Good morning. Thank you for standing by, and welcome to the London Stock Exchange Group Interim Results Investor Call. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you'll need to press star one on your telephone. I must advise you that the call is being recorded today, on Thursday, the 2nd of August 2018. I'll now hand the call over to the speaker today, Paul Fowle. Please go ahead, sir.
Thank you. Good morning, everyone. Thank you for joining us. On the call this morning, we have David Schwimmer, CEO, David Warren, CFO, Tom, and myself. We're going to refer to slides that are available on our website. In terms of format, David Schwimmer will make some opening remarks. David Warren and I will summarize the performance and the progress for the half year. After that, we'll take questions. Let me hand you over to David Schwimmer.
Thank you, Paul. I'm delighted to be here. I would like to say a few words this morning, although I assumed my role as CEO only yesterday, so you'll forgive me if I keep my comments brief. Needless to say, I'm excited to join the group. Let me touch on a few of the reasons why. First, it's a terrific business. We are well-positioned with world-class assets and a strong financial performance. I was attracted to the group's strategy of open access and partnership with its customers. This strategy and its consistent execution has differentiated LSEG from its peers. I fully support it. Secondly, I'm very excited about the growth opportunities in our business.
I should mention, our customers have played a key role in helping to shape our approach in the past. Their views are going to continue to be central to our strategy as we adapt to the challenges and opportunities ahead. The final reason is the people. Although it's still early days in my getting to know my colleagues, I am really impressed by the caliber of the team and their commitment and drive towards achieving outstanding results for our customers and our shareholders. My immediate priority in the coming weeks is to meet with colleagues, customers, shareholders, and other key stakeholders. I look forward to working with the executive team on our plans for further growth and value creation across our businesses as we continue to adapt to an evolving macroeconomic, regulatory, and technology landscape.
Continuing the focus on driving operational excellence and efficiency across the group is also a priority. On that note, the group has delivered strong first half results and is performing well. I look forward to talking to you and answering your questions at future events, but today is about the last six months' performance. I'll hand back to David and Paul to take the lead. Thank you.
Thanks, David. As you've seen from this morning's announcement, we've released a strong set of results. Slide three on the deck that we put out gives you the main headlines. Revenue increased 12% to GBP 953 million, and that had growth across all core business areas. Total income also rose 12%, with another strong increase in net treasury income at LCH. Underlying operating costs were well controlled, rising 5% as we continue to invest across the business in projects to grow and become more operationally efficient. Adjusted EBITDA increased 23%, and adjusted earnings per share rose by 25% to go to GBP 0.887. Finally, the interim dividend, which is calculated as one-third of the prior year full dividend, increased by 19% to GBP 0.172 per share. Let's take a more detailed look at some of the numbers, starting on slide four.
Information Services deliver strong growth, up 16%, and within this division, FTSE Russell grew 19%, with good organic growth and contribution from the Yield Book. On an underlying business, adjusting for FX and for acquisitions, FTSE Russell grew 9% year-on-year. LCH also delivers a strong performance, with revenues up 14%, and with the inclusion of NTI, total income rose 18%. The engine of growth continues to be the OTC clearing services, and we saw a record notional cleared volume at SwapClear and also at ForexClear. Capital Markets was strong, with revenues up 13% from good primary and secondary market performances. There were some small changes that impact the headline reporting in our settlement business in Italy, and those are described in detail in the RNS. Overall, a very good H1 performance across the group.
Next to slide five, this provides the main year-on-year changes to the income line. The graph shows that the FX changes this period were comparatively small, with a GBP 14 million impact. Increases to income therefore come from three main areas. First, higher NTI, which added GBP 29 million in H1. Second, organic growth, that's the largest component of the increase in H1, adding GBP 72 million. As you see, that reflected in the strong performances we just noted in Information Services at LCH and in Capital Markets. Third, there's an inorganic contribution of GBP 27 million in H1, which is the result of the acquisitions and the disposals, mainly including the Yield Book. With regard to NTI at LCH, in H1, we benefited from both a step change in the wider use of counterparties for placing investments, and we also had changes from the U.S. rate environment.
Looking ahead to the second half, absent any other rate changes, I think it would be best to use the strong Q1 run rate for full-year modeling purposes. Let's move now to the operating expenses on slide six. Reported operating OpEx increased by 2%. Underlying costs, on an organic and constant currency basis and excluding depreciation and amortization, these increased by 5%. On the slide, we highlight the principal movement in the cross line. First, as usual, we adjusted the currency effects, and that reduces last year's start point by GBP 22 million. Next, we have the organic cost increases of GBP 34 million for the period, including depreciation, which rose by 18%. Last, we have the inorganic cost increases of GBP 14 million, which aggregates the acquisitions and the disposals. Together, that takes the H1 operating expenses to GBP 471 million.
