Annual Financial Report

Liquidity risk

The risk that NEX will have insufficient funds to meet its obligations under ordinary and reasonably stressed conditions.

This risk occurs within the BrokerTec US matched principal business, where it serves as a fully matched counterparty to offsetting positions entered into by clients of its electronic trading platform to facilitate anonymity and access to clearing and settlement. In the course of utilising a central clearing house as well as a third party clearing bank for the settlement of transactions, BrokerTec will be required to post collateral as well as twice-daily short-term margin based on the size of executed but unsettled transactions. Without sufficient funds to meet its obligations, BrokerTec could be exposed to breach of contract claims, a reluctance of clients to continue using the platform, and an inability to continue as a member of the central clearing house. The board's risk appetite provides for NEX to maintain access to sufficient funding to meet its obligations during ordinary and reasonably stressed market conditions.

This risk has increased somewhat over the past year, as both the clearing house and the Group's clearing banks have increased their margin requirements industry wide in response to more aggressive stress scenarios.

The Group seeks to mitigate and control this risk through the following:

-- periodic reviews, including going concern assessments;

-- membership of the clearing house netting group;

-- $200 million swingline facility maintained centrally for same and next day utilisation;

-- contingency funding arrangements and procedures in place; and

-- daily monitoring and escalation to executive management and Group Risk of funding requirements.

Counterparty credit risk

The risk of loss from the failure of a matched principal counterparty to settle its trades.

This risk occurs within the BrokerTec US matched principal business, where it serves as a fully matched counterparty to offsetting positions entered into by clients of its electronic trading platform to facilitate anonymity and access to clearing and settlement. Transactions with clearing house members are typically confirmed and novated shortly after execution, at which point the clearing house assumes the risk of settlement. For transactions with counterparties that are not members of the clearing house, however, settlement typically occurs on the day following execution and, prior to settlement, BrokerTec is exposed to the risk of loss in the event a counterparty fails to meet its obligations. If that were to occur, BrokerTec would have the right to cover or liquidate the open position, but could incur a loss in doing so. The board's risk appetite provides for the establishment and administration of counterparty credit limits and other risk management tools reasonably designed to avoid any significant credit loss.

This risk has decreased somewhat over the past year as NEX has increased its collection of collateral from clients and lowered the available trading limits for certain clients. Moreover, with the sale of the voice broking business, the instruments that are the subject of settlement risk are exclusively high-quality sovereign instruments and not the broader range of instruments in which the broking business used to transact.

The Group seeks to mitigate and control this risk through the following:

-- membership of the clearing house netting group;

-- establishment and administration of board-approved credit limit matrix;

-- regular review of client financial position and trading activity;

-- collection of client credit enhancement (e.g. collateral, letters of credit); and

-- system-administered blocks on transactions in excess of notional limits.

Legal and regulatory risk

The risk of breaching regulatory requirements, general laws and/or contractual commitments.

This risk generally applies to all of NEX's businesses, though in different ways. BrokerTec, TriOptima, NEX SEF (previously called EBS Global Facility) and NEX Exchange operate regulated introducing or trading platforms, and the Abide Financial regulatory reporting service is an approved reporting entity. These businesses are subject to extensive regulation, including adherence to specific rules and standards, regulatory exams and inquiries, monitoring and surveillance, and creation and maintenance of required records. All of NEX's businesses utilise to a significant degree client contracts that set forth mutual obligations to be adhered to in the course of the provision of products and services. A breach of those obligations by NEX could result in damages, as well as harm to its reputation and loss of clients. In addition to the risks associated with NEX's existing businesses, it may also be exposed to legacy risks from the voice broking business sold to TP ICAP pursuant to indemnities and warranties agreed to as part of the sale. The board's risk appetite provides for NEX to materially operate at all times in accordance with its legal, regulatory and contractual obligations.

This risk has decreased in certain ways and increased in others. With the sale of the voice broking business, the Group believes that its regulatory risk, while still important for certain of its businesses, has decreased on an overall basis as compared with ICAP. The Group now has significantly fewer regulated entities, engages in significantly fewer regulated activities, and has substantially fewer staff engaging in regulated activities. The risk of breaching contractual commitments,

however, has increased, not because of a greater likelihood of breaches, but because the consequences of a breach have become greater as the business increasingly gives rise to assisting its clients with completion of their regulatory obligations.

The Group seeks to mitigate and control this risk through the following:

-- NEX has internal legal and compliance departments which act as independent advisory and investigation functions to enable and defend the Group's strategic aims;

-- the Group seeks to utilise standard contracts for its baseline services that have been reviewed by both the legal department and commercial management to properly allocate risks;

-- advice is taken regularly from appropriately qualified external advisors and professionals;

-- documented policies and procedures are communicated to all relevant staff; and

-- training is provided to staff on an ongoing basis.

