TMX sees Dodd-Frank pushing debt to exchanges

TMX Group Ltd., owner of Canada’s equity and derivatives exchanges, will expand its offerings of fixed-income products as regulations drive trading to public markets, Chief Executive Officer Thomas Kloet said.

The new products are likely to be helped by the Dodd-Frank law in the U.S. and other regulations designed to reduce risk and increase trading transparency after the 2008 global financial crisis, Kloet said in an interview at Bloomberg’s Toronto office. The regulations create “enormous potential” for exchanges and clearing house operators, the 54-year-old CEO said.

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

The parent of the Toronto Stock Exchange, taken over by Canadian banks and pension funds September, is integrating businesses gained from the C$3.73 billion ($3.74 billion) deal. The merger brought Canada’s main equity exchanges and clearing services under one roof, adding stock exchange competitor Alpha Group and the Canadian Depository for Securities Ltd. clearing house.

TMX aims to attract more customers and accelerate fixed- income electronic trading with the new products. The firm already owns the Montreal derivatives exchange, as well as its Shorcan Brokers inter-dealer bond broker and a 47 percent stake in Inc., the fixed-income venue for Canadian government bonds and money market instruments.

‘Logical Move’

“It seems to be, to me, an extremely logical move,” Michael Smedley, who helps manage about C$1 billion at Morgan Meighen & Associates in Toronto including TMX shares. “It’s probably a great advance forward.”

TMX Group rose 0.6 percent to C$50.29 at 9:46 a.m. trading in Toronto. The stock has fallen 1.6 percent this month, compared with the 0.5 percent decline of the 44-company S&P/TSX Financials Index.

TMX received 43 percent of third-quarter revenue of C$171.5 million from trading and clearing of equities, fixed income, derivatives and energy contracts, according to company filings. Twenty-seven percent of revenue comes from providing market data, while 26 percent is from listing fees.

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

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