Edited Transcript of LSE.L earnings conference call or presentation 28-Feb-20 9:00am GMT

Next to Slide 6, which provides the main year-on-year changes to the income line. The graph shows that FX changes were comparatively small with a GBP 23 million impact. NTI added GBP 36 million, reflecting good growth both at LCH, up 18%, and at CC&G and Italy, up 14%. Growth in NTI mainly arose from an increase in the quantum of margin, which reflects higher clearing volumes, volatility and also a change to risk methodology at LCH. And we expect NTI to stabilize around the levels seen in the second half of 2019.

The largest increase to the top line was from the strong organic growth across the group, adding GBP 120 million. Contributions from acquisitions were not as significant this year. We completed one small acquisition, Beyond Ratings, although we did announce a much larger acquisition, which you may have heard something about yet to complete.

We next move to operating expenses, which is on Slide 7. Our costs, excluding depreciation and amortization, were again well controlled, increasing by just 1%. Including D&A, operating expenses rose 7%. Now on this slide, we highlight the principal movements in the cost line. First, we adjust for the currency effects, which increases last year’s starting position by GBP 8 million. We achieved GBP 17 million of savings during the year as part of the total of GBP 30 million headcount reduction program we announced last year.

And together with good control of costs and some benefit from IFRS 16, this means net underlying expenses, excluding D&A, are almost unchanged year-on-year. And finally, you can see from the slide that the principal increase in expenses arose from depreciation and amortization, which were GBP 65 million higher. This increase was driven by the continuation of investment for growth and efficiency and also from accounting changes under IFRS 16. I’ll give a little more information on this on the next slide.

So if we move to Slide 8, this slide looks at some of the actions we are taking to keep the focus on cost efficiencies that also provides some expectations for the current 2020 year. We are controlling costs in a number of ways. There is an ongoing focus on efficiency opportunities that arise from being a larger and more diversified group. And as mentioned just now, we have continued to review headcount. We are making changes to remove duplication and remove — reduce the number of efficiencies and contractors. We have delivered GBP 17 million in savings in 2019 and aim to achieve the full GBP 30 million on a run rate basis this year.

We remain an expanding business. So we’re also continuing to invest in the group for growth, efficiency and resilience. We, therefore, expect underlying depreciation to increase again in 2020. The graph on this slide shows an expected increase of approximately GBP 35 million in overall depreciation, which is similar to the increase experienced in 2019. And finally on this slide, the reported tax rate for 2019 was 23.7%. And for 2020, we expect the tax rate to be between 22% and 23%.

Now turning to Slide 9. This provides more detail on investment initiatives. We invested GBP 195 million of CapEx in various projects in 2019. For 2020, we expect an uplift in the ongoing level of investment to around GBP 220 million. We continue to invest for growth and projects to drive increased returns. Approximately 1/3 of current year investment is for new or enhanced products and also for projects to drive group efficiencies. Examples here include development of index, data and analytics products, trading venue enhancements and multi-asset class clearing and risk platform.

And the other 2/3 of investment focuses on operational projects, which will also deliver long-term benefits. And these include data center consolidation, continued cloud migration and technology upgrades and system resilience. These CapEx projects reflect the group in its current state and do not include the ongoing spend on plans to integrate Refinitiv and the associated integration project costs.

And now let’s turn to cash flow, which is on Slide 10. Cash generation was good with GBP 639 million of discretionary free cash flow after tax, interest payments and investment activities. This equates to 183p per share. This strong cash generation enables further investment in growth initiatives and in infrastructure, as just described. And separately, we invested in a 4.9% stake in Euroclear, and as I mentioned, acquired Beyond Ratings.

Let’s now look at our financial position on Slide 11. Operating net debt at the end of December, after setting aside GBP 1.1 billion of restricted cash, was GBP 1.8 billion, a reduction from GBP 1.9 billion at the half year. We have approximately GBP 680 million of net committed undrawn bank facilities, which extend out to 2024. And separate to this, we have a GBP 13.3 billion bridge facility available to refinance Refinitiv debt, which gives us flexibility when we consider our financing needs after closing.

In terms of ratings, S&P maintaining long-term A rating and Moody’s have an A3 rating. Both like the benefits of the Refinitiv deal and the longer-term financial strength, although they signal an increased near-term credit risk on completion. And in terms of leverage, year-end net debt to adjusted EBITDA is 1.4x and well within our target 1.2x range. And so we start 2020 in a strong position, continuing to support investment in the business and putting us in a good position ahead of the Refinitiv transaction.

And finally, if we move to Slide 12, now this slide confirms the achievement of the financial targets we set in 2017. FTSE Russell delivered a reported 10% revenue increase for 2019 having met the growth target in the previous years. LCH OTC has exceeded targets with 15% reported revenue growth in 2019 and 13% on a constant currency basis. LCH operating margin has increased to 54.9%, helped by top line growth and the reduction in cost of sales, which I noted earlier. And we have kept close control of costs and have prioritized ongoing investment opportunities across the group. And as a result and helped in part by IFRS 15 and 16 effects, we have finished 2019 with a 54.7% EBITDA margin. So another strong set of results and a strong financial position.