Looking ahead to H2, we said in our statement this morning that due to the phasing of investments over the year, operating expenses in the second half are likely to be some GBP 25 million-GBP 30 million higher than they were in H1. However, given the level spend in H1, what this means is that the operating expenses for the full year will still be in line with our expectations. Finally, on this slide, the underlying effective tax rate for the half one, excluding the prior year adjustments and one-offs, is 23%. This is slightly better than the 23.4% for last year, and that's mainly driven by a mix change. Overall, a good cost performance. Let's turn now to cash flow on slide seven. Cash generation was good, with GBP 196 million of free cash after tax, interest payments, and investment activities.
This strong cash generation enables further investments in growth initiatives and in infrastructure. Investment activities include GBP 90 million of CapEx, with ongoing investments in new products such as for FX options clearing, and some technology upgrades, as well as further regulatory changes. Also part of this spend is GBP 27 million of investment, including GBP 16 million in AcadiaSoft. CapEx is likely to increase to around a further GBP 100 million in H2, with continuation of various investment projects across the group. Let's turn now to slide eight. Our operating net debt at the end of June, after normally setting aside just over GBP 1 billion of cash for regulatory purposes, that was GBP 1.63 billion. That's an improvement from the position at the end of December 2017. Gross debt stood at GBP 1.9 billion, with another GBP 900 million in undrawn credit lines.
In terms of leverage, on a pro forma basis, net debt to EBITDA is 1.6 times, and that's an improvement from the 1.7 times at year-end. What we've done is reduced leverage, at the same time as continuing to both invest in the business and also to increase shareholder distributions. There were no major changes in terms of ratings in the period, S&P improved its ratings outlook to positive while maintaining its long-term rating on the group at A minus. Just in conclusion then on this, another strong set of results and a strong financial position. With that, let me hand you over to David Warren.
Thank you, Paul, and good morning, everyone. I'll start on slide 10. As Paul has outlined, the continued execution of our strategy has delivered another strong set of financial results with growth across all business areas. We have continued to invest in organic growth and strategic investments. These include increasing our shareholding in LCH to 68%, acquiring 100% ownership of FTSE TMX, and taking a minority stake in AcadiaSoft. The integration of the Yield Book acquired last year also remains on track. The group is well-positioned as a global financial infrastructure business, providing critical services to clients around the world. Our successful partnership approach enables us to deliver innovative and relevant solutions to our global customer base. We continue to see multiple opportunities for growth, capitalizing on global investment trends, clearing and post-trade risk management, and an evolving regulatory landscape.
Over the next few slides, I will provide a summary of some of the key highlights during the period. Moving to slide 11, our Information Services division continues to perform strongly. FTSE Russell now has approximately GBP 16 trillion in assets benchmarked to its indexes. The value of ETF assets tracking its benchmarks increased by 22% during the half to GBP 646 billion. Its global reach and multi-asset capabilities means that it is well-positioned to benefit from the growth of passive investment, as well as the increasing customer demand for access to data and analytical tools. This is particularly important in areas such as environmental, social, and governance, ESG, which is now being incorporated into a broad range of investment strategies by asset owners. From a country perspective, we announced that Saudi Arabia now meets the criteria for inclusion as an emerging market within FTSE Russell's global benchmarks.
It will be the largest Middle East market in the index when it begins to transition from March next year. FTSE Russell continues to assess the progress of the China A-shares market, evaluating inclusion into its global equity benchmarks. It is also appraising whether to include Chinese government bonds in its World Government Bond Index, WGBI. These decisions also reflect the growing demand from international investors for benchmarks that will facilitate their investment into emerging markets. On slide 12, we highlight the continued global leadership position of SwapClear. The first half of the year saw SwapClear break new records driven by new business as well as additional flow from existing customers. It remains the leading OTC rates liquidity pool, processing $576 trillion in notional during the first half of the year.
It has seen significant onboarding of new clients globally, this includes a 34% increase in the number of clients clearing EUR swaps during the period. This is further demonstrated in the chart on the right-hand side of the slide, which shows the ongoing rise in the average number of daily client trades with a compound annual growth of 48% since 2014. It has also expanded the number of currencies it clears to 21 following the launch of clearing in non-deliverable interest rate swaps. LCH is committed to working with customers and regulators to help facilitate a smooth transition to the new reference rates. In July, LCH started clearing SOFR swaps, the new alternative US dollar reference rate, it also offers clearing of SONIA futures and SARON swaps. I turn now to slide 13.
As I stated back in March, LCH is well-placed to address the capital and margin challenges prevailing in the vast FX market, which trades around $5 trillion a day. The introduction of uncleared margin rules has seen a step change in volumes at ForexClear, with members increasingly incentivized to clear. The momentum in the service continues to build as these rules are phased in. We saw record clearing volumes in the first half, with a 79% increase in the notional cleared compared to the same period last year. We have seen an increase in the number of participants in volume cleared in G10 NDF currency pairs with $26 billion cleared in Q2, that's up from $6 billion in Q1. Last month, we launched deliverable FX options clearing, which has been developed in collaboration with CLS.
