Annual Financial Report
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 Group plc
Paul Froud - Investor Relations
+44 (0) 20 7797 3322
Gavin Sullivan/Lucie Holloway - Media
+44 (0) 20 7797 1222
In compliance with DTR 6.3.5, the following information is extracted from the Annual Report and should be read in conjunction with the Group's preliminary results announcement of 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:
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.
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.
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.
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.
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.
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 £1.4 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.
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.
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.
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:
Security threats - Cyber
Settlement and custodial risks
Employees and culture
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.
(Executive Lead: Chief Executive Officer, Executive Committee)
As a diversified markets infrastructure business, we operate in a broad range of equity, fixed income and derivative markets servicing clients who increasingly seek global products and solutions. If the global economy underperforms, lower activity in our markets may lead to lower revenue.
Weaker economic data and low levels of inflation have dominated central bank official rate actions. The Federal Open Market Committee (FOMC) concerned about a slowing US economy, decreased the Fed Funds target rate three times during 2019. Meanwhile the European Central Bank (ECB) has left rates unchanged at zero and has restarted its quantitative easing programme.
Ongoing geopolitical tensions continue to add uncertainty in the markets and may impact investor confidence and activity levels. In particular, the political uncertainty in the UK following its exit from the EU, tensions between the US and its major trading partners and other countries as well as tensions in Hong Kong and in China, continue to affect global markets.
The emergence toward the end of 2019 of the Novel Coronavirus outbreak in China could have a significant impact on the global economy. In a prolonged outbreak situation, the imposition of travel restrictions, border controls and quarantine protocols could contribute to a major pause in industrial productivity across the Asia
Pacific region and could suppress demand for commodities, impact the supply chain for many industries globally and the international retail market which in turn could significantly impact the global financial markets.
The UK exit from the EU leaves 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.
The footprint of the Group continues to broaden, further improving the geographical diversification of the Group's income streams which mitigates the risks of a localised economic downturn. Furthermore, income streams across the business divisions of the Group comprise annuity and fee based recurring revenues to balance against more cyclical and market driven activity. This diversification will be significantly enhanced (including enjoying an increasing proportion of recurring revenues) if the Group
completes the acquisition of Refinitiv, expected during H2 2020.
The Group performs regular analysis to monitor the markets space and the potential impacts of market price and volume movements on the business. Activities include Key Risk Indicator tracking, stress testing, and hedging. We continue to actively monitor the ongoing developments following the UK's exit from the EU. Committees have been established to assess and address areas of impact on our operations and the Group has formulated contingency plans with the objectives of continuity of market function and customer service in the event of a divergence of regulation if no trade agreement is achieved.
The Financial Risk Committee closely monitors and analyses multiple market stress scenarios and action plans in order to minimise any impacts stemming from a potential deterioration
of the macroeconomic environment. The stress scenarios are regularly reviewed and updated in response to changes in macroeconomic conditions.
LSEG monitors the potential impact of macroeconomic and political events on our operating environment and business model and the Group is an active participant in international and domestic regulatory debates.
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
(Executive Lead: Chief Executive Officer, Executive Committee)
LSEG is a global business operating in multiple regulatory environments that reflect the diversity of products and the jurisdictions in which it operates. The Group is exposed to risks associated with the management of changes to these regulatory requirements. Key regulatory changes include:
Brexit - LSEG companies conducting regulated activities in the EU or with customers in the EU are subject to EU regulation. The Group has implemented contingency plans to maintain continuity of service to customers and orderly functioning of its markets, including incorporation of new entities in the EU27 and securing authorisation within the EU27 for certain Group businesses. The Group continues to engage with regulators and parties in the UK, EU and other jurisdictions to advise on financial market infrastructure considerations such as the potential impacts of divergence.
Regulation impacting CCPs - Regulatory initiatives with the potential to impact cleared derivatives markets and CCPs continue through international standard setters and regulators in the EU and US and other major jurisdictions. Our primary focus remains on development of a coherent, cross-border regulatory framework for market access to global CCPs, including appropriate access rules under the EMIR review
published in December 2019. As part of this review, EMIR 2.2 introduces the option to impose enhanced supervision or deny the recognition of third country CCPs that are of systemic importance for the EU, which could have implications for the Group's CCPs as well as comparable compliance frameworks for jurisdictions of equivalent regulatory frameworks. Proper calibration of EU rules on CCP Recovery and Resolution and harmonisation with other key jurisdictions is also a key priority and could likely have an impact on the Group's CCPs. The European CCP Recovery and Resolution framework is expected to be finalised in 2020 - it could impose additional resources for CCPs.
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.
Changes in the regulatory environment form a key input into our strategic planning, including the political impact on our growth strategies, both organic and inorganic. We monitor regulatory developments continually and engage directly with regulatory and governmental authorities at local, regional and national levels.
The Group also has a structured Brexit programme which includes regulatory specialists engaging at appropriate levels and on financial market infrastructure considerations. Risks are actively monitored and managed - see Emerging Risks.
The Group has executed the following contingency plans for its business. Following the European Commission implementing decision for UK CCPs on 19 December 2018, it was announced on 18 February 2019 that LCH Ltd has been recognised by ESMA as a third country CCP under Article 25 of EMIR. On 23 December 2019 the European Commission extended this equivalence decision for another 12 months in case of a no-deal Brexit. This recognition confirms LCH Ltd's ability to continue to offer all clearing services for all products and services to all members and clients if there were to be a no-deal Brexit scenario post 31 January 2020. LCH reserves its right to take any action it considers appropriate at any time, should there be a material change in circumstances. In addition, LCH SA and CC&G are allowed under the Bank of England Temporary Recognition Regime (TRR) to provide clearing services and activities in the UK for up to three years in a 'no deal' scenario.
