Risk Management oversight
The management of risk is fundamental to the successful execution of our Strategic Plan. As our Group has grown we have enhanced our Risk Management capabilities to maintain our trajectory while protecting the value of our business.
> LSEG's Risk Culture
> Strategic Risk Objectives
> LSEG Risk Appetite
> Group Risk Appetite
> 3 Lines of Defence
> Overall Risk Assessment
> Risk Management Cycle
> CCP Risk Management and Oversight
> Stress Testing Capabilities and Viability Statement
> LSEG Risk Governance Structure
LSEG is a widely, and increasingly, diversified financial infrastructure group. As the Group has grown and the regulatory environment has become more complex, we have adapted to meet the challenges of the post-crisis markets. While our formal risk framework codifies the objectives and practices that govern our processes, our risk culture determines the manner in which we manage risks every day.
Our management culture embeds risk awareness, transparency and accountability. A strong emphasis is placed on the timely identification and reporting of risk exposures and in the strategic analysis of prevailing or anticipated risks. The responsibility for identifying and managing risks rests with management and with the Executive Committee, with independent oversight from our Risk Management Team. Our risk culture is one of our most fundamental tools for effective Risk Management. Our behaviour framework feeds into the criteria that we use to assess the effectiveness of our risk culture and the communication, escalation and use of risk analysis to make strategic decisions.
LSEG’s Strategic Risk Objectives derive from the strategy of the Group, which is defined annually by the Board. The risk objectives of the Group are as follows:
- Maintaining a risk aware culture throughout the Group: the Risk Management Framework is embedded within divisions and functions
- Maintaining stable earnings growth: the strategic growth of the business is delivered in a controlled manner with long-term value enhancement and low volatility of underlying profitability
- Maintaining capital requirements: the Group has sufficient capital resources to meet regulatory requirements, to cover unexpected losses and to meet the Group’s strategic ambitions
- Maintaining liquidity: the Group retains or has adequate access to funding to meet its obligations, taking into account the availability of funds
- Adhering to regulatory requirements: the Group conducts activities at all times in full compliance with its regulatory obligations
- Maintaining operational stability by facilitating orderly market operations: the Group’s operations are delivered in a secure and efficient manner without disruption
- Maintaining stakeholder confidence: the Group’s stakeholders have confidence in its ability to deliver its strategic objectives with robust and effective governance and operational controls
LSEG’s Risk Appetite is defined as the level of risk that the Group will accept in pursuit of its strategic objectives. The Group Risk Appetite Statement, proposed by the Executive Committee, is approved by the Board at least annually and is determined in conjunction with the Group’s strategy and aligned to the Strategic Risk Objectives. The Group has 4 subsidiaries that operate Central Counterparty Clearing Houses (CCPs). The components of Risk Appetite that relate to CCPs are also approved by the Boards of each CCP within the Group, in compliance with EMIR and other applicable regulations.
In 2015, LSEG refreshed its Risk Appetite by reconfirming our focus on risk culture by increasing the number of indicators to be monitored; better defining the scope of stakeholder confidence risk; and strengthening the treatment of counterparty concentration risk, reflecting the continuing enhancement of our Group risk oversight toolkit.
The Group Risk Appetite is cascaded down to each business unit so that operational limits can be derived. Regular reporting at both Group and Business Unit (BU) levels uses Risk Appetite as a benchmark that can then be incorporated into the Group Risk Policy Framework.
Risks that are outside Risk Appetite are escalated to Executive Committee members and to the appropriate Risk Committee. The Risk Appetite status is also reported to the Board Risk Committee and to the Board for all aggregated Group risks.
LSEG’s risk control structure is based on the ‘3 lines of defence’ model:
- The First line (Management) is responsible and accountable for identifying, assessing and managing risk
- The Second line (Risk Management and Compliance) is responsible for defining the Risk Management process and policy framework, providing challenge to the first line on Risk Management activities, assessing risks and reporting to the Group Board Committees on risk exposure
- The Third line (Internal Audit) provides independent assurance to the Board and other key stakeholders over the effectiveness of the systems of controls and the Enterprise Risk Management Framework (ERMF)
Key risk categories include strategic, operational, and financial risks. We recognise that each of these risks, if not properly managed and/or mitigated could have an impact on the Group and on its subsidiaries’ reputation.
Our approach to managing risks includes a bottom up and a top down approach. Key external and internal factors are stress tested across our Group operations to assess the potential impact on the financial results, strategic plans and operational resilience.