The launch of FX options clearing is a significant step forward, and banks have already started testing and using this service, and we expect to see volume growth in the second half of the year. LCH has also seen continued growth in its RepoClear and CDSClear services during the half. Turning to slide 14, our Capital Markets division has performed well with good growth in both primary and secondary markets. GBP 15 billion was raised across our equity markets in the first half, with 87 companies joining the Group's markets in London and Milan. The implementation of MiFID II in January of this year was very smooth for the Group, and we are beginning to see a number of our businesses, including MTS, CurveGlobal, Turquoise, TRADEcho, and UnaVista benefit as customers adapt to the new regulation.
For example, large and scale trades executed through Turquoise Plato Block Discovery has increased significantly. London Stock Exchange recorded an average daily volume traded of GBP 6.2 billion, the highest performance in a decade. We firmly believe MiFID II will introduce greater competition to financial markets, promoting transparency and innovation, better risk management, and reduced costs. CurveGlobal is beginning to benefit from new best execution rules under MiFID II, with open interest continuing to rise. It has also seen good growth in its SONIA three-month futures contract, which was launched at the end of April with around 80% share of volume traded. On slide 15, we have detailed some of our investments in further growth. The GBP 108 million invested during the period includes product enhancements at FTSE Russell and LCH, such as the launch of FX options clearing, which I previously highlighted.
In addition, we continue to spend on efficiency projects, including the development of BSL, the Group's shared services company, which delivers technology, data, and corporate support functions across our global entities. This includes plans to establish a new center in Romania, which will initially employ 200 people across a range of roles. As we have previously said, the Group remains well-positioned to meet the challenges of an evolving macro regulatory environment, and this includes Brexit. As outlined on slide 16, our global balanced portfolio of assets across listing, trading, index, clearing, and settlement will enable us to offer continuity of service to our customers regardless of the outcome of the negotiations. We have seen no discernible change in customer behavior across our businesses, although we remain committed to supporting customers as they prepare their contingency plans.
As part of our own contingency planning, we have made applications for additional licenses in the Netherlands for a select number of businesses, namely Turquoise, TRADEcho, and UnaVista, should an EU location be needed to continue to serve EU-based customers. In clearing, LCH Limited intends to apply for recognition as a third country, a near-recognized CCP, while LCH SA and CC&G will apply for equivalent licenses from the Bank of England. Turning to slide 17. You have seen this slide before, but to remind you, SwapClear remains the global leader in the clearing of OTC interest rate swaps, clearing 21 currencies across 59 jurisdictions. A global liquidity pool enables the multilateral netting of transactions, simplifying outstanding exposures, and delivering significant cost and margin efficiencies for members and customers. It also reduces risk by maximizing the number of counterparties that have access to an international liquidity pool.
If we break out clearing by currency, you can see that more than half of all interest rate swaps volume continues to be denominated in US dollars. 24% of swaps are denominated in euros, and of this percentage, only 6% are euro swaps originating from EU-based entities. LCH operates globally and is directly licensed to clear in many jurisdictions and successfully operates under cooperative regulatory relationships around the world. Therefore, we continue to support proposals for enhanced supervision and the strengthening of global regulatory cooperation designed to make the financial markets more efficient, stable, and safe. On slide 18, we show the financial targets for 2019 that we set out last year. As you can see, with the strong results today, we are making good progress against the various measures, and we remain focused on achieving these results. Finally, turning to slide 19.
In summary, this is another strong financial performance from the group, with growth across all business areas. Our strategic ambition remains the same, to deliver best-in-class capabilities, drive global growth, and deliver our customer partnership approach. We are well-positioned as a global financial infrastructure business, providing critical services to clients around the world. We continue to see multiple opportunities for growth, capitalizing on global investment trends, clearing and post-trade risk management in an evolving regulatory landscape. Going forward, we are in a strong position as we continue to execute on our strategy, invest for further growth, and deliver value for our shareholders. With that, I want to thank you for your time this morning, and Paul and I will be pleased to take any questions you have.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel the request, please press the hash key. So once again, that's star one on your telephone. Your first question today comes from the line of Anil Sharma from Morgan Stanley. Please go ahead.
Morning, guys. Just a few questions, please. I'm just a little bit confused as to why net interest income at LCH would step down. You're basically saying interest rates were a bit better in the U.S. and counterparties have gone up. Have either of those two things changed in Q3? Secondly, on FTSE Russell, I'm just wondering if you could explain or give us a bit more color as to why the growth is a little bit below target on an organic constant currency basis. How should we think about the news from Fidelity and self-indexing yesterday? The final one on OTC clearing, I guess two parts to it. Firstly, what reaction should we expect from SwapClear in the face of increased competition? Secondly, when will ForexClear launch a client clearing service? Thank you.
