m €13.8m Fifth anniversary of the initial
utilisation date which was
April 2012.
EURIBOR plus
1.5% per annum
€0.8m €0.3m
London Stock Exchange (C) Limited £2.8m nil Fifth anniversary of the initial
utilisation date which was
April 2012.
LIBOR plus
1.5% per annum
nil nil
During the year the Company charged in respect of employee share schemes £5.0 million (2013: £8.0 million) to London Stock Exchange plc, £0.2 million
(2013: nil) to London Stock Exchange Group Holdings Inc, £0.1 million (2013: nil) to London Stock Exchange (OV) Limited, £0.1 million (2013: nil) to UnaVista
Limited, £2.7 million (2013: £2.8 million) to London Stock Exchange Group Holdings (Italy) Ltd, £1.0 million (2013: £0.7 million) to Millennium Information
£2.0 million (2013: £1.2 million) to FTSE Group and £0.2 million (2013: nil) to LCH.Clearnet Group. The Company received dividends of £118.2 million
(2013: €112,4 million) and €60.0 million (2013: €60.0 million) respectively from its subsidiaries London Stock Exchange plc and London Stock Exchange
Group Holdings (Italy) Limited.
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141 Group ?nancial statements Notes to the ?nancial statements
32. Other Statutory Information
Auditors’ remuneration payable to PricewaterhouseCoopers LLP (PwC) and its associates comprise the following:
2014 2013
£m £m
Audit of parent and consolidated ?nancial statements 0.5 0.2
Audit of subsidiary companies 1.1 1.0
Audit related assurance services 0.4 0.4
Other non-audit services:
– Taxation 0.6 0.2
– Corporate ?nance 0.2 0.6
– Other assurance services – 0.1
Total expenses 2.8 2.5
Further details of the services provided by PwC are given in the Report of the Audit and Risk Committee on pages 68.
Directors’ emoluments comprise the following:
2014 2013
£m £m
Salary and fees 3.4 2.6
Performance bonus 2.7 2.6
Gains made on share awards 4.8 4.9
Bene?ts 0.4 0.3
11.3 10.4
Contributions to de?ned contribution schemes 0.7 0.3
12.0 10.7
During the year no Directors (2013: none) had retirement bene?ts accruing under de?ned contribution schemes and one Director (2013: one) had retirement
bene?ts accruing under a de?ned bene?t scheme.
Further details of Directors’ emoluments are included in the Remuneration Report on pages 70-97.
142 Shareholder information London Stock Exchange Group plc Annual Report 2014
Market structures
PROCESS EXPLANATION THE GROUP’S INVOLVEMENT
The process of trading
Electronic trading Computerised systems for matching
buy and sell orders of ?nancial
instruments, such as equities,
bonds and derivatives.
— Equities – London and Italian trading platforms and Turquoise pan-European & US trading
— ETFs, ETCs – London and Italian trading platforms
— Bonds – MTS, MOT, ORB and EuroTLX
— Derivatives – LSE Derivatives, IDEM, IDEX and AGREX
Clearing After a trade has been matched,
usually by a trading system, it is
cleared by a Central counterparty
(CCP) who stands in the middle of
a trade as the buyer to every
seller and the seller to every buyer.
If either party defaults on the trade,
the CCP owns the defaulter’s risk
and becomes accountable for its
liabilities. During the life of a trade,
or that of a portfolio of trades,
CCPs process all cash ?ows and
continuously mark the trade or
book to market, calling variation
and initial margin in relation to
prevailing risk of the overall portfolio.
LCH.Clearnet acts as a CCP for LSE equities, derivatives and bonds, Turquoise equities
and MTS bonds. LCH.Clearnet also clears commodities and for global OTC derivatives
and non-Group venues. It has clearing houses in the UK, France and USA.
CC&G acts as a CCP for Italian cash equities, derivatives and ?xed income. CC&G also clears
OTC trades and non-Group venues.
Settlement Settlement is the process of
delivering title to the ?nancial
instrument to the buyer against
payment to the seller. For equities,
this normally takes place three days
after the trade. Netted settlement
reduces a large number of positions
to a single position/payment.
