Annual Financial Report

Released : 04.04.2016 16:48

RNS Number : 1228U
Tullett Prebon PLC
04 April 2016

4 April 2016

Tullett Prebon plc 2015 Annual Report


Tullett Prebon plc ("the Company") has today published its 2015 Annual Report and circular to shareholders incorporating the Notice of the 2016 Annual General Meeting. Both documents can be viewed at or downloaded from


Copies of both these documents, together with the Form of Proxy, have been submitted to the UK Listing Authority's Document Viewing Facility via the National Storage Mechanism and will shortly be available for inspection at


The following disclosures comply with Disclosure and Transparency Rule 6.3.5. The Company's full year results announcement of 1 March 2016 contained a management report and condensed financial information derived from the Group's audited statutory accounts. A description of risks and uncertainties, details of related party transactions and the Directors' Responsibility Statement, extracted in full unedited text from the 2015 Annual Report, are set out below. This information should be read in conjunction with, and not as a substitute for, reading the full 2015 Annual Report. Page numbers and notes in the following appendices refer to page numbers and notes in the Company's 2015 Annual Report.


Principal Risks

The Group identifies the risks to which it is exposed as a result of its business objectives, strategy and operating model, and categorises those risks into three overarching risk categories: Operational Risk, Financial Risk, and Strategic and Business Risk. The risks identified within each of these categories are described below, along with an explanation of how the Group seeks to manage or mitigate these risk exposures.


Operational Risk

Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people activities, systems or external events. Operational risk is a significant component of the Group's overall risk profile and arises in a wide range of activities and scenarios.


Whilst operational risk is often seen as a distinct risk category in its own right, in reality it arises in the execution of all activities undertaken by the Group. Therefore, the Group seeks to ensure that it identifies any exposure to loss arising from processes, people activities, systems or external events, in whatever context it may arise. The Group is exposed to operational risk in nearly every facet of its role as an intermediary in the wholesale financial markets, arising from its dependence on:


• Large numbers of employees (both broking and support staff) undertaking their roles correctly and behaving appropriately;

• Multiple IT platforms (including broking, middle office and support platforms);

• The accurate execution of a large number of processes including those required to execute, clear and settle trades; and

• The continued availability of various third party market infrastructure providers (such as clearing and settlement institutions).


The overall objective of the Group's approach to operational risk management is not to attempt to avoid all potential risks, but to proactively identify and assess risks and risk situations in order to manage them in an efficient and informed manner.


The Group manages its operational risk exposure through its policy framework which prescribes the policies and procedures to be followed to ensure the Group's operational risk exposure remains within risk appetite.


Business Process

The risk that the Group suffers a loss as a result of a failure in the broking business process, whether arising from trade execution or from post-trade activities, such as clearing, settlement or trade reporting. Failures in the broking process could include a broker error or failure to match clients' orders precisely, resulting in an incidental position and consequential market risk for the Group - this is discussed under Market Risk below. The Group could also experience a failure in the non-broking business process, such as in the Information Sales and Risk Management businesses.


Front office and functional heads are responsible for implementing an appropriate control framework and ensuring that all staff are aware of their risk management responsibilities. Senior management are also responsible for monitoring operational risk exposure through the adoption and review of appropriate management information.


Senior management seek to foster a culture of openness and transparency and ensure that brokers and other members of staff are aware of their responsibility to disclose any errors or issues that arise at the earliest opportunity.


Legal and Compliance

The risk that the Group incurs loss as a result of litigation brought against the Group or incurs significant legal costs in conducting litigation to protect the Group's commercial interests. The Group's Legal department manages the Group's legal risk and is responsible for conducting any litigation which may arise.


The Group is also exposed to the risk of loss due to regulatory enforcement action (such as for breaches of conduct of business requirements, failures or inadequacy of systems and controls including those related to know your customer and anti-money laundering, or market abuse provisions) and the possible costs and penalties associated with such action.


The Group's lead regulator is the FCA, but the Group is also subject to the requirements imposed by the regulatory frameworks of the other jurisdictions in which the Group operates. The Group's Compliance function is responsible for ensuring that staff are made aware of all applicable regulatory requirements and for monitoring the Group's compliance with the various regulatory regimes to which the Group is subject.