Okay. You may have to remind me of the last two or Paul will, as I go through them. I think with respect to NTI, if Paul wants to add any technical points to this, he can. I think we have seen an increase in NTI. I think if you look at it sequentially, you can kind of see how it builds against the prior quarters. What we had in the U.S., and I think you're alluding to it in your question, was we did have a rise in U.S. yields in anticipation of the moves that the Fed has made. Those are already sort of in the market. As we move forward, we wouldn't expect to see a continuation of that continuing increase in those U.S. dollar yields. Anything to add to that, Paul?
No, I think that's right, David. We saw a GBP 7 million uplift from Q1 to Q2 in the NTI line. It is due to the anticipating of the U.S. changes in May, as we said. We still expect NTI to be strong. There's no mistake about that. GBP 38 million in the first quarter was quite an uplift on where we were over the last couple of quarters before that. Expect strong NTI performance going ahead. We're just cautioning that what we saw in Q2 was an out-performance, and therefore, if we don't see any similar factors in the market during the rest of the year, we can't expect to see quite the same level of growth. That's all we're saying on that.
Okay. Somewhere between the Q1 and the Q2 run rate is the right way to think about it, not a Q1 run rate.
On the comments I was making just on the call, Anil, I said use Q1, I think, as the run rate, that's pretty strong.
Okay. Thanks.
I think the second question was on FTSE Russell. Look, I think the important point, and in terms of as it relates to the guidance we've given, is there was 19% reported growth in that business. I think when you look at that business and you look at the long-term growth of that business that is delivered, and the long-term growth prospects of that business, we still feel very confident in the double-digit growth in that business. The moves from period to period are always going to have some variability, but it was a good performance by FTSE. Strong increases in ETF. FTSE is a global business, so we will have FX movements in the underlying growth. I think your third question was around SwapClear?
Yes.
That was the self-indexing.
Oh, self-indexing.
Yeah.
Okay. Sorry. Self-indexing, yeah. Self-indexing, and we have definitely had this question before. It's nothing that's really new. Self-indexing has been around for a while, I think as I've said before. It's never really gotten more than 5% traction in the market. I think there's a reason for that. I think we will see a continued use of self-indexing by some funds, and I think it does work for a limited range of products. Some of these indices are easier to create and replicate yourself.
I think if we look at the business overall, the asset management business overall, and where they need to go in terms of their own growth and their own performance, they need the index businesses because a lot of what they're looking for now, particularly as they get more into Smart Beta factor analysis, they're looking for more bespoke indices, and they look for the index business who have the scale, who have the IP, who have the brand, who have the research, and importantly, have the governance. I think it will always be there. Again, I think we're focused on the core business, the value we add to the asset management world in general, and continuing to drive that growth. The next question was on-
The last question was on the OTC clearing. I think there are two parts to that. Firstly, what we've seen from Deutsche Börse.
Yeah. I think on the Deutsche Börse, obviously there was some press this week with respect to the actions taken by Deutsche Bank. I think the important point that I would make today on Euro clearing is that LCH has really gone from strength to strength. You can see the growth in our business this year. We have seen good growth in clearing, both in client clearing, but also, I think, continued increases for members. LCH is the leading OTC clearer. LCH has 21 different currencies, over 59 jurisdictions. We operate across the entire curve, and we operate in cooperative regulatory arrangements. The important point here, as you know, is the customers really need access to this global liquidity pool. They don't want fragmentation, and it's never going to be just about one currency and one product and one part of the curve.
I think our focus is continuing to maintain the leadership that we have in OTC clearing by providing our global customers the maximum opportunities that they can have for capital efficiencies in compression and netting, also continuing to innovate and deliver new services.
I think, Anil, finally, your question, if we've caught all of them, was on client clearing on the FX side. As we talked when we talked about ForexClear, we said this is obviously a business that's growing quickly. We've got new developments coming through. We've listed some of those, G10, NDFs were launched at the end of last year, so they're beginning to grow. The FX options clearing only just gone live. We've also mentioned client clearing will come online. We've also got compression services to some extent coming through. Client clearing is just one in the mix of different products coming through that we expect to fuel the ForexClear. Uncleared margin rules is clearly a driver of that.
Okay. When will client clearing start?
I don't think we've put a date on that.
Okay. All right. Thank you. It's helpful.
Okay. We'll go to our next question.
Thank you. Our next question comes from the line of Philip Middleton from Merrill Lynch. Please go ahead.
Thank you. Almost everybody's questions has been asked, just a couple of other ones. Could you tell us, please, how much of revenues in FTSE Russell came from licenses in the first half? I know that number's been going up post the Citi acquisition. Secondly, on the FX client clearing, if you look at the IRS market, it looks to me like client clearing is about half of the volume. Do you think that's achievable in FX as well?