LSEG's key objectives to provide continuity of stable financial infrastructure services as part of our global remit. As the various regulatory initiatives progress, there will be greater certainty with regard to their likely final form. The Group continues to focus on remaining well positioned to respond to regulatory developments and further opportunities exist for the Group to deliver solutions to help the market address the changing regulatory environment including those linked with the departure of the UK from the EU.
For more information on regulatory changes, see Market trends and our response on pages 14-20.
(Executive Lead: Chief Executive Officer, Executive Committee, Group Board)
On 1 August 2019, LSEG announced that it had agreed definitive terms with a consortium including certain investment funds affiliated with Blackstone, as well as Thomson Reuters (together, the Refinitiv Shareholders) to acquire Refinitiv in an all share transaction (the Transaction).
Completion of the Transaction is subject to a number of conditions (including merger control clearances and regulatory approvals) which may not be satisfied or waived, or which may not be capable of satisfaction without the imposition of undertakings, conditions or divestments, which could be material. If merger clearances are not
obtained or there is material delay in reaching agreement on remedies to facilitate the Transaction, LSEG will in certain circumstances pay a termination fee of £198.3 million to the Refinitiv Shareholders.
Delay in completing the Transaction will prolong the period of uncertainty for LSEG, and both delay and failure to complete may result in the accrual of additional and, in the case of a failure 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.
An Integration Management Office for the Transaction (the IMO) has been established, headed by David Shalders, Chief Integration Officer and Group COO. The IMO is responsible for managing the overall integration planning process and will be responsible for ensuring that the synergies expected to result from the Transaction are properly monitored, reported on and delivered. The IMO comprises senior leaders from both LSEG and Refinitiv and will build upon the strong working relationship already established between the two organisations. LSEG has also engaged a leading global external consulting firm, which is a specialist in planning and delivering large-scale and complex business integration projects for global institutions, to support the integration.
The integration will be managed in two phases, integration planning (prior to Completion) and integration implementation (following Completion). Each phase will be overseen by an
integration committee of senior executives, led by David Schwimmer, with representation from LSEG, Refinitiv and the Refinitiv Shareholders, and will report to the Board on a regular basis.
(Executive Lead: Chief Executive Officer, Group Director for each division, Chief Information Officer)
The competitive environment in which LSEG operates has undergone, and continues to undergo, transformational changes triggered by market participants, investors, infrastructure operators and regulators, as well as intensifying competition. The Group operates in a highly competitive industry. Continued consolidation has fuelled competition including between groups in different geographical areas. Sophisticated FMI providers are diversifying and expanding. As a result, LSEG faces competition
from market operators from the EU, US and Asia that are increasingly broadening their propositions (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.
Competitive markets are, by their very nature, dynamic, and the effects of competitor activity can never be fully mitigated. Senior management and a broad range of customer-facing staff in all business areas are actively engaged with clients to understand their evolving needs and motivations. We have established a Group Relationship Programme to co-ordinate this across Group businesses globally.
The Group undertakes constant market monitoring and pricing revision to mitigate risks and ensure we are competitive.
Commercial initiatives are aligned with our clients and this is complemented by an ongoing focus on technology operations and innovation.
(Executive Lead: Chief Executive Officer, Chief Operating Officer)
The Group is exposed to transformation risks (risk of loss or failure resulting from change/transformation or integration) as it continues to grow rapidly both organically and inorganically. Acquisitions may, in some cases, be complex or necessitate change to operating models, business models, technology and people. This is particularly likely for the current target acquisition of Refinitiv. In general, the combined business' success will be dependent upon its ability to integrate the businesses of LSEG and Refinitiv; there will be challenges associated with the integration and the delivery of synergies, the benefits or business performance expected as a result of the transaction may not be achieved as anticipated or at all, and the costs to achieve the synergies and benefits may 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
The Group's exposure to transformation risk is mitigated through the application of the Group's Enterprise Risk Management Framework to deploy consistent, appropriate Risk Management across the Group, both during and post-acquisition. The governance of the Group following a merger or acquisition is aligned and strengthened as appropriate.
The Integration Management Office, reporting to the Executive Committee, has been established to oversee the completion of the planned acquisition of Refinitiv. Oversight during transformation is provided by a Steering Committee comprising Executive Committee members with regular reports to the Board Risk Committee and the Board.
The Group has an effective track record of integrating acquisitions and delivering tangible synergies, supported by robust governance and programme management structures through the Group's Change Framework to mitigate change-related risks
(Executive Lead: Chief Executive Officer, Executive Committee)
A number of the Group's businesses have iconic national brands that are well- recognised at international as well as at national levels. The strong reputation of the Group's businesses and their valuable brand names are a key selling point. Any events or actions that damage the reputation or brands of the Group, such as those propagated via social media or caused by its misuse, could adversely affect the Group's business, financial condition and operating results.
Failure to protect the Group's intellectual property rights adequately could result in costs for the Group, negatively impact the Group's reputation and affect the ability of the Group to compete effectively. Further, defending or enforcing the Group's intellectual property rights could result in the expenditure of significant financial and managerial resources, which could adversely affect the Group's business, financial condition and operating results.
LSEG has policies and procedures in place which are designed to ensure the appropriate use of the Group's brands and to maintain the integrity of the Group's reputation.
LSEG actively monitors the use of its brands and other intellectual property, including monitoring for internet brand impersonation and social media sentiment, in order to prevent, identify and address any infringements.
The Group protects its intellectual property by relying upon a combination of trademark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other contractual arrangements with its affiliates, customers, suppliers, strategic partners and others.
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.
(Executive Lead: Chief Financial Officer, Director of Post Trade, Financial Risk Committee)
CCPs in the Group are exposed to credit risk as a result of their clearing activities. A default by a CCP clearing member that could not be managed within the resources of the defaulted clearing member could adversely affect that CCP's revenues and its customers' reputation. CCPs authorised in the EU are required to make a proportion of their regulatory capital available to cover default losses after the defaulter's resources have been exhausted and prior to allocation of losses to non-defaulters and so, in extreme circumstances, a default could lead to a call on the Group CCPs' own capital 'skin-in-the-game'. CCPs may also be exposed to credit exposure to providers of infrastructure services such as Central Securities Depositaries (CSDs) and commercial banks providing investment and operational services.
