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Friday 15 February, 2013

LCH.Clearnet Group

Final Results

RNS Number : 9407X
LCH.Clearnet Group Limited
15 February 2013
 

 

15 February 2013

 

LCH.Clearnet Group Limited results 2012

Year of significant strategic and operational progress

 

LCH.Clearnet Group Limited (LCH.Clearnet) today announces its results for the year ended 31 December 2012.

                                         

Strategic and operational highlights

-      Demonstrated, in unprecedented market volatility, its value as a key participant in the global capital markets risk management framework

-      Strengthened position as leading OTC clearing house with SwapClear passing $339.9 trillion notional cleared; ForexClear cleared notional of more than $440 billion in 2012 following March launch; CDSClear extended to include international model

-      RepoClear cleared over €142.4 trillion nominal

-      Continental European cash equity and listed derivative clearing arrangements with NYSE extended

-      Revised terms for London Stock Exchange (LSEG) offer for a majority stake provisionally agreed in December

-      Acquisition of International Derivatives Clearing Group (IDCG) from Nasdaq in August 2012 to provide platform for accelerated expansion of US multi-asset clearing offer

 

Financial highlights

-      Net revenues increased by 24% to €426.2 million

-      Headline operating profit grew by 89% to €127.5 million

-      Clearing fees increased 7% to €253.9 million

-      Net underlying investment income was €132.3 million, down 5%, while average cash and collateral under management rose 13% to €83.6 billion

-      Unrealised net investment gain and net other income including rebates of €40.0 million

-      Operating costs controlled at €298.7 million

-      Tier 1 ratio of 40% and total capital ratio of 46%

 

Commenting on performance Ian Axe, Group Chief Executive, said:

"Last year saw unprecedented stress in European sovereign debt markets and extensive global financial regulatory reforms covering CCPs. LCH.Clearnet came through for clients and regulators demonstrating once again our effectiveness within the global capital markets risk management framework. A €127.5 million profit is sound evidence of how we strengthened our financial stability and is proof of our longevity. We also achieved a number of important milestones in our strategic development, including reinforcing our leading market position in Europe by growing our OTC businesses and extending our horizontal exchange model, as well as investing in the US and Asia.  We are in a strong position to leverage further our strengths as the leading multi-asset class, multi-venue clearer."

 

Ends

For further information please contact

LCH.Clearnet: Juliana Wheeler 020 7426 7638

Brunswick Group: Andrew Garfield / Elvira Eilert Pignal 020 7404 5959

 

About LCH.Clearnet

LCH.Clearnet is a leading multi-national clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets.  It clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, foreign exchange derivatives, interest rate swaps, CDS and euro and sterling denominated bonds and repos; and  works closely with market participants and exchanges to identify and develop clearing services for new asset classes.

A clearing house sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade.  When the trade is registered with a clearing house, it becomes the legal counterparty to the trade, ensuring the financial performance; if one of the parties fails, the clearing house steps in.  By assuming the counterparty risk, the clearing house underpins many important financial markets, facilitating trading and increasing confidence within the market.

Initial and variation margin (or collateral) is collected from clearing members; should they fail, this margin is used to fulfill their obligations.  The amount of margin is decided by the clearing house's risk management teams, who assess a member's positions and market risk on a daily basis.  Both the soundness of the risk management approach and the resilience of its systems have been proven in recent times. LCH.Clearnet is regulated or overseen by the national securities regulator and/or central bank in each jurisdiction from which it operates.

DISCLAIMER

This announcement contains certain forward looking statements, which are made by the Directors in good faith based on the information available to them at the time of their approval of this announcement. Generally, the words "will", "may", "should", "continue", "expects", "intends", "anticipates" or similar expressions identify forward-looking statements. Statements contained in this announcement should be treated with caution due to the inherent uncertainties, including economic, regulatory and business risk factors, underlying any such forward-looking statements.

 


Chairman's statement

 

2012 was a year of transformation for LCH.Clearnet.

Our Board and management team continued to position LCH.Clearnet as a leading international CCP well placed for the new regulatory and competitive world. This was achieved while the Group also faced numerous external challenges: European sovereign risk issues have yet to be resolved, the macro-economic environment remains uncertain and regulations impacting clearing continue to evolve.

Despite this difficult environment LCH.Clearnet management deftly navigated its way through the tumult. Ian Axe, Group Chief Executive, hired a world class management team, executed on his strategic vision for the firm and is well on the way to completing the transformation plan, all of which supports LCH.Clearnet's objective to become the premier multi-national and multi-asset CCP. These successes are a great testament to Ian and his management team.

This was reflected in our financial performance. Clearing revenues increased and net investment income made an important contribution to profit notwithstanding the exceptionally low interest rate environment. The Group's position in our traditional exchange clearing business was complemented by the growing momentum in our OTC businesses.

This positioning is critical. To that end, the Board reached an agreement with LSEG in which LSEG will take a majority ownership stake in LCH.Clearnet of up to 60%. The transaction fits with the Board's strategic objective to ensure LCH.Clearnet maintains its exchange neutrality in line with user and shareholder preferences while ensuring certainty and stability for the future.

In December we agreed with LSEG to extend the deal's expiry date to finalise terms of a revised offer. Both parties also confirmed a provisional agreement that LSEG will make a revised offer for a majority stake of up to 60% of LCH.Clearnet for €15 per share (€14 a share cash and up to an additional €1 per share payable in cash in 2017). The terms assume LCH.Clearnet will raise around €300 million in new capital to meet regulatory requirements immediately after LSEG acquires its majority stake, with LSEG committing to subscribe to its pro-rata share of the capital raise.

Regulators' focus on CCPs and on the critical risk management expertise the clearing model provides to the markets did not abate in 2012. Management worked diligently to ensure LCH.Clearnet is, and will remain, compliant with the various regimes that affect the Group, including CPSS-IOSCO, European Market Infrastructure Regulation (EMIR) and Dodd-Frank, amongst other requirements.

LCH.Clearnet's Board and management are supportive of regulators' efforts to protect investors through the counterparty risk management provided by CCPs, which includes elements such as the move towards LSOC accounts and segregated default funds. The critical role CCPs can play to help regulators achieve their goals was highlighted with the EMIR requirement for CCPs to increase capital.

We are in the process of talking to our shareholders about the capital increase and we are confident we will exceed any technical requirements that come from the new regulations. These discussions are ongoing and we will update the market as appropriate.

Regulations will also impact the make up of the Board and we are working to align the composition of the Group Board, those of its key operating entities and Board Committees with the new regulatory standards.

I would like to welcome four new board members: Lex Hoogduin and Neil Walker as independent non executive Directors, Patrick Combes as non executive Chairman of LCH.Clearnet SA and Yunho Song as a non executive user representative.

Lex's valuable experience as executive director at Dutch National Bank and as an advisor to Wim Duisenberg, the first president of the ECB, will bring invaluable insight to the Board and to his role as Chairman of the Risk Committees for LCH.Clearnet Ltd, SA and LLC. Neil, already a member of the SA Board, has extensive experience in credit derivatives, in designing and implementing trading systems and working with middle and back office personnel and joins the Board and the Risk Committees. The Board will also benefit from Patrick's entrepreneurial leadership at Viel & Cie, which he transformed from a domestic French business to one of the world's leading inter dealer brokers and from Yunho's experience as managing director and head of EMEA global rates and currencies at Bank of America Merrill Lynch in London.

At the same time I would like to thank John Townend and Gerard Hartsink for their service on the Board. John was a long standing Director whose leadership as Chairman of the Risk Committees helped steer us through turbulent and uncertain markets. Gerard's input has been an invaluable resource to the Board.

I would also like to extend my best wishes to Hervé Saint-Sauveur, who stepped down as Chairman of LCH.Clearnet SA and has agreed to continue as an independent Director until spring of 2014 so that we can further benefit from his experience.

2012 was a demanding year and I would like to thank the Board for their hard work, dedication and stewardship. I also extend my gratitude to our staff, whose unrelenting diligence is critical to LCH.Clearnet's success. I would like to thank our clients, who put their trust in LCH.Clearnet and depend on us. They are why we are here.

Jacques Aigrain

Chairman

14 February 2013

 

Group Chief Executive's statement

 

Financial markets in 2012 continued to be stressed and served once again to highlight the importance of LCH.Clearnet's agenda to provide world class market infrastructure risk management.

Pace of regulatory change

Since 2008 the pace of regulatory change has been building and this year we found ourselves increasingly at the centre of CCP consultation for both Dodd-Frank in the US and EMIR in the EU. Our investment in improved risk management and greater compliance capacity has been key to ensuring better protection of client assets, improving margin models and segregating and bolstering default funds. We also embarked on a major investment in our banking platform to address both client and regulatory requirements to improve collateral and liquidity management for future business growth.

The year's regulatory agenda also focused on the sustainability of CCPs and the obligation for CCPs to develop a living will. In addition to operating changes required by this resolution planning, we have seen the largest regulatory impact on CCPs to date with the ESMA and EBA guidelines recommending a substantial regulatory capital increase. LCH.Clearnet estimated that it will increase its regulatory capital by around €300 million and has been fully engaged with shareholders to fulfil this obligation in the first half of 2013.

