The report on expected developments describes the ex- pected development of Deutsche Börse Group in 2009 and 2010. It contains statements and information on events in the future based on the Company’s expectations and assumptions at the time of publication of this report on expected developments. These expectations and as- sumptions are in turn subject to known and unknown risks and uncertainties. Numerous factors influence the success, the business strategy and the financial results of the Group. Many of these factors are outside the Com- pany’s control. Should one of the risks or uncertainties materialize or one of the assumptions made turn out to be incorrect, the actual development of the Group could deviate in either a positive or a negative way from the expectations and assumptions contained in the forward- looking statements and information in this report on expected developments.
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Development of operating environment
After several years of continuous growth, the global econ- omy is currently in a state of great uncertainty as a result of the global financial crisis. In the fourth quarter of 2008 the economic environment deteriorated yet further after the collapse or near-collapse of US and European finan- cial institutions. Extensive measures on the part of central banks and governments throughout the world to support troubled companies at the end of 2008 were followed by further steps in the first weeks of 2009 to stabilize both the economy in general and specific banks and compa- nies and to restore confidence in the financial markets. At the time the consolidated financial statements were prepared, discussions were being held in several coun- tries regarding the establishment of institutions to take over and manage distressed banks (“bad banks”). The reason for this is an attempt to improve the financial institutions’ risk situation, which continues to be difficult, and in so doing to stabilize the financial system.
In view of the last months’ dramatic events, Deutsche Börse Group cannot predict just how far-reaching the global economic downturn will be and how long it will last. In their first forecasts for 2009, leading economic research institutes are predicting negative economic growth of around 2.0 percent in the euro zone and 2.5 percent in Germany. If the predicted contraction in the economy is worse than anticipated, Deutsche Börse Group believes that the financial markets may continue to be dominated by uncertainty and caution, and the prices for certain securities remain low. If additional fi- nancial institutions should collapse in the near future, Deutsche Börse Group is of the opinion that this could have a considerable effect on the stability of the global financial system and lead to a further deterioration in eco- nomic growth. The events of the preceding weeks and months have shown that if this should occur, the expecta- tions and assumptions referred to in this report should be reviewed carefully.
Despite the change in the operating environment, Deutsche Börse Group has no plans in the forecast period for any material changes to its integrated business model with an emphasis on trading, clearing, processing and custody of
securities and derivatives. Based on its successful busi- ness model, which covers the entire process chain for securities transactions and the most prominent invest- ment classes, Deutsche Börse will continue to observe trends in the financial markets worldwide and leverage them for the development of its products and services. The Company’s key strategic goal is to provide all cus- tomers with outstanding services. With its scalable elec- tronic trading platforms, Deutsche Börse believes it is very well positioned to compete with other providers of trading and settlement services.
Development of results of operations
Based on the assumptions regarding the development of the operating environment and on flexible planning and control systems, Deutsche Börse considers itself well pre- pared to react to a changing market environment: After achieving savings of over €50 million in the year
under review under the restructuring and efficiency program announced in September 2007, the Company plans to make additional cost savings of €25 million each year in 2009 and 2010 and annual savings of €100 million thereafter.
Already in February 2009, the cost guidance for the current year was reduced to a maximum of last year’s (2008) level, without factoring in any changes in volume-related costs and while retaining key growth initiatives.
In June 2008, around half of the employees located in Frankfurt-Hausen moved to neighbouring Eschborn. This will reduce the tax rate for 2009 still further and thus improve after-tax earnings. The Company expects a group tax rate of around 27 percent for 2009. The plan is for the main part of the remaining staff in Frankfurt-Hausen to move to Eschborn in mid-2010. The Company therefore expects a group tax rate of be- tween 25 and 27 percent from 2010. The concrete tax rate for 2010 will in particular depend on the exact time of the move.
110 The Financials: Group Management Report
Xetra segment
Sales revenue in the Xetra cash market segment will con- tinue to depend on equity market trends, equity market volatility, and structural and cyclical changes relating to trading activity.
