avatar LONDON STOCK EXCHANGE PLC Finance, Insurance, And Real Estate
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    Risk management oversight The management of risk is fundamental to the successful execution LSEG’s Risk Culture of our Strategic Plan and to the resilience of our operations. The Group While our formal risk framework codifies the objectives and practices that govern adopts a proactive approach to risk management. During 2017 the our processes, our risk culture determines the manner in which we manage risks Group has successfully adapted its systems, processes and controls every day. to meet several significant changes in the regulatory environment including MiFID II and the introduction of the EU Benchmark Our management culture embeds risk awareness, transparency and Regulations. Our approach to both regulatory and other changes has accountability. A strong emphasis is placed on the timely identification allowed the Group to continue to support and service its key markets and reporting of risk exposures and in the strategic analysis of prevailing or and clients and maintain the Group’s standards for delivering stable anticipated risks. The responsibility for identifying and managing risks rests and resilient services that meet our clients’ needs. with management and with the Executive Committee, with independent oversight from our Group Risk Management Team and from the Group Board Risk Committee. Our risk culture is one of our most fundamental tools for effective risk management. Our behaviour framework feeds into the criteria that we use to assess the effectiveness of our risk culture and the communication, escalation and use of risk analysis to make strategic decisions. Strategic Risk Objectives LSEG’s Strategic Risk Objectives derive from the strategy of the Group, which is defined annually by the Board. The risk objectives of the Group are as follows: – Maintaining a strong risk culture throughout the Group: the Risk Management Framework is embedded within divisions and functions – Maintaining stakeholder confidence: the Group’s stakeholders have confidence in its ability to deliver its strategic objectives with robust and effective governance and operational controls – Maintaining stable earnings growth: the strategic growth of the business is delivered in a controlled manner with long-term value enhancement and low volatility of underlying profitability – Maintaining capital requirements: the Group has sufficient capital resources to meet regulatory requirements, to cover unexpected losses and to meet the Group’s strategic ambitions – Maintaining liquidity: the Group retains or has adequate access to funding to meet its obligations, taking into account the availability of funds – Monitoring and managing credit risk exposure in conjunction with prevailing macroeconomic and geopolitical factors to ensure Group Thresholds limits are always adhered to – Ensuring prudent levels of margin, default funds and liquidity arrangements in the Group’s CCPs – Maintaining operational stability by facilitating orderly market operations: the Group’s operations are delivered in a secure and efficient manner without disruption – Achieving operational excellence consistent with the Group’s aspiration to be operationally “best in class” – Maintaining physical and IT security to protect the Group’s assets, our people, infrastructure, data and other assets – Adhering to regulatory requirements: the Group conducts activities at all times in full compliance with its regulatory obligations 42 London Stock Exchange Group Annual Report December 2017

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    Strategic Report Risk management oversight Current Risk Focus Group Risk Appetite Current risks on which we continue to focus relate to: LSEG’s Risk Appetite is defined as the level of risk that the Group will accept in pursuit of its strategic objectives. The Group Risk Appetite Statement, proposed – Geopolitical Uncertainty: Whilst more information with regard to the timing, by the Executive Committee, is approved by the Board at least annually and is progress and outcome of the negotiation process of the UK’s future relationship determined in conjunction with the Group’s strategy and aligned to the Strategic with the EU is starting to emerge uncertainty is expected to continue in 2018 as Risk Objectives. The components of Risk Appetite that relate to Central the UK government moves into the second phase of negotiations Counterparty Clearing Houses (CCPs) and Central Securities Depositories (CSDs) – Regulatory Change: Regulatory change affects the operations of the Group as well are also approved by the respective Boards within the Group, in compliance with as those of our users and customers and increases regulatory risk through EMIR, CSDR and other applicable regulations. increased regulatory compliance risk. Following the requirements of MiFID II and MIFIR coming into effect on 3 January 2018, further changes will continue in 2018 The Group Risk Appetite is cascaded down to each business unit. Regular reporting at both Group and Business Unit levels uses Risk Appetite as a – Transformation: Recent acquisitions increase the transformation risk, whilst benchmark that can then be incorporated into the Group Risk Policy Framework. delivering opportunities to compete globally – Liquidity: The repo market has been adversely affected by banks contracting Risks that are outside Risk Appetite are escalated to Executive Committee members their balance sheets in response to leverage restrictions. This continues to impact and to the appropriate Risk Committee. The Risk Appetite status is also reported CCPs who use secured investments, such as reverse repos, as mandated under to the Board Risk Committee and to the Board for all aggregated Group risks. EMIR, to maintain sufficient ongoing liquidity and immediate access to funds Three Lines of Defence – Security and Resilience: The security and resilience of systems represents a key LSEG’s risk control structure is based on the ‘3 lines of defence’ model: global emerging risk across the whole financial