ICAP plc / Annual Report 2012

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ICAP in 10

www.icap.com

ICAP is the world’s leading interdealer broker and provider of post trade risk and information services.

Business review Governance

Contents
ICAP in 10 Business review Group Chief Executive Officer’s review Global Executive Management Group Business review Key performance indicators Risk and control environment Corporate responsibility Governance Directors’ profiles Chairman’s statement Directors’ report Corporate governance statement Directors’ statement of responsibilities Remuneration report Independent auditors’ report 2 Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated and Company balance sheet Consolidated statement of changes in equity Company statement of changes in equity Consolidated and Company statement of cash flow Basis of preparation Index to the notes to the financial statements Notes to the financial statements Information for shareholders Information for shareholders Definitions 68 70 71 72

16 18 20 30 32 36

Financial statements

73 74 75 78 79

42 44 46 46 54 56 65

136 137

Information for shareholders

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ICAP in 10
The following pages provide a 10 point overview of our business, strategy, performance and governance.

1 Financial summary 2 Our segments 3 Our diversified business 4 What we do 5 How we create value 6 Opportunities and risks 7 Our strategy 8 Measuring our progress 9 Culture and people 10 Governance

ICAP plc / Annual Report 2012 / ICAP in 10

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ICAP in 10

Financial summary

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2011 £m Variance %

Business review Governance

2012 £m

Key highlights
− Group revenue from continuing operations fell to £1,681 million, a 3% decrease. Profit before tax1 of £354 million was up 1%. − Electronic broking revenue of £301 million produced an operating profit1 of £127 million. − Post trade risk and information revenue rose to £208 million and produced an operating profit1 of £91 million. − Electronic, post trade risk and information contributed 59% of operating profit1. − The Group’s operating profit1 margin remained at 22%.

Continuing operations Revenue Operating profit1 Profit before tax1 Profit before tax statutory2 Dividend per share Earnings per share total operations Basic Adjusted basic Earnings per share continuing operations Adjusted basic1

1,681 372 354 217 pence 1,741 375 350 233 pence (3) (1) 1 (7)
Variance %

22.0 21.1 40.1 40.1
2012 £m

19.95 28.7 39.9 39.9
2011 £m

10 (26) 1 1
Variance %

Financial statements

Total operations Net assets Free cash flow Net debt
1 2 3

1,210 268 (82)

1,251 189 (161)

(3) 41 49

Information for shareholders

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From continuing operations before acquisition and disposal costs and exceptional items. From continuing operations, total statutory profit before tax for the year including acquisition and disposal costs of £137 million. Net cash flow from operating activities adjusted for capital expenditure, dividends received from associates and investments and cash from operations relating to non-controlling interests. Cash and cash equivalents less long-term and short-term borrowings.

− EPS (basic) reduced from 28.7p to 21.1p; EPS (adjusted basic) increased by 1% to 40.1p. − Free cash flow3 of £268 million (2011 – £189 million). Net debt4 reduced to £82 million (2011 – £161 million) after paying £135 million in dividends. − The directors recommend a final dividend of 16.00p per ICAP share, which will be paid on 20 July 2012. The full-year dividend will be 22.00p compared with 19.95p per share in 2010/11, an increase of 2.05p.

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Voice

Our segments

Electronic
Markets that are more liquid and have a high degree of consistent buying and selling interest are most efficiently traded on electronic broking platforms. These automated platforms allow users to execute large volumes of deals, quickly and easily. We offer a number of electronic broking platforms, the largest of which are the EBS platform for FX currencies and the BrokerTec platform for G7 public debt securities. Customers range from investment banks, to corporate treasurers, to high-frequency traders. Our services We offer pure electronic trading in the FX and fixed income markets including US and European government debt securities, US and EU repos, interest rate swaps, credit and a money market platform for corporate treasury investors.