Hi, Philip. Look, I think on the first one, I think in the past, I don't think we've actually broken down the differences in terms of revenue between subscriptions and licenses. What has happened is that we are still maintaining good growth. Obviously licensing type of revenue has gone up in terms of, given the increase in ETF activity that we've seen. We're still basically in the same split of about 60%-65% on subscription-based and the rest on the licensing fees. That's not changing. Again, the ETF part of that remains a smaller part of the licensing part. Probably maybe that's drift up a little bit. Again, we don't really break it down, because I think the strength of our business is that revenue model is quite diverse around strong data subscription revenue recurring and more of the volume or market-based revenue.
On the FX client clearing, obviously we do expect it to come. Obviously, I think we've also said in the past that we do see some parallels in terms of how FX will grow and evolve, as it compares to SwapClear, a completely different product. We do expect client clearing to come, but at this point in time, we're just not in a place where we can really judge how it will actually come in, when, and on what pace. All we can really say right now is it's part of what we see as a strong potential for continued growth, in the FX business. If I could just add something to your question, I think what is significant about FX clearing, we're reporting in this path, is the introduction of the options clearing.
That is going to allow us to get into a much broader part, a much bigger part of the market, that we've always known is out there. We know it requires a settlement solution, and we now have that. Again, I think it's just part of a broader growth story that we see in terms of confidence in the growth of the FX business.
Okay. Thank you.
Thank you. Our next question comes from the line of Owen Jones from Citigroup. Please go ahead.
Hi, good morning. Thank you and welcome today to your first analyst call. A couple of questions, please. In terms of LCH, if we look across the activity metrics for the first half, you've reported pretty strong growth, but the average collateral balance has reduced very slightly. Just be keen to understand that dynamic a little bit, because obviously that will have an effect on your NTI for the second half. In terms of your Brexit planning, is there any update that you can give us in terms of how you're thinking and feeling about Brexit? I noted your comments about the approval planning and the licensing planning. You didn't mention anything about LCH SA potentially changing its regulatory approvals, perhaps from a product perspective. Is that how we should now be thinking about your planning, perhaps from an IRS perspective?
Finally, Borsa Italiana, if you look at the terminal numbers, they had quite a sharp step down during the period. Just keen to understand what's happening there. Thank you.
Okay. Why don't I tell you what, I'll take the one on Brexit. I think there was some detail on collateral balances and terminals at Borsa. I might look to Paul for some detail on that. I think as it relates to Brexit, I think in general as a business, and as we've said before, we are well-positioned globally, and we're well-positioned for any outcome. I think also importantly, we're taking steps to support in close discussion with a range of stakeholders, politicians, regulators, industry, and this includes our customers. The steps that we've taken now in terms of contingency planning, I spoke to on the call already. We have taken steps in terms of LCH Limited, and that it will apply for third country EMIR recognition as a CCP, and that SA and CC&G will apply to the Bank of England for recognition.
What this is doing is basically taking the necessary steps in terms of contingency planning, so that we can support the current model, which is what customers want. Customers want a continuation of the clearing services that we offer globally, and we're taking steps to be prepared for those actions.
Okay. Comment on the collateral balances at LCH, Owen. You're right, period to period, there wasn't a big change. We have actually seen within the quarters a bit more movement, and certainly has been a step up in the average cash A quite large increase in the second quarter, for instance, by some GBP 1 billion or so. It is one of the drivers of the treasury line. In addition to that, and apart from the comments that we made around the NTI performance, that's one of the drivers, but also some of the return is generated by placing the investments with the different counterparties and the change in the rates environment as well. It's strong. We can't tell you from period to period how much it's going to change in advance. Your other question was around the Italian terminal numbers.
They have come down, as you say. The typical revenue take on a professional user of Italian market data typically has been about just one-third of the take on professional terminal in U.K. data. The effects on revenue aren't as marked. You've got a smaller concentration of users in Italy overall. If a particular bank, for instance, decides it's going to stop distribution of certain terminals or access, that has an effect. There's nothing more underlying to the numbers than that.
Okay. Thank you. Just a very quick follow-up on David's comment, if that's okay. My interpretation of what you said in terms of the client demand for things staying as they are, does that mean that you're not going to look to use LCH SA to a greater extent under a Brexit scenario from a product perspective?
I think what I'm saying is what the customers want is for the existing services to remain the same. They want to avoid fragmentation. I think the one thing I would highlight, as it relates to LCH SA, is we definitely have seen an increase in the amount of repos that are clearing at SA. Between London, we offer repo clearing at LCH Limited and SA. We cleared about EUR 100 trillion in the half. What we are doing is, we are able now to clear not just French, Spanish, and Italian bonds in SA, but we're now able to clear German and Belgian bonds. Customers have the choice, and many customers now are moving their clearing activity and repos to LCH SA. They have the choice to do that, and what they're able to do is to be able to get the benefits of netting under T2S by doing that.
We expect that those shifts will continue as customers continue to move to SA for the further netting benefits that they can get under T2S. Obviously, repos are quite different than swaps, but this is an area where we are really working with customer preferences to build out the offering that we have within LCH SA as it relates to repo clearing.