services industry – The First line (Management) is responsible and accountable for identifying, The Group has an ongoing programme of development and enhancement of its assessing and managing risk Enterprise-wide Risk Management Framework (ERMF). The ERMF metrics and – The Second line (Risk Management and Compliance) is responsible for defining indicators include stress testing used to monitor risks against risk appetite to the Risk Management process and policy framework, providing challenge to the respond to emerging or unexpected risks. first line on Risk Management activities, assessing risks and reporting to the Group Board Committees on risk exposure Going forward, we will continue to strengthen our Risk Management by building on the frameworks we have put in place. Accordingly, we believe the Group is well – The Third line (Internal Audit) provides independent assurance to the Board positioned to seek new opportunities in the year ahead. and other key stakeholders over the effectiveness of the systems of controls and the ERMF LSEG Risk Appetite Components Overall Risk Assessment Key risk categories include strategic, operational and financial risks. Operational Culture risk includes IT risk as well as risk associated with operational processes with financial risk including credit, clearing and market risks. We recognise that each STRATEGIC RISKS of these risks, if not properly managed and/or mitigated, could have an impact on the Group and on its subsidiaries’ reputation. Indications of the relative sizes Stakeholder Confidence of these risk types are shown overleaf. Risk Management Approach Earnings Our approach to managing risks includes a bottom up and a top down approach. Key external and internal factors are stress tested across our Group operations to FINANCIAL OPERATIONAL assess the potential impact on the financial results, strategic plans and operational resilience. Capital Operational Stability The risk function is centralised at the Group level with the exception of the CCPs Group Liquidity Operational Excellence where each clearing house has its own risk team in compliance with the EMIR requirements and CSDs which will be required to have their own risk teams under the forthcoming provisions of CSDR. The function’s main role is to maintain a fit for Counterparty Concentration Security purpose Group ERMF and recommend to the Risk Committee and to the Board Risk Appetite statements. It also reviews and monitors the risk profile of the Group and of CCP Financial Resources Compliance its subsidiaries and ensures it remains within Risk Appetite. The function supports the Risk Committee members by providing reports on the Group’s risk profile and timely escalation of exceptions. It also monitors compliance with rules and regulations and develops and maintains frameworks to facilitate the identification, assessment, reporting and monitoring of all the principal risks that could materially impact the reputation, financial position or operations of the Group. London Stock Exchange Group ❆♥♥ al ✥❡✁♦rt ✂❡❝❡✄b❡☎ ✆017 43

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    Risk management oversight continued Risk Management Cycle Stress Testing Capabilities and Viability Statement The Group’s Risk Management process is set out in the Risk Management Cycle. The Group’s viability statement is underpinned by the Group’s stress testing The key to the cycle is that it both begins with, and feeds back to, the Business process. Under this process, a set of severe but plausible scenarios appropriate Strategy – which is ultimately determined by both internal and external drivers. to the business of the Group and reflecting our principal risks are defined by This ensures that the management and assessment of risk remains a Management, and the financial impact of each on the Group is quantified. fundamental component of the Group’s strategic decision making process. The stress test scenarios are re-assessed annually and may be updated either during this review process or at other times during the year where the external environment changes. LSEG Risk Management Cycle A 3 year horizon is used for LSEG’s financial viability statement, consistent with Business the Group’s strategic planning cycle. The scenario impacts were evaluated Strategy on the Group’s key financial metrics: liquidity headroom; leverage; interest cover; and regulatory capital headroom. Risk management activity supports the In addition, a set of compounded stresses was evaluated to provide further business strategy confidence on the ongoing financial viability of the Group even under very highly stressed environments. The process and final output of the stress tests was reviewed by management and by the Board and Audit Committee. They also Risk Risk reviewed and discussed ‘reverse’ stress testing, which was performed to assess Monitoring Appetite what would be required to breach the Group’s covenants. Monitor and report The level of risk on our risks that LSEG is willing The Directors’ financial viability statement is contained in the Directors’ Report to accept in pursuit on page 98. of our strategy CCP Risk Management and Oversight Each of the Group’s CCPs complies with the appropriate regulatory requirements. Risk Risk Consequently, they each manage their risk under the governance of their Board of Capture Policies Directors and of their internal risk management structure. The Group monitors the CCP’s aggregated risks positions by using tools that measure the overall exposure Identify all key Minimum to counterparty risk, credit risk (including latent market risk where a default can risk exposures standards for our result in a CCP having the market risk inherent in the defaulter’s portfolio) and people and monitor liquidity risk. It uses a bottom-up approach for the monitoring of operational risks. compliance The Group’s CCPs are managed in accordance with our ERMF, which includes a CCP Financial Risk Policy specifying minimum risk standards for margin Economic Capital confidence level, default fund cover, liquidity, counterparty concentrations, The development of an economic capital