Post trade risk and information
Our post trade risk and information services help users of financial products to reduce operational risk and overall reduce system-wide risks. This increases the efficiency of trading, reduces costs and thereby creates new trading opportunities which in turn benefits ICAP. Our information business empowers customers to make trading decisions with OTC market information across key asset classes. More than 500 customers use our post trade risk services and more than 3,000 market participants use our information services. Our services The post trade risk and information business comprises: − the portfolio risk services businesses, Reset, ReMatch and TriOptima which identify, remove, neutralise and reconcile risk within portfolios of derivatives transactions; − the transaction processing business, Traiana; − the information and data sales businesses.

Market participants can use ICAP’s broking service to assess trading availability and successfully execute trades. Our voice brokers locate and identify potential trading interest and in so doing create liquidity and facilitate the price discovery process. This is particularly important in markets where there are a wide range of potential transaction types and the number of parties willing to enter certain transactions at any moment may be limited. Customers range from investment banks in our fixed income products to end-user corporates and industrials in commodities. Our services We offer voice broking services for a wide range of asset classes including rates, FX, commodities, emerging markets, credit and equities. For each of these asset classes, ICAP has hybrid capability. ICAP defines hybrid broking as providing customers with the choice to enter prices and execute trades electronically, directly via one of ICAP’s electronic trading systems and/or to engage with a broker to identify and help negotiate trades. Strategy ICAP’s voice strategy is to extend its hybrid capabilities, to invest in growth markets and seize opportunities as they arise, to expand market share in products where we are not the leader, and to maintain our market share where we are the leader.

Strategy ICAP’s strategy is to grow its global electronic business both through increasing volumes of existing products and by developing new markets.

Strategy ICAP aims to continue to develop its post trade risk and information business by providing innovative services that enable its customers to reduce costs and risk as well as increase efficiency, return on capital and capacity to process trades.

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ICAP in 10

Our diversified business

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(£m)
Voice 1. EMEA 2. The Americas 3. Asia Pacific Electronic Post trade risk and information Total 154 106 42 6 127 91 372 1

Business review Governance

Revenue by segment
(£m)
Voice 1. EMEA 2. The Americas 3. Asia Pacific Electronic Post trade risk and information Total 1,172 566 478 128 301 208 1,681

Operating profit split

1

Financial statements

3 3 2

2

Revenue by asset class
(£m)
Rates FX Commodities Emerging markets Credit Equities Total 681 343 203 167 154 133 1,681

Diversified revenue
(%)
Bank execution Total subscription Non-bank execution 69 10 21 Information for shareholders

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What we do

Market information

Trade execution

LIVE TRADING DATA FROM ICAP PROPRIETARY SYSTEMS LIVE TRADING DATA, INDICATIVE DATA AND ANALYSIS VIA ICAP PROPRIETARY SYSTEMS INDICATIVE AND TRADING DATA DISTRIBUTED VIA THIRD PARTY DATA VENDORS

ELECTRONIC

VOICE INCLUDING HYBRID

€

$

£

Transparency Market participants access trading and indicative data to inform their trading decisions, assess market levels and activity. ICAP displays live and indicative data and provides price transparency to users of its systems by aggregating bids and offers and indications of trading interest. ICAP sells real-time and historical data, direct and via data vendors, and provides market commentary.

Execution ICAP provides market participants with the ability to trade on a purely electronic basis, typically in the most liquid assets, with direct access to ICAP’s matching engines and central “order book”. For less liquid or “episodic” markets, participants can trade via one of ICAP’s electronic systems and/or speak with an ICAP broker who will identify trading interest and availability from among other markets participants. ICAP also acts as an executing broker for exchange products.