And with that, I will pass on to David.

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [3]

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Thank you, David, and good morning, everyone. We have delivered this morning’s strong results despite another year of macroeconomic and geopolitical events that have directly influenced global financial markets. As David has highlighted, we have continued to invest in our business as we grow in scale while remaining focused on group-wide efficiency and operational excellence. On the next few slides, I’ll provide further detail on the group’s progress strategically and operationally across our businesses of Information Services, Capital Markets and Post Trade. I will then provide an update on the proposed acquisition of Refinitiv, which significantly accelerates our strategy to be a leading global financial markets infrastructure provider.

Turning to Slide 14. As our financial performance demonstrates, we have continued to make progress on our strategic objectives and to take significant steps on a number of group-wide initiatives. Our open access and customer partnership approach are key to our strategy as we work with customers to develop innovative services in a range of areas from reference rate reform to sustainable investment. LSEG has consistently anticipated notable trends in financial markets and has a strong track record of delivering solutions for our customers while creating shareholder value. Capitalizing on global investment trends in an evolving regulatory landscape, we continue to see multiple opportunities for growth and enhanced collaboration.

In Information Services, FTSE Russell has consistently achieved double-digit growth over the last several years and is a key contributor to group revenues. We acquired Beyond Ratings, a very complementary business to FTSE Russell’s existing ESG and data offering as well as to the analytics tools provided through The Yield Book. From the start of this year, we have aligned the group’s Post Trade businesses into a single Post Trade division encompassing LCH Group, CC&G, Monte Titoli and UnaVista, our trade reporting business that previously sat within Information Services. This will ensure greater group-wide collaboration and benefits for customers while continuing to operate on an open access basis with no changes to local legal entity governance and regulatory oversight. We are committed to continued investment in our technology and operations to maintain and enhance our resiliency. The group continued to pursue its cloud strategy to reduce operational costs, deliver system scalability and support our growing global footprint.

Let me now turn to each of our core businesses and discuss 2019 highlights and some opportunities going forward. I will then give an update on Refinitiv. First, turning to Information Services on Slide 15. FTSE Russell continues to be a leader in the global index industry and is benefiting from industry trends, such as the increased demand for data and analytical tools and the continuing growth in passive investing. At the end of the year, value of ETF assets tracking its indices was $765 billion, up 26% on the previous year.

FTSE Russell successfully began inclusion of China A shares into its global equity benchmarks, a significant development for the country. The completion of the first phase will take place in March, and we will continue to consult with the market and regulators on the next stages of inclusion. This past July, FTSE Russell launched the first Climate Risk Government Bond Index, which allows the market to access a quantitative climate risk assessment for sovereign debt. FTSE Russell has also won a number of client mandates to develop sustainable indices, including a new customized ESG benchmark for a Dutch pension fund.

Turning to Slide 16. Our ISD business provides solutions across the investment life cycle. Customers are increasingly demanding valuable IP from market infrastructure providers in the form of indices, data and analytics. FTSE Russell’s multi-asset class capabilities enable it to offer world-class investment tools across these 3 areas, working in partnership with customers to help them improve investment processes and portfolio composition. Core index benchmark families, covering global equities and fixed income, provide essential foundations upon which other key growth areas can be built. Similarly, data accumulated from our benchmarks are used to inform smart beta and factor solutions, where we are continuing to see strong demand. The Yield Book augments our fixed income index capabilities by providing single security and portfolio-level analytics across a wide range of fixed income instruments. Our index and analytics are complemented by data solutions, which provide valuable datasets for customers performing a wide variety of activities across the investment process.

Turning to Capital Markets on Slide 17. Our Capital Markets business has continued to perform well despite macroeconomic headwinds. While IPO activity globally has been slower, London Stock Exchange and Borsa Italiana attracted significant listings with a total of GBP 23.4 billion raised by firms in new and further issues across the group’s markets. London Stock Exchange retained its status as the leading European exchange in terms of money raised. And Borsa Italiana recorded the highest number of new listings in Europe. After close work with the U.K. and Chinese governments and regulators, we launched Shanghai-London Stock Connect in June. It is an important step in our relationship with China. And while we expect it will take a while to build, we welcome Huatai Securities as the first issuer of GDRs on the new segment.

In Secondary Markets, CurveGlobal continued to innovate and build momentum, seeing trade volumes rise by 78% in 2019 compared to 2018. It has introduced a new untapped prepaid trading scheme to encourage further use of its services as it supports the markets’ transition away from LIBOR-based derivatives. MTS, our trading platform for European government bonds, saw the value traded on its repo platform rise by 30% to EUR 113 trillion.