Horizontal business model continues to diversify with strong OTC expansion

Despite market exchange volumes falling significantly in 2012, we strengthened our horizontal exchange model in both the near and long term. NYSE Euronext once again extended its contracts with LCH.Clearnet for cash equities and listed derivatives clearing through 2018 and 2014 respectively and LME extended clearing with LCH.Clearnet for its commodities business until Q4 2014. NASDAQ acquired a stake in LCH.Clearnet and joined our board as an observer ahead of a clearing agreement for NASDAQ London Exchange (NLX) going live in the first half of 2013. We also entered into agreements with SGX to link our commodity clearing services and agreed a collaboration with DTCC and NYPC to evaluate margin efficiency for clients in the US. I would also like to recognise the continued support we received from market participants such as Turquoise and Bats Chi-X Europe in 2012, which enabled us to maintain our consolidation strategy.

Our repo business continued to maintain its market share by clearing €142.4 trillion of nominal value while welcoming 13 new members. We remain the leading fixed income clearer in Europe with a strong market share and appreciate the support from members in a year when we segregated and bolstered the default fund of the UK based service.

Our strategic aim of balancing LCH.Clearnet's traditional exchange business with OTC clearing began to take shape. Banks, broker dealers, FCMs and the buy side community have been instrumental in allowing us to partner and learn from their challenges and business needs in 2012. As a result we expanded our SwapClear business very significantly, launched ForexClear for clearing NDFs and our CDSClear business prepared itself for a full international offering.

SwapClear expanded its product offering, saw its volumes grow, positioned itself globally and had success clearing for clients directly as we built on our  traditional interbank market to deliver a service capable of working with and winning buy side clients. SwapClear's volumes grew to $339.9 trillion in notional outstanding. At year end, there were 2,362,863 trade sides in SwapClear and 72 clearing members. SwapClear has had great success clearing for clients even ahead of legislation requiring them to clear with a CCP with 27,788 client trades cleared and $11.9 trillion in client notional. SwapClear remains the clear leader in interest rate swap clearing globally.

ForexClear was launched during the year and quickly became the leading NDF clearing provider with volumes growing strongly. By year end, ForexClear cleared 11 currencies and covered 95% of the NDF market. Over 33,000 trades were cleared with $444.1 billion in notional value.

CDSClear expanded from a regional business to include an international model and we are proud of the efforts of the team and the future potential of the division. CDSClear cleared €104.2 billion in gross notional, a 77% increase and €12.0 billion of CDS open interest.

Strengthening our financial stability

2012 financial performance saw increased revenues and a flat cost base, with operating profit growth of 89% to €127.5 million. These results helped to strengthen our balance sheet, hire the best market talent, invest in improving risk management and technology and fast track our expansion plans in the US with the acquisition of IDCG.

Net revenues increased 24% to €426.2 million driven by our OTC expansion and good performance in our commodity businesses. Average cash and collateral under management rose 13% to €83.6 billion but negative interest rate movements coupled with our primary responsibility of protecting client assets saw underlying investment income fall 5% to €132.3 million.

The 2011/12 transformation programme proved its worth this year, enabling us to reinvest efficiency gains back into the business. Additional investment was made across all control functions, new business lines were launched, talent investment was accelerated and we purchased a CCP in the US.

Looking forward

In 2013 LCH.Clearnet is focused on delivering five key achievements that will change the face of the firm for many years to come.

1.   regulatory compliance will see the firm recapitalised in line with ESMA and EBA requirements and we continue to work to the relevant timetables for our EMIR and  Dodd-Frank compliance programmes

2.   pending final regulatory and shareholder signoff LSEG will take a majority stake in the firm and the M&A uncertainty of the previous eight years will be removed. The commitment to the horizontal model will see us expanding our strategic partnerships in Europe, the US and Asia in 2013

3.   our global OTC expansion will be driven through international client hubs from New York, London and Paris while international service expansion will focus on local markets in Canada, Japan and Australia. A major focus across all OTC products will be the expansion and extension of client clearing

4.   OTC product expansion will see us continuing to build out IRS capabilities through inflation swaps and swaptions, as well as continuing to extend our FX NDF capabilities. The CDS business will be launching single name CDS clearing for up to 200 names and we are looking to implement new VAR risk models in all three asset classes

5.   our traditional exchange strategy will be repositioned to capture the increasing likelihood of futurisation across several historically OTC products. In 2013 we will be extending our futures clearing capability to include futures on swaps as well as increasingly complex commodities futures contracts

The success achieved in 2012 has largely been down to the dedication of the firm's senior management and staff across our international offices. The market's perception of LCH.Clearnet is changing and a large proportion of this success should be attributed to our staff and their focus on risk management and the client service we strive to provide.

I would also like to thank the members, clients and regulators for their continued support. I look forward to working with all of you in what can only be described as the most dynamic changing CCP environment in our history.

Ian Axe

Group Chief Executive

14 February 2013


Business line review

The Group's revenue base continues to diversify across its products and services. As the OTC businesses grow, the proportion of the Group's revenues derived from other asset classes will reduce.

OTC derivatives

SwapClear

SwapClear generated clearing revenues of €59.8 million, up 36% from €44.0 million in 2011. The increase in revenue for the business was attributable to new clearing members, existing clearing members progressing from the introductory to the standard tariff and the growth of client clearing.

SwapClear worked closely with regulators to define new clearing rules for the OTC derivatives market. In the US SwapClear supported the LSOC segregation model, promoting the importance of client asset segregation and protection in the event of default. SwapClear also recommended to the CFTC the products that should be subject to mandatory clearing, which were largely reflected in the final regulations.

One of the key initiatives in the US was LCH.Clearnet's acquisition of IDCG in August, which paves the way for the introduction of a new US domiciled SwapClear service. In November, the service harmonised FCM and SwapClear clearing member clearing models. The new harmonized model provides clients with simplified trade submission, portfolio portability, increased connectivity to execution platforms and risk free compression. SwapClear more than tripled its US staff to 60 employees as it continued to invest in building its capabilities and, as a result, the New York team relocated into larger premises in June.

SwapClear redefined its clearing membership criteria, default fund construct and default management process as required under the global open access mandate. Consequently, the clearing membership increased in 2012 from 61 to 72, with a strong 2013 pipeline.

During the year, $11.9 trillion of client notional was cleared on SwapClear by a broad range of end user client types including asset managers, hedge funds, pension funds and banks, as market participants adopted central clearing ahead of mandatory clearing due to come into effect in 2013.

Other achievements included:

-     an agreement in March to explore additional cross product margin efficiencies with NYSE Euronext, DTCC and NYPC

-     the announcement of SwapClear's intention to apply for a clearing and settlement facility licence in Australia to support its growing business in  Asia-Pacific

-     growth in clearing of forward rate agreements (FRA), launched in December 2011, with over 70% of all reported FRAs now cleared through SwapClear. The launch reflected the product's value in managing short dated interest rate risk and its role cross margining as an alternative to listed futures contracts

-     improved trade registration with continuous intraday margin runs and the enhancement of the SwapClear margin  
approximation tool (SMART) for on demand margin calculations to help participants understand and manage the new market structure and their risk

-     the introduction of the consultancy certification programme, which provides the industry with its first certification 
programme for consultancy firms preparing market participants for the implementation of centralised OTC clearing

-     increased connectivity, which broadened the global community of middleware providers able to process SwapClear trades

ForexClear

Following its launch in March, the ForexClear service cleared $444.1 billion of notional value in FX NDF trades in 2012. With 14 clearing members at year end, the service had a pipeline of new applicants keen to take advantage of ForexClear's leading risk management framework, while preparing for the mandatory FX clearing deadline in the US in 2013. The year was dominated by regulatory changes, including the redefinition of membership criteria to meet the mandate for open access, along with the enhanced default management process and improved trade registration with continuous margin runs throughout the day. With the service ready to report trades to Swap Data Repository, ForexClear is well positioned to complete derivatives clearing organisation (DCO) obligations under Dodd-Frank and move its focus to EMIR compliance.

ForexClear's focus in 2013 will be on growth in cleared interbank volumes, launching a client clearing model for both the US and Europe, and expanding the range of cleared FX products in line with regulatory and market demand.

ForexClear is run by a strong team with deep market, product and OTC clearing expertise capable of meeting the many challenges of aggressively growing the business while maintaining the stable and robust service that existing clearing members have grown to expect.

CDSClear

CDSClear, the Group's CDS clearing service, launched its international service in May, which added 10 new sell side participants to its existing domestic French service. CDSClear volumes grew materially with a 77% increase in gross notional cleared to €104.2 billion and a 159% increase in open interest to €12.0 billion.

The business offers the broadest set of cleared European credit indices, which facilitated improved portfolio margining for both clearing members and potential clients.

