In compliance with Listing Rule 9. Printed copies of the Annual Report will be posted on 18 August 2017 to those uk regulated binary option brokers who have requested it.
Company’s Full Year 2017 results announcement issued on 18 July 2017 which can be found at www. Together these constitute the information required by DTR. The principal risks set out below are extracted from pages 37 to 41 of the Annual Report and are repeated here solely for the purpose of complying with DTR 6. IG’s Risk Taxonomy categorises the principal risks faced by the firm into five areas: the risks inherent in the regulatory environment, the risks inherent in the commercial environment, business model risk, operational risk and conduct risk. The major risks identified within each of these areas are summarised in the table below, and overleaf we provide an overview of how IG seeks to manage them. The risk that the regulatory environment in which the Group operates changes in a way that has an adverse effect on the Group’s business or operations.
The risk faced by the Group arising from the nature of its business and its business model. The risk of loss resulting from inadequate or failed internal processes, people activities, systems or external events. The risk that the Group is unable to attract and retain the staff it requires to operate its business successfully. The risk that the Group’s conduct poses to the achievement of fair outcomes for consumers or to the sound, stable, resilient and transparent operation of the financial markets.
IG operates in a highly regulated environment which is continually evolving. IG defines regulatory environment risk as the risk that the regulatory environment in any of the jurisdictions in which the Group currently operates, or may wish to operate in, changes in a way that has an adverse effect on the Group’s business or operations, through reduction in revenue, increases in costs or increases in capital and liquidity requirements. The Group operates to the highest regulatory standards and leads the industry in the way in which it deals with its clients. The Group maintains a strong relationship with its key regulators and an active dialogue with them to keep abreast of impending regulatory developments. The Group has responded to all relevant consultations, with each of the regulatory proposals analysed in depth. A comprehensive analysis has been presented to regulators through a series of detailed response documents and consultation meetings. The Group has engaged with a broad range of interested parties to explain its stance on the issues raised.
The Board has been actively involved in overseeing the formation and execution of IG’s response to these proposals, receiving regular updates from the Executive Committee advising on the regulatory and legal position and appropriate response strategy. Within regulatory environment risk, the Group also includes the risk of significant adverse changes in the way in which the Group itself, or the Group’s business, is subject to taxation. Examples of the tax risk faced by the business include the risk of the imposition of a financial transactions tax, which could severely impact the economics of trading, and the risk that the basis under which the Group is taxed, in any of the jurisdictions in which it operates, changes adversely. The Group defines commercial risk as the risk that the Group’s performance is affected by a failure to adopt or implement an effective business strategy, by new or existing competitors offering more attractive products or services, or by a prolonged period of adverse market conditions. The Group seeks to mitigate its strategic management risk through the Board’s regular, thorough review and challenge of the Group’s strategy and the performance of the various strategic initiatives taken. The Board holds an annual strategy day to consider and agree the strategic priorities for the business. The Board also considers specific strategic actions and initiatives during its normal schedule of Board meetings.
The Group’s strategy will be reviewed again in the context of the outcome of the various regulatory consultation papers discussed above. The Group operates in a highly competitive environment, including from some unregulated and illegal operators. The Group seeks to mitigate competitor risk by maintaining a clear distinction in the market in terms of product, service and ethics, and by closely monitoring the activity and performance of its competitors, including detailed comparison of the terms of the product offers. However, the Group seeks to ensure that its product offering remains attractive, taking into account the other benefits that the Group offers its clients, including brand, strength of technology and client service quality. The Group’s trading revenue reflects the transaction fees paid by clients less the transaction costs incurred in hedging market exposures.
The extent of client trading activity and the number of active clients in any period are the key determinants of revenue in that period. The ability to attract new clients and the willingness of clients to trade depends upon the level of opportunities clients perceive are available to them in the markets. The Group uses these forecasts to determine actions necessary to manage performance in the context of market conditions. The Group updates its investors and market analysts on its revenue performance on a regular basis, including quarterly updates and pre-close statements, and engages with investors and market analysts to manage the risk that the impact of market conditions is reflected in performance expectations. IG defines business model risk as the risks faced by the Group arising from the nature of its business and its business model, including market risk, credit risk, liquidity risk and capital adequacy risk. IG takes market risk for the purpose of facilitating instant execution of client trades.
The Group’s real-time market position-monitoring system allows it to monitor its market exposure against its market risk limits continuously. IG has a Market Risk Policy which sets out how the business manages its market risk exposures. The Market Risk Policy incorporates a methodology for setting market position limits, consistent with the Group’s risk appetite, for each financial market in which the Group’s clients can trade, as well as certain groups of markets or assets which the business considers to be correlated. The Group sets its market risk limits with the objective of achieving the optimal trade-off between allowing clients’ trades to be internalised, the cost of hedging and the variability of daily revenue.
The Group seeks to manage its market risk so that its trading revenue predominantly reflects client transaction fees net of hedging costs, and is not driven by market risk gains or losses. The market risk that arises as a result of offering binary contracts, options and guaranteed stops for clients is difficult or not cost-effective to hedge, and there is often no direct underlying market which can be utilised in setting the price which the Group quotes. The Group normally undertakes no hedging for these markets, but can hedge specific positions if considered necessary. The Group monitors its market risk exposures on a real-time basis as well as through regular stress-testing and scenario-testing to analyse the impact of potential stress events, and takes action to reduce its risk exposures and those of its clients as appropriate.
IG faces the risk that either a client or a financial counterparty fails to meet their obligations to IG, resulting in a financial loss. As a result of offering leveraged trading products, IG accepts that client credit losses can arise as a cost of its business model. Client credit risk principally arises when a client’s total funds deposited with the Group are insufficient to cover any trading losses incurred. In addition, a small number of clients are granted credit limits to cover running losses on open trades and margin requirements. Client credit risk is managed through the application of the firm’s Client Credit Risk Policy. The business sets margin requirements that reflect the market price risk for each instrument, and uses tiered margining so that larger positions are subject to proportionately higher margin requirements.
The business offers training and education to clients covering all aspects of trading and risk management, which encourages them to collateralise their accounts at an appropriate level in excess of the minimum requirement. We also require less experienced clients to use limited risk accounts, while offering the option of a limited risk account to all other clients. The COM is an automated liquidation process which automatically identifies accounts that have broken the liquidation threshold. Where client losses are such that their total equity falls below the specified liquidation level, positions will be liquidated, resulting in reduced credit risk exposure for the Group.