Turning to Slide 18. The debate among issuers, investors, regulators, policymakers and wider society about the transition to a more sustainable, low-carbon economy is quickly evolving. Uptake has many touch points with stakeholders that put us in a strong position to engage on and lead this discussion, playing a key role in the investment chain on sustainable investment. We provide companies and investors a comprehensive green and sustainable product offering in both our Capital Markets and index business.

FTSE Russell calibrates indices to investors’ requirements by integrating climate and other environmental, social and governance themes. I would highlight the recent launch of the FTSE TPI Climate Transition Index developed in partnership with The Church of England Pensions Board and the Transition Pathway Initiative. In Capital Markets, London Stock Exchange launched 2 new green initiatives to recognize the increased interest. The new Green Economy Mark recognizes listed companies with 50% or more of their revenues derived from products and services that contribute to the global green economy. And the Sustainable Bond Market builds on the success of the Green Bond Segment launched in 2015 and includes new sustainability, social and issuer-level segments based on independently verified frameworks and use of proceeds.

As a listed company, LSEG is also carefully considering the climate risks and opportunities facing our own business. We have been a public supporter of Task Force for Climate-Related Financial Disclosures, TCFD, since its launch in 2017. We not only encourage issuers to report against TCFD through our reporting guidance, but we follow through on that in our own reporting. In terms of our own direct carbon emissions, we achieved a 41% reduction in our absolute carbon footprint in 2019.

On Slide 19, we outlined some of the key highlights and initiatives in our Post Trade division, another area of strategic focus for the group. LCH’s OTC clearing services continued to set new records in 2019 and have seen good growth in member and client clearing. ForexClear has expanded its product offering to include clearing of deliverable forwards. This comes at a time of increased demand from asset managers to clear their FX derivatives portfolios ahead of the next phases of uncleared margin rules this year and next year.

In the uncleared OTC interest rate swap space, which represents around 25% of the global OTC interest rate derivatives market, LCH SwapAgent has the opportunity to expand its offering. SwapAgent now has 16 members live and actively using the service and has recently surpassed $1 trillion in total notional registered since launch.

In Italy, the group’s central securities depository, Monte Titoli, is implementing a digital transformation program to deliver increased efficiency, risk reduction and simplification for our clients. And as David highlighted in the previous section, LCH and CC&G both recorded double-digit growth in NTI, up 18% and 14%, respectively.

Turning to Slide 20. SwapClear remains the largest OTC rates liquidity pool in the world, processing over $1.2 quadrillion dollars in notional volume in 2019. Alongside this, the increased use of its compression services has enabled members and customers to save approximately $35 billion in capital over the course of the year. And we are never complacent about the competitive landscape, but we continue to see no discernible change in our customer behavior. Our members and clients across 62 countries recognize the benefits and efficiencies offered through SwapClear’s global margin pool with clearing available in 26 currencies.

LCH remains closely engaged with the relevant government authorities and industry participants to fully support a smooth transition to selected alternative reference rates. In October, LCH became the first CCP to offer clearing of euro-denominated swaps benchmarked to the new reference rate, €STR. The move follows its launch of clearing for SOFR swaps and SONIA futures in 2018 and SARON swaps in 2017.

Ahead of Phase 5 of the uncleared margin rules from September of this year, ForexClear is focused on onboarding new clients. Under UMR, firms will have to set up new accounts, calculate, agree and exchange initial margin with their counterparties. This is why we are seeing an increase in funds that have FX hedges clearing non-deliverable forwards. Looking ahead, we will continue to add more

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This transaction will create a business with global scale and geographic diversification in key markets, including North America and in fast-growing emerging markets, particularly in Asia.

As outlined on Slide 24, you have seen earlier this week, Thomson Reuters reported its results. Refinitiv continues to make good progress on its cost program with $520 million run rate savings achieved in 2019 and on track to achieve $650 million by end of 2020. Between the businesses, detailed integration planning is underway to ensure we are ready to deliver the benefits of the transaction to our shareholders, customers and other stakeholders.

David Shalders joined the group in November as Chief Integration Officer, bringing over 30 years’ experience in integration, technology and operations in the financial services sector. We have established 18 work streams across functions and businesses, each with an LSEG and Refinitiv executive sponsor. The regulatory approvals and antitrust process are ongoing, including active engagement with the European Commission in the prenotification period. There’s nothing particularly unexpected in the length of engagement with the commission for a global, large-scale transaction such as this. While the prenotification process is ongoing, we anticipate formally filing in March. We remain on track to close the transaction in the second half of 2020.

So in summary, turning to Slide 25, LSEG is a great business with a successful strategy, working in close partnership with our customers. We have continued to invest across our businesses, delivering innovative products and services while also controlling underlying costs. The group also remains highly cash-generative. So LSEG is well positioned for future growth in this evolving environment as a global financial markets infrastructure leader.

