TIDMTLPR
RNS Number : 3712J
Tullett Prebon PLC
02 April 2015
2 April 2015
Tullett Prebon plc 2014 Annual Report
Tullett Prebon plc ("the Company") has today published its 2014
Annual Report and circular to shareholders incorporating the Notice
of the 2015 Annual General Meeting. Both documents can be viewed at
or downloaded from www.tullettprebon.com.
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 www.Hemscott.com/nsm.do.
The following disclosures comply with Disclosure and
Transparency Rule 6.3.5. The Company's full year results
announcement of 3 March 2015 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
2014 Annual Report, are set out below. This information should be
read in conjunction with, and not as a substitute for, reading the
full 2014 Annual Report. Page numbers and notes in the following
appendices refer to page numbers and notes in the Company's 2014
Annual Report.
Principal Risks
The Group's Risk Assessment Framework categorises the risks
faced by the Group into nine risk categories: Market Risk, Credit
Risk, Operational Risk, Strategic and Business Risk, Governance
Risk, Regulatory, Legal and Human Resources Risk, Reputational
Risk, Liquidity Risk and Other Financial Risks.
MarketRisk
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 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. Such positions
are valued and measured from trade date on a daily mark-to-market
basis.
The Group's risk management policies reduce the likelihood of
such trade mismatches and, in the event that they arise, the
Group's policy is to close out such balances immediately. All
Market Risk arising across the Group is identified and monitored on
a daily basis.
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 each individual element of counterparty risk
identified above, the Group is also exposed to concentration risk.
This is where the Group becomes overly exposed to these credit
exposures in the aggregate either 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 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's 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).
As with trading counterparties, 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 transactions brokered by the Group are 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 possibility of concentration risk exists in the level of
exposure to counterparties. The Group controls its credit exposure
to counterparties and groups of linked counterparties through the
application of a system of counterparty credit limits based on the
mark-to-market exposure for Matched Principal trades, outstanding
brokerage receivables for Name Passing trades, and amount on
deposit for cash deposit exposure. Credit departments also monitor
exposures across country groupings, credit rating, and types of
counterparty.
Operational Risk
Operational Risk is the risk of loss resulting from inadequate
or failed internal processes, people activities, systems or
external events. Operational Risk covers a wide and diverse range
of risk types, and 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. Examples of Operational Risk include:
-- IT systems failures, breakdown in security or loss of data integrity;
-- failure or disruption of a critical business process, through
internal or external error or event;
-- failure or withdrawal of settlement and clearing systems,
-- events preventing access to premises, telecommunications
failures or loss of power supply which interrupt business
activities; and
-- broker errors.
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 long term risk. The Group
has identified four principal categories of Strategic and Business
Risk:
-- direct regulatory risk;
-- indirect regulatory risk;
-- lower market activity risk; and
-- commercial risk.
Direct regulatory risk
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.
Indirect regulatory risk
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.
Lower market activity risk
The risk that the Group experiences a sustained period of low
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.
Commercial risk
The risk of significant or fundamental changes to the commercial
or competitive environment, whether due to client requirements or
competitor activity.
The markets in which the Group competes are characterised by
rapidly changing technology, evolving customer demand and uses of
services, and the potential emergence of new industry standards and
practices. Such changes may increase the risk that the Group faces
additional costs or barriers to entry to markets that its
competitors do not experience. New entrants or new methods of
delivering broking services may gain first mover advantage that the
Group may not be able to respond to in a timely manner.
The Group 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.
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 seeks to manage and mitigate its commercial risk by
following a clearly defined business development strategy,
geographic and product diversification and strong client
relationship management.
Commercial risk also includes the risk that the Group is unable
to respond to market demand for electronic broking solutions and
loses market share as a result. The Group seeks to address this
risk through continued development and enhancement of its
electronic broking capability, to ensure that it can offer a
competitive solution for all major asset classes.
Governance Risk
Governance Risk is the risk of loss or damage to the business
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
to key management positions, or the inappropriate use of authority
and influence by current or former senior members of staff.
The risk of accounting error or fraud is mitigated by the strong
control environment which exists within the Group, in particular
the involvement of the Audit Committee, the Internal Audit function
and the Group Treasury and Risk Committee. Succession planning
within the Group is overseen by the Board.
Regulatory, Legal and Human Resource Risk
This risk concerns the potential loss of value due to regulatory
enforcement action (such as for breaches of conduct of business
requirements or market abuse provisions); the possible costs and
penalties associated with litigation; and the possibility of a
failure to retain and motivate key members of staff. The Group also
faces the risk that changes in applicable laws and regulations
could have a serious adverse impact on the business.
The Group's lead regulator is the FCA, but the Group is also
subject to the requirements imposed by the regulatory framework of
the other jurisdictions in which the Group operates. The Group's
compliance officers monitor compliance with applicable regulations
and report regularly to the Board. The Group's Legal department
oversees contracts entered into by Group companies, and manages
litigation which arises from time to time.
Reputational Risk
Reputational Risk is the risk that the Group's ability to do
business might be damaged as a result of its reputation being
tarnished. Clients rely on the Group's integrity and probity. The
Group has policies and procedures in place to manage this risk to
the extent possible, which include conduct of business rules,
procedures for employee hiring and the taking on of new
business.
Liquidity Risk
The Group seeks to ensure that it has access to an appropriate
level of cash, other forms of marketable securities and 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 GTRC.
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, namely
the cost of funding the security which we have 'failed to deliver'
until such time as the delivery leg is finally settled and we have
received the associated cash.
The Group has addressed this funding risk by arranging overdraft
facilities to cover any '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 a GBP150m committed revolving credit line as additional
contingency funding. This facility remained undrawn throughout
2014.
Further details of the Group's borrowings and cash are provided
in Notes 22, 25 and 31 to the Consolidated Financial
Statements.
Other Financial Risks
The nature and scope of the Group's operations mean that it is
exposed to a number of other financial risks including interest
rate risk, currency risk, taxation risks, and pension obligation
risk.
Interest rate risk
The Group is exposed to interest rate risk on its cash deposits
and on 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 GTRC periodically considers the Group's 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.
Taxation risk
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 qualified staff in
key jurisdictions to manage this risk and in addition uses
professional advisers, as appropriate.
Pension obligation risk
The risk that the Group is required, in the short and medium
term, to fund a deficit in the Group's defined benefit pension
scheme.
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 amount owed to and from related parties and associates
at 31 December 2014 are set out below:
Amounts owed by Amounts owed to
related parties related parties
------------------ ------------------- -------------------
2014 2013 2014 2013
GBPm GBPm GBPm GBPm
------------------ ---------- ------- ---------- -------
Associates 0.5 0.4 - -
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,
is 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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