Settlement operates both for
transactions through a trading
system and those completed over
the counter (OTC).
Monte Titoli operates the X-TRM and EXPRESS II systems, which cover Italian pre-settlement
and settlement, creating netted settlement instructions, making the actual payments and
delivering securities.
Custody A custodian or Central Securities
Depositary (CSD) undertakes the
safekeeping and administration
of securities on behalf of issuers
and investors.
Monte Titoli provides Italian custody services for ?nancial instruments such as equities
and bonds, whether dematerialised or in paper form. De-materialised securities are those
that can be held without the need for paper certi?cates.
The Group will launch a new International CSD, based in Luxembourg, in the ?rst half of 2014.
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143 Shareholder information Market structures
What are features of lit and dark order books?
Lit order books display price and size of bids and offers so that orders are
visible prior to execution. The bene?t is certainty of trade. The challenge i
s potential market impact. Dark order books mitigate market impact by
allowing orders to reside in an order book where the price and size of an
order is not displayed until after the trade. Users of a dark book, therefore,
have no certainty – pre-trade – that another order is in the dark book.
The bene?t, however, is the ability to place orders without revealing one’s
intention, pre-trade. Furthermore, an investor can peg the non-displayed
price of the order in the dark book to follow the mid-point of the bid and
offer displayed on the reference lit Exchange. After a trade, the price and
size of the completed order is published. This is important as it adds to
transparency for all investors, because post trade transparency is
pre-trade transparency for the next trade.
Dark pool trading on Turquoise
Turquoise Midpoint Dark is a public order book offered equally to all
members. Turquoise Midpoint Dark matches orders pegged to the
mid-point of the Primary Best Bid and Offer of the respective Exchange.
Size priority in Turquoise Midpoint matching logic is different to traditional
time priority of other public orders books and promotes larger sized
orders to the front of the queue. Size priority and user-de?ned Minimum
Execution Size (MES) are key features of two distinct functionalities
that Turquoise Midpoint Dark offers: Continuous Midpoint Matching,
and Turquoise Uncross™ an innovation that provides periodic random
uncrossings during the trading day which increases likelihood of matching
resting buy and sell orders at a fair mid price. Independent study by Liquid
Metrix observed execution quality of Turquoise Uncross best in class
among public dark pools by multiple criteria.
Regulatory development – Revised MiFID/MiFIR
Revised MiFID/MiFIR, political agreement having been reached,
are now in the rule-making stage with the EU Commission and ESMA.
The measures contain a broad range of market structure and conduct
of business measures, aimed at extending the scope of MiFID more
generally to non-equities, promoting transparency, regulation, ef?ciency
and competitiveness of EU ?nancial markets. Key changes of relevance
to the Group include non-discriminatory access to trading venues and
CCPs, non-exclusive licensing of benchmark indices, the introduction
of SME Growth Markets, the extension of pre and post trade transparency
to non-equity asset classes, including bonds and derivatives, and increased
regulatory requirements for high frequency trading strategies and
algorithmic trading. Implementation is expected to take place by
end 2016, with full implementation of some aspects thereafter.
EXPLANATION ATTRIBUTES THE GROUP’S INVOLVEMENT
Trading under MiFID
Exchange model
for trading
— Traded through trading
platforms run by an operator
of a Regulated Market.
— Regulated
— Order driven
— Neutral
— Transparent
— Liquid
— Widest stock coverage
— Widest client base
— Trading platforms offered by the London
Stock Exchange and Borsa Italiana,
including securities listed and/or admitted
to trading on the Group’s primary markets
— On exchange business done off
order book and reported to a
Regulated Market.
— Telephone trading — On exchange trade reporting and publication
MTF MiFID compliant secondary trading
platform providing trading facilities
similar to those offered by
exchanges/regulated markets.
— Regulated
— Order driven
— Neutral
— Transparent
— Can include dark pool trading
(see below)
— MTF services provided through Turquoise
and Euro MTS
OTC Over-the-counter/bilateral market
conducted through electronic
systems or by telephone.
