TIDMLSE
RNS Number : 3051G
London Stock Exchange Group PLC
16 March 2020
London Stock Exchange Group plc Annual Report and Accounts,
Notice of Annual General Meeting 2020, Corporate Sustainability
Report, UK Gender Pay Gap Report and related documents.
The Annual Report and Accounts of London Stock Exchange Group
plc (the "Group") for the year ended 31 December 2019 (the "Annual
Report"), Notice of Annual General Meeting 2020 (the "AGM Notice")
and related form of proxy for the Group's 2020 Annual General
Meeting (the "AGM") are being mailed to shareholders today and, in
accordance with paragraph 9.6.1 of the FCA Listing Rules, have been
submitted to the National Storage Mechanism where they will shortly
be available for inspection at http://www.morningstar.co.uk/uk/nsm
.
London Stock Exchange Group has also published today its
Corporate Sustainability Report 2019, which is available on
https://www.lseg.com/about-london-stock-exchange-group/corporate-sustainability
and its UK Gender Pay Gap Report 2019, which is available on
https://www.lseg.com/about-london-stock-exchange-group/corporate-sustainability
.
London Stock Exchange +44 (0) 20 7797
Group plc Paul Froud - Investor Relations 3322
Gavin Sullivan/Lucie Holloway +44 (0) 20 7797
- Media 1222
In compliance with DTR 6.3.5, the following information is
extracted from the Annual Report and should be read in conjunction
with the Group's preliminary results announcement of 28 February
2020 (the "Preliminary Results"). The information reproduced below
and the Preliminary Results together constitute the material
required by DTR 6.3.5 to be communicated in full, unedited text
through a regulatory information service. This is not a substitute
for reading the full Annual Report. Page numbers and cross
references in the extracted information below refer to page numbers
and cross-references in the Annual Report. The Annual Report, the
Preliminary Results and the AGM Notice can be viewed and downloaded
at http://www.lseg.com/investor-relations.
The Annual Report contains the following statements regarding
important events that have occurred during the year on pages 4 to
5:
"Chairman's Statement
Overview
It was a great honour to be asked to serve as Chair of London
Stock Exchange Group, an iconic institution with a 300-year history
at the heart of global financial markets. I would like to extend my
appreciation to the previous Chair for handing over the reins to a
Group that is well positioned strategically and financially. The
Group continues to perform well with total income up 8%, adjusted
earnings per share up 15% and a proposed dividend of 70.0 pence per
share, up 16%.
2019 has been characterised by macroeconomic and political
uncertainty. The challenges posed to all business leaders
throughout the year have been numerous, but LSEG remains well
positioned with a set of highly complementary businesses across the
capital markets lifecycle. Our Open Access philosophy and customer
partnership approach continues to be a true differentiator and
fundamental to our business strategy. As a systemically important
business, the Group plays a significant role in financial markets
globally, contributing to financial stability and supporting
sustainable economic growth.
Refinitiv
LSEG announced the proposed acquisition of Refinitiv on 1 August
2019. This was the culmination of many months of
strategy development, deep consideration and discussion. It is a
transformational transaction, strategically and financially. The
combined global business will be headquartered and domiciled in the
UK with a premium listing in London. The transaction received
overwhelming shareholder approval in November, and we are currently
engaged in the regulatory approvals process and integration
planning. The transaction remains on track to close in the second
half of 2020.
HKEX
In September, LSEG received an unsolicited approach from Hong
Kong Exchanges and Clearing Limited (HKEX). LSEG's Board had
fundamental concerns about the key aspects of the Conditional
Proposal: strategy, deliverability, form of consideration and
value, especially when compared to the significant value we expect
to create through our planned acquisition of Refinitiv.
Accordingly, the Board unanimously rejected the Conditional
Proposal, which HKEX subsequently withdrew.
Governance
The Board seeks to operate to high governance and ethical
standards. Further detail is available later in the Board's
Corporate Governance report starting on page 78. Dominic Blakemore
joined the Board as a Non-Executive Director, effective 1 January
2020, and we also welcomed Cressida Hogg to the Board as an
Independent Non-Executive Director in March 2019. Following the
conclusion of the Group's AGM in April 2020, Paul Heiden will step
down from the LSEG Board and Dominic will assume the Chair of the
Audit Committee from Paul, and Stephen O'Connor will become the
Senior Independent Director. I would like to record the Board's
gratitude to Paul Heiden for his significant contribution to LSEG
over the last decade during which the Group has delivered
significant growth and diversification. His counsel and experience
have been invaluable during this period of transformational
change.
In October, David Warren, Group Chief Financial Officer informed
the Group of his intention to retire from the company and step down
from the Board. The Board is grateful for the key role David has
played in the successful growth, diversification and global
expansion of our business over the last seven years as well as for
his leadership when he served as Interim CEO. David will continue
in his current role as Group CFO and a member of the Board through
the close of the Refinitiv transaction to ensure a smooth
transition to his successor. LSEG is undertaking a global search
for his replacement, which is being led by the Board's Nomination
Committee.
Culture
The Board, along with the executive team, seeks to promote a
culture of Group-wide collaboration and customer focus. LSEG has
made good progress this year on these efforts, which you can read
about further on page 44. The Board has also engaged directly with
employees, with candid feedback provided to Directors through a
series of informal meetings, as well as more formal interaction
with employee forums, which will continue in the coming year.
Corporate Sustainability
The global transition to a more sustainable economy continues to
be a focus across our industry. LSEG has many touch points with
stakeholders that put us in a strong position to engage in this
discussion and we take our responsibility seriously. Our ability to
help facilitate change is demonstrated through the diverse
ecosystem of sustainable bonds listed on our markets with issuers
from 18 different countries and bonds issued in 17 different
currencies. FTSE Russell has also launched an innovative new index
providing a forward-looking assessment of the climate risk faced by
sovereigns allowing investors to reduce climate risk and greenhouse
gas emissions in their portfolios.
As a global company, we are committed to playing our part,
building on our engagement with UK Government initiatives such as
the Green Finance Taskforce, which led to the creation of the Green
Finance Institute, and the EU's High Level Expert Group and
Technical Expert Group. Both of these groups included
representatives from LSEG as part of their work to develop
recommendations for the EU's Green Finance Taxonomy. Within LSEG,
our Environmental Management Group continues to work on delivery of
ambitious targets to improve our environmental efficiency year on
year. Full details can be found later in this report on page
47.
Our LSEG Foundation donated GBP1.4 million in 2019 to various
global and regional charities around the world. The Group also
continues to encourage employees to donate their skills and time to
support disadvantaged young people in the communities in which we
operate.
Summary
Since becoming Chair in May 2019, I have been impressed by the
calibre and focus of our employees. I'd like to thank them for
their dedication and professionalism during what has been a very
busy year. I would also like to thank my Board colleagues for their
support, challenge and for their commitment. London Stock Exchange
Group is in a position of strength, sitting at the heart of
international financial markets, as we look ahead to the many
opportunities within our industry. I look forward to working with
the Board and the executive team to continue to develop the
business for the future.
Don Robert
Chair
28 February 2020"
The Annual Report contains the following statements regarding
principal risks and uncertainties facing the business, with respect
to principal strategic, financial and operational risks, on pages
60 to 73, and, with respect to financial risk management, on pages
158 to 163:
"The management of risk is fundamental to the successful
execution of our strategy and to the resilience of our operations.
During 2019, the Group successfully adapted its systems, processes
and controls, in preparation for regulatory changes and to address
Brexit contingency plans. The Group continues to support its key
markets and deliver stable and resilient services that meet our
customers' needs.
As LSEG's risk culture, objectives, appetite, governance and
operations are well established, these descriptions naturally do
not significantly change from year to year. We have also included a
category of emerging risks which are new to the Group or which are
difficult to quantify due to their remote or evolving nature. In
most cases, the mitigation for such risks is to establish
appropriate contingency plans and monitor the development of the
risk until it can be quantified and removed or included as a
principal risk.
FURTHER DETAIL
Our strategic risk objectives, current risk focus, a narrative
description of our risk appetite, how LSEG's risk management
framework operates, as well as an overview of the CCPs risk
management and operations, are well established and are not
described here.
Detailed information can be found in our risk management
oversight supplement. Please visit:
www.lseg.com/about-london-stock-exchangegroup/risk-management-oversight.
LSEG Risk Governance
OVERVIEW OF PRINCIPAL RISKS:
Strategic Risks Financial Risks Operational Risks Emerging Risks
Global economy Credit risk Technology Climate-related
Regulatory change Market risk Physical threats risk
Refinitiv Transaction Liquidity risk Model risk Emerging technology
Competition Capital risk Security threats
Transformation - Cyber
Reputation/Brand/IP Change management
Settlement and custodial
risks
Compliance risks
Data governance
Employees and culture
STRATEGIC RISKS
Risks related to our strategy (including the implementation of
strategic initiatives and external threats to the achievement of
our strategy). The category also includes risks associated with
reputation or brand values.
Risk Description Mitigation Risk level
Global economy The footprint of the Group continues Increasing
(Executive Lead: Chief Executive to broaden, further improving
Officer, Executive Committee) the geographical diversification
As a diversified markets infrastructure of the Group's income streams
business, we operate in a broad which mitigates the risks of
range of equity, fixed income a localised economic downturn.
and derivative markets servicing Furthermore, income streams across
clients who increasingly seek the business divisions of the
global products and solutions. Group comprise annuity and fee
If the global economy underperforms, based recurring revenues to balance
lower activity in our markets against more cyclical and market
may lead to lower revenue. driven activity. This diversification
Weaker economic data and low will be significantly enhanced
levels of inflation have dominated (including enjoying an increasing
central bank official rate actions. proportion of recurring revenues)
The Federal Open Market Committee if the Group
(FOMC) concerned about a slowing completes the acquisition of
US economy, decreased the Fed Refinitiv, expected during H2
Funds target rate three times 2020.
during 2019. Meanwhile the European The Group performs regular analysis
Central Bank (ECB) has left rates to monitor the markets space
unchanged at zero and has restarted and the potential impacts of
its quantitative easing programme. market price and volume movements
Ongoing geopolitical tensions on the business. Activities include
continue to add uncertainty in Key Risk Indicator tracking,
the markets and may impact investor stress testing, and hedging.
confidence and activity levels. We continue to actively monitor
In particular, the political the ongoing developments following
uncertainty in the UK following the UK's exit from the EU. Committees
its exit from the EU, tensions have been established to assess
between the US and its major and address areas of impact on
trading partners and other countries our operations and the Group
as well as tensions in Hong Kong has formulated contingency plans
and in China, continue to affect with the objectives of continuity
global markets. of market function and customer
The emergence toward the end service in the event of a divergence
of 2019 of the Novel Coronavirus of regulation if no trade agreement
outbreak in China could have is achieved.
a significant impact on the global The Financial Risk Committee
economy. In a prolonged outbreak closely monitors and analyses
situation, the imposition of multiple market stress scenarios
travel restrictions, border controls and action plans in order to
and quarantine protocols could minimise any impacts stemming
contribute to a major pause in from a potential deterioration
industrial productivity across of the macroeconomic environment.
the Asia The stress scenarios are regularly
Pacific region and could suppress reviewed and updated in response
demand for commodities, impact to changes in macroeconomic conditions.
the supply chain for many industries LSEG monitors the potential impact
globally and the international of macroeconomic and political
retail market which in turn could events on our operating environment
significantly impact the global and business model and the Group
financial markets. is an active participant in international
The UK exit from the EU leaves and domestic regulatory debates.
significant uncertainty concerning
the political and regulatory
environment, the UK's future
relationship with the EU and
other trading
partners, and the overall impact
on the UK and EU economies both
in the short and medium term.