In addition, certain CCPs within the Group have interoperability margin arrangements with other CCPs requiring collateral to be exchanged in proportion to the value of the underlying transactions.
The relevant clearing provider entities within the Group are therefore exposed to the risk of a default of other CCPs under such arrangements.
CCPs and other parts of LSEG Group are also exposed to credit risk as a result of placing money with investment counterparties on both a secured and unsecured basis. Losses may occur due to the default of either the investment counterparty or of the issuer of bonds bought outright or received as collateral. The Group's credit risk also relates to its customers and counterparties being unable to meet their obligations to the Group either in part or in full.
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.
As CCP members continue to work towards strengthening their balance sheets, the risk to LSEG CCPs of a member default reduces, although continuing geopolitical uncertainty continues, and the banking sectors of some countries remain stressed. The financial risks associated with clearing operations are further mitigated by:
--Strict CCP membership rules including supervisory capital, financial strength and operational capability
--The maintenance of prudent levels of margin and default funds to cover exposures to participants. Members deposit margin computed at least daily, to cover the expected costs which the clearing service would incur in closing out open positions in a volatile market in the event of the member's default. A default fund sized to cover the default of at least the two members with the largest exposures in each service using a suite of extreme but plausible stress tests mutualises losses in excess of margin amongst the clearing members
--Regular 'Fire Drills' are carried out to test the operational soundness of the CCPs' default management processes
--Infrastructure providers are regularly assessed in line with policy.
Policies are in place to ensure that investment counterparties are of good credit quality, and at least 95% of CCP commercial bank deposits are secured. CCP and non-CCP counterparty concentration risk is consolidated and monitored daily at the Group level and reported to the Executive Committee and to the Board Risk Committee, including limits and status rating.
Group companies make a judgement on the credit quality of their customers based upon the customer's financial position, the recurring nature of billing and collection arrangements and, historically, a low incidence of default.
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.
(Chief Financial Officer, Director of Post Trade)
The Group's CCPs assume the counterparty risk for all transactions that are cleared through their markets. In the event of default of their clearing members, therefore, credit risk will manifest itself as market risk. As this market risk is only present in the event of default this is referred to as 'latent market risk'. The latent market risk includes interest rate risk, foreign exchange risk, equity risk and commodity price risk as well as country risk, issuer risk and concentration risk. This risk is greater if market conditions are unfavourable at the time of the default.
The Group is exposed to foreign exchange risk as a result of its broadening geographical footprint. There are, however, also benefits of global diversification including reduced exposure to local events such as the UK Brexit vote and the
The Group is exposed to interest rate risk through its borrowing activities (including to support M&A objectives) and treasury investments. Further changes in interest rates in 2020 may increase the Group's exposure to these risks.
Similar to credit risks, regulators are also considering the impacts of climate change on market (systemic) risks, and whilst we do not foresee any short-term material risks, we will also keep this under review.
The margins and default funds referred to previously are sized to protect against latent market risk. The adequacy of these resources is evaluated daily by subjecting member and customer positions to 'extreme but plausible' stress scenarios encapsulating not only historical crises, but theoretical forward-looking scenarios
and decorrelation events. All our CCPs are compliant with the appropriate regulatory requirements regarding margin calculations, capital and default rules. Latent market risk is
monitored and managed on a day-to-day basis by the risk teams within the clearing services. Committees overseeing market risks meet on a regular basis.
Foreign exchange (FX) risk is monitored closely and translation risk is managed by matching the currency of the Group's debt to its earnings to protect key ratios and partially hedge currency net assets. FX derivatives including cross-currency swaps are used under a control framework governed by LSEG Board approved policy. The split between floating and fixed debt is managed to support the Group's target of maintaining an interest coverage ratio that underpins a good investment grade credit rating.
Authorised derivatives can be used to:
-- transform fixed rate bond debt, to supplement a mix of short dated commercial paper and floating rate loan borrowings, to achieve the Group's policy objective, and / or
--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.
(Chief Financial Officer, Director of Post Trade, Financial Risk Committee)
There are two distinct types of risk to which the Group's CCPs are exposed to that are commonly referred to as liquidity risk - market liquidity risk and funding liquidity risk. The former is the risk that it may be difficult or expensive to liquidate a large or concentrated position and is addressed under market risk. The latter is the risk that the CCP may not have enough cash to pay variation margin to non-defaulters or to physically settle securities delivered by a non-defaulter that cannot be on-sold to a defaulter and this is the subject of this section.
The Group's CCPs collect clearing members' margin and/or default funds contributions in cash and/or in highly liquid securities. To maintain sufficient ongoing liquidity and immediate access to funds, the Group's CCPs deposit the cash received in highly liquid and secure investments, such as sovereign bonds and
reverse repos, as mandated under EMIR; securities deposited by clearing members are therefore held in dedicated accounts with CSDs and/or International Central Securities Depositaries (ICSDs). The Group's CCPs also hold a small proportion of their investments in unsecured bank and money market deposits subject to the limitations imposed by EMIR. The successful operation of these investment activities is contingent on general market conditions and there is no guarantee that such
investments may be exempt from market losses.
Liquidity risk in a non-clearing context is the risk that the firm may be unable to make payments as they fall due.
The Group's CCPs have put in place regulatory compliant liquidity plans for day-to-day liquidity management, including contingencies for stressed conditions. The Group's CCPs have multiple layers of defence against liquidity shortfalls including intraday margin calls, minimum cash balances, access to contingent liquidity arrangements, and, for certain CCPs, access to central bank liquidity.
