Strategy23

The landscape of the global exchange sector has changed significantly in the past year. We believe that the market uncertainty has created new challenges, but also certain opportunities for exchanges. We believe that transparent, liquid, price discovering and neutral markets could be in a position to flourish as participants and regulators look for solutions to the current crisis and measures to prevent a similar severe market downturn in the future. Centralized clearing and settlement operations also play an important role in the evolving marketplace, offering participants counterparty risk mitigation solutions.

In our view, Canada needs a strong integrated marketplace that offers trading in cash and derivatives, energy and fixed income with centralized clearing and settlement functions in order to compete globally. Our corporate strategy has evolved through our assessment of the exchange sector and of our business.

Our strategy: To expand our integrated business, both domestically and internationally, by offering innovative cash and derivatives products across multiple asset classes.

Our priorities:

  • Integrate:
    • We completed our combination with MX to further diversify our revenue base and to realize revenue and cost synergies. The combination also creates a substantially larger entity that is better positioned to compete:
      - The combination allows us to further diversify our revenue base by including revenue from trading and clearing derivatives as well as by distributing MX market data.
      - The combination is anticipated to create value for our shareholders through realizing cost synergies. By the fourth quarter of 2009, we expect to achieve $25.0 million of cost synergies on a run rate basis when compared with the business plans of the separate organizations. As part of the plan, our offices, data centres and certain corporate support functions will be consolidated, and we will eliminate 85 corporate support and operational positions, or approximately 10% of our workforce, through 2009. The rationalization of data centres will enable customers to consolidate their connectivity networks and co-locate at one location which greatly reduce their technology and communication expenditures. We estimate that synergies of approximately $1.0 million per month were realized on a run-rate basis in Q4/08.
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      In addition, we plan to reinvest in new products such as a futures contract based on a Canadian volatility index and mini-sized equity index futures contracts. Our plans call for the expansion of clearing of over-the-counter derivatives and further development of the SOLA technology platform. These initiatives are anticipated to eventually generate more than $10.0 million annually in new revenue24 and will require us to enhance our pool of expertise by adding approximately 30 highly skilled, value-added jobs in clearing, technology application development and product and services development at the MX office in Montreal.
      - The combination also allows TMX Group to generate growth prospects outside of Canada, particularly in the U.S. through MX’s majority interest in BOX.
  • Enhance:
    • We will continue to enhance our product and service offering to compete for increased market share in cash, derivatives and energy markets.
      - Leveraging our strengths in the natural resource sector and our SME expertise, we have been promoting Toronto Stock Exchange and TSX Venture Exchange as listing destinations globally. In 2008, we completed a successful seven-city U.S. campaign with a particular focus on SMEs. We remain committed to further establishing our markets in China, as our listings road show visited Beijing (twice), Nanjing, Shenzhen, Shanghai and Qingdao in 2008. We also visited Australia, Argentina, Chile, Peru, Hong Kong, South Africa, U.K., Russia and Israel in 2008.
      - In December 2007, we launched TSX Quantum, our new trading engine. The phased roll-out continued throughout 2008 and has increased the capacity and improved the performance of our senior equity trading platform. The second component of the TSX Quantum program is the launch of the new gateway technology planned for Q3/09. We expect the new gateway will provide reduced latency and greater efficiencies.
      - In order to provide low-latency solutions to better support algorithmic and high velocity trading, we have launched the first phase of our co-location program. Co-location provides the opportunity for Toronto Stock Exchange and TSX Venture Exchange clients to locate their trading applications in the same physical data centre as the TSX Quantum trading engine and the TSX market data content provider, which reduces response times. In November 2008, we announced that our co-location services would be expanded in 2009 to include additional client cabinets for both equity and derivatives clients.
      - In July 2008, we announced an agreement with Citi to develop a smart order routing solution (SOR) powered by Lava ColorBook® II technology, which we launched on a pilot basis in December 2008. This marketplace neutral solution has been designed to assist POs to efficiently meet their best price regulatory obligations by routing trades to any exchange or ATSs in Canada. Full roll-out is scheduled for February 2009.
      - In October 2008, we announced the launch of a new Electronic Liquidity Provider incentive program, offering aggressive fee incentives to experienced high-velocity traders using proprietary capital and passive electronic strategies on the Toronto Stock Exchange central limit order book. The addition of experienced Electronic Liquidity Providers should benefit the Canadian equity markets by tightening spreads, leading to reduced friction costs to trading, increased overall turnover and attracting significant liquidity from outside Canada.