And with that, I’ll now hand back to Paul for the Q&A. Thank you.

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Questions and Answers

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Paul Froud, London Stock Exchange Group plc – Head of IR [1]

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(inaudible) to line up questions on the phone. But before we do that, I’m happy take questions from those on the floor. So first of all, from Arnaud there.

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Arnaud Maurice Andre Giblat, Exane BNP Paribas, Research Division – MD & Research Analyst [2]

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It’s Arnaud Giblat from Exane. I’ve got three questions, please. Firstly, on ESG, you outlined that ESG in your presentation was a key component of indexation and info services. And some of your peers are growing. They disclosed revenues and they disclosed that they’re growing revenues at 20% or 30%. I’m wondering if you could give us a bit of color as to how much the revenues that are ESG-related within FTSE Russell are growing at, and if the combination with Refinitiv helps enhance the ESG offering and accelerate that. That’s my first question.

And my second question is FTSE Russell grew revenues on a constant currency by 6%. I suppose you may be waiting for the transaction to close to give us new targets for the segment. But does a double — is a double-digit growth rate at FTSE Russell something that remains sustainable? And thirdly, on costs. So this year, GBP 17 million of efficiency savings you’ve invested, so broadly costs are neutral. Is that something — is that the paradigm we should be looking at for 2020?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [3]

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I’ll answer — thank you, Arnaud. I’ll answer the first two and then David will address the cost question. On ESG, we don’t disclose specific growth rates with respect to ESG-specific products. But we are seeing as is clear from, I’ll call it, the shift in the debate or perception worldwide, we’re seeing an enormous amount of focus on and interest in the topic, in the issue and in our products that address it. And I think I touched on my remarks on the FTSE TPI Climate Transition Index, which was launched last month. The World Government Bond Index now has a Climate WGBI. In January, we launched a government bond index focused on the Eurozone, henceforth known as the EGBI. So the level of interest and engagement and involvement with our customers is substantial.

The second part of your question on that was whether we see opportunity in the Refinitiv transaction to enhance our capabilities in this area. And the answer is certainly yes. Refinitiv has a very strong, attractive data set across ESG data and analytics. And we will be, as part of the transaction, combining our product or enhancing our product with the incremental data and analytics capabilities from the Refinitiv business. So we look forward to that after closing.

In terms of the potential growth of FTSE Russell going forward, we are not putting out targets today. Going forward, as David mentioned, we have — FTSE Russell has achieved a double-digit growth rate that we set out in 2017. All of the growth drivers and the, I’ll call them, the tailwinds in that business persist. And so we still think that has a very attractive growth trajectory. And whether that is the ESG products that we had just touched on, whether that is the continuing trend towards passive, whether that is the growth in emerging market product, such as China and other markets, whether it is the, I’ll call it, the relatively earlier phase in terms of a bunch of these trends on the fixed income side, where we have capabilities in both fixed income and equity, smart beta and factoring, all of those trends are still present and active. So we view this as a very attractive growth business but no specific targets today. I’ll turn it over to you on the cost side.

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David P. Warren, London Stock Exchange Group plc – Group CFO & Executive Director [4]

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Yes. Arnaud, I think on the cost side, we’ve given you some information in the materials today to help you with understanding where we think depreciation will go. Because it will be the flow-throughs of the ongoing investment which continues and is increasing in 2020 over 2019 and also the impacts of IFRS 16. So that, obviously, depreciation will grow for all those reasons. We will continue to invest. And we’re actually investing more in 2020 for both growth initiatives as well as for efficiency opportunities and certainly improvements to our systems and improvements in cyber and operating resilience. These are important things that we will focus on as we are a bigger and more diversified company.

As it relates to expenses, ex depreciation and amortization, you can — I would expect that for 2020, although we’re not giving any specific guidance, we will continue to maintain the discipline, the focus on efficiencies. And I think the core costs will continue to be well controlled. There are programs that were started in 2019, as I mentioned today, in terms of headcount, which will continue. So the actions — those actions will continue. So I think that will paint a picture for you in terms of the cost growth for 2020 over ’19 and exactly where it will come from.

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Operator [5]

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(Operator Instructions)

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Paul Froud, London Stock Exchange Group plc – Head of IR [6]

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Sir, do you have a question?

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Ian White, Autonomous Research LLP – Research Analyst [7]

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It’s Ian White from Autonomous. Three also from my side, please. Just first of all, on FTSE Russell, the ETF volumes, obviously very strong in the fourth quarter. But the revenues I think actually fell versus 3Q and the growth there was sort of significantly sort of less strong than the growth in volumes. Can you just maybe just talk through some of the drivers of what’s going on there, please?