Current risks on which we continue to focus relate to:
- Global Economy: Our acquisition of Russell Indexes to create FTSE Russell accelerates our geographic expansion in the US, the world’s largest financial services market. While this enhances the Group’s global profile, it also increases exposure to systemic risks inherent in running a truly international business
- Europe: Continuing uncertainty in the outlook for Europe introduces the potential for unexpected outcomes and may impact investors’ confidence
- Regulatory Change: The introduction of new regulations including MiFIR will affect the operations of the Group as well as those of our users and customers. There will be a sizeable implementation impact as a result of the incoming regulation and increased regulatory risk
- Liquidity: The repo market has been adversely affected by banks contracting their balance sheets in response to forthcoming leverage restrictions. This has impacted CCPs who use secured investments, such as reverse repos, as mandated under EMIR, to maintain sufficient ongoing liquidity and immediate access to funds
- Security: The security of systems and premises represents a key global emerging risk
The Group has an ongoing programme of development and enhancement of its Enterprise Risk Management Framework (ERMF). The ERMF metrics and indicators include stress testing used to monitor risks against risk appetite to respond to emerging or expected risks.
As we look ahead, 2016 will bring the twin challenges of a rapidly growing business and accelerated regulatory change against a backdrop of heightened volatility in the markets that we serve.
Going forward, we will continue to strengthen our Risk Management by building on the frameworks we have put in place. Accordingly, we believe the Group is well positioned to exploit new opportunities in the year ahead.
Each of the Group’s CCPs complies with the appropriate regulatory requirements. Consequently, they each manage their risk under the governance of their Board of Directors and of their internal Risk Management structure. The Group monitors the CCPs aggregated risks positions by using tools that measure the overall exposure to counterparty, credit and liquidity risks. It uses a bottom up approach for the monitoring of operational risks.
In 2015, LSEG’s Group risk oversight toolkit was expanded to cover additional clearing services and also non-clearing counterparty risk across the Group. This model consolidates the underlying risk by CCP members across their services with liquidity management balances and other Group Treasury activity, enabling LSEG to assess aggregate counterparty risks. During 2015 we enhanced the model to provide stress testing capabilities on our biggest CCP clearing positions.
The Group’s CCPs are managed in accordance with our ERMF, which includes a focused CCP Financial Risk Policy. This promotes consistency in the oversight of our clearing risks while protecting the independence of the CCPs’ Risk Management processes as required by relevant regulation.
The Principles for Financial Market Infrastructures (PFMI) produced by CPMI-IOSCO provide the minimum Risk Management standards that a CCP should apply; however, LSEG CCPs apply more stringent standards where it is felt appropriate.
As well as being managed by the CCP’s own independent processes, CCPs risks are reported to and overseen by the Executive Committee and the Board Risk Committee.
In 2015, LSEG’s Group-wide financial stress testing process was expanded and enhanced. It is now fully embedded in the Group’s Risk Appetite Statements and the Group’s internal planning and budgeting cycles.
The Group’s viability statement is underpinned by this stress testing process. Under this process, a set of severe but plausible scenarios appropriate to the business of the Group and reflecting our principal risks was defined by Management, and the financial impact of each on the Group was quantified.
A 3 year horizon was used for LSEG’s financial viability statement, consistent with the Group’s strategic planning cycle. The scenario impacts were evaluated on the Group’s key financial metrics: liquidity headroom; leverage; interest cover and regulatory capital headroom.
In addition, a set of compounded stresses was evaluated to provide further confidence on the ongoing financial viability of the Group even under very highly stressed environments. The process and final output of the stress tests was reviewed by Management and by the Board and Audit Committee. They also reviewed and discussed ‘reverse’ stress testing, which was performed to assess what would be required to breach the Group’s covenants.
The Risk Governance of the Group is as follows:
- The Board is responsible for determining the Group Risk Appetite (GRA). The Board Risk Committee and the Audit Committee receive regular reports presenting the aggregate risks of the whole Group measured against the Appetite
- The ERMF defines roles and responsibilities for risk management oversight and activities, including for the Board, the Executive Committee and sub-Committee thereof
- The Financial and Operational Risk Committees monitor and report on the risk profile of the Group; review and challenge the application of the Group risk framework; recommend Risk Appetite Statements to the Executive Committee and monitor compliance with the relevant risk policies
- The Group has a Business Continuity Management framework in place which is managed and maintained through a fully established Business Continuity Programme. The Business Continuity Programme is overseen by the Business Continuity Board, a sub-committee of the Operational Risk Committee. The Business Continuity Board receives the self-certification results of all the Group’s Business areas
- The New Product (and Market) Committee reviews and recommends business cases to the Executive Committee ensuring product innovation and new market risks are appropriately identified and assessed
Each Group-level risk is owned by a member of the Executive Committee who is responsible for managing or mitigating the risk in order to remain within Risk Appetite. The Board and the Risk Committee receive presentations on material risks and related mitigants as appropriate.
The Reports of the Audit and of the Risk Committees, on pages [xx] - [xx], provide details on the work carried out to assist the Board in fulfilling its oversight responsibilities for risk management and systems of internal control.