Two Queen’s Awards for International Trade in six years suggest that Icap, an interdealer broker – a middleman in securities trades between banks – is doing something right.
The company’s first award was won as markets were recovering from the dotcom crash, while the latest has come as markets and regulators adjust to the credit crisis.
Icap provides both voice-broking and electronic broking services to its clients in markets ranging from foreign exchange to interest rate swaps, and US Treasuries to commodities.
It has experienced an upsurge in demand for electronic broking – a higher-margin business – as regulators around the world push for greater transparency in derivatives trading. But voice-broking – involving people rather than computers – remains vital for non-standard contracts.
Post-trade risk and information services are Icap’s third area of activity and, together with electronic broking, they deliver more than half total profits. By aggregating and netting off trades between its banking customers, Icap helps them cut costs.
“Getting to settlement more quickly means you take risk out of the system,” says Mike Sheard, director of corporate affairs.
Following the collapse of Lehman Brothers in 2008, efforts were made to reduce the $60,000bn notional amount of outstanding contracts in the credit default swap market. Processing these trades through Icap’s Trireduce platform to find offsetting deals helped halve the value of outstanding trades, simplifying the recovery process and reducing exposures.
Reset, another Icap business, helps banks manage their exposure in the interest rate swap market by finding offsets to reduce the delays between the sixth-monthly payments made between the two parties to the swap deal.
“This is something regulators are keen on, because it reduces the risks for banks,” says Mr Sheard.
Icap was founded in 1986 as Intercapital by Michael Spencer, now chief executive, and went on to merge with Garban and Exco, two established names in the money broking world.
After two years as Garban-Intercapital it changed its name to Icap in 2001. Starting with a staff of four, it now employs about 5,000 people around the world.
Mr Spencer sold part of his personal holding in the London-listed company in January 2010, reducing his stake from about 21 to 16 per cent.
Underlying profit for the year just ended is expected to be between £333m and £357m according to guidance to the market. Profit fell 5 per cent the year before to £333m – the bottom end of the 2010-2011 profit forecast.
Icap delivered “a solid performance” in the last quarter of the financial year, Mr Spencer said in a trading statement made at the end of March. Political uncertainty in north Africa and the Middle East as well as the Japanese earthquake contributed to volatility in global financial markets.
Icap puts its long-term growth performance down to its responsiveness to market developments and a combination of the right technology and the right people to meet its customers’ needs.
But it decided to shut its cash equities business in Europe and Asia last year after issuing a profit warning, admitting some of its new businesses were struggling.
Other challenges faced include a more robust approach from global regulators, though the company is confident that its iSwap interest rate swaps platform will qualify under the US rules for swap execution facilities when they are finally announced. Meanwhile, competition remains fierce, with rivals launching or extending their interest rate swap platforms.