Electronically connected market
consisting of dealers who are in
constant contact, thereby facilitating
trading directly between two parties.
— Regulated participants
— Large or block trades
— Way to trade less liquid stocks
— OTC trade reporting and publication services
144 Shareholder information London Stock Exchange Group plc Annual Report 2014
Glossary
AGREX
The Group’s Italian agricultural commodities derivatives segment of IDEM
AIM
The Group’s market for smaller and growing companies established in
London and now extended to AIM Italia – MAC
Borsa Italiana (BIt)
Borsa Italiana S.p.A., the Group’s Italian exchange business
CAGR
Compound annual growth rate
CCP
Central Counterparty – stands between two parties to a trade to eliminate
counterparty risk by ensuring that settlement takes place
CC&G
Cassa di Compensazione e Garanzia S.p.A., the Group’s Italian subsidiary
which manages the Italian CCP for equity, derivative, commodity and
?xed income trades
Central Securities Depository (CSD)
An entity that enables securities to be processed, settled and held in custody
Company or LSEG, London Stock Exchange Group
London Stock Exchange Group plc
CONSOB
Commissione Nazionale per le Società e la Borsa, Italy’s of?cial body for
regulating and supervising companies and trading infrastructure providers
CPI
Consumer Price Index which measures changes in the price of consumer
goods and services purchased by households
Dark Pool
Electronic trading networks developed by regulated venues such as
Regulated Markets, MTFs and by OTC broker dealers to enable the matching
of orders between buyers and sellers without pre-trade transparency until
the trade is complete
Depositary Receipts/Global Depositary Receipts (GDR)
Tradable certi?cates representing ownership of a number of underlying
shares, mainly for companies in developing or emerging markets
Derivatives
Tradable ?nancial instruments whose value is determined by the value
an underlying instruments; this could be equity, an index, a commodity
or any other tradable instrument
Exchange traded derivatives (ETD) are listed derivatives traded on an
electronic trading venue such as an exchange and cleared through a
clearing house
Over the counter (OTC) derivatives are negotiated privately between
two parties and may be cleared through a clearing house
EBITDA
Earnings before interest, tax, depreciation and amortisation
European Market Infrastructure Regulation (EMIR)
European legislation on regulation of clearing of derivatives,
and the operation and governance of CCPs and trade repositories
ESOP
Employee Share Option Plan
ETC
Exchange Traded Commodity – securities that provide exposure to a range
of commodities and commodity indices
ETF
Exchange Traded Fund – low cost and ?exible investments that track indices
and sectors
ETP
Exchange traded products including ETFs and ETCs
ELITE
A programme in Italy and the UK which is aimed at providing support to
fast growing SMEs, allowing them to boost their appeal and visibility to
potential investors
EuroTLX
The Group’s 70 per cent subsidiary which owns and operates a European MTF
for the trading of ?xed income securities in retail-size and investment
products distributed to retail clients
FCA
Financial Conduct Authority, the current regulator of conduct of providers
of ?nancial services in the UK and of UK trading venues such as Recognised
Investment Exchanges (RIEs) and MTFs
FTSE Group or FTSE
FTSE International Limited and its subsidiaries, the Group subsidiary that
is a leading global provider of index and analytics solutions
FTSE 100 Index
The index developed by FTSE and London Stock Exchange of leading UK
quoted companies
FTSE MIB Index
The index developed by FTSE and Borsa Italiana of leading Italian
quoted companies
globeSettle
The Group’s International Central Securities Depository in Luxembourg
Group
The Company and its group undertakings
Group undertakings
Group undertakings shall be construed in accordance with s1161 of the
Companies Act 2006 and, in relation to the Company, includes London
Stock Exchange plc, Borsa Italiana S.p.A. and FTSE International Limited,
together with respective direct and indirect subsidiaries
High Growth Segment (HGS)
A new segment of the LSE Main Market for the equity shares of UK and
European trading businesses that can demonstrate signi?cant growth
in revenues and a longer term aspiration to join the Premium segment
of the Main Market
International Central Securities Depository (ICSD)
The Group’s new Luxembourg based globeSettle entity that will provide
a full range of custody and settlement services
IDEM
The Group’s Italian Derivatives Market, trading contracts based on equities
and related indices
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145 Shareholder information Glossary
IDEX
The Group’s Italian energy derivatives segment, trading contracts based
on commodities and related indices
IOB
International Order Book – the Group’s electronic trading service for
