International Operation and Risk Management of ICAP PLC - Essay Example

? International operation and risk management of ICAP plc Contents Contents 2 Introduction: ICAP plc 3 Performance - Financial Trend 3 Globalization strategies 8 Managing Risks 10 Foreign Exchange risk 10 Country and Political risk 11 Recommendation for the management of different types of Risks 13 Conclusion 14 References 15 Bibliography 18 Introduction: ICAP plc ICAP plc is an electronic and voice dealer broking company that is based in the UK. The company provided various kinds of risk management services and is by far the biggest of its kind. The company provides services related to risk mitigation and providing necessary information regarding the mitigation of risk. The company provided services to most of the financial institutions of the world and generally does not include individuals in their portfolio of customers. The company is a public limited company and is listed on the London Stock Exchange. The company was founded in the year 1986 and has more than 5000 employees who provide the risk services in the company. The company focuses mainly on the key principles of leadership, Integrity, entrepreneurship as well as respect for control. Performance - Financial Trend A ratio analysis has been conducted for ICAP in order to understand the financial performance of the company. Ratio Analysis     2013 2012 2011 2010 2009 Liquidity Ratios Current Ratio 1.026 1.004 1.003 1.002 0.999     2013 2012 2011 2010 2009 Cash Ratio 0.089 0.017 0.016 0.025 0.014           Profitability Ratio Gross Profit Margin 0.990 0.989 0.984 0.765 -     2013 2012 2011 2010 2009 Operating Profit Margin 0.145 0.160 0.163 0.176 0.191     2013 2012 2011 2010 2009 Net profit Margin 0.030 0.083 0.109 0.074 0.117 Leverage Ratio Debt Ratio 0.939 0.985 0.984 0.981 0.966     2013 2012 2011 2010 2009 Debt Equity Ratio 15.31 66.19 60.37 48.89 28.68           Profitabilty Indicator Ratio Return on Assets 0.09% 0.17% 0.49% 0.24% 0.55%     2013 2012 2011 2010 2009 Return on Capital Employed 0.41% 0.33% 0.40% 0.58% 1.78% Liquidity The current ratio of the company has increased by 22% over the last one year from 1.004 in 2012 to 1.026 in the financial year 2013. The inventory of the company for all the years is equal to zero. This means that for ICAP the current ratio and the quick ratio are the same (Atrill and Mclaney, 2008, pp. 142-178). The increase in the current ratio means that the company has efficient cash management and that the company can meet its short term debt obligations quite comfortably (Kieso, Weygandt and Warfield, 2007, p. 738). Thus ICAP has sound liquidity position. Profitability The profitability levels of the company can be estimated from the profitability ratios as shown in the table above. The gross profit margin for the company has increasing steadily from 2011 to 2012 and then from 2012to 2013. The gross profit margin for the year 2013 is 0.939 which means that the company has been able to use the different resources that it has in the most appropriate way (Williams, Haka, Bettner and Carcello, 2008, p. 266). Source: ICAP 2013, p. 03 The operating profit margin for the company fell almost more than one percent in the year 2013. Thus it shows that the company has not been able to achieve economies of scale for the last one year but the steady figure over the years reflects the efficiency of the company in maintaining the scale of operations (Gallagher, 2003, pp. 94–95). The different compositions of the operating profit of ICAP as per the different businesses have been shown in the dough nut chart as above. This means that most of the operations of the company are equally prosperous and has been able to achieve the desired scale of operations for the long term (Weston and Brigham, 1990, p. 295). The return on assets for the company is 0.09% in 2013 as compared to 0.017% in 2012 and 0.27% in 2011. Looking at the steady level of net income of the company it shows that the company has increased its assets over the phase of 3 years which has resulted in a declining ROA (Tracy, 2004, p. 173). On the other hand the return on Capital employed of the company has increased over time which signifies that the company is being able to get a considerable return over time form the capital that the company had collected either through debt or from the funds provided by the equity holders of the company (Rosenbaum and Pearl, 2009, pp. 45-59). The leverage ratio of the company reflects the fact that most of the funds of the company have been collected from the debt and the other long term borrowing and a smaller section of the fund comes from the equity shareholders (Hennessy and Zechner, 2011, pp. 3369-3400). At present the debt-equity ratio of the company is 15.31 which mean that the amount of debt is almost 15 times more than the capital funded by the shareholders of the company (Heinkel and Zechner, 1990, pp. 2-21). Globalization strategies Degree of competition, geographical location, financing and implications The revenue earned by the company as on 31 March 2013 is 1472 million pounds. There are mainly three divisions of the company that control the various services like the Global Broking Services, Electronic market services as well as the Post Trade Risk Mitigation as well as Information services (ICAP plc, 2013, p.1). The variations in the distribution of revenue have been explained with the help of the following diagram. Source: ICAP 2013, p. 03 The volume of trading in the financial markets that takes place through