CDSClear's focus remained firmly on robust risk and default management. CDSClear introduced a forward looking and asset class appropriate default management framework. CDSClear also led the way in the introduction of recovery and resolution provisions. Its loss distribution mechanism was well received by market participants and regulators.

CDSClear further enhanced its service with the introduction of cleared trades on an intraday basis, automated risk free compression and the acceptance of non-cash collateral via a pledge agreement. This pledge mechanism offers clearing members the benefit of enhanced control over their non-cash assets, while providing the CCP with immediate access in the event of a clearing member default.

In 2013 CDSClear expects to deliver its multi-faceted client clearing and single name services, which include direct trade flow through the ClearLink application programming interface, multiple trade sources and a choice of client account structures. CDSClear continues to engage closely with a wide range of participants from across the buy side and sell side to ensure appropriate focus on delivering meaningful market enhancements including product augmentation, geographic expansion and improved user protections.

RepoClear

RepoClear cleared over €142.4 trillion of nominal value (2011: €152.3 trillion). RepoClear welcomed 13 new clearing members to the fixed income clearing service, consolidating its position as the leading fixed income provider in Europe.

The reduction in clearing volumes was broadly consistent with the market as a whole, which witnessed a general reduction in repo activity. Despite the volume reduction, market participants continued to favour clearing to mitigate risk in a volatile market environment. Clearing revenues fell by 9% to €38.9 million.

RepoClear continued to improve the management of systemic and contagion risk in the fixed income markets by working with clearing members to design a revised default management process and to strengthen the fixed income default management waterfall arrangements. In August the first step of the revised process was implemented by creating a separate default fund for fixed income in London. In December service closure arrangements were put in place, which would be triggered during a clearing member default if all other resources had been exhausted. The implementation of an equivalent service closure provision is scheduled for the Group's Paris based CCP in 2013. These changes are consistent with the regulatory sentiment that CCPs should adhere to the highest standards possible for risk and default management.

A major IT integration programme was launched for fixed income. The fixed income clearing platform, developed in house and deployed in London in 2010, is scheduled to replace the clearing system currently used in Paris in the first half of 2013. The risk management systems supporting the Paris and London businesses are also being upgraded in 2013 with the switch to a value at risk (VAR) based margining methodology. The new risk systems include tools to help clearing members understand and control their exposures and margin costs and will generate significant efficiencies.

In parallel with the infrastructure renewal planned, the fixed income business is developing a collateral basket with pledge product in Paris and a TermDBV product in London, both of which are expected to launch in 2013.

Commodities and listed derivatives

Clearing revenues for the Group's commodities and listed derivatives businesses were affected by challenging market conditions, though the division's asset class diversification limited the fall in income. Clearing revenue was flat at €105.2 million.

Volumes for London Metal Exchange (LME) listed base metal contracts bucked the general market trend with a growth rate of 17.6%. Volumes traded on the Nodal exchange also grew sharply during the course of the year. This was partly driven by the introduction of new contracts which act as financial transmission right equivalents. The recently introduced clearing of OTC coal option contracts by the EnClear service also achieved strong traction and demonstrated encouraging growth, while the OTC freight service had a 65% market share.

Recognising the growth potential for Asia based commodity businesses, LCH.Clearnet invested in developing services for newly developing listed businesses. Hong Kong Mercantile Exchange (HKMEx) experienced steady growth in its first full year of trading and intends to capitalise on its geographic location by launching a range of renminbi denominated contracts in 2013.

The Group expanded its exchange traded business to provide clearing for a cross quotation arrangement between the London Stock Exchange and the Singapore Exchange (SGX). In addition, LCH.Clearnet will continue to build on its horizontal and open access model by providing clearing for NLX, the London based trading venue from NASDAQ due to launch in 2013.

The implementation of EMIR in 2013 is expected to require significant changes to existing business models for the users of commodities and listed derivatives clearing services. The rules cover reporting to trade repositories, segregation, and portability, among other issues.

Cash equities

Group wide cash equities clearing volumes were impacted by a general reduction in activity in European markets. The drop in market volumes was partially offset by an increase in business generated from CCP interoperability.

LCH.Clearnet reached an agreement to extend the contract to clear cash equities for NYSE Euronext's continental cash equities markets until 2018. Under this contract, technology investment decisions taken in 2010 will allow LCH.Clearnet SA to introduce fee reductions for clearing members of 20% in 2013 without compromising service levels.

The Paris and London businesses implemented the EU short selling directive, which require CCPs to impose fines for trades that go beyond the intended settlement date (ISD) and trigger an automatic buy in process four days after ISD. This is expected to improve efficiency and reduce costs for the cash equities markets.

During the year a cross quotation agreement between LSEG and the SGX was launched, allowing LSEG members to trade the top 36 SGX stocks on LSEG's new international board. Separately, SGX members will be able to trade FTSE100 securities on SGX's GlobalQuote board and LCH.Clearnet will clear trades executed on both exchanges when the arrangement goes live in 2013, subject to regulatory approvals.

 

Business report

 

Financial commentary

Underlying net revenue in 2012 rose by €7.6 million (2%) to €391.5 million (2011: €383.9 million). Net investment income decreased during the year by €7.1 million (5%) to €132.3 million (2011: €139.4 million). Increasing levels of collateral managed during the first half of the year acted to mitigate continuing low interest rates.

Operating expenses increased by €21.7 million (8%) to €298.7 million (2011: €277.0 million). The increase in operating expenses reflects investment in infrastructure improvements, growth in the OTC businesses and regulatory driven demands, offset by savings from the transformation programme.

The Group's underlying operating profit for the year decreased by 13% to €92.8 million (2011: €106.9 million).

 


2012
€'m

20111

€'m

Change
€'m

Change
%

Clearing fees

253.9

236.7

17.2

7%

 Total cash and collateral investment income

268.9

494.1

(225.2)

(46%)

 Interest on collateral paid to members

(136.6)

(354.7)

218.1

61%

Net investment income

132.3

139.4

(7.1)

(5%)

Net other income including rebates

5.3

7.8

(2.5)

(32%)

Underlying net revenue

391.5

383.9

7.6

2%

 Operating expenses

(274.2)

(253.5)

(20.7)

(8%)

 Depreciation and amortisation

(24.5)

(23.5)

(1.0)

(4%)

Operating costs2

(298.7)

(277.0)

(21.7)

(8%)

Underlying operating profit

92.8

106.9

(14.1)

(13%)

Unrealised net investment gain/(loss)

34.7

(39.3)



Impairment and non-recurring  items

(27.6)

(22.5)



Statutory operating profit

99.9

45.1



 

1   Prior year figures restated to reflect changes in accounting treatment

2   Before impairment and non-recurring items               

 

Underlying net revenue of €391.5 million differs from statutory net revenue of €426.2 million since it excludes unrealised gains of €34.7 million.

Operating costs of €298.7 million differs from statutory costs and expenses of €326.3 million since it excludes impairment and non-recurring expenditure of €27.6 million.

Underlying operating profit of €92.8 million differs from statutory operating profit of €99.9 million since it excludes unrealised fair value investment gains (shown within interest income on the face of the income statement) of €34.7 million relating to bonds and associated interest rate swaps and impairment and non-recurring costs of €27.6 million.

Clearing fees


2012
€'m

2011
€'m

2012
Volumes
m

2011
Volumes
m

Change in fees
%

Change in volumes
%

Fixed income

38.9

42.9

3.0

2.7

(9%)

11%

OTC derivatives

71.6

44.2

1.9

0.5

62%

280%

Commodities & listed derivatives

105.2

105.6

1,119.0

1,515.1

(0%)

(26%)

Cash equities

38.2

44.0

369.9

427.7

(13%)

(14%)


253.9

236.7

1,493.8

1,946.0

7%

(23%)

 

Clearing fees improved €17.2 million (7%) to €253.9 million (2011: €236.7 million).

Fixed income clearing fees decreased by €4.0 million (9%) to €38.9 million. Volumes increased by 11% and the nominal value cleared fell by 7% to €142.4 trillion.

OTC derivatives clearing fees increased substantially to €71.6 million (62%). Three factors contributed to this fee growth: growth in SwapClear client clearing to $11.9 trillion of notional buy side cleared; an increase in the membership of the SwapClear service to 72 clearing members (2011: 61 clearing members); and the launch of the ForexClear and CDS businesses.

During 2012 the amount of notional principal outstanding cleared by SwapClear grew to $339.9 trillion (net of $160.5 trillion torn up to date) (2011: $283.4 trillion).

Commodities and listed derivatives clearing fees decreased slightly to €105.2 million. Total volumes decreased by 26%, principally due to reduced activity in the NYSE markets. This was offset by strong growth in LME markets, Nodal exchange and OTC coal options. In the freight market the Group was responsive to market price pressures while retaining its position as the leading CCP.

Cash equities clearing fees decreased by 13% to €38.2 million in line with reduced volumes.