These could have adverse impacts
on the Group's businesses, operations,
financial condition and cash
flows.
-------------------------------------------- -----------
For more information, see Market trends and our response on pages 14-20,
and Note 3 to the accounts, Financial Risk Management on pages 158-163.
Regulatory change and compliance Changes in the regulatory environment Increasing
(Executive Lead: Chief Executive form a key input into our strategic
Officer, Executive Committee) planning, including the political
LSEG is a global business operating impact on our growth strategies,
in multiple regulatory environments both organic and inorganic. We
that reflect the diversity of monitor regulatory developments
products and the jurisdictions continually and engage directly
in which it operates. The Group with regulatory and governmental
is exposed to risks associated authorities at local, regional
with the management of changes and national levels.
to these regulatory requirements. The Group also has a structured
Key regulatory changes include: Brexit programme which includes
Brexit - LSEG companies conducting regulatory specialists engaging
regulated activities in the EU at appropriate levels and on
or with customers in the EU are financial market infrastructure
subject to EU regulation. The considerations. Risks are actively
Group has implemented contingency monitored and managed - see Emerging
plans to maintain continuity Risks.
of service to customers and orderly The Group has executed the following
functioning of its markets, including contingency plans for its business.
incorporation of new entities Following the European Commission
in the EU27 and securing authorisation implementing decision for UK
within the EU27 for certain Group CCPs on 19 December 2018, it
businesses. The Group continues was announced on 18 February
to engage with regulators and 2019 that LCH Ltd has been recognised
parties in the UK, EU and other by ESMA as a third country CCP
jurisdictions to advise on financial under Article 25 of EMIR. On
market infrastructure considerations 23 December 2019 the European
such as the potential impacts Commission extended this equivalence
of divergence. decision for another 12 months
Regulation impacting CCPs - Regulatory in case of a no-deal Brexit.
initiatives with the potential This recognition confirms LCH
to impact cleared derivatives Ltd's ability to continue to
markets and CCPs continue through offer all clearing services for
international standard setters all products and services to
and regulators in the EU and all members and clients if there
US and other major jurisdictions. were to be a no-deal Brexit scenario
Our primary focus remains on post 31 January 2020. LCH reserves
development of a coherent, cross-border its right to take any action
regulatory framework for market it considers appropriate at any
access to global CCPs, including time, should there be a material
appropriate access rules under change in circumstances. In addition,
the EMIR review LCH SA and CC&G are allowed under
published in December 2019. As the Bank of England Temporary
part of this review, EMIR 2.2 Recognition Regime (TRR) to provide
introduces the option to impose clearing services and activities
enhanced supervision or deny in the UK for up to three years
the recognition of third country in a 'no deal' scenario.
CCPs that are of systemic importance LSEG's key objectives to provide
for the EU, which could have continuity of stable financial
implications for the Group's infrastructure services as part
CCPs as well as comparable compliance of our global remit. As the various
frameworks for jurisdictions regulatory initiatives progress,
of equivalent regulatory frameworks. there will be greater certainty
Proper calibration of EU rules with regard to their likely final
on CCP Recovery and Resolution form. The Group continues to
and harmonisation with other focus on remaining well positioned
key jurisdictions is also a key to respond to regulatory developments
priority and could likely have and further opportunities exist
an impact on the Group's CCPs. for the Group to deliver solutions
The European CCP Recovery and to help the market address the
Resolution framework is expected changing regulatory environment
to be finalised in 2020 - it including those linked with the
could impose additional resources departure of the UK from the
for CCPs. EU.
MiFID II/MiFIR - The Regulation
and the Directive came into force
on 3 January 2018, however the
European Commission and ESMA
commenced a targeted review process
in the second half of 2019 with
potential impacts on the Group,
particularly in the areas of
trading transparency (e.g. double
volume cap) and market data (fees
transparency and potential introduction
of consolidated tape). The third
country access rules for trading
venues and market participants
continued to be evaluated in
2019 and could also have a potential
impact to access our trading
venues in the UK and EU, in particular
the scope of the Share Trading
Obligation.
Prudential Capital Rules - In
June 2019, the Basel Committee
on Banking Supervision (BCBS)
published final recommendations
on the Basel III Framework, which
as currently drafted could adversely
impact the cleared derivatives
industry. One area of primary
importance is the treatment of
customer margin under the leverage
ratio. BCBS has announced a targeted
revision of the leverage ratio
to allow initial margin and variation
margin received from a client
to offset the replacement cost
and potential future exposure
for client cleared derivatives.
This is a positive development
for market participants and therefore
the Group. The EU regulatory
framework already recognised
this offsetting via the Capital
Requirements Regulation adopted
in May 2019. In 2019, the review
of the prudential regime for
investment
firms was finalised. The implementation
of the Regulation and the Directive
will take place in 2020 and we
will monitor its impact on proprietary
trading firms and their continued
ability to provide liquidity
on LSEG markets.
Regulatory change and compliance
(continued)
Benchmark Regulation - Regulatory
focus on the role of benchmarks
in the market and regulation
of benchmark providers continues
to increase in several major
jurisdictions around the world.
FTSE International Limited was
authorised by the UK's Financial
Conduct Authority (FCA) in 2018
as a Benchmark Administrator,
under the European Benchmark
Regulation. In March 2019 political
agreement was reached for sustainable
finance legislative proposals
and the ESA Review, which could
impact benchmarks. In October
2019, the Commission consulted
on a potential EU BMR Review.
Financial Transactions Tax (FTT)
- A sub-set of EU member states
are discussing, under enhanced
cooperation, a possible FTT,
which could adversely impact
volumes in financial markets.
During 2019 little progress was
made, but efforts continue to
finalise the measure.
Information and cyber security
standards - In many of our key
regulatory jurisdictions, there
is an increasing legislative
and regulatory focus on cyber
security and data protection
which could impact our operations
and compliance models. LSEG supports
the regulatory efforts on these
issues, as they increase the
standards for customers, vendors
and other third parties with
whom we interact. We continue
to support regional and global
efforts to harmonise these standards
globally to avoid conflicting
or duplicative requirements for
financial market infrastructure
providers operating in several
jurisdictions and our market
participants.
-------------------------------------------- -----------
For more information on regulatory changes, see Market trends and our
response on pages 14-20.
Refinitiv Transaction An Integration Management Office New
(Executive Lead: Chief Executive for the Transaction (the IMO)
Officer, Executive Committee, has been established, headed
Group Board) by David Shalders, Chief Integration
On 1 August 2019, LSEG announced Officer and Group COO. The IMO
that it had agreed definitive is responsible for managing the
terms with a consortium including overall integration planning
certain investment funds affiliated process and will be responsible
with Blackstone, as well as Thomson for ensuring that the synergies
Reuters (together, the Refinitiv expected to result from the Transaction
Shareholders) to acquire Refinitiv are properly monitored, reported
in an all share transaction (the on and delivered. The IMO comprises
Transaction). senior leaders from both LSEG
Completion of the Transaction and Refinitiv and will build
is subject to a number of conditions upon the strong working relationship
(including merger control clearances already established between the
and regulatory approvals) which two organisations. LSEG has also
may not be satisfied or waived, engaged a leading global external
or which may not be capable of consulting firm, which is a specialist
satisfaction without the imposition in planning and delivering large-scale
of undertakings, conditions or and complex business integration
divestments, which could be material. projects for global institutions,
If merger clearances are not to support the integration.
obtained or there is material The integration will be managed
delay in reaching agreement on in two phases, integration planning
remedies to facilitate the Transaction, (prior to Completion) and integration
LSEG will in certain circumstances implementation (following Completion).
pay a termination fee of GBP198.3 Each phase will be overseen by
million to the Refinitiv Shareholders. an
Delay in completing the Transaction integration committee of senior
will prolong the period of uncertainty executives, led by David Schwimmer,
for LSEG, and both delay and with representation from LSEG,
failure to complete may result Refinitiv and the Refinitiv Shareholders,
in the accrual of additional and will report to the Board
and, in the case of a failure on a regular basis.
to complete, wasted costs, without
any of the potential benefits
of the Transaction having been
achieved. Further, LSEG's management
would have spent time in connection
with the Transaction that could
otherwise have been spent more
productively in connection with
other activities of LSEG.
In addition, the success of the
Transaction will be dependent
upon LSEG's ability to integrate
the businesses of LSEG and Refinitiv;
there will be challenges associated
with the integration and the
delivery of synergies and/or
the benefits expected as a result
of the Transaction may not be
achieved as anticipated or at
all.
There are also further risks
in relation to the Transaction,
existing risks to LSEG that will
be impacted by the Transaction
and new risks to LSEG as a result
of the Transaction which are
each described in the shareholder
circular related to the Transaction
dated 6 November 2019.
-------------------------------------------- -----------
Competition Competitive markets are, by their Static
(Executive Lead: Chief Executive very nature, dynamic, and the
Officer, Group Director for each effects of competitor activity
division, Chief Information Officer) can never be fully mitigated.
The competitive environment in Senior management and a broad
which LSEG operates has undergone, range of customer-facing staff
and continues to undergo, transformational in all business areas are actively
changes triggered by market participants, engaged with clients to understand
investors, infrastructure operators their evolving needs and motivations.
and regulators, as well as intensifying We have established a Group Relationship
competition. The Group operates Programme to co-ordinate this
in a highly competitive industry. across Group businesses globally.
Continued consolidation has fuelled The Group undertakes constant
competition including between market monitoring and pricing
groups in different geographical revision to mitigate risks and
areas. Sophisticated FMI providers ensure we are competitive.
are diversifying and expanding. Commercial initiatives are aligned
As a result, LSEG faces competition with our clients and this is
from market operators from the complemented by an ongoing focus
EU, US and Asia that are increasingly on technology operations and
broadening their propositions innovation.
(organically, as well as through
consolidation) to gain access
to new product areas and geographies.
The Group's Information Services
business faces competition from
a variety of sources, notably
from index providers which offer
indices and other benchmarking
tools which compete with those
offered by the Group as well
as from other venues that offer
market data relating to securities
that are traded on the Group's
markets. As the Information Services
offering diversifies and seeks
to meet customer needs for new
data sources, segments and asset
classes, it is facing a broader
range of competitors.
In Post Trade Services, we continue
to see increased clearing activity
across a number of asset classes,
in particular OTC derivatives
products, reflecting the attractiveness
of the Group's current customer
offering and open access philosophy.
The competition within the post
trade environment has also intensified
due to a general industry move
towards inter-operability of
CCPs (where participants on trading
platforms are offered a choice
of CCPs), strengthened by regulatory
developments, including MiFID
II and MiFIR.
Our Capital Markets operations
face continuing risk from competitors'
commercial and technological
offerings. There is strong competition
for primary listings and capital
raises from other global exchanges
and regional centres. Private
equity, venture capital and new
options such as crowd-funding
and crypto-currencies are increasingly
being considered as alternatives
methods of capital formation
for issuers. We maintain a dedicated
international team who promote
the benefits of listing on our
markets to international issuers,
the global advisory community
and other stakeholders. The Group
will need to continue strong
and collaborative dialogue with
customers and other relevant
industry stakeholders to ensure
it remains responsive to changing
requirements and is able to react
in a timely manner.
