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Press Release


Francis Berthomier – Chief Financial Officer
+44 (0) 20 7426 7130

Michael March – Director, Corporate Communications
+44 (0) 20 7426 7234

LCH.Clearnet Group results and announcements

London 12 March 2007 – LCH.Clearnet today announced its results for the year ended 31 December 2006

Financial highlights

1 Percentage changes are on an annualised basis compared to the year ended 31
December 2005. No account has been taken of the impact of the movement in average
exchange rates as these are immaterial.

2 Measured on a like-for-like basis. 

Commenting on the Group’s performance, LCH.Clearnet’s Chief Executive Roger Liddell said:

“2006 was a challenging year for the Group, with significant change taking place in the industry as a whole and within LCH.Clearnet as well. It was also a year which saw record levels of clearing activity across the full range of services offered, which resulted in a very strong financial performance. At the same time, a great deal of work has been undertaken to ensure that our systems and internal processes are and will continue to be appropriate to meet current service requirements and future development needs.

“LCH.Clearnet saw spectacular levels of clearing activity and at the year end, the Group had cleared a total of 1.27 billion contracts, an increase of 16.6% over 2005. These reflected a traded value of just over €500 trillion, an increase of 23.0% over 2005, and a notable indicator of the size of and our key position in modern financial markets.

“Transaction revenue increased by 28.3% over 2005 to €421.8 million. This growth was primarily due to the high levels of activity in equity and energy markets during the year. The change in product mix drove a higher proportional increase in transaction revenue than overall volumes. Treasury revenues grew rapidly, driven by unprecedented levels of cash and non-cash margin commitments, particularly in the equity and commodity sectors. Cash margins and default fund contributions under Treasury management peaked early in the summer at €23.5 billion, against an average over the year of €16 billion.

“Interest payments to members, in respect of cash and collateral margin payments, increased by 92.6% to €661.6 million, reflecting the size of balances arising from these high activity levels. Our focus on cost control continued during the year and resulted in administrative expenditure decreasing by 7.5% to €218.3 million.”

Mr Liddell added: “There is no doubt that LCH.Clearnet faces a serious competitive business challenge from a number of directions – “clearing-driven” mergers, new entrants in our market space, development of alternative trading platforms attracting liquidity from customers served by us. At the same time, we are affected by regulatory pressure and by the increasing scrutiny of the sector by competition authorities. For us to continue to prosper as an organisation, we must seek to minimise or remove the incentive for disintermediation, whatever its source. We believe that this can be best achieved by adjusting our operating model to enable us to focus more clearly on delivering benefits to users. We firmly believe that our members, the prime users of our services, would prefer to see more immediate financial benefit from substantially lower fees than from future rebates or dividends. To achieve the conditions for us to be able to deliver a considerably lower tariff, it will be necessary to reduce the shareholding of the largest returns-focused shareholder. We have achieved agreement with Euronext, subject to shareholder approval at an Extraordinary General Meeting to be called later in the year, for the early redemption of its redeemable convertible preference shares, and for a programme, to be completed by the end of 2008, to buy back and retire the great majority of its ordinary shares. These actions will help to free up LCH.Clearnet’s ongoing financial commitments to the extent that we will be able to deliver long term and fully sustainable low price services.”

Financial Review

Summarised consolidated income statement for LCH.Clearnet Group


Total Revenue1,234.9790.3
Interest expense and similar charges(733.3)(406.0)
Fees payable and similar charges(57.9)(34.7)
Net Revenue(443.7)(349.6)
Administrative expenditure(218.3)(236.1)
Write off of capitalised development costs(47.8)(20.1)
Restructuring costs-(7.4)
Operating costs(266.0)(263.3)
Operating profit177.686.3
Net finance income/(cost)4.2(0.7)
Profit before taxation181.885.6
Taxation expense(58.2)(31.8)
Profit for the year123.653.9

Total Revenue

Gross clearing fees 421.8328.728.3
Interest income from cash and collateral margin 728.8386.788.5
Interest earned on Default fund
Other income 22.321.91.6

Group turnover from continuing operations increased by 56.3% to €1,234.9million.

Clearing fees increased by €93.1 million (28.3%) to €421.8 million (2005: €328.7 million), essentially due to increasingly high levels of activity in equities and energy throughout the year.

Interest income from cash and collateral margin balances increased by €342.1 million (88.5%) to €728.8 million (2005: €386.7 million), principally due to the substantially higher cash collateral balances arising from increased levels of market activity during the year.
Default Fund interest earnings increased by €9.0 million (17.0%) to €62.0 million (2005: €53.0 million).

Other income has increased by €0.4 million (1.8%) to €22.3 million (2005: €21.9 million). Other income includes annual fees charged to members, recovery of settlement fees and transfer fees.