      - In June 2008, the MX Information Technology Services team released the first stages of SOLA Clearing, the most recent addition to SOLA software products. SOLA Clearing is intended to provide increased performance and functionality to CDCC and its members.
      - In November 2008, we launched the CBBO, the second phase of our CDF of pre- and post-trade data for equity marketplaces in Canada. CDF and CBBO provide ultra low-latency access to market data from multiple Canadian equity market centres. The equity markets currently participating in the CDF and CBBO are Toronto Stock Exchange, Chi-X Canada, Pure Trading and Omega ATS. We plan to expand the product offering to include deeper consolidated pre-trade order book information, consolidated trade information and opaque market information.
      - In February 2008, NGX launched an arrangement to combine its strengths in physical clearing with the advanced technology capabilities of ICE, whereby NGX provides the marketplace with a clearinghouse for physical gas transactions across North America and ICE offers NGX access to thousands of trading desks. This alliance has been successful and has expanded NGX’s continental footprint for its gas and electricity contracts. NGX now offers their clearing services at ten U.S. hubs with plans to expand to twenty by the end of 2009.
  • Innovate:
    • We currently offer a broad range of cash and derivatives products, including products based on interest rates, equities, equity indices, foreign exchange, energy and environmental financial products. We plan to innovate by continuing to introduce new, customer-focused products, services and solutions to our marketplaces, including those that combine the cash and derivative markets.
    • We have announced several innovative initiatives across our business:
      - In October 2008, we hosted more than 140 investors, investment bankers and analysts at the Toronto Stock Exchange and Sustainable Development Technology Canada Cleantech Investor Day. More than 20 public and private cleantech companies presented their value propositions at the co-sponsored event. At December 31, 2008 there are 110 cleantech companies listed on either Toronto Stock Exchange or TSX Venture Exchange with a combined market capitalization of approximately $6.4 billion. We believe there could be significant growth in investment in the cleantech area over the coming years, which could represent an opportunity for our integrated equities and derivatives markets, particularly regarding developing equity and derivatives products and also environmental products that would trade on MCeX.
      - In 2008, issuer services continued to expand its national relationship management program to bring more value added products and services to our issuers. Through this program, issuers have been given access to a number of new services. New market data tools such as Anonymous Trading Activity Reports and enhancements to our TSXconnect platform were all introduced in 2008. We also launched the TSX Learning Academy, our online educational platform for information relevant to being or becoming a public company. We continued to develop the On the Radar program and introduced a special pricing tier for the S&P Market Access Program, designed to help TSX and TSX Venture companies improve their profile in the U.S. We also enhanced our investor relations service offerings through Equicom.
      - In a subsequent phase currently scheduled for 2010, the TSX Quantum gateway will be expanded to route derivatives orders as well, giving market participants a single point of access to our equities and derivatives markets.
      - On May 30, 2008, MCeX, the first regulated environmental market in Canada officially launched trading of a new futures contract on Canada carbon dioxide equivalent (CO2e) units. Our goal is to lead the growth in Canadian environmental markets and deliver market solutions to help Canadian industries efficiently manage greenhouse gas emissions. MX has a 51% interest in MCeX, which was jointly created with Chicago Climate Exchange Inc.
      - On August 29, 2008, MX increased its holdings in BOX when it completed an acquisition giving it a majority ownership interest of 53.3% in, and control of, BOX. MX acquired a 21.9% ownership position from another senior BOX partner, the BSE, as agreed in December 2007. Under the terms of the agreement with the BSE, MX paid US$52.5 million in cash for the 21.9% partnership interest in BOX held by the BSE. This transaction was financed with existing cash resources. In October 2008, BOX bought back some of its shares and as a result, MX’s ownership in BOX increased to 53.8%. The principal business activity of BOX is to provide an electronic equity options market. MX is the technical operator and technology developer for BOX. Unlike other bigger U.S. competitors, BOX does not pay for order flow. We believe we are well positioned to capture an increasing market share as the U.S. regulatory climate shifts toward imposing tighter constraints on the options marketplace.
      - In September 2007, we purchased an option from Enbridge and Circuit Technology to acquire all the shares of NTP, the Calgary-based leading Canadian electronic platform and clearing facility for crude oil. We intend to exercise the option and acquire the shares of NTP in the first half of 2009. NTP currently trades in 16 locations in Canada and nine locations in the United States and has approximately 230 products overall.
23 The “Strategy” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks and uncertainties related to such statements.
24 The $10 million represents management’s estimate of the potential revenue opportunity based on similar products in Canadian and global markets. Actual results could differ materially from the estimates and could result in minimal revenue depending on customer acceptance, market conditions and competitive factors. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks and uncertainties related to such statements.