If competitors are quicker to
access and deploy technology
innovations such as artificial
intelligence (AI), machine learning
and analytics, they may achieve
a valuable advantage which may
impact the attractiveness of
the Group's offering and its
relative profitability. Our integrated
and business-led approach to
technology innovation helps us
to manage this risk and the Group
is well advanced in investigating
and applying numerous new technology
innovations across its business
portfolio.
In Technology Services, there
is intense competition across
all our current activities and
in some of our growth areas,
in addition to strong incumbent
providers. New entrants are increasing
from both within and outside
of our traditional competition
base and some consolidation is
evident. Start-ups, which may
be sponsored by existing LSEG
competitors or customers, are
introducing new technology and
commercial models to our customer
base to which we need to respond
with new products and services
of our own. Continual customer
dialogue, facilitated through
our partnership approach and
investment in product management
and innovation are critical to
understanding and managing the
impact of changing customer requirements
in our technology and other business
lines.
-------------------------------------------- -----------
Transformation The Group's exposure to transformation Increasing
(Executive Lead: Chief Executive risk is mitigated through the
Officer, Chief Operating Officer) application of the Group's Enterprise
The Group is exposed to transformation Risk Management Framework to
risks (risk of loss or failure deploy consistent, appropriate
resulting from change/transformation Risk Management across the Group,
or integration) as it continues both during and post-acquisition.
to grow rapidly both organically The governance of the Group following
and inorganically. Acquisitions a merger or acquisition is aligned
may, in some cases, be complex and strengthened as appropriate.
or necessitate change to operating The Integration Management Office,
models, business models, technology reporting to the Executive Committee,
and people. This is particularly has been established to oversee
likely for the current target the completion of the planned
acquisition of Refinitiv. In acquisition of Refinitiv. Oversight
general, the combined business' during transformation is provided
success will be dependent upon by a Steering Committee comprising
its ability to integrate the Executive Committee members with
businesses of LSEG and Refinitiv; regular reports to the Board
there will be challenges associated Risk Committee and the Board.
with the integration and the The Group has an effective track
delivery of synergies, the benefits record of integrating acquisitions
or business performance expected and delivering tangible synergies,
as a result of the transaction supported by robust governance
may not be achieved as anticipated and programme management structures
or at all, and the costs to achieve through the Group's Change Framework
the synergies and benefits may to mitigate change-related risks
be higher than anticipated. This
derives from internal (organic)
change and change required by
the integration of acquisitions
whereby the Group targets specific
synergy benefits, necessitating
change to operating models, business
models, technology and people.
A failure to align the businesses
of the Group successfully may
lead to an increased cost base
without a commensurate increase
in revenue; a failure to benefit
from future product and market
opportunities; and risks in respect
of capital requirements, regulatory
relationships and management
time.
The additional effort related
to M&A, especially to the potential
acquisition of Refinitiv and
post-transaction alignment activities,
could have an adverse impact
on the Group's day-to-day performance
and/or key strategic initiatives
which could damage the Group's
reputation and financial performance.
The size and complexity of current
acquisition targets as well as
those acquired in the past five
years have increased the Group's
change management and transformation
risks. However, the target acquisitions
aim to increase the Group's opportunities
to compete on a global scale
and diversify its revenue footprint
by industry, geography and customer
base
-------------------------------------------- -----------
Reputation/Brand LSEG has policies and procedures Static
(Executive Lead: Chief Executive in place which are designed to
Officer, Executive Committee) ensure the appropriate use of
A number of the Group's businesses the Group's brands and to maintain
have iconic national brands that the integrity of the Group's
are well- recognised at international reputation.
as well as at national levels. LSEG actively monitors the use
The strong reputation of the of its brands and other intellectual
Group's businesses and their property, including monitoring
valuable brand names are a key for internet brand impersonation
selling point. Any events or and social media sentiment, in
actions that damage the reputation order to prevent, identify and
or brands of the Group, such address any infringements.
as those propagated via social The Group protects its intellectual
media or caused by its misuse, property by relying upon a combination
could adversely affect the Group's of trademark laws, copyright
business, financial condition laws, patent laws, trade secret
and operating results. protection, confidentiality agreements
Failure to protect the Group's and other contractual arrangements
intellectual property rights with its affiliates, customers,
adequately could result in costs suppliers, strategic partners
for the Group, negatively impact and others.
the Group's reputation and affect
the ability of the Group to compete
effectively. Further, defending
or enforcing the Group's intellectual
property rights could result
in the expenditure of significant
financial and managerial resources,
which could adversely affect
the Group's business, financial
condition and operating results.
-------------------------------------------- -----------
FINANCIAL RISKS
The risk of financial failure, reputational loss, loss of
earnings and/or capital as a result of investment activity, lack of
liquidity, funding or capital, and/or the inappropriate recording,
reporting and disclosure of financial results, taxation or
regulatory information.
Risk Description Mitigation Risk level
Credit risk Clearing Static
(Executive Lead: Chief Financial As CCP members continue to work
Officer, Director of Post Trade, towards strengthening their balance
Financial Risk Committee) sheets, the risk to LSEG CCPs
Clearing of a member default reduces,
CCPs in the Group are exposed although continuing geopolitical
to credit risk as a result of uncertainty continues, and the
their clearing activities. A banking sectors of some countries
default by a CCP clearing member remain stressed. The financial
that could not be managed within risks associated with clearing
the resources of the defaulted operations are further mitigated
clearing member could adversely by:
affect that CCP's revenues and --Strict CCP membership rules
its customers' reputation. CCPs including supervisory capital,
authorised in the EU are required financial strength and operational
to make a proportion of their capability
regulatory capital available --The maintenance of prudent
to cover default losses after levels of margin and default
the defaulter's resources have funds to cover exposures to participants.
been exhausted and prior to Members deposit margin computed
allocation of losses to non-defaulters at least daily, to cover the
and so, in extreme circumstances, expected costs which the clearing
a default could lead to a call service would incur in closing
on the Group CCPs' own capital out open positions in a volatile
'skin-in-the-game'. CCPs may market in the event of the member's
also be exposed to credit exposure default. A default fund sized
to providers of infrastructure to cover the default of at least
services such as Central Securities the two members with the largest
Depositaries (CSDs) and commercial exposures in each service using
banks providing investment and a suite of extreme but plausible
operational services. stress tests mutualises losses
In addition, certain CCPs within in excess of margin amongst the
the Group have interoperability clearing members
margin arrangements with other --Regular 'Fire Drills' are carried
CCPs requiring collateral to out to test the operational soundness
be exchanged in proportion to of the CCPs' default management
the value of the underlying processes
transactions. --Infrastructure providers are
The relevant clearing provider regularly assessed in line with
entities within the Group are policy.
therefore exposed to the risk Non-Clearing
of a default of other CCPs under Policies are in place to ensure
such arrangements. that investment counterparties
Non-Clearing are of good credit quality, and
CCPs and other parts of LSEG at least 95% of CCP commercial
Group are also exposed to credit bank deposits are secured. CCP
risk as a result of placing and non-CCP counterparty concentration
money with investment counterparties risk is consolidated and monitored
on both a secured and unsecured daily at the Group level and
basis. Losses may occur due reported to the Executive Committee
to the default of either the and to the Board Risk Committee,
investment counterparty or of including limits and status rating.
the issuer of bonds bought outright Group companies make a judgement
or received as collateral. The on the credit quality of their
Group's credit risk also relates customers based upon the customer's
to its customers and counterparties financial position, the recurring
being unable to meet their obligations nature of billing and collection
to the Group either in part arrangements and, historically,
or in full. a low incidence of default.
Regulators are increasingly
looking at the impacts of climate
change on credit risks, although
methodologies are in their infancy.
We do not believe this will
give rise to significant increased
risks in the short term, and
will monitor market development,
in particular the proposed climate
stress tests as part of the
UK Prudential Regulation Authority
Biennial Exploratory Scenario
(BES) in 2021.
-------------------------------------------- -----------
For more information on this risk see the Post Trade Services section
of the Segmental Review on pages 30-34, and Note 3 to the accounts,
Financial Risk Management on pages 158-163.
Market risk Clearing Static
(Chief Financial Officer, Director The margins and default funds
of Post Trade) referred to previously are sized
Clearing to protect against latent market
The Group's CCPs assume the risk. The adequacy of these resources
counterparty risk for all transactions is evaluated daily by subjecting
that are cleared through their member and customer positions
markets. In the event of default to 'extreme but plausible' stress
of their clearing members, therefore, scenarios encapsulating not only
credit risk will manifest itself historical crises, but theoretical
as market risk. As this market forward-looking scenarios
risk is only present in the and decorrelation events. All
event of default this is referred our CCPs are compliant with the
to as 'latent market risk'. appropriate regulatory requirements
The latent market risk includes regarding margin calculations,
interest rate risk, foreign capital and default rules. Latent
exchange risk, equity risk and market risk is
commodity price risk as well monitored and managed on a day-to-day
as country risk, issuer risk basis by the risk teams within
and concentration risk. This the clearing services. Committees
risk is greater if market conditions overseeing market risks meet
are unfavourable at the time on a regular basis.
of the default. Non-Clearing
Non-Clearing Foreign exchange (FX) risk is
The Group is exposed to foreign monitored closely and translation
exchange risk as a result of risk is managed by matching the
its broadening geographical currency of the Group's debt
footprint. There are, however, to its earnings to protect key
also benefits of global diversification ratios and partially hedge currency
including reduced exposure to net assets. FX derivatives including
local events such as the UK cross-currency swaps are used
Brexit vote and the under a control framework governed
geopolitical tensions. by LSEG Board approved policy.
The Group is exposed to interest The split between floating and
rate risk through its borrowing fixed debt is managed to support
activities (including to support the Group's target of maintaining
M&A objectives) and treasury an interest coverage ratio that
investments. Further changes underpins a good investment grade
in interest rates in 2020 may credit rating.
increase the Group's exposure Authorised derivatives can be
to these risks. used to:
Similar to credit risks, regulators -- transform fixed rate bond
are also considering the impacts debt, to supplement a mix of
of climate change on market short dated commercial paper
(systemic) risks, and whilst and floating rate loan borrowings,
we do not foresee any short-term to achieve the Group's policy
material risks, we will also objective, and / or
keep this under review. --hedge prospective FX and interest
rates ahead of the completion
of a planned M&A transaction
to protect the financial position
of the Group.
-------------------------------------------- -----------
For more information on this risk, see Note 3 to the accounts, Financial
Risk Management on pages 158-163.
Liquidity risk Clearing Static
(Chief Financial Officer, Director The Group's CCPs have put in
of Post Trade, Financial Risk place regulatory compliant liquidity
Committee) plans for day-to-day liquidity
Clearing management, including contingencies
There are two distinct types for stressed conditions. The
of risk to which the Group's Group's CCPs have multiple layers
CCPs are exposed to that are of defence against liquidity
commonly referred to as liquidity shortfalls including intraday
risk - market liquidity risk margin calls, minimum cash balances,
and funding liquidity risk. access to contingent liquidity
The former is the risk that arrangements, and, for certain
it may be difficult or expensive CCPs, access to central bank
to liquidate a large or concentrated liquidity.
position and is addressed under Under the Enterprise Risk Management
market risk. The latter is the Framework, CCP investments must
risk that the CCP may not have be made in compliance with the
enough cash to pay variation Group CCP Financial Risk Policy
margin to non-defaulters or (as well as the policies of the
to physically settle securities CCPs themselves). These policies
delivered by a non-defaulter stipulate a number of Risk Management
that cannot be on-sold to a standards including investment
defaulter and this is the subject limits (secured and unsecured)
of this section. and liquidity coverage ratios.
