Icap cashes in on market volatility

Source: Icap

Icap plc (IAP.L), the world's premier interdealer broker, is making this trading statement in relation to the first half of ICAP's financial year and particularly to the three month period from 1 July 2007 to 30 September 2007.

Icap expects to announce its results for the six months ending 30 September 2007 on 20 November 2007.

Trading across the group in the first half of ICAP's financial year has been strong and profit (before tax, amortisation and impairment of intangibles arising on consolidation and exceptional items) for the financial year ended 31 March 2008 is anticipated to be at the upper end of analysts' current forecasts despite the adverse impact of the US dollar/sterling exchange rate.

  • Electronic broking has had an outstanding year to date with record volumes.
    • During the last quarter spot foreign exchange average daily electronic volumes were US$209 billion, an increase of 54% compared with the same period in the previous year. In US Treasury products average daily volumes rose 44% to US$164 billion during the same period. Both US and European repo average daily volumes also increased significantly, by 35% and 25% respectively.
    • There were record daily electronic volumes in both fixed income and foreign exchange of US$1,275 billion on 16 August, an increase of almost US$200 billion above the previous record (US$1,077 billion). This was followed by US$1,218 billion on 17 August. Spot foreign exchange on EBS reached a record daily level of US$ $456 billion on 16 August, surpassing the previous record achieved on 27 July of US$311 billion by almost 50 percent. US Treasury products, European repo and US repo - also reached a new record total of US$819 billion on 16 August, breaking the previous record of US$809 billion.
    • The combination of increased electronic activity with the delivery of incremental EBS synergies has driven very strong profit growth in our electronic business.
    • ICAP has further expanded its suite of electronically traded currency pairs on the EBS platform with the introduction of sterling/yen, US dollar/Turkish lira and Australian dollar/New Zealand dollar trading. ICAP currently offers electronic trading in almost 30 currencies and precious metals as well as 35 currency pairs.
  • Voice broking volumes also benefited from the higher volatility, with interest rate derivatives in all markets showing significant gains. With the return of a positive yield curve in many markets, this activity looks set to continue. The credit markets have also been very active, notably in single name credit default swap (CDS) and index products. The energy markets, even though they are not closely correlated with the volatility in the financial markets, have also continued to be very active.
  • ICAP has brokered the first derivative transaction based on the Residential Property Index (RPX) in the United States. Derivative transactions on the RPX index, created by Radar Logic Inc., allow investors to hedge risk on residential property prices in 25 major cities across the United States.
  • Our joint venture in Shanghai, CFETS-ICAP, began voice broking operations on 13 September in money, bond and derivative products in both the Renminbi and international markets.

Commenting on the first half of the year and outlook, Michael Spencer, Group Chief Executive of ICAP, said "ICAP enjoyed a very successful first half to the year benefiting from higher volatility in the interest rate, foreign exchange, energy and credit markets. The increased activity in July and August was particularly noticeable as those months had been very slow in 2006. Both our electronic and voice broking businesses felt the positive impact of these higher levels of activity and we benefited from the substantial leverage in these businesses. Our share of both the voice and electronic markets has increased again. The group's significant investment in electronic systems enabled them to handle record volumes.

The growth areas that we have been focussing on; energy, credit derivatives, emerging markets, equity derivatives and transport, all grew faster than ICAP's overall business. A steeper yield curve, the higher price of credit risk and continuing disruption in the money markets suggest that this period of increased activity may continue for some time though not necessarily at the very high levels of the last few months."

Exceptional Items
As disclosed in the preliminary announcement in May, a sub-custodian made a post settlement adjustment debiting ICAP's account for a total of £22 million without notice or our consent. ICAP continues to believe that this adjustment is erroneous and has formally requested the repayment of the money. After taking further legal advice, ICAP is in the process of drafting legal proceedings to recover this money and reserves its right to commence litigation if payment is not promptly forthcoming. As a result of the need to resort to litigation to recover the debt relating to the post settlement adjustment described above,

ICAP has provided against this debt (net of offsetting cost recoveries).
Meanwhile, since April, ICAP has continued to realise substantial profit from the disposal of exchange shares and seats which are no longer required. In addition ICAP has received a litigation settlement in respect of disputes with BGC in Australia and Hong Kong.

The combination of the exceptional items has no material impact on ICAP's profit for the year.

Capital Position
ICAP has access to more than sufficient capital to continue to develop its businesses under its already announced strategy of organic and acquisition driven growth. As part of its capital management programme, ICAP has taken the opportunity during the past quarter to buy back ICAP ordinary shares and may make further purchases of its ordinary shares.

1) The current forecasts for ICAP plc pre-tax profits referred to in this announcement are based on forecasts of profit before tax, amortisation and impairment of intangibles arising on consolidation and exceptional items provided by eight equity analysts. The range of those forecasts for the year to March 2008 is from £289 million to £305 million compared with the results for the year to March 2007 when ICAP plc's profit was £252 million. The source of these estimates was Bloomberg.
2) ICAP introduced the publication of its market volume data in selected markets on its website at the beginning of September 2007. The aim is to provide more frequent, transparent, granular data about activity levels in the global OTC financial markets in which ICAP has a significant market share. Volume data in additional global OTC financial markets will be made available in future.

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