the processes of the company daily is equivalent to $ 1.3 trillion. It is clear that the major part comes from the Global Revenue division of the business. The company has presence in the Americas, Asia Pacific as well as the EMEA regions. In the US the company has an extremely strong presence (Myers, 1977, pp. 147-175). The services like voice broking, information sales as well as the electronic broking are the segments that contribute to the revenue of the company in this area. The company has offices in the major locations like New York, Houston etc in the US and in Brazil in Rio de Janeiro as well as Mexico etc. This means that the brand has been able to make its mark in these places and is being able to maintain a dominant position among the competitors. The services that the company provides in these regions are the foreign exchange services, patent broking services, equity market services, credits and interest as well as commodity market services. In the Asia Pacific Region the company has a major presence in most of the countries and locations where financial markets are present which include Mumbai, Hong Kong, Tokyo, Bangkok, Australia, Beijing and many other notable regions. The Europe, Middle East and African regions also have the ICAP presence in London, Paris, Madrid, Dubai, Copenhagen, Johannesburg, Amsterdam and many other locations where there are stock exchanges and the financial markets operate actively (Sullivan and Sheffrin, 2003, p. 512). The company mainly targets the markets of the financial institutions who undertake the activity of risky ventures. ICAP does the risk management activities on their behalf but not for the individual clients. Thus the market is mainly for the financial corporate. Most of the services that the company provides take place through the electronic media (Barberis, Huang and Santos, 2001, pp. 7-53). The competitors of the company are BCG partner, Tullet Prebon as well as the GFI group. The market share of the company has been depicted in the chart below. Source: ICAP, 2013, p. 19 Managing Risks Since ICAP provides the services for the mitigation of risks to financial institutions, the company itself is exposed to a lot of risks. The risk profile of ICAP is however different from that which is faced by the business, banks, insurance companies or the asset management companies. The company basically provides fee based services but has to face various types of risks and more prominently exchange rate risks, currency risks as well as political or country risks (Crouchy, Galai and Mark, 2001, pp. 11-33). The various types risks that each of the business units of the company can face has been explained one by one. Foreign Exchange risk ICAP operates in the international markets and as it has already been seen has operation in more than five continents of the world. Thus there would be various kinds of foreign exchange risks that the company would be exposed to. The foreign institutional investors who are the beneficiaries of ICAP would want to invest in the global markets. Thus the company would also face the risks specific to the countries where the company has operations. Thus the changes in the value of one currency with respect to another currency would have an effect on the investors or the enterprises that have their money invested in some other nation or has cross border operations. ICAP would be exposed to these risks because they have are in the practice of dealing with such clients who have their money invested in the foreign markets or have their inter-country businesses (Deloitte, 2012, pp. 3-6). For example, US $ have faced a lot of fluctuations in the currency over the last few days. This would have an effect on the asset position of ICAP because a major part of the operations of ICAP is in the US territories. The changes in the value of the currencies may result in the shortfall of the consumer demand in a particular country. The investors in such cases may be more inclined towards investing in the long term bond market rather than the equity markets. This would have an effect on the volume of transactions in ICAP (Mackenzie and Millo, 2009, pp. 638-653). The payables and the receivables from the cross border operations of the countries may be exposed to such problems. The company has to manage cash on a short term basis (Deloitte, 2012, pp. 3-6). The company deals with a lot of international customers and their funds are dealt in a t+3 settlement framework. The services of ICAP across the countries would witness various issues with the Nostro and Vostro accounts in regard to foreign exchange. Unless the short term interest rate fluctuations are managed the short term cash flows that would be available to ICAP would face adversities (Pennacchi, 2005, pp. 432-465). The companies in order to hedge these kinds of risk of currency go for currency swap with the use of hedging strategies with derivatives or simple equity instruments. The companies often have their supply chains in different and this makes the handling of cash across the barriers of the countries complicated. The currency crisis and other financial issues in one country would lead to lag in the payment to ICAP. There might be parties defaulting. Thus the currency values would have an effect on the cash flow of the company from the foreign nations. Country and Political risk The uncertainties of the political and the global arena have also exposed the company to a huge number of risks. The foreign policies of international trade of a country would have