The Group's CCPs collect clearing Committees overseeing CCP investment
members' margin and/or default risk meet regularly.
funds contributions in cash Each CCP monitors its liquidity
and/or in highly liquid securities. needs daily under stressed and
To maintain sufficient ongoing unstressed assumptions and reports
liquidity and immediate access to the Group Financial Risk Committee
to funds, the Group's CCPs deposit each month.
the cash received in highly Non-Clearing
liquid and secure investments, Requirements for liquidity including
such as sovereign bonds and headroom requirements are set
reverse repos, as mandated under out in the Group's Board approved
EMIR; securities deposited by Treasury Policy. The Group maintains
clearing members are therefore appropriately sized liquidity
held in dedicated accounts with facilities for business as usual
CSDs and/or International Central and, from time to time, large
Securities Depositaries (ICSDs). scale acquisitions and monitors
The Group's CCPs also hold a its requirements on an ongoing
small proportion of their investments basis.
in unsecured bank and money Stressed facility headroom is
market deposits subject to the assessed regularly and on a one-off
limitations imposed by EMIR. basis for working capital reviews
The successful operation of associated with large scale acquisitions
these investment activities using plausible downside business
is contingent on general market projections.
conditions and there is no guarantee Group Treasury risk is monitored
that such daily and is managed within the
investments may be exempt from constraints of a Board approved
market losses. policy by the Group Treasury
Non-Clearing team and is overseen by the Treasury
Liquidity risk in a non-clearing Committee (a sub-
context is the risk that the Committee of the Financial Risk
firm may be unable to make payments Committee, both chaired by the
as they fall due. CFO). An update on Group Treasury
risks and actions is provided
monthly to the Financial Risk
Committee and to each meeting
of the Board Risk Committee.
-------------------------------------------- -----------
Capital risk The Group's Capital Management Static
(Chief Financial Officer, Financial Policy provides a framework to
Risk Committee) ensure the Group maintains suitable
Principal risks to managing capital levels (both at Group
the Group's capital are: and solo entity levels), and
--In respect of regulated entities, effectively manages the risks
capital adequacy compliance thereof. The Group's Treasury
risk (the risk that regulated Policy recognises the need to
entities do not maintain and observe regulatory requirements
report sufficient qualifying in the management of the Group's
capital to meet regulatory requirements) resources.
and capital reporting compliance The Risk Appetite approved by
risk (the risk that regulated the Board includes components
entities fail to comply with related to the Group's leverage
capital reporting and regulatory ratios and capital risks; Key
obligations). If a regulated Risk Indicators are monitored
entity in the Group fails to regularly. The Group maintains
ensure that sufficient capital an ongoing review of the capital
resources are maintained to positions of its regulated entities
meet regulatory requirements, to ensure that they operate within
this could lead to loss of regulatory capital limits which are overseen
approvals and/or financial sanctions by the Financial Risk Committee,
--In respect of regulated and the Executive Committee and the
unregulated entities, commercial Board. The Group can manage its
capital adequacy and quality capital structure by varying
risk (the risk that Group and returns to shareholders, issuing
solo entities do not maintain new shares or increasing or reducing
both sufficient quantity and borrowings. The Board reviews
quality of capital to meet commercial dividend policy and funding capacity
requirements) and investment on a regular basis and the Group
return risk (the risk that capital maintains comfortable levels
is held in subsidiaries or invested of debt facility headroom.
in projects that generate a The Group regularly assesses
return that is below the Group's debt and equity markets to maintain
cost of capital) access to new capital at reasonable
--Availability of debt or equity cost. The Group is mindful of
capital (whether specific to potential impacts on its key
the Group or driven by general metrics when considering changes
financial market conditions) to its capital structure.
-------------------------------------------- -----------
For more information on this risk, see Note 3 to the accounts, Financial
Risk Management on pages 158-163.
OPERATIONAL RISKS
The risk of loss, or other adverse consequences to the business,
resulting from inadequate or failed internal processes, people and
systems, or from external events.
Risk Description Mitigation Risk level
Technology The performance and availability Static
(Responsibility: Chief Operating of the Group's systems are constantly
Officer, Chief Technology Officer) reviewed and monitored to prevent
LSEG is highly dependent on problems arising and where possible,
the development and operation ensure a prompt response to any
of its sophisticated technology potential service-impacting incident.
and advanced information systems The Group continues actively
and those of its third-party to identify, manage and mitigate
service providers. Technology risks associated with the consolidation
failures may impact our clients of technology development and
and the orderly running of our operations. Regular rigorous
markets, potentially leading business impact and operational
to system outages. risk scenario analysis is performed
The Group is reliant on outsourced in conjunction with the Group
service providers for key technology Risk, Group Business Continuity
services and data provision and Crisis Management functions
and actively manages relationships to identify, assess and remedy
with strategic technology suppliers potential system and governance
to avoid a breakdown in service vulnerabilities. In addition,
provision. The Group also actively all technology solutions are
monitors new technological developments comprehensively tested by both
and opportunities for innovation. LSEG Technology and third-party
quality assurance providers as
appropriate; functional, nonfunctional,
user-acceptance and other testing
is performed across a number
of technical environments to
ensure products are ready for
deployment.
The Group's technology teams
mitigate the risk of resource
over-stretch by ensuring prioritisation
of key development and operations
activities, and resource utilisation
and allocation are kept under
constant review. The LSEG Technology
systems are designed to be software
and hardware fault tolerant and
alternative systems are available
in the unlikely event of multiple
failures from which the system
is unrecoverable. The Group has
worked to enhance its service
management capability and tooling
to enhance technology service
delivery.
The Group actively manages relationships
with key strategic technology
suppliers to avoid any breakdown
in service provision which could
adversely affect the Group's
businesses. Where
possible the Group has identified
alternative suppliers that could
be engaged in the event of a
third party failing to deliver
on its contractual commitments.
The Group actively monitors new
technological developments and
opportunities such as blockchain
and AI.
------------------------------------------------ -----------
For more information, see the Technology Services section of the Segmental
Review on page 39.
Physical threats Security threats are treated Static
(Executive Lead: Chief Operating with the utmost seriousness.
Officer) The Group has robust physical
The Group is reliant upon secure security arrangements.
premises to protect its employees The Group is supported by relevant
and physical assets as well governmental organisations in
as deploying appropriate safeguards our key areas of operation. Security
to ensure uninterrupted operation teams respond to intelligence
of its IT systems and infrastructure. received and liaise closely with
Terrorist attacks and similar police and global government
activities directed against agencies. Across major hubs covering
our offices, operations, computer the UK, Europe, the Americas
systems or networks could disrupt and Asia, the Group maintains
our markets, harm staff, tenants close monitoring of geopolitical
and visitors, and severely disrupt threats and horizon scanning
our business operations. Civil through a third-party security
or political unrest could impact monitoring service. Where events
companies within the Group. are detected, response
Long-term unavailability of support services are mobilised
key premises to support as required. The Group
could lead to the loss of customer has well established and regularly
confidence and reputational tested business continuity and
damages. crisis management procedures.
Climate change may cause an The Group assesses its
increase in the severity and dependencies on critical suppliers
frequency of extreme weather and ensures robust contingency
events across the locations measures are in place.
where LSEG operates. This could
disrupt business operations,
through damage to offices and
infrastructure, and cause harm
to staff.
------------------------------------------------ -----------
Model Risk LSEG businesses have in place Static
(Executive Lead: Model Risk industry standard model risk
Committee) control and governance pillars,
The Group defines model risk including a Model Risk Policy,
as the potential loss an institution model inventory tools, documentation
may incur, as a consequence templates and standards.
of decisions that could be principally Robust model validation is in
based on the output of models, place to ensure our models are
due to errors in the development, fit for purpose and appropriately
implementation or use of such developed and implemented. The
models. Model Risk Management team provides
The key model risks are in CCP model risk status reports on
margining, Yield Book mortgage a quarterly basis to the Model
valuation, Environmental, Social Risk Committee, which oversees
and Governance (ESG) scoring model risk across the Group.
and the firms' capital models.
Model risk can be both reputational
and financial.
------------------------------------------------ -----------
Security threats - Cyber The Group continues to invest Increasing
(Executive Lead: Chief Information in and enhance its information
Officer, Chief Information Security security control environment,
Officer) cyber defences and operational
Public and private organisations processes, as it delivers its
continue to be targeted by increasingly Board approved Cyber Security
sophisticated cyber threats. Strategy.
Threats such as ransomware, Extensive organisational, technological
theft of customer data and distributed and culture measures aligned
denial of service attacks were to the National Institute of
increasingly significant to Standards and Technology (NIST)
the financial industry as a control framework are in place
whole in 2019. to prevent, detect, respond to
The Group's data, IT systems and recover from cyber security
and networks, and those of its threats.
third-party service providers, Regular testing of security controls
may be vulnerable to threats, and incident response processes
such as cyber-attacks, data is undertaken, both internally
breach or other leakage of sensitive across our three lines of defence
data, which could adversely model and externally by independent
affect the Group's business. third parties to provide assurance
Additionally, new emerging technologies over the effectiveness of cyber
such as cloud computing and security controls and recovery
AI could impact our cyber risk processes.
profile. The Group monitors intelligence
A major information security and liaises closely with global
breach that results in data Government agencies as well as
and intellectual property loss, industry forums and regulators
system unavailability or loss to help improve our ability to
of integrity of data or systems, respond to the evolving threats
could have a significant negative faced by us and our industry.
impact on our reputation, financial
results and the confidence of
our clients and could lead to
fines and regulatory censure.
------------------------------------------------ -----------
Change management The risks associated with change Static
(Executive Lead: Chief Operating are mitigated by effective implementation
Officer, Chief Information Officer) of the Group's Change framework.
The considerable change agenda This includes Board oversight
exposes the Group to the risk across the Group's change portfolio
that change is either misaligned and project pipeline, to ensure
with the Group's strategic objectives these align to the Group and
or not managed effectively within Divisional strategies and support
time, cost and quality criteria. our financial plans. Appropriate
The volume of change is driven governance, risk and executive
by both internal and external oversight is exercised over individual
factors. Internal factors include programmes and projects based
the diversification strategy on the scale, complexity and
of the Group and its drive for impact of the change. The purpose
technology innovation, consolidation of this oversight is to confirm
and operational resilience. changes do not breach the Group's
External factors include the risk appetite, are compliant
changing regulatory landscape with the approved project management
and requirements which necessitate policy and to oversee the management
changes to our of budget, resource,
systems and processes. Design escalations, risks, issues and
defects, errors, failures or dependencies.
delays associated with new, For software specific development,
modified or upgraded technology, software design methodologies,
products or services introduced testing regimes and test environments
by LSEG and Refinitiv, and therefore are continuously being enhanced
the combined business, could to minimise implementation risk.
negatively impact its business.
------------------------------------------------ -----------
For more information, see the Chair's statement on pages 4-5, and the
Chief Executive's statement on pages 6-9.
Settlement and custodial risks Operational risk related to settlement Static
(Executive Lead: Director of and custodial operations is minimised
Post Trade) via highly automated processes
The Group's CCPs are exposed reducing administrative activities
to operational risks associated while formalising procedures
with clearing transactions and for all services.
the management of collateral, The operations of the settlement
particularly where there are service are outsourced to the
manual processes and controls. European Central Bank (TARGET2-Securities).
