Canda’s TMX Group to expand fixed-income offerings, tap changing regulatory environment

Thomas Kloet

TMX Group Ltd., the owner of Canada’s equity and derivatives exchanges, plans to expand its offerings of fixed-income products as the heightened regulatory environment pushes trading into public markets.

TMX CEO Thomas Kloet said that the new products will get a boost by the Dodd-Frank Act, which requires trades to be pushed through central clearinghouses, adding that the regulations intended to increase transparency and reduce risk in trading create “enormous potential” for exchanges and clearinghouse operators.

“It’s a fundamental sea change, bigger than I’ve ever seen in the last 30 years,” Kloet said, according to Businessweek. “The fixed-income space is a natural space for us to look at. We have a relatively modest position in fixed income.”

TMX seeks to attract customers and increase fixed-income electronic trading by offering the new products. The firm has already acquired the Montreal derivatives exchange in addition to its Shorcan Brokers inter-dealer bond broker and a 47 percent stake in Canada’s fixed-income venue for government bonds and money market tools.

The firm received 43 percent of third-quarter revenue from the trading and clearing of equities, fixed income, energy and derivatives contracts. Twenty-seven percent of TMX’s revenue is derived from publishing market data, and 26 percent comes from listing fees.

“The strategy is also a way of capturing flow that’s happening off the exchange or over the counter,” Shubha Khan, an analyst at Toronto’s National Bank Financial, said, Businessweek reports. “That seems to be what they’re trying to achieve with this fixed-income push, and there’s a lot of upside there.”

Kloet said that the changing regulatory environment may create future opportunities for mergers and takeovers.

“When regulatory change happens, there’s a host of opportunities that come out of that,” Kloet said, according to Businessweek. “That’s why I’m not willing to close the door and lock it and say, ‘no acquisitions for a while—small or large.’ We’re not going to put our head in the sand and ignore what’s going to happen to the marketplace.”

Investors maintain that TMX should not disregard acquisition opportunities.

“They should be exploring as much as possible the international opportunities because they are a very strong exchange,” Michael Smedley, who helps manage more than $1 billion at Toronto’s Morgan Meighen & Associates including TMX shares, said, Businessweek reports. “In particular in the resources sectors they have great global strength, possibly the best.”

Kloet said that TMX’s main focus is on developing Montreal Exchange’s futures products around fixed-income, which involves the creation of a fixed-income market-maker program where dealers buy and sell at firm prices within the exchange.

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