ICAP to face shareholders over weak outlook, Libor

LONDON, July 10 (Reuters) - ICAP Chief Executive Michael Spencer could get a grilling from shareholders at the broker's annual meeting on Wednesday on the gloomy finance sector outlook and over whether the firm will get dragged into the Libor rate-rigging scandal.

Shares in ICAP, the world's biggest inter-dealer broker, have been under pressure for the past year but dropped to their lowest for more than two years after Barclays was fined more than $450 million for its part in manipulating Libor and Bob Diamond quit as the UK bank's chief executive.

Brokers like ICAP match the buyers and sellers of many Libor-based financial products such as interest rate swaps. Their customers include the 18 banks that set the Libor rate, giving the broking firms a unique insight into trading patterns.

ICAP has stressed it is not involved in setting Libor and said only that it is "co-operating fully" with government agencies' requests for information.

It suspended one broker in February, according to sources close to the firm. ICAP has declined to comment.

Spencer will likely also see pushback from some shareholders on his planned new bonus scheme after the Association of British Insurers issued a warning that executive pay was too high last week.

BROKE BROKERS

The Libor probe has put the spotlight on ICAP and rivals such as Tullett Prebon at a difficult time.

They have struggled to sustain income from broking bonds, currencies and swaps as the euro zone financial crisis has spooked investors.

ICAP revenue for the year to the end of March 2012 was down 3 percent to 1.68 billion pounds ($2.60 billion), with Spencer blaming a "difficult economic environment".

Analysts expect the firm to paint a grim picture of trading in the three months to the end of June, when it publishes an update on Wednesday.

"Trading activity has been slow and ICAP's first quarter revenue could be down 5 percent year-on-year," said Richard Perrott, an analyst at Berenberg Bank

"Electronic broking volumes have been particularly weak with U.S. treasuries down 20 percent from last year and spot foreign exchange off 25 percent," he added.

REGULATORY REFORMS

As well as weak trading, ICAP and the other brokers also face a knock-on effect from the financial crisis in the shape of regulatory reforms.

Regulators in Europe and the United States want to address some of the problems that arose after the default of Lehman Brothers in 2008 by changing how the brokers' main over-the-counter markets are traded.

Policymakers want to make the trading of opaque instruments like swaps more transparent and, therefore, easier to monitor by forcing them to trade on virtual exchanges from next year.

But the reforms are likely to hit broker commissions and revenue as the proposed rules target some of the brokers' most lucrative products.

COST CENTRED

ICAP is looking to new asset classes to offset slower trading in its traditional markets and last month bought a loss-making stock exchange from British exchange PLUS Markets Group.

ICAP wants to use the PLUS exchange as a platform to expand its listed derivatives trading business, to complement its over-the-counter (OTC) derivatives units.

The broker has also responded to dwindling trading volumes by focusing on costs.

Spencer said in May the company had removed 20 million pounds of costs in the year to the end of March 2012 and pledged to reduce overheads by 50 million pounds annually until 2014.

The cuts have so far largely focused on headcount reductions on those desks where volumes are down and last month the firm cut about 100 staff in London and New York.

"Structurally ICAP has challenges. Volumes are low and should remain low as banks continue to de-gear," said Peter Lenardos, an analyst at RBC Capital Markets.

Lenardos said the regulatory changes in the OTC markets were "negative for inter-dealer brokers such as ICAP and positive for exchanges."

"I also do not see share price outperformance until we know ICAP is squeaky clean on the Libor probe," he said.