Markets

The interest rate markets have gone "back to basics", with dealers embracing "plain vanilla" flow products such as interest rate swaps and government bonds. Near zero short-term interest rates, increased government and corporate bond issuance and a steeper yield curve created favourable trading conditions and deeper liquidity, particularly for interest rate swaps in Europe. We have seen significantly increased business in longer maturities which, combined with widening spreads, has increased revenue considerably in this market. The dislocation in the credit markets also led to more hedging of basis risk and the development of single currency basis swaps as a new asset class.

The US interest rate market continued to grapple with structural issues within the dealer community: mergers, compensation issues, balance sheet issues, all factors which contribute to lower participation. However, we expect these issues to be more than offset by increased activity from newer players and the increased government issuance in the medium to longer term. Electronic broking of US Treasuries on the BrokerTec platform was subdued throughout the year after the very high levels of the prior year but volumes have started to rise.

The global credit markets also saw a return to simpler products, with the strongest performance coming from corporate bonds. With corporate bond spreads widening, the price discovery mechanism provided by our voice brokers has risen in value. In EMEA we have brought in a new high-yield bond desk to work alongside our successful high-yield CDS desk, strengthening the service provision to our clients. Credit derivative volumes remain subdued, particularly at the structured end. However, this only accounts for a small percentage of ICAP’s business. In the US and Asia we have been building our credit derivative desks to strengthen our market position. The CDS market continued to be the focus of considerable regulatory scrutiny. The move towards centralised clearing of CDS products both in the US and Europe gathered pace. We expect clearing to benefit the CDS market greatly, provided it is delivered on an open-access basis and not tied to any one provider at the execution level. The International Swaps & Derivatives Association introduced a new auction settlement protocol designed to standardise payouts on corporate and sovereign CDS in April 2009, which has established uniform settlement terms in the event of a default. We expect this to have a positive impact on CDS volumes as the market integrates these standardisation initiatives.

Global commodity markets have been extremely volatile, resulting in record revenue for ICAP’s commodities business in EMEA and the Americas. Oil and fuel products saw record volumes on the back of the increased volatility in the oil price and uncertainty about global economic growth. We continued to expand our market leading position in European natural gas following early investment in this sector. There was extremely strong growth in European emissions trading with our market leading carbon and environmental products desk achieving record revenue. Trading in the various US environmental and emissions schemes also increased and is expected to grow further under the Obama Administration. ICAP Energy also expanded into soft commodities with the establishment of the first OTC sugar desk, broking the first ever cleared agricultural swap transaction. ICAP has also expanded into base metals broking.

In the shipping market dry bulk rates and volumes collapsed with the fall in the Baltic Dry Index, however these are beginning to rebound slowly. Tanker rates were more resilient due to the stronger market position of tanker clients (principally major oil companies), although these softened as the oil price fell further. ICAP Shipping continues to gain market share in physical shipbroking and sale and purchase.

FX continued to grow as an asset class as trading volumes in perceived "safe haven assets" increased. Spot FX traded electronically on the EBS platform is one of ICAP’s key flow businesses and as such has benefited from the high levels of volatility that continued this financial year. Average daily electronic spot FX volumes for the 12 months ended 31 March 2009 were $193.1 billion, following a record year. EBS has seen market share gains from smaller FX portals as the market consolidates and market participants seek a central pool of liquidity. In addition, the proportion of total volume accounted for by algorithmic trading increased to record levels. ICAP also launched a new internet service offering access to EBS, leveraging the global architecture without the need for dedicated hardware, and increased access to the EBS platform by introducing a new premium connectivity service, i-Cross. i-Cross provides a high-bandwidth, low latency connection to ICAP’s EBS platform to customers trading spot FX in Europe and in the New York area.

ICAP also continued to promote innovation with new currency pairs, adding South African rand/Japanese yen and USD/Israeli shekel, as well as basket rouble. Basket rouble is a sequence of trades used to construct a hedged position that is in line with weightings prescribed by the Central Bank of Russia. ICAP also expanded EBS’s non-deliverable forward (NDF) offering to include four Latin American currencies. There are currently more than 120 NDF counterparties who access the system trading Latin American and Asian NDFs, in addition to the long-established voice-broking markets.

Equities and equity derivatives continued to experience difficult conditions and our growth in this market was driven primarily by ICAP’s acquisition of equity derivatives broker Link and the development of our cash equities business. Equity derivatives was one of the businesses that we identified as having strong structural growth potential and Link was an important further step in building our overall capability in the equity market. This market has grown strongly in the past five to seven years as a result of the search for yield, the demand for absolute returns and the emergence of volatility as a traded asset class in its own right. The increased volatility in the global financial markets has benefited ICAP as business is migrating from illiquid index, exotic, single stock and emerging markets options to the main European index products in which ICAP is particularly strong.

In 2008, ICAP identified the opportunity for a global, non-conflicted, agency only cash equity broker and has continued to build out this market in Europe, the Americas and Asia. ICAP has hired 76 staff in this area, including teams focused on electronic execution and block crossing.

ICAP is active in many emerging markets across Asia, Latin America and Africa. We are active in supporting emerging economies with trading and development of their FX, interest rate, government bond and corporate bond markets.

Emerging market activity has seen some slowdown following many years of very strong growth, however ICAP has been investing selectively in the market, notably in Brazil. ICAP agreed to acquire Arkhe, a leading independent broker in Brazil, in November 2008. We expect to complete this transaction in mid 2009.

We also entered into a joint venture with the Banco Centroamericano de Integracion Economica, a multilateral bank in Honduras formed by Central American governments. These actions have strengthened ICAP’s presence in Latin America, where it has offices and staff in Argentina, Brazil, Chile, Colombia, Ecuador and Mexico. ICAP also introduced new Latin American NDF FX contracts in the Argentine peso, Chilean peso, Colombian peso and Peruvian nuevo sol.

The Central European economies have slowed in line with the global economy but we are seeing positive development in the Russian rouble market as well as increased trading in Gulf Cooperation Council currencies in the Middle East.

In Africa, we successfully concluded bond transactions in several countries, including Nigeria, Kenya, Zambia and Mauritius, and we are developing the business throughout Africa from our office in South Africa.