Okay. Thank you very much.
Next question, please.
The next question comes from the line of Kyle Voigt of KBW. Please ask your question.
Hi, good morning. Maybe just another follow-up on FTSE Russell. I think you disclosed organic constant currency growth of 11% for the first quarter and now 9% for the first half. I guess that would imply something closer to 7% for 2Q. Just wondering what caused the slight deceleration in growth sequentially. Was it primarily lower exchange- traded derivatives activity, or was there something else going on there?
It was a number of factors. Currency effects are still part of that as well. I think there were a couple of specific points which that I'll let Paul comment on.
Morning, Kyle. I think if you look sequentially at the FTSE Russell Index revenues, we had GBP 150 million of revenues in the first quarter, GBP 159 million in the second quarter. Actually sequentially, we've seen a pick-up from Q1 to Q2, something like a 6% increase. I think currency contributed about 2%, there's about 4% of underlying growth there from quarter to quarter. It's quite strong. Q2 on Q2 last year, it's again, probably a stronger comparator, so it doesn't look quite as strong.
Okay. Fair. I was just talking about the year-on-year comparison, I guess. The first quarter
Yeah
was really strong growth, that kind of tapered off a little bit in the second quarter, understood. I guess just another follow-up on the Fidelity self-indexing and the zero fee offering. Just is there any way to help us frame the percentage of the ETF-based fees that you generate that are driven by your market cap weighting indices versus some of the others, like fundamental or Smart Beta?
We don't break it out in that level of detail. I think if we think about the revenue mix, and we have, say, 35%-40% of our overall revenues in FTSE Russell that come from AUM-driven license fees. About 20% of that are ETFs, it's a smaller part. It's a part of the overall license revenues. We haven't broken out in any further granularity, as it relates to the different types of indexes that are part of those ETFs.
Okay. All right. Fair enough. The last one for me, I guess, is just in the Turquoise business. You highlighted the success in the Turquoise Plato Block Discovery in the quarter. Clearly, we're seeing that coming through the volume data. We are calculating some deterioration in the total Turquoise revenue year-on-year. Can you just talk about some of the headwinds you're facing in the rest of that business right now outside of Block Discovery, and whether you expect that to persist near-term?
I think you have to understand the H1 performance in the context of the implementation of MiFID II, and the fact that the regulations are still evolving, and the fact that there was a three-month delay in terms of the full disclosures on volume caps. I think that's a big part of the H1 performance. I think what I would say generally about MiFID is it's customers. We managed a good transition, but customers are still very much adapting to the regulation. I think there are a number of factors that contribute to the performance for H1. Again, I think a lot of those are relating to customers continuing to adjust. I don't think we really are seeing what the true patterns will be going forward.
All right. Thanks, David. Thanks, Paul.
Thank you. Our next question comes from the line of Arnaud Gibelin from Exane. Please go ahead.
Good morning. First question's on FTSE Russell. Sorry to continue on this, organic revenue's up 90%, AUM up 22% year-on-year. You mentioned that 60%-65% of revenues were coming from subscription-based, and that has shown progress. Therefore, I can infer from that that you've seen quite a material pricing pressure on the asset-based revenues. Is that something you can confirm? What's the outlook there? I would have thought that with a high proportion of AUM coming from Smart Beta, presumably the pricing is more stable there. Do you think that pricing can stabilize over time? My second question was in relation to the third-party application on the EMEA license for LCH.
How confident can you be on that given all the political pressure on third-party recognition coming from Europe, and the real political willingness of trying to repatriate your interest rates for clearing for Europe-based clients back into Europe? Thank you.
Thanks, Arnaud. Let me take your second question first. I think there are probably some technical points on the first one. I think when we come to the answer for the first question, I think there are a number of points that some of the question implies a level of detail that we just don't disclose. I'll let Paul follow up on that. I think with respect to our overall planning as it relates to Brexit, first of all, I think the point I would make, as I made before, is we're not in a position to predict the outcome of the negotiations, and we haven't been given sort of regular commentary on the process. I think importantly, we continue to remain very actively engaged across the range of stakeholders, political, regulatory, and industry.
I think what we have done, I think as customers would expect us to do, is taken the necessary steps to make sure that we're preparing for the range of outcomes. That is what we have done. We are in the process, as I've said, of making the application for recognition of LCH Limited as a third country EMEA recognized CCP, and similarly with the Bank of England, the same type of application for recognition with the Bank of England. Those are the steps we've taken. We're working on pushing those steps through. As to the outcome, I'm not in a position to speculate on it. We just continue to remain very actively engaged to make sure that our contingency plans that will again support kind of continued operation of the markets today can continue. Paul, on the first question?
