Report on expected developments – development of results of operations

Based on the assumption that general conditions in the forecast period will develop positively and, in particular, that confidence in global financial markets will improve further, Deutsche Börse Group considers itself well positioned to boost its sales revenue in the forecast period compared with the year under review. Depending on how general conditions develop, on the form taken by both cyclical and structural growth drivers, and on the success of new products and functionalities, Deutsche Börse Group expects sales revenue of approximately €2.1 billion to 2.3 billion in 2011. This would correspond to an increase of up to 10 percent compared with the year under review. If, contrary to expectations, general conditions do not improve as described or do not have a corresponding effect on the Group’s customers, the Company considers that a decline in sales revenue in 2011 to around €2.0 billion or even less in an extremely negative scenario is also possible. In any case, the Company believes it is in a good position to continue to do business in a profitable manner due to its integrated business model and the implemented cost reduction measures described in the following section. The Company expects sales revenue in 2012 to grow at a similar rate to 2011.

Deutsche Börse AG’s Executive Board adopted additional measures in the first quarter of 2010 to optimise operational processes and cost structures with the aim of adapting to the structural changes in the financial markets and changing customer requirements early on, also in the light of the difficult market environment. As part of these measures, Deutsche Börse has resolved to reassign operating functions within the Group’s locations, to drive forward the ongoing harmonisation of the IT infrastructure, to slim down its management structure, and to focus even more on its core activities (“Excellence” programme).

This programme will lead to significant improvements in Deutsche Börse Group’s cost efficiency: all in all, the measures resolved will lead to annual savings totalling around €150 million per year from 2013. Having achieved €25 million of the savings of €85 million planned for 2011 already in 2010, the Company expects a savings volume of approximately €60 million in 2011. This figure will rise to approximately €115 million overall in 2012. The measures complement the programmes to enhance Group efficiency that have been implemented since 2007.

The expenses for these efficiency measures will amount to less than €180 million. In 2010, costs of €110.7 million were recognised in connection with efficiency programmes, primarily under staff costs in all Group segments. Most of the remaining costs will be incurred in 2011 and 2012.

The Company expects operating costs of €925 million in 2011 (2010: €936.2 million). This forecast takes into account savings of around €60 million generated from further improving operational efficiency. These are partially offset by an expected cost increase due to inflation of approximately €20 million and a further rise in expenses for organic growth initiatives and infrastructure of around €30 million to approximately €120 million. The Company expects volume-related costs, which are heavily influenced by the international settlement and custody business activities at Clearstream, to increase to around €235 million to €255 million (2010: €210.9 million), mainly due to the growth expected in this segment. This results in a total cost forecast of around €1,160 million to €1,180 million for 2011 before costs of efficiency programmes amounting to approximately €30 million and other possiple special effects.

Depending on sales revenue performance, the Company expects EBIT to be in the range of around €1.05 billion to €1.25 billion. In addition to sales revenue and costs, EBIT also depends on the development of net interest income from banking business. Deutsche Börse expects net interest income from banking business to be approximately at the same level in the current financial year as in the year under review. If interest rates increase earlier and stronger than expected, net interest income could make a higher contribution to EBIT than expected. If sales revenue or net interest income from banking business fail to meet expectations, EBIT could drop to around €1.0 billion, or even significantly below this level in the case of an extremely poor development.

Xetra segment

Sales revenue in the Xetra cash market segment will continue 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 computerised trading strategies, known as algorithmic trading. The Company continues to expect a high proportion of algorithmic trading in Xetra trading volumes.

Since it peaked in the second half of 2008, volatility on the equity markets has been steadily decreasing with the exception of the second quarter of 2010. Average annual volatility in 2010 was at a slightly lower level than in 2009. Generally speaking, high volatility can provide the Xetra segment with additional short-term growth momentum, as trading is particularly brisk during such market phases. However, a moderate level of volatility is more beneficial to sustainable growth as this generally leads to increased investor confidence.

In addition to continuing to develop its own cash market, the Company maintains a close watch on changes in the competitive environment for the European cash markets. It considers itself well positioned to retain its status as the market leader for trading German blue chips and to offer its customers across the globe an attractive range of products and services for cash trading in German and European equities, as well as equities clearing. However, due to the stronger competition in the cash market, a further shift in the market shares of all competitors cannot be ruled out.

The Executive Board expects business activities on the cash market to recover during the forecast period as a result of anticipated improvements in the economic environment that is anticipated, and of a corresponding increase in confidence among investors. Despite intense competition, the Company therefore expects trading activity to grow compared to 2010. At the same time, a slight decline in the average sales revenue per transaction is predicted. Overall, therefore, the Company anticipates stable sales revenue in 2011. As costs are expected to drop in the Xetra segment, the Group forecasts an increase in EBIT in financial year 2011.

Eurex segment

In 2009 and parts of 2010, trading activity trends on the Eurex derivatives markets were dominated by cyclical factors such as the decline in the equities trading volume, historically low interest rates and the low level of investor confidence. Nevertheless, Deutsche Börse Group assumes that structural growth factors will continue to have an impact, and that they will positively influence trading volumes in all product segments. The structural growth drivers are as follows:

• Traditional investment funds are increasingly including derivatives in their portfolio strategies as a result of the European legal and administrative framework relating to certain undertakings for collective investment in securities (UCITS III).
• Due to the high significance of risk management, more and more OTC transactions are shifting to Eurex Clearing for settlement so that the counterparty risk can be eliminated through centralised clearing.
• Demand for Eurex products from investors and trading houses from non-European areas such as Asia is growing.
• Banks and investors are increasingly applying fully automated trading strategies (comparable to algorithmic trading on Xetra).

