LSE.L Regulatory News (LSE)

London Stock Exchange Group plc

Paul Froud - Investor Relations

+44 (0) 20 7797 3322

Gavin Sullivan/Lucie Holloway - Media

+44 (0) 20 7797 1222

Risk Description

Mitigation

Risk level

Global economy

As a diversified markets infrastructure business, we operate in a broad range of equity, fixed income and derivative markets servicing clients who increasingly seek global products and solutions. If the global economy underperforms, lower activity in our markets may lead to lower revenue.

Economic data and inflation concerns have dominated central bank official rate actions. The Federal Open Market Committee (FOMC) increased the Fed Funds target rate 4 times during 2018. In November the Bank of England (BoE) increased the Bank Rate to 0.75%. Meanwhile the European Central Bank (ECB) has left rates unchanged at zero and has announced that its quantitative easing programme will end by the end of 2018. The expected economic growth could fail to materialise and higher rates could lead to a slowdown.

Ongoing geopolitical tensions continue to add uncertainty in the markets which may impact confidence and activity levels. This is being be monitored closely.

The footprint of the Group continues to broaden, further improving the geographical diversification of the Group's income streams which serves to mitigate the risks of a localised economic downturn. Furthermore, income streams across the business divisions of the Group comprise annuity and fee based recurring revenues to balance against more cyclical and market driven activity.

The Group performs regular analysis to monitor the markets and the potential impacts of market price movements on the business. Activities include Key Risk Indicator tracking, stress testing, and hedging. We continue to actively monitor the ongoing developments following the result of the UK referendum on leaving the EU. Committees have been established to assess and address areas of impact on our operations and the Group has formulated contingency plans with the objectives of continuity of market function and customer service in the event of a hard no deal Brexit.

The Financial Risk Committee closely monitors and analyses multiple market stress scenarios and action plans in order to minimise any impacts stemming from a potential deterioration of the macroeconomic environment. The stress scenarios are regularly reviewed and updated in response to changes in macroeconomic conditions. Additional ad hoc analysis such as

special credit reviews of counterparties are presented to the Financial Risk Committee for consideration where events dictate.

Increasing

For more information, see Market trends and our response, pages 14-17, and Note 3 to the accounts: Financial Risk Management on pages 133-137.

Regulatory change and compliance

The Group and its exchanges, other trading venues, CCPs, index administrators, central securities depositories, trade repositories and other regulated entities operate in areas that are highly regulated by governmental, competition

and other regulatory bodies.

Brexit - The UK vote in 2016 to leave the EU introduced significant uncertainty concerning the political and regulatory environment, the UK's future relationship with the EU, and the overall impact on the UK and European economies both in the short and medium term. Negotiations between the UK and the EU continue but the UK's final exit terms are unclear. The lack of agreement between the UK and the EU increases the risk of a 'no deal' scenario. The effects of Brexit (including those that may follow an extension to the Article 50 process) are uncertain, and could adversely affect the Group's businesses, operations, financial condition and cash flows.

LSEG companies conducting regulated activities in the EU or with customers in the EU are subject to EU regulation. The Group is executing contingency plans to maintain continuity of service to customers and orderly functioning of its markets, including incorporation of new entities in the EU27 and applications for authorisation within the EU27 for certain Group businesses. The Group also has a structured Brexit programme to engage with UK, EU and US Brexit policy leads to advise on financial market infrastructure considerations. However, the complexity and the lack of clarity of the application of a hard Brexit may decrease the effectiveness or applicability of some of these contingency plans. As is the case with all change, these contingency plans introduce some execution risk.

Regulation Impacting CCPs - Regulatory initiatives with the potential to impact cleared derivatives markets and CCPs continue through international standard setters and regulators in the EU and US and other major jurisdictions. Our primary focus remains on development of a coherent, cross-border regulatory framework for

market access to global CCPs, including appropriate access rules under the EMIR review, likely to be finalised in H1 2019. As part of this review, EMIR 2.2 introduces the option to impose enhanced supervision or deny the recognition of third country CCPs that are of systemic importance for the EU, which could have implications for the Group's CCPs. Proper calibration of EU rules on CCP Recovery and Resolution and harmonisation with other key jurisdictions is also a key priority and could likely have an impact on the Group's CCPs.

MiFID II/MiFIR - Together with MiFIR, its accompanying regulation, MiFID II came into force on 3 January 2018. LSEG delivered a series of key technological and procedural changes to prepare for smooth implementation. ESMA has signalled that reviewing the implementation of MiFID II/R is a priority and it is likely to propose amendments with potential impacts on the Group, particularly in the areas of trading transparency and market data. The third country access rules for trading venues and market participants continue to be evaluated in 2019 and could also have a potential to impact access to our trading venues in the UK and EU.

Prudential Capital Rules - In December 2017, the Basel Committee on Banking Supervision (BCBS) published final recommendations on the Basel III Framework, which as currently drafted could adversely impact the cleared derivatives industry. One area of primary importance is the treatment of customer margin under the Leverage Ratio. BCBS is considering reviewing its approach on this issue which would be a positive development for market participants and therefore the Group. The European Commission also proposed a prudential regime for investment firms which may affect the ability of proprietary trading firms to provide liquidity on LSEG markets. However, the nature of final political agreement on the proposal is highly uncertain.

Regulatory change and compliance (continued)

Benchmark Regulation - Regulatory focus on the role of benchmarks in the market and regulation of benchmark providers continues to increase in several major jurisdictions around the world. FTSE International Limited, was authorised by the UK's Financial Conduct Authority (FCA) in 2018 as a Benchmark Administrator, under the European Benchmark Regulation. In May 2018, the European Commission proposed several sustainable finance legislative proposals, which could potentially impact sustainable indices. Benchmark Administrators located outside of the EU will likely have to elect an established method for EU users to access their benchmarks after the BMR transitional period ends this year.

Financial Transactions Tax (FTT) - Some EU member states are considering a possible Financial Transaction Tax (FTT), which could adversely impact volumes in financial markets. During 2018 little progress was made, but efforts continue to finalise the measure.

Information and cyber security standards - In many of our key regulatory jurisdictions, there is an increasing legislative and regulatory focus on cyber security and data protection which could impact our operations and compliance models. LSEG supports the regulatory efforts on these issues, as they increase the standards for clients, vendors and other third parties with whom we interact. We continue to support regional and global efforts to harmonise these standards to avoid conflicting or duplicative requirements for market infrastructure providers and our market participants.

Regulation of Emerging Technology - Regulators are considering the application of existing or new frameworks around the development of innovative financial services technologies, which are important for maintaining the resilience in the market and allowing innovation with emerging technology. We are monitoring these efforts closely as they have potential to impact industry behaviour and potential application of emerging technology to our businesses.

Changes in the regulatory environment form a key input into our strategic planning, including the political impact on our growth strategies, both organic and inorganic. We monitor regulatory developments continually and engage directly with regulatory and governmental authorities at local, regional and national levels.

The Group has developed contingency plans to address the UK's exit from the EU and monitors developments closely. We continue to develop our relationships with the key government and regulatory stakeholders in all relevant jurisdictions. Potential impacts from regulatory change are assessed and, depending on the impact, opportunities are developed, and mitigating strategies and actions are planned and executed.