Interest payments to clearing members

Interest payments to clearing members in respect of cash and collateral margins similarly increased by €318.1 million (92.6%) to €661.6 million (2005: €343.5 million).

Interest paid to clearing members in respect of contributions to the Default Funds increased by €9.2 million (14.7%) to €71.7 million (2005: €62.5 million).

Fees payable and similar charges

These amounts principally relate to retrocession fees collected on behalf of a related party, Euronext, as disclosed in note 15.22 to the consolidated financial statements. They have increased in line with the increase in volumes and clearing fee income experienced in continental Europe. Additionally a number of contractual revenue and fee guarantees provided by Euronext, that were previously offset against the retrocession fees, expired at the end of 2005.

During 2006 as part of the Group’s review of the fee tariff structure, and in line with the transparency requirements of the McCreevy Code of Conduct, it was agreed with Euronext that with effect from 1 January 2007 the Group will merely act as a collection agent and the retrocession fees will no longer pass through the Group’s income statement.

Administrative expenditure

Overall, administrative expenditure has fallen by €17.8 million (7.5%) to €218.3 million (2005: €236.1 million).

The fall in administrative expenditure reflects the cost control initiatives that were implemented in 2005 and have yielded benefits in 2006.

Impairment of capitalised development costs

During the first half of the year, the Group undertook a further review of its technology strategy. As a result of this review, the Group has decided not to continue to use assets from the Generic Clearing System (GCS) within its technology strategy. Accordingly, a €47.8 million write off (2005: €20.1 million), which substantially relates to those assets, has been recognised in the consolidated income statement. The programme has now been fully written off.

Restructuring costs

One-off restructuring costs of €7.1 million were incurred in 2005 in relation to expenses associated with cost reductions and consultants assisting with the integration process. No restructuring costs were incurred in 2006.

Operating profit

Significant revenue improvement through strong trading volumes, combined with cost containment, resulted in an increase in operating profit of €91.3 million (105.8%) to €177.6 million (2005: €86.3 million) after allowing for the write off of capitalised development costs of €47.8 million (2005: €20.1 million).

Net finance cost

Interest income on shareholders’ funds now exceeds that payable in respect of long term financing with the result that the net finance cost is now a net finance income.

Interest costs attributable to the RCPS and subordinated loan increased by €1.8 million (24.0%) to €9.3 million due to the increase in Euro interest rates. However, the interest derived from the investment of shareholders’ funds has risen by €6.7 million (98.5%) to €13.5 million (2005: €6.8 million) benefiting from both higher UK and Eurozone interest rates and from increased shareholders’ funds generated through strong levels of retained profits.

Taxation expense

The tax rate for the financial year is 32.0% (2005: 37.1%).

Compared to 2005 a greater proportion of Group profits have been generated in the UK which has led to the reduction in the effective rate.

A full copy of the LCH.Clearnet Group Limited 2005 Annual Report and Consolidated Financial Statements is available on the LCH.Clearnet website at www lchclearnet.com.

LCH.Clearnet Group Limited
Extracts from 2005 Annual Report and Consolidated Financial Statements

Consolidated Income Statement for the Year ended 31 December 2006

Interest income790,798439,705
Interest expense and similar charges(733,278)(405,972)
Net interest income57,52033,733
Clearing Fees421,844328,695
Other Fee Income22,25421,932
Fees payable and similar charges(57,926)(34,720)
Net revenue443,692349,640
Costs and Expenses
Employee benefits expense(71,929)(70,470)
Depreciation and amortisation charge(14,639)(11,966)
Write-off of capitalised development costs(47,822)(20,106)
Other operating expenses(131,667)(153,675)
Restructuring costs-(7,075)
Total costs and expenses(266,057)(263,292)
Operating profit177,63586,348
Net finance income14,2627,450
Net finance costs(10,032)(8,155)
Profit before taxation181,86585,643
Taxation expense(58,216)(31,757)
Profit for the period123,64953,886

Consolidated balance sheet as at 31 December 2006

Non-current Assets
Intangible fixed assets520,261576,697
Property, plant and equipment7,6166,815
Other financial assets15,00015,000
Deferred taxation18,8216,565
Current assets
Cash and short term investments15,701,71915,448,406
Debtors and other receivables70,56389,921
Balances with clearing members257,551,329262,047,676
TOTAL ASSETS262,652,753202,910,650
Capital and reserves
Called up share capital100,116100,116
Capital reserves376,371376,371
Translation reserve5,2632,403
Retained earnings243,358124,486
Non-current liabilities
Interest bearing loans and borrowings225,840225,840
Default Funds1,732,6711,542,430
Employee benefits46,95337,230
Current liabilities
Interest bearing loans and borrowings1,24912,124
Income tax payable30,41310,908
Creditors and other payables82,94991,235
Balances with clearing members271,267,844260,243,877
TOTAL EQUITY AND LIABILITIES274,113,027262,652,753


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