Annual Financial Report

Strategic risk

The risk arising from inappropriate strategic decisions that fail to reflect the full business operating environment, and/or full impacts on execution, or fail to adequately or timely identify changes to the business model.

To ensure ICAP remains competitive in its chosen strategic markets, identifying and optimising commercial opportunities requires ICAP to assess the risks, rewards and costs associated with each.

Strategic risks generally manifest over a medium time frame allowing corrective proactive management.

Appetite

ICAP will innovate and grow through considered initiatives and acquisitions that are scalable, experience positive switching/network effects or show a competitive advantage.

Regulatory landscape impacting our business or our customers' businesses.

Commercial/market conditions.

Internal business/operating model.

Business case and risk assessment of significant business initiatives.

Defined product, country and customer strategies.

Surveillance of market, regulatory landscape and customer demand.

Risk scenario contingency planning.

Operational risk

The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

While ICAP's reputation is built on strong execution of service, ICAP actively identifies, monitors and controls the risk that its people, processes or systems fail leading to a reduction in the quality of service to our customers and an increase in our operating costs.

Operational risks could manifest themselves across any time frame.

Appetite

ICAP will take measures to identify and proportionally manage operational risk to a desired level through mitigating systems, processes and controls, but recognises operational risk is inherent in its business activities.

Internal business/operating model.

External threats.

Market conditions.

The Group maintains an operational risk framework, with independent risk function oversight.

Timely escalation and mitigation of risk events.

Provision of training and guidance.

Information security breach monitoring.

Cyber security programme, including penetration testing.

Critical technology monitoring.

Risk scenario contingency planning.

Liquidity risk

Liquidity risk is the risk that the Group or any of its entities do not have sufficient liquid resources or are unable to deploy such resources to meet their actual or potential obligations in a timely manner as they fall due.

ICAP has short-term liquidity requirements arising from settlement and clearing arrangements, in the form of collateral and margin requirements for clearing houses or financial institutions providing clearing access. It is possible large liquidity demands may arise on the same or next day, due to reasons beyond ICAP's direct control. The Group ensures adequate liquidity resources are maintained to meet these requirements in support of its trading activities.

Longer-term requirements arise in relation to the timing of the Group's operating cash inflows against outflows, principally for capital expenditure and dividends. The Group maintains a diversified funding base with sufficient committed headroom to forecast requirements.

Appetite

ICAP will have sufficient financial resources to ensure there is no significant risk that it is unable to access and utilise these resources to meet financial obligations as they fall due.

Operational risk.

Credit risk (events).

Operating / business model.

Periodic reviews including going concern assessments.

Use of financial institutions for clearing access.

$250 million of committed liquidity held centrally for same and next day utilisation.

Contingency funding arrangements and procedures in place.

Reputation risk

The risk that the Group fails to meet expectations of stakeholders, is unable to build or sustain relationships with customers, incurs regulatory censure or experiences more costly access to funding sources.

ICAP remains focused on maintaining and constantly strengthening relationships with shareholders, customers, regulators, lenders, clearing and settlement providers, market infrastructure providers and employees.

Reputation risk can manifest over the near term with long-term impacts.

Appetite

ICAP will adhere to its core values and fulfil its corporate responsibilities by ensuring it acts responsibly, ethically and with integrity.

Operational risk.

Regulatory risk - conduct risk.

Strategic risk.

Active assessment via investor relationship surveys, media surveys and employee statistics.

Culture and conduct initiatives.

Credit risk

The risk of a financial loss due to the failure of a customer to meet its obligation to settle outstanding amounts.

While ICAP enters into transactions only when executing on behalf of customers, providing customer access to clearing, or provides additional fee-based services to customers, there does exist short-term credit exposure prior to clearing and settlement, and outstanding receivables risk that ICAP manages.

Appetite

ICAP will engage only in activities which it believes will not result in loss due to significant credit risk.

Market conditions.

Counterparty credit worthiness.

Counterparty due diligence.

Credit assessments and limits.

Risk scenario and stress contingency planning.

Legal and regulatory risk

Legal risk can arise from defective transactions, failing to take appropriate measures to protect assets, changes in law and/or breach of law or acceptable practice, and claims, resulting in a liability or loss to a company(ies) within the Group.

Regulatory risk is the risk of material loss, regulatory sanction, or reputational damage arising from the failure to comply with relevant regulatory requirements.

ICAP operates in multiple jurisdictions and remains focused on ensuring it recognises and respects the rules and laws to which it is held. ICAP also recognises that the conduct of the Group and its employees is of paramount importance to its strategic aims and reputation.

Legal and regulatory risk can manifest over the near term and long term.

Appetite

ICAP will have in place processes, controls and frameworks to comply with legal and regulatory requirements and will use appropriate external legal advisors for contentious matters and litigation. For the avoidance of doubt, ICAP has no appetite for material legal or regulatory breaches.

Multiple and dynamic regulatory regimes.

Regulatory risks - conduct risk.

ICAP has internal legal and compliance departments which act as independent advisory and investigation functions to enable and defend the Group's strategic aims. Both legal policies and compliance risk management frameworks strengthen this defence.

Advice is taken regularly from appropriately qualified external advisors and professionals.

Training is provided to staff on an ongoing basis.

Culture and conduct initiatives.

Cross risk

The risk that the Group and its divisions fail to maintain its commercial targets due to either internal or external factors.

In support of achieving its commercial targets, ICAP works diligently with all stakeholders to identify threats and opportunities.

Appetite

ICAP will monitor its internal and external environment in order to maintain stable and robust financial performance over the long term.

ICAP's credit worthiness.

Market competition.

Predictability of earnings - discipline is applied to existing financial performance and new business proposals.

Maintenance of ICAP's external credit rating.

Market risk

The risk of losses in on and off-balance sheet positions arising from adverse movements in market prices.

ICAP does not actively take market risk. Where it does arise this is due to failures in our expected business processes, systems or human error. As such it is identified and treated as operational risk.

Appetite

ICAP will not engage in proprietary trading or actively seek market exposure and will actively reduce any incidental market exposure resulting from its activities as soon as reasonably practicable.

Volume and complexity of trade booking.

Market movements / liquidity.

Monitoring and timely mitigation of unmatched positions.

Exposure modelling.

Financial risk

The risk that the Group is exposed to significant losses due to adverse movements in interest and exchange rates.

Interest rate risk from the Group's exposure to rate fluctuations on cash balances and borrowings.

Currency translation risk arising from the conversion of foreign currency results to pound sterling for the preparation of ICAP plc's consolidated financial statements.

Currency risk for the Group's entities arising from transactions, assets or liabilities denominated in a foreign currency for an individual entity.

Appetite

ICAP will manage its financial risks in accordance with approved policies for the Group.

Market rates.

Trading volume.

Geographic profile.

Regulatory and working capital requirements.

Details of the Group's management of interest rate and currency risks are contained in notes 9 and 27 to the financial statements.

Established Group policies for the management of interest rate and currency exposures.

Long-term debt raised with fixed rates with the option to swap to variable rates.

Quarterly review of currency exposures and hedging levels.

Year ended31 March 2016£m

Year ended31 March 2015£m

Management services expenses

-

-

Net interest from related parties

4.0

3.0