model, consisting of 4 risk components new member assessment, reporting and collateral. This promotes consistency (credit, market, operational and business), will enable the Group to consistently in the oversight of our clearing risks while protecting the independence of the assess risk and the economic effects of risk-taking activities. The relative CCPs’ risk management processes as required by relevant regulation. contribution of each component to the Group’s total economic capital is shown in the chart below. Operational risk represents the largest component of the Group’s CCP Risk Management and Operations economic capital; this implies that operational risk is the main source of risk for the The Group’s CCPs interpose themselves between 2 counterparties in a trade Group which is expected given that the Group is a market infrastructure business. and assume the legal counterparty risk for eligible transactions that are cleared through their markets. If either party defaults on the trade, the CCP becomes accountable for the defaulter’s risk and associated liabilities. LSEG E✚✙✘✙✗✖✚ ✝✔✓✖✒✔✑ ✝✙✗✓✙✘✏✘✒✎ Fundamental to a CCP’s risk process is its collection of high quality and highly liquid collateral from clearing members and clients as security for potential defaulter risk. The CCPs have in place a variety of margin models, across asset classes, to calculate the collateral requirements appropriate to each member’s risk Credit Risk position. Clearing members are also required to pledge collateral to the default Market Risk fund(s), the overall size of which, for each clearing service, is computed to at least Operational Risk the ‘Cover 2’ level – large enough to cover the 2 members that would create the Business Risk largest liability given a simultaneous default under extreme but plausible market conditions – and allocated across the members of the clearing service. The adequacy of the CCP’s Financial Resources (Margins and Default Fund contributions collected from its members) is assessed on at least a daily basis and reported regularly in accordance with the CCP Financial Risk Policy using Group 44 L✞✟❞✞✟ ✠✡✞c❦ ☛ xch❛✟g☞ ✌r✞✉♣ ✍✕✕✛al Report December 2017

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    Strategic Report Risk management oversight Risk Appetite as a benchmark. The Principles for Financial Market Infrastructures LSEG Risk Governance Structure (PFMI) produced by CPMI-IOSCO and EMIR provide the minimum Risk The Risk Governance of the Group is as follows and presented diagrammatically Management standards that a CCP should apply; however, LSEG CCPs apply below: more stringent margin confidence levels in most cases. – The Board is responsible for determining the Group Risk Appetite. The Board’s Risk and Audit Committees receive regular reports presenting the aggregate If a clearing member fails, the collateral collected is used by a CCP to complete the risks of the whole Group measured against the Appetite trades and fulfil the failed organisation’s obligations. This ensures that the party on the other side of the trade is not negatively impacted by the default. The – The ERMF defines roles and responsibilities for risk management oversight margin is calculated to cover market moves up to a certain confidence level. and activities, including for the Board, the Executive Committee and sub- If losses exceed the defaulter’s financial resources, then under EMIR Regulation Committees thereof the CCP is required to utilise a specified proportion of its own capital ‘skin-in-the- – The Executive Financial and Operational Risk Committees monitor and report game’ before it can utilise the assets of non-defaulters. The skin-in-the-game on the risk profile of the Group; review and challenge the application of the represents a proportion of the CCP’s own capital that is sufficient to act as an Group risk framework; recommend Risk Appetite Statements to the Executive incentive for CCPs to minimise the operational risk related to default management Committee and monitor compliance with the relevant risk policies and to adopt robust risk management processes. Once the skin-in-the-game has been exhausted, further losses are allocated to the non-defaulting members via – The Group has a Business Continuity Management framework in place which funded member contributions to a mutualised default fund for each asset class is managed and maintained through a fully established Business Continuity or group thereof followed by further cash calls known as assessments and then Programme. The Business Continuity Programme is overseen by the Business a loss distribution waterfall set out in the CCP rulebook. CCP operational risk is Continuity Board, a sub-committee of the Operational Risk Committee. The managed using a bottom-up approach and is aligned with the Group’s operational Business Continuity Board receives the self-certification results of all the Group’s risk management approach. Business areas – The New Product/Market Committee reviews and recommends business cases Further information on the Group’s clearing related risk is contained in the to the Executive Committee ensuring product innovation and new market risks Principal Risks and Uncertainties on pages 49–50. are appropriately identified and assessed Each Group-level risk is owned by a member of the Executive Committee who is responsible for managing or mitigating the risk in order to remain within Risk Appetite. The Board and the Risk Committee receive presentations on material risks and related mitigants as appropriate. The Reports of the Audit and of the Risk Committees, on pages 65–71, provide details on the work carried out to assist the Board in fulfilling its oversight responsibilities for risk management and systems of internal control. LSEG Risk Governance FIRST LINE SECOND LINE THIRD LINE LSEG Board Risk Audit Committee Committee Executive Committee Financial Operational Risk New Product/Market Risk Committee Committee Committee Treasury Business Committee Continuity Board London Stock Exchange Group ✜✢✢✣al Report December 2017 45

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