international securities
IPO
Initial Public Offering – the process whereby companies join our markets
and raise capital for the ?rst time
Latency
A measure of time delay experienced in a system, measured in milliseconds
(1/1,000th of a second) or microseconds (1/1,000,000th of a second)
LCH.Clearnet or LCH.Clearnet Group
LCH.Clearnet Group Limited and its subsidiaries, the Group’s 57.8 per cent
owned global clearing and risk management business
Main Market
The market for companies which have been admitted to trading on the
London Stock Exchange’s principal market; and in Italy, the market for
companies listed on Borsa Italiana’s principal MTA market
MiFID or Markets in Financial Instruments Directive
EU Directive introduced in November 2007 to harmonise cross-border trading
of equities, providing greater choice of trading venues. Revised MiFID and
MiFIR (a directive and regulation) are now in the rule making stage with the
EU Commission and ESMA
Millennium Exchange
MillenniumIT’s multi-asset trading platform, deployed for the UK, Italian and
Turquoise equities markets
MillenniumIT
Millennium Information Technologies Limited, the Group’s subsidiary that
is the developer of ?exible, low cost, high performance trading platforms
and ?nancial markets software serving both the Group’s own businesses
and third parties
Monte Titoli
Monte Titoli S.p.A., the Group’s Italian Central Securities Depository and
settlement provider
MOT
Mercato Obbligazionario Telematico is the Group’s Italian retail bond
trading platform
MTA
Mercato Telematico Azionario is the Group’s Italian electronic market on
which shares, convertible bonds, warrants and option rights are traded
MTS
Società per il Mercato dei Titoli di Stato S.p.A., the Group’s 60 per cent
subsidiary which owns and operates an electronic trading platform for
European ?xed income securities
Multilateral Trading Facility (MTF)
Alternative electronic trading systems as categorised under MiFID
ORB
The Group’s UK Order Book for Retail Bonds
OTC
Over-the-counter trades in ?nancial instruments executed outside a
Regulated Market or MTF – see also OTC Derivatives
Primary market
The listing of securities for the ?rst time via an IPO or introduction of
existing securities
Proquote
The Group’s ?nancial market software and data services provider
Regulated Market
A multilateral system which brings together multiple third party buying and
selling in ?nancial instruments in accordance with rules, authorised under
provisions of MiFID
Repo
Repurchase Agreement – the process of borrowing money by combining
the sale and subsequent repurchase of an asset, traded through MTS and
cleared through CC&G or LCH.Clearnet
RNS
Regulatory News Service, the Group’s Primary Information Provider,
for dissemination of regulatory and non-regulatory news to the market
RPI
The Retail Price Index which measures in?ation in the UK economy
Secondary market
The public market on which securities once issued are traded
SEDOL
The Group’s securities identi?cation service
SETS
The electronic order book operated by the London Stock Exchange for the
trading of the most liquid securities
Specialist Fund Market (SFM)
The Group’s regulated market for highly specialised investment entities that
wish to target institutional, professional and highly knowledgeable investors
SwapClear
LCH.Clearnet’s OTC interest rate swap clearing service
TARGET2-Securities (T2S)
Initiative led by the European Central Bank to provide a platform for
settlement of bonds and equities traded in the Eurozone, expected to be
launched in 2015
Transaction Reporting Service (TRS)
Approved Reporting Mechanism, part of the UnaVista range of services
Turquoise
Turquoise Global Holdings Limited and its subsidiaries, the Group’s 51 per cent
owned pan-European MTF equity trading subsidiary, a venture between the
Group and 12 global investment bank clients
UnaVista
The Group’s web-based matching, reconciliation and data integration engine
that provides matching of post trade data in a simple, automated process and
the Trade Repository approved by ESMA under EMIR
X-TRM
The Group’s post trade router, to manage the trade ?ows between two
competing CCPs and onward to settlement
146 Shareholder information London Stock Exchange Group plc Annual Report 2014
Financial calendar
(Provisional)
AGM 16 July 2014
Q1 Interim Management Statement (revenues only) 16 July 2014
Ex-dividend date for ?nal dividend 23 July 2014
Final dividend record date 25 July 2014
Final dividend payment 19 August 2014
Half year end 30 September 2014
Interim Results November 2014
New Financial year end (9 months) 31 December 2014
Preliminary Results (9 months) March 2015
Change of financial year
In order to create alignment of the ?nancial years of LSEG plc and LCH.Clearnet
Group, a change was made to the Group’s accounting reference date,
moving from 31 March to 31 December, with effect from 1 April 2014.