Under the Enterprise Risk Management Framework, CCP investments must be made in compliance with the Group CCP Financial Risk Policy (as well as the policies of the CCPs themselves). These policies stipulate a number of Risk Management standards including investment limits (secured and unsecured) and liquidity coverage ratios. Committees overseeing CCP investment risk meet regularly.
Each CCP monitors its liquidity needs daily under stressed and unstressed assumptions and reports to the Group Financial Risk Committee each month.
Requirements for liquidity including headroom requirements are set out in the Group's Board approved Treasury Policy. The Group maintains appropriately sized liquidity facilities for business as usual and, from time to time, large scale acquisitions and monitors its requirements on an ongoing basis.
Stressed facility headroom is assessed regularly and on a one-off basis for working capital reviews associated with large scale acquisitions using plausible downside business projections.
Group Treasury risk is monitored daily and is managed within the constraints of a Board approved policy by the Group Treasury team and is overseen by the Treasury Committee (a sub-
Committee of the Financial Risk Committee, both chaired by the CFO). An update on Group Treasury risks and actions is provided monthly to the Financial Risk Committee and to each meeting of the Board Risk Committee.
(Chief Financial Officer, Financial Risk Committee)
Principal risks to managing the Group's capital are:
--In respect of regulated entities, capital adequacy compliance risk (the risk that regulated entities do not maintain and report sufficient qualifying capital to meet regulatory requirements) and capital reporting compliance risk (the risk that regulated entities fail to comply with capital reporting and regulatory obligations). If a regulated entity in the Group fails to ensure that sufficient capital resources are maintained to meet regulatory requirements, this could lead to loss of regulatory approvals and/or financial sanctions
--In respect of regulated and unregulated entities, commercial capital adequacy and quality risk (the risk that Group and solo entities do not maintain both sufficient quantity and quality of capital to meet commercial requirements) and investment return risk (the risk that capital is held in subsidiaries or invested in projects that generate a return that is below the Group's cost of capital)
--Availability of debt or equity capital (whether specific to the Group or driven by general financial market conditions)
The Group's Capital Management Policy provides a framework to ensure the Group maintains suitable capital levels (both at Group and solo entity levels), and effectively manages the risks
thereof. The Group's Treasury Policy recognises the need to observe regulatory requirements in the management of the Group's resources.
The Risk Appetite approved by the Board includes components related to the Group's leverage ratios and capital risks; Key Risk Indicators are monitored regularly. The Group maintains an ongoing review of the capital positions of its regulated entities to ensure that they operate within capital limits which are overseen by the Financial Risk Committee, the Executive Committee and the Board. The Group can manage its capital structure by varying returns to shareholders, issuing new shares or increasing or reducing borrowings. The Board reviews dividend policy and funding capacity on a regular basis and the Group maintains comfortable levels of debt facility headroom.
The Group regularly assesses debt and equity markets to maintain access to new capital at reasonable cost. The Group is mindful of potential impacts on its key metrics when considering changes to its capital structure.
For more information on this risk, see Note 3 to the accounts, Financial Risk Management on pages 158-163.
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.
(Responsibility: Chief Operating Officer, Chief Technology Officer)
LSEG is highly dependent on the development and operation of its sophisticated technology and advanced information systems and those of its third-party service providers. Technology failures may impact our clients and the orderly running of our markets, potentially leading to system outages.
The Group is reliant on outsourced service providers for key technology services and data provision and actively manages relationships with strategic technology suppliers to avoid a breakdown in service provision. The Group also actively monitors new technological developments and opportunities for innovation.
The performance and availability of the Group's systems are constantly reviewed and monitored to prevent problems arising and where possible, ensure a prompt response to any potential service-impacting incident.
The Group continues actively to identify, manage and mitigate risks associated with the consolidation of technology development and operations. Regular rigorous business impact and operational risk scenario analysis is performed in conjunction with the Group Risk, Group Business Continuity and Crisis Management functions to identify, assess and remedy potential system and governance vulnerabilities. In addition, all technology solutions are comprehensively tested by both LSEG Technology and third-party quality assurance providers as appropriate; functional, 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.
(Executive Lead: Chief Operating Officer)
The Group is reliant upon secure premises to protect its employees and physical assets as well as deploying appropriate safeguards to ensure uninterrupted operation of its IT systems and infrastructure.
Terrorist attacks and similar activities directed against our offices, operations, computer systems or networks could disrupt our markets, harm staff, tenants and visitors, and severely disrupt our business operations. Civil or political unrest could impact companies within the Group. Long-term unavailability of key premises
could lead to the loss of customer confidence and reputational damages.
Climate change may cause an increase in the severity and frequency of extreme weather events across the locations where LSEG operates. This could disrupt business operations, through damage to offices and infrastructure, and cause harm to staff.
Security threats are treated with the utmost seriousness. The Group has robust physical security arrangements.
The Group is supported by relevant governmental organisations in our key areas of operation. Security teams respond to intelligence
received and liaise closely with police and global government agencies. Across major hubs covering the UK, Europe, the Americas and Asia, the Group maintains close monitoring of geopolitical threats and horizon scanning through a third-party security monitoring service. Where events are detected, response
support services are mobilised to support as required. The Group has well established and regularly tested business continuity and crisis management procedures. The Group assesses its
dependencies on critical suppliers and ensures robust contingency measures are in place.
(Executive Lead: Model Risk Committee)
The Group defines model risk as the potential loss an institution may incur, as a consequence of decisions that could be principally based on the output of models, due to errors in the development, implementation or use of such models.
The key model risks are in CCP margining, Yield Book mortgage valuation, Environmental, Social and Governance (ESG) scoring and the firms' capital models. Model risk can be both reputational and financial.
LSEG businesses have in place industry standard model risk control and governance pillars, including a Model Risk Policy, model inventory tools, documentation templates and standards.