As the various regulatory initiatives progress, there will be greater certainty with regard to their likely final form. The Group continues to focus on remaining well positioned to respond to regulatory developments and further opportunities exist for the Group to deliver solutions to help the market address the changing regulatory environment including those linked with the departure of the UK from the EU.

The Group continues to maintain systems and controls to mitigate compliance risk. Compliance policies and procedures are regularly reviewed to ensure that Group entities and staff are compliant with applicable laws and regulations and uphold our corporate standards. All staff across the Group are subject to mandatory compliance training.

Compliance Risk - There is a risk that one or more of the Group's entities may fail to comply with the laws and regulatory requirements (incl. GPDR) to which it is, or becomes, subject. In this event, the entity in question may be subject to censures, fines and other regulatory or legal proceedings.

Changes in the regulatory environment form a key input into our strategic planning, including the political impact on our growth strategies, both organic and inorganic. We monitor regulatory developments continually and engage directly with regulatory and governmental authorities at national, EU and international levels. The Group has developed contingency plans to address the UK's exit from the EU and monitors developments closely.

We continue to develop our relationships with the key political stakeholders in the EU, North America and Asia. Potential impacts from regulatory change are assessed and, depending on the impact, opportunities are developed and mitigating strategies and actions are planned.

The Group has executed the following contingency plans for its business. Following the EC Implementing decision for UK CCPs on 19 December 2018, it was announced on 18 February 2019 that LCH Ltd has been recognised by ESMA as a third country CCP under Article 25 of EMIR. This recognition will apply from 30 March 2019 until 30 March 2020 in the absence of a withdrawal agreement with the UK in accordance with Article 50(2) of the Treaty on European Union. This recognition confirms LCH Ltd's ability to continue to offer all clearing services for all products and services to all members and clients after 29 March 2019 in a

no-deal Brexit scenario. LCH reserves its right to take any action it considers appropriate at any time, should there be a material change in circumstances. In addition, LCH SA and CC&G are

allowed under the Bank of England Temporary Recognition Regime (TRR) to clearing services and activities in the UK for up to 3 years in a 'no deal' scenario.

In June 2018, Turquoise Global Holdings Europe B.V. submitted an application for authorisation as an investment firm to operate a multilateral trading facility (MTF) in the Netherlands. Similarly, also in June 2018, UnaVista TRADEcho B.V. submitted an application for authorisation as a Data Reporting Services Provider (DRSP) in the

Netherlands, under which it will operate an approved reporting mechanism (ARM) and an approved publication arrangement (APA). Both applications are in advanced stages and we anticipate receiving regulatory authorisations imminently.

In addition, MTS has established 2 MTF markets in Italy to replace certain markets operated by EuroMTS in the UK.

Potential impacts from regulatory change are assessed and, depending on the impact, opportunities are developed, and mitigating strategies and actions are planned and executed.

LSEG's key objectives are maintaining London's position as a global financial hub and providing continuity of stable financial infrastructure services. As the various regulatory initiatives progress, there will be greater certainty with regard to their likely final form. The Group continues to focus on remaining well positioned to respond to regulatory developments and further opportunities exist for the Group to deliver solutions to help the market address the changing regulatory environment including those linked with the departure of the UK from the EU.

The Group continues to maintain systems and controls to mitigate compliance risk. Compliance policies and procedures are regularly reviewed to ensure that Group entities and staff are compliant with applicable laws and regulations and uphold our corporate standards. All staff across the Group are subject to mandatory compliance training.

Increasing

For more information on regulatory changes see Market trends and our response on pages 14-17.

Competition

The Group operates in a highly competitive and global industry. Continued consolidation has fuelled competition including between peers and service providers in different geographical areas.

The Group's Information Services business faces competition from a variety of sources, notably from index providers which offer indices and other benchmarking tools which compete with those offered by the Group as well as from other venues that offer market data relating to securities that are traded on the Group's equity

markets. As the Information Services offering diversifies and seeks to meet customer needs for new data sources, segments and asset classes, it is facing a broader range of competitors.

In Post Trade Services, we continue to see increased clearing activity of OTC derivative products across a number of asset classes, reflecting the attractiveness of the Group's current customer offering and open access philosophy, however competitors may be able to respond more quickly to changing market conditions or develop products that are preferred by customers. The Group's track record of working with customers and other financial market infrastructure providers, including the user focused model in LCH, will help us to continue to deliver innovative new products and services to seek to meet evolving customer needs.

Our Capital Markets operations face continuing risk from competitors' commercial and technological offerings. There is strong competition for primary listings and capital raises from other global exchanges and regional centres. Private equity, venture capital and new options such as crowd-funding and crypto-currencies are increasingly being considered as alternatives methods of capital formation for issuers. We maintain a dedicated international team who promote the benefits of listing on our markets to international issuers, the global advisory community and other stakeholders. The Group will need to continue strong and collaborative dialogue with customers and other relevant industry stakeholders to ensure it remains responsive to changing requirements and is able to react in a timely manner.

If competitors are quicker to access and deploy technology innovations such as artificial intelligence (AI), machine learning and analytics, they may achieve a valuable advantage which may impact the attractiveness of the Group's offering and its relative profitability. Our integrated and business-led approach to technology innovation help us to manage this risk and the Group is well advanced in investigating and applying numerous new technology innovations across its business portfolio.

In Technology Services, there is intense competition across all our current activities and in some of our growth areas, in addition to strong incumbent providers. New entrants are increasing from both within and outside of our traditional competition base and some consolidation is evident. Start-ups, which may be

sponsored by existing LSEG competitors or customers, are introducing new technology and commercial models to our customer base to which we need to respond with new products and services of our own. Continual client dialogue, facilitated through our partnership approach and investment in product management and innovation are critical to understanding and managing the impact of changing customer requirements in our technology and other business lines.

Competitive markets are, by their very nature, dynamic, and the effects of competitor activity can never be fully mitigated. Senior management and a broad range of customer-facing staff in all

business areas are actively engaged with clients to understand their evolving needs and motivations. We have established a Group Relationship Programme to co-ordinate this across Group businesses globally.

The Group undertakes constant market monitoring and pricing revision to mitigate risks and ensure we are competitive. Commercial initiatives are aligned with our clients and this is

complemented by an ongoing focus on technology operations and innovation.

Static

Transformation

The Group is exposed to transformation risks (risk of loss or failure resulting from business/integration transformation or integration). This derives from internal (organic) change and change required by the integration of acquisitions whereby the Group targets specific synergy benefits, necessitating change to operating models, business models, technology and people.

A failure to successfully align the businesses of the Group may lead to an increased cost base without a commensurate increase in revenue; a failure to capture future product and market opportunities; and risks in respect of capital requirements, regulatory relationships and management time.

The additional effort related to M&A and post-transaction alignment activities could have an adverse impact on the Group's day-to-day performance and/or key strategic initiatives which could damage the Group's reputation and financial performance.

The size and complexity of acquisitions in the past 6 years have increased the Group's change management and transformation risks. However, it allows the Group to compete on a global scale and it has diversified its revenue footprint by industry / product and customer base.

