Tullett Prebon plc Annual Report 2010
There have been signiﬁcant developments during 2010 in the process of agreeing and introducing reforms designed to strengthen the ﬁnancial system and to improve the operation of the ﬁnancial markets. In the United States the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted on 21 July 2010 and includes legislation governing the regulation and operation of OTC derivatives markets. The Act requires the CFTC and SEC to establish detailed rules and regulations to apply the principles of the legislation by July 2011. Most pertinently for the inter-dealer broker industry the CFTC published its proposed rules on the Core Principles and Other Requirements for Swap Execution Facilities (SEFs) in early January 2011. The CFTC rules governing SEFs are due to come into force in the ﬁnal quarter of 2011 although this could be delayed pending the outcome of the comment process. In Europe, the European Commission tabled proposals on the regulation of OTC derivatives markets, commonly known as the European Markets Infrastructure Regulation (EMIR), in September 2010, and in December published a consultation on the review of the Markets in Financial Instruments Directive, commonly known as MiFID II. It is envisaged that the EMIR and MiFID II reforms will come into force during 2013. We continue to be engaged both directly and through our trade associations in responding to these consultation and discussion documents, and with assisting the rule setters in understanding how the OTC markets currently operate, to help ensure that the ﬁnal regulations achieve their stated objectives and avoid unintended negative consequences. Although the ﬁnal rules are still to be agreed, focusing on the impact on the OTC markets, there are four general themes that emerge in these proposals: – the requirement for market participants to use central counterparties (CCPs) to clear certain contracts (to be determined by a central authority), with exemptions for non-ﬁnancial counterparties; – the requirement for trades to be reported to trade repositories; – enhanced pre and post trade transparency; and – the requirement for trades which are settled through a central counterparty to be traded through regulated execution venues that meet particular criteria in how they operate and how they are governed – termed SEFs in the US and ‘qualifying organised trading facilities’ in Europe. We agree with the objectives and support the direction of these proposals. We believe that their introduction will be positive for our business as the proposals formalise the role of the intermediary in the OTC markets. Speciﬁcally, we would make the following observations:
– the increased use of CCPs transfers rather than eliminates risk, and as acknowledged by the proposals, the decision as to which trades are suitable for CCP clearing needs to be made in conjunction with the CCP in the context of their ability to manage the risk; – the increased use of CCPs is likely to increase the number of counterparties able to be served by the business; – access to clearing should be open to all execution venues in order to maintain efﬁciency and market ﬂexibility, and this is recognised by the proposals; – the provision of trade information to central repositories would be useful for regulators to understand total market and individual participant exposures, but too much pre and post trade transparency can be harmful to liquidity, reduce market efﬁciency and undermine the efﬁcacy of regulation; and – there are only a very few highly liquid products that are suitable for execution solely on pure electronic platforms without intervention and support from brokers. The proposed requirements for execution venues include the increased use of electronic facilitation, but we believe that given the nature of the markets, broker support in providing liquidity will remain essential to the effective operation of those markets. We believe that our hybrid electronic broking model means that we are well positioned to continue to provide a valuable service to clients, and that our offering can be developed to meet the requirements being proposed.
Although ﬁnancial markets have remained unsettled and risk appetite has started to return, market activity was more subdued overall in 2010 than in 2009. There were only a few limited periods of sustained higher volatility during the year, most notably in May, and in November and the ﬁrst two weeks in December. Underlying revenue in 2010 was unchanged compared with the prior year which was a good performance in these market conditions. The net effect of the broker defections in North America, following the raid by BGC in the second half of 2009, reduced revenue by 5%. In addition the action taken during the year to close six satellite ofﬁces in North America that made only a limited contribution to operating proﬁt reduced revenue by 1%. The impact of currency movements on the translation of our non-UK operations was slightly favourable. Overall, revenue of £908.5m was 4% lower than reported for 2009. Operating proﬁt for the year was £152.4m, 11% lower than 2009, with an operating margin of 16.8%. Excellent progress has been made in re-establishing our presence in all of the major product areas in North America affected by the broker defections. Including the 26-strong credit broking team who started with the business in early January 2011, broker headcount on the affected desks is now largely back to the levels before the defections.