Dividend payments are expected to be made as follows:
— Final dividend for year ending 31 March 2014 – to be paid August
2014 (as per current timetable)
— Interim dividend for 6 months ending 30 September 2014
– to be paid January 2015 (as per current timetable)
— Final dividend for 9 months ended 31 December 2014
– to be paid May 2015
— Thereafter, interim dividends to be paid in October and ?nal
dividends to be paid in May
The ?nancial calendar is updated on a regular basis throughout the year.
Please refer to our website www.lseg.com/investor-relations/
investor-relations.htm and click on the shareholder services section
for up-to-date details.
The Group’s AGM for the year ended 31 March 2014 will be held on
16 July 2014 at Haberdashers’ Hall, 18 West Smith?eld, London EC1A 9HQ
starting at 12:00 noon.
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147 Shareholder information Investor relations
Investor relations
Shareholder services
Equiniti registrars Shareview service
Shareholders who hold London Stock Exchange Group shares in certi?cated
form or within Equiniti Investment Account or ISA can access Shareview.
Shareview is a free service provided by our registrars, Equiniti. It may be
accessed through the internet at www.shareview.co.uk
By creating a Shareview portfolio, you will gain online access to
information about your London Stock Exchange Group shares and
other investments including:
— Direct access to information held for you on the share register
including share movements
— A daily indicative valuation of all investments held in your portfolio
— A range of information and practical help for shareholders.
To register at Shareview you will need your shareholder reference (which
can be found on your share certi?cate) and you will be asked to select your
own personal identi?cation number. A user ID will then be posted to you.
If you have any problems in registering your portfolio for the Shareview
service, contact Equiniti on 0871 384 2544. Calls to this number are
charged at eight pence per minute from a BT landline. Other telephone
providers’ costs may vary. For calls from outside the UK, contact Equiniti
on +44 121 415 7047. Please note that you should only use electronic
addresses included in this Annual Report for the purposes expressly stated.
Group’s share price service
To obtain share price information for London Stock Exchange Group plc,
see our website at: www.lseg.com
By clicking on the Investor Relations tab, you will ?nd the Company’s
share price, historical closing prices and volumes and an interactive
share price graph.
Substantial Shareholders
As at 14 May 2014, the Company had been noti?ed of the following
interests amounting to more than three per cent in the issued share
capital of the Company in accordance with DTR 5 of the FSA’s Disclosure
and Transparency Rules:
Borse Dubai Limited 20.6%
Qatar Investment Authority 15.08%
148 Shareholder information London Stock Exchange Group plc Annual Report 2014
Investor relations contacts
Investor Relations
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
For enquiries relating to shareholdings in London Stock Exchange Group plc:
Shareholder helpline: +44 (0)20 7797 3322
email: [email protected]
Visit the investor relations section of our website for up-to-date information
including the latest share price, announcements, ?nancial reports and details
of analysts and consensus forecasts
www.lseg.com/investor-relations/investor-relations.htm
Registered office
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Registered company number
London Stock Exchange Group plc: 5369106
Registrar information
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
T 0871 384 2544 or +44 (0)121 415 7047
www.shareview.co.uk
Chartered accountants and independent auditors
PricewaterhouseCoopers LLP
7 More London Riverside
London SE1 2RT
Principal legal adviser
Fresh?elds Bruckhaus Deringer LLP
65 Fleet Street
London
EC4Y IHS
T +44 (0)20 7936 4000
Corporate brokers
Barclays
5 The North Colonnade
Canary Wharf
London
E14 4BB
T +44 (0)20 7623 2323
www.barclays.com
Morgan Stanley & Co Limited
20 Bank Street
Canary Wharf
London
E14 4AD
T +44 (0)20 7425 8000
www.morganstanley.com
AIM, London Stock Exchange, the London Stock Exchange coat of arms device, NOMAD, RNS,
SEDOL, SEDOL Master?le, SETS, TradElect, UnaVista, and IOB are registered trade marks of London
Stock Exchange plc. Main Market, Specialist Fund Market, SFM and ORB, High Growth Segment,
Professional Securities Market, PSM are trade marks of London Stock Exchange plc.