The Group's exposure to transformation risk is mitigated through the application of the Group's Enterprise Risk Management Framework (ERMF) to deploy consistent, appropriate Risk Management across the Group, both during and post-acquisition. The governance of the Group following a merger or acquisition is aligned and strengthened as appropriate.

Oversight during transformation is provided by a Steering Committee comprising Executive Committee members and chaired by the Chief Financial Officer with reports to the Board Risk Committee and the Board.

The Group has an effective track record of integrating acquisitions and delivering tangible synergies, supported by robust governance and programme management structures through the Group's Change Framework to mitigate change-related risks.

Increasing

Reputation/Brand

A number of the Group's businesses have iconic national brands that are well recognised at international as well as at national levels. The strong reputation of the Group's businesses and their valuable brand names are a key selling point. Any events or actions that damage the reputation or brands of the Group, such as those propagated via social media or caused by its misuse, could adversely affect the Group's business, financial condition and operating results.

Failure to protect the Group's intellectual property rights adequately could result in costs for the Group, negatively impact the Group's reputation and affect the ability of the Group to compete effectively. Further, defending or enforcing the Group's intellectual property rights could result in the expenditure of significant financial and managerial resources, which could adversely affect the Group's business, financial condition and operating results.

LSEG has policies and procedures in place which are designed to ensure the appropriate use of the Group's brands and to maintain the integrity of the Group's reputation.

LSEG actively monitors the use of its brands and other intellectual property, including monitoring for internet brand impersonation and social media sentiment, in order to prevent, identify and address any infringements.

The Group protects its intellectual property by relying upon a combination of trademark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other

contractual arrangements with its affiliates, clients, customers, suppliers, strategic partners and others.

Static

Risk Description

Mitigation

Risk level

Credit risk

Clearing

CCPs in the Group are exposed to credit risk as a result of their clearing activities. A default by a CCP clearing member that could not be managed within the resources of the defaulted clearing member, could adversely affect that CCP's revenues and its customers' reputation. CCPs authorised in the EU are required to make a proportion of their regulatory capital available to cover default losses after the defaulter's resources have been exhausted and prior to allocation of losses to non-defaulters and so, in extreme circumstances, a default could lead to a call on the Group CCPs' own capital 'skin-in-the-game'. CCPs may also be exposed to credit exposure to providers of infrastructure services such as Central Securities Depositaries (CSDs) and commercial banks providing investment and operational services.

In addition, certain CCPs within the Group have interoperability margin arrangements with other CCPs requiring collateral to be exchanged in proportion to the value of the underlying transactions.

The relevant clearing provider entities within the Group are therefore exposed to the risk of a default of other CCPs under such arrangements.

Non-Clearing

CCPs and other parts of LSEG Group are also exposed to credit risk as a result of placing money with investment counterparties on both a secured and unsecured basis. Losses may occur due to the default of either the investment counterparty or of the issuer of bonds bought outright or received as collateral. The Group's credit risk also relates to its customers and counterparties being unable to meet their obligations to the Group either in part or in full.

Clearing

As CCP members continue to work towards strengthening of their balance sheets, the risk to LSEG CCPs of a member default reduces, although continuing geopolitical uncertainty continues, and the banking sectors of some countries remain stressed. The financial risks associated with clearing operations are further mitigated by:

- Strict CCP membership rules including supervisory capital, financial strength and operational capability

- The maintenance of prudent levels of margin and default funds to cover exposures to participants. Members deposit margin, computed at least daily, to cover the expected costs which the clearing service would incur in closing out open positions in a volatile market in the event of the member's default. A default fund sized to cover the default of the 2 members with the largest exposures in each service using a suite of extreme but plausible stress tests mutualises losses in excess of margin amongst the clearing members

- Regular 'Fire Drills' are carried out to test the operational soundness of the CCPs' default management processes

- Infrastructure providers are regularly assessed in line with policy

Non-Clearing

Policies are in place to ensure that investment counterparties are of good credit quality, and at least 95% of CCP commercial bank deposits are secured. CCP and non-CCP counterparty concentration risk is consolidated and monitored daily at the Group level and reported to the Executive Committee and to the Board Risk Committee, including limits and status rating.

Group companies make a judgement on the credit quality of their customers based upon the customer's financial position, the recurring nature of billing and collection arrangements and, historically, a low incidence of default.

Static

For more information on this risk see the Post Trade Services section of the Segmental Review on pages 26 - 28, and Note 3 to the accounts, Financial Risk Management on pages 133 - 137.

Market risk

Clearing

The Group's CCPs assume the counterparty risk for all transactions that are cleared through their markets. In the event of default of their clearing members, therefore, credit risk will manifest itself as market risk. As this market risk is only present in the event of default this is referred to as 'latent market risk'. The latent market risk includes interest rate risk, foreign exchange risk, equity risk and commodity price risk as well as country risk, issuer risk and concentration risk. This risk is greater if market conditions are unfavourable at the time of the default.

Non-Clearing

The Group is exposed to foreign exchange risk as a result of its broadening geographical footprint. There are, however, also benefits of global diversification including reduced exposure to local events such as the UK Brexit vote and the

geopolitical tensions.

The Group is exposed to interest rate risk through its borrowing activities and treasury investments. Further changes in interest rates in 2019 may increase the Group's exposure to these risks.

Clearing

The margins and default funds referred to previously are sized to protect against latent market risk. The adequacy of these resources is evaluated daily by subjecting member and customer positions to 'extreme but plausible' stress scenarios encapsulating not only historical crises, but theoretical forward-looking scenarios and decorrelation events. All our CCPs are compliant with the appropriate regulatory requirements regarding margin calculations, capital and default rules. Latent market risk is monitored and managed on a day-to-day basis by

the risk teams within the clearing services. Committees overseeing market risks meet on a regular basis.

Non-Clearing

Foreign exchange (FX) risk is monitored closely and translation risk is managed by matching the currency of the Group's debt to its earnings to protect key ratios and partially hedge currency net assets. FX derivatives including cross-currency swaps are used -under a control framework governed by LSEG Board approved policy.

The split between floating and fixed debt is managed to support the Group's target of maintaining an interest coverage ratio that underpins a good investment grade credit rating.

Authorised derivatives can be used to transform fixed rate bond debt, to supplement a mix of short dated commercial paper and floating rate loan borrowings, to achieve the Group's policy objective.

Static

For more information on this risk, see Note 3 to the accounts, Financial Risk Management on pages 133 - 137.

Liquidity risk

Clearing

There are 2 distinct types of risk to which the Group's CCPs are exposed to that are commonly referred to as liquidity risk - market liquidity risk and funding liquidity risk. The former is the risk that it may be difficult or expensive to liquidate a large or concentrated position and is addressed under market risk. The latter is the risk that the CCP may not have enough cash to pay variation margin to non-defaulters or to physically settle securities delivered by a non-defaulter that cannot be on-sold to a defaulter and this is the subject of this section.

The Group's CCPs collect clearing members' margin and/or default funds contributions in cash and/or in highly liquid securities. To maintain sufficient ongoing liquidity and immediate access to funds, the Group's CCPs deposit the cash received in highly liquid and secure investments, such as sovereign bonds and reverse repos, as mandated under EMIR; securities deposited by clearing members are therefore held in dedicated accounts with CSDs and/or International Central Securities Depositaries (ICSDs). The Group's CCPs also hold a small proportion of their investments in unsecured bank and money market deposits subject to the limitations imposed by EMIR. The successful operation of these investment activities is contingent on general market conditions and there is no guarantee that such investments may be exempt from market losses.

