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Edited Transcript of CMCX.L earnings conference call or presentation 6-Jun-19 8:30am GMT

Full Year 2019 CMC Markets PLC Earnings Call

London Jun 19, 2019 (Thomson StreetEvents) -- Edited Transcript of CMC Markets PLC earnings conference call or presentation Thursday, June 6, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Fineberg

CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO

* Grant Jeffrey Foley

CMC Markets Plc - Director

* Matthew Lewis

CMC Markets Plc - Head of Asia Pacific & Canada

* Peter Andrew Cruddas

CMC Markets Plc - Founder, CEO & Executive Director

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Conference Call Participants

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* Anthony Da-Costa

Peel Hunt LLP, Research Division - Analyst

* Joanna Elizabeth Nader

RBC Capital Markets, LLC, Research Division - Analyst

* Mark Thomas

Hardman & Co. - Analyst

* Paul McGinnis

Shore Capital Group Ltd., Research Division - Research Analyst

* Portia Anjuli Patel

Canaccord Genuity Limited, Research Division - Analyst

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Presentation

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [1]

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Good to see you all. Thanks for coming. Morning. Morning. Well, we'll get on with things because I know we're all busy here.

And firstly, thanks for coming. My name's Peter Cruddas. I'm the Chief Executive. Got an extra person here today, Matt Lewis, who runs our APAC. He's flown in from Sydney at great expense. Apparently they got snow in Australia at the moment so he's escaping that. They haven't seen snow for about 30 years, did they, where you are, Matt? But Matt will be part of the Q&A session at the end, so if you want to ask him about the ANZ deal or the APAC region, any regulatory changes. Grant would be doing the financial presentation today. This will be his last analyst presentation for us. Done a great job for us. I wish him well and his family and for the future. And Euan's here who's our finance guy as well working with Grant; and then Dave Fineberg who's now Deputy CEO and who's been with me for 20-odd years.

So we'll get on. I mean I'll do a short presentation and we'll go through the numbers, and then I'll talk about strategy and so on. But there's no hiding from the fact that it has been a difficult year from a financial point of view. But from our point of view, we're quite buoyant. I mean we've had quite a good year internally because we delivered on our ANZ deal. And our strategy, Project Tuna, is kind of where the industry is going anyway, and our B2B business is really coming through.

And I think the main purpose of today -- and I've got a script, I'll read that, is to try to convince you guys and try to demonstrate to you guys that we are not a one-trick pony. We are not just a Spreadbet/CFD business. We have a platform business where we generate an income outside of typical Spreadbet and CFD business. We have a part of our business that is growing and we have been developing for 5 years that generates royalty and incremental income without actually managing risk at all. And that's starting to come through. We see ourselves.

And just thinking about the ANZ deal -- and I've probably gone off script a little bit, but the ANZ deal is actually a technology deal because we don't own the clients, we don't onboard the clients, we don't execute their trades, we don't manage the risk. All we do is actually connect clients to an exchange and we get a royalty from ANZ Bank. Anyway -- and of course this period we're going to talk about today was we got the full shock impact of the regulatory changes, which we agree with totally. We think it's a good thing. It's good for the sector.

So this has been a difficult period. Have I got a slide or -- yes, introduction. Yes, guys. Is this me? So this has been a difficult period for -- period of trading for CMC and our sector. But having now weathered the ESMA transition, we exit this year with renewed confidence in the future. We have learned as our clients adjusted to the imposition of much lower leverage levels at the same time as experiencing range-bound markets. As a result, we have adjusted our business to ensure we capture revenue appropriately and manage the net risk that we are exposed to from higher client margins against smaller positions being held for longer periods.

Our business is much more balanced today than it was -- than it has ever been with a larger stockbroking business, an important growth in our institutional business alongside our stabilized CFD and Spreadbet business all underpinned by our technology platform. We have demonstrated that our ability to use technology to provide a high-quality service and access to innovative investment opportunities means we are an attractive partner for a wide array of customers and partners around the world.

As regulatory change continues to be a key positive driver in our markets, we believe that our strong product offering, client service, technology platform and balance sheet will ensure our ongoing success.

Right. I think it's time to hand over to Grant.

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Grant Jeffrey Foley, CMC Markets Plc - Director [2]

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Thank you, Peter, and good morning, everyone. So looking at the financial performance, and let me start by looking at key performance indicators.

As Peter has already mentioned, it was a challenging year for the group, particularly in the second and fourth quarters, a combination of low market volatility and range-bound markets presented fewer trading opportunities for our clients, and this was particularly the case in foreign exchange. This was further impacted by the higher margin requirements that were introduced in August with the ESMA regulations, resulting in retail clients being less active, trading lower volumes and also holding on to their positions for longer.

So starting on the top left, the number of active clients of just over 53,000 was 10% lower than the same period last year, with market conditions resulting in more clients stopping trading during the current year and enhancements to the application process impacting client acquisition. Pleasingly, the drop in active clients following the implementation of ESMA has now stabilized.

Revenue per active client was 30% lower reflecting the overall revenue performance. We continue to focus on higher value and professional clients, and we are continuing to make good progress in this segment.