While the Group's CCPs have The CSD mitigates technology
in place procedures and controls risk by providing for redundancy
to prevent failures of these of systems, daily backup of data,
processes, and to mitigate the fully updated remote recovery
impact of any such failures, sites and SLAs with outsourcers.
any operational error could Our CSD and CCPs Business Continuity
have a material adverse effect Plan covers all the critical
on the Group's reputation, business, operational processes and related
financial condition and operating activities.
results.
The Group provides routing,
netting and settlement and custody
services through its CSD to
ensure that securities are settled
in a timely and secure manner.
There are operational risks
associated with such services,
particularly where processes
are not fully automated.
------------------------------------------------ -----------
Compliance The Group continues to maintain Static
(Executive Lead: Chief Executive systems and controls to mitigate
Officer, Executive Committee) compliance risk. Compliance policies
There is a risk that one or and procedures are regularly
more of the Group's entities reviewed to ensure that Group
may fail to comply with the entities and staff are compliant
laws and regulatory requirements with applicable laws and regulations
to which it is, or becomes, and uphold our corporate standards.
subject. In this event, the All staff across the Group are
entity in question may be subject subject to mandatory compliance
to censures, fines and other training
regulatory or legal proceedings
------------------------------------------------ -----------
Data Governance Data standards are defined through Static
(Executive Lead: Chief Information the Chief Data Office (CDO) which
Officer, Chief Data Officer) identifies the various data held
Through its various entities, across the Group, access rights/entitlements,
LSEG collects, owns, licenses, any legal or regulatory restrictions
calculates, transforms, and which may apply and how such
distributes data in many forms data is used and the intended
(e.g. structured, unstructured, future uses. The framework sets
electronic, and print formats, out the principles to ensure
audio-visual data, production, Group Data is of the highest
testing, archive data, derived quality and meets the highest
data, etc.). LSEG is accountable standards, while highlighting
to its customers, counterparties, key characteristics of data which
owners, vendors, regulators, are important for measurement,
and the public, for the careful oversight, and governance.
and proper protection and use
of its data. As such the
Group has defined a consistent,
standardised approach to procurement,
collection, ingestion, transformation,
quality, storage, retention,
calculations and disposition
of its data.
Failure to govern the Group's
data effectively, could result
in this data being unfit for
purpose with respect to availability,
completeness, accuracy, validity,
usage, entitlement and timeliness.
This could result in the Group
or its customers and stakeholders
placing reliance on inadequate
data when making strategic or
operational decisions which
could adversely affect the Group's
business, financial condition
and operating results
------------------------------------------------ -----------
Employees and culture We focus on a number of strategic Static
(Executive Lead: Group HR Director) initiatives to ensure we attract
The calibre and performance and retain the right calibre
of our leaders and colleagues of talent for our business and
is critical to the success of continue to facilitate a culture
the Group. of high performance.
The Group's ability to attract We have a rigorous in-house recruitment
and retain key personnel is and selection process, to ensure
dependent on several factors. that we are bringing the best
This includes organisational possible talent into the organisation,
culture and reputation, prevailing in terms of their skills, technical
market conditions, compensation capabilities, cultural fit and
packages offered by competing potential. We undertake a comprehensive
companies, and any regulatory annual review of critical roles,
impact thereon. These factors and ensure we have succession
also encompass the Group's ability plans in place to
to continue to have appropriate minimise the impact of losing
variable remuneration and retention critical personnel. We monitor
arrangements in place, which the attrition in each division
help drive strong business performance and country, in addition to any
and alignment to long-term shareholder critical colleague turnover,
value and returns, impact the so that appropriate mitigation
size of the local labour force can be taken where needed.
with relevant experience, and We aim to remove barriers to
the number of businesses competing our colleagues' overall sense
for such talent. Whilst the of engagement, proactively measuring
Group focuses very carefully how satisfied they are with their
on the attraction and retention working experience at LSEG, and
of talent, if unsuccessful, the extent to which they would
it may adversely affect the recommend it as a place to work,
Group's ability to conduct its via our annual engagement 'Have
business through an inability Your Say' survey.
to execute business operations We recognise that the overall
and strategies effectively. wellbeing of our colleagues is
Cultivating a diverse talent vital for our continued performance
pool and an inclusive culture and have introduced a proactive
is of great importance to the approach to wellbeing in the
Group to reflect the societies UK, which we are in the process
we serve, both for the innovation of rolling out globally. This
benefits that diversity of thought looks to improve wellbeing across
help to promote, but also in five dimensions: physical, mental,
light of increased industry-wide financial, social purpose, and
expectations for ESG transparency. work-life balance. We also operate
If the Group were unable to a Speak Up campaign, designed
attract, support and retain to provide our colleagues with
diverse talent, it may have the confidence to speak up and
an adverse impact on the Group's raise concerns when they witness
ability to or suspect inappropriate behaviour,
deliver its strategic objectives misconduct or wrongdoing that
and its reputation. conflicts with our values.
Whilst our preparations are Career development remains a
comprehensive in relation to key enabler for success, and
Brexit, a common risk across we have a carefully managed learning
the Group is the uncertainty and development programme which
surrounding the status of the enables us to focus on providing
EU citizens in the UK and UK colleagues with a range of courses,
citizens in the EU. materials and tools to support
Pandemics represent a potential their development.
threat to employee health and We strive to inspire diverse
wellbeing. talent to pursue careers at LSEG
Please see also Supporting sustainable and encourage industry-wide change
growth for details regarding to increase equal opportunity
employee matters and Corporate for all, across every part of
Governance for information about LSEG. We support diversity and
Workforce Engagement have established targets for
female representation at senior
management level and overall
as well as having signed the
Women in Finance Charter.
Performance management plays
a key role in mitigating retention
and performance risk at LSEG,
and the Group has in place a
robust approach to assess performance
against financial objectives,
strategic deliverables, and the
extent to which colleagues role
model the Group's values and
behaviours.
We also regularly benchmark our
reward, benefits and incentive
systems to ensure they are competitive.
LSEG continuously engages with
the EU and the UK regulators
to minimise the impact of Brexit
on our colleagues.
The Group adopts preventative
critical monitoring and contingency
arrangements to manage potential
threats such as pandemics.
------------------------------------------------ -----------
For more information, see Supporting sustainable growth on pages 40-50
and Remuneration Report on pages 98-128.
EMERGING RISKS
Risks which are new to the Group or which are difficult to
quantify due to their remote or evolving nature.
Risk Description Mitigation Risk level
Climate-related Risk We support consistent global Increasing
(Executive Lead: Group Corporate standards and encourage continued
Sustainability Committee) alignment between the EU and
International organisations, UK on sustainable finance. We
governments and regulators are have been members of the EU High
focused on integrating climate Level Expert Group and the Technical
risks and opportunities into Expert Group, and the FCA/PRA
investment decision making, Climate Financial Risk Forum.
to enable transition to a low To further align with the TCFD
carbon economy. This is an area recommendations, the Group has
of emerging and wide-ranging developed climate-related risks
policy making, impacting financial scenario over both the medium
market participants and corporates. and longer term, and how these
The increased focus from regulators, may impact credit, operational,
investors and other stakeholders, market and liquidity risks.
has generated a requirement In line with increased disclosure
for enhanced climate-related requirements for corporations
risk oversight. Climate-related and financial markets participants,
risks include Transition risks, LSEG has taken proactive steps
Litigation risks and Physical to develop its methodology to
risks (further information is define and model how climate
provided under Physical Threats change impacts its businesses.
risk). The aim is to reinforce the Group's
With respect to this, it is resilience to acute physical
acknowledged that although climate-related risks today and chronic physical
risks have been categorised risks in the future, and to address
as an emerging risk, they are transition risks, to be aligned
inherently linked to other strategic, with the Task Force on Climate-related
financial and operational risks, Financial Disclosures (TCFD)
as well as commercial opportunities. recommendations, be prepared
Please see also Supporting sustainable for potential future mandatory
growth for details regarding reporting requirements and to
Corporate Sustainability. protect the Group's reputation
- See the TCFD disclosures section
under Supporting Sustainable
Growth for more information.
To further align with the TCFD
recommendations, the Group has
developed climate-related risk
scenarios over both the medium
and longer term, to help identify
how these scenarios may impact
credit, operational, market and
liquidity risks using the most
material physical and transition
risks for the business.
From the review of published
climate scenarios, two scenarios
from the International Energy
Agency World Energy Outlook have
been selected for transition
risk, and for physical risk,
two scenarios from the Intergovernmental
Panel on Climate Change are considered
most appropriate. These scenarios
cover a <2 degree
and 3-4 degree scenario, over
both the medium (2025-2035) and
longer (2050) term.
Looking ahead, we plan to continue
to integrate climate risk into
our existing risk management
frameworks.
------------------------------------------- -----------
More information on our environmental management can be found in the
supporting sustainable growth section of this report on pages 47-49.
Emerging Technology The Group continues to maintain Increasing
(Executive Lead: Chief Information systems and controls to mitigate
Officer) the risk resulting from emerging
The increased integrated artificial technology. Risk arising from
intelligence (AI) in digital the Group's use of AI is identified,
transformation strategies brings assessed, managed and reported
with it associated risks such through the current ERMF. We
as inherent bias in the historical align with industry best practices
data and behaviour patterns and guidance when considering
which feed AI algorithms. This the trustworthiness and bias
may give rise to automated decisions in AI systems and AI aided decision
which are not aligned with current making. The Group ensures the
societal expectations or organisational use of AI is fair, explainable
values. AI use by cyber hackers and transparent, secure and safe.
can also render cyber security The continuous development of
defence and detective mechanisms AI has the potential to impact
ineffective. industry behaviour and our business,
Regulators are considering the we will continue to monitor and
application of existing or new manage this risk closely.
frameworks to manage the development
of innovative financial services
technologies, which are important
for maintaining the resilience
and stability in the market
and allowing innovation with
emerging technology.
------------------------------------------- -----------
Financial Risk Management
The Group seeks to protect its financial performance and the
value of its business from exposure to capital, credit,
concentration, country, liquidity, settlement, custodial and market
(including foreign exchange, cash flow and fair value interest
rate) risks.
The Group's financial risk management approach is not
speculative and adopts a '3 lines of defence' model. It is
performed both at a Group level, where the treasury function
identifies, evaluates and hedges financial risks from a Group
perspective and locally, where operating units manage their
regulatory and operational risks. This includes clearing operations
at the Group's CCPs (CC&G and LCH Group) that adhere to local
regulation and operate under approved risk and investment
policies.
The Group Chief Risk Officer's team provides assurance that the
governance and operational controls are effective to manage risks
within the Board-approved risk appetite, supporting a robust Group
risk management framework. The Financial Risk Committee, a
sub-committee of the Group Executive Committee and chaired by the
Chief Financial Officer, meets at least quarterly to oversee the
consolidated financial risks of the Group. In addition, the
Treasury Committee, a sub-committee of the Financial Risk Committee
(which is also chaired by the Chief Financial Officer), meets
regularly to monitor the management of, and controls around foreign
exchange, interest rate, credit and concentration risks and the
investment of excess liquidity in addition to its oversight of the
Group's funding arrangements and credit ratings. Both committees
provide the Group's senior management with assurance that the
treasury and risk operations are performed in accordance with Group
Board approved policies and procedures. Regular updates, on a range
of key criteria as well as new developments, are provided through
the Enterprise-Wide Risk
Management Framework to the Group Risk Committee. See 'Risk
Management Oversight Supplement' for further detail on the Group's
risk framework on our website at:
www.lseg.com/about-london-stockexchange-group/risk-management-oversight.