Technology and Infrastructure

The risk that the Group experiences the unavailability or failure of business critical systems or infrastructure undermining the Group's ability to conduct its business. This includes the failure of critical applications, hardware or network components operated by the Group, as well as loss or unavailability of any infrastructure provided by a third party, such as clearing and settlement facilities. It also includes the occurrence of an event which prevents access to premises, telecommunications failure or loss of power supply.


The Group seeks to mitigate this risk by maintaining detailed and comprehensive business continuity plans which can be activated at short notice to minimise business disruption.


Recent events in the financial services sector illustrate the serious threat posed by cyber-criminals whose activity can result in the prolonged disruption of technology infrastructure as well as potential loss of critical business or client data. The Group continues to monitor and assess the evolving and increasingly sophisticated cyber-threat landscape to ensure that its control framework is appropriate to address the potential cyber-threats to which it is exposed.


Human capital

The risk that the Group is unable to attract or retain the staff it requires to operate its business, or is subject to employee litigation. The Group seeks to ensure the retention of staff through an effective recruitment and performance management process, and to foster appropriate employee behaviour through clearly articulated values and expectations.



Financial management

This is the risk of loss arising from a failure to manage or safeguard the Group's financial assets or a failure in a financial management process. It includes the risk of loss arising from internal or external fraud or employee error (inaccurate payment or cash transfer). It also includes a failure to ensure the Group holds adequate working capital resulting in an ability to meet obligations as they fall due.


The Group is also exposed to the risk of financial loss or misstatement as a result of non-compliance with regulations relating to direct, indirect or employee taxation.


The Group employs experienced professionals in key jurisdictions to manage the Group's financial position, engaging professional advisers, where required.




The risk of loss or damage to the Group arising as a result of a failure of management structures or processes. This includes failure to adhere to applicable corporate governance requirements (such as those recommended by the UK Corporate Governance Code), a failure to ensure adequate succession for key management positions, or a failure to exercise effective risk management oversight.


The Group manages this risk through the adoption of appropriate governance arrangements and by maintaining up-to-date succession plans.


Financial Risk


Market Risk

Market Risk is the vulnerability of the Group to movements in the value of financial instruments. The Group does not take trading risk and does not hold proprietary trading positions. Consequently, the Group is exposed to trading-book market risk only in relation to incidental positions in financial instruments arising as a result of the Group's failure to match clients' orders precisely. The Group has limited exposure to non-trading book market risk, specifically to interest rate risk and currency risk.


Residual balances

The Group incurs occasional residual balances in instruments traded on a Matched Principal or Executing Broker basis. The Group's operational procedures and risk management policies reduce the likelihood of such trade mismatches and, in the event that they arise, the Group's policies require such balances to be closed-out as soon as practicable.


Interest rate risk

The Group is exposed to interest rate risk on its cash deposits and on any borrowings under bank facilities. The Group's Sterling Notes carry interest at fixed rates. Cash deposits are typically held at maturities of less than three months.


The Group periodically considers its exposure to interest rate volatility.


Analysis of the Group's sensitivity to movements in interest rates is set out in Note 25 to the Consolidated Financial Statements.


Currency risk

The Group trades in a number of currencies around the world, but reports its results in Sterling. The Group therefore has translation exposure to foreign currency exchange rate movements in these currencies, principally the US dollar and the Euro, and transaction exposure within individual operations which undertake transactions in one currency and report in another.


Analysis of the Group's sensitivity to movements in foreign currency exchange rates is set out in Note 25 to the Consolidated Financial Statements.


Credit Risk

The Credit Risk faced by the Group consists of counterparty credit risk (as opposed to issuer risk), and principally arises from the following:


• pre-settlement risk arising from Matched Principal broking;

• settlement risk arising from Matched Principal broking;

• cash deposits held at banks and money market instruments; and

• Name Passing brokerage receivables.


In addition to the individual elements of counterparty risk identified above, the Group is also exposed to concentration risk, whereby the Group incurs an excessive exposure to an individual counterparty or to a group of linked counterparties.