And just secondly on costs, thanks for additional detail. I’m just trying to understand, and sorry if I missed it, at the interim stage I think you guided to a GBP 25 million uplift in the second half across the 2 cost lines, and delta has been GBP 51 million, I think. So can you just set out for me precisely what the delta was versus your expectation at the interim stage, please?

And lastly, I just want to get your thoughts on potential opportunities for the group arising as a result of the introduction of MiFID II’s open access provisions in July. The group’s previous CEO sounded a very confident tone on opportunities for the group arising from that. Do you think that those changes will still be introduced? And can you just talk through some of the efficiencies there, please?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [8]

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Great. Do you want to take the first two and then I’ll take up…

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David P. Warren, London Stock Exchange Group plc – Group CFO & Executive Director [9]

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Yes. I think on the question on FTSE Russell, there are a number of factors that go into the pricing of the index products, and particularly on the AUM side. I think the important thing, and I know you know this but just to say it, just to underline this, is that I think a strength of the FTSE Russell business is the composition of those revenues being about 65% in the strongly recurring and strongly growing subscription revenues. The AUM base fees, the more — the asset-based fees percentages on assets under management are about — are a smaller part of that, 35%.

Within that, there are a number of different pricing structures for different customers. So there are, I think, 2 things that I would highlight. One is that part of the pricing structure is, and particularly for funds, the actual revenue that we bill and collect lags the fund performance by about a quarter, in some cases more. So you will have that. This is the function of how the contracts are set up. So you’ll always have a bit of a lag. So you — yes, Q4 was strong. But we would hope that, that — we would expect that that would come through as we go as we go into this year.

I think the other aspect of this, which obviously I can’t go into in full detail, but with each customer a lot of this will depend on the asset side, on the mix of different funds. And there are different pricing contracts with different customers. Some of them have certain tiered structures, certain cap structures. So it’s not going to be precisely linear even with the lag in terms of how billing and collection and revenue will flow from the AUM growth. I think the most important part about FTSE Russell in terms of watching it is you’ve got to really evaluate it over time because there will be quarterly fluctuations. But if we look at the growth of that business over time, which is what we do, that’s, I think, where you can really see that the growth is occurring.

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [10]

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Second question was the GBP 25 million to the…

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David P. Warren, London Stock Exchange Group plc – Group CFO & Executive Director [11]

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Yes. I think, look, it’s interesting because when we sat here last year at this time, we said we were going to consciously prioritize investments over cost. And I think what — and simply what happened in the second half of this past year was we did that. In fact, we actually did more of it. So there was a little bit more investment that I think we had sight of at the half year. We saw more opportunities. We thought they made a lot of sense and we invested in them. So it was — I would say — again that’s where they came from. Again, as I said in my part of the presentation, if you strip out the D&A, the core costs were well controlled. So it really was a continuation of a very conscious decision that we took last year to prioritize investments in efficiencies and investments in top line growth.

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [12]

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And then your third question was on open access. So many of you are very well aware of this. We operate under open access today and have operated under open access for years. So customers can execute with us, clear elsewhere, execute elsewhere, clear with us. We will continue to operate under open access going forward. We think that is the right way to operate. We think it’s the right operating philosophy from a customer perspective in terms of giving customers choice as to where they want to execute. A number of our competitors operate with vertical silos and force customers if they come in at any step along that trading life cycle value chain, whatever you want to call it, then they force them to stay within that vertical silo.

You are absolutely correct that under MiFID II, open access is supposed to be the law of the land this coming summer. We’ll see. I think that a number of our competitors are not excited about that. It is likely to get caught up in the politics of the moment and various equivalent decisions, et cetera. So we’ll see how that plays out. The one thing I can say is that we are committed to open access, we will continue to operate under open access and we think it is the right approach for our customers.

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Paul Froud, London Stock Exchange Group plc – Head of IR [13]

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And if you could just pass it around to Philip on the fourth row, next to you.

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Philip David Middleton, BofA Merrill Lynch, Research Division – Analyst [14]

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The mic took the scenic route. Yes, it’s Philip Middleton from Bank of America. I just wondered, could you say a little bit more about what you’re seeing in FX clearing? Because you previously said, had a fairly ambitious perspective here for layering product on product on product as the UMR rolls out. Is that still how you’re looking at it? And when should we begin to see all this incremental growth coming through?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [15]

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Thanks a lot. So we still have ambitious plans, and we’re pleased with how ForexClear is developing. We have always indicated that it would be a relatively long trajectory. A couple of thoughts on that. So as you all will be aware, the uncleared margin rule, time line has been stretched out by a year. So we have the next phase of the uncleared margin rule rolling in this September and then the final phase, the big phase, rolling in next September because the industry was viewed as not ready for that this year.

