Chief Financial Officer’s Report
Against a backdrop of market instability, geopolitical challenges and significant inflationary pressures, I am pleased to report a return to profit in 2022, with a profit before tax of GBP9.2 million.
From a financial perspective 2022 was a strong year for CLS, returning a profit before tax of GBP9.2 million (compared to prior year losses of GBP17.6 million) and an increase in cash and investment balances to GBP202 million as at the end of 2022 (December 2021: GBP178 million).Overall our financial performance was underpinned by strong levels of CLSSettlement activity, a decrease in operating costs and careful management of our balance sheet.
Revenue of GBP253.3 million in 2022 represented an increase of GBP15.4 million compared to 2021. CLSSettlement continued to be the most significant contributor to overall revenue, underpinned by strong growth in payment instruction volumes and average daily settled values increasing from USD6.18 trillion in 2021 to USD6.46 trillion in 2022. Overall,third-party participant numbers in CLSSettlement continued to increase throughout the year, with more than 30,000 third-party participants now using the service. We remain focused on engaging the asset manager community, who continue to diversify their global assets and adopt FX as an important part of their portfolio management.
“Revenue of GBP253.3 million in 2022 represented an increase of GBP15.4 million compared to 2021. ”
Outside of CLSSettlement, our other services saw good year-on-year progress. Though revenues remain small in relation to CLSSettlement, CLSNet, our bilateral payment netting calculation service, saw a substantial rise in adoption in 2022, with a significant year-on-year increase in average daily notional of net calculations. This increased demand for the service aligns to one of our key objectives: to help market participants address the risks associated with post-trade processing and settlement of currencies not eligible for CLSSettlement.
Uptake of our other products also increased strongly throughout the year; in our CCS service we saw a year-on-year increase of 60% in terms of values of trades processed in Q4 2022, as well as steady year-on-year revenue growth in our CLSMarketData and CLSTradeMonitor products.
On the expenses side, our operating expenses for 2022 reduced by GBP10 million. This was driven by several factors, including cost savings across the business and lower amortization costs, following completion and go-live of our Convergence program. While we continue to look for ways to improve efficiency during 2022, we recognize the importance of ongoing investment. Notably, we continued to invest in strengthening our critical infrastructure, resilience and governance and controls across all our activities.
Additionally, after several years of low interest rates, 2022 saw a return to small levels of investment income earned from our cash and investment portfolio. While interest rates remain higher, we should expect a continued return from our portfolio.
From a balance sheet perspective, our capital strength, measured in terms of cash and investments, grew year-on-year, despite significant ongoing investments in the business. Following the completion of our Convergence program, overall investment fell from amounts seen in prior years.
Given the long-term benefits of this project, this specific investment is held on our balance sheet and amortized each year. In contrast, in 2022, given the nature of our initiatives, we have charged much more of our financial investment directly to the profit and loss account than in previous years. As a result, we booked a lower level of balance sheet additions in 2022. Combined with ongoing amortization, this led to a reduction in the level of intangible assets compared to the previous year.
During 2022, we also further enhanced our Risk Capital Management framework and methodology, integrating different related activities under one approach. As a result, we have developed a framework and methodology that is better aligned to the potential risks we may face, and as such we will hold a more defined and specific level of ‘risk capital’ to absorb the potential financial impact of operational risks. This capital will by design include at least the minimum level of capital, as required by regulations, and will also include an additional amount as determined by the CLS Board each year, after careful evaluation of the CLS risk profile. At the end of 2022, we held capital which fully met our risk capital requirements, and after allowing for day-to-day working capital requirements, we held available capital to support our strategic objectives, and if needed to provide further protection to potential operational loss events.
With a strong financial performance in 2022, combined with the strengthening of our balance sheet and an updated Risk Capital Management framework, we closed 2022 in a strong financial position.
In 2023, we will maintain ongoing, and further investment in our risk management practices, cyber security and governance and controls, to deliver the level of resilience expected of a critical financial market infrastructure. We will do this in a measured manner and will pursue these objectives ensuring we have the financial stability and maintain a strong capital position at all times.
All these efforts are fundamental to improving our business, protecting CLSSettlement and maintaining our reputation as the trusted financial market infrastructure at the center of the FX ecosystem.
Chief Financial Officer