The UK's exit from the EU leaves significant uncertainty
concerning the political and regulatory environment, the UK's
future relationship with the EU, and the overall impact on the UK
and EU economies both in the short and medium term. The UK
companies within the Group, as members of the EU or European
Economic Area (EEA), rely on a number of rights that are available
to them to conduct business with other EU or EEA members. This
includes, without limitation, the right for UK CCPs to offer
clearing services to EU regulated firms under EMIR, and the right
for UK trading venues to offer services to members in the EU or
EEA. The Group companies have analysed the potential impacts and
considered contingency plans that they may choose to execute should
these rights not be replaced by rights that persist outside EU
membership. The European Commission published in the Official
Journal on 23 December 2019 an extension of temporary equivalence
for UK CCPs for another twelve months, confirming LCH Ltd's ability
to continue to offer all clearing services for all products and
services to all members and clients after 31 January 2020 even
under a no-deal Brexit scenario.
Capital risk
Risk description Risk management approach
The Group is profitable and strongly The Group focuses upon its overall
cash generative cost of capital as it seeks, within
and its capital base comprises equity the scope of its risk appetite, to
and debt capital. provide
However, the Group recognises the superior returns to its shareholders,
risk that its entities fulfil its obligations to the relevant
may not maintain sufficient capital regulatory authorities and other stakeholders
to meet their obligations or they and ensure that it is not overly dependent
may make investments that fail to upon short and medium term debt that
generate a positive or value enhancing might not be
return. available at renewal. Maintaining
The Group comprises regulated and the flexibility to invest for growth
unregulated entities. It considers is a key capital management consideration.
that: The Group can manage its capital structure
--increases in the capital requirements and react to changes in economic conditions
of its regulated by varying returns to shareholders,
companies, or issuing new shares or increasing or
--negative yields on its investments reducing borrowings. The Board reviews
of cash, or dividend policy
--a scarcity of debt or equity (driven and funding capacity on a regular
by its own basis and the Group maintains comfortable
performance or financial market conditions) levels of debt facility headroom.
either separately or in combination A summary of the Group's capital structure
are the principal is presented below: 2019 2018
risks to managing its capital. Book value GBPm GBPm
of capital
------ ------
Total shareholders'
funds 3,455 3,343
------ ------
Group consolidated
debt 2,085 2,203
------ ------
Whilst the Company is unregulated,
the regulated entities within the
Group monitor compliance with the
capital requirements set by their
respective competent authorities and
the terms of reference of the Financial
Risk Committee includes oversight
of the Group's Capital Management
Policy. The Capital Management Policy
seeks to ensure that capital is allocated
optimally in order to maintain a prudent
balance sheet and meet regulatory
requirements, drive growth and offer
suitable returns to shareholders.
Regulated entities within the Group
have to date predominantly issued
equity and held cash to satisfy their
local regulatory capital requirements.
We believe that capital held by Group
companies is sufficient to comfortably
support current regulatory frameworks.
Whilst the level of amounts set aside
for these purposes remains subject
to ongoing review with
regulators, particularly in Europe,
total capital amounts are broadly
in line year on year reflecting a
relatively settled regulatory backdrop
for the Group in 2019. The aggregate
of the Group's regulatory and operational
capital is shown below:
2019 2018
Regulatory GBPm GBPm
and Operational
Capital
------ ------
Total regulatory
and operational
capital 1,231 1,203
------ ------
Amount included
in cash and
cash equivalents 1,125 1,120
------ ------
To maintain the financial strength
to access new capital at reasonable
cost and sustain an investment grade
credit rating, the Group monitors
its net leverage ratio which is operating
net debt (i.e. net debt after excluding
cash and cash equivalents set aside
for regulatory and operational purposes)
to proforma adjusted EBITDA (Group
consolidated earnings before net finance
charges, taxation, impairment, depreciation
and amortisation, foreign exchange
gains or losses and non--underlying
items, prorated for acquisitions or
disposals undertaken in the period)
against a target range of 1-2 times.
The Group is also mindful of potential
impacts on the key metrics employed
by the credit rating agencies in considering
increases to its borrowings. The Group
seeks to maintain a strong investment
grade credit rating over time and
will therefore employ a credible plan
to return to its target range in the
event leverage rises temporarily due
to a debt funded major investment.
As at 31 December 2019, net leverage
was 1.4 times (2018: 1.8 times) and
remains well within the Group's target
range. The Group is comfortably in
compliance with its bank facility
ratio covenants (net leverage and
interest cover) and these measures
do not inhibit the Group's operations
or its financing plans.
---------------------------------------------------------
Credit and concentration risk
Risk description Risk management approach
The Group's credit risk relates to Group
its customers and counterparties being Credit risk is governed through policies
unable to meet their obligations to developed at a Group level. Limits
the Group either in part or in full, and thresholds for credit and concentration
including: risk are kept under review.
--customer receivables, Group companies make a judgement on
--repayment of invested cash and cash the credit quality of their customers
equivalents, and based upon the customer's financial
--settlement of derivative financial position, the recurring nature of
instruments. billing and collection arrangements
In their roles as CCP clearers to and, historically, a low incidence
financial market participants, the of default. The Group is exposed to
Group's CCPs guarantee final settlement a large number of customers and so
of transactions acting as buyer towards concentration risk on its receivables
each seller and as seller towards is deemed low by management. The Group's
each buyer. They manage substantial credit risk is equal to the total
credit risks as part of their operations of its financial assets as shown in
including unmatched risk positions note 19. No estimated credit losses
that might arise from the default have been recognised on other financial
of a party to a cleared transaction. instruments and there have been no
For more information see 'Principal significant increases in credit risk
Risks and Uncertainties', pages 60 for these assets.
to 73. Non --CCP entities
Notwithstanding regulations that require Credit risk associated with cash and
CCPs to invest predominantly in secured cash equivalents is managed by limiting
instruments or structures (such as exposure to counterparties with credit
government bonds and reverse repos), rating levels below policy minimum
CC&G and the LCH Group CCPs are able thresholds, potentially overlaid by
to maintain up to 5% of their total a default probability assessment.
deposits at commercial banks on an Except where specific approval is
unsecured basis. Through this potential arranged to increase this limit for
for its CCPs to invest on an unsecured certain counterparties, investment
basis (as well as by certain other limits of between GBP25 million and
regulated and unregulated operations GBP100 million apply for periods ranging
observing agreed investment policy between a week and 12 months, depending
limits), the Group may continue to on counterparty credit rating and
face some risk of direct loss from default probability risk. Derivative
a deterioration or failure of one transactions and other treasury receivable
or more of its unsecured investment structures are undertaken or agreed
counterparties. with well--capitalised counterparties
Concentration risk may arise through and are authorised by policy to limit
Group entities having large individual the credit risk underlying these transactions.
or connected exposures to groups of CCPs
counterparties whose likelihood of To address market participant and
default is driven by common underlying latent market risk, the Group's CCPs
factors. This is a particular focus have established financial safeguards
of the investment approach at the against single or multiple defaults.
Group's CCPs. Clearing membership selection is based
upon supervisory capital, technical
and organisational criteria. Each
member must pay margins, computed
and collected at least daily, to cover
the exposures and theoretical costs
which the CCP might incur in order
to close out open positions in the
event of the member's default. Margins
are calculated using established and
internationally acknowledged risk
models and are debited from participants'
accounts through central bank accounts
and via commercial bank payment systems.
Minimum levels of cash collateral
are required. Non--cash collateral
is revalued daily.
Clearing members also contribute to
default funds managed by the CCPs
to guarantee the integrity of the
markets in the event of multiple defaults
in extreme market circumstances. Amounts
are determined on the basis of the
results of periodic stress testing
examined by the risk committees of
the respective CCPs. Furthermore,
each of the Group's CCPs reinforces
its capital position to meet the most
stringent relevant regulatory requirements
applicable to it, including holding
a minimum amount of dedicated own
resources to further underpin the
protective credit risk framework in
the event of a significant market
stress event or participant failure.
An analysis of the aggregate clearing
member contributions of margin and
default funds across the CCPs is shown
below:
Total collateral 2019 2018
held
GBPbn GBPbn
--------------- ------ ------
Collateral
security Cash received 93 81
--------------- ------ ------
Non--cash
pledged 115 92
---------------------------------- ------ ------
Guarantees
pledged 4 2
---------------------------------- ------ ------
Total collateral
as at 31
December
2019 212 175
------ ------
Maximum
collateral
held during
the year 242 181
------ ------
Investment counterparty risk for CCP
margin and default funds is managed
by investing the cash element in instruments
or structures deemed 'secure' by the
relevant regulatory bodies including
through direct investments in highly
rated, 'regulatory qualifying' sovereign
bonds and supra--national debt, investments
in
tri--party and bilateral reverse repos
(receiving high--quality government
securities as collateral) and, in
certain jurisdictions, deposits with
the central bank. The small proportion
of cash that is invested unsecured
is placed for short durations with
highly rated counterparties where
strict limits are applied with respect
to credit quality, concentration and
tenor.
2019 2018
GBPbn GBPbn
------ ------
Total investment portfolio 85 94
------ ------
Maximum portfolio size
during the year 122 103
------ ------
Additional portfolio information:
Amount invested securely 100% 98%
------ ------
Weighted average maturity
(days) 90 49
------ ------
Associated liquidity risks are considered
in the investment mix and discussed
further below.
To address concentration risk, the
Group maintains a diversified portfolio
of high--quality, liquid investments
and uses a broad range of custodians,
payment and settlement banks and agents.
The largest concentration
of treasury exposures as at 31 December
2019 was 17% of the total investment
portfolio to the French Government
(2018: 17% to the French Government).
Trade and fees receivable
An impairment analysis is performed
monthly using a provision matrix to
measure expected credit losses on
trade and fees receivable. The calculation
reflects current conditions and forecasts
of future economic conditions. None
of the Group's trade receivables are
material by individual counterparty.
At 31 Fees <180 >180 Total
December receivable days days GBPm
2019 GBPm GBPm GBPm
Expected
credit
loss rate <1% <1% 46%
------------ ------ ------ ------
Total
receivables 141 310 16 467
------------ ------ ------ ------
Expected
credit
loss - (2) (7) (9)
------------ ------ ------ ------
141 308 9 458
------------ ------ ------ ------
At 31 Fees <180 >180 Total
December receivable days days GBPm
2018 GBPm GBPm GBPm
------------ ------ ------ ------
Expected
credit
loss rate <1% <1% 19%
------------ ------ ------ ------
Total
receivables 139 380 52 571
------------ ------ ------ ------
Expected
credit
loss - (1) (10) (11)
------------ ------ ------ ------
139 379 42 560
------------ ------ ------ ------
------------------------------------------------------
Country risk
Risk description Risk management approach
Distress can result from the risk Specific risk frameworks manage country
that certain governments may be unable risk for both fixed income clearing
or find it difficult to service their and margin collateral and all clearing
debts. This could have adverse effects, members' portfolios are monitored
particularly on the Group's CCPs, regularly against a suite of sovereign
potentially impacting cleared products, stress scenarios. Investment limits
margin collateral, investments, the and counterparty and clearing membership
clearing membership and the financial monitoring are sensitive to changes
industry as a whole. in ratings and other financial market
indicators, to ensure the Group's
CCPs are able to measure, monitor
and mitigate exposures to sovereign
risk and respond quickly to anticipated
changes. Risk Committees maintain
an ongoing watch over these risks
and the associated policy frameworks
to protect the Group against potentially
severe volatility in the sovereign
debt markets.