The value of trade at GBP 2.3 trillion and the number of trades at 64.5 million were down 13% and 6%, respectively, again as a result of market conditions and regulatory change. Overall, net operating income of GBP 130.8 million, which is net of partner commissions and spread-betting levies, was 30% lower than the prior year in line with the guidance that we gave on our trading update on the 3rd of April.

With that cost base, which is relatively fixed, any revenue decrease has a significant impact on the bottom line. Although revenue reduced by GBP 56.3 million, a strong focus on cost control resulted in profit before tax falling by slightly less, GBP 53.8 million, to a profit before tax of GBP 6.3 million and profit after tax of GBP 5.9 million.

The Board recommended a final dividend of 0.68p per share, subject to approval at the AGM, resulting in a total dividend for the year of 2.03p per share. This represents 100% of our profit after tax and is in excess of our stated dividend policy to pay out 50% of post-tax profits. However, based on the current liquidity and capital within the group, the Board believes that this is an appropriate distribution.

Moving on to the income statement, CFD and Spreadbet revenue of GBP 110.2 million was in line with our previous guidance and was 30% lower than last year. We saw our revenue decrease across all geographic regions in the group.

Stockbroking revenue was 81% higher than last year at GBP 15.5 million, with nearly half of the revenue being generated from the white label partnership with ANZ Bank that went live in September last year. We're very pleased with the success of this partnership and the additional diversification that it brings to the group. We are now the #2 stockbroker in Australia.

Interest income of GBP 3.4 million was up 54% on the prior year due to the fact that we are now able to place some U.K. client money on deposit and generate a higher return. The increase in sundry income was driven by a sublease of our old office in Sydney.

As you would expect, given the lower revenues I've said, operating expenses were well controlled throughout the year and decreased by 2% compared to 2018, and I'll talk more about that in a few moments.

As I've already mentioned, the operating leverage of the business means that any decrease in revenue falls almost entirely through to the bottom line and this resulted in PBT of GBP 6.3 million, GBP 53.8 million lower than last year and broadly in line with the revenue decrease. PBT margin was 4.8%.

Profit after tax is GBP 5.9 million with the group's effective tax rate for the year being 7%, lower than the U.K. corporation tax, mainly due to the additional recognition of our deferred tax assets from Australia.

This next slide shows the breakdown of CFD and Spreadbet revenue by region for both the first half and the second half of the year as well as year-on-year. You can see here the impact that the ESMA regulations have had in the second half of the year. In the U.K., net revenue in the second half of GBP 19.7 million was 29% lower than in the first half; while in Europe, net revenue was 33% lower.

In the U.K. and Europe, revenue performance was impacted by both market conditions and the ESMA changes, although with the U.K., having a higher proportion of professional clients and a larger institutional business, this region was less impacted with the value of client trades down 15% in the second half compared to 38% in Europe.

Asia Pacific and Canada saw fewer foreign exchange trading opportunities and this is historically the more heavily traded asset class in the region compared to the U.K. and Europe.

As Peter said, ESMA has resulted in clients continuing to trade but at significantly lower volumes than was the case before the ESMA measures were introduced. But what is important is that we are still seeing an appetite from our clients to trade.

Now moving on to operating expenses. As I've said, during a period of weak revenue performance and predominately fixed cost base, we had been very focused on controlling our costs throughout the year. Overall, operating expenses of GBP 123.1 million were 2% lower than last year despite the additional expenses this year as a result of the ANZ partnership, which meant the stockbroking costs increased by GBP 8.4 million.

Going for each the line items. Staff costs of GBP 51.7 million were 11% lower than 2018 driven by lower discretionary bonus and share-based payments costs following the weaker group performance. This was partly offset by the additional costs relating to the investment in stockbroking business where average head count has more than doubled.

Our IT costs increased by 18% due to higher maintenance cost on our platforms and the increased cost of obtaining market data for our clients in our stockbroking and CFD business. Marketing costs were lower as we've targeted this spend towards more efficient digital channels.

To support the larger stockbroking business, revenue increased in both premises and depreciation, while legal and professional fees increased due to various projects including preparation for Brexit.

Finally, other costs increased by 23% driven by higher bad debt where there was an unusually low prior year charge and higher bank charges where we are no longer able to recover those from clients due to changes in the EU rules.

So now I'll talk through the liquidity and regulatory capital position as at the 31st of March. The group's balance sheet and overall regulatory capital remains strong with a capital ratio of 17.4%. Our Pillar 1 requirement increased during the year as a result of higher market risk charges which in turn reduced the overall ratio. And David Fineberg will talk more about this shortly.

Total available liquidity of GBP 197 million, shown on the bottom left, also remained strong. Our own funds decreased by GBP 44 million from GBP 193.9 million to GBP 149.8 million, reflecting the payments of dividends, tax and bonuses during the year.

The decrease in nonsegregated funds to GBP 7.6 million was due to a particularly large client that traded for a short period of time last year and is now at a more normalized level. We also reduced our syndicated facility to GBP 40 million from GBP 65 million in the prior year which is in line with our usage estimates going forward.

On the bottom right, you can see the reconciliation from total available liquidity to net available liquidity position. Blocked cash, which is a liquidity that is required to support both regulatory and operational requirements in our overseas offices, increased marginally due to the increased cash required for our larger stockbroking business. The broker margin requirement decreased from GBP 103.7 million to GBP 68.3 million, driven by the change in our risk management strategy which, as I said, David will talk you through in just a few moments.