Net investment income


2012
€'m

2011
€'m

Change
€'m

Change
%

Realised income from cash and collateral margin

253.0

477.8

(224.8)

(47%)

Interest earned on default funds

15.9

16.3

(0.4)

(2%)

Total cash and collateral income

268.9

494.1

(225.2)

(46%)

 Interest paid on cash and collateral margin

(116.5)

(332.6)

216.1

65%

 Interest paid on default funds

(20.1)

(22.1)

2.0

9%

Interest expense and similar charges

(136.6)

(354.7)

218.1

61%

 Net income earned on cash and collateral margin

136.5

145.2

(8.7)

(6%)

 Net interest earned on default funds

(4.2)

(5.8)

1.6

28%

Realised investment income

132.3

139.4

(7.1)

(5%)

 

The average level of collateral held by the Group in 2012, including default fund deposits, was 13% higher than 2011 at €83.6 billion (2011: €73.8 billion). However total investment income received in relation to both margin collateral and default fund deposits decreased by €225.2 million (46%) to €268.9 million (2011: €494.1 million) reflecting lower interest rates.

The Group pays interest to clearing members on cash collateral and default fund deposits. The amount of interest paid to clearing members decreased by €218.1 million (61%) to €136.6 million (2011: €354.7 million) reflecting lower interest rates. A small deficit of €4.2 million was incurred on default funds where interest paid to clearing members exceeded interest received (2011: €5.8 million deficit).

Net other income including rebates

Net other income including rebates fell by €2.5 million to €5.3 million (2011: €7.8 million). These include annual fees charged to clearing members less profit share amounts due on OTC business lines. Net other income including rebates for 2011 has been restated to reflect a change in accounting treatment whereby the recovery of certain development costs is now netted within operating expenses.

Operating costs

Operating costs before impairment and non-recurring items rose by €21.7 million (8%) to €298.7 million (2011: €277.0 million), driven by the growth in OTC businesses and partially offset by savings from the delivery of the transformation programme.

The Group continued to make investments in its OTC derivatives business. In particular the Group supported the growth of SwapClear in the US with the acquisition in August of IDCG, now renamed LCH.Clearnet (US) LLC.

In March 2012 the Group launched its ForexClear clearing service and started clearing FX NDFs.

The development of the CDS offering continued with the launch in May of the international CDSClear service, an extension to the established domestic French offering.

The Group has also invested in strengthening its senior management throughout the organisation. Governance and organisational structure has been enhanced and IT contractual arrangements improved.

Depreciation and amortisation increased by €1.0 million (4%) to €24.5 million (2011: €23.5 million), reflecting the Group's continuing investment in its technology infrastructure.

Unrealised net investment income

The Group only invests in high quality assets, typically high grade government issued bonds. During the year the Group ceased making investments in longer term fixed rate assets. The Group entered into interest rate swaps to hedge the interest rate risk that arose from receiving a fixed rate of return from those longer term fixed rate assets whilst paying clearing members a floating rate of return.

The Group is required to mark to market both the underlying investment and interest rate swaps and, under its accounting policy, the full impact of any mark to market movement is reflected through the income statement.

At times of stress in the financial markets, as experienced during the sovereign debt crisis, the yield curves of the underlying investment and the interest rate swaps may become dislocated reflecting the credit risk perceived by the market. These result in an unrealised credit or charge being reflected through the income statement. These are non-cash adjustments made for accounting purposes.

Mark to market adjustments on bonds and related interest rate hedging instruments resulted in a credit to the income statement of €34.7 million (2011: a charge of €39.3 million), representing a 0.3% movement on the portion of the portfolio that is subject to fair value adjustments (2011: fall of 0.3%). As at 31 December 2012 the total unrealised gains contained in the balance sheet were €4.3 million (2011: €31.1 million loss). These related to an investment portfolio of €11.7 billion (2011: €11.2 billion) consisting of assets which are individually due to mature during 2013 and 2014. By the time of maturity, and assuming full recovery of the principal, the mark to market positions will have fully reversed through the income statement.

Impairment and non-recurring expenditure

Non-recurring costs increased by €5.1 million (23%) to €27.6 million (2011: €22.5 million) and substantially relate to the transformation programme.

There were no impairments in 2012. In 2011 there was a write-off of €3.4 million related to software assets.

Capital resources

The total equity of the Group increased during the year by €91.0 million to €424.1 million (2011: €333.1 million).

The total regulatory capital of the Group, at €403.7 million (2011: €340.2 million restated), continues to exceed the minimum Pillar 1 requirements of €70.3 million (2011: €92.6 million), and the combined Pillar 1 and Pillar 2 requirement of €251.1 million (2011: €210.3 million).

The Group's tier 1 asset ratio of 39.6% (2011: 21.7% restated) exceeds the minimum requirement of 4% and the total capital ratio of 46.1% (2011: 29.5% restated) is also above the 8% minimum required.

The Group's Standard & Poor's long term credit rating of A+ was reaffirmed during the year. The rating is on negative watch following the announcement of the potential acquisition of a majority stake in LCH.Clearnet Group by LSEG, which currently has a lower rating.

 

Consolidated income statement

For the year ended 31 December 2012



 20121

 

20111

 


Note

Before impairment & non-recurring items
€'m

Impairment & non-recurring items
€'m

Total
€'m

Before impairment & non-recurring items
€'m

Impairment & non-recurring items
€'m

Total
€'m

Revenue








 Interest income


303.6

-

303.6

 454.8

-

454.8

 Interest expense


(136.6)

-

(136.6)

 (354.7)

-

(354.7)

Net interest income


167.0

-

167.0

 100.1

-

100.1

Clearing fees


253.9

-

253.9

 236.7

-

236.7

 Settlement and other income


25.4

-

25.4

29.5

-

29.5

 Settlement fees payable


(13.9)

-

(13.9)

(15.3)

-

(15.3)

Net settlement and other income


11.5

-

11.5

14.2

-

14.2

Rebates


(6.2)

-

(6.2)

(6.4)

-

(6.4)

Net revenue

2

426.2

-

426.2

344.6

-

344.6

 

Costs and expenses








Employee benefits expense


(141.7)

(7.4)

(149.1)

 (118.0)

(4.7)

(122.7)

Depreciation and amortisation charge


(24.5)

-

(24.5)

 (23.5)

(0.7)

(24.2)

Write-off/impairment of intangible assets


-

-

-

-

(3.4)

(3.4)

Other operating expenditure


(132.5)

(20.2)

(152.7)

 (135.5)

(13.7)

(149.2)

Total costs and expenses


(298.7)

(27.6)

(326.3)

(277.0)

(22.5)

(299.5)









Operating profit/(loss)


127.5

(27.6)

99.9

67.6

(22.5)

45.1









Finance income


4.0

-

4.0

2.7

-

2.7

Finance costs


(12.6)

-

(12.6)

 (12.7)

-

(12.7)

Profit before taxation


118.9

(27.6)

91.3

 57.6

(22.5)

35.1

Taxation expense


(38.0)

6.4

(31.6)

 (19.9)

6.0

(13.9)

Profit for the year

2

80.9

(21.2)

59.7

 37.7

(16.5)

21.2

 

1   Prior year figures restated to reflect change in accounting treatment

 

The results for both years are in respect of continuing operations.

The notes on pages 16 to 28 of this announcement form an integral part of these consolidated financial statements.

 

Consolidated statement of comprehensive income

For the year ended 31 December 2012


2012
€'m

2011
€'m

Profit for the year

59.7

21.2

 Exchange differences on retranslation of foreign operations

(1.3)

-

 Actuarial gain/(loss) recognised in the UK pension scheme

7.5

(11.6)

 Deferred tax relating to the UK actuarial (gain)/loss

(1.8)

2.9

 Actuarial (losses)/gains recognised in overseas employee benefit plans

(4.0)

0.2

 Deferred tax relating to the overseas actuarial losses

1.2

0.4

Other comprehensive income/(expense) for the year, net of tax

1.6

(8.1)

Total comprehensive income for the year, net of tax

61.3

13.1

 

The results for both years are in respect of continuing operations.

The notes on pages 16 to 28 of this announcement form an integral part of these consolidated financial statements.

 

Consolidated statement of financial position

As at 31 December 2012


Note

2012
€'m

20111

€'m

Assets




Non-current assets




 Intangible assets


198.3

170.3

 Property, plant and equipment


18.5

12.2

 Trade and other receivables


84.2

-

 Deferred taxation asset


14.8

29.0

Total non-current assets


315.8

211.5

Current assets




 Cash and short term deposits

3

26,345.4

20,414.0

 Other financial assets


13,997.3

18,749.4

 Derivative financial assets


-

1.0

 Income tax receivable


12.1

2.1

 Trade and other receivables


33.7

91.5

 Balances with clearing members

4

455,364.1

501,565.3

Total current assets


495,752.6

540,823.3

Total assets

2

496,068.4

541,034.8





Equity and liabilities




Capital and reserves




Called up share capital


42.2

40.6

Share premium


28.1

-

Capital reserves


15.3

15.3

Capital redemption reserve


59.5

59.5

Translation reserve


(1.3)

-

Retained earnings


280.3

217.7

Total equity

page 15 & note 5

424.1

333.1

Non-current liabilities




Interest bearing loans and borrowings


179.0

178.0

Default funds

6

5,595.1

2,043.7

Trade and other payables


51.8

-

Employment benefits


8.1

15.6

Total non-current liabilities


5,834.0

2,237.3

Current liabilities




 Interest bearing loans and borrowings


69.0

68.1

 Derivative financial liabilities


35.4

60.8

 Income tax payable


-

1.8

 Trade and other payables


187.8

324.0

 Balances with clearing members

4

489,518.1

538,009.7

Total current liabilities


489,810.3

538,464.4

Total liabilities

2

495,644.3

540,701.7

Total equity and liabilities


496,068.4

541,034.8

 

1   Prior year figures restated to reflect change in accounting treatment

 

Jacques Aigrain                                                           Ian Axe

Chairman, LCH.Clearnet Group Limited                            Director, LCH.Clearnet Group Limited

The notes on pages 16 to 28 of this announcement form an integral part of these consolidated financial statements.