Borsa Italiana, MTA, MIB, MOT, AGREX and IDEX are registered trade marks of Borsa Italiana S.p.A.
IDEM is a trade mark of Borsa Italiana S.p.A.. CC&G is a trade mark of Cassa di Compensazione e
Garanzia S.p.A.. Monte Titoli S.p.A. and X-TRM are registered trade marks of Monte Titoli S.p.A..
EuroMTS, MTS and BOND VISION are registered trade marks of Mercato dei Titoli di Stato S.p.A.
Proquote is a registered trade mark of Proquote Limited.
FTSE is a registered trade mark of subsidiaries of London Stock Exchange Group plc and is used by
FTSE International Limited under licence.
MillenniumIT and Millennium Exchange are registered trade marks of Millennium Information
Technologies (Private) Limited and MillenniumIT Software and NewClear are registered trade marks
of Millennium IT Software (Private) Limited.
Millennium Surveillance and Millennium CSD are trade marks of MillenniumIT Software
(Private) Limited.
Turquoise is a registered trade mark of Turquoise Global Holdings Limited.
SwapClear, ForexClear and CDSClear are registered trade marks of LCH.Clearnet Limited.
LCH.Clearnet is a trade mark of LCH.Clearnet Limited.
Other logos, organisations and company names referred to may be the trade marks of
their respective owners.
Designed by Addison Group www.addison-group.net
Board and Executive Committee photography by
Paul Hackett (www.paulhackett.net) and Nick Sinclair (www.nicksinclair.com)
Printed in England by CPI Colour, CPI Colour is a certi?ed CarbonNeutral company.
Welcome to our
annual report
Further information on London Stock
Exchange Group can be found at:
www.lseg.com
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales
No. 5369106
Who we are
London Stock Exchange Group is a diversi?ed international market
infrastructure and capital markets business that sits at the heart of
the world’s ?nancial community.
The Group operates a broad range of international equity, bond and derivatives
markets, including London Stock Exchange; Borsa Italiana; MTS, one of
Europe’s leading ?xed income markets; and Turquoise, the pan-European
equities MTF. Through its various platforms, the Group offers international
businesses and investors unrivalled access to Europe’s capital markets.
Post trade and risk management services are a signi?cant part of the Group’s
business operations. LSEG operates CC&G, the Italian clearing house, and
Monte Titoli, the European settlement business. The Group is also a majority
owner of leading multi-asset global clearing service, LCH.Clearnet Group.
The Group offers customers an extensive range of real time, reference
data and news products, including SEDOL, UnaVista, Proquote and RNS,
as well as access to over 250,000 international equity, bond and alternative
asset class indices, through its world leading index provider, FTSE.
The Group is also a leading developer of high performance trading platforms
and capital markets software for customers around the world.
Headquartered in London, with signi?cant operations in Italy, France,
North America and Sri Lanka, the Group employs approximately 2,900 people.
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Delivering
Growth
Annual Report
31 March 2014
© May 2014
London Stock Exchange Group plc
10 Paternoster Square
London EC4M 7LS
Telephone +44 (0)20 7797 1000
Registered in England and Wales No. 5369106
www.lseg.com
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