So that concludes my review of the financials. As I've said -- Peter said, after 6 years with the business, this is my last presentation for the group and I leave CMC a significantly more diversified business with a strong balance sheet well placed to deal with regulatory change.

Euan Marshall will become interim CFO. And Euan has been with the group for 7 years and is currently Group Head of Finance having worked directly with me during my tenure. So I leave finance -- the finance function in very safe hands and wish Euan well in his new interim role. Many of you already know Euan, and if you don't, I will introduce you after the presentation.

Thank you for listening, and I'll now hand over to David who will cover market conditions and regulation.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [3]

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Thank you very much.

Okay. So let me start by talking about the market conditions that we've seen during the financial year and how this has impacted client behavior and trading patterns. As has been widely reported both from the press and across the industry, market conditions were unusually subdued at various periods throughout the year, most notably in the final quarter.

This low volatility across the asset classes has had a significant impact on client trading with fewer opportunities presenting themselves to garner client interest. This has been particularly notable in foreign exchange where volatility since the start of the calendar year is at the lowest level since September 2014, with the major payers trading in tight ranges. This is illustrated in the chart on the top left of the slide, which shows the euro-dollar price range.

The significantly high volatility in indices that occurred in the fourth quarter of FY '18 has also not repeated during the current financial year. The low volatility impacted our clients across all regions including those unaffected by regulatory change. And while some clients look to seek opportunities in other asset classes, in the main, clients reside with their chosen asset class and traded lower volumes across the board, as shown in the chart on the bottom left-hand side.

This chart shows the value per trades per client for ESMA professional and ESMA retail clients and has been rebased at the average monthly volumes per client for the months in FY '19, this is prior to the ESMA changes. This clearly illustrates not only the ESMA impacts on retail clients but also the impacts of the subdued markets on trading by professional clients.

With volumes picking up at the start of the new financial year, we feel confident that lower trading volumes were indicative of poor market conditions rather than being entirely driven by clients moving away from CFD trading in light of new regulations.

In addition to the unfavorable market conditions, we also saw the implementation of new leverage limits in the U.K. and Europe from the 1st of August. The tables on this slide summarize some key events for the region split by half, with H2 the first full period in which the change is applied. Taking into account not just the leverage impact but the subdued markets unsurprisingly saw us encounter a drop in net revenue in H2 versus H1 of 31%. This has led to a lower revenue per client of GBP 1,308 in H2 versus GBP 1,585 in H1.

Active clients, which encountered a drop upon new margin implementation, have stabilized as existing and new clients adapt to the changes and remain loyal to CMC. Active client in numbers were also affected by the introduction of new, stricter appropriateness tests during H1 which reduced the number of new clients onboarded, impacting the H2 active clients.

Whilst we and the industry encountered lower trading volumes from the ESMA regions, clients have remained with CMC and retail client AUM has increased 8% in H2 versus H1. Whilst free cash has moved from margin in part, the trust, loyalty garnered over the years shows clients are content to leave their cash with CMC and utilize this as and when trading opportunities present themselves.

Now looking at that ESMA client activity levels. Although still a short time frame to analyze the change in client behaviors, we do see positive signs. On the left, we have shown the average daily turnover for the U.K. and European region split between professional and retail clients. Following the ESMA implementation, retail volumes fell by approximately 80%. However, this combined with subdued market conditions seen during Q2.

As market opportunities presented themselves and clients adapted to the leverage limits, we are seeing clients' trading volumes start to recover and stabilize. At the end of the year, we are still seeing retail volumes trading at circa 35% of pre-ESMA levels. After an initial drop in the number of daily active retail clients in August immediately after the leverage restrictions came into effect, the number of daily active retail clients has recovered and stabilized.

Whilst trading volumes from professional clients are more sensitive to market volatility, the number of professional clients remains consistent and we are still seeing clients applying for elective professional status. Although, as expected, the level of inquiries are lower.

Our focus in recent years on more experienced clients means that we had a significant portion of elected professionals when the new rules were implemented. Market conditions resulted in these professional clients not being active during the year. However, they are particularly valuable to us as and when the market conditions normalize. So due to a combination of these well-publicized market conditions and the new leverage limits for ESMA retail clients, we have seen a reduction in the notional value of trades placed.

Client behaviors also changed in that we have seen an increase in trade duration whereby our clients are holding on to positions for longer. This can be seen in the chart on the left with the FX seeing increases in trade duration across all regions and client categories, most notably in the ESMA region where higher margins required increased patience from clients to attain their desired outcome.

As previously stated, clients are managing positions with less headroom, and this can be seen on the chart on the right. Prior to the margin changes, ESMA retail clients, on average, held circa 5x the margin requirement. And whilst this has dropped to 2.5x post implementation, it remains broadly stable indicating an acceptance and adherence to the new margins.

As we've already outlined, both market conditions and regulatory change have caused clients to change their trading behavior leading to lower trading volumes and longer trade durations. This has led to less aggregation and less opportunity to monetize revenue just from spreads. These factors meant that our hedging costs became more material during 2019, which led to a review and further refinement to our risk management strategy in the final months of the financial year.