Robust model validation is in place to ensure our models are fit for purpose and appropriately developed and implemented. The Model Risk Management team provides model risk status reports on a quarterly basis to the Model Risk Committee, which oversees model risk across the Group.
Security threats - Cyber
(Executive Lead: Chief Information Officer, Chief Information Security Officer)
Public and private organisations continue to be targeted by increasingly sophisticated cyber threats.
Threats such as ransomware, theft of customer data and distributed denial of service attacks were increasingly significant to the financial industry as a whole in 2019.
The Group's data, IT systems and networks, and those of its third-party service providers, may be vulnerable to threats, such as cyber-attacks, data breach or other leakage of sensitive data, which could adversely affect the Group's business. Additionally, new emerging technologies such as cloud computing and AI could impact our cyber risk profile.
A major information security breach that results in data and intellectual property loss, system unavailability or loss of integrity of data or systems, could have a significant negative impact on our reputation, financial results and the confidence of our clients and could lead to fines and regulatory censure.
The Group continues to invest in and enhance its information security control environment, cyber defences and operational processes, as it delivers its Board approved Cyber Security Strategy.
Extensive organisational, technological and culture measures aligned to the National Institute of Standards and Technology (NIST) control framework are in place to prevent, detect, respond to and recover from cyber security threats.
Regular testing of security controls and incident response processes is undertaken, both internally across our three lines of defence model and externally by independent third parties to provide assurance over the effectiveness of cyber security controls and recovery processes.
The Group monitors intelligence and liaises closely with global Government agencies as well as industry forums and regulators to help improve our ability to respond to the evolving threats faced by us and our industry.
(Executive Lead: Chief Operating Officer, Chief Information Officer)
The considerable change agenda exposes the Group to the risk that change is either misaligned with the Group's strategic objectives or not managed effectively within time, cost and quality criteria.
The volume of change is driven by both internal and external factors. Internal factors include the diversification strategy of the Group and its drive for technology innovation, consolidation and operational resilience. External factors include the changing regulatory landscape and requirements which necessitate changes to our
systems and processes. Design defects, errors, failures or delays associated with new, modified or upgraded technology, products or services introduced by LSEG and Refinitiv, and therefore the combined business, could negatively impact its business.
The risks associated with change are mitigated by effective implementation of the Group's Change framework. This includes Board oversight across the Group's change portfolio and project pipeline, to ensure these align to the Group and Divisional strategies and support our financial plans. Appropriate governance, risk and executive oversight is exercised over individual programmes and projects based on the scale, complexity and impact of the change. The purpose of this oversight is to confirm changes do not breach the Group's risk appetite, are compliant with the approved project management policy and to oversee the management of budget, resource,
escalations, risks, issues and dependencies.
For software specific development, software design methodologies, testing regimes and test environments are continuously being enhanced to minimise implementation risk.
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
(Executive Lead: Director of Post Trade)
The Group's CCPs are exposed to operational risks associated with clearing transactions and the management of collateral, particularly where there are manual processes and controls. While the Group's CCPs have in place procedures and controls to prevent failures of these processes, and to mitigate the impact of any such failures, any operational error could have a material adverse effect on the Group's reputation, business, financial condition and operating results.
The Group provides routing, netting and settlement and custody services through its CSD to ensure that securities are settled in a timely and secure manner. There are operational risks associated with such services, particularly where processes are not fully automated.
Operational risk related to settlement and custodial operations is minimised via highly automated processes reducing administrative activities while formalising procedures for all services.
The operations of the settlement service are outsourced to the European Central Bank (TARGET2-Securities).
The CSD mitigates technology risk by providing for redundancy of systems, daily backup of data, fully updated remote recovery sites and SLAs with outsourcers.
Our CSD and CCPs Business Continuity Plan covers all the critical operational processes and related activities.
(Executive Lead: Chief Executive Officer, Executive Committee)
There is a risk that one or more of the Group's entities may fail to comply with the laws and regulatory requirements to which it is, or becomes, subject. In this event, the entity in question may be subject to censures, fines and other regulatory or legal proceedings
The Group continues to maintain systems and controls to mitigate compliance risk. Compliance policies and procedures are regularly reviewed to ensure that Group entities and staff are compliant with applicable laws and regulations and uphold our corporate standards. All staff across the Group are subject to mandatory compliance training
(Executive Lead: Chief Information Officer, Chief Data Officer)
Through its various entities, LSEG collects, owns, licenses, calculates, transforms, and distributes data in many forms (e.g. structured, unstructured, electronic, and print formats, audio-visual data, production, testing, archive data, derived data, etc.). LSEG is accountable to its customers, counterparties, owners, vendors, regulators, and the public, for the careful 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
Data standards are defined through the Chief Data Office (CDO) which identifies the various data held across the Group, access rights/entitlements, any legal or regulatory restrictions which may apply and how such data is used and the intended future uses. The framework sets out the principles to ensure Group Data is of the highest quality and meets the highest standards, while highlighting key characteristics of data which are important for measurement, oversight, and governance.
Employees and culture
(Executive Lead: Group HR Director)
The calibre and performance of our leaders and colleagues is critical to the success of the Group.
The Group's ability to attract and retain key personnel is dependent on several factors. This includes organisational culture and reputation, prevailing market conditions, compensation packages offered by competing companies, and any regulatory impact thereon. These factors also encompass the Group's ability to continue to have appropriate variable remuneration and retention arrangements in place, which help drive strong business performance and alignment to long-term shareholder value and returns, impact the size of the local labour force with relevant experience, and the number of businesses competing for such talent. Whilst the
Group focuses very carefully on the attraction and retention of talent, if unsuccessful, it may adversely affect the Group's ability to conduct its business through an inability to execute business operations and strategies effectively.
Cultivating a diverse talent pool and an inclusive culture is of great importance to the Group to reflect the societies we serve, both for the innovation benefits that diversity of thought help to promote, but also in light of increased industry-wide expectations for ESG transparency. If the Group were unable to attract, support and retain diverse talent, it may have an adverse impact on the Group's ability to
deliver its strategic objectives and its reputation.