Going back to the FTSE Russell. Where we were at the end of last year, as David's already said, is around 60% or so of the revenues came from subscriptions. That has increased a bit because we've had a full six months of the Yield Book and [inaudible] coming to peak, most of which revenue is more subscription in nature. That kind of pushes us more towards the 65% end. That doesn't mean to say that the revenue therefore we get from the asset base has shrunk. It hasn't because the overall pie has grown. We've talked about the headline growth in FTSE Russell is going up 19%. The asset-based revenues, that remaining 35% or so, is made up of three areas.
ETFs, about half of it, as we've said before. The non-ETF passive or tracker-type instruments is in there, and then the revenue that we get from the index derivatives trading is the other component part. When I look at the numbers, and I'm conscious that we don't discreetly spread these out each quarter publicly, when I look at those numbers, the ETF component part of that has grown year-on-year. We saw a 22% increase in the ETF AUM. It hasn't grown by 22%, but it's certainly grown in double-digit terms. The reason why it hasn't grown exactly in the same percentage amount is for the reasons we've talked before, where the basis point take is the driver of the revenue there.
It isn't a direct linear link because there's some minimum fees, there's some maximum fees at various according to which kind of ETF product it is. I'm absolutely sure that the quality of the growth line in the ETF is increasing. You're right, Arnaud, you make more money in some of the areas, some of the ETF products, where you've got more higher added value, if you like, the complexities, the data, the calculations against some of the other products. That's just normal pricing policy, where you're providing more value, it's harder to produce the product, so you charge more for that. There's nothing really changing in that mixed term. Everything is pretty much as we talked about in terms of the revenue mix and the quality of that mix. The ETF component of that is and has grown over that time period.
Great. Thank you, very helpful.
Thank you. Your next question comes from the line of Chris Turner from Berenberg. Please go ahead.
Yes, good morning. It's Chris Turner from Berenberg. Just two questions from me, if I may. Firstly, on your costs, I think you mentioned the creation of 200 roles in Romania. As you transition costs over to that location, presumably it becomes possible to remove some of the dual running costs there. How should we think about the potential benefit from that in maybe H2 or maybe 2019? Secondly, regarding the launch of clearing of non-deliverable swaps and also FX options, I guess obviously both of those products are deliverable, so you've had to work with CLS. Can you explain a little bit about how the economics of these products will work? Will there be a revenue share or some kind of rebate to CLS?
Finally, I guess, related to that, given the pace at which the uncleared margin rules are going to roll out, do you have any plans to launch any other deliverable products, FX forward, FX swaps and so on? Thank you.
Okay. Thanks, Chris. On the first question, I think we are continuing, as we've said, we are continuing to invest in the build-out of the business service center in Romania. It's across a range of further investments we're making for further operational efficiencies. There is some dual running in this year. It's one of the reasons we're talking about increase in terms of the phasing of our spending, why we talked about some increased costs in the second half of the year as against the first. We do expect, and the whole plan is obviously to move a number of our core operations and corporate operations and in IT to lower cost centers. There will be a benefit that will come, but that benefit comes more in 2019 following the build-out of that center this year.
I think with respect to the question you asked on the clearing and FX options, we do have a good partnership with CLS, we don't disclose the details of that arrangement. Obviously, we're quite happy with the engagement and very pleased with the product that we've developed with CLS over a period of years. In terms of further innovation within SwapClear and the further application of the uncleared margin rules, it's definitely something that is in our planning. I go back to an answer I gave to an earlier question. It is part of the range of reasons why we believe that there are really good, strong growth prospects for ForexClear overall. I'm not going to talk about any specific plans right now for new products. As you would expect, there are a number of different activities and different services that we're working on.
Very clear. Thank you.
Thanks, Chris. Can we have the next question, please?
Thank you. Our next question comes from the line of Gurjit Kambo from J.P. Morgan. Please go ahead.
Hi. Good morning. Gurjit Kambo here. Just in terms of your relationship with the NEX Group, and obviously now part of CME Group in the U.S., what's the relationship there? Are you looking at building out your own proposition within areas such as the compression services, etc., or is it business as usual? That's the first question. Just second one on the OTC derivatives clearing. Within CDSClear and ForexClear, what's the pricing strategy there? Is it similar to what you have in SwapClear? Or do clients get some sort of benefit if they use a combination of more than one service?
Right. Thank you. In terms of NEX, it is
It really continues to be business as usual. We continue to operate a range of optimization services with LCH. Obviously, a big part of that are the compression services that LCH operates. There are other third-party optimization services, obviously including NEX, and right now it just continues to operate as it's operating. I would expect that customer preferences exist today for the types of services that we're providing, and you would expect customer preferences would be a big part of how the provision of those services will work going forward. That's really all I can say right now, is that it's functioning as it has always functioned, providing a value from a range of optimization services.
With respect to the pricing and pricing structures in some of the other OTC asset classes, as it relates to the members, they operate quite similar to, not identical, but quite similar to the IRS business, in that there's a member fee, and there is some revenue-sharing arrangements. I think in terms of a further detail, Paul, we haven't given that in the past, I don't think we are saying more today.