In effect, with the reduced leverage, clients' trade horizon has lengthened. This causes less spikes in our intra-day exposures, results in greater stability in market risk exposures. This has enabled us to be more passive on our intra-day hedging, reducing transactional costs. We have refined our risk management in response to changing client behaviors and are now managing risk in a more effective way.

We continue to actively hedge a significant portion of risk. Although client exposures -- absolute exposures have reduced in the low-volatility, higher-margin environment, we continue to operate at all times within our risk appetite.

So moving on to other regulatory matters. The Australian regulator, ASIC, whilst granted product intervention powers in April 2019 have not articulated how they plan to use them or when. Consultation is likely with the market participants and we will use the experience gained to aid engagement with ASIC.

In Singapore, FX margins for retail clients will be increased from 2% to 5% in October. This change will not be material with less than 10% of the group CFD net revenue being generated in that region. Clients in Singapore are also more familiar with lower leverage and so client reactions may be less pronounced than seen in other regions.

In the U.K., the FCA are considering a ban on cryptocurrency derivatives being sold to retail clients. Again, this is not expected to be material for CMC as the total U.K. revenue from cryptocurrency products was a mere GBP 200,000 in 2019.

Finally, in Germany we're on track to establish a new subsidiary by October 2019 pending final regulatory approval. And this will allow us to continue offering our products uninterrupted in the EU. Our group headquarters will remain in the U.K.

Thank you very much, and I'll hand over to Peter who'll provide you with the group strategy.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [4]

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Right. Crack on a bit, if we can. Okay. So thanks, David.

Since the company went public in 2016, our strategy has been built around 5 initiatives. We've made good progress on these initiatives. However, given the developments over the course of the year, we have chosen this time to review our strategy.

Going forward, we are prioritizing 3 strategic initiatives which will continue to unlock future value and continue to support diversification, supported by our technology. These initiatives are: growing in our deep and established core markets, growing our institutional offering and optimizing our client journey.

Geographical expansion and product remain important to the business, although we believe that further geographical expansion can be achieved through our institutional offering and product developments will be small and incremental, such as regular releases of products that our clients want, such as baskets on our NexGen platform.

Before moving on to talking about these 3 strategic initiatives in more depth, I want to run you through our technology offering on the next slide as this underpins the delivery of our strategy.

CMC has had a long-standing focus on investing in technology, and this has resulted in our offering expanding over recent years to accommodate a more diverse potential client base. This puts us in a strong position for growth and diversification. our ability to implement our technology with partners, which can immediately add scale, cannot be underestimated. Our ANZ Bank stockbroking deal provided access to over 0.5 million ANZ stockbroking clients overnight and is the biggest client migration in the history of the Australian Stock Exchange.

During the year, we have launched our Prime FX and DMA equity products which again should provide us with growth opportunities, which I will discuss in a separate slide. Additionally, the stockbroking and DMA platform -- products -- additionally, the stockbroking and DMA products offer us revenue that is effectively risk-free where we generate revenue through commissions. We believe our technology continues to differentiate us in the market and makes us an attractive partner for a wide array of clients and institutions around the world.

On the next slide, I'll take you through our 3 strategic initiatives in more depth. So starting with our established markets, the U.K., Australia and Germany are our core markets. CMC was established in the U.K. in 1989 and we were early to enter the Australian and German markets in 2002 and 2005, respectively. As a result, we generate the large majority of our revenue in these regions.

We have strong positions in each of these 3 countries. High levels of brand awareness and regulatory -- and regularly performed well in independent surveys particularly around client service. Our customer bases here are loyal and a large proportion of clients have traded with us for a number of years.

Our aim is to become the provider of choice, particularly in the high-valued client segment. We will do this by continuing to invest in the brand to develop product awareness, and we will continue to focus our efforts on growing professional client base in the U.K. and Europe and high-valued client base in Australia. Project Tuna, remember that one? That's what that is.

Next slide. Moving on to our institutional strategy. Our institutional business provides the group with significant diversification benefits and provides differentiation from many of our competitors. And we have exciting opportunities to grow further in this space, offering our award-winning platform to other institutions through our white and gray label propositions, our API offering and our Prime FX and equities DMA products, which we have recently released.

With our white and gray label propositions, we are focused on acquiring strategic distribution partnerships using the strength of our technology and platform offering. The successful ANZ transaction, where we migrated both ANZ and St. George Bank stockbroking clients, including an additional 103 intermediaries and over 0.5 million clients to our stockbroking platform, gives us confidence that we can replicate this success with other partners.

Our API offering is already a globally recognized CFD liquidity provision solution. Bloody all, that was a mouthful, wasn't it? Our API offering is already a globally recognized CFD liquidity provision solution. There you go. I could do it twice. Here, we are targeting the international broker community and banks. With our Prime FX and DMA offerings, we will also target the brokers and banks and we expect that the proposition will also appeal to hedge funds as well.

[Project Caffeine], the third --'s this is the client journey optimization. The third strategic initiative focuses on optimizing the client experience. We're very proud of our quality client service, the positive feedback that we received from our clients and the numerous awards that we have won. We're on track to retain clients through a highly digital and targeted approach and we will continue to invest in this area, particularly into mobile channels where we see the best opportunities. Our fully customizable and user-friendly technology and our absolute focus on customers are key differentiators for our business. The client journey and optimizing their journey is essential to our future success and growth ambitions.