Non-Clearing

Liquidity risk in a non-clearing context is the risk that the firm may be unable to make payments as they fall due.

Clearing

The Group's CCPs have put in place regulatory compliant liquidity plans for day-to-day liquidity management, including contingencies for stressed conditions. The Group's CCPs have multiple layers of defence against liquidity shortfalls including intraday margin calls, minimum cash balances, access to contingent liquidity arrangements, and, for certain CCPs, access to central bank liquidity.

Under the ERMF, CCP investments must be made in compliance with the Group CCP Financial Risk Policy (as well as the policies of the CCPs themselves). These policies stipulate a number of Risk Management standards including investment limits (secured and unsecured) and liquidity coverage ratios. Committees overseeing CCP investment risk meet regularly.

Each CCP monitors its liquidity needs daily under stressed and unstressed assumptions and reports to the Group Financial Risk Committee each month.

Non-Clearing

Requirements for liquidity including headroom requirements are set out in the Group's Board approved Treasury Policy. The Group maintains appropriately sized liquidity facilities and monitors its requirements on an ongoing basis. Stressed facility headroom is assessed using plausible downside business projections.

Group Treasury risk is monitored daily and is managed within the constraints of a Board approved policy by the Group Treasury team and is overseen by the Treasury Committee (a sub-Committee of the Financial Risk Committee, both chaired by the CFO). An update on Group Treasury risks and actions is provided monthly to the Financial Risk Committee and to each meeting of the Board Risk Committee.

Static

For more information on this risk, see Note 3 to the accounts, Financial Risk Management on pages 133 - 137.

Capital risk

Principal risks to managing the Group's capital are:

- In respect of regulated entities, capital adequacy compliance risk (the risk that regulated entities do not maintain and report sufficient qualifying capital to meet regulatory requirements) and capital reporting compliance risk (the risk that regulated entities fail to comply with capital reporting and regulatory obligations). If a regulated entity in the Group fails to ensure that sufficient capital resources are maintained to meet regulatory requirements, this could lead to loss of regulatory approvals and/or financial sanctions

- In respect of regulated and unregulated entities, commercial capital adequacy and quality risk (the risk that Group and solo entities do not maintain both sufficient quantity and quality of capital to meet commercial requirements) and investment return risk (the risk that capital is held in subsidiaries or invested in projects that generate a return that is below the Group's cost of capital)

- Availability of debt or equity capital (whether specific to the Group or driven by general financial market conditions)

The Group's Capital Management Policy provides a framework to ensure the Group maintains suitable capital levels (both at Group and solo entity levels), and effectively manages the risks thereof. The Group's Treasury Policy recognises the need to observe regulatory requirements in the management of the Group's resources.

The Risk Appetite approved by the Board includes components related to the Group's leverage ratios and capital risks; Key Risk Indicators are monitored regularly. The Group maintains an

ongoing review of the capital positions of its regulated entities to ensure that they operate within capital limits which are overseen by the Financial Risk Committee, the Executive Committee and the Board. The Group can manage its capital structure by varying returns to shareholders, issuing new shares or increasing or

reducing borrowings. The Board reviews dividend policy and funding capacity on a regular basis and the Group maintains comfortable levels of debt facility headroom.

The Group regularly assesses debt and equity markets to maintain access to new capital at reasonable cost. The Group is mindful of potential impacts on its key metrics when considering changes to its capital structure.

Static

For more information on this risk, see Note 3 to the accounts, Financial Risk Management on pages 133 - 137.

Risk Description

Mitigation

Risk level

Technology

Robust, secure and stable technology performing to high levels of availability, continues to be critical to the Group's businesses. Technology failures may impact our clients and the orderly running of our markets, potentially leading to a loss of trading or clearing volumes or impacting our information services activities.

The Group continues to consolidate its technology delivery and operation capabilities through its LSEG Technology and LSEG Business Services companies respectively.

Continued efforts to consolidate to LSEG Technology solutions and a homogeneous technology stack may increase systemic technology risk as components and development are shared or similar in build. Furthermore, increased demand on LSEG Technology as a mission-critical supplier may result in over-stretch resources to meet both the requirements of the Group and those of third parties.

The Group also has dependencies on a number of third parties for the provision of hardware, software and networks for elements of its trading, clearing, settlement, data and other systems.

The performance and availability of the Group's systems are constantly reviewed and monitored to prevent problems arising and where possible, ensure a prompt response to any potential service-impacting incident.

The Group continues actively to identify, manage and mitigate risks associated with the consolidation of technology development and operations. Regular rigorous business impact and operational risk scenario analysis are performed in conjunction with the Group Risk Group Business Continuity and Crisis Management functions to identify, assess and remedy potential system and governance vulnerabilities. In addition, all technology solutions are comprehensively tested by both LSEG Technology and third-party quality assurance providers as appropriate; functional, non-functional, user-acceptance and other testing is performed across

a number of technical environments to ensure products are ready for deployment.

The Group's technology teams mitigate the risk of resource over-stretch by ensuring prioritisation of key development and operations activities, and resource utilisation and allocation are kept under constant review. The LSEG Technology systems are designed to be software and hardware fault tolerant and alternative systems are available in the unlikely event of multiple failures from which the system is unrecoverable.

The Group actively manages relationships with key strategic technology suppliers to avoid any breakdown in service provision which could adversely affect the Group's businesses. Where

possible the Group has identified alternative suppliers that could be engaged in the event of a third party failing to deliver on its contractual commitments. The Group actively monitors new

technological developments and opportunities such as blockchain and Artificial Intelligence (AI).

Static

For more information, see the Technology Services section of the Segmental Review on pages 35.

Model Risk

The Group defines model risk as the risk that a model may not capture the essence of the events being modelled, or inaccuracies in the underlying calculation potentially resulting in adverse consequences resulting from decisions based on incorrect or missed model outputs.

The Group defines model risk as the risk that a model may not capture the essence of the events being modelled, or inaccuracies in the underlying calculation potentially resulting in adverse consequences resulting from decisions based on incorrect or missed model outputs.

Static

Security threats - Physical

The Group is reliant upon secure premises to protect its employees and physical assets as well as appropriate safeguards to ensure uninterrupted operation of its IT systems and infrastructure.

Terrorist attacks and similar activities directed against our offices, operations, computer systems or networks could disrupt our markets, harm staff, tenants and visitors, and severely disrupt our business operations. Civil or political unrest could impact companies within the Group. Long-term unavailability of key premises could lead to the loss of client confidence and reputational damages.

Security threats are treated very seriously. The Group has robust physical security arrangements.

The Group is supported by relevant governmental organisations in our key areas of operation. Security teams respond to intelligence received and liaise closely with police and global government agencies. Across major hubs covering the UK, Europe, the Americas and Asia, the Group maintains close monitoring of geopolitical threats through a third-party security monitoring service. Where events are detected, response support services are mobilised to support as required. The Group has well established and regularly tested business continuity and crisis management procedures. The Group assesses its dependencies on critical

suppliers and ensures robust contingency measures are in place.

