British interdealer broker ICAP PLC has today released its trading update slightly prior to the close period for the half-year ending September 30, 2013.
The company, which provides post trade risk mitigation and information services, has announced that Group revenue for the six months ending 30 September 2013 is expected to be around 1% lower than the previous year.
During the first half, ICAP reported that increased volatility in US dollar markets stimulated trading activity in US Treasuries and interest rate swaps. In contrast, more muted volatility in euro markets negatively impacted EUR/USD activity on EBS, its largest currency pair, as well as euro interest rate volumes in Global Broking.
Furthermore, ICAP’s business model continues to convert profits into cash. In June, the Group refinanced its previous core bank facility into a new three year, £425 million committed revolving credit facility with eight banks and more recently the Group entered into a £50m 364-day term loan facility. ICAP anticipates that at 30 September 2013, its gross debt:EBITDA leverage will be approximately 1.7x.
The company is continuing down its path of ongoing cost reduction and noted that the benfits of this are visible, and given the uncertain market environment plans to accelerate a number of initiatives. Management expects profit before tax for the first half to be in line with the previous year.
Michael Spencer, Group Chief Executive Officer, made a corporate statement today that: “During the first half we have seen some improvement in the global financial environment benefiting activity in certain markets. This has been offset, however, by a steeper than expected slowdown over the summer months. We remain focused on delivering our ongoing cost savings programme as well as continuing to invest in new platforms, products and services which will drive our growth over the coming years.
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“Earlier this month we filed our Swap Execution Facility (SEF) application, a major milestone for ICAP. While the introduction of SEFs may give rise to short term market uncertainty, I believe that with our expertise and experience in operating regulated markets, the quality of our technology, and the depth of our customer relationships, we look forward to our SEF becoming a leading facility for trading in the new regulated landscape” concluded Mr. Spencer.
Substantial US Daily Volumes
US Treasury volumes traded on the BrokerTec platform reached an all-time high of $215 billion per day in June prompted by the quantitative easing tapering debate in the US. The prospect that the Fed will begin tapering later this financial year and the reduction in internalisation of government debt is expected to support future activity levels on BrokerTec. Trading on the EBS platform has been negatively impacted by the extremely tight range in the euro/USD pair in contrast to the higher volatility seen in previous years. In addition, in the second quarter there has been reduced activity in yen as the financial markets absorb the significant changes to Japanese monetary policy announced earlier in the year. The EBS Direct pilot programme, ICAP’s new relationship based disclosed liquidity service, is progressing well with more than 275 customers signed up.
The performance of the Global Broking division has been mixed, an added woe having been today’s penalty of $65 million imposed on the European division of the company for manipulating Yen LIBOR. In order to take steps toward settlement, the Group intends to treat FCA and CFTC settlement costs and the related legal and professional fees incurred as exceptional items. To date, ICAP has not provided for any penalty or settlement costs payable to the US Department of Justice in respect of the on-going discussions in respect of Yen LIBOR.
With regard to instruments other than FX, trading activity in US interest rate derivatives business benefited from the steepening of the US Treasury yield curve. The equity derivatives business and the financial futures and options businesses also continued to deliver strong growth. Activity in credit products remains depressed in line with lower industry volumes as higher rates have impacted new issuance. In addition, market volumes in commodity products suffered from lower volatility in certain markets and the withdrawal of some investment banks from this area.
The performance of the Post Trade Risk and Information business benefited from further growth at Traiana as it increased its market share. Revenue at TriOptima has been broadly in-line with last year as banks have focused their resources on preparing for operating in a new SEF environment. The performance of Reset was held back by the lack of volatility at the very short end of the yield curve, which as previously highlighted, restrains demand for this risk mitigation service.
ICAP expects to publish its results for the half year to 30 September 2013 on 13 November 2013.