The prices are all on the website. The prices are very transparent. To your point, Gurjit, is about whether there's any kind of discount. If you've got members using more than one service, they're all separately priced-
Right
Kept separate.
Great. Thanks very much.
Thank you. Our next question comes from the line of Johannes Thormann from HSBC. Please go ahead.
Morning, everybody. Johannes Thormann, HSBC. Three questions and follow-ups probably. First of all, on net treasury income. Can you break down the cash collateral by currency and also say how much duration do you have on your portfolio for that business? Secondly, previously, some years ago, we still had a breakdown in the OTC fees between SwapClear and the FX clear. Is the share still 80/20 or has this moved? What has been driving this, the biggest growth driver in LCH revenues have been actually other fees. What has been driving this fee income growth over the past years? Last but not least, how much is the decline in other costs driven by organic means, or what has been driving this? Thank you.
Yeah. I think in terms of if I go from in reverse order. If I take the cost story at LCH, that is really around control of core operating expenses. A lot of the investment in terms of project spending that we had been making in the past years as we were bringing out a lot of new products and services. Some of that increased investment, although we'll continue to invest for growth, some of that increased investment has started to tail off as a number of these new products, as an example, options clearing, is now coming into service. That's an important part of what's really happening there is just continuing to find efficiencies in LCH as part of a whole broader program of finding cost efficiencies within the London Stock Exchange Group broadly.
Should I-
On the other, I'll just pass it to you, Paul, but I think what we record in other income within LCH is our fees around compression services, that's a service that's been growing strongly.
Johannes, when you look at the breakdown of both the revenues and also the income, you've got two other categories. In the other income category, where we didn't have any income this year against GBP 7 million last year, that's really come about just by the change in way which we accounted for what were cost of sales there for the LIBOR data fees, and then we getting it off. That's the reason for the change there. You'll see a reduction in the income. When we look at the other revenue line, that's gone up from GBP 29 million to GBP 40 million, there's several component parts to that, but the two largest parts of that other revenue line are the non-cash collateral and the compression fees, and both of those have increased over the period. We don't give any further split out.
There are also some other services and some other lines that are caught in there as well that have also gone up, that just don't neatly fall into the clearing revenue lines. That's the reason that underlies the increase in that area. We don't split out, and haven't done for a couple of years now, the revenue between SwapClear service, the FX service, and the CDS one. Broadly, your split of 80/20 in favor of the SwapClear service still holds. The biggest driver of the SwapClear service has been, in this period, as it has been in the last year or so, has been the big increase in the amount of client clearing. That's what's really continuing to drive in that clearing line, as well as obviously compression and other things that appear elsewhere.
I think your other question, your first question, was on the cash collateral, on the breakdown by currency. We haven't given an exact split on that. Broadly, if you think about the split between the currency of the swaps, with over half of that being dollar-denominated, 25%-30% of it being EUR, and the rest GBP and other, that's broadly the split in terms of the cash margin as well. The majority of the NTI is driven by the returns on the U.S. cash component, and that's where we've obviously seen the change in the interest rate environment and where there's been more scope to make stronger returns. The average duration that you talk about, a high proportion of it has to be on very short-term duration. The nature of having the cash effectively available on very short turnaround is still clear.
Where we are able to go out on the longer term, and typically, I think the average period is about just over 30 days, some of the money can obviously go out on for a longer time period. That's a relatively smaller amount.
Okay. Thank you.
I think we've got one more question left.
Thank you. Just as a reminder, it's star one to ask a question, we have another question from Martin Price from Credit Suisse. Please go ahead.
Good morning. Just a quick question on LCH. I think the revenue-sharing agreements with banks that apply to parts of the OTC clearing business are up for renegotiation this year. I was wondering if you could provide some thoughts on where you are in that process and perhaps when we should expect to hear something on the outcome. Thank you.
We have in the past really not given any detail. Obviously, the operating agreements have there and have been there, but we have not given detail in terms of those agreements. They are confidential agreements between the banks and LCH. It's not something we can provide any further clarity on today. I think just have to leave it at that.
Would it be fair to assume that there has to be a new contract in place for next year, then, David?
I think what we've said is they come up for renewal periods at various points in time. I think if you see what we've done in the past, when we have reached a new agreement, we've been able to give some further disclosures as to what that is, and within the bounds of the confidentiality, give some clarity about what the changes are. I think what I would say at this point is we continue to proceed on that basis. These contracts do come up for various renewal periods. There's really not much more I can say at this point in time because they do remain confidential agreements.
Understood. Thanks, David.
Thank you.
I think then that we've run out of questions finally. We've gone through the hour mark as well, so it sounds like a pretty good place to stop. Thank you for joining the call. Thank you for your questions. I'm sure we'll catch up with a large number of you over the next few days and weeks. Thank you very much for signing on. Bye.
That concludes the conference call today. Thank you all for participating. You may now disconnect.