The consolidated financial statements were approved by the Board on 14 February 2013.

 

Consolidated statement of cash flows

For the year ended 31 December 2012


Note

2012
€'m

20111

€'m

Cash flows arising from operating activities




Profit for the year


59.7

21.2

 Taxation expense


31.6

13.9

 Finance income


(4.0)

(2.7)

 Finance costs


12.6

12.7

 Depreciation and amortisation


24.5

22.9

 Loss on disposal and write-off of assets


-

1.3

 Impairment of intangible assets


-

3.4

 Increase in trade and other receivables


(23.9)

(33.1)

 Decrease in employee benefits


(4.0)

(6.3)

 (Decrease)/increase in trade and other payables


(83.8)

184.8

 Unrealised fair value (gains)/losses on financial instruments


(34.7)

39.3

 Margin monies cash (outflow)/inflow


(2,290.4)

8,695.7

 Increase/(decrease) in default funds


3,535.5

(5.7)

Net cash inflow from operations


1,223.1

8,947.4

Taxation paid


(29.9)

(20.4)

Net cash inflows from operating activities


1,193.2

8,927.0





Investing activities




 Investment in intangible assets


(17.7)

(15.3)

 Purchase of property, plant and equipment


(10.6)

(8.3)

 Redemption of/(investment in) other financial assets


4,761.2

(4,336.0)

 Interest received


1.6

2.7

Net cash inflow/(outflow) from investing activities


4,734.5

(4,356.9)





Financing activities




 Interest paid


(11.9)

(12.2)

 Finance lease principal payments


(0.3)

(0.2)

Net cash used in financing activities


(12.2)

(12.4)





Increase in cash and cash equivalents


5,915.5

4,557.7





Cash and cash equivalents at 1 January


20,414.0

15,769.2

Effects of foreign exchange movements


15.9

19.3

Cash and cash equivalents at 31 December


26,345.4

20,346.2





 Cash and cash equivalents at 31 December comprise




 Investments in secured short term deposits


20,655.6

16,809.4

Cash at bank and in hand


5,689.8

3,604.6


3

26,345.4

20,414.0

Bank overdrafts


-

(67.8)



26,345.4

20,346.2

 

1   Prior year figures restated to reflect changes in accounting treatment

 

The notes on pages 16 to 28 of this announcement form an integral part of these consolidated financial statements.

 

Consolidated statement of changes in equity

For the year ended 31 December 2012


Called up share capital €'m

Share

premium

€'m

Capital reserves

€'m

Capital redemption
reserves

€'m

Translation

reserve

€'m

Retained earnings

€'m

Total

€'m

Shareholders' equity at 1 January 2011

40.6

-

15.3

59.5

-

204.6

320.0

 Profit for the year to 31 December 2011

-

-

-

-

-

21.2

21.2

 Other comprehensive expense

-

-

-

-

-

(8.1)

(8.1)

Total comprehensive income

-

-

-

-

-

13.1

13.1

Shareholders' equity at 31 December 2011

40.6

-

15.3

59.5

-

217.7

333.1

 Profit for the year to 31 December 2012

-

-

-

-

-

59.7

59.7

 Other comprehensive expense

-

-

-

-

(1.3)

2.9

1.6

Total comprehensive income

-

-

-

-

(1.3)

62.6

61.3

Shares issued

1.6

28.1

-

-

-

-

29.7

Shareholders' equity at 31 December 2012

42.2

28.1

15.3

59.5

(1.3)

280.3

424.1

 

The notes on pages 16 to 28 of this announcement form an integral part of these consolidated financial statements.

 

 

Notes to the consolidated financial statements

 

1 Summary of significant accounting policies

 

Basis of preparation

These financial statements have been prepared in accordance with IFRSs and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the International Accounting Standards Board (IASB) effective for 2012 reporting and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs. The financial statements have been prepared under the historical cost convention as modified by the valuation of financial assets and liabilities held at fair value through profit and loss. A summary of significant accounting policies is set out below, together with an explanation of changes to previous policies on the adoption of new accounting standards.

The consolidated financial statements are presented in millions of euros except where otherwise indicated.

 

Changes in accounting treatment

The Group has made a number of accounting treatment changes which have required the restatement of prior year results in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. None of these have resulted in a change to either reported profits or net assets from prior years. The changes are:

-     reclassification of settlement fees payable

-     reclassification of income share rebates

-     reclassification of recoverable development costs

-     de-recognition of assets where development costs have been funded by third parties

 

Settlement fees payable

The Group recovers settlement costs incurred from clearing members. Previously these fees payable have been included within other operating expenses although the recovery from clearing members has been included in other income within net revenue. The Directors believe it is more appropriate for these costs to be netted within revenue and have included the costs in a separate line on the face of the income statement as settlement fees payable. For the 2011 comparative information this has resulted in a reduction of both operating costs and net revenue of €15.3 million from the levels originally reported in respect of 2011 with no change to net profit.

 

Income share rebates

Under agreements with certain clearing members the Group shares profits from specific clearing services with them. This share can either be an income or an expense for the Group depending on the profitability of the individual services. In 2011 this expense was disclosed within operating expenses. However, the Directors believe it is more appropriate to classify this item in rebates which reduces net revenue. For the 2011 comparative information this has resulted in a reduction of both operating costs and net revenue of €6.4 million from the levels originally reported in respect of 2011 with no change to net profit.

 

Recoverable development costs

The Group has made two changes in 2012 in respect of the accounting for those costs incurred to create or upgrade existing clearing systems which are funded under agreements with certain clearing members. Clearing members underwrite the system development costs that are incurred and closely direct the development and investment in the clearing service. Clearing members also direct the operational use of the relevant clearing service which includes control over the governance committees that determine fee levels, set development priorities, appoint staff and set remuneration levels. The Group retains control over the admission of clearing members to the service, setting of margins, all risk management policies and the day to day operation of the systems. Clearing members have the option to take full control of these assets in the future.

Individual agreements differ. Some developments are prefunded by clearing members and some are funded by the Group, with expenditure then recovered from future profits of the clearing service concerned under individually negotiated arrangements. A liability is recognised in the statement of financial position for the pre-funding which is then reduced as the costs are incurred by the Group. Under other agreements the Group initially funds the development and will recognise a debtor in the statement of financial position to reflect the costs that have been incurred to date. This debtor will be recovered either directly from the clearing members or through the future profits of the clearing service, again under individually negotiated arrangements.

Change in accounting presentation of recoverable development costs in the income statement

Previously, for costs expensed to the income statement the corresponding credit was made to other income in the income statement. This credit is now made to other operating expenditure in the income statement to net with the incurred cost which the Directors believe more faithfully reflects the substance of the arrangements as they represent direct cost recoveries for the Group and is in accordance with IAS 1, Presentation of Financial Statements.

For 2011 this change has resulted in a reduction in both other income and other operating expenses of €22.9 million and no change in reported profit.

Change in accounting policy for derecognition of assets where development costs have been funded by third parties

The Group has previously capitalised costs incurred under these arrangements. For costs that were incurred and capitalised on the statement of financial position the Group recognised an intangible asset or property, plant and equipment in the statement of financial position and recognised a corresponding credit to a deferred income account in the statement of financial position. The deferred income account was then released over time to offset the amortisation of the assets to the income statement.

During 2012 the Group has reviewed these arrangements in light of changes to the profit sharing and cost reimbursement terms of the agreements with members against the requirements of IFRIC 18, Transfers of Assets from Customers, and IFRIC 12, Service Concession Arrangements and revisited the level of control that the participating members have over the direction of the relevant assets. Continued development of the assets has confirmed that they will have a useful life beyond the date at which members can opt to take control of them.

The effect of these restatements is shown below on the effected items.