The Group's sovereign exposures of
GBP1 billion or more at the end of
either of the financial reporting
periods shown
below were:
Group Aggregate 2019 2018
Sovereign Treasury
Exposures
Country GBPbn GBPbn
------ ------
France 18 16
------ ------
USA 12 9
------ ------
Italy 11 2
------ ------
EU 10 3
------ ------
UK 6 4
------ ------
Spain 1 -
------ ------
Netherlands - 7
------ ------
Switzerland - 3
------ ------
Germany - 1
------ ------
------------------------------------------
Liquidity, settlement and custodial risk
Risk description Risk management approach
The Group's operations are exposed Group
to liquidity risk to the extent that The combined Group businesses are
they are unable to meet their daily profitable, generate strong free
payment obligations. cash flow and operations are not
In addition, the Group's CCPs and significantly impacted by seasonal
certain other Group companies must variations. The Group maintains sufficient
maintain a level of liquidity (consistent liquid resources to meet its financial
with regulatory requirements) to obligations as they fall due and
ensure the smooth operation of their to invest in capital expenditure,
respective markets and to maintain make dividend payments, meet its
operations in the event of a single pension commitments, appropriately
or multiple market stress event or support or fund acquisitions or repay
member failure. This includes the borrowings. Subject to regulatory
potential requirement to liquidate constraints impacting certain entities,
the position of a clearing member funds can generally be lent across
under a default scenario including the Group and cash earnings remitted
covering the associated losses and through regular dividend payments
the settlement obligations of the by local companies. This is an important
defaulting member. component of the Group Treasury cash
The Group is exposed to the risk management policy and approach.
that a payment or settlement bank Management monitors forecasts of
could fail or that its systems encounter the Group's cash flow and overlays
operational issues, creating liquidity sensitivities to these forecasts
pressures and the risk of possible to reflect assumptions about more
defaults on payment or receivable difficult market conditions or stress
obligations. events. The Group will take the appropriate
The Group uses third--party custodians actions to satisfy working capital
to hold securities and is therefore requirements when committing to large
exposed to the custodian's insolvency, scale acquisitions, including comfortable
its negligence, a misuse of assets liquidity headroom projected over
or poor administration. a reasonable timeframe.
Non --CCP entities
Treasury policy requires that the
Group maintains adequate credit facilities
provided by a diversified lending
group to cover its expected funding
requirements and ensure a minimum
level of headroom for at least the
next 24 months. The financial strength
of lenders to the Group is monitored
regularly.
During the year ended 31 December
2019, to improve its debt maturity
profile, the Group approached its
lenders to further extend the maturity
of its 2017 arranged, five year,
GBP600 million committed revolving
credit facility by another year to
2024. To diversify and maintain its
liquidity sources the Group continued
to issue Euro commercial paper under
its GBP1 billion programme, with
EUR300 million in issuance at the
end of the financial period (2018:
EUR300 million). At 31 December 2019,
GBP934 million (2018: GBP1,159 million)
of the Group's bank facilities were
unutilised, with circa GBP250 million
having been drawn to repay the Group's
2009 issued Bond which matured in
the year. Facilities also provide
swingline backstop coverage for the
EUR300 million Euro commercial paper
in issuance.
During the year, LSEG also arranged
a Bridge Facility to facilitate a
potential refinancing as it completes
the acquisition of Refinitiv, announced
on 1 August 2019. The facility is
committed and structured with a US$9,325
million tranche and a EUR3,580 million
tranche to provide funding capacity
to precisely match the debt the Group
will take on when the acquisition
completes.
CCPs
The Group's CCPs maintain sufficient
cash and cash equivalents and, in
certain jurisdictions, have access
to
central bank refinancing or commercial
bank liquidity support credit lines
to meet the cash requirements of
the clearing and settlement cycle.
Revised regulations require CCPs
to ensure that appropriate levels
of back--up liquidity are in place
to underpin the dynamics of a largely
secured cash investment requirement,
ensuring that the maximum potential
outflow under extreme market conditions
is covered (see credit and concentration
risk section above). The Group's
CCPs monitor their liquidity needs
daily under normal and stressed market
conditions.
Where possible, the Group employs
guaranteed delivery versus payment
settlement techniques and manages
CCP margin and default fund flows
through central bank or long--established,
bespoke commercial bank settlement
mechanisms. Monies due from clearing
members remain the clearing members'
liability if the payment agent is
unable to effect the appropriate
transfer. In addition, certain Group
companies, including
the CCPs, maintain operational facilities
with commercial banks to manage intraday
and overnight liquidity.
Custodians are subject to minimum
eligibility requirements, ongoing
credit assessment, robust contractual
arrangements and are required to
have appropriate back--up contingency
arrangements in place.
The table below analyses the Group's
financial liabilities into relevant
maturity groupings based on the remaining
period from the balance sheet date
to the contractual maturity date.
The amounts disclosed in the table
reflect the contractual undiscounted
cash flows. The borrowings line includes
future interest on debt that is not
accrued for in relation to bonds
that are not yet due.
---------------------------------------------------
As at 31 December Less than Between 1 Between 2 Over 5 Total
2019 1 year & 2 years & 5 years years
--------------------------------- ------------ -------------- -------------- -------- ---------
GBPm GBPm GBPm GBPm GBPm
Borrowings 529 333 483 914 2,259
Trade & other payables
(excluding lease
liabilities) 560 - - - 560
Lease liabilities 39 41 90 36 206
Clearing member business
liabilities 796,102 - - - 796,102
Derivative financial
instruments 1 - 30 9 40
Other non-current
liabilities
(excluding lease
liabilities) - 4 - - 4
--------------------------------- ------------ -------------- -------------- -------- ---------
797,231 378 603 959 799,171
As at 31 December Less than Between 1 Between 2 Over 5 Total
2018 1 year & 2 years & 5 years years
GBPm GBPm GBPm GBPm GBPm
Borrowings 601 34 373 1,435 2,443
Trade & other payables 509 - - - 509
Clearing member business
liabilities 835,508 - - - 835,508
Derivative financial
instruments 30 - - 17 47
Other non-current
liabilities - 7 3 1 11
--------------------------------- ------------ -------------- -------------- -------- ---------
836,648 41 376 1,453 838,518
--------------------------------- ------------ -------------- -------------- -------- ---------
Market Risk - Foreign Exchange
Risk description Risk management approach
The Group operates primarily in The Group seeks to match the currency
the of its debt liabilities to the currency
UK, Europe and North America, but of its earnings and cash flows which,
also has growing and strategically to an extent, protects its key ratios
important businesses in Asia, and (net leverage and interest coverage)
other alliances and investments and balances the currency of its assets
across with its liabilities. In order to
the globe. Its principal mitigate the impact of unfavourable
currencies currency exchange rate movements on
of operation are Sterling, Euro earnings and net assets, non--Sterling
and cash earnings are centralised and
US dollars. applied to matching currency debt
Group companies generally invoice and interest payments, and, where
revenues, incur expenses and relevant, interest payments on Sterling
purchase debt re--denominated through the use
assets in their respective local of cross--currency swaps.
currencies. A material proportion of the Group's
As a result, foreign exchange risk debt is held in or swapped into Euros
arises mainly from the translation and US dollars as noted below. 31 December 31 December
of the Group's foreign currency 2019 2018
earnings, Currency GBPm GBPm
assets and liabilities into its of debt
reporting ------------ ------------
currency, Sterling, and from Euro- denominated
occasional, drawn debt 1,557 1,631
high value intragroup ------------ ------------
transactions. Euro- denominated
Exceptions exist including at cross-currency
MillenniumIT interest
(a Sri Lankan Rupee reporting rate swaps (637) (361)
entity) ------------ ------------
which invoices a material US Dollar- 107 -
proportion denominated
of its revenues in US dollars, and drawn debt
at certain operations of the LCH ------------ ------------
Group US Dollar
(a Euro reporting subsidiary), denominated
which cross - currency
generate material revenues in interest
Sterling rate swaps 637 631
and US dollars and incur material ------------ ------------
costs in Sterling.
Intragroup dividends and the During the year, the Group settled
currency maturing Euro--denominated cross--currency
debt interest obligations of the interest rate swaps linked to the
Company maturity of its 2009 issued GBP250
may create short--term million bond. Therefore, at the end
transactional of the year, the remaining cross--currency
FX exposures but play their part interest rate swaps are directly linked
in to Euro fixed debt. The Euro and US
controlling the level of dollar denominated debt, including
translational the cross--currency swaps, provides
FX exposures the Group faces. a hedge against the Group's net investment
The Group may be exposed from time in Euro and US dollar denominated
to time to FX risk associated with entities.
strategic investments in, or As at 31 December 2019, the Group's
divestments designated hedges of its net investments
from, operations denominated in were fully effective.
currencies Whilst transactional foreign exchange
other than Sterling. exposure is limited, the Group hedges
material transactions in accordance
with Group Treasury policy (which
requires cash flows of single transactions
or a series of linked transactions
of more than GBP5 million or equivalent
per annum to be hedged) with appropriate
derivative instruments or by settling
currency payables or receivables within
a short timeframe. Where appropriate,
hedge accounting for derivatives is
considered in order to mitigate material
levels of income statement volatility.
In addition to projecting and analysing
its earnings and debt profile by currency,
the Group reviews sensitivities to
movements in exchange rates which
are appropriate to market conditions.
The Group has considered movements
in the Euro and the US dollar over
the year ended 31 December 2019 and
year ended 31 December 2018 and, based
on actual market observations between
its principal currency pairs, has
concluded that a 10% movement in rates
is a reasonable level to illustrate
the risk to the Group. The impact
on post tax profit and equity for
the years ended 31 December is set
out in the table below:
--------------------------------------------------------------------------------
2019 2018
Post tax profit Equity Post tax profit
Equity
GBPm GBPm GBPm GBPm
Euro Sterling weaken - 5 (2) (16)
Sterling strengthen - (5) 2 15
US Dollar Sterling weaken (4) (55) 7
(45)
Sterling strengthen 4 50 (7) 41
This reflects foreign exchange gains or
losses on translation of Euro
and US dollar denominated financial
assets and financial liabilities,
including Euro and US dollar denominated
cash and borrowings.
