Group Chief Executive Officer’s Review

There are three components to our strategy:

• expanding our leading voice broking business both organically and by acquisition;
• growing our leading electronic broking business both in existing products and by developing new markets; and
• developing our post-trade businesses to provide innovative services that enable our customers to reduce their costs, risks and increase their efficiency, return on capital and capacity to process trades.

Our strategy ensured that ICAP was well positioned to weather the turbulent markets of the past year. It also placed us in a good position to take full advantage of the likely restructuring of the financial markets.

We have identified several markets we believe to have considerable structural growth potential over the next three to five years. It is in those focus areas that we have been investing primarily to expand our voice broking business – emerging markets, credit, cash equities and equity derivatives and commodities, including shipping. We have during the year:

• launched our cash equities business in Europe, North America and Asia;
• established our domestic Brazilian business;
• acquired the equity derivatives broker, Link; and
• integrated Capital Shipbrokers, a leading tanker broker

Volumes in electronic broking began to slow in November from the very high levels of the prior year, but overall have stabilised since then. Our market position in both FX and fixed income remains very strong and there is potential for volumes to grow with increased government bond issuance. Our reported revenue for electronic broking has increased by 19% to £324 million, primarily as a result of the strong performance from post-trade services. The operating profit* margin was maintained at 39%, despite investing in the development of Traiana, a key component of our post-trade services offering. Over one third of ICAP’s operating profit* is now derived from electronic broking and post-trade services.

ICAP is diversifying its revenue base. This year the proportion of ICAP’s revenue derived from businesses acquired or started in the previous three years increased again to a very healthy 28%, up from 20% in the previous financial year. In addition to our acquisitions, we maintained our commitment to the future growth of the business by investing £44 million in new organic initiatives in our focus areas during the year. We will continue to invest in these and other opportunities in the coming year to support the long-term growth of the business. This has had an impact on margins but we believe the current environment presents an excellent opportunity to accelerate the development of our business.

We maintained our focus on costs and took advantage of a number of opportunities in both voice and electronic broking to reduce annualised costs by £38 million: costs were reduced this year by £15 million and in 2009/10 will be reduced by a further £23 million. These savings partially offset the continuing investment in the new focus areas described above, many of which are still in their development phase.

We believe ICAP is well positioned to take advantage of the trends emerging from the recent financial crises. Very low short-term interest rates and capital rebuilding by the banks will, in due course, restore confidence in the financial markets. However, the period of turbulence, as banks and other financial institutions restructure to address asset disposals and reduce costs and leverage, is likely to continue through the rest of this year.

In their recent results, the major banks have demonstrated that the high volume “flow” markets have provided strong revenues. Furthermore, banks and their customers continue to use derivatives as the most efficient way to manage their risks. It is these flow and derivative markets that form the core of ICAP’s business. Our continued investment in both the voice business and electronic broking platforms is designed to capture the benefits of this trend.

On both sides of the Atlantic, politicians and regulators are examining changes to the operation and regulation of the OTC markets to ensure that the infrastructure is as robust as possible. They are calling for a stronger regulatory framework for OTC derivatives markets, improved access to information for regulators, increased efficiency and the reduction of credit risk through the expansion of clearing.

The solution to current problems in financial markets does not lie in attempting to mandate the transfer of OTC trading on to exchanges, as politicians and regulators understand. Clearing houses already operate very effectively in many OTC markets and OTC markets themselves play a different role to exchange traded markets. They are much larger than exchange markets and provide vital, flexible risk management tools, their use benefiting governments, corporations, investors and individuals worldwide. Furthermore, a mandated exchange solution needlessly grants the exchange a monopoly on trade execution, and often clearing, to the detriment of the market as a whole.

We welcome the further development of central counterparties/clearing houses for those OTC markets that do not already operate in such a manner. Approximately 60% of ICAP’s transaction volume derives from markets where clearing already exists. Historically, we have seen volumes increase substantially in markets where clearing is introduced, mainly as a result of the reduction in the costs and risk of doing business ICAP is an equal member of a consortium of a number of leading financial institutions that has collectively made a cash offer for LCH.Clearnet Group Limited. Discussions are continuing.

The majority of OTC derivatives are already traded using standardised documentation and the US Department of Treasury has called for the movement of these trades on to regulated transparent electronic trade execution systems and regulated exchanges. We believe the migration of trading of interest-rate swaps, credit derivatives and other OTC derivative markets to electronic execution platforms would be a great step forward: we have proven systems to take these markets electronic, improving market efficiency and auditability. ICAP is a regulated business and we have many years’ experience of operating electronic trading systems in global markets, integrated with independent clearing and settlement facilities. We fully expect to have competition in electronic trade execution of OTC derivatives and, given our previous investment in installing these technologies, we are in a strong position to be successful.

The demands for improvements in the efficiency of post-trade processing and for reductions in the capital allocated to existing positions are providing significant opportunities for ICAP to expand our range of post-trade processing and risk management services.

