2019 Annual Report & Consolidated Accounts

As highlighted in my previous reports, our current financial results continue to be the outcome of our ongoing multi-year investment program.

Reported losses after tax were GBP28 million for the year (2018: loss GBP19 million), while cash and deposit balances, a measure of our capital strength, stood at GBP195 million. Although balances were down compared to last year, our level of capital remains well in excess of the required minimum regulatory requirements.

Before tax, reported losses for the  year were GBP29 million. The loss for the year included GBP17 million of accelerated amortization charges and GBP13 million of product development investment, which we have charged in full to the income statement. Both items are further detailed below.

Excluding these two items, to allow for a more meaningful assessment of financial performance, we achieved an underlying profit before tax of GBP2 million in the year (2018: profit GBP9 million). Most notably, this includes the cost to maintain our technology infrastructure to the standards expected for a systemically important financial market infrastructure, and enhancements to our Governance and Control framework, as we continue to raise the bar in this area.

Our reported results as stated include an accelerated amortization charge relating to our legacy FXCore infrastructure platform. This non-cash accounting adjustment recognizes charges in the income statement earlier than originally planned and reflects the move to a new technology platform for CLSSettlement. Further, this charge is aligned to the completion of our Convergence program, and given its later anticipated delivery, we have revised the rate of future accelerated amortization charges. Additionally, we have factored the cost of further investment to complete the program into our future financial projections.

Analysis of our cash and deposit balances reflects a year of significant, but conscious investment..

As in prior years, we have fully expensed charges relating to further enhancing CLSNet. This includes costs to further enhance the flexibility and scalability of the product and to provide alternative connectivity for both buy-side and sell-side clients. To date I am encouraged by the number of participants that have recently joined this service and the respective network opportunity. However, as we further develop and enhance our products, we must remain mindful of the need to fully justify any further investment and whether these developed assets can be held on our balance sheet. The majority of these assets relate to our settlement business line, operating on both our new and legacy platforms. However, a small amount of assets relate to our new processing and data businesses. Our experience to date shows that it will take several years to fully achieve steady state economic maturity. Given this, we have chosen to expense development costs for CLS Direct, our new web-based client portal, to the income statement now, rather than hold the asset on the balance sheet in the future.

Revenues, as expected, were broadly comparable year-on-year. Underpinning this, is that tariff rates for our CLSSettlement service have remained unchanged since 2015. In that period the total level of value settled within CLS Settlement has significantly increased and as a result our settlement members have benefited overall from a double digit percentage reduction in the unit price for every USD million of value settled. This year we also saw a modest, but increasing revenue contribution from other products. Revenues and activity in our Compression service grew strongly, complemented by revenues from CLSClearedFX, our settlement service for OTC cleared FX derivatives. As a positive future sign, we are seeing increasing momentum across many of our other products, including recently launched CLSNow and CLSNet.

With respect to operating expenses in 2019, underlying costs increased by a modest 4% year-on-year. As in 2019, our investment program will continue, and wherever possible we will seek strategic savings to offset this activity. Given competing priorities, we must, and will also continue to adopt a robust prioritization of our book of work.

Analysis of our cash and deposit balances reflects a year of significant, but conscious investment. This was not only in the Convergence program, but in strengthening our control processes by adding new talent, capabilities, and enhancing related process and tools. We will continue to monitor our current and future capital position closely, at both an aggregate and individual legal entity level. On completion of our long-term investment program, we are targeting a return to positive cash generation. In the intervening period we will ensure that we continue to hold capital well above the minimum requirements in our regulated entity. In aggregate across the Group, we will also ensure that we hold a level of capital in excess of these minimum requirements, in the form of a buffer, held for prudence purposes.

While the scale of investment has had an impact on our financial results, at all times we will actively balance the need for service excellence and resilience with our capital position. The heart of our business continues to be CLSSettlement and ongoing investment here is paramount. However the completion of our Convergence program and the introduction of our Unified Services Platform for CLSSettlement remains one of our most critical priorities. Coupled with initiatives to strengthen our Governance and Control framework, this will set the foundation for the future. In parallel, we will also seek to carefully enhance our three business lines of settlement, data and processing, to fully support our clients.

In closing I look forward to sharing further updates of our progress with you in future reports, but for now I thank all our many stakeholders and especially my fellow colleagues for their commitment and continued contribution to CLS.


Trevor S
uarez
Chief Financial Officer

2019 Annual report and consolidated accounts