The second point, just to remind everyone, the uncleared margin rule is a — it’s an economic or a capital incentive. It is not a mandate. And so even as these different phases roll in, there are many market participants who are still playing catch up in terms of realizing what they are, what’s going on, what is the capital cost, et cetera. So it is not — from a time perspective, it is not as a definitive — not as much of a definitive driver as is, for example, the clearing mandate under swaps.

And then the third point I would just mention, and this gets specifically to your question, we are expanding the product suite within ForexClear. So it started out as non-deliverable forwards; that expanded into options. This past year, we included deliverable forwards. And deliverable forwards are a significantly larger percentage of the market in terms of ForEx derivatives. So the process is moving along. Customers and members are engaging. They’re being educated. They’re testing their connections, testing their systems. And we expect that process to carry on over the course of the next couple of years as that business continues to grow.

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Paul Froud, London Stock Exchange Group plc – Head of IR [16]

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I think we can go to the phones now. I think there’s a couple questions there to take and then we’ll come back to the floor after that.

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Operator [17]

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Kyle Voigt from KBW.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [18]

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Two questions for me. One is on the Refinitiv business. I think there was some thought of wanting to offer a different pricing model to the dealers there, a kind of enterprise or more bundled fee structure. Just wondering how the progress has developed thus far and, in offering that, whether you’re seeing any early success uptake.

And then my second question is for David Warren. The Fed funds futures curve in the U.S. is pricing in more cuts even this morning. Just wondering if we get back into a kind of 0 interest rate policy environment globally, how that — how do you think that would impact the yield in terms of the NTI yield on — at LCH?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [19]

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Thanks, Kyle. So on your question on Refinitiv pricing model, that is ongoing and that evolution is ongoing in terms of how they are engaging with customers. That will be a fairly lengthy process, I think it’s fair to say, just as it will happen sort of negotiation-by-negotiation. But as we have talked about in the past, there is growing demand for data. And that is a pricing model that takes advantage of that while also providing flexibility to customers who are looking for that kind of flexibility.

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David P. Warren, London Stock Exchange Group plc – Group CFO & Executive Director [20]

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Yes. I think, Kyle, on your other question, so I think let’s just start with the guidance we’ve kind of given you for next year based on where we are right now, which I think H2 is sort of — on NTI is sort of on the right level to think about for next year, given kind of current markets and activities. I think in terms of going forward and if we look at just kind of rate environments overall and where they might go, certainly LCH invests a large part of its collateral, which is in dollars, so invests those in dollar products. But I think in terms of how to predict it, well, frankly, it’s not something you can predict. But I think what is also true about NTI is that what really drives it is the absolute — is the level of collateral that we collect. So that’s going to be a function of clearing activity and volatility.

And in terms of the yield or rate environment, it’s more going to be a function of not the absolute levels per se, but really the steepness of the yield curve and how that’s playing out. Because what we really are able to capture is the yield between an overnight rate and a very short-term rate. I know you know this but just to say it. So I think if you want to project where it’s going, you’ll have to make an assessment about what the real short-term part of the yield curve looks like. But you’ll also have to hold that against the collateral balances themselves and how they will be moving in terms of just overall clearing activity. So I appreciate the question. I’ve never been an interest rate — an accurate interest rate forecaster. So I think I’ll have to leave a little bit to that to your modeling as well.

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Operator [21]

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Benjamin Goy from Deutsche Bank.

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Benjamin Goy, Deutsche Bank AG, Research Division – Research Analyst [22]

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Two questions, please, from my side. First, on your Information Services ecosystem slide, just wondering whether you could give a bit more color on the different growth rates you see in the index business or at the analytics part? And then secondly, on LCH OTC volumes, they declined quite a bit in Q4 and then strongly recovered in January. Both effects were more than we would normally seasonally expect, so some additional insights would be much appreciated.

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David P. Warren, London Stock Exchange Group plc – Group CFO & Executive Director [23]

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Yes. I think in terms of the first question, that breakout is not a level of detail that we give right now. But certainly, all of that is contributing to the mix and the growth that we have seen and will see in the ISD business going forward. It’s just not information that we’re giving at this point. I mean I think in terms of LCH, the volumes for Q4 across the market were down. And we know that, in fact, many of you were predicting that and factoring that into some of your — some of the adjustments you were making in your models, both for us and for other companies that you follow.

And I think we have seen a strong pickup in Q1 for a number of factors. But I’m not sure that’s responsive to your question. But that’s probably about all I can say on it. It’s always going to move around with markets. Market activity will influence — market activity with clearing, anyway, will be a function of clearing activity and volatility. And both of those are going to drive clearing activity as well as the amount of margin that we collect.

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Operator [24]

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Johannes Thormann, HSBC.