Nearly done. Outlook. So to conclude, we have made a profitable start to financial year '20, and we expect to see higher revenues than last year due to improved risk management performance, meaning that we retain a higher proportion of client trading costs, institutional growth by strong -- driven by a strong pipeline, higher stockbroking revenue with financial year '20 representing the first full year of the ANZ Bank revenue.

As a result, we remain confident in meeting market expectations for financial year '20. We expect operating expenses to be marginally higher year-on-year, excluding discretionary remuneration, bonuses for staff. Our effective tax rate is expected to be in the region of 13% to 15%.

So in conclusion, we are becoming an increasingly diverse business. We now have higher stockbroking revenues with the technology and service that makes us an attractive partner to a wide range of clients and institutions across the world. I believe that the regulatory changes are positive both for us and the industry as a whole. Although it's been a challenging year, I feel positive about the future and our ongoing success.

Q&A. Right. So myself, Grant, David, but Matt Lewis is here, we'll get him to answer any questions on Australia. Our Chairman is here. Sarah, one of our important heads is here. So we're all here to help if we can.

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Questions and Answers

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [1]

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Joanna, do you -- go ahead. Yes.

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Joanna Elizabeth Nader, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Just wondered if you could elaborate a bit more on your plans for sort of promoting your Prime FX business and your DMA business, like how you're going to reach out to potential customers that don't know about it and sort of what the selling points you are sort of making in terms of the traditional way of doing this business. And then, Peter, you also mentioned baskets. Just thinking about sort of the opportunities for developing a user base or a use case beyond the traditional case for this product. And does that require a new marketing approach? What do you -- how are you thinking about that?

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [3]

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Okay. So yes. So regarding the Prime FX institutional space, so following the whole Swiss peg, that presents an opportunity for us in that space. And I've previously articulated about our robust pricing infrastructure, just generally our infrastructure here at CMC. So we already had the capability to enter the market, and for us, it's probably establishing that brand within it. So we've -- they got -- our Head used to be at Saxo. We're building that team both here in London, in Australia as well. And we look in other regions as well. So we've got the people now, we've got the infrastructure, we're building the brand awareness and [while just getting others] as well. So like a lot of things, it's -- you have a lot of warm leads but it's actually going through all. So that's one to watch in our space.

The baskets, I'll take that as well. That for us -- clients have just been requesting them for a while. So they build their own portfolio on the platform anyway but what they have been asking for is the basket type products, so be it a commodity basket so you can have your prime commodities, your wider commodities baskets, they're even asking for the crypto baskets as well. So it's just meeting demand. So with something like that, we can do it ourselves. We don't need a third party to stream their price upon our platform. We do everything in-house. So that is just an expansion on our offering -- native offering that we have today.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [4]

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And just to broaden the point as well. And I really want to start the thinking now about -- people not thinking about everybody in this sector as a churn-and-burn retail spread bet outfit. I mean -- and I'll try and keep it generic. But if a bank called us today and said, "We love your technology. We want to white label it but we want to keep the flows," we would do that transaction. We would give them our technology.

And the point about baskets is possibly 1 or 2 banks are saying, "Could we add our own products onto your platform?" And our answer is provide the pricing because we'll API to your pricing, provide the product, we'll add it and you get all the flow back. It's really about what we can do. And I don't mean this in an unfair way. But when you look at the ANZ transaction, none of our rivals could do that transaction in the time frame required. I'm sure 1 or 2 of our bigger rivals could build what we've built, but they couldn't do it in the time frame. And that's not a reflection of their inability, it's reflection of our strategy.

We've been building this now for 6 years. We've invested a huge amount of money in technology. And now we are leveraging off of our technology. We don't -- we're not precious about flows. The ANZ deal -- and we keep talking about it but we're really proud of it, it's not even a year old. And the ANZ deal was we don't get any of the risks, we don't get any of the clients but we get a fraction of the income from it. It's a technology deal. That's what we do and we're doing technology deals. So that's what we are as a company. It's not just the Spreadbet, CFD, retail.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [5]

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Paul McGinnis from Shore Capital. A couple questions. Just on stockbroking, I think you said the incremental revenue from Australia was around about GBP 7 million, GBP 7.5 million, whereas the additional costs on site I think we're around about GBP 8 million. Obviously, some of the costs will have been set up in the first half. But I'm just trying to get a feel for, if that's the ongoing revenue run rate, what sort of margins are we talking about from that business specifically going forward. And then second one, it was the Pillar 1 capital. Obviously, that's a big jump from GBP 50 million up to nearly GBP 90 million. Is that a direct result of this sort of new risk management policy? I just want to understand that movement a little bit better.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [6]

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So I'll take the question on stockbroking. I think from a cost perspective, you got to remember that we had pretty much the cost base for most of the year because we had to bring on our customer service people earlier and we had to try people out. We had people working on building the platform and getting ready for the migration. And then the actual clients and revenue-generating opportunity happened at the end of September. So you've got a mismatch on cost and revenue in this particular year. So think about it, going forward, is we reiterate the guidance that we've given before. We expect the ANZ transaction to generate $27 million of commission revenue, $15 million of addition cost and $12 million of PBT. That's Australian dollars. Do you want to take the rest?