Structural changes in the equity market stem primarily from the increasing use of fully computerized trading strategies, known as algorithmic trading. The Company continues to expect a high proportion of algorithmic trad- ing in Xetra trading volumes.
Volatility was at a very high level over a longer period from the third quarter of 2008. Continued high volatility could provide the Xetra segment with additional momen- tum for growth, as trading is particularly brisk during such market phases. However, the continued uncertainty and caution of market participants in the first two months of 2009 have overshadowed the positive effects of vola- tility, which is still high, and as a result the overall num- ber of traded transactions has fallen sharply compared to last year. In addition, the lower index levels resulted in a strong decline in volumes traded in euro.
Despite the intact structural drivers, which in principle influence business development in a positive way, the Company does not expect a noticeable recovery on the cash market until stability and confidence have returned to the global financial markets.
The Company is not only developing its own cash mar- kets but is also closely monitoring events as they occur in the competitive environment of the European cash mar- kets. It considers itself well positioned to retain its status as market leader in the trade of German blue-chip shares and to offer its customers across the globe an attractive range of products and services for cash trading and equi- ties clearing.
Eurex segment
Volume trends last year revealed that the general devel- opment of the financial markets has a less significant impact on the Eurex derivatives segment than it does on the cash market. The Company therefore continues to expect structural growth factors to have a strong influence on all product segments. The structural growth drivers are as follows:
Traditional investment funds are increasingly includ- ing derivatives in their portfolio strategies as a result of the European legal and administrative framework (UCITS III).
Due to the high significance of risk management, more and more OTC transactions are shifted to Eurex Clear- ing for settlement so that the counterparty risk can be eliminated through centralized clearing.
Banks and investors are increasingly applying fully automated trading strategies (comparable to algorith- mic trading on Xetra).
In addition, the US equity options exchange ISE, which belongs to Eurex, offers potential for growth through the cross-selling of existing products and the joint develop- ment of new products. Deutsche Börse and ISE are cur- rently developing a new global electronic trading system which is scheduled to start operations at the beginning of 2011.
In the context of the ISE acquisition, intangible assets (net of related deferred tax liabilities) in the amount of €1,623.1 million, including goodwill in the amount of €862.2 million, were included in the consolidated bal- ance sheet for 2007. In the event of a clearly negative business development at ISE – and an impairment test held in that connection – a need to write down the intan- gible assets and/or goodwill either fully or partially could arise. Despite the positive competitive position and growth perspectives of ISE, there is a higher risk of this being necessary in the forecast period due to great uncer- tainty as to further developments on the financial markets.
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Clearstream segment
The Clearstream segment will continue to generate the majority of its sales revenue through the settlement and custody of international bonds. Deutsche Börse predicts that the volume of bonds issued internationally will con- tinue to grow faster than that of fixed-income securities issued nationally.
The Company also expects the number of new issues to increase compared with last year, which would have a positive effect on Clearstream’s business. In the wake of the financial crisis, a number of governments, including those of the United States and many European countries, put together financial rescue packages and will now issue bonds to finance the increase in government debt. With regard to its customer structure, the Company con- tinues to expect consolidation in the financial sector to persist and customers in Clearstream’s domestic and international business to merge. These larger customers would receive larger rebates, which could lead to a de- cline in average fees. As Deutsche Börse faces especially intense competition in the areas of settlement and cus- tody of international bonds, loss of market share and a consequent reduction in Clearstream’s sales revenue could occur. For the forecast period, however, the Com- pany does not expect any loss of market share. As part of the Clearstream segment’s upgraded product and service offering, the Company’s plan for the forecast period is not only to implement the pan-European Link Up Markets initiative but also to extend its collateral man- agement, liquidity and risk management services, while taking advantage of the synergies offered by Deutsche Börse Group, such as the clearing house operated by Eurex.