Static

Security threats - Cyber

The threat of cybercrime has the potential to have an adverse impact on our business. Public and private organisations continue to be targeted by increasingly sophisticated cyber-attacks.

Threats such as ransomware, theft of customer data and distributed denial of service attacks were increasingly significant to the financial industry as a whole in 2018. Such threats could result in the loss of data integrity or disruption to our operations and client-facing services. Additionally, new emerging technologies for the Group such as cloud computing could impact our cyber security risk profile.

The Group's technology and operational support providers, internal and third-party, could suffer a security breach resulting in the loss or compromise of sensitive information (both internal and external) or loss of services. Such a breach could materialise as a result of weaknesses in system controls or processes, or through the inadvertent or malicious actions of employees, contractors or vendors.

A major information security breach that results in data and intellectual property loss, system unavailability or sensitive data leakage, could have a significant negative impact on our reputation, financial results and the confidence of our clients and could lead to fines and regulatory censure.

The Group continues to invest in and enhance its information security control environment, cyber defences and operational processes, including its recovery capability, as it delivers its Board

approved Cyber Security Strategy.

Extensive IT measures aligned to the National Institute of Standards and Technology (NIST) control framework are in place to prevent, detect and respond to cyber security threats such as third-party risks, sophisticated malware, system vulnerabilities and access control, as well as enhancing our security event detection and incident response processes. Security training and awareness of our people remains a key component of the control framework.

Regular testing of security controls and incident response processes is undertaken, both internally and externally to provide assurance over the effectiveness of cyber security controls and recovery processes.

Information Security teams monitor intelligence and liaise closely with global Government agencies as well as industry forums and regulators to help improve our ability to respond to the evolving threats faced by us and our industry.

Increasing

Change management

The considerable change agenda exposes the Group to the risk that change is either misaligned with the Group's strategic objectives or not managed effectively within time, cost and quality criteria. In turn this could lead to an adverse impact on the operation of core services, and revenue growth, as well as damaging the Group's

reputation. The volume of simultaneous change could also lead to a loss of client goodwill if execution is not managed appropriately and supported with adequate operating models to operationalise new services. Synergies and cost benefits may not be delivered to anticipated levels.

The volume of change is driven by both internal and external factors. Internal factors include the diversification strategy of the Group and its drive for technology innovation, consolidation and operational resilience. External factors include the changing regulatory landscape and requirements which necessitate changes to

our systems and processes.

The risks associated with change are mitigated by effective implementation of the Group's Change framework. This includes Board oversight across the Group's change portfolio and project pipeline, to ensure these align to the Group and Divisional strategies and support our financial plans. Appropriate governance and executive oversight is exercised over individual programmes and projects based on the scale, complexity and impact of the change to confirm compliance with the approved project management policy and to manage budget, resource, escalations, risks, issues and dependencies.

For software specific development, software design methodologies, testing regimes and test environments are continuously being enhanced to minimise implementation risk.

Static

For more information, see the Chairman's statement on pages 4 - 5, and the Chief Executive's statement on pages 6 - 9.

Settlement and custodial risks

The Group's CCPs are exposed to operational risks associated with clearing transactions and the management of collateral, particularly where there are manual processes and controls. While the Group's CCPs have in place procedures and controls to prevent failures of these processes, and to mitigate the impact of any such failures, any operational error could have a material adverse effect on the Group's reputation, business, financial condition and operating results.

The Group provides routing, netting and settlement and custody services through its CSD to ensure that securities are settled in a timely and secure manner. There are operational risks associated with such services, particularly where processes are not fully automated.

In addition to the technology, model and change management risks, the Group's CCPs are also exposed to Operational risk. Operational risk is minimised via highly automated processes reducing administrative activities while formalising procedures for all services.

The operations of the settlement service are outsourced to the European Central Bank (TARGET2-Securities).

The CSD mitigates IT risks by providing for redundancy of systems, daily backup of data, fully updated remote recovery sites and SLAs with outsourcers.

Monte Titoli Business Continuity Plan covers all the critical operational processes and related activities.

Static

Employees

The calibre and performance of our leaders and colleagues is critical to the success of the Group.

The Group's ability to attract and retain key personnel is dependent on several factors. This includes (but not exclusively) organisational culture and reputation, prevailing market conditions, compensation packages offered by

competing companies, and any regulatory impact thereon. These factors also encompass the Group's ability to continue to have appropriate variable remuneration and retention arrangements in place, which help drive strong

business performance and alignment to long-term shareholder value and returns, impact the size of the local labour force with relevant experience, and the number of businesses competing for such talent. Whilst the Group focuses very carefully on the attraction and retention of talent, if unsuccessful it may adversely affect the Group's ability to conduct its business through an inability to execute

business operations and strategies effectively.

Whilst our preparations are comprehensive in relation to Brexit, a common risk across the Group is the uncertainty surrounding the status of the EU citizens in the UK and UK citizens in the EU.

Employee-related risks are assessed and monitored as sustainability risks within our Enterprise Risk Management Framework. Please see also Our Wider Responsibility for details regarding employee matters.

We focus on a number of strategic initiatives to ensure we attract and retain the right calibre of talent for our business and continue to facilitate a culture of high performance.

We have a rigorous in-house recruitment and selection process, to ensure that we are bringing the best possible talent into the organisation, in terms of their skills, technical capabilities, cultural

fit and potential.

We aim to remove barriers to our colleagues' overall sense of engagement, proactively measuring how satisfied they are with their working experience at LSEG, and the extent to which they would recommend it as a place to work, via our bi-annual engagement 'Have Your Say' survey. We also measure colleague sentiment when they join the organisation via our joiners' survey and via an exit survey for those who choose to move on. We use this feedback to inform our plans for improvement, and to identify and resolve any barriers to performance and engagement in the workplace.

We recognise that the overall wellbeing of our colleagues is vital for our continued performance and have introduced a proactive approach to wellbeing in the UK, which we are in the process of rolling out globally. This looks to improve wellbeing across 5 dimensions: physical, mental, financial, social purpose, and work-life balance. In 2018 we also launched the new Speak Up campaign, designed to provide our colleagues with the confidence to speak up and raise concerns when they witness or suspect inappropriate behaviour, misconduct or wrongdoing that conflicts with our values.

Career development remains a key enabler for success, and we have a carefully managed learning and development budget which enables us to take a coordinated approach and focus investment in the development of colleagues. We provide colleagues with a range of courses, materials and tools to support them in owning their development. In 2018 we launched our global career framework, Futures, which outlines all roles in our organisation, helping our colleagues understand how to navigate the opportunities that exist across the Group and the development steps they need to take to progress. We also offer additional investment to identified key talent and executives, for instance, by providing coaches for key senior successors.

In terms of talent management, we always look to promote internally where possible. We undertake a comprehensive annual review of critical roles, and ensure we have succession plans in place to minimise the impact of losing critical personnel. We monitor the attrition in each division and country, in addition to any critical colleague turnover, so that appropriate mitigation can be taken where needed.

Performance management plays a key role in mitigating retention and performance risk at LSEG, and the Group operates a robust performance management and appraisal process for all colleagues, which links to how we utilise incentives and compensation to drive organisational performance. This assesses performance against financial objectives, strategic deliverables, and the extent to which colleagues' role model the Group's values and behaviours.

In terms of other reward approaches, critical high performers are offered Long Term Incentive Plans, aligned with the fulfilment of the Group's strategic goals and increases in shareholder value. We also regularly benchmark our reward, benefits and incentive systems to ensure they are competitive.

LSEG continuously engages with the EU and the UK regulators to minimise the impact of Brexit on our colleagues.

Static

For more information, see Our wider responsibility on pages 36 - 40 and Remuneration Report on pages 82 - 100.

Risk description

Risk management approach

The Group is profitable and strongly cash generative

and its capital base comprises equity and debt capital.

However, the Group recognises the risk that its entities

may not maintain sufficient capital to meet their

obligations or they may make investments that fail

to generate a positive or value enhancing return.

The Group comprises regulated and unregulated entities.

It considers that:

--increases in the capital requirements of its regulated

companies, or

--negative yields on its investments of cash, or

--a scarcity of debt or equity (driven by its own

performance or financial market conditions)

either separately or in combination are the principal

risks to managing its capital.

The Group focuses upon its overall cost of capital as it seeks, within the scope of its risk appetite, to provide

superior returns to its shareholders, fulfil its obligations to the relevant regulatory authorities and other stakeholders and ensure that it is not overly dependent upon short and medium term debt that might not be

available at renewal. Maintaining the flexibility to invest for growth is a key capital management consideration.

The Group can manage its capital structure and react to changes in economic conditions by varying returns to shareholders, issuing new shares or increasing or reducing borrowings. The Board reviews dividend policy

and funding capacity on a regular basis and the Group maintains comfortable levels of debt facility headroom.

A summary of the Group's capital structure is presented below:

Whilst the Company is unregulated, the regulated entities within the Group monitor compliance with the capital requirements set by their respective competent authorities and the terms of reference of the Financial Risk Committee includes oversight of the Group's Capital Management Policy. The Capital Management Policy seeks to ensure that compliance with local regulations is maintained and that there is a robust evaluation, undertaken by the Group's Investment Committee, of the impact of new investments, across the Group, on its capital position. Regulated entities within the Group have to date predominantly issued equity and held cash to satisfy their local regulatory capital requirements.

We believe that capital held by Group companies is sufficient to comfortably support current regulatory frameworks. The level of amounts set aside by the Group for these purposes remains subject to on-going review with regulators, particularly in Europe. A summary of the Group's regulatory and operational capital is shown below:

The total capital amounts have increased year on year reflecting strong cash generation at regulated entities

and to meet the requirements of MiFID II regulation and IFRS 15 accounting changes.

To maintain the financial strength to access new capital at reasonable cost and sustain an investment grade credit rating, the Group monitors its net leverage ratio which is operating net debt (i.e. net debt after excluding cash and cash equivalents set aside for regulatory and operational purposes) to proforma adjusted EBITDA (Group consolidated earnings before net finance charges, taxation, impairment, depreciation and amortisation, foreign exchange gains or losses and non-underlying items, prorated for acquisitions or disposals undertaken in the period) against a target range of 1-2 times. The Group is also mindful of potential impacts on the key metrics employed by the credit rating agencies in considering increases to its borrowings.

As at 31 December 2018, net leverage was 1.8 times (2017: 1.7 times), but remains well within the Group's target range. The Group is comfortably in compliance with its bank facility ratio covenants (net leverage and interest cover) and these measures do not inhibit the Group's operations or its financing plans.

Risk description

Risk management approach

The Group's credit risk relates to its customers and counterparties being unable to meet their obligations

to the Group either in part or in full, including:

--customer receivables

--repayment of invested cash and cash equivalents

--settlement of derivative financial instruments.

In their roles as CCP clearers to financial market participants, the Group's CCPs guarantee final settlement of transactions acting as buyer towards each seller and as seller towards each buyer. They manage substantial credit risks as part of their operations including unmatched risk positions that might arise from the default of a party to a cleared transaction. For more information see 'Principal Risks and Uncertainties', pages 48 - 57.

Notwithstanding regulations that require CCPs to invest

predominantly in secured instruments or structures

(such as government bonds and reverse repos), CC&G

and the LCH Group CCPs continue to be able to maintain

up to 5% of their total deposits at commercial banks on

an unsecured basis. Through this potential for its CCPs to

invest on an unsecured basis (as well as by certain other

regulated and unregulated operations observing agreed

investment policy limits), the Group will continue to face

the risk of direct loss from a deterioration or failure of one or more of its unsecured investment counterparties.

Concentration risk may arise through Group entities having large individual or connected exposures to groups

of counterparties whose likelihood of default is driven

by common underlying factors. This is a particular focus

of the investment approach at the Group's CCPs.

Group

Credit risk is controlled through policies developed at a Group level. Limits and thresholds for credit and concentration risk are kept under review.

Group companies make a judgement on the credit quality of their customers based upon the customer's financial position, the recurring nature of billing and collection arrangements and, historically, a low incidence of default. Furthermore, the Group is exposed to a large number of customers and so concentration risk on its receivables is deemed by management as low.

Non-CCP entities

Credit risk associated with cash and cash equivalents is managed by limiting exposure to counterparties with credit rating levels below policy minimum thresholds, potentially overlaid by a default probability assessment. Except where specific approval is arranged to increase this limit for certain counterparties, investment limits of between £100 million and £25 million apply for periods between 12 months and 1 week depending on counterparty credit rating and default probability risk. Derivative transactions and other treasury receivable structures are undertaken or agreed with well capitalised counterparties and are authorised by policy to limit the credit risk underlying these transactions.

CCPs

To address market participant and latent market risk, the Group's CCPs have established financial safeguards

against single or multiple defaults. Clearing membership selection is based upon supervisory capital, technical

and organisational criteria. Each member must pay margins, computed and collected at least daily, to cover the exposures and theoretical costs which the CCP might incur in order to close out open positions in the event of a member's default. Margins are calculated using established and internationally acknowledged risk models and are debited from participants' accounts through central bank accounts and via commercial bank payment systems. Minimum levels of cash collateral are required and non-cash collateral is revalued daily.

Clearing members also contribute to default funds managed by the CCPs to guarantee the integrity of the markets in the event of multiple defaults in extreme market circumstances. Amounts are determined on the basis of the results of periodic stress testing examined by the risk committees of the respective CCPs. Furthermore, each of the Group's CCPs reinforces its capital position to meet the most stringent relevant regulatory requirements applicable to it, including holding a minimum amount of dedicated own resources to further underpin the protective credit risk framework in the event of a significant market stress event or participant failure. An analysis of the aggregate clearing member contributions to default funds across the CCPs is shown below:

Investment counterparty risk for CCP margin and default funds is managed by investing the cash element in instruments or structures deemed "secure" by the relevant regulatory bodies including through direct investments in highly rated, "regulatory qualifying" sovereign bonds and supra-national debt, investments in tri-party and bi-lateral reverse repos (receiving high quality government securities as collateral) and, in certain jurisdictions, deposits with the central bank. The small proportion of cash that is invested unsecured is placed for short durations with highly rated counterparties where strict limits are applied with respect to credit quality, concentration and tenor.

Associated liquidity risks are considered in the investment mix and discussed further below.

To address concentration risk, the Group maintains a diversified portfolio of high quality, liquid investments and uses a broad range of custodians, payment and settlement banks and agents. The largest concentration

of treasury exposures as at 31 December 2018 was 17% of the total investment portfolio to the French

Government (2017: 24% to the French Government).

Risk description

Risk management approach

Distress can result from the risk that certain governments may be unable or find it difficult to service their debts. This could have adverse effects, particularly

on the Group's CCPs, potentially impacting cleared products, margin collateral, investments, the clearing membership and the financial industry as a whole.

Specific risk frameworks manage country risk for both fixed income clearing and margin collateral and all clearing members are monitored regularly against a suite of sovereign stress scenarios. Investment limits and counterparty and clearing membership monitoring are sensitive to changes in ratings and other financial market indicators, to ensure the Group's CCPs are able to measure, monitor and mitigate exposures to sovereign risk and respond quickly to anticipated changes. Risk Committees maintain an on-going watch over these risks and the associated policy frameworks to protect the Group against potentially severe volatility in the sovereign debt markets.

The Group's sovereign exposures of £1billion or more at the end of either of the financial reporting periods shown below are:

Risk description

Risk management approach

The Group's operations are exposed to liquidity risk to

the extent that they are unable to meet their daily

payment obligations.

In addition, the Group's CCPs and certain other subsidiary companies are required to maintain a level of liquidity (consistent with regulatory requirements) to ensure the smooth operation of their respective markets and to maintain operations in the event of a single or multiple market stress event or member failure. This includes the potential requirement to liquidate the position of a clearing member under a default scenario including covering the associated losses and the settlement obligations of the defaulting member.

The Group is exposed to the risk that a payment or settlement bank could fail or that its systems encounter operational issues, creating liquidity pressures and the risk of possible defaults on payment or receivable obligations.

The Group uses third party custodians to hold securities

and is therefore exposed to the custodian's insolvency,

its negligence, a misuse of assets or poor administration.

Group

The combined Group businesses are profitable, generate strong free cash flow and operations are not significantly

impacted by seasonal variations. The Group maintains sufficient liquid resources to meet its financial obligations as they fall due and to invest in capital expenditure, make dividend payments, meet its pension commitments, support acquisitions or repay borrowings. With the exception of regulatory constraints impacting certain entities, funds can generally be lent across the Group or remitted through dividend payments. This is an important component of the Group Treasury cash management policy and approach.

Management monitors forecasts of the Group's cash flow and overlays sensitivities to these forecasts to reflect assumptions about more difficult market conditions or stress events.

Non- CCP entities

Treasury policy requires that the Group maintains adequate credit facilities provided by a diversified lending group to cover its expected funding requirements and ensure a minimum level of headroom for at least the next 24 months. The financial strength of lenders to the Group is monitored regularly.

During the year ended 31 December 2018, the Group extended the maturity of its 2017 arranged, 5-year,

£600 million committed revolving credit facility by another year to 2023 and issued a €500 million bond due

in 2027, further extending its debt maturity profile. It also issued Euro commercial paper under its newly

established £1 billion programme, further diversifying its sources of liquidity, with €300 million in issuance at

the end of the financial year. At 31 December 2018, £1,159 million (2017: £675 million) of the Group's bank

facilities were unutilised, providing swingline backstop coverage for the €300 million Euro commercial paper

in issuance and financing flexibility more broadly for the Group.

CCPs

The Group's CCPs maintain sufficient cash and cash equivalents and, in certain jurisdictions, have access to central bank refinancing or commercial bank liquidity support credit lines to meet the cash requirements of the clearing and settlement cycle. Revised regulations require CCPs to ensure that appropriate levels of back-up liquidity are in place to underpin the dynamics of a largely secured cash investment requirement, ensuring that the maximum potential outflow under extreme market conditions is covered (see Credit and concentration risk section above). The Group's CCPs monitor their liquidity needs daily under normal and

stressed market conditions.

Where possible, the Group employs guaranteed delivery versus payment settlement techniques and manages CCP margin and default fund flows through central bank or long-established, bespoke commercial bank settlement mechanisms. Monies due from clearing members remain the clearing members' liability if the payment agent is unable to effect the appropriate transfer. In addition, certain Group companies, including the CCPs, maintain operational facilities with commercial banks to manage intraday and overnight liquidity.

Custodians are subject to minimum eligibility requirements, ongoing credit assessment, robust contractual arrangements and are required to have appropriate back-up contingency arrangements in place.

The table below analyses the Group's financial liabilities into relevant maturity groupings based on the

remaining period from the balance sheet date to the contractual maturity date. The amounts disclosed in the

table reflect the contractual undiscounted cash flows. The borrowings line includes future interest on debt

that is not accrued for in relation to bonds that are not yet due.

As at 31 December 2018

Less than 1 year

Between 1 & 2 years

Between 2 & 5 years

Over 5 years

Total

£m

£m

£m

£m

£m

Borrowings

601

34

373

1,435

2,443

Trade & other payables

509

-

-

-

509

Clearing member business liabilities

835,508

-

-

-

835,508

Derivative financial instruments

30

-

-

17

47

Other non-current liabilities

-

7

3

1

11

836,848

41

376

1,453

838,518

As at 31 December 2017

Less than 1 year

Between 1 & 2 years

Between 2 & 5 years

Over 5 years

Total

£m

£m

£m

£m

£m

Borrowings

556

299

364

951

2,170

Trade & other payables

471

-

-

-

471

Clearing member business liabilities

734,981

-

-

-

734,981

Derivative financial instruments

-

29

-

-

29

Other non-current liabilities

-

34

12

3

49

736,008

362

376

954

737,700

Risk description

Risk management approach

The Group operates primarily in the UK, Europe and North America, but also has growing and strategically important businesses in Asia, and other alliances and investments across the globe. Its principal currencies of operation are Sterling, euro and US Dollars.

Group companies generally invoice revenues, incur expenses and purchase assets in their respective local currencies. As a result, foreign exchange risk arises mainly from the translation of the Group's foreign currency earnings, assets and liabilities into its reporting currency, Sterling, and from occasional, high-value intragroup transactions. Exceptions exist including at

MillenniumIT (a Sri Lankan Rupee reporting entity) which invoices a material proportion of its revenues in US Dollars, and at certain operations of the LCH Group (a Euro reporting subsidiary), which generate material revenues in Sterling and US Dollars and incur material costs in Sterling.

Intragroup dividends and the currency debt interest obligations of the Company may create short term transactional FX exposures but play their part in controlling the level of translational FX exposures the Group faces.

The Group may be exposed from time to time to FX risk associated with strategic investments in, or divestments from operations denominated in currencies other than Sterling.

The Group seeks to match the currency of its debt liabilities to the currency of its earnings and cash flows which, to an extent, protects its key ratios (net leverage and interest coverage) and balances the currency of its assets with its liabilities. In order to mitigate the impact of unfavourable currency exchange rate movements on earnings and net assets, non-Sterling cash earnings are centralised and applied to matching currency debt and interest payments, and, where relevant, interest payments on Sterling debt redenominated through the use of cross-currency swaps.

A material proportion of the Group's debt is held in or swapped into Euros and US Dollars as noted below.

The cross-currency interest rate swaps are directly linked to Sterling fixed debt. The Euro and USD denominated

debt, including the cross-currency swaps, provides a hedge against the Group's net investment in Euro and USD denominated entities.

As at 31 December 2018, the Group's designated hedges in its net investments were fully effective.

Whilst transactional foreign exchange exposure is limited, the Group hedges material transactions in accordance with Group Treasury policy (which requires that cash flows of more than £5 million or equivalent per annum should be hedged) with appropriate derivative instruments or by settling currency payables or receivables within a short timeframe. Where appropriate, hedge accounting for derivatives is considered in order to mitigate material levels of income statement volatility.

In addition to projecting and analysing its earnings and debt profile by currency, the Group reviews sensitivities to movements in exchange rates which are appropriate to market conditions. The Group has considered movements in the Euro and the US Dollar over the year ended 31 December 2018 and year ended 31 December 2017, and based on actual market observations between its principal currency pairs, has concluded that a 10% movement in rates is a reasonable level to illustrate the risk to the Group. The impact on post tax profit and equity for the years ended 31 December is set out in the table below:

31 December 2018 31 December 2017

Post tax profit Equity Post tax profit Equity

£m £m £m £m

Euro Sterling weaken (2) (16) 4 21

Sterling strengthen 2 15 (3) (19)

US Dollar Sterling weaken 7 (45) 6 (39)

Sterling strengthen (7) 41 (5) 35

This reflects foreign exchange gains or losses on translation of Euro and US Dollar denominated trade receivables,

trade payables, financial assets at fair value through profit or loss including Euro and US Dollar denominated cash

and borrowings.

The impact on the Group's operating profit for the year before amortisation of purchased intangible assets and

non-recurring items, of a 10 Euro cent and 10 US Dollar cent movement in the Sterling-Euro and Sterling-US Dollar

rates respectively, can be seen below:

31 December 2018 31 December 2017

£m £m

Euro Sterling weaken 27 25

Sterling strengthen (23) (21)

US Dollar Sterling weaken 31 26

Sterling strengthen (27) (22)

Risk Description

Risk management approach

The Group's interest rate risk arises through the impact of changes in market rates on cash flows associated with cash and cash equivalents, investments in financial assets and borrowings held at floating rates.

The Group's CCPs face interest rate exposure through the impact of changes in the reference rates used to calculate member liabilities versus the yields achieved through their predominantly secured investment activities.

Group interest rate management policy focuses on protecting the Group's credit rating and maintaining compliance with bank covenant requirements. To support this objective, a minimum coverage of interest expense by EBITDA of 7 times, and a maximum floating rate component of 50% of total debt are targeted.

This approach reflects:

i. a focus on the Group's cost of gross debt rather than its net debt given the material cash and cash equivalents set aside for regulatory purposes;

ii. the short duration allowed for investments of cash and cash equivalents held for regulatory purposes which, by their nature, generate low investment yields;

iii. a view currently maintained that already low market yields are unlikely to move materially lower; and

iv. the broad natural hedge of floating rate borrowings provided by the significant balances of cash and cash equivalents held effectively at floating rates of interest.

As at 31 December 2018, consolidated net interest expense cover by EBITDA was measured over the 12 month period at 16.1 times (2017: 15.5 times) and the floating rate component of total debt was 14% (2017: 27%).

In the Group's CCPs, interest bearing assets are generally invested in secured instruments or structures and for a longer term than interest bearing liabilities, whose interest rate is reset daily. This makes net investment revenue vulnerable to volatility in overnight rates and shifts in spreads between overnight and term rates.

Interest rate exposures (and the risk to CCP capital) are managed within defined risk appetite parameters

against which sensitivities are monitored daily.

In its review of the sensitivities to potential movements in interest rates, the Group has considered interest rate volatility over the last year and prospects for rates over the next 12 months and has concluded that a 1 percentage point upward movement (with a limited prospect of material downward movement) reflects a reasonable level of risk to current rates. At 31 December 2018, at the Group level, if interest rates on Sterling-denominated, Euro-denominated and US Dollar-denominated cash and borrowings had been 1 percentage point higher with all other variables held constant, post-tax profit for the year would have been £8 million higher (2017: £5 million higher) mainly as a result of higher interest income on floating rate cash and cash equivalents partially offset by higher interest expense on floating rate borrowings.

At 31 December 2018, at the CCP level (in aggregate), if interest rates on the common interest bearing member liability benchmarks of Eonia, Fed Funds and Sonia, for Euro, US Dollar and Sterling liabilities respectively, had been 1 percentage point higher, with all other variables held constant, the daily impact on post-tax profit for the Group would have been £2 million lower (2017: £2 million lower). This deficit is expected to be recovered as investment yields increase as the portfolio matures and is reinvested.

Period ended

31 December 2018

Year ended

31 December 2017

£m

£m

Salaries and other short term benefits

11

13

Pensions

1

1

Share based payments

14

21

26

35

Amount in millions due

(owed to)/from as at

Interest (charge)/credit

Loan counterparty

31 December 2018

31 December 2017

Term

Interest rate as at 31 Dec 2018

2018

2017

London Stock Exchange plc

£(198)m

£(130)m

25 years from May 2006 with five equal annual repayments commencing in May 2027.

LIBOR plus 2% per annum

£(5)m

£(3)m

London Stock Exchange Employee Benefit Trust

£25m

£37m

Repayable on demand.

Non-interest bearing

-

-

London Stock Exchange Group Holdings (Italy) Limited

€(11)m

-

Fifth anniversary of the initial utilisation date which was April 2018.

EURIBOR plus 1.5% per annum

€(1)m

-

London Stock Exchange Group Holdings Limited

£226m

£240m

Tenth anniversary of the initial utilisation date which was October 2009.

LIBOR plus 4.0% per annum

£12m

£10m

London Stock Exchange Group Holdings Limited

-

-

Tenth anniversary of the initial utilisation date which was October 2009

LIBOR plus 4.0% per annum

-

$(1)m

London Stock Exchange Group Holdings Limited

-

€(1)m

Tenth anniversary of the initial utilisation date which was October 2009.

EURIBOR plus 4.0% per annum

-

-

LSE Reg Holdings Limited

 -

€1m

Fifth anniversary of the initial utilisation date which was July 2018.

EURIBOR plus 1.2% per annum

-

-

LSE Reg Holdings Limited

£20m

£20m

Fifth anniversary of the initial utilisation date which was July 2018.

LIBOR plus 1.2% per annum

-

-

London Stock Exchange (C) Limited

-

€19m

Fifth anniversary of the initial utilisation date which was May 2017.

EURIBOR plus 1.5% per annum

-

-

LSEGH (Luxembourg) Ltd

US$(24)m

US$(4)m

Fifth anniversary of the initial utilisation date which was December 2014.

LIBOR plus 1.5% per annum

US$(3)m

-

LSEG Employment Services Limited

£137m

£111m

Fifth anniversary of the initial utilisation date which was January 2015.

LIBOR plus 1.2% per annum

£2m

£1m

London Stock Exchange Group (Services) Limited

£71m

£67m

Fifth anniversary of the initial utilisation date which was January 2016.

LIBOR plus 0.9% per annum

£2m

-