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Grant Jeffrey Foley, CMC Markets Plc - Director [7]

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And the increase in Pillar 1, yes, that is linked to the restructuring. So obviously, you see an increase in the Pillar 1 and you've seen a decrease in the broker margin. But as pointed out in the slides, we still hedge a significant portion of our book. So it's still GBP 68 million in broker margin.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [8]

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I think just to add to that, Paul. If you look at our risk book, we think of that as part of our business. They -- post the ESMA changes, they are the same clients doing the same trades in smaller amounts. Effectively, when the regulators put up minimum margin requirements for nonprofessional business, clients have 2 choices. They could top up their account and give us more cash or they could keep the cash the same and reduce the amount of size of the trade. Effectively, what we saw was a bit of both. Initially, we saw a big drop-out -- drop-off in trade size and that really impacted the numbers quite a bit. And then we have started to see clients utilize more of their cash. So it's a combination of the 2.

From our point of view, it stabilized the risk book quite dramatically in a good way because we don't have as much leverage risk to manage. It's a much more stable environment for us to manage the client flows. And effectively, we are thinking, "Well, hang on a minute. You haven't got the client volatility on leverage. Let's look at ways of reducing our costs." And the biggest overhead in this company for the last 10 years consistently has been hedging costs. Now we are able to get more value out of our book of business because there's less volatility in it primarily because of the regulatory changes. Clients' positions are -- they're hanging on to their position longer, which is a good thing because they can.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [9]

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Okay. But just to follow that point through. In terms of just lower hedging costs going forward, obviously in the final quarter, one aspect of the trading update was that there was a -- more of a volatility on revenue because of the unhedged risk within client positions. I mean is that something, therefore, that might become more of a feature going forward? Or is it just particular to that period?

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [10]

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It has to do with that period. And honestly, with that broker margin, obviously you can flex throughout the year. So if our active book is to grow, our index book was to grow in line with conditions, then you'll see that move accordingly. So it's just more about the scale.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [11]

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Any question?

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [12]

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Portia, I think you had a question.

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Portia Anjuli Patel, Canaccord Genuity Limited, Research Division - Analyst [13]

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My question was really a follow-on -- well, was really Paul's last question with regard to the hedging policy. But I wonder if you could just elaborate a little bit more on kind of potential volatility within the P&L if you reduce your hedging costs. So for example, on a looking-backwards basis, if the hedging policy had been in line with your new policy going forward, what would the P&L movement have been for FY '19?

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [14]

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If our new policy -- sorry, I missed that last bit.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [15]

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If we had more volatility in the year.

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Grant Jeffrey Foley, CMC Markets Plc - Director [16]

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If it'd been close, would we be more volatile.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [17]

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If we are...

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Grant Jeffrey Foley, CMC Markets Plc - Director [18]

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The risk -- yes, more volatile.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [19]

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Yes. No, no, sorry. No, no. I'm listening earlier in your question. No, no, no, sorry. So in terms of [volatility], whilst that could increase, I think it's important to point out what I was saying in that book before is that under the old method with the higher leverage, you would see these big intra-day spikes, so your position could go from long to short in a matter of minutes, okay, and that's because clients are [using us as] leverage to trade in narrow ranges, okay?

But with the trade duration, what you're basically seeing is the clients will enter a trade and then hold it for a longer. So they're not trading higher amounts in a narrow range, they're holding the position for longer in a wider range. So rather than 0.5%, it might be looking at 0.5%. So what it means is the position that we inherit, we inherit over a longer period of time, okay? Now if you link that directly to price, then yes, okay, you will have that. But I think what we're talking about is the volatility almost in the position itself. It's not constantly, again long/short, long/short all the time, there is more stability in the book from the clients that are within it. [Ben], you have a question?

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Unidentified Analyst, [20]

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Can I just follow on to -- because I think it's part of the...

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [21]

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Yes. Sorry, [Ben], use the mic.

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Unidentified Analyst, [22]

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So following on from that, in terms -- if -- I mean everything will be different. But if everything stays the same, when you talk about your new hedging policy, what will be the reduction in costs that you'd anticipate for the forward year?

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Grant Jeffrey Foley, CMC Markets Plc - Director [23]

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It's netted off. We've been net trading revenue, so you can't really say, right? We've never really know because risk management is the net of hedging, client positions, and everything about that. But the back-testing that we've done to support the risk management change would suggest that this is definitely going to improve our revenue performance given the change that we've seen in the market conditions and post-ESMA in the way the clients are holding positions for longer.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [24]

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We can -- we do know the number but we've never published it because basically, hedging costs come off your income and -- but it's worth the exercise.