A valuable illustration was our announcement, just after the end of the financial year, of our new joint venture with CLS Group using technology provided by our subsidiary Traiana, through its Harmony Network. The new business addresses the back office strains created by the rapid increase of trading volumes in FX by a widening group of hedge funds, algorithmic traders, retail and institutional market participants. It will provide trade aggregation services to reduce operational risk, rationalise and consolidate legacy post-trade processes and reduce post-trade costs. A group of banks has committed support to the joint venture including Citigroup, Deutsche Bank, J.P.Morgan and The Royal Bank of Scotland.

We operate in a robustly competitive environment and we have further consolidated our position as the leading interdealer broker by a clear margin. The wider definition of our markets, which we introduced last year, includes interdealer broking markets in interest rates, credit, commodities (including shipping), FX, equities and emerging markets – together with markets such as post trade. Markets like global cash equities and financial futures remain separate from this broader definition, although ICAP does act as an executing broker in all the largest equity and financial futures markets. By our estimates, the size of ICAP’s available market has grown by 3% to $12.6 billion. On this basis ICAP currently estimates its share of this market to be 21%–23%. Our target is to increase this share to 35%.

In voice broking markets, competitive strength is a function of longstanding customer relationships, coherent asset class coverage and, increasingly, the speed and efficiency of straight-through-processing that is normally provided or facilitated by ICAP as a free ancillary service in conjunction with voice broking.

In the past year, market share among the leading interdealer brokers continued to consolidate as our customers rationalised their voice broking relationships to achieve economies of scale, a process that increased in pace due to the difficult market conditions. ICAP is well positioned in this market and our revenue per voice broker increased during this period. In electronic broking markets, our key competitive advantages are: depth of available liquidity, breadth of the electronic network and established customer connectivity. Our networks are also highly scalable, offering scope for functional enhancement and delivery of new innovative products.

Our competitors in post-trade services are widely dispersed and there are no businesses with the scale, technology or connectivity covering the segments in which we operate. Our post-trade operations have significant growth capacity and can be leveraged across different asset classes throughout their trading life cycle to reduce further risk and improve operational efficiency in the wholesale financial markets.

In the past year, volume growth at the major financial and commodity exchanges in the US and Europe has slowed either in line with or more than the corresponding OTC markets, demonstrating the often symbiotic relationship between the two markets.

As a people business, a key attribute of our management is our ability to attract and retain the highest quality staff. We have continued to expand successfully, both organically and by acquisition, and once again we have seen a substantial growth in the number of ICAP staff, to more than 4,300. My thanks go to them all, to our executive management team and to my fellow directors, for their individual and collective contributions to ICAP’s continuing success.

ICAP’s Charity Day has, for the past 16 years, raised very significant revenues which are donated to charities chosen by our staff round the world. In December 2008 we raised an amazing £11 million in one day – an incredible achievement, particularly in the current market environment. I would like to thank our customers, staff and supporters who made Charity Day 2008 such a fantastic success, helping many people round the world with their efforts.

Our business is highly cash generative and the post-tax profit tends to equate to free cash flow, which grew to £296 million, an increase of £64 million over the previous year. As a result we are able to continue to invest in the growth and development of the Group and to increase the dividend paid to shareholders: the directors recommend a final dividend of 12.35p per share to be paid on 21 August 2009 to shareholders on the register on 17 July 2009 making a total dividend of 17.05p per share for the year, an increase of 9%.

In order to give shareholders greater flexibility and the opportunity to elect to receive new ordinary shares in ICAP, we will be seeking authority at the annual general meeting to introduce a scrip dividend scheme. The scrip dividend scheme gives shareholders the opportunity to elect to receive a share alternative to any cash dividend declared by the Company including this year’s final dividend.

We entered this period of financial instability with a very clear strategy and are well positioned to take advantage of the significant restructuring of the financial services industry that is taking place and the changes that will happen in our customers’ business models. Increased focus on reducing the overall level of risk in the global financial markets by improving market infrastructure offers particular opportunities for our post-trade business. This environment also creates new opportunities for an un-conflicted, independent agency broker like ICAP in areas such as equities and futures.

It seems likely that developments in the global financial markets this year will continue to be dominated by regulators and the banks; as the former demand increased oversight of the wholesale financial markets, clearing of OTC derivatives and improved transparency and the latter reallocate the risk capital committed to both their buy-side and sell-side business. The extra regulatory oversight should enable improvements in both the operational and capital efficiency of the infrastructure that supports trading, resulting in reduced costs and other commercial benefits.

We operate in a robust competitive environment in all of our markets worldwide and expect these conditions to prevail. There is potential for further consolidation of market share among interdealer brokers as traders concentrate their business in the largest, deepest and most reliable liquidity pools.

We are keeping our focus on costs and are taking advantage of a number of opportunities to reduce overheads. These savings will partially offset our continuing investment in opportunities to build our business, both by attracting high quality people and acquiring some assets at attractive prices. The Group continues to be highly cash generative to support these investments and benefits from a strong balance sheet.