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ICAP in 10 Business review Governance

Automated links to other parts of market infrastructure

Portfolio risk reduction and messaging

AUTOMATED LINKS TO: – CLEARING – USER RISK SYSTEMS – SETTLEMENT

MANAGEMENT AND NETTING OF HIGH VELOCITY MARKET TRANSACTION DETAILS SYSTEMISED MITIGATION OF CUSTOMER RISKS, BY IDENTIFYING AND REMOVING: – TRADE MISMATCHES – UNWANTED EXPOSURES – TRANSACTIONS THAT NO LONGER HAVE A COMMERCIAL PURPOSE

Financial statements

Automated links ICAP automates links from its electronic, hybrid, voice broking and post trade systems to send trade information to clearing houses, customer risk and position keeping systems and settlement venues.

Risk reduction and messaging The Traiana service automates links from any high speed execution system, not just ICAP’s. ICAP also operates a series of services through TriOptima, Reset and ReMatch that enable users of derivatives and bonds to mitigate unwanted risks in their trading portfolios.

Information for shareholders

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How we create value

Help create more transparent and efficient markets
We provide accurate, timely price information across global markets and seek to promote transparency in “episodic” markets by displaying indications of interest.

Maintain an entrepreneurial edge
We invest in technology and integration with user and market infrastructure to build and maintain our market leading positions.

Reduce risk for users and the financial system as a whole
We automate links to clearing and help reduce systemic risk and remove legacy transactions from the financial system.

29m

Average daily updates to 96,000 instruments Access to global pools of buyers and sellers helps create liquid markets and greater transparency.

13%

Revenue invested in technology in 2012 We have the appetite to innovate and to develop new products and services. The i-Swap platform won the OTC Trading Platform of the Year award in the Risk Awards 2012, recognising best practice in the risk management and derivatives markets.

$1 70tr $60tr

Interest rate swaps eliminated since 2008

$1.4tr
Average daily volumes traded via our systems

Credit default swaps eliminated since 2008

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ICAP in 10

Opportunities and risks

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Our principal risks
The board has identified three principal risk categories for the Group: − operational risk: the risk of suffering a financial loss or reputational damage directly or indirectly from inadequate or failed internal processes, human error, systems failure or external events; − liquidity risk: the risk that any part of the Group does not have sufficient financial resources available to enable it to meet its financial obligations as they fall due; and − strategic risk: the risk of competition in the marketplace and of not identifying or delivering new initiatives through organic growth or acquisition to keep our services attractive and relevant.

Business review Governance

Opportunities
The wholesale financial markets continue to evolve. We have invested ahead of our competitors, positioning our business to take advantage of forthcoming market and regulatory developments. We intend to: − seize the opportunities created by regulatory change; − leverage the competitive advantage of our voice, hybrid and electronic business model, providing market participants with a choice of execution methods; and − capitalise on the significant investment we have made in our networks and post trade risk-reduction businesses.

Our risk profile
ICAP is an interdealer broker and provider of post trade risk mitigation, messaging and data services. Consequently we have a very different risk profile from that of a bank, investment bank, asset manager, insurance company or hedge fund. We are not required to commit material amounts of capital in the conduct of our day-to-day business. The profit and cash flows of the business are driven by the level of activity of our customers and do not depend on the valuation of its assets and liabilities. ICAP does not have material exposures to market risk or long-duration credit risk.

Financial statements Information for shareholders

Electronic average daily volumes
($bn) 2012
130 237 281 152 $800bn

Post trade risk and information revenue
43 37 53 501,000 75

(£m) 2012
£208m

2011
147 220 260 151 $778bn 35 32 47 70

2011
£184m

2010
110 166 219 135 $630bn

TriOptima Information

Traiana

Reset/ReMatch

US Treasury Spot FX

US Repo

EU Repo

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Our strategy

We aim to be the infrastructure provider to the world’s wholesale financial markets, in both execution and post trade

ACHIEVED THROUGH DELIVERING

Broad, innovative service offering

Optimisation of people, systems and processes

WHICH LEADS TO

Superior shareholder returns

Leading market position

AS MEASURED THROUGH OUR KPIs

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ICAP in 10

Measuring our progress

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Business review Governance

Our eight key performance indicators are the measures we use to monitor progress against our strategic objectives. Broad, innovative service offering
Measuring the breadth and balance of our businesses and the quality of our earnings Operating profit split (%)