Extracts from accounts

Income statement for the year ended 31 December 2011


As previously reported
€'m

Recover-able develop-ment costs
€'m

Income share rebates
€'m

Settlement fees payable
€'m

Restated
€'m

Other income

54.7

(25.2)


-

29.5

Settlement fees payable

-

-

-

(15.3)

(15.3)

Rebates

-

-

(6.4)

-

(6.4)

Depreciation and amortisation

(26.5)

2.3

-

-

(24.2)

Other operating expenses

(193.8)

22.9

6.4

15.3

(149.2)







Operating profit

45.1

-

-

-

45.1

Profit for the year

21.2

-

-

-

21.2

 

Statement of financial position as at 31 December 2011


As previously reported
€'m

Restatement
€'m

Restated
€'m

Intangible assets

203.1

(32.8)

170.3

Property, plant and equipment

13.0

(0.8)

12.2

Total assets

541,068.4

(33.6)

541,034.8

Total equity

333.1

-

333.1

Trade and other payables

357.6

(33.6)

324.0

Total liabilities

540,735.3

(33.6)

540,701.7

Total equity and liabilities

541,068.4

(33.6)

541,034.8

 

Statement of financial position as at 31 December 2010


As previously reported
€'m

Restatement
€'m

Restated
€'m

Intangible assets

193.1

(15.9)

177.2

Property, plant and equipment

10.1

(0.8)

9.3

Total assets

513,324.6

(16.7)

513,307.9

Total equity

320.0

-

320.0

Trade and other payables

158.2

(16.7)

141.5

Total liabilities

513,004.6

(16.7)

512,987.9

Total equity and liabilities

513,324.6

(16.7)

513,307.9

 

There is no restatement required for the statement of financial position as at 31 December 2009.

 

Judgements and key sources of estimation uncertainty

The preparation of financial statements in conformity with IFRSs requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are:

-     the measurement and impairment of goodwill and other intangible assets

-     the estimated useful economic life of assets

-     the measurement of defined benefit pension obligations

The Group determines whether indefinite life goodwill is impaired on an annual basis and this requires an estimation of the value in use of cash generating units to which the goodwill is allocated.

Other assets are assessed when an indication of impairment arises. This requires the estimation of future cash flows and choosing a suitable discount rate. The Group regularly reviews its estimate of useful economic lives to ensure it fairly reflects the period over which the Group expects to derive economic benefits from its assets.

Measurement of defined benefit pension obligations requires estimation of future changes in salaries and inflation as well as mortality rates, the expected return on assets and the choice of a suitable discount rate.

 

Going concern

The Directors have made an assessment of the Group's ability to continue as a going concern and to meet current and future regulatory capital requirements and are satisfied that it has the resources to continue in business for the foreseeable future, being at least 12 months from the date on which these accounts were approved by the Board. Contracts for the majority of the exchanges for which the Group clears have a notice period of at least one year. It has a large number of clearing members and is not unduly reliant on any single clearing member or group of clearing members. The Group is working towards being compliant with EMIR and will apply for registration during 2013. Furthermore, the Directors are not currently aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. Therefore the financial statements continue to be prepared on the going concern basis.

 

Presentational currency

The Group's financial statements are presented in euros, which is the functional currency of the Company. Items included in the financial statements of each of the Group's entities are measured using their functional currency.

 

Basis of consolidation

Subsidiaries are consolidated from the date on which the Group obtains control and continue to be consolidated until the date that such control ceases. Control comprises the power to govern the financial and operating policies of the subsidiary so as to obtain benefit from its activities and is achieved through direct ownership of voting rights.

The financial statements of the subsidiaries are prepared for the same reporting year as the Company using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All significant intra-group balances and transactions have been eliminated on consolidation.

LCH.Clearnet SA has been consolidated under the acquisition method of accounting.

LCH.Clearnet Limited has been consolidated using merger accounting principles as if LCH.Clearnet Group Limited had always been the parent Company following a scheme of arrangement under section 425 of the Companies Act 1985.

LCH.Clearnet LLC, acquired by the Group in August 2012, has been consolidated using the acquisition method of accounting.

 

Investments

In its separate financial statements the Company recognises its investments in its subsidiaries at cost less the value of any impairment provision that may be necessary. Income is recognised from these investments in relation to any distributions received.

 

Foreign currencies

Monetary assets and liabilities denominated in currencies other than the functional currency are translated into euros at the rates of exchange ruling on the statement of financial position date. Transactions in foreign currencies are recorded at the prevailing FX rates at the date of the transaction. Exchange differences on the retranslation of LCH.Clearnet LLC are recorded in the translation reserve. All other exchange differences are recorded in the income statement.

 

Goodwill

Goodwill arising on an acquisition is the fair value of consideration less the fair value of the net assets acquired. Goodwill is capitalised in the statement of financial position within intangible assets.

Following initial recognition goodwill is measured at initial value less any accumulated impairment losses.

 

Intangible assets other than goodwill

Intangible assets other than goodwill are initially recognised at cost and are capitalised on the statement of financial position.

Following initial recognition the assets are amortised at rates calculated to write off their cost on a straight line basis over their estimated useful lives. Self developed software is amortised over periods between three and five years.

An internally generated intangible asset arising from the Group's business development is created if the asset can be identified, its cost measured reliably and it is probable that it will generate future economic benefits. Amortisation is charged from the date the developed product, service, process or system is available for use.

 

Property, plant and equipment

Property, plant and equipment is initially recognised at cost and capitalised in the statement of financial position and is stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value based on current prices, of each asset over its expected useful life as follows:

-     leasehold refurbishment over the term of the lease (up to a maximum of ten years)

-     computer equipment and purchased software over three years

-     office equipment and other fixed assets between three and five years

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognised.

 

Impairment of goodwill, intangible assets, and property, plant and equipment

Goodwill and intangible assets in the course of development are subject to an annual impairment review or a more frequent review if there are events or changes in circumstances that indicate that the carrying amount of the asset may not be fully recoverable. Other intangible assets and property, plant and equipment are subject to an impairment review if there are events or changes in circumstances that indicate that the carrying amount of the fixed asset may not be fully recoverable.

For the purpose of impairment testing, goodwill and other assets are allocated to cash generating units monitored by management, usually at statutory company level. The impairment review involves a comparison of the carrying amount of the goodwill or other asset allocated to the related cash generating units, with its recoverable amount, which is the higher of fair value less costs to sell and value in use. Fair value less costs to sell is calculated by reference to the amount at which the asset could be disposed of less the costs associated with the sale.

Value in use is calculated by discounting the expected future cash flows obtainable as a result of the assets continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre-tax basis. The carrying values of goodwill, intangible assets or property, plant and equipment are written down by the amount of any impairment and this loss is recognised in the income statement in the year in which it occurs.

The carrying amount of goodwill allocated to a cash generating unit is taken into account when determining the gain or loss on disposal of the unit.

 

Financial instruments

The Group classifies its financial instruments into the following categories: financial assets and liabilities at fair value through profit or loss, held to maturity investments, loans and receivables cash and short term deposits, trade and other payables, interest bearing loans and borrowings and derivative financial instruments.

Financial assets and liabilities at fair value through profit or loss are financial instruments which are either acquired for trading purposes, or as designated by management. Financial instruments held in this category are initially recognised and subsequently measured at fair value with transaction costs taken directly to the income statement. Changes in fair value are recorded within net interest income. Interest earned or incurred is accrued in interest income or expense, or finance income or cost according to the purpose of the financial instrument.

Balances with clearing members are included in this category upon initial recognition and are recorded on a settlement date basis. Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Held to maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities which the Group has the intention and ability to hold to maturity. After initial measurement held to maturity financial investments are subsequently measured at amortised cost using the effective interest rate less impairment. The amortisation of any premium or discount is included in interest income.

If the Group were to sell or reclassify a significant amount of held to maturity investments before maturity (other than in certain specific circumstances) the entire category might have to be reclassified as available for sale. The Group would then be prohibited from classifying any financial asset as held to maturity during the following two years.

Securities sold under agreements to repurchase at a specified future date are not derecognised from the statement of financial position as the Group retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the consolidated statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability, reflecting the transaction's economic substance as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method.

Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, reflecting the transaction's economic substance as a loan by the Group. The difference between the purchase and resale prices is recorded in interest income and is accrued over the life of the agreement using the effective interest rate method.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition at fair value, loans and receivables are subsequently measured at amortised cost using the effective interest rate method, less allowance for impairment.

Cash and short term deposits comprise cash in hand and current balances with banks and similar institutions which are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value and have an original maturity of six months or less. For the purposes of the cash flow statement cash and cash equivalents are as defined above, but with an original maturity of three months or less, net of bank overdrafts (which are included within interest bearing loans and borrowings in current liabilities on the statement of financial position).

Other financial assets include government backed certificates of deposit issued by banks, notes and treasury bills directly issued by state or national governments. These assets are initially recognised and subsequently measured at fair value.

Interest bearing loans and other borrowings, including preferred securities, and default funds are initially recorded at fair value. Subsequent measurement is at amortised cost using the effective interest method, and amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate.

Where derivative financial instruments are used, such as interest rate swaps and foreign currency forward exchange contracts, they reduce exposure to interest rate movements and foreign currency movements. The change in fair value of these hedging instruments is recognised in the income statement. The Group does not hold derivative financial instruments for trading purposes, but derivatives that do not qualify for hedge accounting are accounted for as trading instruments and are initially recognised and subsequently measured at fair value.