Whilst our preparations are comprehensive in relation to Brexit, a common risk across the Group is the uncertainty surrounding the status of the EU citizens in the UK and UK citizens in the EU.
Pandemics represent a potential threat to employee health and wellbeing.
Please see also Supporting sustainable growth for details regarding employee matters and Corporate Governance for information about Workforce Engagement
We focus on a number of strategic initiatives to ensure we attract and retain the right calibre of talent for our business and continue to facilitate a culture of high performance.
We have a rigorous in-house recruitment and selection process, to ensure that we are bringing the best possible talent into the organisation, in terms of their skills, technical capabilities, cultural fit and potential. We undertake a comprehensive annual review of critical roles, and ensure we have succession plans in place to
minimise the impact of losing critical personnel. We monitor the attrition in each division and country, in addition to any critical colleague turnover, so that appropriate mitigation can be taken where needed.
We aim to remove barriers to our colleagues' overall sense of engagement, proactively measuring how satisfied they are with their working experience at LSEG, and the extent to which they would recommend it as a place to work, via our annual engagement 'Have Your Say' survey.
We recognise that the overall wellbeing of our colleagues is vital for our continued performance and have introduced a proactive approach to wellbeing in the UK, which we are in the process of rolling out globally. This looks to improve wellbeing across five dimensions: physical, mental, financial, social purpose, and work-life balance. We also operate a Speak Up campaign, designed to provide our colleagues with the confidence to speak up and raise concerns when they witness or suspect inappropriate behaviour,
misconduct or wrongdoing that conflicts with our values.
Career development remains a key enabler for success, and we have a carefully managed learning and development programme which enables us to focus on providing colleagues with a range of courses, materials and tools to support their development.
We strive to inspire diverse talent to pursue careers at LSEG and encourage industry-wide change to increase equal opportunity for all, across every part of LSEG. We support diversity and 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.
Risks which are new to the Group or which are difficult to quantify due to their remote or evolving nature.
(Executive Lead: Group Corporate Sustainability Committee)
International organisations, governments and regulators are focused on integrating climate risks and opportunities into investment decision making, to enable transition to a low carbon economy. This is an area of emerging and wide-ranging policy making, impacting financial market participants and corporates.
The increased focus from regulators, investors and other stakeholders, has generated a requirement for enhanced climate-related risk oversight. Climate-related risks include Transition risks, Litigation risks and Physical risks (further information is provided under Physical Threats risk).
With respect to this, it is acknowledged that although climate-related risks have been categorised as an emerging risk, they are inherently linked to other strategic, financial and operational risks, as well as commercial opportunities.
Please see also Supporting sustainable growth for details regarding Corporate Sustainability.
We support consistent global standards and encourage continued alignment between the EU and UK on sustainable finance. We have been members of the EU High Level Expert Group and the Technical Expert Group, and the FCA/PRA Climate Financial Risk Forum. To further align with the TCFD recommendations, the Group has developed climate-related risks scenario over both the medium and longer term, and how these may impact credit, operational, market and liquidity risks.
In line with increased disclosure requirements for corporations and financial markets participants, LSEG has taken proactive steps to develop its methodology to define and model how climate change impacts its businesses. The aim is to reinforce the Group's resilience to acute physical risks today and chronic physical risks in the future, and to address transition risks, to be aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, be prepared for potential future mandatory reporting requirements and to 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.
(Executive Lead: Chief Information Officer)
The increased integrated artificial intelligence (AI) in digital transformation strategies brings with it associated risks such as inherent bias in the historical data and behaviour patterns which feed AI algorithms. This may give rise to automated decisions which are not aligned with current societal expectations or organisational
values. AI use by cyber hackers can also render cyber security defence and detective mechanisms ineffective.
Regulators are considering the application of existing or new 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.
The Group continues to maintain systems and controls to mitigate the risk resulting from emerging technology. Risk arising from the Group's use of AI is identified, assessed, managed and reported through the current ERMF. We align with industry best practices and guidance when considering the trustworthiness and bias in AI systems and AI aided decision making. The Group ensures the use of AI is fair, explainable and transparent, secure and safe. The continuous development of AI has the potential to impact industry behaviour and our business, we will continue to monitor and manage this risk closely.
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.
Risk management approach
The Group is profitable and strongly cash generative
and its capital base comprises equity and debt capital.
However, the Group recognises the risk that its entities
may not maintain sufficient capital to meet their obligations or they may make investments that fail to generate a positive or value enhancing return.
The Group comprises regulated and unregulated entities. It considers that:
--increases in the capital requirements of its regulated
--negative yields on its investments of cash, or
--a scarcity of debt or equity (driven by its own
performance or financial market conditions)
either separately or in combination are the principal
risks to managing its capital.
The Group focuses upon its overall cost of capital as it seeks, within the scope of its risk appetite, to provide
superior returns to its shareholders, fulfil its obligations to the relevant regulatory authorities and other stakeholders and ensure that it is not overly dependent upon short and medium term debt that might not be
available at renewal. Maintaining the flexibility to invest for growth is a key capital management consideration.
The Group can manage its capital structure and react to changes in economic conditions by varying returns to shareholders, issuing new shares or increasing or reducing borrowings. The Board reviews dividend policy
and funding capacity on a regular basis and the Group maintains comfortable levels of debt facility headroom.
A summary of the Group's capital structure is presented below:
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:
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 management approach
The Group's credit risk relates to its customers and counterparties being unable to meet their obligations to the Group either in part or in full, including:
--repayment of invested cash and cash equivalents, and
--settlement of derivative financial instruments.