Optimisation of people, systems and processes
Measuring continued investment in efficiency of systems and people Technology spend as % of revenue

41

34

25

Voice

Electronic

Post trade risk and information

13%
Revenue per voice broker

Financial statements

Diversified revenue (%)

69

10

21

Bank execution

Total subscription

Non-bank execution

£498k
Leading market position
A focus on remaining number one in the industry Global market share

Information for shareholders

Superior shareholder returns
Ensuring a focus on delivery to our owners Adjusted basic EPS Conversion of profit to cash

40. p 103% 23%-25% 1
Operating profit margin

22%

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Culture and people

Our values and culture guide the way we do business
There are four key qualities that define the culture of ICAP on which we focus in order to deliver our strategic and commercial goals: Leadership – ICAP needs to deliver “best in industry” results, both financially and operationally. We need to be the standard setter for our industry across a broad range of measures, establishing the performance benchmarks that other companies use to judge themselves. To do this we need to foster and reward ambition in our employees and managers. Integrity – ICAP aims to build and maintain a relationship of openness and trust with its customers, partners, investors and regulators. To do this the Company and its employees are expected to behave consistently and within standards of ethical and professional conduct at all times and these qualities need to be rewarded. Entrepreneurship – ICAP needs to anticipate industry change, identify and assess new business opportunities, move at speed to capture these and manage the risks that inevitably arise in this process. To do this the Company needs to attract, motivate and retain creative people, manage itself and its infrastructure and processes in a way which fosters agility and controlled experimentation and foster an environment where employees charged with supporting the business are heard and valued. Respect for control – As a key part of global financial infrastructure, ICAP has to respect, and be seen to be respecting, both the spirit and the letter of the control, compliance and assurance environment within which the Group operates, worldwide.

Our people
ICAP employs more than 5,100 people worldwide. Our ability to attract and retain the highest quality people is one of the key factors driving the success of our business. We are committed to providing an environment that is intellectually challenging, motivating and supportive. Our award-winning graduate recruitment programme delivers a steady flow of talent into the business and our increasing investment in employees through training has been designed to ensure our people are able to operate effectively in increasingly complex markets and in a changing regulatory environment.

Global presence

Employee by business segment
Voice 1. EMEA 2. The Americas 3. Asia Pacific Electronic Post trade risk and information Total 4,122 1,569 1,725 828 542 459 5,123

1

3

2

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ICAP in 10

Governance

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Chairman − Charles Gregson Senior independent director − John Sievwright Non-executive directors − Hsieh Fu Hua − Diane Schueneman − Robert Standing Executive directors and members of the GEMG − Michael Spencer − John Nixon − Iain Torrens Additional GEMG members − Mark Beeston − David Casterton − Hugh Gallagher − Gil Mandelzis − Mark Price − Douglas Rhoten − Duncan Wales Board evaluation The externally facilitated board evaluation confirmed the changes in the board composition were highly effective and the directors’ expertise was well drawn on during the year and is valued by the business. Focus areas for 2012/13 − increase efficiency from the business model − the regulatory environment − HR strategy and succession planning − IT strategy − the Brazilian business − key customer analysis including customer perception − external market developments

Business review Governance

The Group is led by an experienced board of directors and senior management team with extensive knowledge of ICAP’s markets, the regions and regulatory frameworks in which it operates and its technology.
The role of the board and the members of the GEMG is to provide oversight and direction of the business. There is a clear division of responsibility between the Chairman and the Group Chief Executive Officer. The board is responsible for ensuring the Group has the appropriate people, financial resources and controls in place to deliver on its strategy and long-term objectives.

Financial statements Information for shareholders

Balance of the board
Independent non-executive directors Executive directors Chairman

Directors’ tenure
5 years + 2 – 5 years 1 – 2 years