The Group establishes fair value using recognised valuation techniques. These include the use of externally available market prices, discounted cash flow analysis and other valuation techniques commonly used by market participants. Where discounted cash flow analysis and other valuation techniques are used assumptions are validated against market observable inputs.

 

Interest bearing loans and borrowings

Gains and losses arising on the repurchase, settlement or otherwise cancellation of liabilities are recognised respectively in finance income and finance cost.

 

Derecognition of financial assets and financial liabilities

A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in the income statement.

 

Taxation

Deferred and current tax assets and liabilities are only offset when they arise in the same reporting tax group and where there is both a legal right of offset and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

Income tax relating to items recognised directly in other comprehensive income is charged or credited as appropriate to other comprehensive income and there is no effect on profit for the year.

Current tax

Current tax assets and liabilities for current and prior periods are measured at the amount expected to be recovered from or paid to relevant taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the date on which the Board approves the financial statements.

Deferred tax

Deferred income tax is provided using the liability method on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes using tax rates and laws enacted or substantively enacted by the date on which the Board approves the financial statements.

Deferred tax liabilities are recognised for all temporary differences. Deferred income tax assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, except where the deferred income tax asset arises through investments in subsidiaries and it is not probable that the temporary differences will reverse in the foreseeable future.

 

Provisions

Provisions are recognised for current obligations arising as consequences of past events where it is probable that a transfer of economic benefits will be necessary to settle the obligation and it can be reliably estimated. All provisions, except for those arising under pension liabilities, are undiscounted where not material.

 

Share capital

Called up share capital comprises ordinary shares. Other instruments are classified as liabilities if there is an obligation to transfer economic benefits and if not they are included in shareholders' funds. The finance cost recognised in the income statement in respect of capital instruments other than equity shares is allocated to periods over the term of the instrument at a constant rate on the carrying amount.

The share premium comprises the difference between the issue proceeds of shares and their nominal value.

 

Revenue recognition

Clearing fee income and rebates, together with other fee income and settlement fees payable, are recognised on a transaction by transaction basis in accordance with the Group's fee scales.

Net interest income is the total of revenue earned on the cash and other financial assets held that have been generated from clearing member activity, less interest paid to clearing members on their margin and other monies lodged with the Group. Interest expense or income is recorded using the effective interest rate method, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial instrument.

Finance income is revenue earned on the Group's own cash and financial assets balances and is also recognised on an effective interest rate basis.

 

Employee benefits

The Group operates a defined benefit section of the pension scheme for its UK employees which requires contributions to be made to a separate trustee administered fund. This was closed to new members from 30 September 2009.

The Group has also committed to assume obligations in respect of certain staff in the Euronext defined benefit pension scheme in Amsterdam who transferred their employment to LCH.Clearnet SA in 2004. The obligations in respect of certain staff in an independent defined benefit scheme in Porto were assumed in 2006. An updated valuation of these funds was carried out at 31 December 2012 by a qualified independent actuary.

A full actuarial valuation of the LCH pension scheme was carried out at 30 June 2010 and partially updated to 31 December 2012 by a qualified independent actuary.

The cost of providing benefits under the defined benefit plans is determined using the projected unit method, which attributes entitlement to benefits to the current period (to determine current service cost) and to the current and prior periods (to determine the present value of defined benefit obligations) and is based on actuarial advice. Past service costs are recognised in the income statement on a straight line basis over the vesting period or immediately if the benefits have vested. When a settlement or a curtailment occurs, the change in the present value of the scheme liabilities and the fair value of the plan assets reflects the gain or loss which is recognised in the income statement. Losses are measured at the date that the employer becomes demonstrably committed to the transaction, and gains are measured when all parties whose consent is required are irrevocably committed to the transaction.

The interest element of the defined benefit cost represents the change in the present value of scheme obligations relating from the passage of time, and is determined by applying the discount rate to the opening present value of the benefit obligation taking into account material changes in the obligation during the year. The expected return on plan assets is based on an assessment made at the beginning of the year of long term market returns on scheme assets, adjusted for the effect on the fair value of plan assets of contributions received and benefits paid during the year. The difference between the expected return on plan assets and the interest cost is recognised in the income statement within employee benefits.

Actuarial gains and losses are recognised in full in the statement of changes in equity in the period in which they occur. The defined benefit pension liability in the statement of financial position comprises the total for each plan of the present value of the defined benefit obligation (using a discount rate based on high quality corporate bonds that have been rated at AA or equivalent status), less any past service cost not yet recognised and less the fair value of plan assets out of which the obligations are to be settled directly. Fair value is based on market price information, and in the case of quoted securities is the published mid market price.

The Group also has obligations in respect of unfunded early retirement plans in Paris. This is in compliance with a 2001 agreement with Euronext Paris personnel and these provisions are included in employee benefits. They have been calculated by a qualified independent actuary.

The Group also operates a defined contribution section of the pension plan in the UK which has been open since January 2010 for new staff. The contribution payable to a defined contribution plan is in proportion to the services rendered to LCH.Clearnet Limited by the employees and is recorded as an expense in the income statement within employee benefits.

 

Borrowing costs

Borrowing costs are recognised as an expense when incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

 

Dividends

Revenue is recognised when the Company's right to receive payment is established.

 

Leases

The Group is a lessee. Leases of property, plant and equipment where substantially all the risks and rewards of ownership have passed to the Group are capitalised in the statement of financial position as property, plant and equipment. Finance leases are capitalised at the lower of the fair value of the leased property and the present value of the minimum lease payments. The capital element of future obligations under finance leases is included as a liability in the statement of financial position. The interest element of rental obligations is charged to the income statement over the period of the lease and represents a constant proportion of the balance of capital repayments outstanding. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful economic life of the asset or the lease term.

Leases of property, plant and equipment where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rentals payable under operating leases are charged in the consolidated income statement on a straight line basis over the lease term. Lease incentives are recognised over the lease term.

Where a lease becomes onerous the full value of net future costs is immediately recognised in the income statement.

 

New accounting standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2012 and not early adopted

The following standards, amendments and interpretations have been issued by the IASB and IFRIC with an effective date, subject to EU endorsement, that does not impact on the Group's financial information. The directors do not expect adoption of these standards to have a material effect on the results of the Group.


Effective date for periods beginning on or after

Amendment to IAS 1, Presentation of Financial Statements regarding other comprehensive income

1 July 2012

Amendments to IAS 19, Employee Benefits

1 January 2013

Amendments to IFRS 7, Financial Instruments: Disclosures regarding offsetting financial assets and financial liabilities

1 January 2013

Amendments to IAS 32 Financial Instruments: Presentation regarding offsetting financial assets and financial liabilities

1 January 2014

IFRS 10, Consolidated Financial Statements and amended IAS 27 Separate Financial Statements

1 January 20131

IFRS 11 Joint Arrangements and amended IAS 28 Investments in Associates and Joint Ventures

1 January 20131

IFRS 12, Disclosures of Interests in Other Entities

1 January 20131

IFRS 13, Fair Value Measurement

1 January 2013

Amendments to IFRS 10, IFRS 12 & IAS 27

1 January 20142

IFRS 9, Financial Instruments

1 January 20152

 

1   Endorsed by the EU on 11 December 2012 and to be implemented, at the latest, for periods beginning on or after 1 January 2014.

2   Subject to endorsement by the EU.

 

2 Operating segment information

For management purposes the Group is organised into business units based on legal entities and has three reporting operating segments:

-     LCH.Clearnet Limited based in the UK, with a branch in New York

-     LCH.Clearnet SA based in Europe with its main operations in France, branches in Belgium and the Netherlands and a representative office in Portugal

-     other, including the remainder of the Group's activities

These segments reflect the way in which the Group's chief operational decision makers monitor results and determine resource allocation within the Group.

The appropriate segment has directly attributable costs allocated to it. Where costs are not directly attributable, the relevant portion is allocated on a reasonable basis to each segment. Assets that are jointly used by two or more segments are allocated to segments only where the related revenues and expenses are also allocated to those segments.

Transfer pricing between segments is set on an arm's length basis in a manner similar to transactions with third parties.

LCH.Clearnet Limited and LCH.Clearnet SA derive revenues through their activities as clearing houses. They provide CCP services in respect of OTC markets, a broad range of cash and derivative products traded on or through various exchanges and trading platforms in the UK (LCH.Clearnet Limited), Europe (LCH.Clearnet SA) and the US (LCH.Clearnet Limited). LCH.Clearnet LLC will derive revenues as a clearing house from 2013, pending regulatory approvals from the CFTC.

Of other Group companies, LCH.Clearnet (Luxembourg) S.á.r.l. earns royalties from Group companies who use the intellectual property held by it in their operations, and LCH.Clearnet Group Limited earns revenue from the operating subsidiaries in the form of management fees.

Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. 