Deutsche Börse also expects net interest income from banking business to be significantly lower in the current financial year than in the year under review. The Com- pany does not expect a sustained increase in income until short-term interest rates rise in the relevant markets. This assumption is based on the expectation that the relevant short-term interest rates in the main currencies, the euro and US dollar, will generally be at a historic low in 2009. In an effort to counter negative interest rate trends, part of the expected customer cash balances were hedged at higher interest rates than those valid at the time the con- solidated financial statements were prepared.
Market Data & Analytics segment
Sales revenue in the Market Data & Analytics segment is largely dependent on the demand for market data in the financial sector. If this demand should fall off as a result of the financial crisis, there will be a delayed effect on the segment’s sales revenue. Momentum for growth may, however, result throughout the segment from the intended extension of the product portfolio.
Development of pricing models
Deutsche Börse continues to anticipate sustained price pressure in some of its business areas, such as Xetra’s electronic trading activities and the clearing business, during the forecast period. The Company’s objective is to mitigate this price pressure by continually improving its products and services and offering selective incentives for price-elastic business. Despite reducing costs, Xetra and Eurex for example increased their system capacity significantly in the year under review. In addition, both segments offered price incentives for algorithmic trading and special clearing products in the cash market as well as for over-the-counter transactions in the derivatives market. When volumes are low, particularly in the cash market, the phased pricing model may cause a short-term increase in the average sales revenue per chargeable unit. In spite of this, it is to be expected that average sales revenue per chargeable unit will decline slightly over the long term in some areas.
112 The Financials: Group Management Report
Regulatory framework
Large parts of the existing regulatory framework are sub- ject to political review as a result of the current financial market crisis at a national, a European and at a global level. It is to be expected that the regulatory reform of the financial markets will include alterations in the years to come that will also affect Deutsche Börse Group. The result cannot be predicted with any certainty at this time. On the whole, however, Deutsche Börse, with its regu- lated markets and its central counterparty, could be strengthened in its endeavour to ensure market trans- parency and integrity.
At the end of last year, a voluntary industry commitment to establish a central counterparty (CCP) for credit default swap (CDS) clearing came to nothing. At the time the con- solidated financial statements were prepared the Euro- pean Commission therefore sought to regulate the market for credit default swaps via legislation to extend the capi- tal requirement rules for banks. Deutsche Börse considers the clearing of credit default swaps through a central Euro- pean clearing house required by the regulatory activities as a means of extending its service portfolio and at the same time of stabilizing the market for credit derivatives previously traded over the counter. The aim of a central clearing service is to improve risk management and the capital efficiency of the parties involved and to minimize the existing counterparty risk. The targeted range of clear- ing services can only then positively affect Deutsche Börse’s business when the relevant market participants actively use these services. At the time of the preparation of these consolidated financial statements, there have not yet been any clear commitments from key market partici- pants on the use of clearing services for business transac- tions previously executed off-exchange.
Deutsche Börse does not expect TARGET2 Securities, the European Central Bank’s securities settlement platform planned for the year 2013, to have an adverse effect on the result of operations in the forecast period.
Development of the Group’s financial position
The Company expects operating cash flow to remain positive. As a result of the consolidation of ISE, Deutsche Börse now plans to invest slightly more than €100 mil- lion per year in intangible assets and property, plant and equipment in the forecast period as part of its cash flow from investing activities (2008: €94.5 million). These investments will serve primarily to develop new and en- hance existing products and services in the Xetra, Eurex and Clearstream segments. This increase compared with previous years is mainly the result of the development of the Global Trading System together with ISE. In the long term, annual investment activities are planned to fall
below the €100million mark.
Under the capital management program, Deutsche Börse will react flexibly to a changing market environment in the forecast period. Deutsche Börse Group continues to pursue the objective to maintain an interest cover ratio (ratio of EBITDA to interest expenses on financing activi-
ties)of at least 16 at Group level. Both the planned divi-
dend distribution ratio of 40 to 60 percent of consolidated net income for the year and any share buy-backs are sub- ject to capital requirements, investment needs and gen- eral liquidity considerations.
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