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Grant Jeffrey Foley, CMC Markets Plc - Director [25]

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If you think more about the transaction cost, so if you're literally constantly trying to weigh, you're constantly paying spread throughout the year. So focus more on the actual transactional costs.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [26]

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This is quite an important point really because the stability -- people become polarized about, well, they're running more risks or they're not getting as much turnover. But there's so many levers that we can pull as a company because of the change in the nature of the business. Like I said, it's the same clients trading at exactly the same time as they would normally trade. We assume, because if they want to buy gold, they're going to buy gold. They're just going to buy it when they think it's the right time not because they can't leave their job or anything like that. And -- but what it's done is that it's really, really -- this is where CMC was 20 years ago before this massive explosion of churn-and-burn companies bringing -- targeting clients, getting them leveraged up, bringing in IBs and salespeople to bring on inappropriate people. 20 years ago, CMC, when David was here, and I had hair...

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [27]

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I didn't have gray hair.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [28]

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You didn't have gray hair, I had a full head of hair. Long, growing locks. Lovely, it was. But we had a very stabilized risk book because the industry hadn't been invented then. It's churn and burn, cryptos, 500x leverage, mini contracts and digital marketing. Back then, it was clients trading and trading in less leverage. We've gone back 20 years. It's much better. But it allows us to understand our flows better and allows us to reduce our hedging costs with effectively less risk onboard. And it's hard to get across in an AP all the sort of details of that. But you're very welcome to come in some time. We are really happy about the changes. I am because it takes me back to when I have hair. Good old days. I used to blow dry every morning.

Mark. Yes, Mark?

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Mark Thomas, Hardman & Co. - Analyst [29]

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Sorry, I'm going to continue on this subject. If we just cut to the chase or I'm going to be blunt on this.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [30]

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It's not like you, Mark.

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Mark Thomas, Hardman & Co. - Analyst [31]

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No, quite. I think what we really all want to know, and I guess you're not going to tell us, is what was the net loss against client positions? And allied to that, if you did the back testing, what would the difference have been? And thirdly, in order to provide greater transparency going forward, why can't you break the revenues down for the leverage trading business by spread, financing income and net position against client -- or the net profit loss against client positions?

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [32]

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Right. Next question please. Dave, do you want to take us out of this one or not?

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [33]

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So the net loss against clients, so we don't actually -- we don't publish that.

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Grant Jeffrey Foley, CMC Markets Plc - Director [34]

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We don't. We're not going to disclose that number out. Yes, I know one person in our space who's disclosed it so far. We're not disclosing it.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [35]

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But that's because their strategy is more akin to the client, isn't it?

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Grant Jeffrey Foley, CMC Markets Plc - Director [36]

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Yes.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [37]

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Yes. So if you openly state you don't hedge anything, then yes, it's the perfect correlation. So I can understand why they did, but we don't publish that number.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [38]

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But I think they published the number because they'd misrepresented it before. We have prime brokerage accounts we hedge. I think -- I mean my view of this is that every trade that comes through on our risk book is a trade with us. We get and we could have big professional clients and we could have nonprofessional clients doing small amounts. And we aggregate the flows coming through and then we hedge it sometimes. Now we're not hedging as much because the volatility and our [available] risk and so on, we can -- we've reassessed it and we've worked it all through.

But at the end of the day, when a client -- because these are the rules, when they buy or sell, they buy and sell from us, we then have to deal with the risk that we inherit from clients. We don't prop trade and we don't target clients that are going to lose money because we hedge, we hedge in the underlying market.

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Mark Thomas, Hardman & Co. - Analyst [39]

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And I get that. But ultimately, there are 3 sources of revenue or profit in this business: spread, financing and that net position against the client. So if we can see that, we can better understand the sensitivities in your business. Surely, that's got to be to your benefit in terms of transparency and understanding.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [40]

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I don't know really.

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Grant Jeffrey Foley, CMC Markets Plc - Director [41]

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I mean it's something that we can look at in future periods.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [42]

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Yes. I mean we're not nervous about any of this. Because all of a sudden, this is now relevant because of something that happened in somebody else reporting, which actually -- they have actually a very different business model to us. Effectively, if you think of the sort of bigger picture, clients buy and sell and the net of their buying and selling, they're either net overall making money or net overall losing money. And then when we get all of their net positions on a regular basis, our profit is effectively what they have won or lost minus our hedging costs.

But all we're trying to say, Mark -- and we'll discuss this, but all we're trying to say is that we don't churn clients, we don't look for low-value clients that we don't want to hedge. We have a very diverse book of business. We're right in partner deals where we don't get any of the risk management at all. We just make it from commission. And I think it's just a different mindset to us but definitely worth looking at.

And I think you're right, I don't know if it worked for us or against us. But I do think the sector, there is a sort of overhang in the sector that people think, well, they all want their clients to lose money. We've seen evidence, not recently, that it would actually be better for this company if clients made money overall because they would trade more, they'd generate more financing. It's no skin off our nose effectively because we will just hedge more. That's the culture here. It's a different mindset. It's a different business. And I think that's where we struggle, really, trying to understand why people ask the question. But if we can do something about it, we will.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [43]

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Any other questions? Joanna.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [44]

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I want to -- I want you to ask a question so we can get Matt here in the hot seat, otherwise, he has to pay for his own plane ticket. He's got to justify from a tax point of view.

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Joanna Elizabeth Nader, RBC Capital Markets, LLC, Research Division - Analyst [45]

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Well, maybe we could talk about the -- just the competitive conditions in Australia, particularly just whether there has been that same treatment and aggressive marketing to clients, et cetera, that you think might prompt -- I mean it's hard to make a call on what ASIC will do, but would you say the conditions in Europe pre-ESMA are similar to the conditions in Australia today? Or are they different?