The competitive situation at the US equity options exchange ISE, which belongs to Eurex, stabilised somewhat in the course of 2010. Nevertheless, in the second half of 2010, its market share continued to be affected by the way in which dividend transactions are promoted on some US equity options exchanges. Some exchange operators provide substantial financial incentives to encourage traders to use their platforms when executing this type of transaction. However, ISE’s strategy is geared towards the key performance indicators of sales revenue and profitability rather than winning market share at any price.

For the forecast period, Deutsche Börse Group expects contract volumes to increase and market share to stabilise further despite the sustained high level of competition. In addition to the performance of the US equity options market, which is expected to be positive, this assessment is based on various initiatives that aim to enhance the product range and the trading infrastructure. For example, Deutsche Börse and ISE have developed a new electronic trading system that will go into operation in 2011. In addition, ISE received approval from the US Securities and Exchange Commission (SEC) on 24 February 2011 for trading in certain types of orders, which will neutralise the competitive disadvantage for fully electronic equity options trading compared with floor trading existing since the second quarter of 2009.

Eurex will also step up investments to enhance its technology and its European product offering in the forecast period. The new trading infrastructure developed together with ISE will replace Eurex’s existing trading system. Another investment focus is on expanding risk management. For example, the Eurex segment is planning to introduce a portfolio-based risk management, which will offer customers the ability to net out on-exchange and off-exchange (OTC) transactions against each other. Among other things, this new feature is part of the functional preparations to enable Eurex to offer an expanded range of clearing services for OTC derivatives trading in future.

On the whole, Eurex considers itself to be well positioned in its competitive environment and predicts an increase in business during the forecast period for both European products and US equity options. In addition to the expected positive cyclical factors, this assessment reflects in particular the structural drivers underlying the business. On this basis, the Company expects sales revenue to increase in 2011, coupled with falling costs. Overall, the Group anticipates an increase in EBIT in the Eurex segment in the current financial year.

Clearstream segment

The Clearstream segment generated the bulk of its sales revenue in the past year with the settlement and custody of international bonds. This will remain the case in the future. Deutsche Börse continues to predict a sharper rise in the volume of bonds issued internationally compared with fixed-income securities issued domestically.

With regard to its customer structure, the Company expects that consolidation in the financial sector will persist and that customers in Clearstream’s domestic and international business will merge. These larger customers would benefit from greater discounts, which would lead to a decline in average fees. Although Deutsche Börse faces especially intense competition in the areas of the settlement and custody of international bonds, the Group does not expect this to have a major impact on its sales revenue or to result in a loss of market share during the forecast period.

In the course of efforts to enhance the Clearstream segment’s product and service offering, the Company plans to further expand its central liquidity and risk management functionalities and products during the forecast period as part of its global securities financing services. This includes, for example, expanding the eligible collateral securities to include the equities asset class and extending the GC Pooling product range. In addition, Clearstream will position itself even more strongly in future as a provider of value adding services for customers. The aim is to offer these services in the future to customers of other post-trade services providers as well via generally available channels such as the central settlement system planned by the European Central Bank (TARGET2-Securities).

Deutsche Börse continues to expect net interest income from the banking business in the current financial year to be more or less on a par with that of the year under review. The Company anticipates that a sustained increase in income will occur only when short-term interest rates rise in Europe and the US. This expectation is based on the assumption that, contrary to the original plans, the relevant short-term interest rates for the main currencies, the euro and US dollar, will largely remain at a very low level in 2011. The Company does not expect short-term interest rates to rise significantly until 2012.

Overall, Clearstream has a strong competitive position as a result of its diversified product and services portfolio and expects business activity to increase in all business areas in the forecast period. As a result, the Group expects to see further growth in sales revenue and a corresponding improvement in EBIT in 2011.

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. After a slight decline in demand in the segment’s core business, the sale of data packages for the cash and derivatives markets, as a result of the financial crisis, the Company expects performance in this business area to remain stable in 2011. Despite this, the Group anticipates a slight increase in sales revenue and EBIT in Market Data & Analytics, as this segment intends to steadily expand its product range with new data offerings in all areas.

Development of pricing models

Deutsche Börse continues to anticipate sustained price pressure in some of its business areas 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.

During the year under review, the Company cut its prices for equities clearing in the Xetra cash market segment. The Company’s objective in doing this was to further reinforce its position on the cash market as the largest central liquidity pool for trading German blue chips. For this reason, the Company does not rule out additional strategic price adjustments in the Xetra segment.

In the Eurex segment, changes to the fee model were approved in the year under review, which take effect from 1 February 2011. The main objective is to increase the attractiveness of Eurex as a trading venue. In order to achieve this, the Company will offer price incentives on the basis of the market quality provided, grant volume discounts and reduce fees for specific products. The introduction of the new pricing model is expected to lead to a rise in trading activity and thus to have a neutral impact on sales revenue.

Over the long term, the average sales revenue per chargeable unit is expected to decline in all areas of the Company. This is a result of the laddered pricing models that lead to a decline in income per unit as customers’ business activities increase.