Pre-settlement risk

Pre-settlement Risk arises in the Matched Principal broking business in which Group subsidiaries interpose themselves as principal between two (or more) contracting parties to a Matched Principal transaction and as a result the Group is at risk of loss should one of the parties to a transaction default on its obligations prior to settlement date. In the event of default, the Group would have to replace the defaulted contract in the market. This is a contingent risk in that the Group will only suffer loss if the market price of the securities has moved adversely to the original trade price.


Counterparty exposures are kept under constant review and are managed against exposure reporting thresholds, and the Group takes steps to reduce counterparty risk where market conditions require. Particular attention is paid to more illiquid markets where the price movement is more volatile, such as broking in GDR, ADR and emerging markets instruments.


The Group is also exposed to short term pre-settlement risk where it acts as an executing broker on an exchange, during the period between the execution of the trade and the client claiming the trade. This exposure is minimal as under the terms of the 'give-up' agreements the Group has in place with its clients, trades must be claimed by the end of trade day. Once the trade has been claimed, the Group's only exposure to the client is for the invoiced receivables.


Settlement risk

Settlement Risk is the risk that on settlement date a counterparty defaults on its contractual obligation to make payment for a securities transaction after the corresponding value has been paid away by the Group. Unlike pre-settlement risk, the exposure is to the full principal value of the transaction.


In practice the Group is not exposed to this risk as settlement is almost invariably effected on a delivery-versus-payment basis. Free-of-payment deliveries (where an immediate exposure arises due to the Group settling its side of the transaction without simultaneous receipt of the counter-value) occur very infrequently and only under the application of stringent controls.


Cash deposits

The Group is exposed to counterparty Credit Risk in respect of cash deposits held with financial institutions. The vast majority of the Group's cash deposits are held with highly rated clearing banks and settlement organisations (as set out in the Credit Risk analysis in Note 25 to the Consolidated Financial Statements).


Cash deposit counterparty exposures and limits are kept under review and steps are taken to reduce counterparty risk where market conditions require.


Name Passing brokerage receivables

The majority of revenue generated by the Group is on a Name Passing basis, where the Group acts as agent in arranging the trade and is not a counterparty to the transaction. Whilst the Group does not suffer any exposure in relation to the underlying instrument brokered (given that the Group is not a principal to the trade), it is exposed to the risk that the client fails to pay the brokerage it is charged. Receivables arising from Name Passing brokerage are closely monitored by senior management.


Concentration risk

The Group manages its Concentration Risk exposure by continually monitoring its exposures to single counterparties and to concentrations of counterparty exposure, assessed by reference to country groups, credit rating, and counterparty type.


Liquidity Risk

The Group seeks to ensure that it has access to an appropriate level of cash, other forms of marketable securities and liquidity facilities to enable it to finance its ongoing operations on cost effective terms. Cash and cash equivalent balances are held with the primary objective of capital security and availability, with a secondary objective of generating returns. Funding requirements are monitored by the Group's Finance and Treasury functions.


As a normal part of its operations, the Group faces liquidity risk through the risk of being required to fund transactions that fail to settle on the due date. From a risk perspective, the most problematic scenario concerns 'fail to deliver' transactions, where the business has received a security from the selling counterparty (and has paid cash in settlement of the same) but is unable to effect onward delivery of the security to the buying counterparty.  Such settlement 'fails' give rise to a funding requirement, reflecting the value of the security which the Group has 'failed to deliver' until such time as the delivery leg is finally settled and the business has received the associated cash.


The Group has addressed this funding risk by arranging overdraft facilities to cover 'failed to deliver' trades, either with the relevant settlement agent/depository or with a clearing bank. Under such arrangements, the facility provider will fund the value of any 'failed to deliver' trades until delivery of the security is effected. Certain facility providers require collateral (such as a cash deposit or parent company guarantee) to protect them from any adverse mark-to-market movement and some also charge a funding fee for providing the facility.


The Group is also exposed to potential margin calls from clearing houses and correspondent clearers, both in the UK and the United States.


In the event of a liquidity issue arising, the firm has recourse to existing global cash resources, after which it could draw down on its Åí250m committed revolving credit facility as additional contingency funding. This facility remained undrawn throughout 2015.


