Tullett Prebon plc Annual Report 2010
8. Financial risk The nature and scope of the Group’s operations mean that it is exposed to a number of ﬁnancial risks, principally liquidity risk (including the risk of being required to fund margin calls and failed settlements), interest rate risk, currency risk, taxation risks, and pension obligation risk.
funding. The ﬁrm is rated Investment Grade by both Moody’s and Fitch with issuer ratings of ‘Baa3 Stable’ and ‘BBB Stable’ respectively. Further details of the Group’s borrowings and cash are provided in Notes 21, 25 and 31.
Liquidity risk – The Group seeks to ensure that it has access to an appropriate level of cash, other forms of marketable securities or funding to enable it to ﬁnance its ongoing operations, proposed acquisitions and any other reasonable unanticipated events, 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 Risk and Treasury Committee.
The Group is exposed to potential margin calls from clearing houses and correspondent clearers, both in the UK and US. Following a major project to mitigate its exposure to margin calls completed in 2009, the Group has not been subjected to any signiﬁcant margin call requirements. However, the Group remains alert to the risk of large margin calls in the future. As a normal part of its operations, the Group has a 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, namely 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 itself 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. 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 £115m committed revolving credit line as additional contingency
Interest rate risk – The Group is exposed to interest rate risk due to the short term nature of its cash deposits, which are typically held at maturities of less than three months, primarily for liquidity and other operational reasons. The exposure on sterling cash is partially hedged by rolling the term loans under the bank facility for similar short term periods. Cash denominated in currencies other than sterling is not hedged and remains at short term ﬂoating rate. The Eurobond debt is not swapped and remains a ﬁxed sterling rate cost.
The Group’s Treasury and Risk Committee 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.
GOVERNANCE SHAREHOLDER INFORMATION
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.
Pension obligation risk is the risk that the Group is required, in the short and medium term, to fund a deﬁcit in any of the Group’s deﬁned beneﬁt pension schemes.
The latest triennial actuarial valuations of the two UK deﬁned beneﬁt schemes undertaken during 2010 show that both schemes have a substantial funding surplus. As a result, the trustees of both schemes have agreed that no further funding contributions are required, pending the next actuarial valuations.
Taxation risk is 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.