Segmental income statement


2012

 


Ltd

€'m

SA

€'m

Other

€'m

Total

€'m

Revenue





Clearing fees

167.9

86.0

-

253.9






Interest income





 Treasury

96.4

191.2

0.1

287.7

 Default fund

11.1

4.7

0.1

15.9


107.5

195.9

0.2

303.6

Interest expense





 Treasury

(12.6)

(103.7)

(0.2)

(116.5)

 Default fund

(15.4)

(4.7)

-

(20.1)


(28.0)

(108.4)

(0.2)

(136.6)






Net Interest income

79.5

87.5

-

167.0






 Settlement and other income

7.5

26.5

40.9

74.9

 Inter-segment

(0.5)

(8.1)

(40.9)

(49.5)


7.0

18.4

-

25.4

Settlement fees payable

(6.9)

(7.0)

-

(13.9)

Net settlement and other income

0.1

11.4

-

11.5






Rebates

(9.6)

3.4

-

(6.2)






Segment revenue

237.9

188.3

-

426.2






Result





 Segment result before non-recurring items

28.5

97.0

2.0

127.5

 Non-recurring items

(12.7)

(7.5)

(7.4)

(27.6)

Segment result after non-recurring items

15.8

89.5

(5.4)

99.9

 Finance income

2.7

1.2

0.1

4.0

 Finance costs

(0.2)

-

(12.4)

(12.6)

Profit before tax

18.3

90.7

(17.7)

91.3

Tax expense

(5.4)

(29.9)

3.7

(31.6)

Profit for the year

12.9

60.8

(14.0)

59.7

 

Included within interest expense is an estimated €24.8 million negative amount, due to negative rates being applied to members' cash balances.

 


20111

 


Ltd

€'m

SA

€'m

Other

€'m

Total

€'m

Revenue





Clearing fees

146.1

90.6

-

236.7






Interest income





 Treasury

166.3

272.2

-

438.5

 Default fund

3.5

12.8

-

16.3


169.8

285.0

-

454.8

Interest expense





 Treasury

(72.9)

(259.7)

-

(332.6)

 Default fund

(9.4)

(12.7)

-

(22.1)


(82.3)

(272.4)

-

(354.7)






Net Interest income

87.5

12.6

-

100.1

    Result





 Settlement and other income

5.6

26.5

29.3

61.4

 Inter-segment

(0.1)

(2.5)

(29.3)

(31.9)


5.5

24.0

-

29.5

Settlement fees payable

(7.7)

(7.6)

-

(15.3)

Net settlement and other income

(2.2)

16.4

-

14.2






Rebates

(6.4)

-

-

(6.4)






Segment revenue

225.0

119.6

-

344.6






 Segment result before non-recurring items

43.1

28.2

(3.7)

67.6

 Non-recurring items

(14.4)

(2.5)

(5.6)

(22.5)

Segment result after non-recurring items

28.7

25.7

(9.3)

45.1

 Finance income

1.0

1.2

0.5

2.7

 Finance costs

(0.1)

-

(12.6)

(12.7)

Profit before tax

29.6

26.9

(21.4)

35.1

Tax expense

(8.6)

(8.1)

2.8

(13.9)

Profit for the year

21.0

18.8

(18.6)

21.2

 

1   Prior year figures restated to reflect changes in accounting treatment

 

 

Assets and liabilities


2012

 


Ltd

€'m

SA

€'m

Other

€'m

Total

€'m

Assets and liabilities





Total assets

263,489.8

232,419.2

159.4

496,068.4

Total liabilities

(265,792.3)

(229,606.6)

(245.4)

(495,644.3)






Other segment information





Capital expenditure on fixed assets

11.3

3.3

14.5

29.1

Non-cash items





Fair value (gain)/loss on financial instruments

1.4

(36.1)

-

(34.7)

Goodwill addition (consideration issued in shares)

-

-

29.7

29.7

Depreciation of property, plant and equipment

4.3

0.8

-

5.1

Amortisation

3.2

5.0

11.2

19.4

 

 


20111

 


Ltd

€'m

SA

€'m

Other

€'m

Total

€'m

Assets and liabilities





Total assets

310,043.2

230,952.3

39.3

541,034.8

Total liabilities

(309,900.6)

(230,626.5)

(174.6)

(540,701.7)






Other segment information





Capital expenditure on fixed assets1

7.8

12.9

2.9

23.6

Non-cash items





Fair value (gain)/loss on financial instruments

(0.1)

39.4

-

39.3

Write off of intangible assets

3.4

-

-

3.4

Loss on disposal of property, plant and equipment within non-recurring items

0.7

-

-

0.7

Depreciation of property, plant and equipment

4.0

0.4

0.1

4.5

Amortisation1

3.0

5.0

10.4

18.4

 

1   Prior year figures restated to reflect changes in accounting treatment

 

Geographic information


2012

€'m

20111

€'m

Revenues from external customers



UK

237.9

225.0

Europe

188.3

119.6

Net revenue per consolidated income statement

426.2

344.6

Non-current assets



UK

103.5

30.6

Europe

182.6

180.9

Other

29.7

-

Total

315.8

211.5

 

1   Prior year figures restated to reflect changes in accounting treatment

 

Revenue is based on the location of the Group entity which earns the revenue.

Non-current assets are as defined in the statement of financial position.

 

3 Cash and short term deposits

 


2012

€'m

2011

€'m

Cash at bank and in hand

5,689.8

3,604.6

Short term deposits

20,655.6

16,809.4


26,345.4

20,414.0

 

€20,357.6 million (2011: €16,226.3 million) of short term deposits are fully collateralised by sovereign and investment grade corporate securities in accordance with eligibility criteria approved by the Group's Risk Committees.

 

4 Balances with clearing members

 


2012

€'m

2011

€'m

Assets



Fair value of transactions with clearing members, less variation margin

450,553.3

497,279.7

Initial margin and other clearing member balances

4,810.8

4,285.6


455,364.1

501,565.3

Liabilities



Fair value of transactions with clearing members, less variation margin

(450,460.1)

(497,262.0)

Initial margin and other clearing member balances

(39,058.0)

(40,747.7)


(489,518.1)

(538,009.7)

 

The balances due from clearing members recorded in the statement of financial position of €455,364.1 million (2011: €501,565.3 million) are fully secured by collateral held by the Group. To date this collateral has not been utilised.

At 31 December 2012 the total of fully collateralised loans in respect of fixed income transactions was €446,783.3 million (2011: €491,410.0 million). This collateral has in turn, been passed on to fixed income counterparties to secure the Group's liabilities in respect of fixed income contracts.

The total net amount of non-cash collateral, including that in respect of initial margin, relating to other balances due from clearing members was €33,506.0 million (2011: €37,758.0 million) and the total amount of guarantees held was €2,387.4 million (2011: €2,456.4 million). To date this collateral has not been utilised.

 

5 Issued capital and reserves

 


2012

€'m

2011

€'m

Authorised



100,916,003 (2011: 100,916,003) ordinary shares of €1 each

100.9

100.9

200,000 (2011: 200,000) non-cumulative callable preference shares of €1 each

0.2

0.2

Issued and fully paid



42,193,814 (2010: 40,632,643) ordinary shares of €1 each (Including three non-voting shares)

42.2

40.6

 

Share capital

The balance classified as share capital includes the total nominal value on issue of the Company's equity share capital, comprising €1 ordinary shares.

In August 2012 LCH.Clearnet Group Limited issued 1,561,171 shares at €19 per share to NASDAQ OMX Inc. in consideration for the acquisition of IDCG (now renamed LCH.Clearnet (US) LLC). This resulted in an increase of €1.6 million in issued share capital and a credit of €28.1 million to the share premium account.

 

Non-cumulative callable preference shares (NCPS)

The NCPS can only be issued in the event that the Group's capital ratios fall below the minimum required by the relevant regulatory authority for a period of six months.

 

Capital reserves

The balance on this reserve represents the difference between the called up share capital of the Company and the called up share capital, share premium account and capital redemption reserve of LCH.Clearnet Limited at 19 December 2003, when the Group was formed, less the amount transferred in 2007 as part of a Court-approved capital restructuring.

 

Capital redemption reserve

The balance on this reserve represents the nominal value of the ordinary shares that have been repurchased and cancelled.

 

Distributable reserves

Retained earnings are reduced by €19.9 million to determine legally distributable reserves reflecting the nominal value of the redeemable convertible preference shares redeemed in 2007.

 

6 Default funds

 


2012

€'m

2011

€'m

LCH.Clearnet SA



RepoClear

654.4

603.7

CDSClear

280.4

252.1

Other

1,030.2

475.5


1,965.0

1,331.3

LCH.Clearnet Limited



SwapClear

2,324.4

-

ForexClear

252.8

-

RepoClear

619.9

-

Other

433.0

712.4


3,630.1

712.4





5,595.1

2,043.7

 

The purpose of the default funds is to absorb any losses incurred by the Group in the event of clearing member default if margin collateral is insufficient to cover the management and close out of the positions of the defaulting clearing member.


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