In their roles as CCP clearers to financial market participants, the Group's CCPs guarantee final settlement of transactions acting as buyer towards each seller and as seller towards each buyer. They manage substantial credit risks as part of their operations including unmatched risk positions that might arise from the default of a party to a cleared transaction. For more information see 'Principal Risks and Uncertainties', pages 60 to 73.
Notwithstanding regulations that require CCPs to invest predominantly in secured instruments or structures (such as government bonds and reverse repos), CC&G and the LCH Group CCPs are able to maintain up to 5% of their total deposits at commercial banks on an unsecured basis. Through this potential for its CCPs to invest on an unsecured basis (as well as by certain other
regulated and unregulated operations observing agreed investment policy limits), the Group may continue to face some risk of direct loss from a deterioration or failure of one or more of its unsecured investment counterparties.
Concentration risk may arise through Group entities having large individual or connected exposures to groups of counterparties whose likelihood of default is driven by common underlying factors. This is a particular focus of the investment approach at the Group's CCPs.
Credit risk is governed through policies developed at a Group level. Limits and thresholds for credit and concentration risk are kept under review.
Group companies make a judgement on the credit quality of their customers based upon the customer's financial position, the recurring nature of billing and collection arrangements and, historically, a low incidence of default. The Group is exposed to a large number of customers and so concentration risk on its receivables is deemed low by management. The Group's credit risk is equal to the total of its financial assets as shown in note 19. No estimated credit losses have been recognised on other financial instruments and there have been no significant increases in credit risk for these assets.
Credit risk associated with cash and cash equivalents is managed by limiting exposure to counterparties with credit rating levels below policy minimum thresholds, potentially overlaid by a default probability assessment. Except where specific approval is arranged to increase this limit for certain counterparties, investment limits of between £25 million and £100 million apply for periods ranging between a week and 12 months, depending on counterparty credit rating and default probability risk. Derivative transactions and other treasury receivable structures are undertaken or agreed with well‑capitalised counterparties and are authorised by policy to limit the credit risk underlying these transactions.
To address market participant and latent market risk, the Group's CCPs have established financial safeguards against single or multiple defaults. Clearing membership selection is based upon supervisory capital, technical and organisational criteria. Each member must pay margins, computed and collected at least daily, to cover the exposures and theoretical costs which the CCP might incur in order to close out open positions in the event of 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:
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.
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.
Risk management approach
Distress can result from the risk that certain governments may be unable or find it difficult to service their debts. This could have adverse effects, particularly on the Group's CCPs, potentially impacting cleared products, margin collateral, investments, the clearing membership and the financial industry as a whole.
Specific risk frameworks manage country risk for both fixed income clearing and margin collateral and all clearing members' portfolios are monitored regularly against a suite of sovereign stress scenarios. Investment limits and counterparty and clearing membership monitoring are sensitive to changes in ratings and other financial market indicators, to ensure the Group's CCPs are able to measure, monitor and mitigate exposures to sovereign risk and respond quickly to anticipated changes. Risk Committees maintain an 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 £1 billion or more at the end of either of the financial reporting periods shown
Liquidity, settlement and custodial risk
Risk management approach
The Group's operations are exposed to liquidity risk to the extent that they are unable to meet their daily payment obligations.
In addition, the Group's CCPs and certain other Group companies must maintain a level of liquidity (consistent with regulatory requirements) to ensure the smooth operation of their respective markets and to maintain operations in the event of a single or multiple market stress event or member failure. This includes the potential requirement to liquidate the position of a clearing member under a default scenario including covering the associated losses and the settlement obligations of the defaulting member.
The Group is exposed to the risk that a payment or settlement bank could fail or that its systems encounter operational issues, creating liquidity pressures and the risk of possible defaults on payment or receivable obligations.
The Group uses third‑party custodians to hold securities and is therefore exposed to the custodian's insolvency, its negligence, a misuse of assets or poor administration.
The combined Group businesses are profitable, generate strong free cash flow and operations are not significantly impacted by seasonal variations. The Group maintains sufficient liquid resources to meet its financial obligations as they fall due and to invest in capital expenditure, make dividend payments, meet its pension commitments, appropriately support or fund acquisitions or repay borrowings. Subject to regulatory
constraints impacting certain entities, funds can generally be lent across the Group and cash earnings remitted through regular dividend payments by local companies. This is an important component of the Group Treasury cash management policy and approach.
Management monitors forecasts of the Group's cash flow and overlays sensitivities to these forecasts to reflect assumptions about more difficult market conditions or stress events. The Group will take the appropriate actions to satisfy working capital requirements when committing to large scale acquisitions, including comfortable liquidity headroom projected over a reasonable timeframe.
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, £600 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 £1 billion programme, with €300 million in issuance at the end of the financial period (2018: €300 million). At 31 December 2019, £934 million (2018: £1,159 million) of the Group's bank facilities were unutilised, with circa £250 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 €300 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 €3,580 million tranche to provide funding capacity to precisely match the debt the Group will take on when the acquisition completes.
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 2019
Less than 1 year
Between 1 & 2 years
Between 2 & 5 years
Over 5 years
Trade & other payables
(excluding lease liabilities)
Clearing member business liabilities
Derivative financial instruments
Other non-current liabilities
(excluding lease liabilities)
As at 31 December 2018
Less than 1 year
Between 1 & 2 years
Between 2 & 5 years
Over 5 years
Trade & other payables
Clearing member business liabilities
Derivative financial instruments
Other non-current liabilities
Market Risk - Foreign Exchange
Risk management approach
The Group operates primarily in the UK, Europe and North America, but also has growing and strategically important businesses in Asia, and other alliances and investments across the globe. Its principal currencies of operation are Sterling, Euro and US dollars.
Group companies generally invoice revenues, incur expenses and purchase assets in their respective local currencies. As a result, foreign exchange risk arises mainly from the translation of the Group's foreign currency earnings, assets and liabilities into its reporting currency, Sterling, and from occasional, high value intragroup transactions. Exceptions exist including at MillenniumIT (a Sri Lankan Rupee reporting entity) which invoices a material proportion of its revenues in US dollars, and at certain operations of the LCH Group (a Euro reporting subsidiary), which generate material revenues in Sterling and US dollars and incur material costs in Sterling.