The impact on the Group's operating
profit for the year before amortisation
of purchased intangible assets and non
-- underlying items, of a 10 Euro
cent and 10 US dollar cent movement in
the Sterling -- Euro and Sterling
-- US dollar rates respectively, can be
seen below:
31 December 2019 31 December 2018
GBPm GBPm
Euro Sterling weaken 32 27
Sterling strengthen (27) (23)
US Dollar Sterling weaken 37 31
Sterling strengthen (31) (27)
Market risk - Cash Flow and Fair Value Interest Rate Risk
Risk Description Risk management approach
The Group's interest rate risk arises Group interest rate management policy
through the impact of changes in market focuses on protecting the Group's
rates on cash flows associated with credit rating and maintaining compliance
cash and cash equivalents, investments with bank covenant requirements. To
in financial assets and borrowings support this objective, a minimum
held at floating rates. The Group coverage of interest expense by EBITDA
may also face future interest rate of 7 times, and a maximum floating
exposure connected to rate component of 50% of total debt
committed M&A transactions where significant are targeted. This approach reflects:
debt financing is involved. (i) a focus on the Group's cost of
The Group's CCPs face interest rate gross debt rather than its net debt
exposure through the impact of changes given the material cash and cash equivalents
in the reference rates used to calculate set aside for regulatory purposes;
member liabilities versus the yields (ii) the short duration allowed for
achieved through their predominantly investments of cash and cash equivalents
secured investment activities. held for regulatory purposes which,
by their nature, generate low investment
yields;
(iii) a view currently maintained
that already low market yields are
unlikely to move materially lower;
and
(iv) the broad natural hedge of floating
rate borrowings provided by the significant
balances of cash and cash equivalents
held effectively at floating rates
of interest.
As at 31 December 2019, consolidated
net interest expense cover by EBITDA
was measured over the 12--month period
at 14.4 times (2018: 16.1 times) and
the floating rate component of total
debt was 25% (2018: 14%).
Where the Group has committed to M&A
transactions and is exposed to prospective
interest rate risk on borrowings the
Group Treasury function will consider
the exposure and recommend hedging
solutions that conform with policy
and seek to limit future interest
costs. The acquisition of Refinitiv
will meaningfully increase the Group's
debt and the interest rate risk exposure
was evaluated during the financial
period. As at 31 December 2019, no
hedging had been arranged but the
exposure remains under ongoing review.
In the Group's CCPs, interest bearing
assets are generally invested in secured
instruments or structures and for
a longer term than interest bearing
liabilities, whose interest rate is
reset daily. This makes investment
revenue vulnerable to volatility in
overnight rates and shifts in spreads
between overnight and term rates.
Interest rate exposures (and the risk
to CCP capital) are managed within
defined risk appetite parameters against
which sensitivities are monitored
daily.
In its review of the sensitivities
to potential movements in interest
rates, the Group has considered interest
rate volatility over the last year
and prospects for rates over the next
12 months and has concluded that a
1 percentage point upward movement
(with a limited prospect of material
downward movement) reflects a reasonable
level of risk to current rates. At
31 December 2019, at the Group level,
if interest rates on cash and cash
equivalents and borrowings had been
1 percentage point higher with all
other variables held constant, post
tax profit for the year would have
been GBP8 million higher (2018: GBP8
million higher) mainly as a result
of higher interest income on floating
rate cash and cash equivalents partially
offset by higher interest expense
on floating rate borrowings.
At 31 December 2019, at the CCP level
(in aggregate), if interest rates
on the common interest bearing member
liability benchmarks of Eonia, Fed
Funds and Sonia, for Euro, US dollar
and Sterling liabilities respectively,
had been 1 percentage point higher,
with all other variables held constant,
the daily impact on post tax profit
for the Group would have been GBP2
million lower (2018: GBP2 million
lower). This deficit is expected to
be recovered as investment yields
increase as the portfolio matures
and is reinvested.
-----------------------------------------------
The Annual Report contains the following statements regarding
responsibility for financial statements on page 133:
"The Directors are responsible for preparing the Annual Report,
the Directors' Remuneration Report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. The Directors have prepared the
Group and Company financial statements in accordance with
International Financial Reporting Standards
(IFRSs) as adopted by the European Union and applicable law.
Under company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of the affairs of the Group and the Company and
of the profit or loss for that year.
In preparing those financial statements, the Directors are
required to:
- Select suitable accounting policies in accordance with IAS 8:
Accounting Policies, Changes in Accounting Estimates and Errors and
then apply them consistently
- Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
- Make judgements and estimates that are reasonable
- Provide additional disclosures when compliance with the
specific requirements in IFRSs as adopted by the EU is insufficient
to enable users to understand the impact of particular
transactions, other events and conditions on the Group and the
Company's financial position and financial performance
- State whether the Group and the Company financial statements
have been prepared in accordance with IFRSs as adopted by the EU,
subject to any material departures disclosed and explained in the
financial statements
- Prepare the financial statements on the going concern basis,
unless it is inappropriate to presume that the Group and the
Company will continue in business
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and the
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the
Company and the Group and to enable them to ensure that the
financial statements and the Directors' Remuneration Report comply
with the Companies Act 2006, other applicable laws and regulations,
including the requirements of the Listing Rules and the Disclosure
Guidance and Transparency Rules, and, as regards the Group
financial statements, Article 4 of the IAS Regulation. The
Directors are also responsible for safeguarding the assets of the
Company and the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information on the Company's
website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Overview and Strategic Report sections of the
Annual Report on pages 2-73. 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 60-73.
The Financial Risk Management objectives and policies of the
Group and the exposure of the Group to capital risk, credit risk,
market risk and liquidity risk are discussed on pages 158-163. 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. The combined total of committed facilities and bonds
issued at 31 December 2019 was GBP2,781 million
(2018: GBP3,103 million) excluding the undrawn Bridge Facility
arranged to provide financing capacity relating to the Group's
proposed acquisition of the Refinitiv business, with the first
maturing in November 2021, described further in the Financial
Review on pages 53-59.
The Directors have reviewed the Group's forecasts and
projections, taking into account reasonably possible changes in
trading performance, which show that the Group has sufficient
financial resources. On the basis of this review, and after making
due enquiries, the Directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in
operational existence for the foreseeable future. Accordingly, they
continue to adopt the going concern basis in preparing the
financial statements.
Each of the Directors, whose names and functions are set out on
pages 76-78 of this Annual Report confirms that, to the best of
their knowledge and belief:
- The Group and the Company financial statements, which have
been prepared in accordance with IFRSs as adopted by the EU, give a
true and fair view of the assets, liabilities, financial position
and profit or loss of the Company and the Group taken as a
whole
- The report of the Directors contained in the Annual Report
includes a fair review of the development and performance of the
business and the position of the Company and the Group taken as a
whole, together with a description of the principal risks and
uncertainties that they face
- They consider that the Annual Report and Accounts 2019, taken
as a whole, is fair, balanced and understandable and provide the
information necessary for shareholders to assess the Group and the
Company's performance, business model and strategy
By Order of the Board
Lisa Condron
Group Company Secretary
28 February 2020"
"34. Transactions with Related Parties
Key management compensation
Compensation for Directors of the Company and key personnel who
have authority for planning, directing and controlling the
Group:
Period ended Year ended
31 December 2019 31 December 2018
GBPm GBPm
Salaries and other short-term
benefits 11 11
Pensions 1 1
Share based payments 12 14
------------------------------ --- --------------------
24 26
------------------------------------- ------------------
Key management compensation relates to the Executive Directors,
Group Chair and Executive Committee, who have authority for
planning, directing and controlling the Group.
Other directors' interests
One director has a 40.5% (2018: 40.5%) equity interest in
Quantile Technologies Limited who are an approved compression
service provider for the Group's LCH Limited subsidiary. The Group
operated a commercial arrangement with Quantile Technologies
Limited and all transactions were carried out on an arm's length
basis. During the year the Group recognised income of GBP0.5
million and expenses of GBP0.4 million as part of the agreement
(2018: nil).
Inter-company transactions with subsidiary undertakings
The Company has loans with some subsidiary undertakings. Details
as at 31 December 2019 are shown in the table below:
Amount in millions due Interest (charge)/credit
(owed to)/from as at
Loan 31 December 31December 2018 Term Interest rate 2019 2018
counterparty 2019 as at 31 Dec
2018
---------------- ----------------- ---------------- ---------------- ------------- ------------
London Stock GBP(203)m GBP(198)m 25 years from LIBOR plus 2% GBP(6)m GBP(5)m
Exchange plc May 2006 with per annum
five equal
annual
repayments
commencing in
May 2027.
---------------- ----------------- ---------------- ---------------- ------------- ------------
London Stock GBP41m GBP25m Repayable on Non-interest - -
Exchange demand. bearing
Employee
Benefit Trust
---------------- ----------------- ---------------- ---------------- ------------- ------------
Fifth
London Stock anniversary of
Exchange Group the initial
Holdings utilisation
(Italy) date which was EURIBOR plus
Limited EUR(206)m EUR(11)m April 2018. 1.5% per annum EUR(2)m EUR(1)m
---------------- ----------------- ---------------- ---------------- ------------- ------------
London Stock GBP272m GBP226m Fifth LIBOR plus GBP9m GBP12m
Exchange Group anniversary of 1.5% per annum
Holdings the
Limited initial
utilisation
date
which was
October 2019.
---------------- ----------------- ---------------- ---------------- ------------- ------------
London Stock GBP24m GBP20m Fifth LIBOR plus - -
Exchange Reg anniversary of 1.2% per annum
Holdings the
Limited initial
utilisation
date
which was July
2018.
---------------- ----------------- ---------------- ---------------- ------------- ------------
London Stock GBP(40)m - Fifth EURIBOR plus - -
Exchange (C) anniversary 1.5% per annum
Limited of the initial
utilisation
date
which was May
2017.
---------------- ----------------- ---------------- ---------------- ------------- ------------
London Stock US$(227)m US$(24)m Fifth EURIBOR plus US$(2)m US$(3)m
Exchange Group anniversary 1.5% per annum
Holdings of the initial
(Luxembourg) utilisation
Ltd date
which was
November 2019.
---------------- ----------------- ---------------- ---------------- ------------- ------------
LSEG Employment GBP34m GBP137m Fifth LIBOR plus GBP1m GBP2m
Services anniversary 1.2% per annum
Limited of the initial
utilisation
date
which was
January 2015.
---------------- ----------------- ---------------- ---------------- ------------- ------------
London Stock GBP197m GBP71m Fifth LIBOR plus GBP3m GBP2m
Exchange Group anniversary 0.9% per annum
(Services) of the initial
Limited utilisation
date
which was
January 2016.
---------------- ----------------- ---------------- ---------------- ------------- ------------
During the year, the Company charged in respect of employee
share schemes GBP10 million (2018: GBP9 million) to LSEG Employment
Services Limited, GBP6 million (2018: GBP5 million) to LCH Group,
GBP4 million (2018: GBP5 million) to the London Stock Exchange
Group Holdings Italia S.p.A. group of companies, GBP4 million
(2018: GBP3 million) to the FTSE Group, GBP5 million (2018: GBP7
million) to London Stock Exchange Group Holdings Inc, GBP4 million
(2018: GBP5 million) to London Stock Exchange plc and GBP2 million
(2018: GBP1 million) to other subsidiaries of the Group.
During the year the Company received dividends of GBP218 million
from LSE plc, GBP155 million from LSE Group Holdings Ltd, GBP31
million from LSE Group Holdings (Italy) Ltd and GBP60 million from
LSEGH (Luxembourg) Ltd. The Company recognised GBP7 million income
(2018: GBP7 million) and GBP72 million expenses (2018: GBP61
million) with Group undertakings in relation to corporate
recharges. At 31 December 2019, the Company had GBP25 million
(2018: GBP67 million) other receivables due from Group companies
and other payables of GBP78 million (2018: GBP144 million) owed to
Group undertakings.
Transactions with associates
In the year ended 31 December 2019, the Group recognised GBP1
million revenue (2018: GBP1 million) from its associates and as at
31 December 2019, the Group had GBP1 million receivable from its
associates (2018: GBP1 million).
All transactions with subsidiaries and associates were carried
out on an arm's length basis."
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
ACSUNAORRNUOAAR
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