an effect on the businesses. The macroeconomic policies would either encourage the investors to spend more or to draw out their money out of a particular country and to invest it into another country (Power, 2007, pp. 37-59). Along with those any kind of strategic events like any war or encounter in a country may cause the reduction in the volume of transactions in the financial markets (PricewaterhouseCoopers, 2012, pp. 6-9). Most of these may arise out of the political events around the world. Any change of government would have a change in the investor sentiment and in turn would have an effect of political risks on the company (Fligstein, 1990, pp. 72-94). Since most of the funds collected by the company are fee based decrease in the volume of transactions would hamper the revenue of the company. The political risks that a company faces would be either at the macro level or the micro level. The macro level policies of the government would affect the entire business environment and the entire financial services industry. These would not be exclusive to ICAP but also have an impact on the competitors and the other stakeholders of the entire industry. For example the implementation of the Sarbanes Oxley Act in the US had an effect on the entire financial services industry (Arena, Arnaboldi and Azzone, 2010, pp. 659–675). A huge amount of regulatory bindings would definitely have an impact on the volume of trade that takes place in ICAP. Along with this the company has to incur a huge amount of operational costs due to the mandatory SEC filings. These actions on part of the government have posed a threat to ICAP and have affected the balance sheet of ICAP. These risks may be considered as the political risks and may be country specific. These risks also affect the foreign investors who intend to invest in the US financial markets. Thus political issues may also expose the company to a lot of possible damages (Swoboda and Zechner, 1986, pp. 327-341). However this would not be specific to the company but would affect the competitors of ICAP as well. ICAP is also affected by the micro level political risks which would be exclusive to the company. ICAP has to acquire the necessary licenses as well as grants from the companies in which they operate. There might be opposition from the political parties which are not in power in case they want to enter a market or affects the interests of the local people to a large extent. The company may also face public relations damage and reputation damage which may influence the local political parties in a negative way. The board of director of the company is entrusted with the entire risk management activities. Thus the board of governance of the company has to set up a framework that would provide the solutions for mitigation of the risks that may emerge from time to time. The company needs to carry on with a proper governance model so that the compliance and the regulatory norms are followed in a proper manner in all the countries where the company operates (Holmstrom and Tirole, 2001, pp. 12-15). Thus the corporate risk culture is being introduced in the company. Recommendation for the management of different types of Risks The exchange rate risks can be managed by the company by indulging in the various kinds of derivatives and other financial instruments so that the risks are mitigated by diversifying across the countries. Since the exchange rates of the countries would vary the company can take advantage of this by investing in one country where there is better prospect. The country which would have a better liquidity position would act as a better investment destination for the institutional investors. On the other hand the political crisis in one country would have an effect on the entire financial system and the company has to review the policies that are intrinsic to it with the changes in the government tax policy or the central banks’ monetary policy. ICAP as a business having operations in the international markets would not be able to influence the government policies at the micro level. Thus the changes in the government of a country or the possible policy alterations have to be well forecasted in order to gauge the exposure that ICAP would be facing on the verge of the change. Enough protection has to be taken through accounting techniques and hedging of exposures have to be done before hand to minimise the level of loss. For successful method implementation there is a need for the testing of the stress testing capabilities of the company at all the levels. A thorough probability analysis is also desirable which would help the company to understand the markets and the shift in the demand pattern among the consumers (Brunnermeier and Pedersen, 2009, pp. 2201-2238). Conclusion Thus from the above analysis it is clear that ICAP has a sound financial as well as market position which is understood from the various metrics that have been computed and analysed in the initial part of the essay. The later part of the essay analyses the various kinds of risks that ICAP is exposed to. A detailed analysis of the risks also shows the direction in which the company would be able to mitigate them taking the necessary steps. These would ensure the company would be able to survive in the long run in a sustainable environment. References ICAP plc, 2013. About the Group. Available at http://www.icap.com/about-the-group.aspx [Accessed on 10 Dec 2013] ICAP plc, 2013. Annual Report 2013. 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