Tullett Prebon plc Annual Report 2010
Objectives, strategy and risk proﬁle
The Company’s objective is to maximise returns to shareholders over the medium to long term with an acceptable level of risk. The strategy to achieve this objective is to continue to build a business, operating as an intermediary in the wholesale OTC ﬁnancial markets internationally, with the scale and breadth to deliver superior performance and returns, whilst maintaining strong ﬁnancial management disciplines. The key actions to deliver this strategy are: – Develop and maintain strong pools of liquidity in all major ﬁnancial products and all major ﬁnancial centres; – Attract and retain key revenue producers; – Development of electronic broking capabilities to support our voice broking expertise; – Focus on improving contribution rates; and – Focus on maintaining an appropriately sized support cost base. As an intermediary, the business does not take trading risk and does not hold principal trading positions. The key day to day risks faced by the business are counterparty credit risk (which in the event of a counterparty default becomes a market risk) and settlement risk. Around three-quarters of the revenue is derived from Name Give-Up activities, where the business is not at any time counterparty to the trade, and where its exposure to a client is limited to outstanding invoices for commission. All activity relating to derivatives is undertaken Name Give-Up. The level of invoiced receivables is monitored closely, by individual client and in aggregate, and there have been very few instances in the past few years when invoiced receivables have not been collected.
The balance of the revenue is derived from Matched Principal activities, where we are the counterparty to both sides of a matching trade. To mitigate settlement risk the business undertakes transactions on a strict delivery-versus-payment basis. In the event of a client default in a Matched Principal trade, our exposure is not to the principal amount but to the movement in the market value of the underlying instrument, and so our exposure becomes a market risk. This risk is mitigated by use of central counterparty services and other default risk transfer agreements wherever possible, and where such services are not available, by taking swift action to close out any position that arises as a result of a client default. Once a Matched Principal transaction has settled (usually 1-3 days after trade date), there is no ongoing risk for the business. Discussion of our risk management governance structure and the Group’s risk proﬁle is included on pages 15 to 19.