Information security risk

The risk of confidential client information being improperly shared or accessed.

This risk generally applies to all of NEX's businesses. The NEX Markets business will routinely have access to information about the trading activity of its clients on its platforms, and the NEX Optimisation business provides a variety of services that necessitate access to its clients' trading, settlement, margining and risk activity. The failure to protect this information effectively could result in damages for breach of contract, breach of data protection requirements in certain jurisdictions and a loss of client trust. The board's risk appetite provides for the Group to maintain robust policies, procedures and systems reasonably designed to protect the confidentiality of client information.

This risk has increased as the incidence and gravity of cyber security threats and attacks continue to increase in the financial sector and in the markets generally. The risk is also likely to increase in light of two impending regulatory developments. One is the implementation of the EU General Data Protection Regulation, which takes effect on 25 May 2018, and which increases both the obligations associated with protecting confidential information and the penalties associated with failing to do so. The other is the implementation of MiFID II, which takes effect on 1 January 2018, and which will require specified new monitoring of the Group's EU-based EBS and BrokerTec trading platforms that will necessitate collection and proper handling of individual trader information.

The Group seeks to mitigate and control this risk through the following:

-- timely escalation and mitigation of risk events;

-- provision of training and guidance;

-- information security breach monitoring;

-- cyber security programme, including penetration testing;

-- contractual liability limitations; and

-- restrictions on physical access to Company facilities.

Business resiliency risk

The risk that key operating and control systems are unavailable.

This risk applies to all of NEX's businesses. NEX's clients utilise the Group to provide essential execution and optimisation services and, as such, rely on the services being available and operating as intended. A failure to maintain this availability could result in disruption and loss for clients, as well as increase their interest in utilising competitor service providers. This is a particularly significant risk for NEX Markets' trading platforms, which have established well-regarded levels of liquidity that encourage continued use, but could face difficulty replicating those same levels of liquidity if clients were to make a significant and sustained switch to alternative venues. Certain of the NEX Optimisation businesses also rely on the network effects of multiple participants utilising a service at the same time, so a service disruption that prompted client defections could also have a pronounced negative affect on certain of these businesses. The board's risk appetite provides for the Group to maintain robust policies, procedures and systems reasonably designed to ensure the availability of key systems.

This risk has increased in recognition that cyber threats generally are increasingly targeted not only at the theft of information but at disrupting the operations of market participants.

The Group seeks to mitigate and control this risk through the following:

-- timely escalation and mitigation of risk events;

-- provision of training and guidance;

-- cyber security programme, including penetration testing;

-- contractual liability

limitations; and

-- documented and tested business recovery programme.

External change risk

The risk that NEX does not effectively respond to significant political and regulatory changes pertinent to its business.

This risk applies to all of NEX's businesses. NEX's businesses are either themselves regulated, or serving financial institutions that are. As such, developments in the regulatory environment have the potential to significantly affect NEX's business. Two recent examples of such developments are particularly noteworthy. First, the vote for the UK to leave the EU has the potential to change significantly the prevailing model of how financial institutions in Europe operate and how and from where they provide their services. With UK-based regulated platforms that have relied on EU passporting (notably BrokerTec Europe), the Group will have to respond to changes in licensing requirements as well as decisions by its clients, all of which may entail added cost and operating complexity. Secondly, with the change in presidential administration in the US, the regulatory climate of the past eight years may change significantly, potentially manifesting itself in reduced regulatory burdens and greater flexibility. This would be helpful for some of the Group's businesses that are regulated, but potentially unhelpful for those that provide services to financial institutions seeking to comply with regulatory obligations. The board's risk appetite provides for sufficient resources and expertise to be allocated to the identification, analysis, monitoring and response to such changes.

This risk has increased, given the magnitude of the change and uncertainty that both the UK vote to leave the EU and the new US administration pose to the future of financial services. The elevated risk level is not a judgement that the eventual changes will be negative for the Group; they may in fact be positive. It is, rather, a judgement that the level of change and uncertainty is at an almost historic level, creating a necessarily higher degree of challenge to manage the change effectively.

The Group seeks to mitigate and control this risk through the following:

-- maintenance of internal and external regulatory affairs advisors to provide updates on regulatory developments and convey the Group's perspective on legislative and regulatory issues to policymakers;

-- internal committees tasked with monitoring, analysing and implementing change necessitated by regulatory developments; and

-- regular reporting and discussion of key and emerging risks at the board Risk Committee.