ICAP Revenues down 14%, EBS down 10% – will new products stem the tide?

British conglomerate ICAP has today released its Interim Management Statement for the period between April 1, 2014 to July 15, 2014, which provides grave material evidence that the first two quarters of this year have been difficult indeed.

Group revenue for the quarter was 14% behind the same period last year on a constant currency basis (19% on a reported basis). Management continues to focus on enhancing the efficiency and cost effectiveness of the organization.

Double digit revenue growth achieved by the Post Trade Risk and Information division in the first quarter demonstrated the positive return from the ongoing investment in the business to meet its customers’ changing needs in the new regulatory environment. Unprecedented demand for TriOptima’s compression (triReduce) and portfolio reconciliation (triResolve) services together with an encouraging upturn in activity on Reset were the primary drivers of revenue growth during the period.

Combined average daily electronic volumes for the BrokerTec and EBS platforms in the first quarter were $707 billion, a decrease of 10% on the previous year. Activity levels on EBS Market remains muted reflecting multi-year lows in volatility in EBS’s major currency pairs and continued internalization of bank flow. The comparative prior year volumes reflected exceptional levels of trading activity on both platforms caused by external stimuli; specifically increased speculation around the future of quantitative easing (BrokerTec) and change in Japanese monetary policy (EBS).

Average daily volume on EBS Direct, the relationship-based disclosed liquidity service, continued to grow during the period, averaging $11 billion per day in June, including a record single day high of $13 billion. EBS Direct continues to generate new incremental revenue for the Group, with more than one third of the volume transacted on platform in sterling, Canadian dollars and Australian dollars, currencies in which EBS has historically not been a primary trading venue.

In June, both the number of trades (557) and the notional value ($25 billion) of US Dollar interest rate swaps (USD IRS) transacted on i-Swap, the electronic arm of the ICAP SEF, achieved record highs. The number of electronic trades represented 31% of all USD IRS trades via ICAP, up from 23% in May and 2% in January. During the period, i-Swap on-boarded additional new customers and saw an increase in market share.

The trading performance of the Global Broking division (which contributes less than 30% of total Group profits) continues to be adversely impacted by a combination of both structural and cyclical factors including bank deleveraging, ongoing regulatory uncertainty and lack of interest rate and FX volatility. These factors represent a significant drag on trading activity as evidenced by the continuing decline in the reported FICC revenues of the major dealer banks. Against the backdrop of challenging market conditions, Global Broking revenue declined by 19% on a constant currency basis (25% on a reported basis). The Group remains focused on protecting the division’s ongoing profitability.

The cost savings program remains on track to deliver the annualized target of at least £60 million for the current year. Since announcing FY results in mid-May, over £28 million of annualized cost savings have been identified partly through a reduction in broker headcount, the one-off costs of which will be treated as an exceptional item. These savings are in addition to the £125 million of cost savings delivered over the past three years.

EBS, the company’s ECN, has actually begun to make steps in the direction of recovery, with a 5% increase in monthly volumes during June this year, compared with that of May. With an overall drop of 10% in order flow on EBS during the period concerned, however, it is evident that the new proposed corporate direction is timely.

This particular division is set to expand its product range between now and next April, with CEO Gil Mandelzis looking to ensure a wider audience is attracted.

According to Reuters, the planned transformation of EBS has been driven by the greater regulatory scrutiny which this industry sector faces after alleged manipulation of foreign exchange benchmarks used to price trillions of dollars of investments and company deals.

EBS is one of two major platforms which continues to battle for supremacy against Thomson Reuters’ FXall and is the main market for large banks to trade spot FX pairs against the dollar, with Mr. Mandelzis having told Reuters this week that the company is looking to introduce up to four “initiatives” by the end of March.

Israel-born Mr. Mandelzis, founder of fellow ICAP company Traiana and who took the reins at EBS in 2012, believes that volatility will return but is building the business to be less dependent on market fluctuations.

“Market volatility will come back over the next 12 to 18 months and we will have up to eight vehicles to capture that growth,” he said.

“Within the next 24 months we will see very clearly strong indications for resumed growth that is not related to market conditions,” he added, but declined to give specific growth targets.

Michael Spencer, Group Chief Executive Officer of ICAP said: “Our post trade businesses are growing strongly, supported by accelerating demand for risk reduction services. During the quarter we have made further progress with our growth initiatives. Volumes on EBS Direct and on i-Swap in US dollar reached new highs, in addition to a record number of compressions within triReduce and further expansion of triResolve’s customer base.”

“In Global Broking, conditions are still very difficult, and we continue to mitigate these challenges by increasing the flexibility of our operating model, focusing on priorities and delivering cost efficiencies. The Group is in the process of progressing a number of multi-year structural projects to enhance the efficiency and cost effectiveness of the organization which will result in a more efficient corporate structure and more variability in its cost base. These will enable ICAP to continue to invest in products and services to drive future growth across the Group.”

The statement is scheduled to be delivered today at the company’s Annual General Meeting.

Read Also: