CLS Annual Report and Consolidated Accounts

31 December 2018

…we are progressing well through what is our largest single investment program since we began operations in 2002.

I would echo Bryan, Rick and Ken’s observations that we remain committed to our long-term strategy: delivering an exceptional service while investing in our infrastructure and new products to meet the needs of our clients today and in the future. This has led to record levels of  investment, which over the medium term impacts  our profitability, resulting in a reported loss in 2018 of GBP 18.5 million.

Providing more context to the investment activity, we are progressing well through what is our largest single investment program since we began operations in 2002. The multi-year Convergence program, which replaces and modernizes our current technology platform supporting CLSSettlement, is expected to go live in late 2020.

The accelerated amortization of the legacy infrastructure being replaced by Convergence is the single largest item affecting our profitability this year. This has had an adverse impact on the statement of profit and loss (P&L) by bringing forward a charge which otherwise would have been reported in future years.

Combined with this, is the investment in new products, which will take several years to achieve full financial maturity, and as a result we will continue to see a dip in short-term profitability. Additionally, given the projected long pay back on our investment in CLSNet, for accounting reasons, we have decided to expense to the P&L statement the carrying value previously held on the balance sheet. Irrespective of this accounting adjustment, CLSNet continues to be a key strategic initiative for us.

All of these items impact our results when compared to the previous year and as highlighted in my prior CFO statement, we expect this to continue until 2020, by when we will complete the transition of the current platform supporting CLSSettlement to the new Unified Services Platform. Upon completion, we will have some of the most robust and sophisticated technology in the financial market infrastructure space.

Given the above, our financial results are better assessed on an ‘underlying’ basis. This basis removes both positive and negative distorting impacts and provides year–on-year comparability.

On this comparable basis, our results show a underlying profit for the year after tax of GBP4.7 million, though down on the equivalent GBP23.5 million, for the same period last year.

Looking more closely at our revenues, and in line with projections, CLSSettlement revenues remained broadly comparable to last year. Activity, in the form of traded volumes settled through CLSSettlement continued to show strong year-on-year growth. As a consequence of our pricing methodology, our members have benefited materially from a reduced unit price for each transaction processed and settled through CLS.

In fact, since 2015, the average price for each USD million settled across the CLS membership has fallen by over 17%. Outside of CLSSettlement, 2018 included for the first time almost GBP6 million of revenues from new products. 

Additionally, as Ken references, we jointly decided with Traiana to discontinue the CLS Aggregation Service. In 2018 the financial impact is minimal, and we expect this to be the case going forward from a total profitability perspective, though individual lines in the income statement will be impacted

With respect to operating expenses, we have materially increased our investment in governance and control-related initiatives across the organization, reflecting our own heightened demand, coupled with changes in regulatory and industrywide requirements. While some of this cost increase is one-off in nature, a proportion will be recurring into future ears. Operating expenses in 2018 also include, for the first time, the running cost of CLSNet and some pre-launch costs for CLSNow.

We are also exposed to the impact of foreign exchange translation of USD expenses into GBP. We manage this risk activity and achieve rate certainty through a hedging program, but in 2018, compared to the prior year, we recorded an adverse foreign exchange impact adding to the overall year-on-year cost growth.  With respect to tax, our results this year, as noted in my half year report, include a provision release which is no longer required.

Turning to our balance sheet, our two largest assets are intangible assets, and Cash and Investments. The former largely represents the cumulative value of our investment in CLSSettlement service. We have already started to see the value of the legacy system supporting the CLSSettlement service reduce sharply through accelerated amortization charges, which will then be replaced by the new Unified Services Platform post Convergence.

Cash and Investments, represents our other major asset on the balance sheet. We continue to hold prudent levels of working capital and during 2018, after careful evaluation, we appointed a leading third party asset manager to manage a proportion of our funds, leveraging their market expertise, governed by tight risk limits and liquidity parameters.

In addition to Convergence, our use of capital in 2018 reflects further investment in our data and processing business lines as well as investment in Governance and Control activities. This is fully aligned with our strategic and business goals and as expected has led to near term reduction in the absolute level of capital we hold. This trend will continue through to 2020 until we complete our major multi-year investment program.

However, at all times we maintained, and will continue to maintain levels of capital in the form of Cash and Investments, well above minimum regulatory requirements, and above the additional prudent buffer capital we have opted to hold.

In closing, in 2018 we continued with the significant progress in delivering our long-term strategy. Though our reported financial results have been adversely impacted, we have anticipated this, planned for it and operate with the underpinning strength of our balance sheet, which enables us to maintain momentum in achieving our long term goals.


Trevor S

Chief Financial Officer

Annual financial report 2018