Further details of the Group's borrowings and cash are provided in Notes 22, 25 and 31 to the Consolidated Financial Statements.


Specific liquidity risk exposures

In addition to its general Liquidity Risk exposure, the Group is exposed to two additional types of funding risk.


The Group is exposed to the risk that it is required, in the short and medium term, to fund a deficit in the Group's defined benefit pension scheme. The scheme currently has a substantial funding surplus, and the Group closely monitors developments in its funding position.


The Group is also exposed to the risk that is unable to refinance its outstanding debt. The Group seeks to mitigate this risk by maintaining a strong credit rating and an ongoing dialogue with its lenders and investors, and by ensuring that it complies with all of its current debt covenants.


Strategic and Business Risk

The Group operates in an environment characterised by intense competition, rapid technological change and a continually evolving regulatory framework. Failure to adapt to changing market dynamics, customer requirements or the way OTC markets and their participants are regulated constitutes a significant risk. The Group has identified three principal categories of Strategic and Business Risk:


• regulatory environment;

• commercial environment; and

• strategic management.



Regulatory Environment

The Group is exposed to the risk of new regulations imposing a fundamental change to the structure or activity of financial markets, resulting in a reduced role for IDBs. Specific issues could include an inability of the business to provide electronic platforms or market facilities which are compliant with new regulations, or the obligation to hold punitive levels of regulatory capital.


The Group is also exposed to the risk of a fundamental change to the commercial environment due to the impact on clients of changes to their regulatory environment causing significantly reduced trade volumes. This could include increased execution and clearing costs, onerous collateral requirements or increases in regulatory capital requirements, or a prohibition on certain types of trading activity.


The Group monitors closely regulatory developments in its markets and is actively involved in consultation and rule setting processes so as to ensure an informed debate of all regulatory issues potentially affecting the IDB markets, both on an individual firm basis and through trade associations.


Commercial Environment

The Group's performance would be adversely affected by a sustained and prolonged period of suppressed market activity leading to reduced revenues. This could arise as a result of adverse macro-economic conditions, reduced levels of general banking activity, market uncertainty or lack of volatility.


The Group is also exposed to the risk of significant or fundamental changes to the commercial or competitive environment. The markets in which the Group competes are characterised by rapidly changing technology and evolving customer requirements, including the demand for electronic broking solutions. Competitors offering new or enhanced services may gain first-mover advantage to which the Group may not be able to respond in a timely manner. Consolidation within the industry or integration with adjacent sectors may provide competing firms or platforms with advantages of scale, access to wider pools of liquidity, or service capability that may put the Group at a competitive disadvantage.


The Group also competes with other interdealer brokers for staff. The costs of employing front office broking staff is currently the largest cost faced by the Group. The effect of the competition for broking staff can result in an increase in staff costs, or if staff leave the Group, can result in the loss of capability, customer relationships and expertise.


The Group seeks to manage and mitigate its commercial risk through geographic and product diversification and strong client relationship management. The Group also continues to develop and enhance its electronic broking capability, to ensure that it can offer a competitive solution for all major asset classes.


Strategy Management

This is the risk that the Group suffers a reduction in its profitability or its competitive position due to a failure to adopt or implement an effective business strategy, or as a result of inadequate management of the business, potentially undermining the viability of the business. It also includes the risk that the Group fails to integrate a business acquisition, resulting in a material loss of value.


The Group manages this risk by adopting a strategy defined by the Board, which clearly articulates the Group's business objectives. This is subject to ongoing review by the Board to ensure it remains effective and appropriate in the context of any changes to the commercial and regulatory environment in which the Group operates.



Appendix B: Related party transactions


Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

The total amounts owed to and from related parties   and associates at 31 December 2015, which also represents the value of transactions during the year are set out below:



Amounts owed by related parties

Amounts owed to related parties











Related parties











The amounts outstanding are unsecured and will be settled in cash.  No guarantees have been given or received.  No provisions have been made for doubtful debts in respect of the amounts owed by related parties.




Appendix C: Directors' Responsibility Statement


The Directors confirm that to the best of their knowledge:


·          the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;


·          the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and


·          the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

- Ends -

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