Intragroup dividends and the currency debt interest obligations of the Company may create short‑term transactional FX exposures but play their part in controlling the level of translational FX exposures the Group faces.
The Group may be exposed from time to time to FX risk associated with strategic investments in, or divestments from, operations denominated in currencies other than Sterling.
The Group seeks to match the currency of its debt liabilities to the currency of its earnings and cash flows which, to an extent, protects its key ratios (net leverage and interest coverage) and balances the currency of its assets with its liabilities. In order to mitigate the impact of unfavourable currency exchange rate movements on earnings and net assets, non‑Sterling cash earnings are centralised and applied to matching currency debt and interest payments, and, where relevant, interest payments on Sterling debt re‑denominated through the use of cross‑currency swaps.
A material proportion of the Group's debt is held in or swapped into Euros and US dollars as noted below.
During the year, the Group settled maturing Euro‑denominated cross‑currency interest rate swaps linked to the maturity of its 2009 issued £250 million bond. Therefore, at the end of the year, the remaining cross‑currency interest rate swaps are directly linked to Euro fixed debt. The Euro and US dollar denominated debt, including the cross‑currency swaps, provides a hedge against the Group's net investment in Euro and US dollar denominated entities.
As at 31 December 2019, the Group's designated hedges of its net investments were fully effective.
Whilst transactional foreign exchange exposure is limited, the Group hedges material transactions in accordance with Group Treasury policy (which requires cash flows of single transactions or a series of linked transactions of more than £5 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:
Post tax profit Equity Post tax profit Equity
£m £m £m £m
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
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 management approach
The Group's interest rate risk arises through the impact of changes in market rates on cash flows associated with cash and cash equivalents, investments in financial assets and borrowings held at floating rates. The Group may also face future interest rate exposure connected to
committed M&A transactions where significant debt financing is involved.
The Group's CCPs face interest rate exposure through the impact of changes in the reference rates used to calculate member liabilities versus the yields achieved through their predominantly secured investment activities.
Group interest rate management policy focuses on protecting the Group's credit rating and maintaining compliance with bank covenant requirements. To support this objective, a minimum coverage of interest expense by EBITDA of 7 times, and a maximum floating rate component of 50% of total debt are targeted. This approach reflects:
(i) a focus on the Group's cost of gross debt rather than its net debt given the material cash and cash equivalents
set aside for regulatory purposes;
(ii) the short duration allowed for investments of cash and cash equivalents held for regulatory purposes which, by their nature, generate low investment yields;
(iii) a view currently maintained that already low market yields are unlikely to move materially lower; and
(iv) the broad natural hedge of floating rate borrowings provided by the significant balances of cash and cash equivalents held effectively at floating rates of interest.
As at 31 December 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 £8 million higher (2018: £8 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 £2 million lower (2018: £2 million lower). This deficit is expected to be recovered as investment yields increase as the portfolio matures and is reinvested.
The Annual Report contains the following statements regarding responsibility for financial statements on page 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 £2,781 million
(2018: £3,103 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
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:
31 December 2019
31 December 2018
Salaries and other short-term benefits
Share based payments
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 £0.5 million and expenses of £0.4 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
(owed to)/from as at
31 December 2019
Interest rate as at 31 Dec 2018
London Stock Exchange plc
25 years from May 2006 with five equal annual repayments commencing in May 2027.
LIBOR plus 2% per annum
London Stock Exchange Employee Benefit Trust
Repayable on demand.
London Stock Exchange Group Holdings (Italy) Limited
Fifth anniversary of the initial utilisation date which was April 2018.
EURIBOR plus 1.5% per annum
London Stock Exchange Group Holdings Limited
Fifth anniversary of the
initial utilisation date
which was October 2019.
1.5% per annum
London Stock Exchange Reg Holdings Limited
Fifth anniversary of the
initial utilisation date
which was July 2018.
1.2% per annum
London Stock Exchange (C) Limited
of the initial utilisation date
which was May 2017.
1.5% per annum
London Stock Exchange Group Holdings
of the initial utilisation date
which was November 2019.
1.5% per annum
LSEG Employment Services Limited
of the initial utilisation date
which was January 2015.
1.2% per annum
London Stock Exchange Group (Services) Limited
of the initial utilisation date
which was January 2016.
0.9% per annum
During the year, the Company charged in respect of employee share schemes £10 million (2018: £9 million) to LSEG Employment Services Limited, £6 million (2018: £5 million) to LCH Group, £4 million (2018: £5 million) to the London Stock Exchange Group Holdings Italia S.p.A. group of companies, £4 million (2018: £3 million) to the FTSE Group, £5 million (2018: £7 million) to London Stock Exchange Group Holdings Inc, £4 million (2018: £5 million) to London Stock Exchange plc and £2 million (2018: £1 million) to other subsidiaries of the Group.
During the year the Company received dividends of £218 million from LSE plc, £155 million from LSE Group Holdings Ltd, £31 million from LSE Group Holdings (Italy) Ltd and £60 million from LSEGH (Luxembourg) Ltd. The Company recognised £7 million income (2018: £7 million) and £72 million expenses (2018: £61 million) with Group undertakings in relation to corporate recharges. At 31 December 2019, the Company had £25 million (2018: £67 million) other receivables due from Group companies and other payables of £78 million (2018: £144 million) owed to Group undertakings.
Transactions with associates
In the year ended 31 December 2019, the Group recognised £1 million revenue (2018: £1 million) from its associates and as at 31 December 2019, the Group had £1 million receivable from its associates (2018: £1 million).
All transactions with subsidiaries and associates were carried out on an arm's length basis."
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