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Johannes Thormann, HSBC, Research Division – Global Head of Exchanges and Analyst [25]

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Johannes Thormann, HSBC. Two questions for me as well. First of all, as you called it the politics of the moment, what could happen if it turns more ugly between the EU and the U.K. and we see more negative impact on the reciprocity agreement and so on? Could you update us on the OTC clearing plans and the feedback from your customers, what do they say? How quickly have you to move to Paris if this is needed? What would it cost you? Is this in your current cost plans? And how quickly could you get a license for this? Secondly, on the Refinitiv refinancing, the time line from the bond issuance, can you talk about this? And did you already get a feeling for the coupons to be paid?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [26]

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Okay. Thanks, Johannes. I’ll take your first question. And David will probably not answer your second question. So not in a position to speculate on politics as to how the, I’ll call it, the final year of Brexit — or maybe not the final year — the negotiations on this year in terms of equivalents and various other decisions are going to play out. I think the important thing to note and for everyone to remember is that there has been very clear recognition by regulators in the EU, in the U.K., in the various different national markets within the EU and in jurisdictions outside of the EU, around the world, of the systemic importance of LCH Limited and the swap clearing service that it provides. And it provides that service in 60-plus jurisdictions around the world, in 26 different currencies. No other service provides that and no other service has that kind of swaps clearing liquidity.

To be very clear on your specific question, we have no plans to move that. And we have always been clear, both publicly and with regulators, that we work with our customers and with our members. And our members have made it very clear that they have no interest in moving that. So we will continue to work with the regulatory authorities in all the relevant jurisdictions. We look forward to the process of equivalence. We look forward to applying under EMIR 2.2 for permanent recognition for LCH Limited as a third country CCP. If there is a delay in that process for whatever reason, we would expect that we get another round of temporary recognition. We’ll see how that plays out. But the key message here is that there has been clear recognition that LCH Limited is systemic in its importance and that regulators, central bankers in all the relevant jurisdictions do not want to go down a path of systemic disruption because of the politics of the situation.

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David P. Warren, London Stock Exchange Group plc – Group CFO & Executive Director [27]

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Yes. Johannes, on your second question, so as I said in my comments this morning, as you know, we have bridge financing in place. So we have that, and that provides us with further flexibility. So when we look at the — we will look at the market very closely as we get up to closing. And we have the option to draw on the bridge. We have the option to sort of go into market and establish some permanent financing for the takeout of the Refinitiv debt. So that plan remains the same, good flexibility. That bridge has been secured at very attractive rates, so I’m not going to make a prediction, although if you’re — if you’ve got some contracts you want to propose, I’m happy to listen. But I think in terms of the rates, we will wait and see.

I will say though that this will be a combination of term bonds as well as bonds. And those bonds obviously will be priced at some reference rate. And I will say that over the past 6 to 8 months, those rates, both with respect to dollars as well as with euros, have been tracking in a downward direction. So whatever we’re able to secure, we’re in a very good interest rate environment right now as it relates to the reference rate for whatever instruments we decide to price.

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Operator [28]

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Mike Werner, UBS.

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Michael Joseph Werner, UBS Investment Bank, Research Division – Executive Director and Equity Research Analyst [29]

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Most of my questions have been asked. But I have a couple of follow-ups, if that’s all right. Particularly on ForexClear, in terms of the volume growth, it was certainly slower this year than what we saw last year. Particularly going into the end of the year, we saw a slowdown. I assume that’s mostly driven by dealer-to-dealer volumes. Has there been any pickup in dealer-to-client volumes? And then a follow-up on the equivalency question. What proportion of your business in terms of SwapClear is being done by euro-domiciled institutions?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [30]

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Sure. So on the second question, it’s roughly — so in terms of euro-denominated, euro-domiciled, it’s something like mid-single-digit percentage of the SwapClear pool. If you include non-euro currencies, this will be a rough estimate, maybe you double that for euro-domiciled institutions. So it is a relatively small percentage of the SwapClear pool.

On the — your first question, do you want to answer the other question? Your question on ForexClear, and I think the best way to think about that is that as with SwapClear, volumes are driven by market activity and market volatility. And so that will ebb and flow with market levels of volatility. And there were some, as David touched on earlier, in various different asset classes in the fourth quarter there were some moderate levels of volatility and therefore trading volume. I mean that’s probably the best way to think about that.

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David P. Warren, London Stock Exchange Group plc – Group CFO & Executive Director [31]

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I don’t know. I mean the other part is that — I think we’ve always said and we’re seeing it now, I mean, David, we’ve already talked about it today is just that a growth dynamic, it’s the overall growth dynamics of the of ForEx clearing are going to — well, they’re very much there, but they’re going to play out in a different way than we are seeing with swaps, just given the different motivation on the part of the customer to clear ForEx contracts centrally.

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Operator [32]

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Bruce Hamilton, Morgan Stanley.

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Bruce Allan Hamilton, Morgan Stanley, Research Division – Equity Analyst [33]

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It’s two sort of follow-ups, really. On the ESG topic, obviously you made some comments. But in terms of just thinking about your source of competitive differentiation, given that MSCI have a lead on sort of equity benchmark, should we be thinking more on the fixed income side for you guys? Or are you saying the fact that you can offer sort of integrated equity fixed income issuance provision that will be — that will help you dramatically versus the other players?