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [46]

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Yes. That's a pretty straightforward one, to be honest, we see most of the same competitors from a global perspective operate in the APAC region. We've probably seen, over the past 6 or 12 months, an increase in some of the interest of those competitors in the APAC region. But I guess to echo what David or Peter have said, we do operate a different business. We have the past 6 years where we target that premium client demographic. We've been particularly good at that across APAC. The proof point from an investment trends prospective, we are #1 in that segment for Australia, we are #1 in that segment for Singapore. So that is really where we're trying to compete in.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [47]

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Matt, can you talk -- sorry, Joanna. Yes. Go ahead, yes.

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Joanna Elizabeth Nader, RBC Capital Markets, LLC, Research Division - Analyst [48]

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Sorry, I just want to like -- just to be more precise in my question. I guess a lot of, in my view, what ESMA did was prompted by the sort of unscrupulous marketing approach of many players often not based here in terms of onboarding and targeting and calling multiple times a day kind of customers. And are people doing that in Australia, like we are...

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [49]

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Yes. To be clear...

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [50]

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That's a short answer.

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [51]

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Just to reiterate, there are many similar competitors, they operate the same tactics, the same marketing aggressiveness in our region. And to be blunt, we simply do not operate that way.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [52]

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I mean some of the firms use Australia as a hub to get into China and onboard into Australia. Can I ask you a question, Matt? How's the ANZ deal? Have we maxed out on the ANZ deal? Or is there more to come?

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [53]

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No, there is. And it should be a question that people are interested in to justify the flight.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [54]

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Be careful how you answer it, Matt.

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [55]

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So look, I think 2 things are important. One, we've only just really bedded that down. We're not through a full year of the integration. Where we would look forward to for the year ahead is we're out communicating the enhanced product offering that we've got through the international offering, the enhanced options offering. And the beneficiaries of that are not just ANZ, it's our existing core retail business. It's the existing transfer partners business, and that sets us up very well for any potential pipeline that is out there. And to be blunt, the kudos that -- and brand recognition that we have received in the marketplace over there from successfully delivering such a big migration, as Peter said the biggest in the ASIC's history, it sets us up very well from a brand perspective.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [56]

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But can they mobile trade in ANZ Bank?

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [57]

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They can. But there are far more...

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [58]

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So ANZ clients, can use mobile trading?

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [59]

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They can. But there are far more enhancements that will be delivered over the next few months, which we think we'd beneficiaries of. Thanks, Peter.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [60]

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Anthony, yes.

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Anthony Da-Costa, Peel Hunt LLP, Research Division - Analyst [61]

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And what about sort of those ANZ customers trading CFD products? What's the migration with that? Or what's the strategy around that?

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [62]

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So the ANZ retail customers that are trading across, that's a straight standalone stockbroking deal. So it's not a [save-day] deal. And ANZ retained the ownership of those clients, which is important. What I would say though is that at the same time as the transition, we have migrated 103 partners, and they are direct clients of CMC such that we do have, I guess, a different strategy in terms of how we would communicate our wider product offering to those clients.

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Anthony Da-Costa, Peel Hunt LLP, Research Division - Analyst [63]

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In terms of Australia, what percentage of your revenues come from Australian CFD trading in terms of the overall group?

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Grant Jeffrey Foley, CMC Markets Plc - Director [64]

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So 32% of our overall CFD and Spreadbet revenue comes from the APAC region, of which roughly Australia is only 2/3.

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Anthony Da-Costa, Peel Hunt LLP, Research Division - Analyst [65]

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Okay. And given ASIC has now got product intervention powers, we could assume that going forward, they may be sort of look into sort of leverage limits. How would you be sort of -- to be sort of positioned with that sort of change?

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [66]

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Yes, look, I'll take that, and one that we'd expect. I guess to point out, yes, that they have -- ASIC has been granted product intervention powers, very -- it's uncertain yet how they'll use those powers, the time frame in which they'll do that. We do know that we have a very proactive relationship with the regulator all across APAC and the globe, in fact. We do know that ASIC has communicated that there will be a consultation period with the industry, which obviously we'll take part in. And I think importantly, from the lessons learned from the changes that we've seen from the regulators across the U.K. and Europe, that we'll be beneficiaries and in a better position to acclimatize to that and learn the lessons that we've seen across the wider group.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [67]

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I think to just to finish off on Matt's point, it's worth remembering the strategy has been focusing on more valuable, more sophisticated clients. And Matt's already said, the investment trends on our Australian business is the #1 in the high-value segment.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [68]

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Matt's got his own B2B team. He's got his own sales traders. He's been operating Project Tuna for 5, 6 years.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [69]

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One more questions or...

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [70]

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A couple of that had been probably at Project Barramundi.

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [71]

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Okay.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [72]

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One last question or are we done? Excellent. Thank you very much, everyone. Thank you.

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Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [73]

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Bye. Thanks, guys.

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David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [74]

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Thanks.

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Matthew Lewis, CMC Markets Plc - Head of Asia Pacific & Canada [75]

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Thank you. Cheers!