And then secondly, on the OTC business. Obviously, FX is the kind of most interesting source of growth going forward. But is there any other sort of growth runway in terms of buy-side clients being more in interest rate swaps, so on the credit side, that could be meaningful? Or should we really just focus on FX in terms of what’s going to drive most of the delta?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [34]

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Sure. Thanks, Bruce. So on your first question, I would really say it’s all of the above. The — you’re correct in pointing out the fact that unlike some of our — unlike most of our competitors, FTSE Russell has a leading position in equity indices and a leading position in fixed income indices. And our competitors are not in a position to say that. So we are able to have conversations and customer engagement across asset classes. And really, that helps us have a discussion at a portfolio — more of a portfolio level. But that does not mean we have ceded the field in terms of equity. And every equity mandate that’s given out out there in terms of index products, benchmarks, et cetera, we are in the fight with the other competitors. We win some of those and we lose some of those. In the fixed income space, it’s a little bit more of an open field with respect to that, certainly with respect to the particular competitor that you mentioned.

In terms of growth runway in clearing beyond ForexClear, we touched on — there are a couple of different areas I will touch on, one of which I mentioned in my remarks, one of which I don’t think we mentioned in our remarks. But as this group knows very well, we have 90%-plus market share in cleared interest rate swaps. Cleared interest rate swaps represent roughly 75% of the swaps market. And there are certain swaps, such as swaptions, cross-currency swaps, et cetera, that do not need to be cleared under the mandate. But given the size of the swaps market, that is — that 25% or so is a big pool of potential business. And that is what SwapAgent is going after. And SwapAgent, we did not build this on spec. This was built in cooperation with our member banks, and they are signing up for it and they are using it.

So it’s still early days. But it is, we think, a very attractive option and an attractive product for members to sign up for and use for that pool, let’s call it, 25% of uncleared swaps. It also provides the capability to compress a portfolio of uncleared swaps, so attractive both in terms of all of the other non-cleared services that it provides in addition to compression.

The other area that I would just mention briefly is we had a very strong year this past year with repos. Now repos, in many ways, a relatively more mature market from our perspective. But I think that combination of our moving repo volumes across our consolidating repo volumes in LCH SA as well as market activity, led to significantly higher growth than we expected in repos. Unclear if we’ll see that going forward on an annual basis, but it’s just a sign of how diverse the business is by asset class. And we will see what other opportunities there are in other asset classes. But in terms of the growth opportunities, SwapClear, continuing to do very well. SwapAgent, we think has a nice trajectory going forward for us. ForexClear, we think has a nice trajectory going forward. RepoClear surprised us a bit this past year, CDSClear doing very well, EquityClear, pretty mature business, is probably the way that we think about the landscape. But new products in each of those areas. And so we’re not sitting still in any of these.

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Paul Froud, London Stock Exchange Group plc – Head of IR [35]

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I don’t think we have any more questions on the phone, right? I’m conscious that 1 or 2 of you need to go to another results presentation shortly. So let me just put it back to the floor one more time, see if there’s any more questions before we finish. Yes, Martin on the fourth row there.

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Martin Gerald Price, Jefferies LLC, Research Division – Equity Analyst [36]

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It’s Martin Price from Jefferies. I was just wondering if you could talk briefly about Borsa Italiana, how you — sort of investments you’re making in that business, how you see it evolving in the context of the group. I guess one of your competitors has been sort of reasonably active in quoting that business. So any response to that would be helpful as well.

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [37]

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We are aware of some of the speculation out there. We’ve seen some of the comments from some of the competition. And we’re not surprised that they find it an attractive asset. Borsa Italiana has been an integral part of the business since 2007. Good contributor to the financial results, good contributor to our culture, our culture of innovation. So there is no expectation, no intention that we’re doing anything with that business.

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Paul Froud, London Stock Exchange Group plc – Head of IR [38]

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So one more there.

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Unidentified Analyst [39]

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Sorry. Just a very quick follow-up on what you mentioned about SwapAgent and the growth there. Are you taking market share from TriOptima?

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [40]

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From?

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Unidentified Analyst [41]

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TriOptima.

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [42]

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I don’t think we think about that as a direct competitor there. So I don’t know if I would — and we can come back to you with more detail on that. But I don’t think we really think about it as it’s a different service provision there.

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Paul Froud, London Stock Exchange Group plc – Head of IR [43]

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Okay. I think we’re about finished then. So thank you very much for your time. Thank you for coming along. We can also take questions throughout the rest of the day. But that’s the end of the call. Thank you.

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David A. Schwimmer, London Stock Exchange Group plc – Group CEO & Executive Director [44]

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Thank you all.